nep-cba New Economics Papers
on Central Banking
Issue of 2005‒11‒05
fifteen papers chosen by
Roberto Santillan

  1. Central Banks as Agents of Economic Development By Gerald Epstein
  2. Monetary policy under uncertainty in micro-founded macroeconometric models By Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
  3. Monetary policy inertia: fact or fiction? By Glenn D. Rudebusch
  4. "Is Money Neutral in the Long Run?" By Burton Abrams; Russell Settle
  5. Monetary policy with imperfect knowledge By Athanasios Orphanides; John C. Williams
  6. The Cause of the Great Inflation: Interactions between the Government and the Monetary Policymakers By Taiji Harashima
  7. Financial Supervision Fragmentation and Central Bank Independence: The Two Sides of the Same Coin? By Andreas Freytag; Donato Masciandaro
  8. An Estimated DSGE Model for Sweden with a Monetary Regime Change By Cúrdia, Vasco; Finocchiaro, Daria
  9. Exchange Market Pressure, Monetary Policy, and Economic Growth: Argentina in 1993 - 2004 By Clara Garcia; PNuria Malet
  10. Monetary Policy under Sudden Stops By Vasco Cúrdia
  11. The Hyperinflation Model of Money Demand (or Cagan Revisited): Some New Empirical Evidence from the 1990s By Atanas Christev
  12. Monetary and Exchange Rate Policy Coordination in ASEAN 1 By William H. Branson; Conor N. Healy
  13. Review of A History of the Federal Reserve. Volume 1 (2003) by Allan H. Meltzer By Michael D. Bordo
  14. Lessons from Italian Monetary Unification By James Foreman-Peck
  15. Inflation and Economic Growth: A Cross-Country Non-linear Analysis By Robert Pollin; Andong Zhu

  1. By: Gerald Epstein
    Abstract: In the last two decades, there has been a global sea change in the theory and practice of central banking. The currently dominant “best practice” approach to central banking consists of the following: (1) central bank independence (2) a focus on inflation fighting (including adopting formal “inflation targeting”) and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings). This paper argues that this neo-liberal approach to central banking is highly idiosyncratic in that, as a package, it is dramatically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. Throughout the early and recent history of central banking in the U.S., England, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using “direct methods” of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The neoliberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history.
    Date: 2005
  2. By: Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
    Abstract: We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
    Keywords: Monetary policy ; Macroeconomics ; Microeconomics
    Date: 2005
  3. By: Glenn D. Rudebusch
    Abstract: Estimated monetary policy rules often appear to indicate a sluggish partial adjustment of the policy interest rate by the central bank. In fact, such evidence does not appear to be persuasive, since the illusion of monetary policy inertia may reflect spuriously omitted persistent influences on the setting of policy. Similarly, theoretical arguments do not provide a compelling case for real-world policy inertia. However, empirical evidence on the policy rule obtained by examining expectations of future monetary policy embedded in the term structure of interest rates is very informative and indicates that the actual amount of policy inertia is quite low.
    Keywords: Monetary policy ; Interest rates
    Date: 2005
  4. By: Burton Abrams (Department of Economics,University of Delaware); Russell Settle (Department of Economics,University of Delaware)
    Abstract: The traditional neoclassical open-economy flexible exchange rate model is expanded to include a “credit channel” by incorporating a bank loan market. The new “credit view” model provides substantially different predictions concerning the neutrality of money and the types of autonomous shocks that might affect the real exchange rate.
    Keywords: Credit Channel, Monetary policy, Fixed Exchange Rates, Money Neutrality
    JEL: F41 E51
    Date: 2005
  5. By: Athanasios Orphanides; John C. Williams
    Abstract: We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.
    Keywords: Monetary policy ; Econometric models ; Interest rates
    Date: 2005
  6. By: Taiji Harashima (University of Tsukuba & Cabinet Office of Japan)
    Keywords: The Great Inflation; Inflation; Persistence; Monetary policy
    JEL: E31 E52 E65 N12
    Date: 2005–10–31
  7. By: Andreas Freytag (University of Jena, Faculty of Economics); Donato Masciandaro (Paolo Baffi Centre, Bocconi University, Milan, and Department of Economics, Mathematics and Statistics, University of Lecce)
    Abstract: This paper analyses how the central banks role in the monetary institutional setting can affect the unification process of the overall financial supervision architecture. Using indicators of monetary commitment and central bank independence, we claim that these legal proxies show an inverse link with financial supervision unification. Therefore, the trade off still holds between the supervisory and the central bank involvement per se, however, monetary commitment and independence do also matter. In this respect, in an institutional setting characterized by a central bank deeply and successfully involved in supervision, or legally independent, a multi-authority model is likely to occur.
    Keywords: Financial Supervision, Single Authority, Central Bank Independence, Monetary Commitment
    JEL: E58 G20 G28
    Date: 2005–11–01
  8. By: Cúrdia, Vasco (Princeton University); Finocchiaro, Daria (Institute for International Economic Studies, Stockholm University)
    Abstract: Using Bayesian methods, we estimate a small open economy model for Sweden. We explicitly account for a monetary regime change from an exchange rate target zone to flexible exchange rates with explicit inflation targeting. In each of these regimes, we analyze the behavior of the monetary authority and the relative contribution to the business cycle of structural shocks in detail. Our results can be summarized as follows. Monetary policy is mainly concerned with stabilizing the exchange rate in the target zone and with price stability in the inflation targeting regime. Expectations of realignment and the risk premium are the main sources of volatility in the target zone period. In the inflation targeting period, monetary shocks are important sources of volatility in the short run, but in the long run, labor supply and preference shocks become relatively more important. Foreign shocks are much more destabilizing under the target zone than under inflation targeting.
    Keywords: Bayesian estimation; DSGE models; target zone; inflation targeting; regime change
    JEL: C10 C30 E50
    Date: 2005–10–01
  9. By: Clara Garcia; PNuria Malet
    Abstract: The pressure in the exchange market against a particular currency has been frequently measured as the sum of the loss of international reserves plus the loss of nominal value of that currency. This paper follows the tradition of investigating the interactions between such measure of exchange market pressure (EMP) and monetary policy; but it also questions the usual omission of output growth in the empirical investigations of the interrelations between EMP, domestic credit, and interest rates. The focus of this work is Argentina between 1993 and 2004. As in previous studies, we found some evidence of a positive and double-direction relationship between EMP and domestic credit. But output growth also played a role in the determination of EMP, even more than domestic credit or interest rates. Also, there is some evidence that EMP affected growth negatively.
    Date: 2005
  10. By: Vasco Cúrdia (Princeton University)
    Abstract: Emerging markets are often exposed to sudden stops of capital inflows. What are the effects of monetary policy in such an environment? To answer this question, the paper proposes a model with the typical elements of an emerging market economy. Credit frictions generate balance sheet effects, debt is denominated in foreign currency, production requires an imported input, and households have access to the international capital market only indirectly, through their ownership of leveraged firms. In the model, a sudden stop is generated by a change in the perceptions of foreign lenders, which leads to an increase in the cost of borrowing. The paper then compares the response of the economy to a sudden stop under alternative monetary policy rules. A first result is that the recession is most acute in a fixed exchange rate regime. Taylor rules reacting to inflation and output are more stabilizing. The comparison of policies also suggests that, rather than focus on whether to increase or decrease interest rates, it is more important to influence agents' expectations about future monetary policy. Furthermore, the flexible price equilibrium is attained if the monetary policy is set to completely stabilize the domestic price index.
    Keywords: sudden stops, monetary policy, emerging markets, financial crises
    JEL: E5 F3 F4
    Date: 2005–10–31
  11. By: Atanas Christev
    Abstract: This paper employs cointegration techniques to examine three recent hyperinflationary episodes in transition economies, which, with the exception of Russia (1992-1994), have been largely overlooked in the literature. More specifically, these episodes include Bulgaria during 1995-1997 and Ukraine during 1993-1995. We use the well-known maximum likelihood estimator due to Johansen (1988, 1991) and Stock and Watson's (1993) dynamic ordinary least squares (DOLS) estimator to complement each other and obtain consistent estimates of the semi-elasticity of real money demand with respect to inflation. The empirical results obtained in this study support the Cagan model of money demand in the East European hyperinflation experiences of the 1990s. However, our results do not indicate that the rational expectations hypothesis holds during these episodes. In addition, we also test the hypothesis that monetary policy in these three hyperinflations was conducted with the sole intent of maximizing the inflation tax revenue for the government.
    Keywords: Cagan, cointegration, inflation tax, transition economies, stabilizations
    JEL: C45 C62 E31 E63 E65
    Date: 2005
  12. By: William H. Branson; Conor N. Healy
    Abstract: This paper develops the basis for monetary and exchange rate coordination in Asia as part of a package of monetary integration that could support growth and poverty reduction. This could be achieved directly through coordinated exchange rate stabilization, and indirectly through the implications of this for reserve pooling and investment in an Asian development fund (ADF) and through development of the Asian bond market (ABM). Macro policy coordination could be viewed as a necessary condition for further development of both reserve pooling via the Chiang Mai Initiative (CMI) and of the ABM. The paper analyzes the trade structure of ASEAN and China in terms of both geographic sources of imports and markets for exports, and of the commodity structure of trade. The similarities of the geographic and commodity trade structures across the region are consistent with adoption of a common currency basket for stabilization, and with an argument for monetary integration across the region along the lines of Mundell (1961) on optimum currency areas. The paper constructs currency baskets and real effective exchange rates (REERs) for the countries in the region. Since their trade patterns are quite similar and their policies are already implicitly coordinated, their REERs tend to move together. This means that ASEAN and China are already moving toward integration in practical effect. Explicit movement toward coordination could support surveillance and reserve-sharing under the CMI, and release reserves to be invested in an ADF.
    JEL: F33 F41 G15
    Date: 2005–10
  13. By: Michael D. Bordo
    Abstract: In this essay I distill the seven major themes in A History of the Federal Reserve which covers the Federal Reserve's record from 1914 to 1951. I conclude with a critique.
    JEL: E58
    Date: 2005–10
  14. By: James Foreman-Peck (Cardiff Business School)
    Abstract: This paper examines whether the states brought together in the Italian monetary union of the nineteenth century constituted an optimum monetary area, either before or after unification. Interest rate shocks indicate close relations between states in northern Italy but negative correlations between the North and the South before unification, suggesting some advantages of continued Southern monetary independence. The proportion of Southern Italian trade with the North was small, in contrast to intra- Northern trade, and therefore monetary independence imposed a light burden. Changes in the wheat market indicate that the South and North after unification (though not probably because of it) increasingly specialised according to their comparative advantages. Coupled with differences in economic behaviour of the Southern economy, this meant that monetary policies appropriate for the North were less so for the South. In the face of agricultural shocks originating in the New World and in France, the South would have gained from depreciating its exchange rate against the North or against the non-Italian world. As it was, nineteenth century Italian monetary union did not create the conditions for its own success, contrary to the findings of Frankel and Rose (1998) for the later twentieth century.
    JEL: E42 N23 F15 F33
    Date: 2005
  15. By: Robert Pollin; Andong Zhu
    Abstract: This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 – 2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 – 2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 – 18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the OECD countries, no clear pattern emerges at all with either the inflation coefficient or our estimated turning point. With the middle income countries, we return to a consistently positive pattern of inflation coefficients, though none are statistically significant. The turning points range within a narrow band in this sample, between 14 – 16 percent. With the low income countries, we obtain positive and higher coefficient values on the inflation coefficient than with the middle-income countries. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries, that is, to maintain inflation with a 3 – 5 percent band.
    Date: 2005

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