nep-cba New Economics Papers
on Central Banking
Issue of 2007‒01‒28
thirty-two papers chosen by
Alexander Mihailov
University of Reading

  1. Productivity, external balance and exchange rates: evidence on the transmission mechanism among G7 countries By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  2. US imbalances: the role of technology and policy By Rudolfs Bems; Luca Dedola; Frank Smets
  3. The Economic Impact of Central Bank Transparency: A Survey By Eijffinger, Sylvester C W; van der Cruijsen, Carin A B
  4. Transparence et Efficacité de la Politique Monétaire. By Romain Baeriswyl; Camille Cornand
  5. Evaluating An Estimated New Keynesian Small Open Economy Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  6. Persistence and Nominal Inertia in a Generalized Taylor Economy: How Longer Contracts Dominate Shorter Contracts By Dixon, Huw; Kara, Engin
  7. Monetary Policy in a Small Open Economy with a Preference for Robustness By Dennis, Richard; Leitemo, Kai; Söderström, Ulf
  8. Technological change and the demand for currency: An analysis with household data By Lippi, Francesco; Secchi, Alessandro
  9. Optimal external debt and default By Guimarães, Bernardo
  10. An Evolutionary Theory of Inflation Inertia By Alexis Anagnostopoulos; Omar Licandro; Italo Bove; Karl Schlag
  11. S-Curve Redux: On the International Transmission of Technology Shocks. By Zeno Enders; Gernot J. Mueller
  12. On Econometric Analysis of Structural Systems with Permanent and Transitory Shocks and Exogenous Variables. Working paper #7 By Adrian Pagan; Hashem Pesaran
  13. Pricing to Habits and the Law of One Price By Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
  14. The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan By Kilian, Lutz; Manganelli, Simone
  15. Random Walk Expectations and the Forward Discount Puzzle By Philippe Bacchetta; Eric van Wincoop
  16. Predictability in Financial Markets: What Do Survey Expectations Tell Us? By Philippe Bacchetta; Elmar Mertens; Eric van Wincoop
  17. Anticipated Raw Materials Price Shocks and Monetary Policy Response - A New Keynesian Approach By Wohltmann, Hans-Werner; Winkler, Roland
  18. Optimal Monetary and Fiscal Policy in an Economy with Non-Ricardian Agents By Michal Horvath
  19. How good are dynamic factor models at forecasting output and inflation? A meta-analytic approach By Eickmeier, Sandra; Ziegler, Christina
  20. Is Numerairology the Future of Monetary Economics? Unbundling numeraire and medium of exchange through a virtual currency and a shadow exchange rate By Willem H. Buiter
  21. Exchange Market Pressure: Some Caveats In Empirical Applications By Simone Bertoli; Giampiero Gallo; Giorgio Ricchiuti
  22. Model-free Measurement of Exchange Market Pressure By Franc Klaassen; Henk Jager
  23. Term structure of interest rate. european financial integration. By Hortènsia Fontanals; Elisabet Ruiz; Catalina Bolancé
  24. Macroeconomic imbalances and exchange rate regime shifts By Post, Erik
  25. Sustainability of EU fiscal policies, a panel test By Peter Claeys
  26. Reforming China’s Exchange Rate Policy By John Ryan
  27. Does Inflation Targeting Matter for EMEs? By René Cabral
  28. Exchange rate sensitivity of China’s bilateral trade flows By Wang , Jiao; Ji, Andy G.
  29. How the Removal of Deposit Rate Ceilings Has Changed Monetary Transmission in the US: Theory and Evidence By Karel Mertens
  30. Progress toward a Common Currency Basket System in East Asia By OGAWA Eiji; SHIMIZU Junko
  31. Exchange Rate Pass-Through in ASEAN: Implications for the Prospects of Monetary Integration in the Region By Carlos Cortinhas
  32. Regionalwährungen in Deutschland – Lokale Konkurrenz für den Euro? By Rösl, Gerhard

  1. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labor productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables - in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade di¤ers across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country's terms of trade fall when its output grows, thus providing a mechanism to contain di¤erences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growthin the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run.
    Keywords: International transmission mechanism, net exports, terms of trade, real exchange rates, VAR, long-run restrictions, US current account
    JEL: F32 F41 F42
    Date: 2006
  2. By: Rudolfs Bems (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Luca Dedola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the role of three likely factors in driving the steady deterioration of the US external balance: US technology developments, changes in the US government fiscal position and the Fed’s monetary policy. Estimating several Vector Autoregressions on US data over the period 1982:2 to 2005:4 we identify five structural shocks: a multi-factor productivity shock; an investment-specific technology shock; a monetary policy shock; and a fiscal revenue and spending shock. Together these shocks can account for the deterioration and subsequent reversal of the trade balance in the 1980s. Productivity improvements and fiscal and monetary policy easing also play an important role in the increase of the external deficit since 2000, but these structural shocks can not explain why the trade balance deteriorated in the second half of the 1990s. JEL Classification: F3, F4.
    Keywords: global imbalances, open economy, VARs.
    Date: 2007–01
  3. By: Eijffinger, Sylvester C W; van der Cruijsen, Carin A B
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its effects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: i) the empirical research resolves all theoretical question marks, ii) how the findings of the literature match the actual practice of central banks, and iii) where there is scope for more research.
    Keywords: central bank transparency; monetary policy; survey
    JEL: E31 E52 E58
    Date: 2007–01
  4. By: Romain Baeriswyl; Camille Cornand
    Abstract: Cet article analyse les effets de la transparence économique sur l’efficacité de la politique monétaire dans un modèle de concurrence monopolistique en connaissance commune imparfaite sur les chocs de demande affectant une économie sans biais inflationniste. Nous montrons que la transparence est optimale lorsque l’économie est affectée par des chocs de demande que la banque centrale tente de neutraliser, tant que cette dernière n’est pas trop orientée en faveur de la stabilisation du produit.
    Keywords: information, politique monétaire, transparence.
    JEL: E52 E58 D82
    Date: 2007
  5. By: Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
    Abstract: This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank's instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.
    Keywords: Bayesian inference; DSGE model; DSGE-VAR model; DSGE-VECM model; open economy
    JEL: C11 C53 E17
    Date: 2007–01
  6. By: Dixon, Huw (Cardiff Business School); Kara, Engin
    Abstract: We develop the Generalized Taylor Economy (GTE) in which there are many sectors with overlapping contracts of different lengths. In economies with the same average contract length, monetary shocks will be more persistent when longer contracts are present. Using the Bils-Klenow distribution of contract lengths, we find that the corresponding GTE tracks the US data well. When we choose a GTE with the same distribution of completed contract lengths as the Calvo, the economies behave in a similar manner.
    Keywords: Persistence; Taylor contract; Calvo
    JEL: E50 E24 E32 E52
    Date: 2007–01
  7. By: Dennis, Richard; Leitemo, Kai; Söderström, Ulf
    Abstract: We use robust control techniques to study the effects of model uncertainty on monetary policy in an estimated, semi-structural, small-open-economy model of the U.K. Compared to the closed economy, the presence of an exchange rate channel for monetary policy not only produces new trade-offs for monetary policy, but it also introduces an additional source of specification errors. We find that exchange rate shocks are an important contributor to volatility in the model, and that the exchange rate equation is particularly vulnerable to model misspecification, along with the equation for domestic inflation. However, when policy is set with discretion, the cost of insuring against model misspecification appears reasonably small.
    Keywords: model misspecification; model uncertainty; robust control
    JEL: E52 E61 F41
    Date: 2007–01
  8. By: Lippi, Francesco; Secchi, Alessandro
    Abstract: Advances in the transaction technology allow agents to economize on the cost of cash management. We argue that accounting for the impact of new transaction technologies on currency holding behaviour is important to obtain theoretically consistent estimates of the demand for money. We modify a standard inventory model to study the effect of the withdrawal technology on the demand for currency. An empirical specification for the households demand schedule is suggested in which both the level of currency holdings and the interest rate elasticity of the demand depend on the withdrawal technology available to agents (e.g. ATM card ownership or a high/low density of bank branches, ATMs). The theoretical implications are tested using a unique panel of Italian household data (on currency holdings, deposit interest rates, consumption, development of banking services, etc.) for the 1989-2004 period.
    Keywords: inventory models; money demand; technological change
    JEL: E5
    Date: 2007–01
  9. By: Guimarães, Bernardo
    Abstract: This paper analyses whether sovereign default episodes can be seen as contingencies of optimal international lending contracts. The model considers a small open economy with capital accumulation and without commitment to repay debt. Taking first order approximations of Bellman equations, I derive analytical expressions for the equilibrium level of debt and the optimal debt contract. In this environment, debt relief generated by reasonable fluctuations in productivity is an order of magnitude below that generated by shocks to world interest rates. Debt relief prescribed by the model following the interest rate hikes of 1980-81 accounts for a substantial part of the debt forgiveness obtained by the main Latin American countries through the Brady agreements.
    Keywords: default; optimal contract; sovereign debt; world interest rates
    JEL: F3 F4 G1
    Date: 2007–01
  10. By: Alexis Anagnostopoulos; Omar Licandro; Italo Bove; Karl Schlag
    Abstract: We provide a simple theory of inflation inertia in a staggered price setting framework a la Calvo (1983). Contrary to Calvo.s formulation, the frequency of price changes is allowed to vary according to an evolutionary criterion. Inertia is the direct result of gradual adjustment in this frequency following a permanent change in the rate of money growth.
    Date: 2006
  11. By: Zeno Enders; Gernot J. Mueller
    Abstract: Using vector autoregressions on U.S. time series, we find that technology shocks induce an ‘S’- shaped cross-correlation function for the trade balance and the terms of trade (S-curve). In calibrating a prototypical international business cycle model to match the S-curve under complete and incomplete financial markets, we find two distinct sets of parameter values. While both model specifications deliver the S-curve, the underlying transmission mechanism of technology shocks is fundamentally different. Most importantly, only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks - as suggested by time series evidence.
    Keywords: S-curve, Technology shocks, Terms of trade, Trade balance, Incomplete markets
    JEL: F41 E32 F32
    Date: 2006
  12. By: Adrian Pagan; Hashem Pesaran (National Centre for Econometric Research)
    Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations for which there are known permanent shocks must have no error correction terms present in them, thereby freeing up the latter to be used as instruments in estimating their parameters. The proposed approach is illustrated by a re-examination of the identification scheme used in a monetary model by Wickens and Motta (2001), and in a well known paper by Gali (1992) which deals with the construction of an IS-LM model with supply-side effects. We show that the latter imposes more short-run restrictions than are needed because of a failure to fully utilize the cointegration information.
    Keywords: Permanent shocks, structural identi?cation, error correction models, IS-LM models
    Date: 2007–01
  13. By: Ravn, Morten O.; Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper proposes a novel international transmission mechanism based on the assumption of deep habits. The term deep habits stands for a preference specification according to which consumers form habits on a good-by-good basis. Under deep habits, firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand, creating an incentive to price discriminate. We refer to this type of price discrimination as pricing to habits. In the presence of pricing to habits, innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad, leading to a departure from the law of one price. In this way, the proposed pricing-to-habit mechanism can explain the observation that prices of the same good across countries, expressed in the same currency, vary over the business cycle. Furthermore, it can account for the empirical fact that in response to a positive domestic demand shock, such as an increase in government spending, the real exchange rate depreciates, domestic consumption expands, and the trade balance deteriorates.
    Keywords: countercyclical markup; deep habits; government spending; Law of one price; real exchange rate
    JEL: E32 F30 F41
    Date: 2007–01
  14. By: Kilian, Lutz; Manganelli, Simone
    Abstract: Motivated by policy statements of central bankers, we propose to regard the central banker as a risk manager who aims at containing inflation and the deviation of output from potential within pre-specified bounds. We develop formal tools of risk management that may be used to quantify the risks of failing to attain that objective. Risk measures inherently depend on the loss function of the user. We propose a simple, yet flexible class of loss functions that nests the standard assumption of quadratic symmetric preferences, while being congruent with a risk management model. We show how the parameters of this loss function under weak assumptions may be estimated from realizations for inflation and output gap data even in the absence of a fully specified structural model of the economy. We present estimates of the Federal Reserve’s risk aversion parameters with respect to the inflation and output objectives during the Greenspan period. We formally test for and reject the standard assumptions of quadratic and symmetric preference that underlies the derivation of the Taylor rule. Our results suggest that Fed policy decisions under Greenspan are better understood in terms of the Fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap. We derive a natural generalization of the Taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability. Unlike standard Taylor rules, this generalized policy rule is consistent with the wording of policy decisions by the Federal Reserve.
    Keywords: Greenspan; inflation; monetary policy; output; policy rule; preferences; risk
    JEL: E31 E52 E58
    Date: 2007–01
  15. By: Philippe Bacchetta (Study Center Gerzensee); Eric van Wincoop (University of Virginia)
    Abstract: Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate dierentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest dierentials naturally results when participants in the FX market adopt random walk expectations. We nd that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we nd that high interest rate currencies depreciate much more than what UIP would predict.
    Date: 2007–01
  16. By: Philippe Bacchetta (Study Center Gerzensee); Elmar Mertens (Study Center Gerzensee); Eric van Wincoop (University of Virginia)
    Abstract: There is widespread evidence of excess return predictability in financial markets. In this paper we examine whether this predictability is related to expectational errors. To consider this issue, we use data on survey expectations of market participants in the stock market, the foreign exchange market, and the bond and money markets in various countries. We find that the predictability of expectational errors coincides with the predictability of excess returns: when a variable predicts expectational errors in a given market, it typically predicts the excess return as well. Understanding expectational errors appears crucial for explaining excess return predictability.
    Date: 2006–06
  17. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the dynamic effects of anticipated raw materials price increases for small open oil-dependent economies and investigates the con- sequences of several monetary policy rules in response to commodity price shocks. Based on a calibrated New Keynesian open economy model the analysis shows that anticipated increases in the price of oil will involve oil- dependent economies both in temporary inflation and deflation as well as in output expansion and contraction. Compared to an interest rate Taylor rule a money growth rule is more appropriate to reduce the volatility of the CPI in°ation rate whereas just the opposite holds for stabilizing the output gap.
    Keywords: Oil price shocks, Monetary Policy, Open Economy
    JEL: E32 E52 F41 Q43
    Date: 2006
  18. By: Michal Horvath
    Abstract: The optimal policy mix maximizes a quadratic welfare objective which follows from the agents. utility function and depends only on inflation and output gap volatility. We analyze the optimal response of the economy to a rise in government spending. We find that the optimal economy moves along an analogue of a conventional inflation-output variance frontier, as the population share of non-Ricardian agents rises. Output should optimally vary more, as this is to the benefit of the liquidity-constrained agents via net real wages, while optimal inflation volatility falls as there is less of a need to use inflation to maintain fiscal solvency. There is little evidence that increased government spending would crowd in private consumption. The tax rate varies to contain pressures on prices by shifting the natural rate of output towards its preference-driven target level. We identify the size of the target deviation in output and the interest rate elasticity of demand as the key determinants of the optimal interest rate policy.
    Keywords: Optimal Monetary and Fiscal Policy, Macroeconomic Stabilization, Non-Ricardian Agents.
    JEL: E61 E63
    Date: 2007–01
  19. By: Eickmeier, Sandra; Ziegler, Christina
    Abstract: This paper surveys existing factor forecast applications for real economic activity and inflation by means of a meta-analysis and contributes to the current debate on the determinants of the forecast performance of large-scale dynamic factor models relative to other models. We find that, on average, factor forecasts are slightly better than other models’ forecasts. In particular, factor models tend to outperform small-scale models, whereas they perform slightly worse than alternative methods which are also able to exploit large datasets. Our results further suggest that factor forecasts are better for US than for UK macroeconomic variables, and that they are better for US than for euro-area output; however, there are no significant differences between the relative factor forecast performance for US and euro-area inflation. There is also some evidence that factor models are better suited to predict output at shorter forecast horizons than at longer horizons. These findings all relate to the forecasting environment (which cannot be influenced by the forecasters). Among the variables capturing the forecasting design (which can, by contrast, be influenced by the forecasters), the size of the dataset from which factors are extracted seems to positively affect the relative factor forecast performance. There is some evidence that quarterly data lend themselves better to factor forecasts than monthly data. Rolling forecasts are preferable to recursive forecasts. The factor estimation technique seems to matter as well. Other potential determinants - namely whether forecasters rely on a balanced or an unbalanced panel, whether restrictions implied by the factor structure are imposed in the forecasting equation or not and whether an iterated or a direct multi-step forecast is made - are found to be rather irrelevant. Moreover, we find no evidence that pre-selecting the variables to be included in the panel from which factors are extracted helped to improve factor forecasts in the past.
    Keywords: Factor models, forecasting, meta-analysis
    JEL: C2 C3 E37
    Date: 2006
  20. By: Willem H. Buiter
    Abstract: The paper discusses some fundamental problems in monetary economics associated with the determination and role of the numeraire. The issues are introduced by formalising a proposal, attributed to Eisler, to remove the zero lower bound on nominal interest rates by unbundling the numeraire and medium of exchange/means of payment functions of money. The monetary authorities manage the exchange rate between the numeraire ('sterling') and the means of payment ('drachma'). The short nominal interest rate on sterling bonds can then be used to target stability for the sterling price level. The paper puts question marks behind two key bits of conventional wisdom in contemporary monetary economics. The first is the assumption that the monetary authorities define and determine the numeraire used in private transactions. The second is the proposition that price stability in terms of that numeraire is the appropriate objective of monetary policy. The paper also discusses the merits of the next step following the decoupling of the numeraire from the currency: doing away with currency altogether - the cashless economy. Because the unit of account plays such a central role in New-Keynesian models with nominal rigidities, monetary economics needs to devote more attention to numerairology - the study of the individual and collective choice processes that govern the adoption of a unit of account and its role in economic behaviour.
    JEL: E3 E4 E5 E6
    Date: 2007–01
  21. By: Simone Bertoli (Università degli Studi di Firenze, Dipartimento di Economia); Giampiero Gallo (Università degli Studi di Firenze, Dipartimento di Statistica "G. Parenti"); Giorgio Ricchiuti (Università degli Studi di Firenze,Dipartimento di Economia)
    Abstract: The Exchange Market Pressure (EMP) Index, developed by Eichengreen et al. [1994], is widely used to study currency crises as a tool to signal whether pressures on a currency are softened or warded off through monetary authorities’ interventions or whether a currency crisis has originated. In this paper we show how the index is sensitive to some assumptions behind the aggregation of the information available (exchange rates, interest rates and reserves), especially when emerging countries are involved. Specifically, we address the way exchange rate variations are computed and the impact of different definitions of the reserves, and we question the constancy of the weights adopted. These issues compound with the choice of a fixed threshold when crisis episodes are identified through EMP. As a result, the dichotomous crisis variable thus derived when adopted as a dependent variable may lead to varied results in subsequent econometric analysis.
  22. By: Franc Klaassen (Universiteit van Amsterdam); Henk Jager (Universiteit van Amsterdam)
    JEL: E58 F31 F33 G15
    Date: 2007–01–02
  23. By: Hortènsia Fontanals (Faculty of Economics, University of Barcelona.); Elisabet Ruiz (Universitat Oberta de Catalunya.); Catalina Bolancé (Faculty of Economics, University of Barcelona.)
    Abstract: In this paper we estimate, analyze and compare the term structures of interest rate in six different countries, during the period 1992-2004. We apply Nelson and Siegel model to obtain them with a weekly frequency. Four European Monetary Union countries, Spain, France, Germany and Italy are included. UK is also included as a European country, but not integrated in the Monetary Union. Finally US completes the analysis. The goal is to determine the differences in the shape of curves between these countries. Likewise, we can determinate the most usual term structure shapes that appear in every country.
    Keywords: Term structure of interest rate, parsimonious models, level parameter, slope parameter, European interest rate.
    JEL: C14 C51 C82 E43 G15
    Date: 2006–12
  24. By: Post, Erik (Department of Economics)
    Abstract: This paper uses a dynamic stochastic rational expectations model of a small open economy to shed some light on factors determining exits from a fixed to a flexible exchange rate regime. Exits are in the model determined by a concern for macroeconomic stabilization. If cost-push shocks are important relative to demand shocks exits should occur more likely in times of low consumption and output, high interest rates, negative asset holdings, current account deficits, high inflation and high domestic prices. If the policy maker is more sensitive to negative rather than positive output deviations the probability of exits increases overall and is tilted toward exits with accompanying depreciation.
    Keywords: exchange rates; exchange rate regimes; rational expectations model
    JEL: E42 E44 E47
    Date: 2007–01–16
  25. By: Peter Claeys (Faculty of Economics, University of Barcelona.)
    Abstract: The fiscal policy rule implicit in the Stability and Growth Pact, has been rationalised as a way to ensure that national fiscal policies remain sustainable within the EU, thereby endorsing the independence of the ECB. We empirically examine the sustainability of European fiscal policies over the period 1970-2001. The intertemporal government budget constraint provides a test based on the cointegration relation between government revenues, expenditures and interest payments. Sustainability is analysed at both the national level and for a European panel. Results show that European fiscal policy has been sustainable overall, yet national experiences differ considerably.
    Keywords: Fiscal policy, debt sustainability, panel unit root test, panel cointegration test, EMU.
    JEL: E61 E63 H63
    Date: 2007–01
  26. By: John Ryan (European Business School, Regent’s College)
    Abstract: This paper is aimed at analysing the decision of the Chinese central bank to reform the exchange rate of the national currency and to gauge the effects of this change in regime on the Chinese economy and the world currency markets. Although many nations have been largely disappointed by the relatively small revaluation of 2%, it will be argued that moving away from the dollar-peg is a step in the right direction in moving to a floating exchange rate, and the reform should be expected to occur in two-stages over a longer time frame The paper focuses on those studies attempting to estimate the under-valuation of the Renminbi and the effects of the change in policy. To enable the reader to understand the degree of misalignment of the. Renminbi this paper will examine various factors that determine whether the currency is undervalued. This will then allow the review of the policy options available to the central bank for facilitating an appreciation and the potential effects of a regime change will be reported. The expected outcomes on the currencies, US treasuries and trade deficit will also be analysed and the study will find that, post-revaluation, the dollar depreciates, the Yen moves in line with the Renminbi and the Euro strengthens, as was expected. The implications for the U.S. treasury market, after a move to a currency basket, is that China will reduce their dollar holdings by selling treasuries, however the region will still remain a net-buyer.
    Keywords: Renminbi, China, United States, Dollar, Euro and Yen
    JEL: D53 E41 E42 E44 F31
    Date: 2006
  27. By: René Cabral
    Abstract: This paper presents an empirical assessment of the performance of EMEs that have adopted inflation targets to conduct monetary policy. In contrast to the evidence previously found for industrial economies, we observe that IT has really mattered for EMEs' price stability. Cross-section and panel estimations consistently suggest that IT has significantly contributed to EMEs' disinflation.
    Keywords: Inflation, Prices, EME, EMEs
    JEL: E31
    Date: 2006–07
  28. By: Wang , Jiao (BOFIT); Ji, Andy G. (BOFIT)
    Abstract: Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices. Such studies relied heavily on aggregated trade data. More recent studies employ bilateral trade data and methodologies such as ECM and gravity models. This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China. Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China’s trade balance. Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China’s anticipated shift toward a more flexible exchange rate regime fails to address China’s trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility. It appears a major overhaul of the country’s heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China’s international trade.
    Keywords: exchange rate; trade; China; competition; gravity model; panel
    JEL: C22 C22 F14 F31
    Date: 2007–01–18
  29. By: Karel Mertens
    Abstract: A test for the cointegrating rank of a vector autoregressive (VAR) process with a possible shift and broken linear trend is proposed. The break point is assumed to be known. The setup is a VAR process for cointegrated variables. The tests are not likelihood ratio tests but the deterministic terms including the broken trends are removed first by a GLS procedure and a likelihood ratio type test is applied to the adjusted series. The asymptotic null distribution of the test is derived and it is shown by a Monte Carlo experiment that the test has better small sample properties in many cases than a corresponding Gaussian likelihood ratio test for the cointegrating rank.
    Keywords: Cointegration, structural break, vector autoregressive process, error correction model
    JEL: C32
    Date: 2006
  30. By: OGAWA Eiji; SHIMIZU Junko
    Abstract: Ogawa and Shimizu (2005, 2006a) have proposed a possible way to create an Asian Monetary Unit (AMU) as a weighted average of the thirteen East Asian currencies (ASEAN + China, Japan, and Korea) and developed AMU Deviation Indicators for a surveillance process under the Chiang Mai Initiative. Both the AMU and the AMU Deviation Indicators are important in helping the countries in the region to recognize the necessity of moving toward a common currency basket system. However, there remains an open question about how to implement this system in East Asian countries. The purpose of this paper is to compile the latest issues of currency basket itself and to develop concrete steps toward a common currency basket system in East Asia. Particularly, we simulate possible individual currency basket weights based on trade shares of each East Asian country and convert them to G3 currency (the US dollar, the euro, and the Japanese yen) basket weights. We also investigate the discrepancies between the converted G3 currency basket weight of the AMU and the weights of the common G3 currency basket, which is to illustrate the reality of implementing a common currency basket system. We propose a possible way to shift from an individual G3 currency basket system to the AMU currency basket system. In this process, we expect that the Japanese yen would play a varying role at each stage toward monetary coordination in East Asia.
  31. By: Carlos Cortinhas (Universidade do Minho - NIPE)
    Abstract: This paper investigates, for the first time, the degree of exchange rate pass-through to domestic prices in all five founding members of ASEAN. For this purpose, a three variable recursive VAR model was applied which uses the Choleski decomposition method along the distribution chain of pricing, using data for the period 1968 to 2001. The results show that a strong case for entering a currency union can only be made for the cases of Singapore and Malaysia as in these countries there appears to be a case of exchange rate disconnect. A case for a common currency can also be made for Indonesia but for entirely different reasons. For this country, an independent monetary policy is a clear source of shocks to the economy and therefore a currency union would tend to eliminate then. A weaker case for a common currency can be made for the Philippines as evidence of some exchange rate pass-through to inflation was found but not to import prices. Finally, Thailand exhibits a clear case of exchange rate pass-through to import prices (but not to inflation) and thus evidence that a flexible exchange rate might be preferable as it provides the means to improve the country’s price competitiveness.
    Keywords: Exchange Rate Pass-Through; Monetary Integration; Asean
    JEL: F31 F33 E42
    Date: 2007
  32. By: Rösl, Gerhard
    Abstract: In a surprisingly growing number of regions in Germany private “regional currencies” are issued as a cash substitute for the euro. Currently, these regional currencies are conceived almost exclusively as Schwundgeld (depreciative currency), which loses value on a predetermined timescale. This loss of value is intended to encourage the money owners to spend their money quickly in order to boost local demand. The paper shows that the issuance of unofficial parallel currencies is not a fundamentally new phenomenon neither in Germany nor in other European countries. The theoretical assumptions of the Schwundgeld concept (Silvio Gesell (1862 – 1930)) are highly flawed and suboptimal from a welfare-theoretical perspective. However, the current economic welfare losses resulting from the issuance of Schwundgeld are negligibly small.
    Keywords: Regionalwährungen, Regionalgeld, Parallelgeld, Gesell, Währungssubstitution, Schwundgeld, Freigeld, currency substitution, private money
    JEL: E40 E41 E42 E50
    Date: 2006

This nep-cba issue is ©2007 by Alexander Mihailov. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.