nep-cba New Economics Papers
on Central Banking
Issue of 2005‒04‒03
seven papers chosen by
Roberto Santillan

  1. Capital Market Frictions, Business Cycle and Monetary Transmission By Olivier Pierrard
  2. An empirical examination of exchange-rate credibility determinants in the EMS By Francisco Ledesma-Rodríguez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
  3. US Monetary Police 1988-2004: An Empirical Analysis By Anders Møller Christensen; Heino Bohn Nielsen
  4. Inflation Targeting and Output Growth: Evidence from Aggregate European Data By Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanassios Vamvakidis
  5. Monetary Aggregation By William Barnett
  6. Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience By Tomáš Holub
  7. The Role of Banks in the Czech Monetary Policy Transmission Mechanism By Anca Pruteanu

  1. By: Olivier Pierrard
    Abstract: Empirical evidence shows that some firms may be capital constraintbecause of capital market imperfections. We therefore extend the business cycle models with frictions `a la Pissarides on the labour market by also introducing symmetric frictions on the capital market. We show that the capital market frictions (and their interactions with the labour market frictions) improve the statistical properties of the model and generate a financial accelerator.
    Keywords: capital market frictions; business cycle; monetary transmission
    JEL: E13 E24 E51
    Date: 2005–02
  2. By: Francisco Ledesma-Rodríguez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
  3. By: Anders Møller Christensen (Danmarks Nationalbank); Heino Bohn Nielsen (Institute of Economics, University of Copenhagen)
    Abstract: Relationships between the Federal funds rate, unemployment, inflation, and the long-term government-bond rate are investigated with cointegration techniques. We find a stable long-term relationship between the Federal funds rate, unemployment, and the bond rate. This relationship is interpretable as a policy target because deviations are corrected primarily via the Federal funds rate. A traditional Taylor-type rule is clearly rejected by the data. Inflation does thus only influence the instrument indirectly via the bond rate, but we find that inflation is controllable with the Federal funds rate. The results are in accordance with recent developments in monetary theory stressing management of expectations as an important transmission channel.
    Keywords: cointegration; equilibrium correction; monetary policy; Taylor rule; Bond rate
    JEL: C32 E52
    Date: 2005–02
  4. By: Nicholas Apergis (University of Macedonia, Greece); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Alexandros Panethimitakis (University of Athens); Athanassios Vamvakidis (International Monetary Fund)
    Abstract: This paper evaluates inflation targeting and assesses its merits by comparing alternative targets in a macroeconomic model. We use European aggregate data to evaluate the performance of alternative policy rules under alternative inflation targets in terms of output losses. We employ two major alternative policy rules, forward-looking and spontaneous adjustment, and three alternative inflation targets, zero percent, two percent, and four percent inflation rates. The simulation findings suggest that forward-looking rules contributed to macroeconomic stability and increase monetary policy credibility. The superiority of a positive inflation target, in terms of output losses, emerges for the aggregate data. The same methodology, when applied to individual countries, however, suggests that country-specific flexible inflation targeting can improve employment prospects in Europe.
    JEL: E31 E32 E37 E52
    Date: 2005–03
  5. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This entry on monetary aggregation will appear under that title in The New Palgrave Dictionary of Economics, 2nd edition, edited by Steven Durlauf and Lawrence Blume. The entry provides an up-to-date overview of state-of-the-art research on monetary aggregation and index number theory, from its origins in 1980 to the current time. At the end of this dictionary entry, emphasis is placed on ongoing research on extensions to risk and to multilateral aggregation within multicountry areas, such as the euro area. Research on monetary aggregation theory has been especially successful in solving the 'puzzles' that have appeared in the monetary economics literature over the past 35 years.
    Keywords: monetary aggregation, Divisia index, money demand, monetary policy, dictionary, Divisia monetary aggregates
    JEL: E41 G12 C43 C22
    Date: 2005–03
  6. By: Tomáš Holub
    Abstract: This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. While the CNB’s interventions in mid- 1998 and in 2002 pass these criteria easily, the judgement might be more uncertain concerning the interventions in early-1998 and in 1999/2000. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions. This contrasts with the procedures guiding the interest rate decisions under the inflation targeting regime, which may occasionally create tensions in the policy regime, as demonstrated by the Czech experience, too. The interventions’ effectiveness in the Czech Republic is also discussed. It seems that sometimes they might have had an immediate impact lasting up to 2 or 3 months, but no strategy can be identified that would work in all episodes. Moreover, even many of the “successful” interventions were not able to prevent quite prolonged periods of exchange rate overvaluation in 1998 and in 2002. It is concluded that the signalling role of foreign exchange interventions is more important than their “market-equilibrating effect”, implying a rather unstable transmission between the central bank actions and the market reactions. Finally, the paper analyses the sterilisation costs, which are shown to have been quite substantial in the Czech Republic. It is argued that the financial sustainability of the interventions is quite important for their credibility and effectiveness.
    Keywords: Exchange rate, foreign exchange interventions, inflation targeting, sterilisation.
    JEL: E42 E44 E52 E58 E65 F31
  7. By: Anca Pruteanu
    Abstract: With this work, we aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, we study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market’s supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. We find that changes in monetary policy alter the growth rate of loans with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, we conclude that the lending channel was operative in the period 1996–1998: we find cross-sectional differences in the lending reactions to monetary policy shocks due to degree of capitalization and liquidity. For the subsequent period 1999– 2001, the results also show distributive effects of monetary policy due to bank size and a bank’s proportion of classified loans. In the context of steadily decreasing interest rates, this bolsters the supposition of credit rationing and hence that of an operative broad credit channel. At the same time, we find evidence of linear relationships between bank characteristics and the growth rate of loans, and again these relationships change between the two time periods. This bodes well with the changes in the structure and attitude towards lending of the Czech commercial banks.
    Keywords: Bank lending channel, broad credit channel, credit rationing, monetary transmission mechanism.
    JEL: E52 E51 E58 G21

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