nep-cba New Economics Papers
on Central Banking
Issue of 2006‒03‒11
twenty-one papers chosen by
Roberto Santillan

  1. "Are Long-run Price Stability and Short-run Output Stabilization All that Monetary Policy Can Aim For?" By Giuseppe Fontana; Alfonso Palacio-Vera
  2. Monetary Policy Transparency and Uncertainty: A Comparison between the Bank of England and the Bundesbank/ECB By Iris Biefang-Frisancho Mariscal; Peter Howells
  3. Revisiting the Delegation Problem in a Sticky Price and Wage Economy. By Gregory E. Givens
  4. "Monetary Policy Strategies of the European Central Bank and the Federal Reserve Bank of the U.S." By L. Randall Wray
  5. Can monetary policy be helped by domestic oil price stabilization?, By Eduardo Loyo; Luciano Vereda
  6. Monetary Policy Transparency:Lessons from Germany and the Eurozone By Iris Biefang-Frisancho Mariscal; Peter Howells
  7. Monetary Policy Regimes: a fragile consensus By Peter Howells; Iris Biefang-Frisancho Mariscal
  8. Are the Effects of Monetary Policy Asymmetric in Australia? By Phil Bodman
  9. UN ESTUDIO EMPÍRICO DE TRANSMISIÓN MONETARIA EN EUROPA By Gloria M. Soto Pacheco; Mª Asunción Prats Albentosa
  10. "Prolegomena to Realistic Monetary Macroeconomics: A Theory of Intelligible Sequences" By Wynne Godley; Marc Lavoie
  11. A Microfoundation of Monetary Economics By Shouyong Shi
  12. The Endogeneity of Money: Empirical Evidence By Peter Howells
  13. Methodological Triangulation at the Bank of England:An Investigation By Paul Downward; Andrew Mearman
  14. "Micro-aspects of Monetary Policy in Pre-war Japan: Lender of Last Resort and Selection of Banks" By Tetsuji Okazaki
  15. "Bad for Euroland, Worse for Germany: The ECB's Record" By Joerg Bibow
  16. "Is the Dollar at Risk?" By Korkut A. Erturk
  17. Testing for Rate-Dependence and Asymmetry in Inflation Uncertainty: Evidence from the G7 Economies By Sandy Suardi; O.T.Henry; N. Olekalns
  18. Monetary and Fiscal Theories of the Price Level: The Irreconcilable Differences By Bennett T. McCallum; Edward Nelson
  19. "Keynes's Approach To Money: An Assessment After 70 Years" By L. Randall Wray
  20. Hot money inflows in China : How the people's bank of China took up the challenge. By Vincent Bouvatier
  21. "Speculation, Liquidity Preference, and Monetary Circulation" By Korkut A. Erturk

  1. By: Giuseppe Fontana; Alfonso Palacio-Vera
    Abstract: A central tenet of the so-called new consensus view in macroeconomics is that there is no long-run trade-off between inflation and unemployment. The main policy implication of this principle is that all monetary policy can aim for is (modest) short-run output stabilization and long-run price stabilityÑi.e., monetary policy is neutral with respect to output and employment in the long run. However, research on the different sources of path dependency in the economy suggests that persistent but nevertheless transitory changes in aggregate demand may have a permanent effect on output and employment. If this is the case, then, the way monetary policy is run does have long-run effects on real variables. This paper provides an overview of this research and explores how monetary policy should be implemented once these long-run effects are acknowledged.
    Date: 2005–11
  2. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: It is widely believed that institutional arrangements influence the quality of monetary policy outcomes. Judged on its ‘transparency’ characteristics, therefore the Bank of England should do better than the Bundesbank/ECB. We show that this is not confirmed by agents’ ability to anticipate central bank decisions. Furthermore, benefits from transparency should also show in a narrowing of the diversity in cross sectional forecasts. We show that the diversity in interest rate forecasts is no greater under the Bundesbank/ECB than the Bank of England. This suggests that other factors than ‘transparency’ may affect interest rate uncertainty. Increasing difficulty in forecasting inflation appears to play a part in the UK while being less of a problem in Germany.
    Keywords: transparency, yield curve, forecasting uncertainty, Bank of England, Bundesbank/ ECB
    JEL: E58
    Date: 2005–10
  3. By: Gregory E. Givens
    Abstract: In a stylized economy with price and wage stickiness, this paper argues that delegating a nominal wage target to a central bank operating under discretion generally delivers better social outcomes than delegating price level or inflation targets. Although both policies impart inertia into central bank actions, wage targeting dominates price level targeting because the former delivers a more favorable tradeoff between the stabilization goals appearing in the social welfare function, namely, price inflation, wage inflation, and the output gap. Delegation of a dual policy featuring both price level and nominal wage targets, however, nearly replicates the efficient outcome accompanying the precommitment policy from a timeless perspective.
    Keywords: Price Level Targeting, Wage Targeting, Delegation, Timeless Perspective
    JEL: E42 E50 E52 E58
    Date: 2006–02
  4. By: L. Randall Wray
    Abstract: In the debate on monetary policy strategies on both sides of the Atlantic, it is now almost a commonplace to contrast the Fed and the ECB by pointing out the formerÕs flexibility and capacity to adjust rigidity, and the latterÕs extreme caution, and obsession with low inflation. In looking at the foundations of the two banksÕ strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor for the very different economic performance in the U.S. and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long period, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, etc., but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and U.S. The two economic areasÕ differences must be explained by considering other factors among which the most important is fiscal policy.
    Date: 2005–11
  5. By: Eduardo Loyo (Department of Economics PUC-Rio); Luciano Vereda (Department of Economics PUC-Rio)
    Date: 2005–05
  6. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: The conduct of monetary policy emphasises institutional arrangements which make monetary policy decision-making more ‘transparent’. Judged by these institutional features neither the Bundesbank, nor the ECB, score very highly. We test for (i) agents’ average ability to anticipate policy rate changes under the Bundesbank and the ECB and (ii) and agents’ forecasting unanimity of money market rates. Rising forecasting uncertainty may either be due to a lack of ECB transparency or to larger inflation and growth forecasting errors. Our results indicate that inflation forecast spreads widened amongst private agents and that inflation forecasting uncertainty increased the forecasting spread of money market rates
    Keywords: transparency, yield curve, forecasting uncertainty, Bundesbank, ECB
    JEL: E58
    Date: 2004–12
  7. By: Peter Howells (School of Economics, University of the West of England); Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England)
    Abstract: The last fifteen years have seen the emergence of widespread consensus that optimum monetary policy is designed on the basis of three pillars: a short-term official rate of interest as the sole policy instrument and the placing of that instrument in the hands of a central bank which is (a) independent of government and (b) transparent in its decision-making. We take a critical look at each of these. In the first case, we focus attention on the failure of mainstream economics to recognise the choice of instrument and the implications of its adoption. In the case of independence we argue that he theoretical case for independence has been misunderstood and that it is not an essential requirement for successful policy. We also show that ‘independence’ is not best measured against a checklist of statutory characteristics. As regards ‘transparency’ our argument is slightly different, though we come to a similar conclusion. Unlike independence, ‘transparency’ does address a real problem for central banks. However, the evidence suggests that transparency is not the only, or even the best, solution. A variety of evidence tells us that agents can understand and anticipate the actions of the most secretive institutions.
    Keywords: Monetary policy; central banks; independence; transparency
    JEL: E31 E42
    Date: 2005–12
  8. By: Phil Bodman (MRG - School of Economics, The University of Queensland)
    Abstract: This paper examines whether monetary policy shocks have asymmetric effects on output in Australia. Using methods similar to Cover (1992) together with some other simple threshold models, evidence is found of certain types of asymmetries when comparing monetary contractions to monetary policy expansions. Unanticipated decreases in interest rates appear to significantly raise GDP growth rates, whilst unexpected increases in rates do not appear to significantly lower growth. These findings are also found in a brief examination of the investment and consumption channels within the monetary policy transmission process. Economic growth is also significantly higher in a low interest rate regime (when interest rates are below a certain threshold, such as the sample average or average over some longer time period) than in a high interest rate environment. These results appear to refute the idea that monetary policy is like `pushing on a string', at least for Australian data over the period 1973:1-2005:1.
  9. By: Gloria M. Soto Pacheco (Universidad de Murcia); Mª Asunción Prats Albentosa (Universidad de Murcia)
    Abstract: The aim of this paper is to determine whether there have been differences in the effectiveness of the transmission mechanism of monetary policy in Germany, France, Italy, Spain and the United Kingdom since Economic and Monetary Union (EMU) establishment. The analysis is based on the fulfilment of the Expectations Hypothesis under rational expectations and the methodology is implemented through a VAR model with ARCH disturbances.The evidence obtained shows that the analysed countries started from different monetary transmission structures and that these differences still remain at a larger extent. Also, the EMU seems not to have increased the power of the transmission mechanism in every single country. Its contribution is shown to be poor in the case of the Mediterranean countries (Spain and Italy). However, in Continental countries, Germany and especially in France, the effectiveness of monetary transmission is outstanding nowadays. Este trabajo analiza las diferencias en la efectividad del mecanismo de transmisión monetaria en Alemania, Francia, Italia, España y el Reino Unido en el periodo previo y posterior a la UEM. El análisis se centra en el estudio de la estructura temporal de los tipos de interés y emplea como marco analítico el contraste de la Teoría de las Expectativas bajo la hipótesis de racionalidad. La metodología econométrica se implementa mediante un modelo VAR con perturbaciones ARCH.Los resultados obtenidos muestran que los países analizados partían de estructuras de transmisión monetaria diferentes que aún permanecen en la actualidad. La UEM no parece haber aumentado significativamente la capacidad de transmisión monetaria en cada uno de ellos. En los países mediterráneos (España e Italia) los resultados muestran una transmisión débil, mientras que en los países continentales (Alemania y Francia) la evidencia es mucho mayor y hasta un horizonte de medio plazo.
    Keywords: Estructura temporal, transmisión monetaria , VAR, cointegración, expectativas Term structure, monetary transmission, VAR, cointegration, expectations hypothesis
    JEL: C22 E52
    Date: 2006–02
  10. By: Wynne Godley; Marc Lavoie
    Abstract: This paper sets out a rigorous basis for the integration of Keynes-Kaleckian macroeconomics (with constant or increasing returns to labor, multipliers, mark-up pricing, etc.) with a model of the financial system (comprising banks, loans, credit money, equities, etc.), together with a model of inflation. Central contentions of the paper are that, with trivial exceptions, there are no equilibria outside financial markets, and the role of prices is to distribute the national income, with inflation sometimes playing a key role in determining the outcome. The model deployed here describes a growing economy that does not spontaneously find a steady state even in the long run, but which requires active management of fiscal and monetary policy if full employment without inflation is to be achieved. The paper outlines a radical alternative to the standard narrative method used by post-Keynesians as well as by Keynes himself.
    Date: 2006–02
  11. By: Shouyong Shi
    Abstract: In this lecture, I explain what the microfoundations of money are about and why they are necessary for monetary economics. Then, I review recent developments of a particular microfoundation of money, commonly known as the search theory of money. Finally, I outline some unresolved issues.
    JEL: E40 E50 E31
  12. By: Peter Howells (School of Economics, University of the West of England)
    Abstract: For many years, the endogenous nature of the money supply has been a cornerstone of post-Keynesian economics. In this paper we survey the empirical work which has been done on both the ‘core’ thesis – that loans create deposits – and on peripheral questions such as the origin of the demand for loans, the reconciliation of the demand for money with the loan-created supply and the accommodationist/structuralist debate. The originality of the paper lies in its demonstration that while post-Keynesians may have thought they were fighting in heroic isolation, most economists involved with the real world of monetary policy-making in practice took much the same view. The consequence is that we can find empirical investigations of issues relating to the endogeneity in a wide range of locations.
    Keywords: Money; endogeneity;
    JEL: E50
    Date: 2005
  13. By: Paul Downward (Augusta State University); Andrew Mearman (School of Economics, University of the West of England)
    Abstract: This paper investigates the extent to which triangulation takes place within the Monetary Policy Committee (MPC) process at the Bank of England. Triangulation is at its most basic, the mixing of two or more methods, investigators, theories, methodologies or data in a single investigation. More specifically, we argue for triangulation as a commitment in research design to the mixing of methods in the act of inference. The paper argues that there are many motivations for triangulation as well as types of triangulation. It is argued that there is evidence of extensive triangulation of different types within the MPC process. However, there is very little theoretical triangulation present; raising concerns about pluralism. Also, it is argued that the triangulation which occurs is mainly undertaken for pragmatic reasons and does not reflect other, coherent ontological and epistemological positions.
    Date: 2005–08
  14. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: The central bank as the Lender of Last Resort (LLR) is faced with a trade off between the stability of the financial system and the "moral hazard" of banks. In this paper we explore how this trade off was dealt with by the Bank of Japan (BOJ) in the pre-war period, and how LLR lending by the BOJ affected the financial system. In particular, this paper focuses on the following two stylized facts of Japanese financial history. First, the BOJ actively intervened in the market as the LLR under the unstable financial system in the 1920s. Second, in this period, the financial market worked well to sort out inefficient banks through failures. In providing an LLR loan, the BOJ adopted the policy of favoring those banks that had an already established transaction relationship with the BOJ. At the same time, the BOJ was selective about which banks it would enter into a transaction relationship with. That is, the BOJ chose the banks it would conduct transactions with based on criteria that included profitability, liquidity, quality of assets, and the personal assets of directors. Furthermore, the BOJ did not hesitate to suspend transaction relationships with those banks whose performance declined. This policy enabled the BOJ to act as the LLR without impairing the function of the market to sort out inefficient banks. Whereas the transaction relationship with the BOJ affected a bank's survivability, the effect was not across the board. That is, the transaction relationship did not increase the survivability of a bank directly, but it increased the influence of profitability and liquidity on survivability, especially in a period of financial crisis. This implies that the BOJ bailed out only those transaction counterparts that were profitable and prudent when the financial system was especially unstable. It is suggested that through concentrating LLR lending on its transaction counterparts, the BOJ could successfully bail out only those banks which were illiquid but solvent, and thereby avoided the moral hazard that the LLR policy might otherwise have incurred.
    Date: 2006–01
  15. By: Joerg Bibow
    Abstract: This paper assesses the contribution of the European Central Bank (ECB) to GermanyÕs ongoing economic crisis, a vicious circle of decline in which the country has become stuck since the early 1990s. It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking: the bank is quick to hike, but slow to ease. It thereby acts as a brake on growth. This approach has worked for the Bundesbank in the past because other banks behaved differently. Exporting the Bundesbank Òsuccess storyÓ to Euroland has undermined its working, however; given its sheer size, Euroland simply cannot freeload on external stimuli forever. While Euroland cannot do without proper demand management, the Maastricht regime and especially the ECB are firmly geared against it. The ECBÕs monetary policies have been biased against growth and have thus proved bad for Euroland as a whole. Meanwhile, the German disease of protracted domestic demand weakness has spread across much of Euroland. Yet, by pursuing its peculiar traditions of wage restraint and procyclical public thrift, the ECBÕs policies have had even worse results for Germany. Fragility and divergence undermine the euroÕs long-term survival.
    Date: 2005–11
  16. By: Korkut A. Erturk
    Abstract: A massive fiscal stimulus and, until recently, aggressive monetary easing have been successful in raising bond and real estate prices to unprecedented levels, inducing a credit boom that has prevented private consumption from falling. While it might still be too early to say that it worked, the strategy has indeed, for the time being, prevented the U.S. economy from slipping into a severe depression after the collapse of the stock market at the turn of the millennium.
    Date: 2005–04
  17. By: Sandy Suardi (MRG - School of Economics, The University of Queensland); O.T.Henry; N. Olekalns
    Abstract: The Friedman-Ball hypothesis implies a link between the inflation rate and inflation uncertainty. In this paper we employ a new test for the joint null hypothesis of no dependence effects and no asymmetry in the G7 inflation volatility. The results show that higher inflation rates operate additively via the conditional variance of inflation to induce greater inflation uncertainty in the U.S., U.K. and Canada. In addition, positive inflationary shocks are found to generate greater inflation uncertainty than negative shocks of a similar magnitude in the U.K. and Canada.
  18. By: Bennett T. McCallum; Edward Nelson
    Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability – and therefore plausibility – of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
    JEL: E5 E6 D8
    Date: 2006–03
  19. By: L. Randall Wray
    Abstract: This paper first examines two approaches to money adopted by Keynes in the General Theory (GT). The first is the more familiar Òsupply and demandÓ equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even Post Keynesians utilizing KeynesÕs Òfinance motiveÓ or the ÒhorizontalÓ money supply curve adopt similar methodology. The second approach of the GT is presented in Chapter 17, where Keynes drops Òmoney supply and demandÓ in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of moneyÕs role in constraining effective demand. In the penultimate section, I return to KeynesÕs earlier work in the Treatise on Money (TOM), as well as the early drafts of the GT, to obtain a better understanding of the nature of money. I conclude with policy implications.
    Date: 2006–01
  20. By: Vincent Bouvatier (CES-TEAM)
    Abstract: This paper investigates hot money inflows in China. The financial liberalization comes into effect and the effectiveness of capital controls tends to diminish over time. As a result, China is fuelled by hot money inflows. The US interest rate cut since 2001 and expectations of exchange rate adjustments are the main factors explaining these capital inflows. This study use the Bernanke and Blinder (1988) model extended to an open economy to examine implications of hot money inflows for the Chinese economy. A Vector Error Correction Model (VECM) on monthly data from March 1995 to March 2005 is estimated to investigate the recent upsurge in foreign reserves and shows that the interaction between domestic credit and foreign reserves was stable and consistent with monetary stability. Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this result.
    Keywords: Hot money inflows, domestic credit, VECM, Granger causality.
    JEL: C32 E5 F32 F33
    Date: 2006–02
  21. By: Korkut A. Erturk
    Abstract: The sharp exchanges that Keynes had with some of his critics on the loanable funds theory made it harder to appreciate the degree to which his thought was continuous with the tradition of monetary analysis that emanates from Wicksell, of which KeynesÕs A Treatise on Money was a part. In the aftermath of the General Theory (GT), many of KeynesÕs insights in the Treatise were lost or abandoned because they no longer fit easily in the truncated theoretical structure he adopted in his latter work. A part of KeynesÕs analysis in the Treatise which emphasized the importance of financial conditions and asset prices in determining firmsÕ investment decisions was later revived by Minsky, but another part, about the way self-sustained biases in asset price expectations in financial markets exerted their influence over the business cycle, was mainly forgotten. This paper highlights KeynesÕs early insights on asset price speculation and its link to monetary circulation, at the risk perhaps, of downplaying the importance of the GT.
    Date: 2006–01

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