nep-cba New Economics Papers
on Central Banking
Issue of 2006‒11‒12
23 papers chosen by
Alexander Mihailov
University of Reading

  1. On Linear Quadratic Approximations By Debortoli, Davide; Nunes, Ricardo
  2. Is Macroeconomics a Science? By Barnett, William A.
  3. La théorie et la modélisation macroéconomiques, d'hier à aujourd'hui. By Michel De Vroey; Pierre Malgrange
  4. Communication and Coordination-Palgrave Entry By Jack Ochs
  5. Supply of Money By Barnett, William A.
  6. Divisia Monetary Index By Barnett, William A.
  7. A New Cost Channel of Monetary Policy By Cenesiz, Alper
  8. Inflation and the underground economy By Ahiabu, Stephen
  9. On stabilisation policy: Are there conflicting implications for growth and welfare? By Dimitrios Varvarigos
  10. Linearity and stationarity of South Asian real exchange rates By Liew, Venus Khim-Sen; Lee, Hock-Ann; Lim, Kian-Ping; Lee, Huay-Huay
  11. The Financial System of the EU 25 By Allen, Franklin; Laura, Bartiloro; Oskar, Kowalewski
  12. Restoring Fiscal Sustainability in the Euro Area: Raise Taxes or Curb Spending? By Boris Cournède; Frédéric Gonand
  13. Regional and Global Financial Integration in East Asia By Kim, Soyoung; Lee, Jong-Wha; Shin, Kwanho
  14. Can We Predict GDP Through Examining the Past Values of Money? Empirical Evidence from an Asian Tiger By Feridun, Mete
  15. Capital Mobility, Labor Markets, and Macroeconomic Policies By Cenesiz, Alper; Pierdzioch, Christian
  16. Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions By An, Lian
  17. Real interest rates equalization: The case of Malaysia and Singapore By Ling, Tai-Hu; Liew, Venus Khim-Sen; Syed Khalid Wafa, Syed Azizi Wafa
  18. Milkshake Prices, International Reserves, and the Mexican Peso By Fullerton, Thomas; Torres, David
  19. Equilibrium price dynamics in an overlapping-generations exchange economy By Brito, Paulo; Dilao, Rui
  20. Bayesian Learning in Optimal Stochastic Growth By Koulovatianos, Christos; Mirman, Leonard J.; Santugini, Marc
  21. Can the Law of One Price be tested? By Philip, Kostov
  22. Stock prices, exchange rates and causality in Malaysia: a note By Azman-Saini, W.N.W.; Habibullah, M.S.; Law, Siong Hook; Dayang-Afizzah, A.M.
  23. Hedge funds, exchange rates and causality: Evidence from Thailand and Malaysia By Azman-Saini, W.N.W.

  1. By: Debortoli, Davide; Nunes, Ricardo
    Abstract: We prove the generality of the methodology proposed in Benigno and Woodford (2006). We show that, even in the presence of a distorted steady state, it is always possible and relatively simple to obtain a purely quadratic approximation to the welfare measure. We also show that, in order to do so, the timeless perspective assumption is crucial.
    Keywords: Linear-Quadratic Approximation; Distorted Steady State; Timeless Perspective
    JEL: C60 E0
    Date: 2006–07
  2. By: Barnett, William A.
    Abstract: This paper was written as the first draft of the invited Foreword for the book, Money and the Economy, by Apostolos Serletis. The paper provides a critical view of those areas in which methodology in economics deviates from that in the physical sciences, provides examples and illustrations of those deviations, and emphasizes those areas of and approaches to economic research that most closely correspond with the nature of research in the physical sciences.
    Keywords: science; social science; politics; Federal Reserve; monetary policy
    JEL: B41 A11 C00 B20 A10
    Date: 2006–01–30
  3. By: Michel De Vroey; Pierre Malgrange
    Abstract: Nous retraçons à grands traits l'évolution de la macroéconomie de sa naissance à nos jours, son émergence dans les années 1930, puis la période de règne sans partage de la macroéconomie keynésienne des années 1950 à 1970. L'étape suivante de son évolution est l'offensive menée par Milton Friedman et Robert Lucas contre la macroéconomie keynésienne. Les travaux de ces auteurs ont débouché sur un changement de perspective qui nous paraît mériter d'être épinglé comme une "révolution scientifique" à la Kuhn, l'émergence de la macroéconomie dynamique et stochastique. Avec celle-ci, le centre d'intérêt de la théorie et de la modélisation macroéconomie se déplace. Le thème des défaillances de l'économie de marché, et en particulier du chômage, est délaissé au profit d'un examen des phénomènes du cycle et de la croissance, ceux-ci étant étudiés à partir de l'hypothèse d'un fonctionnement efficace du système. Ces dernières années ont vu l'émergence d'une "nouvelle synthèse néoclassique" rejouant le jeu de la synthèse ancienne avec une combinaison d'éléments keynésiens et classiques, tout en adoptant la méthodologie nouvelle de discipline de l'équilibre et de rationalité des agents. ### [english abstract: An outline of the evolution from the birth up to present days of the macroeconomics is laid out, its emergence during the thirties, then the period of the domination of the Keynesian macroeconomics of the years 1950 to 1970. The following stage of the evolution has been the attack from Milton Friedman and Robert Lucas against Keynesian macroeconomics. We consider the works of these authors deserve the label of a "scientific revolution à la Kuhn", with the emergence of the dynamic and stochastic macroeconomics. Associated with this, the focus of macroeconomics has shifted. Themes linked to market failures, and especially to unemployment disappear, in favour of cycle and growth analysis, these last being studied from the postulate of efficient working of the system. These last years have seen the emergence of a "New Neoclassical Synthesis" mimicking the old synthesis in combining keynesian and classical elements, while adopting the new methodology of equilibrium discipline and of agents rational behaviour.] ###
    Date: 2006
  4. By: Jack Ochs
    Date: 2006–01
  5. By: Barnett, William A.
    Abstract: This short paper is the encyclopedia entry on Supply of Money to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale).
    Keywords: monetary aggregation; index number theory; Divisia index; encyclopedia entry; aggregation theory; supply of money
    JEL: E5 E4 C43 G12
    Date: 2006–07–14
  6. By: Barnett, William A.
    Abstract: This short paper is the first draft of an encyclopedia entry on Divisia Monetary Indexes to appear in the second edition of the International Encyclopedia of the Social Sciences. The encyclopedia is edited by William A. Darity and forthcoming from Macmillan Reference USA (Thomson Gale).
    Keywords: monetary aggregation; index number theory; Divisia index' encyclopedia entry; aggregation theory
    JEL: E5 E4 C43 G12
    Date: 2006–04–18
  7. By: Cenesiz, Alper
    Abstract: I develop a new cost channel of monetary policy transmission in a small scale, dynamic, general equilibrium model. The new cost channel of monetary policy transmission implies that the frequency of price adjustment increases in the nominal interest rate. I report that allowing for the new cost channel can account both for the muted and delayed inflation response and for the persistence of the output response to monetary policy shocks. Without any additional assumption, my model can also generate the delayed output response.
    Keywords: Price stickiness; Monetary policy; Price adjustment; Persistence.
    JEL: E52 E32 E31
    Date: 2006–07
  8. By: Ahiabu, Stephen
    Abstract: This paper studies the optimal rate of seigniorage in an economy characterized by decentralized trade and a tax-evading underground sector. The economy has buyers, some of whom visit the formal market, while others visit the underground market. I find that the optimal rate of inflation depends on which of the two sectors, formal or underground, is more crowded/congested with buyers. If the underground sector is more crowded, the optimal inflation rate is as high as 42% per annum for Peru. That is, I offer a possible motivation for the high rates of inflation observed in that country from the mid 1970s up to the mid 1990s. If the formal sector is more crowded, optimal inflation falls to about 1.4%, which is close to the rate in 2005. Friedman rule is not optimal.
    Keywords: Inflation; Market Congestion; Ramsey Equilibrium; Underground Economy
    JEL: E6 E26 H21
    Date: 2006–10
  9. By: Dimitrios Varvarigos (Dept of Economics, Loughborough University)
    Abstract: The paper examines the choices for fiscal stabilisation policy that maximise aggregate welfare and long-run growth. This is done in the context of a stochastic dynamic general equilibrium model where premeditated learning provides the engine of human capital accumulation and growth, and technology shocks provide the impulse source of fluctuations. Contrary to existing conventional wisdom, the results indicate a conflict between the two policy objectives: the choice of no stabilisation, associated with maximum growth, is also associated with minimum welfare. Welfare maximisation requires a full stabilisation response to the occurrence of business cycles.
    Keywords: money; growth; volatility.
    JEL: E32 E63 O41
    Date: 2006–07
  10. By: Liew, Venus Khim-Sen; Lee, Hock-Ann; Lim, Kian-Ping; Lee, Huay-Huay
    Abstract: The linearity and stationarity of the real exchange rates of India, Nepal, Pakistan and Sri Lanka are investigated using formal linearity and the recently developed nonlinear stationary test procedures. Results obtained show that these real exchange rates are stationary albeit the presence of nonlinearity.
    Keywords: Nonlinearity; Real exchange rates; South Asia; linearity test; nonlinear stationary test
    JEL: N15 F14 C51
    Date: 2006–02
  11. By: Allen, Franklin; Laura, Bartiloro; Oskar, Kowalewski
    Abstract: We present an overview of the financial structure of the enlarged European Union with 25 countries. We start by describing the financial system development in all member states since 1995, and then compare the structure between the old and new countries. Using financial measures we document the prevailing substantial differences in the financial structure between new and old member states after the enlargement in 2004. Finally, we compare the financial structures of an enlarged EU with those of the United States and Japan.
    Keywords: Financial System
    JEL: G20
    Date: 2005–06
  12. By: Boris Cournède; Frédéric Gonand
    Abstract: With population ageing, fiscal consolidation has become of paramount importance for euro area countries. Consolidation can be pursued in various ways, with different effects on potential growth, which itself will be dragged down by ageing. A dynamic general equilibrium model with overlapping generations and a public finance block (including a pay-as-you-go pension regime, a health care system, non ageingrelated public spending and a stock of debt to be repaid) is used to compare the macroeconomic impact of four scenarios: a) increasing taxes to finance unchanged pensions and repay public debt, b) lowering future pension replacement rates and repaying public debt through a lower ratio of non ageing-related outlays to GDP, c) raising the retirement age by 1.25 years per decade and increasing taxes only to pay off debt, and d) increasing the retirement age by 1.25 years per decade and paying off debt through a lower ratio of non ageing-related expenditure to GDP. This last scenario is the one where growth is strongest: with gradual increases in the retirement age and spending restraint, average GDP growth in the 2010s would be 0.34 percentage point stronger than in a scenario where fiscal consolidation is achieved exclusively through tax hikes. The appropriate conclusion from the model is not that public spending is bad per se, but that cuts to lower-priority spending items can deliver surprisingly large income gains compared with the alternative of raising taxes. <P>Rétablir la soutenabilité des finances publiques dans la zone euro : Augmenter les impôts ou maïtriser les dépenses ? <BR>Le vieillissement démographique renforce la nécessité d'un redressement des finances publiques dans la zone euro. Ce redressement peut emprunter plusieurs voies dont les effets sur la croissance potentielle sont variables, et dans un contexte où le vieillissement lui-même pèse sur l'activité à long terme. Un modèle d'équilibre général dynamique avec générations imbriquées, intégrant une modélisation des finances publiques avec un régime de retraites par répartition, un système d'assurance-maladie, des dépenses publiques non liées à l'âge et un stock de dette publique à rembourser, permet d'étudier l'impact macroéconomique de quatre scénarios de consolidation: a) hausse généralisée des prélèvements obligatoires pour financer l'accélération des dépenses sociales et rembourser la dette, b) baisse des taux de remplacement pour les futurs retraités et maîtrise des dépenses publiques non liées à l'âge pour rembourser la dette, c) augmentation de l'âge moyen de départ à la retraite de 1.25 année par décade et augmentation des impôts limitée au remboursement de la dette, d) augmentation de l'âge de départ à la retraite de 1.25 année par décade et remboursement de la dette par maîtrise des dépenses publiques. C'est ce dernier scénario qui aboutit au taux de croissance le plus élevé: une augmentation graduelle de l'âge de la retraite et une maîtrise des dépenses non liées à l'âge permettrait de relever le taux moyen de croissance potentielle pendant la décennie 2010 de 1/3 de point de PIB dans la zone euro, par rapport à une consolidation procédant par hausses générales d'impôts. La conclusion de cet exercice ne consiste pas à prétendre que les dépenses publiques seraient mauvaises en soi pour l'économie, mais qu'une baisse des dépenses dans des secteurs non prioritaires permettrait de dégager des gains significatifs en matière de croissance par comparaison à un recours massif aux prélèvements obligatoires.
    Keywords: public debt, dette publique, ageing, dépenses publiques, public expenditure, vieillissement, zone Euro, fiscal consolidation, fiscal sustainability, consolidation fiscale, euro area, potential growth, croissance potentielle, soutenabilité des finances publiques, general equilibrium, équilibre général
    JEL: D58 E27 E60 H55 H63 J11
    Date: 2006–10–30
  13. By: Kim, Soyoung; Lee, Jong-Wha; Shin, Kwanho
    Abstract: We examine the degree of regional vs. global financial integration of East Asian countries in three ways; (1) comparing the size of cross-border assets such as securities and bank claims, (2) estimating the gravity model of bilateral financial asset holdings, and (3) estimating consumption risk sharing model. The results suggest that East Asian financial markets, particularly compared to the European ones, are relatively less integrated with each other than to global markets. We also find relatively more evidence of regional financial integration in bank claim markets than portfolio asset markets. The low financial integration within East Asia is attributed to the low incentives for portfolio diversification within the region, the low degree of development and deregulation of financial markets, and the instability in monetary and exchange rate regime.
    Keywords: Regional financial integration; Global financial integration; East Asia
    JEL: F36
    Date: 2006–05
  14. By: Feridun, Mete
    Abstract: The paper aims at establishing whether the fluctuations of money help predict future fluctuations of income, that are not already predictable on the basis of fluctuations of income itself or other readily observable variables. For this purpose vector autoregression (VAR) modelling is used to test whether changes in money supply (M2) has any deterministic or predictive content for movements in Income (GDP). The analysis is performed using quarterly macroeconomic data from Singapore spanning the period between 1980 and 2001. The results suggest that money (M2) and interest rates have information content for future movements in real GDP beyond that contained in past values of GDP itself. This relationship only establishes itself with a fairly long lag. The finding suggests the possibility of making use of the money-income relationship for forecasting purposes.
    Keywords: Vector autoregression (VAR); cointegration; causality
    JEL: E30
    Date: 2005–07
  15. By: Cenesiz, Alper; Pierdzioch, Christian
    Abstract: We used a dynamic two-country optimizing model featuring a labor-market friction to analyze the implications of international capital mobility for the effectiveness of macroeconomic policies in an open economy. Conventional wisdom suggests that higher capital mobility significantly increases (decreases) the effectiveness of monetary (fiscal) policy. Simulations of the model suggest that accounting for a labor-market friction substantially reduces the quantitative impact of capital mobility on the effectiveness of monetary and fiscal policy.
    Keywords: Open economy macroeconomics; Financial markets; Labor-market friction
    JEL: F41
    Date: 2006–01
  16. By: An, Lian
    Abstract: Abstract: This paper provides cross-country and time-series evidence on the extent of exchange rate pass-through at different stages of distribution - import prices, producer prices and consumer prices - for eight major industrial countries: United States, Japan, Canada, Italy, UK, Finland, Sweden and Spain. The analysis is based on a vector autoregreesion (VAR) model that includes the distribution chain of pricing. Instead of the conventional choleski decomposition as used in the literature, I propose to identify the exchange rate shock by the more recent sign restriction approach. For the first time in the literature, estimates of pass-through based on the sign restriction procedure are provided. I find exchange rate pass-through incomplete in many horizons, though complete pass-through is observed occasionally. The degree of pass-through declines and time needed for complete pass-through lengthens along the distribution chain. Furthermore, I find that a greater pass-through coefficient is associated with an economy that is smaller in size with higher import shares, more persistent and less volatile exchange rates, more volatile monetary shocks, higher inflation rate, and less volatile GDP.
    Keywords: Keywords: pass-through; vector autoregression; sign restrictions; exchange rates
    JEL: F31 F41
    Date: 2006–10–24
  17. By: Ling, Tai-Hu; Liew, Venus Khim-Sen; Syed Khalid Wafa, Syed Azizi Wafa
    Abstract: This study provides some evidences showing high degree of financial integration from both evidences of common shocks and real interest parity in the context of two small and open economies, that is, Malaysia and Singapore. Few key policy implications may be suggested from the findings in this study. First, foreign investors who invest in these two countries may need to look for sources of diversification to protect their wealth against the occurrence of contagion effect due to the strong trade and finance relationship between these two countries. Second, the banks and businesses that set rules for interest rates on deposits and loans should be kept consistently with commercial banking practices and key developments in the financial sectors for the betterment of both Malaysia and Singapore economies. Third and most importantly, as two financial markets are highly linked, the monetary and fiscal authorities of both countries should work hand-in-hand to avoid any potential macroeconomic instability in this region.
    Keywords: Real Interest Rate Parity; Malaysia; Singapore
    JEL: F36 R12
    Date: 2006–09–26
  18. By: Fullerton, Thomas; Torres, David
    Abstract: Menu prices from 13 international restaurant franchises that operate in both El Paso and Ciudad Juarez are utilized to examine the behavior over time of the peso/dollar exchange rate. Parametric and non-parametric tests indicate that the price ratio alone provides a biased estimator of the exchange rate. In addition to the multi-product price ratio, the empirical analysis also incorporates interst rate prity and balance of payment variables. The combination of unique microeconomic sample data with national macroeconomic variables illustrates one manner in which border economies provide information regarding the interplay of financial markets between Mexico and the United States.
    Keywords: Prices; exchange rates; border economics
    JEL: R15 F31
    Date: 2005
  19. By: Brito, Paulo; Dilao, Rui
    Abstract: We present a continuous time overlapping generations model for an endowment Arrow-Debreu economy with an age-structured population. For an economy with a balanced growth path, we prove that Arrow-Debreu equilibrium prices exist, and their dynamic properties are age-dependent. Our model allows for an explicit dependence of prices on critical age-specific endowment parameters. We show that, if endowments are distributed earlier than some critical age, then speculative bubbles for prices do exist.
    Keywords: Arrow-Debreu equilibrium; overlapping generations models; McKendrick model.
    JEL: G12 D51 J10
    Date: 2006–10–31
  20. By: Koulovatianos, Christos; Mirman, Leonard J.; Santugini, Marc
    Abstract: We introduce Bayesian learning in a general stochastic growth model and examine the consumption and saving decisions of an agent facing a stochastic production function depending on a parameter. The agent does not know the value of the parameter but has beliefs about it, expressed as a prior distribution. By collecting observations of the stock of capital, given his consumption decision, his beliefs about the value of the parameter evolve over time using Bayesian methods. Both active and passive Bayesian learning can be studied here. The active Bayesian learner can affect the learning process through his present decision, while the passive Bayesian learner cannot. We study the effect of changes in the distributions of the production shock and of the unknown parameter on consumption and saving, using the concepts of first-order and second-order stochastic dominance, in a class of growth models with passive Bayesian learning. These results are general in that they apply to general distribution functions. In particular, our results are valid for priors that are not conjugate. For example, we show that a riskier distribution of the production shock has no effect on consumption, while a riskier prior distribution of the value of the unknown parameter affects consumption.
    JEL: D80 D90
    Date: 2006–11–09
  21. By: Philip, Kostov
    Abstract: A simple stylised model, that incorporates transaction costs, is developed. The Law of One Price (LOP) is assumed to hold with regard to a reference market that is not taken into account in the empirical testing of the Law. It is shown that under these assumptions the empirical tests of the LOP will fail.
    Keywords: Law of one price; purchasing power parity; transaction costs
    JEL: F14 F0
    Date: 2006–01–17
  22. By: Azman-Saini, W.N.W.; Habibullah, M.S.; Law, Siong Hook; Dayang-Afizzah, A.M.
    Abstract: This article contributes to the debate on stock prices and exchange rates in Malaysia. It examines causal relations using a new Granger non-causality test proposed by Toda and Yamamoto (Journal of Econometrics, 66, 225-50, 1995). Among the findings of interest, there is a feedback interaction between exchange rates and stock prices for the pre-crisis period. The results also reveal that exchange rates lead stock prices for the crisis period. In a financially liberalized environment, exchange rates stability is important for stock market well-being.
    Keywords: Exchange rates; Stock prices; Causality; Malaysia
    JEL: G1 F31
    Date: 2006–10
  23. By: Azman-Saini, W.N.W.
    Abstract: This article contributes to the debate on hedge funds and exchange rates in Thailand and Malaysia. It examines causal relations using a new Granger non-causality procedure proposed by Toda and Yamamoto (Journal of Econometrics, 66, 225-50, 1995). Monthly observations are utilized over a sample period from January, 1994 to April, 2002. The results show that the funds lead Thai baht for the crisis period. The results also reveal that the funds lead Malaysian ringgit for the pre-crisis period.
    Keywords: Hedge Funds; Exchange Rates; Granger Non-Causality; Thailand; Malaysia
    JEL: G2 F31
    Date: 2006–10

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