nep-cba New Economics Papers
on Central Banking
Issue of 2005‒06‒27
eight papers chosen by
Roberto Santillan

  1. "Monetary Policy during Japan's Lost Decade" By R. Anton Braun; Yuichiro Waki
  2. Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version By Stephanie Schmitt-Grohe; Martin Uribe
  3. How does the New Keynesian Monetary Model fit in the ES and the Eurozone?. By Ramón María-Dolores; Jésus Vazquez
  4. Derivative Markets' Impact on Colombian Monetary Policy By Esteban Gómez; Diego Vásquez; Camilo Zea
  5. Nominal versus Real Convergence with Respect to EMU Accession.How to Cope with the Balassa-Samuelson Dilemma By Paul de Grauwe; Gunther Schnabl
  6. Good Deflation/Bad Deflation and Japanese Economic Recovery By Gary Saxonhouse
  7. Foreign Exchange Intervention and Monetary Policy in Japan, 2003-2004 By Rasmus Fatum; Michael M. Hutchison
  8. Price Expectations and Consumption under Deflation: Evidence from Japanese Household Survey Data By Masahiro Hori; Satoshi Shimizutani

  1. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Yuichiro Waki (Graduate School of Economics, University of Tokyo)
    Abstract: We develop a quantitative costly price adjustment model with capital formation for the Japanese Economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3 percent during the 1990s avoids the zero bound and enhances welfare.
    Date: 2005–05
  2. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: In this paper, we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation---particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. Simple monetary and fiscal rules are shown to implement a competitive equilibrium that mimics well the one induced by the Ramsey policy. When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital.
    JEL: E52 E61 E63
    Date: 2005–06
  3. By: Ramón María-Dolores (Universidad de Murcia); Jésus Vazquez (Universidad del País Vasco)
    Keywords: Indirect inference, NKM model, Taylor rule, optimal policy
    JEL: C32 E30 E52
    Date: 2005–06–22
  4. By: Esteban Gómez; Diego Vásquez; Camilo Zea
    Abstract: Derivatives are contingent claims that complete financial markets. Their use allow agents and firms to ameliorate the impact over con- sumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives gene- rate in some cases a loss in the effectiveness of the traditional monetary transmission channels in the short run, and in others, they promote an increase in the speed of transmission itself. Using an investment model, the impact of the use of interest rate and exchange rate derivatives in the dilution of colombian monetary channels is verified. Empirical exercises suggest that monetary policy has lost effectiveness in the short run.In spite of the surprise this result may offer given the relative im- matureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial mar- kets' imperfections. In addition, not only the hedge directly taken by firms with access to this instruments matter; there could be hedging spill-overs whenever commercial banks use derivatives, which allow for a more stable and cheap credit supply for firms with no access to those markets. The natural recommendation deriving from this conclusion suggests an urgent analysis of the derivatives impact over the speed of monetary transmission in Colombia.
    Keywords: Derivatives; Monetary Policy Transmission Channels;Investment
    JEL: E22 E52 G11
  5. By: Paul de Grauwe; Gunther Schnabl
    Keywords: Euro; EMU; EU-East-Central Europe; enlargement
    Date: 2004–10–15
  6. By: Gary Saxonhouse
    Abstract: Many economists dismiss the role of positive supply shocks as a cause of Japan's deflation. Indeed, they attribute the long delay in Japan's recovery to the mistaken view that Japan's deflation reflects an acceleration of technological progress. Whatever the current situation in Japan, however, economic history certainly suggests that technological progress can go hand in hand with general deflation. Conducting a VAR analysis using very detailed information about the components of Japan's consumer price index, this paper finds that short-run shocks to Japan's relative price structure persist in the long run. Given this finding, it is possible to conclude that such shocks are real in origin and reflect technological change. As no effort has yet been completed to show the full extent to which technological change is driving short-run relative price change in Japan compared with other factors, and the full extent to which relative price changes are driving aggregate price change compared with other factors, the policy implications of these findings are unclear. What is clear is that it is a mistake to dismiss out of hand the possibility that technological shocks are playing an important role among other forces in Japan's current deflation.
    Date: 2005–06
  7. By: Rasmus Fatum; Michael M. Hutchison
    Date: 2005–06
  8. By: Masahiro Hori; Satoshi Shimizutani
    Abstract: The Japanese economy has experienced price deflation since the mid-1990s. Despite the importance of overcoming deflation, there has been little recent research on price expectations in Japan. This paper takes advantage of an original and rich quarterly household-level data set from the gKokumin Seikatsu Monitorsh to estimate average price expectations, examine the factors that affect price expectations, and examine how changes in price expectations have affected household consumption. Our estimates indicate that average price expectations ranged from minus 0.2 to zero percent in 2001 and 2002. However, there was an increase to 1 percent in the first quarter of 2003, followed by a decline to 0.2 percent in the second quarter, and a steady increase toward 0.8 percent by the first quarter of 2004. Price expectations depend on current price movements and lagged expectations. A series of quantitative easing monetary policies were not very effective in changing the price expectations, since the policy announcements caused revision of price expectations only for a small portion, i.e., 5-10% of people surveyed. The jump observed in the first quarter of 2003 was a reaction to the outbreak of the Iraq war. Our study also confirms that deflationary expectations discourage household consumption, mainly durable consumption, by delaying the timing of purchases, suggesting that the deflationary expectations should be upwardly revised to restore a vital Japanese economy.
    Date: 2005–06

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