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on Central Banking |
| By: | Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, United Kingdom.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, United Kingdom.) |
| Abstract: | The objectives of this paper are - first, to quantify the stabilization welfare gains from commitment; second, to examine how commitment to an optimal rule can be sustained as an equilibrium and third, to find a simple interest rate rule that closely approximates the optimal commitment one. We utilize an influential empirical micro-founded DSGE model, the euro area model of Smets and Wouters (2003), and a quadratic approximation of the representative household’s utility as the welfare criterion. Importantly, we impose the effect of a nominal interest rate zero lower bound. In contrast with previous studies, we find significant stabilization gains from commitment - our central estimate is a 0.4 ? 0.5% equivalent permanent increase in consumption, but in a variant with a higher degree of price stickiness, gains of over 2% are found. We also find that a simple optimized commitment rule with the nominal interest rate responding to current inflation and the real wage closely mimics the optimal rule. JEL Classification: E52, E37, E58. |
| Keywords: | Monetary rules, commitment, discretion, welfare gains. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070709&r=cba |
| By: | Jean Boivin; Marc Giannoni; Ilian Mihov |
| Abstract: | This paper disentangles fluctuations in disaggregated prices due to macroeconomic and sectoral conditions using a factor-augmented vector autoregression estimated on a large data set. On the basis of this estimation, we establish eight facts: (1) Macroeconomic shocks explain only about 15% of sectoral inflation fluctuations; (2) The persistence of sectoral inflation is driven by macroeconomic factors; (3) While disaggregated prices respond quickly to sector-specific shocks, their responses to aggregate shocks are small on impact and larger thereafter; (4) Most prices respond with a significant delay to identified monetary policy shocks, and show little evidence of a "price puzzle," contrary to existing studies based on traditional VARs; (5) Categories in which consumer prices fall the most following a monetary policy shock tend to be those in which quantities consumed fall the least; (6) The observed dispersion in the reaction of producer prices is relatively well explained by the degree of market power; (7) Prices in sectors with volatile idiosyncratic shocks react rapidly to aggregate monetary policy shocks; (8) The sector-specific components of prices and quantities move in opposite directions. |
| JEL: | C3 D2 E31 E4 E5 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12824&r=cba |
| By: | Friberg, Richard (Stockholm School of Economics); Wilander, Fredrik (ECON) |
| Abstract: | This report, commissioned by Sveriges Riksbank, examines the role of currency denomination in international trade transactions. It is divided in two parts. The first part consists of a survey of the price setting and payment practices of a large sample of Swedish exporting firms. The second part analyzes payments data from the Swedish settlement reports from 1999-2002. We examine whether invoicing patterns of Swedish and European companies changed following the creation of the EMU and how the currency denomination of exports differ from that of imports. Finally we consider the possibility that changes in invoicing patterns are correlated with changes in nominal exchange rates. Our main finding is that the same currency to a large extent is used for price setting, invoicing and payment for exports to third parties. We also find that the currency of the customer is the most used and that the euro is replacing the Swedish krona both in transactions with EMU-member countries but outside the EMU. Finally we find some evidence of a weak correlation between aggregate changes in invoicing patterns and changes in the trade weighted exchange rate over the period 1999-2002. |
| Keywords: | Invoicing currency; exchange rate pass-through; price setting currency; exchange rate exposure; nominal rigidity |
| JEL: | F31 F41 G32 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0201&r=cba |
| By: | Ester Faia (Department of Economics, Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain.) |
| Abstract: | This paper studies the design of optimal monetary policy (in terms of unconstrained Ramsey allocation) in a framework with sticky prices and matching frictions. Furthermore I consider the role of real wage rigidities. Optimal policy features significant deviations from price stability in response to various shocks. This is so since search externalities generate an unemployment/ inflation trade-off. In response to productivity shocks optimal policy is pro-cyclical when the worker’s bargaining power is higher than the share of unemployed people in the matching technology and viceversa. This is so since when the workers’ share of surplus is high there are many searching workers and few vacancies hence the monetary authority has an incentive to increase vacancy profitability by reducing the interest rate and increasing inflation. The opposite is true when the workers’ share of surplus is high. This implies that optimal inflation volatility is U-shaped with respect to workers’ bargaining power. JEL Classification: E52, E24. |
| Keywords: | optimal monetary policy, matching frictions, wage rigidity. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070707&r=cba |
| By: | Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin)) |
| Abstract: | We estimate the sticky information Phillips curve model ofMankiw and Reis (2002) using survey expectations of professional forecasters from four major European economies. Our estimates imply that inflation expectations in France, Germany and the United Kingdom are updated about once a year, in Italy about once each six months. |
| Keywords: | Inflation expectations, sticky information, Phillips curve, inflation persistence |
| JEL: | D84 E31 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:200604&r=cba |
| By: | Jonas Dovern (Kiel Institute for World Economics (IfW Kiel)); Joerg Doepke (Fachhochschule Merseburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jirka Slacalek (German Institute for Economic Research (DIW Berlin)) |
| Abstract: | We investigate the relevance of the Carroll’s sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year. |
| Keywords: | Inflation expectations, sticky information, inflation persistence |
| JEL: | D84 E31 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:200603&r=cba |
| By: | Martin Fukac; Adrian Pagan |
| Abstract: | Our discussion is structured by three concerns ů model design, matching the data and operational requirements. The paper begins with a general discussion of the structure of dynamic stochastic general equilibrium (DSGE) models where we investigate issues like (i) the type of restrictions being imposed by DSGE models upon system dynamics, (ii) the implication these models would have for ölocation parametersö, viz. growth rates, and (iii) whether these models can track the long-run movements in variables as well as matching dynamic adjustment. The paper further looks at the types of models that have been constructed in central banks for macro policy analysis. We distinguish four generations of these and detail how the emerging current generation, which are often referred to as DSGE models, differs from the previous generations. The last part of the paper is devoted to a variety of topics involving estimation and evaluation of DSGE models. |
| Keywords: | . DSGE model, Bayesian estimation, model evaluation. |
| JEL: | C11 C13 C51 C52 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2006/6&r=cba |
| By: | Martin Fukac |
| Abstract: | We analyze the economic dynamics in a basic New Keynesian model adjusted for imperfect, heterogeneous knowledge and adaptive learning. The policy, represented by a forward-looking Taylor rule, is driven by the central bankŽs own internal forecasts, whereas the core economic dynamics are driven by private agentsŽ expectations. We study the implications of disagreement between those two. We find that if there is expectations heterogeneity, monetary policy should be less active in its actions in order to be short-run stability improving, and to affect positively the speed of convergence towards the first best equilibrium in the long run. This is in contrast to the homogeneous incomplete knowledge literature, which predicts the opposite. We also find that the homogeneous expectations economy is easier to operate in for monetary policy, and that policy can be more effective than in the heterogeneous expectations economy. From the perspective of incomplete, heterogeneous knowledge and adaptive learning methodology, we can thus see the importance of good communication policy and monetary policy credibility. |
| Keywords: | . Imperfect and heterogeneous knowledge, adaptive learning, monetary policy. |
| JEL: | E52 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2006/5&r=cba |
| By: | Patrick Honohan |
| Abstract: | Although the worldwide growth in dollarization of bank deposits has recently slowed, it has already reached very high levels in dozens of countries. Building on earlier findings that allowed the main cross-country variations in the share of dollars to be explained in terms of national policies and institutions, this paper turns to analysis of short-run variations, particularly the response of dollarization to exchange rate changes, which is shown to be too small to warrant ‘fear of floating’ by dollarized economies. But high dollarization is shown to increase the risk of depreciation and even suspension, as indicated by interest rate spreads. While specific policy is needed to deal with the risks associated with dollarization, the underlying causes of unwanted dollarization should also be tackled. |
| Date: | 2007–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp201&r=cba |
| By: | Jiri Podpiera |
| Abstract: | Operational monetary policy rules are characterized by a parsimonious specification and are therefore prone to specification error when estimated on real data. I devise a policy rule estimation procedure, which is robust to marginal misspecification, and study the effects of specification error in least squares. I find the robust evidence of upward bias in policy inertia in least squares applied to most commonly used Taylor type rule. In effect, least squares learning of a central bank can lead to increasing monetary policy inertia over time. |
| Keywords: | Monetary policy inertia, policy rule. |
| JEL: | E4 E5 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp314&r=cba |
| By: | Fanelli Luca (Department of Statistical Sciences, University of Bologna, Italy); Paruolo Paolo (Department of Economics, University of Insubria, Italy) |
| Abstract: | This paper addresses the problem of measuring the speed of adjustment of exchange rates and relative prices to purchasing power parity (PPP), in the multivariate context of Vector Autoregressive Processes (VAR). We consider the speed of adjustment of one variable y in response to another variable x, where x, y belong to the VAR. We propose a multivariate measure defined as the forecasting horizon for which the cumulated interim multiplier of x on y surpasses a given fraction p of the corresponding total multiplier. This measure of speed for p = 1/2 coincides with the usual concept of half-life when restricted to univariate processes. We emphasize the importance to separate the concepts of long run e¤ect size and its speed of adjustment, where the latter is unambiguosly defined only when the long run e¤ect is non-zero. We discuss likelihood-based point estimators and confidence sets for this notion of half-life, and reconsider evidence on adjustment to PPP in monthly post-Bretton Woods data for five major industrialized countries against the U.S. dollar. Results show that nominal exchange rates bu¤er the entire adjustment to PPP disequilibrium, wheras relative prices do not adjust either in the short or the long run to PPP deviations. Concluding in such a situation that prices adjust faster than exchange rates is a matter of how one interprets the absence of short run and long run effects. |
| Keywords: | Invariance, Half-life, purchasing power parity, impact factors, speed of adjustment, vector equilibrium correction, upcrossing and downcrossing. |
| JEL: | C32 C52 F31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ins:quaeco:qf0606&r=cba |
| By: | Erlandsson, Mattias (National Institute of Economic Research); Markowski, Alek (National Institute of Economic Research) |
| Abstract: | The world trade patterns have changed over the recent years, and for Sweden many important trading partners have emerged. The National Institute of Economic Research has therefore compiled a new effective exchange rate of index for the Swedish krona, KIX. KIX is a chain-linked index that includes the currencies of 32 countries. The weight attached to each country is based on the patterns of international trade in manufactured goods and commodities. The index includes a number of emerging economies and gives in this way a more adequate definition of the effective exchange rate of the krona than the traditional indices. Furthermore, it allows for the changes in relative importance of Sweden´s trading partners. The calculation of KIX is now documented in a Working Paper: The Effective Exchange Rate Index KIX - Theory and Practise. |
| Date: | 2006–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nierwp:0095&r=cba |
| By: | Gabriel Fagan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vítor Gaspar (Banco de Portugal, Avenida Almirante Reis, 71-8o, 1150, Lisboa, Portugal.) |
| Abstract: | In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects. JEL Classification: F36, E21, F32. |
| Keywords: | Euro area, interest rate convergence, overlapping generations model. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070716&r=cba |
| By: | Luis Carranza (Universidad de Navarra); José Enrique Galdón Sánchez (Universidad Pública de Navarra); Javier Gómez Biscarri (Universidad de Navarra) |
| Abstract: | In this paper we summarize the results of a broad exploratory empirical analysis where we attempt to relate the level of financial development with the effectiveness of monetary policy. The analysis is based on a panel of sixty plus countries for whom we calculate measures both of financial development and of monetary policy effectiveness. We correlate the above measures and other macroeconomic variables to look for statistically significant relationships between the indicators of financial development, the effectiveness coefficients and other country characteristics. We present our results in the form of a list of stylized facts that deserve to be given future attention. Given the focus of the analysis on financial development, our results have important implications for emerging markets. |
| Keywords: | Financial Markets, Investment, Emerging Markets, Asymmetry Response of Credit, Lending Rates |
| JEL: | E44 E52 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp1406&r=cba |
| By: | Ulrich Fritsche (Department for Economics and Politics, University of Hamburg, and DIW Berlin); Jan Gottschalk (International Monetary Fund) |
| Abstract: | New-Keynesian macroeconomic models typically assume that any long-run trade-off between inflation and unemployment is ruled out. While this appears to be a reasonable characterization of the US economy, it is less clear that the natural rate hypothesis necessarily holds in a European country like Germany where hysteretic effects may invalidate it. Inspired by the framework developed by Farmer (2000) and Beyer and Farmer (2002), we investigate the long-run relationships between the interest rate, unemployment and inflation in West Germany from the early 1960s up to 2004 using a multivariate co-integration analysis technique. The results point to a structural break in the late 1970s. In the later time period we find for west Germany data a strong negative correlation between the trend components of inflation and unemployment. We show that this finding contradicts the natural rate hypothesis, introduce a version of the New Keynesian model which allows for some hysteresis and compare the effectiveness of monetary policy in these two models. In general, a policy rule with an aggressive response to a rise in unemployment performs better in a model with hysteretic characteristics than in a model without. |
| Keywords: | Cointegration, Vector error Correction Model, Unemployment, Phillips Curve, Hysteresis |
| JEL: | B22 C32 E24 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:200601&r=cba |
| By: | Emmanuel De Veirman |
| Abstract: | It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, be it moderately negative inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. The broader relevance of our analysis lies in its attempt to shed light on the determinants of such time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:536&r=cba |
| By: | William Dickens (The Brookings Institution); Lorenz Goette (University of Zurich); Erica L. Groshen (Federal Reserve Bank of New York, and IZA); Steinar Holden (University of Oslo, Center for Economic Studies-Information and Forschung Institute (CESifo)); Julian Messina (CSEF, University of Salerno, and European Central Bank); Mark Schweitzer (Federal Reserve Bank of Cleveland); Jarkko Turunen (European Central Bank); Melanie Ward (European Central Bank, and IZA) |
| Abstract: | How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals’ earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries. |
| Keywords: | Wage setting, Wage change distributions, Downward nominal wage rigidity, Downward real wage rigidity |
| JEL: | E3 J3 J5 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:171&r=cba |
| By: | Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we seek to quantify the importance of state-level housing price spillovers and interest rate shocks to house price developments in the United States. The econometric approach involves an application of the recently developed global VAR (GVAR) as presented in Dées, DiMauro, Pesaran, and Smith (2005) and Pesaran, Schuermann, and Weiner (2004) to the 31 biggest US states over the period 1986-2005. Such an approach allows not only for the empirical derivation of the impact of common shocks (such as interest rate shocks) on US house price developments, but also for an analysis of the importance of interstate housing price spillovers. Beyond real house prices and real income per capita, each state-specific vector error correction model also includes nation-wide variables — measured as a weighted average of other states —. These individual state models are then linked in a consistent and cohesive manner. Impact elasticities indicate strong interregional linkages for both real house prices and real income per capita. An analysis of generalised impulse responses indicates that the importance of housing price spillovers is state dependent, with shocks occurring in states with relatively lower land supply elasticities having much stronger spillover effects that those in the other states. As regards real interest rates, the impact appears to be relatively small with an increase of 100 basis points in the real 10-year government bond yield resulting in a long run fall in house prices of between 0.5 and 2.5%. This would suggest, in line with DelNegro and Otrok (2005) that the decline in long-term interest rates is not the primary factor that has driven the recent surge in house prices in the United States. JEL Classification: C32, E44, R10, R31. |
| Keywords: | housing, monetary policy, global VAR (GVAR). |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070708&r=cba |
| By: | Stephan Sauer (Seminar for Macroeconomics, University of Munich, Ludwigstrasse 28 Rgb., 80539 Munich, Germany.) |
| Abstract: | Discretionary monetary policy produces a dynamic loss in the New Keynesian model in the presence of cost-push shocks. The possibility to commit to a specific policy rule can increase welfare. A number of authors since Woodford (1999) have argued in favour of a timeless perspective rule as an optimal policy. The short-run costs associated with the time-less perspective are neglected in general, however. Rigid prices, relatively impatient households, a high preference of policy makers for output stabilisation and a deviation from the steady state all worsen the performance of the timeless perspective rule and can make it inferior to discretion. JEL Classification: E5. |
| Keywords: | Optimality, Timeless perspective, Policy rules. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070717&r=cba |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank, Prague, Czech Republic) |
| Abstract: | This paper examines policy neutral rate in real time for the Czech Republic in 2001:1-2006:09 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply a structural timevarying parameter model with endogenous regressors to evaluate the fluctuations of policy neutral rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the policy neutral rate gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium, equilibrium exchange rate appreciation as well as successful disinflation in the Czech economy. |
| Keywords: | policy neutral rate; Taylor rule; time-varying parameter model with endogenous regressors |
| JEL: | E43 E52 E58 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2007_01&r=cba |
| By: | Giuseppe Marotta |
| Abstract: | We search for multiple unknown structural breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the single currency. One break is detected in five EMU countries, two are found in other four, and in the UK as well. The last break occurs much before the event for France, several quarters later for Austria, Germany, Italy and Portugal, and the UK, hinting at best at a loose link with the inception of EMU. Long run pass-throughs decrease (except for France), becoming even more incomplete (except for the Netherlands and the UK); though the adjustment to equilibrium has become faster, cross-country heterogeneity in the euro area has barely changed. An incomplete lending rate pass-through, even in the long run, for the least sticky bank rate and the persistence of cross-country heterogeneity make tougher for the ECB to realize an effective area-wide monetary policy. |
| Keywords: | Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:modena:0612&r=cba |
| By: | Manolis Galenianos (Department of Economics, Penn State University); Philipp Kircher (Department of Economics) |
| Abstract: | We develop a model of monetary exchange that avoids several common criticisms of the recent microfoundations literature. First, rather than random matching, we assume that buyers know the location of all sellers, and hence the process of finding a partner is deterministic, although trade is still stochastic since the number of buyers visiting a given seller is random. Second, given multilateral matching, rather than bargaining, we assume that goods are allocated according to second-price auctions. Third, given this mechanism, we do not have to assume agents can observe each other’s money holdings or preferences, as is necessary for tractability with bargaining. A novel result is that homogeneous buyers hold different amounts of money, leading to equilibrium price dispersion. We find the closed-form solution for the distribution of money holdings. We characterize equilibrium and efficient monetary policy. |
| Keywords: | Search Theory of Money, Budget Constrained Auctions, Friedman Rule |
| JEL: | E41 D83 |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-004&r=cba |
| By: | Bertocco Giancarlo (Department of Economics, University of Insubria, Italy) |
| Abstract: | The endogenous money theory constitutes the core element of the post-keynesian monetary theory. The first formulation of this theory can be found in the works of Kaldor published in the 1970s. Taking these studies as a starting point, the post-keynesians elaborated two versions of the endogenous money theory which differ in their assumptions about the behaviour of the monetary authorities and the banking system, and hence offer different conclusions about the slope of the money supply curve. The aim of this paper is to evaluate the importance of the endogenous money theory using a criterion which can be defined on the basis of Keynes’s distinction between a real exchange economy and a monetary economy. As is well known, Keynes (1933a, 1933b) uses the former term to refer to an economy in which money is merely a tool to reduce the cost of exchange and whose presence does not alter the structure of the economic system, which remains substantially a barter economy. A monetary economy instead refers to an economic system in which the presence of fiat money radically changes the nature of exchange and the characteristics of the production process. Keynes (1933a, p. 410) notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded and stressed the need to elaborate a ‘monetary theory of production, to supplement the real–exchange theories which we already possess’ (Keynes, 1933a, p. 411). The specification of the elements determining the non-neutrality of money is thus the key factor differentiating Keynes’s theory from the classical one.1 The criterion used to evaluate the significance of the endogenous money theory is whether it enables us to elaborate on and to broaden the explanation of the justification the nonneutrality of money formulated by Keynes. In The General Theory the reasons for the non-neutrality of money are grounded in the store of wealth function of money; the liquidity preference theory is the element on which the keynesian explanation of income fluctuation is based. The importance of the money endogeneity theory can therefore be assessed in relation to its ability to specify determinant factors for the non-neutrality of money that have not been highlighted by the liquidity preference theory; in other words, the significance of the endogenous money theory depends on its capacity to bring out elements of a monetary economy that have been overlooked in the liquidity preference theory. This paper presents the following results. First of all, it shows that the endogenous money theory makes it possible to extend the analysis of the factors accounting for the non-neutrality of money beyond what Keynes has done in The General Theory; in particular this paper argues that the theory of money endogeneity obtains this result by underlying the means of payment function of money. Second, the work shows that the money endogeneity theory gives credence to certain points developed by Keynes in some works published in 1933 and between 1937 and 1939. Third, the work emphasises that the novel aspects of the money endogeneity theory do not depend on the particular version of this theory, i.e. they do not depend on the slope of the credit supply curve. Finally, in the paper the most significant aspects of the money endogeneity theory are presented by means of a theoretical model that distinguishes clearly between the credit market and the money market. It is shown that an important element of the money endogeneity theory is that it elaborates an alternative credit theory to the neoclassical one. The paper is divided into three parts. In the first one, the most relevant aspects of the money endogeneity theory are presented starting from Kaldor’s work, and we bring out the consistency between that theory and the considerations formulated by Keynes in some writings which preceded and followed the publication of The General Theory. In the second part the two versions of the money endogeneity theory are analysed and it is noted that the debate between the supporters of these two versions risks overshadowing the innovative aspects of the money endogeneity theory that do not depend on the slope of the credit and money supply curves. Then in the third part, the aspects that distinguish a monetary economy from a real-exchange economy and that emerge because of the money endogeneity theory are described. |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:ins:quaeco:qf0602&r=cba |
| By: | Vit Barta |
| Abstract: | The purpose of this paper is twofold: firstly, to identify and quantify the potential costs to the Czech economy should fulfilment of the Maastricht inflation criterion (MIC) require disinflation; and secondly, to discuss and suggest policies geared towards minimising the costs related to meeting the MIC. We assume that the real appreciation of the koruna will be about 1.5% during the reference period. Three disinflation simulations are derived from this assumption. The results show that a decline in inflation by 0.5 p.p., 1 p.p. and 1.5 p.p. leads to a cumulative loss of output reaching about 0.5%, 1% and 1.6% respectively of annual potential GDP over a period of four years. The time restriction imposed on the simulations implies that the shorter the time to reach a given lower level of inflation, the higher the initial increase in the interest rate and the more aggressive the policy rule needed. The simulation results and the likely application of the monetary convergence criteria are relevant to the discussion of policy options. We argue that due to the asymmetry of the Maastricht exchange rate criterion (MERC), allowing for nominal appreciation rather than depreciation, fulfilment of the MIC should be superior. Also, we suggest that the main task for the CNB will be to focus on reaching a level of inflation consistent with the presumed level of the MIC sufficiently early before the reference period. This may require a downward adjustment of the CNB’s inflation point target and an extension of the current policy horizon. |
| Keywords: | Disinflation, EMU entry, euro adoption, Maastricht inflation criterion, policy options, real exchange rate appreciation, output loss. |
| JEL: | E31 E32 E47 E52 E58 E63 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2005/04&r=cba |