nep-cba New Economics Papers
on Central Banking
Issue of 2005‒10‒22
ninety papers chosen by
Roberto Santillan

  1. Central Bank Governance: A Survey of Boards and Management By JoAnne Morris; Tonny Lybek
  2. Governance Structures and Decision-Making Roles in Inflation-Targeting Central Banks By Anita Tuladhar
  3. Monetary Policy, Monetary Areas, and Financial Development with Electronic Money By Marco Arnone; Luca Bandiera
  4. Inflation Targeting and Exchange Rate Rules in an Open Economy By Eric Parrado
  5. Optimal Monetary Policy and Asset Price Misalignments By Alexandros Kontonikas and Alberto Montagnoli
  6. Deconstructing the Art of Central Banking By Silvia Sgherri; Tamim A. Bayoumi
  7. Explicit and Implicit Targets in Open Economies By Silvia Sgherri
  8. Inflation Targeting and Output Growth: Empirical Evidence for the European Union By Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanasios Vamvakidis
  9. The Monetary Transmission Mechanism By Peter N. Ireland
  10. Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy By Julian di Giovanni; Justin McCrary; Till von Wachter
  11. Monetary and Exchange Rate Policies in Colombia: Progress and Challenges By Sergio Clavijo
  12. Singapore's Unique Monetary Policy: How Does it Work? By Eric Parrado
  13. A New Taxonomy of Monetary Regimes By Ashok Bhundia; Mark R. Stone
  14. Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy By Daniel Leigh
  15. A Post-Reflation Monetary Framework for Japan By Charles Frederick Kramer; Mark R. Stone
  16. Zimbabwe: A Quest for a Nominal Anchor By Arto Kovanen
  17. The EURO and Inflation Uncertainty In The EMU By Guglielmo maria Coporale and Alexandros Kontonikas
  18. Latin American Central Bank Reform: Progress and Challenges By Agustin Carstens; Luis Ignacio Jácome H.
  19. Macroeconomic Implications of the Transition to Inflation Targeting and Capital Account Liberalization in Romania By Nikolay Gueorguiev; Pelin Berkmen
  20. A Monetary Policy Rule for Jamaica By Yan Sun
  21. The Greenbook and U.S. Monetary Policy By Robert Tchaidze
  22. Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy By Silvia Sgherri; Tamim A. Bayoumi
  23. On Target? The International Experience with Achieving Inflation Targets By Scott Roger; Mark R. Stone
  24. Central Bank Independence and Inflation: The case of Greece By Theodore Panagiotidis; Afrodit Triampella
  25. Inflation Dynamics in the Dominican Republic By Olumuyiwa Adedeji; Oral Williams
  26. Has More Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics By Alexander Mihailov
  27. 'Inflation Targeting Lite' in Small Open Economies: The Case of Mauritius By James Y. Yao; Nathaniel John Porter
  28. Monetary and Exchange Rate Dynamics During Disinflation: An Empirical Analysis By Andrés Arias; Lei Zhang; A. Javier Hamann
  29. Does Money Matter for Inflation in the Euro Area? By Peter Kugler; Sylvia Kaufmann
  30. Are Emerging Market Countries Learning to Float? By Dalia Hakura
  31. Inflation and Monetary Pass-Through in Guinea By Rodolphe Blavy
  32. Operational Independence, Inflation Targeting and UK Monetary Policy By Alexander Mihailov
  33. Monetary Policy Rules and the U.S. Business Cycle: Evidence and Implications By Pau Rabanal
  34. Monetary Equilibrium with Decentralized Trade and Learning By Luis Araujo; Braz Camargo
  35. How Useful Is Monetary Econometrics in Low-Income Countries? The Case of Money Demand and the Multipliers in Rwanda By C. Gabriel Di Bella; David Hauner
  36. Achieving and Maintaining Price Stability in Nigeria By Nicoletta Batini
  37. The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them? By Alina Carare; Robert Tchaidze
  38. Capitalizing Central Banks: A Net Worth Approach By Alain Ize
  39. Robust versus Optimal Rules in Monetary Policy: A Note By Alexander F. Tieman; Maria Demertzis
  40. Transparency in Central Bank Financial Statement Disclosures By Kenneth Sullivan
  41. Inflation in Mainland China - Modelling a Roller Coaster Ride By Michael Funke
  42. Exchange Rate, Money, and Wages: What is Driving Prices in Armenia? By David A. Grigorian; Armine Khachatryan; Grigor Sargsyan
  43. What Drives Inflation Expectations in Brazil? An Empirical Analysis By Martin Cerisola; R. Gaston Gelos
  44. Structural Reforms and the Exchange Rate Regime: A Panel Analysis for the World versus OECD Countries By Ansgar Belke; Bernhard Herz; Lukas Vogel
  45. Financial Dollarization Equilibria: A Framework for Policy Analysis By Alain Ize
  46. Interest Rate Pass-Through in Romania and other Central European Economies By Alexander F. Tieman
  47. The Gains from International Monetary Cooperation Revisited By Ivan Tchakarov
  48. Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank By Olivier Jeanne; Lars E. O. Svensson
  49. Central Bank Losses and Experiences in Selected Countries By John W. Dalton; Claudia Helene Dziobek
  50. On the Pattern of Currency Blocs in Africa By Etienne B. Yehoue
  51. Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean By Luis Ignacio Jácome; Francisco F. Vázquez
  52. Interest Rate Defenses of Currency Pegs By Juan Sole
  53. Monetary Policy and Corporate Behaviour in India By A. Prasad; Saibal Ghosh
  54. Fiscal Indulgence in Central Europe: Loss of the External Anchor By Helge Berger; George Kopits; István P. Székely
  55. Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies By Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
  56. Money Demand and Inflation in Dollarized Economies: The Case of Russia By Nienke Oomes; Franziska Ohnsorge
  57. Exchange Rates in Central Europe: a Blessing or a Curse? By Alain Borghijs; Louis Kuijs
  58. Rational Speculation, Financial Crises, and Optimal Policy Responses By Jay Surti
  59. Finance in Lower Income Countries: An Empirical Exploration By Thierry Tressel; Enrica Detragiache; Poonam Gupta
  60. The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution By James M. Boughton
  61. On The Relationship Between inflation and Stock Mark Votality By Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
  62. Angola's Fragile Stabilization By Jose Giancarlo Gasha; Gonzalo C. Patsor
  63. Modeling The Non-Linear Behaviour of Inflation Deviations From The Target By Andros Gregoriou and Alexandros Kontonikas
  64. Capital Account Liberalization and the Real Exchange Rate in Chile By Guillermo R. LeFort-Varela
  65. Insurance Value of International Reserves: An Option Pricing Approach By Jaewoo Lee
  66. Portfolio Choice in a Monetary Open-Economy DSGE Model By Charles Engel; Akito Matsumoto
  67. Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment By Thomson Fontaine
  68. Foreign Exchange Market Volatility in EU Accession Countries in the Run-up to Euro Adoption: Weathering Uncharted Waters By Ádám Kóbor; István P. Székely
  69. Does Financial Globalization Induce Better Macroeconomic Policies? By Irina Tytell; Shang-Jin Wei
  70. Six Puzzles in Electronic Money and Banking By Saleh M. Nsouli; Connel Fullenkamp
  71. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries By Vivian Z. Yue; Samir Jahjah
  72. Prudential Responses to De Facto Dollarization By Andrew Powell; Alain Ize
  73. International Risk Sharing and Currency Unions: The CFA Zones By Etienne B. Yehoue
  74. From Fixed to Float: Operational Aspects of Moving Towards Exchange Rate Flexibility By Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
  75. Assessing the Assessment: A Critical Look at the June 2003 Assessment of the United Kingdom's Five Tests for Euro Entry By Carlo Cottarelli; Julio Escolano
  76. Exits from Heavily Managed Exchange Rate Regimes By Ashoka Mody; Eisuke Okada; Enrica Detragiache
  77. Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime By S. Beidas; Magda E. Kandil
  79. Financial Globalization and Exchange Rates By Gian Maria Milesi-Ferretti; Philip R. Lane
  80. Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism? By Ari Aisen
  81. Exchange Rate Regimes and Trade By Christopher Adam; David Cobham
  82. Deriving Market Expectations for the Euro-Dollar Exchange Rate from Option Prices By Noureddine Krichene
  83. Choosing the Correct Currency Anchor For a Small Economy: The Case of Nepal By Sibel Yelten
  84. Financial Sector Development in the Middle East and North Africa By Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
  85. Asymmetric Effects of Government Spending: Does the Level of Real Interest Rates Matter? By Michael B. Devereux; Woon Gyu Choi
  86. Foreign Bank Supervision and Challenges to Emerging Market Supervisors By Inwon Song
  87. Managing Revenue Volatility in a Small Island Economy: The Case of Kiribati By Catriona M. Purfield
  88. Financial De-Dollarization: Is It for Real? By Alain Ize; Eduardo Levy Yeyati
  89. Inflation and Relative Price Dispersion in Canada: An Empirical Assessment By André Binette; Sylvain Martel
  90. Does the World Need a Universal Financial Institution? By James M. Boughton

  1. By: JoAnne Morris; Tonny Lybek
    Abstract: This paper identifies issues to consider when designing the structure, size, and composition of the governing boards and management of a central bank. While central bank autonomy and accountability are generally accepted as good practice, there is less consensus regarding the structure, size, and composition of the governing bodies. This paper surveys 101 central bank laws covering 113 countries and classifies the governance structure according to degree of autonomy, functions performed, size, composition, appointment procedures, and terms of the members. The paper concludes that an appropriate balance must be struck between the functions of the governing entities, simplicity, and country specific factors. The functions of the various bodies follow logically if a greater appreciation exists for the type of autonomy delegated to the central bank.
    Keywords: Central banks , Governance , Central bank role ,
    Date: 2004–12–17
  2. By: Anita Tuladhar
    Abstract: This paper surveys decision-making roles of governing bodies of central banks that have formally adopted inflation targeting as a monetary framework. Governance practices seek to balance institutional independence needed for monetary policy credibility with accountability required to protect democratic values. Central bank laws usually have price stability as the primary monetary policy objective but seldom require an explicit numerical inflation target. Governments are frequently involved in setting targets, but to ensure operational autonomy, legal provisions explicitly limit government influence in internal policy decision-making processes. Internal governance practices differ considerably with regard to the roles and inter-relationships between the policy, supervisory, and management boards of a central bank.
    Keywords: Inflation targeting , Governance , Central bank role , Price stabilization , Monetary policy ,
    Date: 2005–09–28
  3. By: Marco Arnone; Luca Bandiera
    Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.
    Keywords: Money , Monetary policy , Monetary unions , Monetary operations ,
    Date: 2004–07–28
  4. By: Eric Parrado
    Abstract: This paper provides a simple dynamic neo-Keynesian model that can be used to analyze the impact of monetary policy that considers inflation targeting in a small open economy. This economy is characterized by imperfect competition and short-run price rigidity. The main findings of the paper are that, depending on what shocks affect the economy, the effects of inflation targeting on output and inflation volatility depend crucially on the exchange rate regime and the inflation index being targeted. First, in the presence of real shocks, flexible exchange rates dominate managed exchange rates, while for nominal shocks the reverse is true. Second, domestically generated inflation targeting is preferable to CPI inflation targeting, because the former is more stabilizing not only in relation to both measures of inflation, but also to the output gap and the real exchange rate. Finally, flexible inflation targeting outperforms strict inflation targeting in terms of welfare.
    Keywords: Inflation targeting , Exchange rates , Monetary policy , Economic models ,
    Date: 2004–02–20
  5. By: Alexandros Kontonikas and Alberto Montagnoli
    Abstract: This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value since they may be positively affected by past price changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function.
    JEL: E52 E60 G1
  6. By: Silvia Sgherri; Tamim A. Bayoumi
    Abstract: This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
    Keywords: Monetary policy , Inflation , Central Banks , Economic models ,
    Date: 2004–10–21
  7. By: Silvia Sgherri
    Abstract: Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation-targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate.
    Keywords: Inflation targeting , Interest rate policy , Exchange rates , Monetary policy ,
    Date: 2005–09–20
  8. By: Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanasios Vamvakidis
    Abstract: This paper evaluates the performance of two alternative policy rules, a forward-looking rule and a spontaneous adjustment rule, under alternative inflation targets, in terms of output losses in a macroeconomic model, using European Union data. The simulations suggest that forward-looking rules contribute to macroeconomic stability and monetary policy credibility, and that a positive inflation target, as opposed to zero inflation, leads to higher and less volatile output. These results are robust to changes in the specification of the model and time period. The same methodology applied to individual countries supports country-specific flexible inflation targeting.
    Keywords: Inflation targeting , European Union , Economic growth ,
    Date: 2005–05–19
  9. By: Peter N. Ireland (Boston College)
    Abstract: The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment.  Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets.  Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
    Keywords: Monetary transmission mechanism
    JEL: E52
    Date: 2005–10–19
  10. By: Julian di Giovanni; Justin McCrary; Till von Wachter
    Abstract: Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.
    Keywords: Monetary policy , Germany , Fund , Interest rates ,
    Date: 2005–05–10
  11. By: Sergio Clavijo
    Abstract: This paper focuses on monetary and exchange rate policies in Colombia, with particular emphasis on the period 1999-2002, when flotation of the peso and inflation targeting were adopted. We argue, first, in favor of adopting "operational inflation target ranges" and, second, in favor of strengthening the current scheme of foreign exchange options. The impact of reductions in the reference rates of the Central Bank of Colombia is also assessed. We find that a lower central bank policy interest rate is likely to affect demand only if mortgage refinancing takes place. We present preliminary estimates of Taylor rules in an openeconomy framework for Colombia.
    Keywords: Monetary policy , Colombia , Exchange rate policy , Central bank role ,
    Date: 2004–09–14
  12. By: Eric Parrado
    Abstract: The Monetary Authority of Singapore, instead of relying on short-term interest rates or monetary aggregates as its monetary policy instrument, conducts policy by managing the trade-weighted exchange rate index (TWI). This paper investigates how this operating procedure actually works. For empirical purposes, it assumes the authorities follow a reaction function that aims the TWI at stabilizing expected inflation and maintaining output at potential. A partial adjustment mechanism is included to dampen the actual changes in the exchange rate. The estimates confirm that the major focus of monetary policy in Singapore is controlling inflation. The estimated changes in the TWI track the actual change relatively well, and the estimated parameters are as expected. Accordingly, they support the hypothesis that monetary policy in Singapore can be described by a forward-looking policy rule that reacts to both inflation and output volatility. The results suggest that Singapore's monetary policy has mainly reacted to large deviations in the target variables, which is consistent with monetary policy's medium-term orientation.
    Keywords: Monetary policy , Singapore , Exchange rate policy , Inflation ,
    Date: 2004–02–05
  13. By: Ashok Bhundia; Mark R. Stone
    Abstract: This paper proposes a new taxonomy of monetary regimes defined by the choice and clarity of the nominal anchor. The regimes are as follows: (i) monetary nonautonomy, (ii) weak anchor, (iii) money anchor, (iv) exchange rate peg, (v) full-fledged inflation targeting, (vi) implicit price stability anchor, and (vii) inflation targeting lite. This taxonomy captures the commitment-discretion tradeoffs that lie at the heart of choosing a monetary regime. During the last 15 years the world has moved toward monetary regimes with less discretion. Empirical analysis suggests that country regime choices reflect the level of financial and economic development and recent inflation history.
    Keywords: Monetary policy , Monetary systems , Transparency , Exchange rate regimes ,
    Date: 2004–10–18
  14. By: Daniel Leigh
    Abstract: This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about "opportunistic disinflation" and the recent "deflation scare."
    Keywords: Inflation targeting , United States , Monetary policy , Interest rates , Disinflation , Deflation , Economic models ,
    Date: 2005–04–27
  15. By: Charles Frederick Kramer; Mark R. Stone
    Abstract: Modifications to Japan's monetary policy framework will be needed as positive inflation resumes because the current monetary regime and operations are tailored to ending deflation. The paper suggests that the monetary regime should move from an "anti-deflation" objective to an inflation objective, complemented by a shift of monetary operations from a quantitative operating target to an interest rate target. There are also questions about the timing of these shifts and the particulars of such arrangements, but decisive answers are elusive.
    Keywords: Monetary policy , Japan , Monetary operations , Deflation ,
    Date: 2005–04–20
  16. By: Arto Kovanen
    Abstract: This study examines the appropriateness of alternative intermediate monetary policy targets for Zimbabwe in light of the stability of the demand for money and the information content of financial variables for predicting price level movements. Results of the study indicate that a well-defined long-run demand relation exists for currency in circulation, but not for other monetary aggregates. Currency in circulation has strong information content for predicting future price level movements. The information content of other financial variables, such as the exchange rate and interest rates, is weaker. Statistical relationships break down of the outset of high inflation.
    Keywords: Monetary policy , Zimbabwe , Demand for money , Inflation ,
    Date: 2004–08–04
  17. By: Guglielmo maria Coporale and Alexandros Kontonikas
    Abstract: In this paper, we investigate empirically the relationship between inflation and inflation uncertainty in twelve EMU countries. We estimate a time-varying parameter model with a GARCH specification for the conditional volatility of inflation in order to distinguish between short-run (structural and impulse) and steady-state uncertainty. We then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the Euro, and its effects on the links between inflation and inflation uncertainty. We find that the EMU countries have had rather different experiences, and that in the post-Euro period monetary policy might have become less effective in lowering inflation uncertainty, in the sense that a monetary tightening on the part of the ECB might in result in higher uncertainty. This suggests the need for improvements in the ECB’s analytical framework.
    JEL: E31 E52 C22
  18. By: Agustin Carstens; Luis Ignacio Jácome H.
    Abstract: This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America.
    Keywords: Inflation , Latin America , Bank reforms , Monetary policy ,
    Date: 2005–06–16
  19. By: Nikolay Gueorguiev; Pelin Berkmen
    Abstract: In the near future, Romania will introduce inflation targeting and fully liberalize its capital account. This paper aims to analyze, in a dynamic general-equilibrium model with sticky prices and monopolistic competition, how these two profound changes will affect the ability of monetary policy to pursue its objective of price stability. In particular, the resilience of the current and future monetary policy regimes to shocks is evaluated against two welfare criteria: a standard central bank loss function containing the deviations of inflation, output, and the real exchange rate from their equilibrium values, and the compensating variation measure of Lucas (1987).
    Keywords: Inflation targeting , Romania , Monetary policy , Capital account liberalization ,
    Date: 2004–12–27
  20. By: Yan Sun
    Abstract: Since 1996, the Bank of Jamaica (BoJ) has sought to limit changes in the exchange rate for the Jamaican dollar in the context of its efforts to maintain low inflation. However, with a persistently high public sector deficit, real interest rates have remained generally high, which partly explains the slow pace of growth. This paper discusses an alternative monetary policy mix for achieving low variance for inflation and output through the prism of an empirical macroeconomic model. The simulation results suggest that a monetary policy mix that takes into account the impact of policy on both inflation and output achieves lower variance for inflation and output compared with the current policy mix, which tilts somewhat toward exchange rate stabilization. A case, therefore, can be made for the BoJ to move to a soft inflation targeting regime supported by fiscal consolidation.
    Keywords: Monetary policy , Jamaica , Inflation targeting ,
    Date: 2005–03–11
  21. By: Robert Tchaidze
    Abstract: Although very attractive both theoretically and empirically, Taylor rules imply mechanical responses by the policy variable (interest rate) to fundamental ones (inflation and output gap). This study looks for empirical evidence of a more sophisticated monetary policy, one which takes into account expected future developments. An important piece of information added is the "Greenbook" forecast series, calculated by the Federal Reserve staff and which allow evaluation of expected inflation shocks. These shocks are significant in the estimated Taylor rule, confirming that policymaking is forward looking. This paper also demonstrates that a simple Taylor rule may be a misspecification if policymakers have in mind a timevarying inflation target.
    Keywords: Monetary Policy , United States ,
    Date: 2004–11–24
  22. By: Silvia Sgherri; Tamim A. Bayoumi
    Abstract: Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve, we find strong evidence that this link exists. These results bring into question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the United States and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy.
    Keywords: Monetary policy , United States , Inflation , Economic models ,
    Date: 2004–02–25
  23. By: Scott Roger; Mark R. Stone
    Abstract: This paper examines the international experience with full-fledged inflation targeting monetary regimes. Stylized facts are brought together from a review of the institutional elements of inflation targeting frameworks, a comparison of actual and targeted inflation outcomes, and case studies of large inflation target misses. Inflation targets are missed about 40 percent of the time and often by substantial amounts and for prolonged periods, yet no country has dropped inflation targeting. The resilience of the inflation targeting regime is attributable to the flexibility of the framework, its high standards of transparency and accountability, and the lack of realistic alternatives.
    Keywords: Inflation targeting , Monetary policy ,
    Date: 2005–08–25
  24. By: Theodore Panagiotidis (Dept of Economics Univ. of Loughborough); Afrodit Triampella
    Abstract: This paper investigates the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU, the hypothesis that central bank independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI, LegalCBI and TOR, the inverse relationship between CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggest that the rate of turnover Granger causes inflation.
    Keywords: Central Bank Independence, Inflation, Greece.
    JEL: E58 E52
    Date: 2005–07
  25. By: Olumuyiwa Adedeji; Oral Williams
    Abstract: This paper investigates the determinants of inflation in the Dominican Republic during 1991-2002, a period characterized by remarkable macroeconomic stability and growth. By developing a parsimonious and empirically stable error-correction model using quarterly observations, the paper finds that inflation is explained by changes in monetary aggregates, real output, foreign inflation, and the exchange rate. Long-run relationships in the money and traded-goods markets are found to exist, but only the disequilibrium from the money market exerts a significant impact on inflation.
    Keywords: Inflation , Dominican Republic , Economic models ,
    Date: 2004–03–04
  26. By: Alexander Mihailov
    Abstract: This paper is an empirical investigation into the question of whether increased independence affects central bank behavior, in particular when monetary policy is already in an inflation targeting regime. We take advantage of the unique experience in that sense of the United Kingdom, where the Bank of England was granted operational independence from Her Majesty's Treasury only in May 1997, while inflation targeting had been implemented since October 1992. Our strategy is to estimate Taylor rules employing alternative specifications, econometric methods and variable proxies in search for robust results that survive most of those modifications. The key lesson we extract from UK quarterly data is that the Bank of England has responded to the output gap, and not at all to output growth, the more so after receiving operational independence, when the gap has been positive or close to zero and inflation credibly stabilized at target. We find no unambiguous evidence for any definite change in the Bank's reaction to inflation or in the degree of its interest rate smoothing. Our main import is to argue that both the asymmetry of the monetary policy reaction function across the cycle and the response to the output gap, not growth, are fully consistent with New Keynesian theory, especially under inflation targeting. Anchored inflation and economic expansion during the post-independence period thus complement greater autonomy in influencing the behavior of the Bank of England, yet clear separation of the individual contribution of each of these effects appears challenging given our short sample.
    Date: 2005–10–11
  27. By: James Y. Yao; Nathaniel John Porter
    Abstract: This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius's experience with 'inflation targeting lite' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its 'inflation targeting lite' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations.
    Date: 2005–09–09
  28. By: Andrés Arias; Lei Zhang; A. Javier Hamann
    Abstract: Based on the observed behavior of monetary aggregates and exchange rates, we classify inflation-stabilization episodes into two categories: de facto exchange rate-based stabilizations (ERBS) and non-ERBS. Unlike the standard de jure ERBS studied in the literature, de facto ERBS encompass cases in which the central bank intervenes in the foreign exchange market but does not preannounce the use of an exchange rate anchor. The number of the de facto ERBS is twice as large as that of de jure ERBS. Output dynamics during disinflation do not differ significantly between these two groups. We conclude that empirical studies on the effects of exchange rate anchors must seek to disentangle the effects of their announcement from those related to their role in the remonetization process.
    Keywords: Monetary policy , Disinflation , Exchange rates , Economic stabilization ,
    Date: 2005–03–01
  29. By: Peter Kugler (University of Basel, Petersplatz 1, CH-4003 Basel,Switzerland); Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna)
    Abstract: This paper analyses the role of M3 as an indicator for future inflation and correspondingly for current monetary policy in the euro area. We analyse the short and long run interrelationship between inflation and money growth in an error correction framework taking into account the output gap and short and long term interest rates. We find robust cointegration between money growth and inflation. In the long run, shocks in M3-growth account for 33 percent to 40 percent of the inflation forecast error variance. The effects of output gap and interest rate shocks on inflation are mainly transitory and there forecasting variance shares are negligible for medium term horizons. There is evidence for a second regime prevailing at the end of the seventies and beginning of the eighties which relates to periods of high interest rate and inflation rate levels and decreasing rates in real money growth. Overall, we present firm evidence for a stable dynamic relationship between money growth and inflation which implies that the deviation of the real money growth from its long run average is a good indicator of future inflation acceleration or deceleration. Of course, this finding provides evidence in favour of the recently de-emphasised first pillar of the ECB strategy. According to our results, however, an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%.
    Date: 2005–09–19
  30. By: Dalia Hakura
    Abstract: The paper finds that exchange rate flexibility in emerging market countries has increased over the past decade. This "learning to float" appears to have involved a strengthening of monetary and financial policy frameworks aimed at directly addressing the key vulnerabilities that give rise to the "fear of floating." The results in the paper suggest that the trend toward greater exchange rate flexibility, alongside a strengthening of banking supervision, has afforded emerging market countries more monetary policy independence.
    Keywords: Emerging markets , Developed countries , Floating exchange rates , Monetary policy ,
    Date: 2005–06–01
  31. By: Rodolphe Blavy
    Abstract: The paper analyzes the dynamics of inflation in Guinea during 1992-2003 applying cointegration and error-correction modeling to a bivariate model that includes consumer price and monetary variables. The empirical results, based on quarterly data, confirm the existence of a long-run relationship between money supply and consumer prices. This paper argues further that the pass-through has increased in recent years. Short-term dynamics are shown to accentuate the long-run impact. Impulse response analysis shows that a shock in the money stock will have an increasing impact over two years and will then stabilize at a higher level.
    Keywords: Inflation , Guinea , Money supply , Consumer prices , Economic models ,
    Date: 2004–12–09
  32. By: Alexander Mihailov
    Abstract: This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one - according to our real-time data set - in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration.
    Date: 2005–10–11
  33. By: Pau Rabanal
    Abstract: This paper estimates Taylor-type interest rates for the United States allowing for both time and state dependence. It provides evidence that the coefficients of the Taylor rule change significantly over time, and that the behavior of the Federal Reserve over the cycle can be explained using a two-state switching regime model. During expansions, the Federal Reserve follows a rule that can be characterized as inflation targeting with a high degree of interest rate smoothing. During recessions, the Federal Reserve targets output growth and conducts policy in a more active manner. The implications of conducting this type of policy are analyzed in a small scale new Keynesian model.
    Keywords: Business cycles , United States , Monetary Policy , Economic models ,
    Date: 2004–09–13
  34. By: Luis Araujo (Michigan State University); Braz Camargo (University of Western Ontario)
    Abstract: This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of overissued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development.
    Keywords: monetary stability; endogenous money; decentralized trade; learning
    JEL: D82 D83 E00
    Date: 2005
  35. By: C. Gabriel Di Bella; David Hauner
    Abstract: This paper revisits the usefulness of econometric monetary analysis in low-income countries in a case study on Rwanda, an interesting case given its floating exchange rate and reliance on indirect monetary policy instruments on the one hand, and its somewhat typical data and institutional shortcomings on the other hand. The findings are generally encouraging for the use of econometric models for monetary analysis in low-income countries. Notwithstanding substantial qualifications, time series and structural models of the money multiplier and money demand yield results that are statistically and economically reasonable enough to usefully inform policymaking.
    Keywords: Demand for money , Rwanda , Monetary policy , Economic models ,
    Date: 2005–09–21
  36. By: Nicoletta Batini
    Abstract: This paper reviews the historical performance of monetary policy in Nigeria and discusses the relative merits of alternative monetary policy strategies that Nigeria could adopt in the future, once the many operational issues that today obstruct the conduct of monetary policy have been addressed. An analysis of external and fiscal dominance in Nigeria reveals that none of the candidate strategies is particularly appealing although, on various grounds, a long-run target for inflation combined with a free float seems to be the ultimate option. The paper shows how to design and operationalize such a regime in Nigeria when account is taken for the emerging market features of the economy.
    Keywords: Price stabilization , Nigeria , Inflation targeting , Dollarization , Fiscal management ,
    Date: 2004–06–29
  37. By: Alina Carare; Robert Tchaidze
    Abstract: This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules.
    Keywords: Central banks , Monetary policy , Economic models ,
    Date: 2005–08–08
  38. By: Alain Ize
    Abstract: This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.
    Keywords: Central banks , Costa Rica , Chile , Mozambique , Capital , Reserves ,
    Date: 2005–02–02
  39. By: Alexander F. Tieman; Maria Demertzis
    Abstract: We provide a framework for analyzing the choice between optimal and robust monetary policy rules in the presence of paradigm uncertainty. We first discuss the conditions on uncertainty that render a robust rule preferable to an optimal rule. Second, we show how the degree of risk aversion of the policymaker increases the region in which the robust rule is preferred.
    Keywords: Monetary policy , Economic models , Risk premium ,
    Date: 2004–06–23
  40. By: Kenneth Sullivan
    Abstract: The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements.
    Keywords: Central banks , Transparency , Bank accounting ,
    Date: 2005–04–29
  41. By: Michael Funke
    Abstract: The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy.
    Keywords: China, Inflation, New Keynesian Phillips Curve
    JEL: C22 E31
    Date: 2005–07
  42. By: David A. Grigorian; Armine Khachatryan; Grigor Sargsyan
    Abstract: This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.
    Keywords: Price adjustments , Armenia , Exchange markets , Wages , Money markets , Labor markets , Economic models ,
    Date: 2004–12–21
  43. By: Martin Cerisola; R. Gaston Gelos
    Abstract: This study examines the macroeconomic determinants of survey inflation expectations in Brazil since the adoption of inflation targeting in 1999. The results suggest that the inflation targeting framework has helped anchor expectations, with the dispersion of inflation expectations declining considerably, particularly during periods of high uncertainty. We also find that apart from the inflation target, the stance of fiscal policy, as proxied by the ratio of the consolidated primary surplus to GDP, has been instrumental in shaping expectations. The importance of past inflation in determining expectations appears to be relatively low, and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process.
    Keywords: Inflation , Brazil , Inflation targeting , Economic models ,
    Date: 2005–06–13
  44. By: Ansgar Belke (University of Hohenheim and IZA Bonn); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth)
    Abstract: We test the significance of the relationship between the exchange rate regime and the degree of structural reforms by estimating panel regressions for a world and an OECD country sample. The empirical results suggest a positive correlation between on the one side the adoption of an exchange rate rule and on the other side overall structural reforms as well as reforms in the money and banking sector in the broad country sample. For government size and for market regulation, we do not find any robust significant effect, however. The results do not confirm the main implication of Calmfors-type models, namely a higher degree of reforms under monetary policy autonomy. They corroborate conditional policy convergence and, partly, that limiting monetary policy autonomy fosters structural reforms.
    Keywords: exchange rates, monetary policy regime, liberalisation, panel data, political economy of reform
    JEL: D78 E52 E61
    Date: 2005–10
  45. By: Alain Ize
    Abstract: Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.
    Keywords: Dollarization , Monetary policy , Financial crisis , Credit , Risk premium , Economic models ,
    Date: 2005–09–30
  46. By: Alexander F. Tieman
    Abstract: Interest rate pass-through from policy interest rates to market rates and inflation has been hypothesized to play a lesser role in Romania than in other Central European transition economies. This paper tests this hypothesis and concludes that it cannot be supported by the data. Hence pass-through in Romania is concluded to be in line with that in comparable economies in the region. Moreover, the interest rate pass-through has become more pronounced over time.
    Keywords: Monetary policy , Romania , Transition economies , Interest rates , Economic models ,
    Date: 2004–11–15
  47. By: Ivan Tchakarov
    Abstract: This paper examines the issue of whether countries can improve their welfare by coordinating macroeconomic policies. The main purpose is to compute the gains from international monetary cooperation as the difference between the steady state consumption levels associated with the Nash and the cooperative outcomes of the game in which monetary authorities pursue active monetary policy. A numerical second-order approximation makes the solution of the model possible. Contrary to Obstfeld and Rogoff (2002), who claim that the gains from international cooperation in monetary policy are negligible, the paper finds that they could be very significant and reach as high as 2.2 percent of steady state consumption. This suggests that individual countries could experience significant welfare losses if they concentrate only on domestic stabilization policies.
    Keywords: Monetary policy , International cooperation ,
    Date: 2004–01–23
  48. By: Olivier Jeanne; Lars E. O. Svensson
    Abstract: An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.
    Keywords: Deflation , Liquidity , Central Banks , Interest rates , Exchange rates ,
    Date: 2004–09–13
  49. By: John W. Dalton; Claudia Helene Dziobek
    Abstract: Under normal circumstances, a central bank should be able to operate at a profit with a core level of earnings derived from seigniorage. Losses have, however, arisen in several central banks from a range of activities including monetary operations under extreme conditions and financial sector restructuring. The paper discusses the impact of losses on central bank operations and lays out the principles and practices for handling central bank losses. It is suggested that losses should be disclosed as a reduction of the central bank's net worth unless covered by the government. Governments may cover losses through recapitalization of the central bank, and this will create a new central bank asset, usually in the form of government securities held by the central bank. Six case studies illustrate the circumstances under which losses may arise, their coverage, and central banks' disclosure practices.
    Keywords: Central banks , Brazil , Chile , Czech Republic , Hungary , Korea, Republic of , Thailand , Currency issuance ,
    Date: 2005–04–19
  50. By: Etienne B. Yehoue
    Abstract: This paper seeks to elucidate the debate over currency union in Africa. The paper examines whether empirical investigation points to the gradual emergence of currency blocs. Based on the historical data on inflation, trade, and the comovements of prices and outputs, I argue that the emergence of large-scale currency blocs in Africa will follow a gradual path and that this dynamic does not lead to the emergence of a single continental currency at this time. Rather, the pattern which emerges seems to suggest three blocs: one in West Africa, a second around South Africa, and a third in Central Africa. Although little evidence is found supporting the emergence of a single African currency at this time, the emergence of an African currency union is not necessarily precluded, since the ultimate decision to surrender a nation's monetary policy to a supranational institution is not made based solely on economic considerations. I then address the issue of a possible anchor for the union, were it to emerge and opt for an anchorage. I find- based on the trade criterion-that the euro seems to be a good choice.
    Keywords: Monetary unions , Africa , Financial crisis , Emerging markets , Production , Trade relations , Economic models ,
    Date: 2005–03–15
  51. By: Luis Ignacio Jácome; Francisco F. Vázquez
    Abstract: This paper reviews central bank legislation in 24 countries in Latin America and the Caribbean during the 1990s. Using panel regressions, we find a negative relationship between legal central bank independence (CBI) and inflation. This result holds for three alternative measures of CBI and after controlling for international inflation, banking crises, and exchange regimes. The result is also robust to the inclusion of a broader indicator of structural reforms that usually go along with changes in central bank legislation, illustrating the complementary nature of various aspects of economic reform. The paper fails, however, to find a causal relationship running from CBI to inflation.
    Keywords: Central bank legislation , Latin America , Central bank role , Inflation , Structural adjustment ,
    Date: 2005–04–21
  52. By: Juan Sole
    Abstract: This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time.
    Keywords: Interest rates , Currency pegs , Exchange rate regimes ,
    Date: 2004–06–08
  53. By: A. Prasad; Saibal Ghosh
    Abstract: The paper examines the association and corporate behavior for a sample of manufacturing firms in India for the post-reform period 1992-2003. The findings suggest that a contractionary monetary policy lowers overall debt including bank debt, although the lagged response is positive, and listed firms increase their short-term bank borrowings, after monetary tightening. The responses of corporates to a monetary contraction in the post-1997 period has been more pronounced. A disaggregated analysis of responses of firms according to size and leverage largely validates these findings. Two policy implications emerge from the analysis. First, the interest rate transmission channel has strengthened since 1998, and, second, corporates in India, especially listed ones, seem to exhibit relationship lending.
    Keywords: Governance , India , Monetary policy ,
    Date: 2005–02–10
  54. By: Helge Berger; George Kopits; István P. Székely
    Abstract: In recent years, fiscal performance in Central Europe has steadily deteriorated, in contrast to the improvement in the Baltics. This paper explores the determinants of such differences among countries slated for EU accession. Regression estimates suggest that economic and institutional fundamentals do not provide a full explanation. An alternative explanation lies in the political economy of the accession process, and a game-theoretic model illustrates why a country with a stronger bargaining position might have an incentive to deviate from convergence to the Maastricht criteria. The model generates alternative fiscal policy regimes-allowing for regime shifts-depending on country characteristics and EU policies.
    Keywords: Fiscal policy , Europe , European Union , European Economic and Monetary Union , Fiscal reforms , Budget deficits , Economic models ,
    Date: 2004–04–26
  55. By: Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
    Abstract: This paper reviews trends in bank lending to the private sector, with a particular focus on Central and Eastern European countries, and finds that rapid growth of private sector credit continues to be a key challenge for most of these countries. The paper discusses possible implications for economic and financial stability and the policy options available to counter and reduce these risks. It argues that the authorities will need to focus on the implications for both the macro economy and the financial system and, depending on their assessment, may need a comprehensive policy response comprising a mix of macro and prudential policies. In particular where there are limitations to the effective use of monetary and fiscal measures, supervisory and prudential policy responses will have a key role in addressing financial stability concerns.
    Keywords: Credit expansion , Europe , Financial stability , Economic policy ,
    Date: 2005–08–10
  56. By: Nienke Oomes; Franziska Ohnsorge
    Abstract: Money demand in dollarized economies often appears to be highly unstable, making it difficult to forecast and control inflation. In this paper, we show that a stable money demand function for Russia can be found for "effective broad money," which includes an estimate of foreign cash holdings. Moreover, we find that an excess supply of effective broad money is inflationary, while other excess money measures are not, and that effective broad money growth has the strongest and most persistent effect on short-run inflation.
    Keywords: Demand for money , Russian Federation , Inflation , Dollarization , Currency substitution ,
    Date: 2005–08–02
  57. By: Alain Borghijs; Louis Kuijs
    Abstract: Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.
    Keywords: Exchange rates , Czech Republic , Hungary , Poland , Slovak Republic , Slovenia ,
    Date: 2004–01–23
  58. By: Jay Surti
    Abstract: This paper develops a theory of the onset of financial crises by solving for the optimal trading strategies of speculators in financial markets, in a model where each speculator tries to coordinate her trades with the market's by observing the decisions of other speculators, while simultaneously trying to preempt the market. The interaction and resolution of these two conflicting incentives are analyzed under alternate central bank policy regimes. Our model explains how imperfect information structures prevent traders from exploiting profitable opportunities and suggests how large traders help alleviate this problem by undertaking risky arbitrage early in the investment process, in return for higher profits, if successful. The central bank's defense strategy is a parameter of this model. We compare the likelihood of a crisis under alternate defense strategies and show that credible monetary authorities can provide a better defense of exchange rate regimes against adverse shocks by not disclosing their commitment value to the market.
    Keywords: Central bank policy , Financial crisis , Trade , Markets , Economic models ,
    Date: 2004–02–27
  59. By: Thierry Tressel; Enrica Detragiache; Poonam Gupta
    Abstract: This paper considers how a comprehensive set of factors relates to financial sector performance in low-income countries (LICs). It finds that corruption and inflation are associated with a shallower and less efficient financial system, while legal origin and characteristics of the supervisory and regulatory framework have no significant relationship with performance. Moreover, better contract enforcement and information about borrowers are associated with more private sector credit. Some results are surprising. Countries with more foreign bank penetration seem to have shallower and not necessarily more efficient financial sectors, while a larger presence of state-owned banks is correlated with more bank deposits and lower overhead costs, even after controlling for market size and concentration. Although these relationships are robust, more research is needed to ascertain the direction of causality and identify channels of transmission before deriving policy implications.
    Date: 2005–08–25
  60. By: James M. Boughton
    Abstract: The International Monetary Fund was designed during World War II by men whose worldview had been shaped by the Great War and the Great Depression. Their views on how the postwar international monetary system should function were also shaped by their economics training and their nationalities. After the IMF began functioning as an institution, its evolution was similarly driven by a combination of political events (Suez, African independence, the collapse of global communism), economic events (the rising economic power of Europe, the Middle East, and Asia), and trends and cycles in economic theory (the monetary approach to the balance of payments, new classical economics, the rise and fall of the Washington Consensus). As they happened, these forces had effects that were perceived as adaptations to current events and new ideas within a fixed institutional structure and mandate. The cumulative effect of history on the institution has been rather more profound and requires a longer and larger perspective.
    Keywords: Fund , Fund history , Financial institutions , International capital markets , Debt problems , Monetary measures , Balance of payments , Floating exchange rates , Supply-side policy , Inflation targeting , Globalization ,
    Date: 2004–05–21
  61. By: Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
    Abstract: In this paper we investigate the interaction between inflation and stock market volatility. We employ unconditional and conditional volatility measures, the latter derived from a Bivariate GARCH model with the BEKK representation. The results indicate that once the impact of IT is taken into account, the relationship between inflation and stock market volatility ceases to be positive and be comes negative in line with the New Environment Hypothesis. The implication for monetary policy design is that focusing on price stability alone may not be a suffcient condition for financial stability.
    JEL: C22 E31 E44 E52
  62. By: Jose Giancarlo Gasha; Gonzalo C. Patsor
    Abstract: This paper discusses the nature of Angola's disinflation strategy in recent years, with special emphasis on the most recent efforts by the Angolan authorities to stabilize the economy. Looking to the past, the paper stresses the costs of the disinflation strategy, as measured by the central bank sizable foreign exchange intervention and the increase in Angola's external liabilities that unfolded in the process. The paper also notes that non-oil fiscal deficits have remained very large. Looking to the future, the paper stresses the pressing need to reduce demand pressures stemming from sizable government spending on wages and salaries, goods and services, subsidies, and other current transfers to the economy. The prescribed fiscal consolidation effort is viewed as critical to curtail the non-oil fiscal deficit, reduce inflation expectations on a lasting basis, and avoid further foreign borrowing on commercial terms, including loans collateralized by future oil revenues.
    Keywords: Economic stabilization , Angola , Monetary policy , Fiscal policy ,
    Date: 2004–06–02
  63. By: Andros Gregoriou and Alexandros Kontonikas
    Abstract: This study tests for and models non-linearities in inflation deviations from the target in five OECD countries that adopted inflation targeting over the 1990s. Our tests reject the linearity hypothesis and we show that the exponential smooth transition autoregressive (ESTAR) model is capable of capturing the non-linear behavior ofinflation misalignments. The extent of inflation deviations from the target varies across the OECD countries, with countries that consistently undershoot the target having a rapid adjustment process, whereas countries that overshoot the target have a slower revision back to equilibrium.
    JEL: E31 E52 C5
  64. By: Guillermo R. LeFort-Varela
    Abstract: After the failure of the early 1980s, a second attempt at capital account liberalization was gradually carried out in Chile during the 1990s, this time in parallel with increased exchange rate flexibility. Capital account regulations were applied to support the independent monetary policy committed to the inflation target, while the exchange rate was quasi-pegged within a band that targeted the real exchange rate (RER). Still, the policy framework directed at stabilizing the RER appears to have been of limited effectiveness, with the surges and sudden-stops in capital flows playing an important role in RER dynamics. Foreign exchange market intervention appears not to have affected the RER while reserve requirement appears to have exerted a depreciating effect. Government spending and import tariffs, appear to be significant tools to moderate the real appreciation thus providing one additional reason for adopting a countercyclical fiscal policy and accelerating trade openness
    Keywords: Capital account liberalization , Chile , Real effective exchange rates , Foreign exchange , Intervention , Reserve requirements , Capital flows ,
    Date: 2005–07–15
  65. By: Jaewoo Lee
    Abstract: A quantitative framework is developed to bring forward the insurance motive of holding international reserves. The insurance value of reserves is quantified as the market price of an equivalent option that provides the same insurance coverage as the reserves. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.
    Keywords: Insurance , Reserves , Prices ,
    Date: 2004–09–28
  66. By: Charles Engel; Akito Matsumoto
    Abstract: This paper develops a two-country monetary DSGE (dynamic stochastic general equilibrium) model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some goods prices are set without full information of the state. Home and foreign portfolios are not identical in equilibrium. In response to technology shocks, sticky prices generate a negative correlation between labor income and the profits of domestic firms, biasing portfolios in favor of home equities. In contrast, under flexible prices, labor income and the profits of the domestic firms are positively correlated.
    Date: 2005–08–25
  67. By: Thomson Fontaine
    Abstract: This paper takes a step in empirically testing the implications of a number of theoretical models that attempt to highlight the dynamics behind currency crises. By focusing on countries with broadly disparate economic and political arrangements, the study attempts to determine the extent to which these variables matter in affecting the probabilities of currency crises occurring. The empirical findings provide support for the view that, in general, a deterioration in economic fundamentals and the pursuit of lax monetary policy can contribute to currency crises. The experiences of several emerging market economies suggests that the sustainability of exchange rate policy depends both on adequate policy responses to the shocks to the economy and on the fragility of the economic, financial, and political system.
    Keywords: Currencies , Developed countries , Emerging markets , Financial crisis , Exchange rates ,
    Date: 2005–02–02
  68. By: Ádám Kóbor; István P. Székely
    Abstract: The paper analyzes foreign exchange market volatility in four Central European EU accession countries in 2001-2003. By using a Markov regime-switching model, it identifies two regimes representing high- and low-volatility periods. The estimation results show not only that volatilities are different between the two regimes but also that some of the cross-correlations differ. Notably, cross-correlations increase substantially for two pairs of currencies (the Hungarian forint-Polish zloty and the Czech koruna-Slovak koruna) in the high-volatility period. The paper concludes by discussing the policy implications of these findings.
    Keywords: Exchange markets , Czech Republic , Hungary , Poland , Slovak Republic , Euro , Economic models ,
    Date: 2004–02–10
  69. By: Irina Tytell; Shang-Jin Wei
    Abstract: Monetary and fiscal policies around the world are in better shape today than two decades ago. This paper studies whether financial globalization has helped induce governments to pursue better macroeconomic policies (the "discipline effect"). The empirical tests have two innovations. First, we recognize potential endogeneity of the observed capital flows in a given country and employ an instrumental variable approach that relies on the autonomous (global) component of the capital flows. Second, we recognize inherent discreteness in defining good versus bad macroeconomic policies and use a transition matrix technique to determine whether capital flows are effective in inducing substantial qualitative policy shifts. Our results suggest that, in spite of the plausibility of the "discipline effect" in theory, it is not easy to find strong and robust causal evidence. There is some evidence that financial globalization may have induced countries to pursue low-inflation monetary policies. However, there is no evidence that it has encouraged low budget deficits.
    Keywords: Globalization , Financial sector , Inflation targeting , Capital flows ,
    Date: 2004–06–08
  70. By: Saleh M. Nsouli; Connel Fullenkamp
    Abstract: The literature on the economic effects of electronic money and banking lacks organization and a common analytical framework. This paper identifies the main issues raised by e-money and e-banking and presents them as six puzzles. Our solutions to the puzzles build a framework for analyzing the effects of e-money and e-banking, and for choosing the appropriate approach to regulating electronic money and banking. Although electronic money and banking will likely not fulfill the more dire predictions in the literature, such as the possible loss of central banks' ability to control the money supply, they nonetheless will need to be regulated carefully.
    Keywords: Banking , Monetary policy ,
    Date: 2004–02–17
  71. By: Vivian Z. Yue; Samir Jahjah
    Abstract: We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.
    Keywords: Exchange rate regimes , Bond issues , Developing countries , Debt , Credit , Financial crisis , Economic models ,
    Date: 2004–11–15
  72. By: Andrew Powell; Alain Ize
    Abstract: We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high.
    Keywords: Dollarization , Monetary policy , Financial crisis , Financial systems , Currencies , Exchange risk , Economic models ,
    Date: 2004–05–11
  73. By: Etienne B. Yehoue
    Abstract: This paper explores income and consumption smoothing patterns among the member countries of each of the CFA zones-the CEMAC2 and the WAEMU3-during the period 1980-2000. I find that for the CEMAC, only about 15 percent of shocks to GDP are smoothed through the standard channels (that is, capital market, credit market, and remittances). On the other hand, I find that 44 percent of shocks are smoothed via foreign aid from France, and 5 percent via central bank contributions, while reserves pooling provides no shock smoothing. For the WAEMU, I find that only 13 percent of shocks are smoothed through the standard channels, while 63 percent are smoothed via foreign aid from France, 7 percent via central bank contributions, and no smoothing via reserves pooling. I compare these results with the risksharing pattern in the Unites States. I argue that creating public venture capital at a regional level might help promote free capital flows within each zone and alleviate the apparently insufficient degree of risk-sharing observed through the standard channels.
    Date: 2005–05–24
  74. By: Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
    Abstract: This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with the new regime, establishing an alternative nominal anchor in the context of a new monetary policy framework, and building the capacity of market participants to manage exchange rate risks and of supervisory authorities to regulate and monitor them. It also assesses the factors that influence the pace of exit and the appropriate sequencing of exchange rate flexibility and capital account liberalization.
    Keywords: Exchange rate policy , Foreign exchange , Exchange markets , Intervention , Capital account liberalization , Flexible exchange rate policy ,
    Date: 2004–07–29
  75. By: Carlo Cottarelli; Julio Escolano
    Abstract: This paper provides a framework for evaluating the decision to enter a currency area, including the best timing for entry, and uses it to evaluate the assessment of the five tests for euro entry published by the U.K. Treasury in June 2003. The breadth and depth of its assessment is impressive by any standard. Nonetheless, this paper points at some areas that deserve to be explored further in future assessments. Covering these areas would not necessarily have changed the assessment's conclusion, namely that the case for entry is not yet "clear and unambiguous,." but it would have strengthened any conclusion reached. In addition, the paper highlights that in several areas relevant to the entry decision, the margin for uncertainty will remain significant, regardless of any reasonable attempt to reduce it.
    Keywords: Monetary policy , United Kingdom , Euro area ,
    Date: 2004–07–20
  76. By: Ashoka Mody; Eisuke Okada; Enrica Detragiache
    Abstract: A widely held nostrum is that countries should exit heavily managed exchange rate regimes when the going is good, rather than when the exchange rate is under pressure to depreciate. Have countries followed this advice in practice? And, if so, how good has the going been? We find that in the past 25 years or so, almost all exits to more flexible regimes were followed by a depreciation of the exchange rate, and that exits were about evenly divided between disorderly and orderly cases. A logit econometric model, indicates that the general circumstances of orderly and disorderly exits have been broadly similar: an overvalued real exchange rate, falling reserves, a difficult fiscal position, and high world interest rates. Wellestablished pegs were less likely to end.
    Keywords: Exchange rate regimes , Economic models ,
    Date: 2005–03–07
  77. By: S. Beidas; Magda E. Kandil
    Abstract: This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time.
    Keywords: Exchange rate regimes , West Bank and Gaza Strip , Currencies , Currency substitution ,
    Date: 2005–04–15
  78. By: Demid Golikov
    Abstract: This is a short literature overview. (1) The literature demonstrates no coherent view on the nature of economic exchange and, in particular, provides no conventionally accepted, fully satisfactory explanation of the real effects of money. Recent developments in macroeconomics suggest a role for financial intermediaries. (2) The economics literature, however, has very little to say about that though the role of intermediaries in economic history has always been emphasised. (3) Further reading suggests that intermediation is largely missing from economics for methodological reasons. Revival of interest in this topic became evident in recent years thanks to developments in the treatment of asymmetric information, thin markets, and dynamics with innovations. (4) Today's literature, however, still primarily addresses empirical and specific issues like particular functions of intermediaries. Analysis of intermediation in the context of general equilibrium, explanation of its role in the monetary transmission and non-neutrality have not been seriously undertaken. Only a few authors so far have put forward their proposals for this perspective.
    Keywords: monetary theory, financial intermediary, asymmetric information, microfoundations
    JEL: B41 E4 E51 G21
    Date: 2005–10–20
  79. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: The founders of the Bretton Woods System 60 years ago were primarily concerned with orderly exchange rate adjustment in a world economy that was characterized by widespread restrictions on international capital mobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for the international monetary system. In particular, large gross cross-holdings of foreign assets and liabilities mean that the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional trade balance channel. Accordingly, this paper empirically explores some of the interconnections between financial globalization and exchange rate adjustment and discusses the policy implications.
    Keywords: Globalization , Financial assets , Capital flows , Exchange rates , Emerging markets , Economic models ,
    Date: 2005–01–18
  80. By: Ari Aisen
    Abstract: In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Since exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations (MBS) generate a consumption bust followed by a recovery, policymakers may consider the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections while MBS are set after them.
    Keywords: Stabilization measures , Anti-inflation policy , Economic models ,
    Date: 2004–06–22
  81. By: Christopher Adam; David Cobham
    Abstract: A 'new version' gravity model is used to estimate the effect of de facto exchange rate regimes, as classified by Reinhart and Rogoff (2004), on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly 'protrade' - as first suggested by Rose (2000) - other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade between countries are significantly more pro-trade than the default regime of a 'double float'. They suggest that the direct and indirect effects of exchange rate regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. In addition, there is evidence that membership of different currency unions by two countries has pro-trade effects, which can be understood in terms of a large indirect effect on transactions costs. Tariff-equivalent monetary barriers associated with each of the exchange rate regimes are also calculated.
    Keywords: Gravity models, geography, trade, exchange rate regime, currency union, transactions costs, tariff-equivalent barriers
    JEL: F10 F33 F49
    Date: 2005
  82. By: Noureddine Krichene
    Abstract: Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
    Keywords: Emerging markets , Euro , U.S. dollar , Exchange rates , Prices , Economic models ,
    Date: 2004–10–22
  83. By: Sibel Yelten
    Abstract: This paper uses the Sjaastad model to estimate the optimal currency area for the Nepalese rupee and concludes that, currently, Nepal may be reasonably well off with its peg to the Indian rupee. As its economy opens and its trade base and trading partners expand, it may want to reevaluate whether moving toward an exchange rate basket including the U.S. dollar may be a better policy choice. The regression results indicate that, currently, the prices of imported goods in Nepal are solely influenced by India, suggesting that with the peg to the Indian rupee, Nepal can isolate the import side of its economy completely from external shocks. On the export side, the regression results indicate that Nepalese export prices seem, to a large extent, to be influenced by U.S. prices. However, the export price index had to be constructed, and the construction methodology is likely to entail an overestimation of the impact of the U.S. dollar.
    Keywords: Monetary unions , Nepal , Asia , Financial crisis , Exchange rates , Currencies , Currency pegs , Economic models ,
    Date: 2004–08–16
  84. By: Rishi Goyal; A. Mushfiq Mobarak; Susan Creane; Randa Sab
    Abstract: Based on data collected on a wide range of financial sector indicators, new indices of financial development for countries in the Middle East and North Africa (MENA) are constructed, encompassing six themes: development of the monetary sector and monetary policy, banking sector development, nonbank financial development, regulation and supervision, financial openness, and institutional quality. The paper finds that the degree of financial development varies across the region. Some countries have relatively well-developed banking sectors and regulatory and supervisory regimes. However, across the region, more needs to be done to reinforce the institutional environment and promote nonbank financial sector development. Based on a subset of indicators, the MENA region is found to compare favorably with a few other regions, but it ranks far behind the industrialized countries and East Asia.
    Keywords: Financial Sector , Middle East , Africa , Development ,
    Date: 2004–11–02
  85. By: Michael B. Devereux; Woon Gyu Choi
    Abstract: This paper empirically explores how fiscal policy (represented by increases in government spending) has asymmetric effects on economic activity at different levels of real interest rates. It suggests that the effect of fiscal policy depends on the level of real rates, since the Ricardian effect is smaller at lower financing costs of fiscal policy. Using threshold regression models on U.S. data, the paper provides new evidence that expansionary government spending is more conducive to short-run growth when real rates are low. It also finds asymmetric effects on interest rates and inflation, and threshold effects associated with substitution between financing methods.
    Keywords: Fiscal policy , United States , Government expenditures , Real interest rates , Economic models ,
    Date: 2005–01–31
  86. By: Inwon Song
    Abstract: The increased presence of foreign banks in a country's domestic banking system necessitates the development of effective cross-border prudential supervision where the consolidated supervision is the essential element. This paper presents foreign bank supervision in terms of division of responsibilities between the home and host countries, consolidated supervision, quality of home-country supervision, memoranda of understanding (MOUs), and "ringfencing" of banks. A number of challenges which foreign banks bring to emerging market banking supervisors are also discussed. The paper also provides surveys of country cases.
    Keywords: Bank Supervision , International banking , Emerging markets , Financial sector ,
    Date: 2004–06–01
  87. By: Catriona M. Purfield
    Abstract: The formulation of fiscal policy in Kiribati faces unusual challenges. Kiribati's revenue base is among the most volatile in the world, and it possesses sizeable financial assets. Drawing on lessons from some other countries who experience high volatility in their revenues, this paper proposes a fiscal policy rule for Kiribati which is nested within a medium-term macroeconomic framework that aims to ensure the sustainable use of Kiribati's financial assets while managing the impact of extreme revenue volatility. It also discusses improvements in the institutional fiscal policy framework that could support such a framework.
    Date: 2005–08–18
  88. By: Alain Ize; Eduardo Levy Yeyati
    Abstract: De facto (unofficial) dollarization, defined as the holding by residents of assets and liabilities denominated in a foreign currency, is a policy concern in an increasing number of developing economies. This paper addresses the dollarization debate from this perspective, with the goal of setting the stage for a more detailed and focused discussion of whether de-dollarization should be a policy objective and, if so, how best to pursue this objective. We review existing theories of de facto dollarization and the extent to which they are supported by the available evidence, presents the main strategies for reform, and proposes a list of policy recommendations.
    Keywords: Dollarization , Monetary policy ,
    Date: 2005–09–30
  89. By: André Binette; Sylvain Martel
    Abstract: The authors investigate empirically the relationship between different aspects of inflation and relative price dispersion in Canada using a Markov regime-switching Phillips curve. They examine three theories that explain movements in relative price dispersion: the signal extraction model, the extension of the signal extraction model, and the menu cost model. The authors show that expected inflation, which is captured by the menu cost model, is the aspect of inflation that is most closely associated with relative price dispersion. Furthermore, this result seems robust to different specifications. The authors, however, cannot completely discard inflation uncertainty (the signal extraction model), especially when using core inflation. They also observe a strong asymmetry regarding the impact of positive and negative unexpected inflation on relative price dispersion using total inflation, but this asymmetry is not observed for core inflation. This suggests that the strong asymmetry arises mainly from the presence of components typically associated with supply shocks, and not from the presence of downward nominal rigidities, as Aarstol (1999) proposes, following Ball and Mankiw (1992a,b).
    Keywords: Inflation and prices
    JEL: C32 E31
    Date: 2005
  90. By: James M. Boughton
    Abstract: All financial institutions specialize, in dimensions that may include categories of assets and liabilities, types of services offered, customer demographics, and geographic coverage. The International Monetary Fund is the only international financial institution that is universal in its geographic scope, prepared to lend on request to virtually any country in the world. Why has this status come about? What are its costs and benefits? Is it an appropriate model for a world where macroeconomic imbalances, financial crises, and disparities in economic development must compete for attention and resources?
    Date: 2005–06–22

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