|
on Central Banking |
| By: | Alex Cukierman (Tel-Aviv University and Center, Tilburg University); Francesco Lippi (Banca d'Italia) |
| Abstract: | This paper characterizes endogenous monetary policy when policymakers are uncertain about the extent to which movements in output and inflation are due to changes in potential output or to cyclical demand and cost shocks. We refer to this informational limitation as the “information problem” (IP). Main results of the paper are: 1. Policy is likely to be excessively loose (restrictive) for some time when there is a large decrease (increase) in potential output in comparison with a full information benchmark. 2. Errors in forecasting potential output and the output gap are generally serially correlated. These ndings provide a partial explanation for the inflation of the seventies and the price stability of the nineties. 3. A quantitative assessment, based on an empirical model of the US economy developed by Rudebusch and Svensson (1999), indicates that during and following periods of large changes in potential output the IP significantly affects the dynamics of inflation and output. 4. The increase in the Fed’s conservativeness between the seventies and the nineties, and a more realistic appreciation of the uncertainties surrounding potential output in the second period, imply that the IP problem had a stronger impact in the seventies than in the nineties. |
| Keywords: | monetary policy, potential output, filtering, inflation, output gap |
| JEL: | E5 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_493_04&r=cba |
| By: | Schabert, Andreas |
| Abstract: | This paper examines monetary policy implementation in a sticky price model. The central bank’s plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money transfers. These equilibria can be associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation tends to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank’s plan can uniquely be implemented in a history dependent way by money transfers, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity. |
| Keywords: | equilibrium indeterminacy; history dependence; Monetary policy implementation; money growth policy; optimal discretionary policy |
| JEL: | E32 E51 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5400&r=cba |
| By: | Helge Berger (Free University Berlin, Department of Economics, Boltzmannstr. 20, 12161 Berlin, Germany & CESifo.); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank,Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.) |
| Abstract: | Monetary policy in the euro area is conducted within a multi-country, multicultural, and multi-lingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the ECB? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent. |
| Keywords: | monetary policy; ECB; forecast; geography; history; heterogeneity; Taylor rule; learning; transmission; survey data; communication. |
| JEL: | E52 E58 G14 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060578&r=cba |
| By: | Francis Vitek (University of British Columbia) |
| Abstract: | This paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a small open economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. |
| Keywords: | Monetary policy analysis; Inflation targeting; Small open economy; Unobserved components model; Indicators of inflationary pressure; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | E52 F41 F47 |
| Date: | 2005–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512019&r=cba |
| By: | Eugenio Gaiotti (Banca d'Italia) |
| Abstract: | The paper examines the link between the precision of the available monetary policy indicators and the determinacy of equilibrium in a forward-looking macroeconomic model with partial information and an optimizing central bank. When the information on endogenous variables is not precise enough, the central bank acts too timidly; there is a possibility of self-fulfilling fluctuations in inflation and output. It is argued that, unless they are very precise, projections of output or inflation over the relevant horizon cannot be the only criterion for determining monetary policy actions. Rules which include a sufficient reaction to nominal variables may be necessary to supply an anchor for prices, even when the policymaker intends to consider all relevant information. Appointing a “conservative” central banker may also induce a less timid response to signs of inflation or deflation, even when their interpretation is difficult. In contrast, relying too much on measures of exogenous variables, such as potential output, can be counter-productive, because it could induce an attitude that is not responsive enough to inflation or deflation. |
| Keywords: | Monetary policy, information variables, incomplete information |
| JEL: | E52 E58 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_488_04&r=cba |
| By: | Marie Diron (Brevan Howard Asset Management); Benoît Mojon (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper first shows that the forecast error incurred when assuming that future inflation will be equal to the inflation target announced by the central bank is typically at least as small and often smaller than forecast errors of model-based and published inflation forecasts. It then shows that there are substantial benefits in having rule-of-thumb agents who simply trust that the central bank will deliver its pre-announced inflation objective. |
| Keywords: | Monetary policy, credibility, inflation targeting, inflation forecast. |
| JEL: | E5 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050564&r=cba |
| By: | Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper explores whether there are systematic patterns as to when members of the decision-making committees of the Federal Reserve, the Bank of England and the European Central Bank communicate with the public, and under what circumstances such communication has the ability to move financial markets. The findings suggest that communication is generally seen as a tool to prepare markets for upcoming decisions, as it becomes more intense before committee meetings, and particularly so prior to interest rate changes. At the same time, markets react more strongly to communication prior to policy changes. Other instances where communication becomes more intense, or where financial markets become more responsive are also identified; even though these are more specific to the individual central banks, they are consistent with differences in the central banks’ monetary policy strategies and communication policies. |
| Keywords: | Communication; central bank; monetary policy; timing. |
| JEL: | E43 E52 E58 G12 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050565&r=cba |
| By: | Galí, Jordi; Monacelli, Tommaso |
| Abstract: | We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyse its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending level. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal monetary policy requires that inflation be stabilized at the union level. On the other hand, the relinquishment of an independent monetary policy, coupled with nominal price rigidities, generates a stabilization role for fiscal policy, one beyond the efficient provision of public goods. Interestingly, the stabilizing role for fiscal policy is shown to be desirable not only from the viewpoint of each individual country, but also from that of the union as a whole. In addition, our paper offers some insights on two aspects of policy design in currency unions: (i) the conditions for equilibrium determinacy and (ii) the effects of exogenous government spending variations. |
| Keywords: | countercyclical policy; inflation differentials; monetary union; sticky prices |
| JEL: | E52 E62 F41 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5374&r=cba |
| By: | Andreas Schabert (Faculty of Economics and Econometrics, Universiteit van Amsterdam) |
| Abstract: | This paper examines monetary policy implementation in a sticky price model. The central bank's plan under discretionary optimization is entirely forward-looking and exhibits multiple equilibrium solutions if transactions frictions are not negligibly small. The central bank can then implement stable history dependent equilibrium sequences that are consistent with its plan by inertial interest rate adjustments or by money injections. These equilibria are associated with lower welfare losses than a forward-looking solution implemented by interest rate adjustments. The welfare gain from a history dependent implementation is found to rise with the strength of transactions frictions and the degree of price flexibility. It is further shown that the central bank's plan can uniquely be implemented in a history dependent way by money injections, whereas inertial interest rate adjustments cannot avoid equilibrium multiplicity. |
| Keywords: | Monetary policy implementation; optimal discretionary policy; history dependence; equilibrium indeterminacy; money growth policy |
| JEL: | E52 E51 E32 |
| Date: | 2005–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20050098&r=cba |
| By: | Marc Giannoni |
| Abstract: | This paper characterizes a robust optimal policy rule in a simple forward-looking model, when the policymaker faces uncertainty about model parameters and shock processes. We show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty. Thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations. However uncertainty may amplify the degree of "super-inertia" required by optimal monetary policy. We finally discuss the sensitivity of the results to alternative assumptions. |
| JEL: | C61 D81 E42 E52 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11942&r=cba |
| By: | Attila Csajbók (Magyar Nemzeti Bank); András Rezessy (Magyar Nemzeti Bank) |
| Abstract: | This article investigates the potential impact of a shift in market expectations about a country’s eurozone entry date on long-term yields and the spot exchange rate in a simple uncovered interest parity (UIP) framework. The results suggest that the size of the reactions depend on how far the entry date is postponed, how far current inflation is from the Maastricht-satisfying level, and whether the credibility of the central bank’s target inflation path is sensitive to changes in the expected entry date. In the empirical part, the authors apply the framework for Hungary and draw some policy conclusions for the timing of ERM II entry. |
| Keywords: | monetary policy, monetary union, expectations, euro zone entry, uncovered interest parity. |
| JEL: | E42 E52 F33 F42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/37&r=cba |
| By: | Thomas Colignatus (Thomas Cool Consultancy & Econometrics) |
| Abstract: | Proper monetary accounting rules are: (1) Central Banks should conform to the practice of the US Federal Reserve to distinguish its Balance Sheet from its Statement of Conditions. (2) Fiat money should not appear as a liability in a Balance Sheet. (3) The Central Bank should not record more government bonds than required for open market operations. Surplus bonds should be accounted as being void (on loan from the government who should destroy them). If these rules are not observed, a wrong measure of government debt arises, distorting the requirements for policy making. |
| Keywords: | Fiat Money, Money, Central Bank, Government Debt, Seigniorage, Inflation Tax, Gold Standard, Accounting |
| JEL: | A00 |
| Date: | 2005–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0512014&r=cba |
| By: | Eugenio Gaiotti (Banca d'Italia); Alessandro Secchi (Banca d'Italia) |
| Abstract: | The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases (the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications. |
| Keywords: | monetary transmission, cost channel, working capital |
| JEL: | E52 E31 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_525_04&r=cba |
| By: | John Landon-Lane (Rutgers University); Filippo Occhino (Rutgers University) |
| Abstract: | This paper develops a heterogeneous agents segmented markets model with endogenous production and a monetary authority that follows a Taylor-type interest rate rule. The model is estimated using Markov chain Monte Carlo techniques and is evaluated as a framework suitable for empirical monetary analysis. We find that the segmented markets friction significantly improves the statistical out-of-sample prediction performance of the model, and generates delayed and realistic impulse response functions to monetary policy shocks. In addition, we find that the estimates of the Taylor rule are stable across the pre-1979 and post-1982 periods in our sample, while the volatilities of the structural shocks faced in the pre-1979 period are substantially higher than in the post-1982 period. |
| Keywords: | Segmented Markets; Markov chain Monte Carlo; Taylor rule; Monetary policy shocks; |
| JEL: | C11 C52 E52 |
| Date: | 2005–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200505&r=cba |
| By: | Francesco Lippi (Banca d'Italia); Stefano Neri (Banca d'Italia) |
| Abstract: | This paper estimates a small New-Keynesian model with imperfect information and optimal discretionary policy using data for the euro area. The model is used to assess the usefulness of monetary aggregates and unit labour costs as information variables for monetary policy. The estimates reveal that the information content of the M3 monetary aggregate is limited. A more useful role emerges for the unit labour cost indicator, which contains information on potential output that helps to reduce the volatility of the output gap. Finally, the estimated weights for the objectives of monetary policy show that considerable importance is attributed to interest-rate smoothing, greater than to output gap stabilization. This finding indicates that the welfare gains of commitment may be smaller than suggested by typical parametrizations of New-Keynesian models. |
| Keywords: | monetary policy, Kalman filter, inflation, output gap |
| JEL: | E5 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_511_04&r=cba |
| By: | John Sargent |
| Abstract: | The author provides an overview of the 1975–78 Anti-Inflation Program (AIP), in a background document prepared for a seminar organized by the Bank of Canada to mark the AIP's 30th anniversary. After reviewing Canada's experience with, and policy response to, inflation in the decade preceding the introduction of the AIP, the author sets out the elements of the AIP's monetary and fiscal policy, and prices and incomes controls. He then compares the program's inflation objectives with the actual course of inflation and aggregate demand during, and immediately after, the AIP. Drawing on existing analyses of the program's monetary and fiscal policy and controls elements, the author discusses why the program's specific targets and general objectives were not met. He concludes, with the benefit of hindsight, that-while external factors contributed to the failure to meet objectives-monetary and fiscal policy were not suc h as to give the AIP a strong chance of fully succeeding. The program's controls element has generally been assessed more favourably, although certain specifics of the controls design can be questioned. The author briefly considers parallels with recent retrospective considerations of monetary and fiscal policy over the same period in the United States. He also attempts to draw some general lessons from the AIP experience and, more generally, from the 1970s experience. Given that the AIP was an early attempt at a form of inflation targeting, these include lessons that may be relevant to current policy with respect to inflation. |
| Keywords: | Credibility; Fiscal policy; Inflation and prices; Inflation targets; Monetary policy framework; Monetary policy implementation |
| JEL: | E31 E52 E63 E64 E65 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-43&r=cba |
| By: | Linda S. Goldberg; Michael W. Klein |
| Abstract: | The credibility of a central bank’s anti-inflation stance, a key determinant of its success, may reflect institutional structure or, more dynamically, the history of policy decisions. The first years of the European Central Bank (ECB) provide a natural experiment for considering whether, and how, central bank credibility evolves. In this paper, we present a model demonstrating how the high-frequency response of asset prices to news reflects market perceptions of the anti-inflation stance of a central bank. Empirical tests of this model on high frequency data, regressing both the change in the slope of the German yield curve and the change in the euro/dollar exchange rate on the surprise component of price news, suggest significant instability in the market’s perception of the policy stance of the ECB during its first five years of operation. Estimated smoothed paths of the coefficients linking news to asset prices show that these coefficients change with policies undertaken by the ECB. In contrast, there is no evidence of parameter instability for the response of the slope of the United States yield curve to price news during this period, suggesting no comparable evolution in the market perceptions of the commitment to inflation fighting by the Federal Reserve. |
| Keywords: | Central Banking, European Central Bank, Federal Reserve, inflation, exchange rate, credibility, yield curve |
| JEL: | F3 E5 E6 |
| Date: | 2005–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp105&r=cba |
| By: | Martin Menner |
| Abstract: | Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. We extend the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyze the monetary propagation mechanism and contrast the model .s implications with US business cycle stylized facts. With empirically plausible adjustment costs the model features a persistent propagation of monetary shocks and is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment. We find that monetary policy shocks are unlikely to be an important source of business cycle fluctuations but discover another dimension where money matters: the very frictions that make money essential shape also the responses of variables to real shocks. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we056634&r=cba |
| By: | Francis Vitek (University of British Columbia) |
| Abstract: | This paper develops and estimates an unobserved components model for purposes of monetary policy analysis in a closed economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a closed economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. |
| Keywords: | Monetary policy analysis; Unobserved components model; Indicators of inflationary pressure; Monetary transmission mechanism; Forecast performance evaluation |
| JEL: | E37 E52 |
| Date: | 2005–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512018&r=cba |
| By: | Yann Algan; Xavier Ragot |
| Abstract: | This paper analyzes the long-run effect of monetary policy when credit constraints are taken into account. This analysis is carried on in a heterogeneous agents framework in which infinitely lived agents can partially self-insure against income risks by using both financial assets and real balences. First we show theoretically that financial borrowing constraints give rise to an heterogeneity in money demand, leading to a real effect of inflation. Secondly, we show that inflation has a quantitative positive impact on output and consumption in economies which closely match the wealth distribution of the United States. Thirdly, we find that the average welfare cost of inflation is much smaller compared to a complete market economy, and that inflation induces important redistributive effects across households. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2005-45&r=cba |
| By: | Alessio Anzuini (Banca d'Italia); Aviram Levy (Banca d'Italia) |
| Abstract: | The paper analyses the financial structure of the private sector in the Czech Republic, Hungary and Poland and assesses its implications for the monetary transmission mechanism. The financial accounts of these countries provide a picture of a private sector which is predictably financially less mature than the EU average: the corporate sector relies significantly on non-market financial liabilities (such as trade credits and non-traded shares) and bears a substantial exchange rate risk; the household sector is less sophisticated both in terms of financial assets, whose composition is tilted towards bank deposits, and liabilities, the volume of which is still negligible. VAR system estimates conducted separately on each acceding country suggest that, despite the inferior financial development of these countries, the co-movement of macroeconomic variables conditional on a monetary policy shock is similar across countries and not dissimilar to what is found in the more advanced economies. |
| Keywords: | Financial structure, identified VAR, monetary policy shock, price puzzle. |
| JEL: | C30 E44 E52 F41 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_514_04&r=cba |
| By: | Bartosz Mackowiak |
| Abstract: | In recent policy debates some have argued that expansionary monetary policy in Japan can increase real output in Japan and in Japan´s neighbors, while others have warned that it is a beggar-thy-neighbor policy. In this paper we estimate structural vector autoregressions to assess the effects of Japanese monetary policy shocks. We find that the effects of Japanese monetary policy shocks on macroeconomic variation in East Asia have been modest and difficult to reconcile with the beggar-thy-neighbor view. We estimate that the Asian crisis was preceded by expansionary monetary policy shocks in Japan, but we fail to find support for the view that these shocks contributed to the crisis. |
| Keywords: | Structural vector autoregression, sign restrictions, monetary policy shocks, spillover effects, beggar-thy-neighbor, Japan, East Asia |
| JEL: | F41 E3 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-059&r=cba |
| By: | Kai Christoffel (European Central Bank); Keith Kuester (Goethe University, Frankfurt); Tobias Linzert (European Central Bank and IZA Bonn) |
| Abstract: | Real wages are a key determinant of marginal costs. The latter themselves are a driving force of inflation. We ask how wages and labor market shocks feed into the inflation process. We model search and matching frictions in the labour market in an otherwise standard New- Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the mid 70s to present. In our framework, we find that labor market structure is important for the evolution of the business cycle, and for monetary policy in particular. Yet labor market shocks are not important information for the conduct of stabilization policy. |
| Keywords: | labor market, wage rigidity, bargaining, Bayesian estimation |
| JEL: | E52 E58 J64 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp1902&r=cba |
| By: | Caroline Schmidt (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | How does an unexpected domestic monetary expansion a.ect the foreign economy? Does it induce an increase or a decline in foreign production? In the traditional two-country Mundell-Fleming model, monetary policy has «beggar-thy-neighbor» effects. Yet, empirical evidence from VARs indicates that U.S. monetary policy has positive international transmission effects on both foreign (non-U.S. G-7) output and aggregate demand. In this paper, I will show that a two-country dynamic general equilibrium model with sticky prices can account for these «stylized facts» if we allow for international asymmetries in the price-setting behavior of firms. If U.S. firms set export prices in their own currency only (producer-currency pricing), whereas producers in the rest of the world price their exports to the U.S. in the local currency of the export market (local-currency pricing), a U.S. monetary expansion is found to increase output and aggregate demand abroad. |
| Keywords: | Local-currency pricing, Producer-currency pricing, New Open Economy Macroeconomics, International transmission effects of monetary policy |
| JEL: | F41 E52 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:05-102&r=cba |
| By: | Xavier Ragot |
| Abstract: | The article presents a new channel through which inflation affects real variables. In a simple liquidity constraint model where money enters the utility function of infinitely living households, it is proven that credit constraints create heterogeneity in money demand. Because of this, long run inflation affects the real interest rate and wealth inequalities even when there is no redistributive effect, no distorting fiscal policy, and no substitution between leisure and working time. This result is proven for a general class of utility and production functions. In a simple calibration exercise, an increase in inflation from 2% to 3% increases the capital stock by 0.12% and raises wealth inequality. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2005-51&r=cba |
| By: | András Rezessy (Magyar Nemzeti Bank) |
| Abstract: | The paper estimates the immediate impact of Hungarian monetary policy on three classes of asset prices: the exchange rate of the forint vis-à-vis the euro, spot and forward government bond yields and the index of the Budapest Stock Exchange. The endogeneity problem is treated with the method of identification through heteroskedasticity as described by Rigobon and Sack (2004). The results suggest a significant impact on the exchange rate in one day i.e. an increase in the policy rate leads to an appreciation of the domestic currency, which is in line with the classic intuition. The effect increases markedly when the estimation is carried out with a two-day window suggesting the inefficiency of markets in incorporating monetary policy decisions in asset prices in a short period of time. Monetary policy affects spot yields positively, but the effect gradually dies out as the horizon gets longer. This can be explained with the impact on forward yields, as the results suggest a positive impact on short-term and a negative impact on long-term forward yields meaning that a surprise change in the policy rate leads to a rotation of the forward curve. The method does not provide interpretable and significant results for the stock exchange index. |
| Keywords: | Monetary transmission mechanism, Asset prices, Exchange rate, Yield curve, Stock market, Identification, Heteroskedasticity. |
| JEL: | E44 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/38&r=cba |
| By: | William Fuchs (Stanford University); Francesco Lippi (Banca d'Italia) |
| Abstract: | A Monetary Union is modeled as a technology that makes a surprise policy deviation impossible but requires voluntarily participating countries to follow the same monetary policy. Within a fully dynamic context, we identify conditions under which such arrangement may dominate a coordinated system with independent national currencies. Two new results are delivered by the voluntary participation assumption. First, optimal policy is shown to respond to the agents’ incentives to leave the union by tilting both current and future policy in their favor. This contrasts with the static nature of optimal policy when participation is exogenously assumed and implies that policy in the union is not exclusively guided by area-wide developments but does occasionally take account of member countries’ national developments. Second we show that there might exist states of the world in which the union breaks apart, as occurred in some historical episodes. The paper thus provides a first formal analysis of the incentives behind the formation, sustainability and disruption of a Monetary Union. |
| Keywords: | monetary union, limited commitment |
| JEL: | C7 E5 F33 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_512_04&r=cba |
| By: | Balázs Vonnák (Magyar Nemzeti Bank) |
| Abstract: | A standard approach in measuring the effect of monetary policy on output and prices is to estimate a VAR model, characterise somehow the monetary policy shock and then plot impulse responses. In this paper I attempt to do this exercise with Hungarian data. I compare two identification approaches. One of them involves the ‘sign restrictions on impulse responses’ strategy applied recently by several authors. I also propose another approach, namely, imposing restrictions on implied shock history. My argument is that in certain cases, especially in the case of the Hungarian economy, the latter identification scheme may be more credible. In order to obtain robust results I use two datasets. To tackle possible structural breaks I make alternative estimates on a shorter sample as well. The main conclusions are the followings: (1) although the two identification approaches produced very similar results, imposing restrictions on history may help to dampen counterintuitive reaction of prices; (2) after 1995 a typical unanticipated monetary policy contraction (a roughly 25 basis points rate hike) resulted in an immediate 1 per cent appreciation of the nominal exchange rate (3) followed by a 0.3% lower output and 0.1-0.15% lower consumer prices; (4) the impact on prices is slower than on output; it reaches its bottom 4-6 years after the shock, resembling the intuitive choreography of sticky-price models; (5) using additional observations prior to 1995 makes identification more difficult indicating the presence of a marked structural break. |
| Keywords: | structural VAR, monetary transmission mechanism, identification, sign restriction, monetary policy shocks |
| JEL: | C11 C32 E52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2005/01&r=cba |
| By: | Stefano Neri (Banca d'Italia) |
| Abstract: | The objective of this paper is to evaluate the effects of monetary policy shocks on stock market indices in the G-7 countries and Spain using the methodology of structural VARs. A model is estimated for each country and the effects of monetary policy shocks are evaluated by means of impulse responses. A contractionary shock has a negative and temporary effect on stock market indices. There is evidence of a significant cross-country heterogeneity in the persistence, magnitude and timing of the responses. A limited participation model with households trading in stocks is set up and the responses of stock prices to a monetary policy shock under different rules are evaluated. The model is able to account for the empirical response of stock prices to monetary policy shocks under different policy rules. |
| Keywords: | monetary policy; stock prices; structural VAR; limited participation model |
| JEL: | C32 E52 G12 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_513_04&r=cba |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper assesses the prospects for monetary integration between Emerging East Asian (EEA) economies. Our empirical analysis is based on a simple analytical framework for currency unions of small open economies, with a focus on the conduct of monetary policy in the presence of different types of shocks. Our empirical analysis looks at a number of supply-side characteristics of EEA countries, distinguishing between aggregate and tradable sector structural features. Moreover, we discuss the evidence on the cross-country variation of disturbances hitting the region. Our study indicates that, at present, EEA economies exhibit a high degree of cross-country supply diversity, while there is no compelling evidence that shocks are highly correlated across the region. |
| Keywords: | East Asia, emerging economies, currency union, stabilisation. |
| JEL: | E52 E58 F33 F40 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050567&r=cba |