nep-cba New Economics Papers
on Central Banking
Issue of 2007‒04‒21
fifty-one papers chosen by
Alexander Mihailov
University of Reading

  1. Information-Price Updating and Inertia By COLLARD, Fabrice; DELLAS, Harris
  2. Misperceived Money and Inflation Dynamics By COLLARD, Fabrice; DELLAS, Harris
  3. The Dynamic Effects of Disinflation Policies By COLLARD, Fabrice; FÈVE, Patrick; MATHÉRON, Julien
  4. The New Keynesian Phillips Curve and Lagged Inflation: A Case of Spurious Correlation? By George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  5. Checking Out: Exits from Currency Unions By Rose, Andrew K
  6. Learning and the Great Inflation By Carboni, Giacomo; Ellison, Martin
  7. Long-lived collateralized assets and bubbles By Aloisio Araujo; Mario Rui Pascoa; Juan Pablo Torres-Martinez
  8. Optimal Monetary Policy under Downward Nominal Wage Rigidity By Carlsson, Mikael; Westermark, Andreas
  9. Central bank communication, transparency and interest rate volatility: Evidence from the USA By Iris Biefang-Frisancho Mariscal; Peter Howells
  10. Monetary Policy Inertia or Persistent Shocks: A DSGE Analysis By CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien
  12. An Embarrassment of Riches: Forecasting Using Large Panels By Eklund, Jana; Karlsson, Sune
  13. A Multivariate Integer Count Hurdle Model: Theory and Application to Exchange Rate Dynamics By Katarzyna Bien; Ingmar Nolte; Winfried Pohlmeier
  14. On Some Slippery Slopes: Horizontalists, Structuralists and Diagrams By Peter Howells
  15. Pillars of Globalization: A history of monetary policy targets, 1797-1997 By Flandreau, Marc
  16. Unbalanced Trade By Robert Dekle; Jonathan Eaton; Samuel Kortum
  17. Effective Labor Regulation and Microeconomic Flexibility By Ricardo J Caballero; Kevin N Cowan; Eduardo M.R.A. Engel; Alejandro Micco
  18. Labor Search and Matching in Macroeconomics By Eran Yashiv
  20. The Role of Interbank Markets in Monetary Policy: A Model with Rationing By Xavier Freixas; José Jorge
  21. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  22. Policy Evaluation and Economic Policy Advice By Christoph M. Schmidt
  23. The Euro's Effect on Trade on a Dynamic Setting By Sergio de Nardis; Roberta De Santis; Claudio Vicarelli
  24. Price Rigidity and Flexibility: Recent Theoretical Developments By Levy, Daniel
  25. Price Rigidity and Flexibility: New Empirical Evidence By Levy, Daniel
  26. Convergence, capital accumulation and the nominal exchange rate By Péter Benczúr; István Kónya
  27. Modelling Payments Systems: A Review of the Literature By Jonathan Chiu; Alexandra Lai
  28. Simulating retaliation in payment systems: Can banks control their exposure to a failing participant? By Elisabeth Ledrut
  29. Interior Optima and the Inada Conditions By Aliprantis, C.D.; Camera, G.; Ruscitti, F.
  30. "Chaotic Equilibria in Models with Ill-Defined Forward Dynamics" By David Stockman; Judy Kennedy
  31. "Inverse Limits and Models with Backward Dynamics" By David Stockman; Judy Kennedy; James Yorke
  32. Rescuing the LM (and the money market) in a modern Macro course By Roberto Tamborini
  33. Monetary Commitment, Institutional Constraints and Inflation: Empirical Evidence for OECD Countries since the 1970s By Andreas Freytag; Friedrich Schneider
  34. Central Bank Interventions, Communication & Interest Rate Policy in Emerging European Economies By Balázs Égert
  35. Interest Rate Pass-Through in Central and Eastern Europe: Reborn from Ashes Merely to Pass Away? By Balázs Égert; Jesus Crespo-Cuaresma; Thomas Reininger
  36. Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges? By Balázs Égert; Kirsten Lommatzsch; Amina Lahrèche-Révil
  37. "State-Dependent Nominal Rigidities & Disinflation Programs in Small Open Economies" By Kolver Hernandez
  38. Monetary Policy before Euro Adoption: Challenges for EU New Members By Jan Filácek; Roman Horváth; Michal Skorepa
  39. Monetary Transmission Mechanism in Central & Eastern Europe: Gliding on a Wind of Change By Fabrizio Coricelli; Balázs Égert; Ronald MacDonald
  40. Monetary Equilibrium and the Differentiability of the Value Function By Aliprantis, C.D.; Camera, G.; Ruscitti, F.
  41. Liquidity preference as rational behaviour under uncertainty By Mierzejewski, Fernando
  42. "How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes" By Burton A. Abrams
  43. "Benjamin Franklin and the Birth of a Paper Money Economy" By Farley Grubb
  44. "The Net Worth of the U.S. Federal Government, 1784-1802" By Farley Grubb
  46. The Determinants & Excessiveness of Current Account Deficits in Eastern Europe & the Former Soviet Union By Aleksander Aristovnik
  47. Is Mercosur an optimum currency area? By Neves, J. Anchieta; Stocco, Leandro; Da Silva, Sergio
  48. Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic By Roman Horváth
  49. The Hungarian Monetary Transmission Mechanism: an Assessment By Balázs Vonnák
  50. Monetary policy credibility and inflation risk premium: a model with application to Brazilian data By Alexandre Lowenkron; Marcio Gomes Pinto Garcia
  51. Financial Accelerator Effects in the Balance Sheets of Czech Firms By Roman Horváth

  1. By: COLLARD, Fabrice; DELLAS, Harris
    JEL: E32 E52
    Date: 2006–11
  2. By: COLLARD, Fabrice; DELLAS, Harris
    JEL: E32 E52
    Date: 2006
  3. By: COLLARD, Fabrice; FÈVE, Patrick; MATHÉRON, Julien
    JEL: E31 E32 E52
    Date: 2007–03
  4. By: George Hondroyiannis (Bank of Greece, Economic Research Department and Harokopio University); P.A.V.B. Swamy (US Bureau of Labour Statistics); George S. Tavlas (Bank of Greece, Economic Research Department)
    Abstract: The New Keynesian Phillips Curve (NKPC) specifies a relationship between inflation and a forcing variable and the current period’s expectation of future inflation. Most empirical estimates of the NKPC, typically based on Generalized Method of Moments (GMM) estimation, have found a significant role for lagged inflation, producing a “hybrid” NKPC. Using U.S. quarterly data, this paper examines whether the role of lagged inflation in the NKPC might be due to the spurious outcome of specification biases. Like previous investigators, we employ GMM estimation and, like those investigators, we find a significant effect for lagged inflation. We also use time varying coefficient (TVC) estimation, a procedure that allows us to directly confront specification biases and spurious relationships. Using three separate measures of expected inflation, we find strong support for the view that, under TVC estimation, the coefficient on expected inflation is near unity and that the role of lagged inflation in the NKPC is spurious.
    Keywords: New Keynesian Phillips curve; time-varying coefficients; spurious relationships.
    JEL: C51 E31
    Date: 2007–02
  5. By: Rose, Andrew K
    Abstract: This paper studies the characteristics of departures from monetary unions. During the post-war period, almost seventy distinct countries or territories have left a currency union, while over sixty have remained continuously in currency unions. I compare countries leaving currency unions to those remaining within them, and find that leavers tend to be larger, richer, and more democratic; they also tend to have higher inflation. However, there are typically no sharp macroeconomic movements before, during, or after exits.
    Keywords: country; data; empirical; monetary; panel; probit; statistic
    JEL: E42 E58
    Date: 2007–04
  6. By: Carboni, Giacomo; Ellison, Martin
    Abstract: We respond to the challenge of explaining the Great Inflation by building a coherent framework in which both learning and uncertainty play a central role. At the heart of our story is a Federal Reserve that learns and then disregards the Phillips curve as in Sargent's Conquest of American Inflation, but at all times takes into account that its view of the world is subject to considerable uncertainties. Allowing Federal Reserve policy to react to these perceived uncertainties improves our ability to explain the Great Inflation with a learning model. Bayesian MCMC estimation results are encouraging and favour a model where policy reacts to uncertainty over a model where uncertainty is ignored. The posterior likelihood is higher and the internal Federal Reserve forecasts implied by the model are closer to those reported in the Greenbook.
    Keywords: Great Inflation; learning; monetary policy; uncertainty
    JEL: E52 E58 E65
    Date: 2007–04
  7. By: Aloisio Araujo; Mario Rui Pascoa; Juan Pablo Torres-Martinez (Department of Economics, PUC-Rio)
    Abstract: When infinite lived agents trade long-lived assets secured by durable goods, equilibrium exists without any uniform impatience requirements or additional debt constraints. Asset pricing bubbles are absent when the new endowments of durable goods are uniformly bounded away from zero. Otherwise, bubbles may occur, even for assets in persistently positive net supply and for deflators that yield finite present values of aggregate wealth.
    Keywords: Existence of equilibrium, Asset pricing bubbles, Collateralized assets.
    JEL: D50 D52
    Date: 2007–03
  8. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Department of Economics, Uppsala University)
    Abstract: We develop a New Keynesian model with staggered price and wage setting where downward nominal wage rigidity (DNWR) arises endogenously through the wage bargaining institutions. It is shown that the optimal (discretionary) monetary policy response to changing economic conditions then becomes asymmetric. Interestingly, we find that the welfare loss is actually slightly smaller in an economy with DNWR. This is due to that DNWR is not an additional constraint on the monetary policy problem. Instead, it is a constraint that changes the choice set and opens up for potential welfare gains due to lower wage variability. Another finding is that the Taylor rule provides a fairly good approximation of optimal policy under DNWR. In contrast, this result does not hold in the unconstrained case. In fact, under the Taylor rule, agents would clearly prefer an economy with DNWR before an unconstrained economy ex ante.
    Keywords: Monetary Policy; Wage Bargaining; Downward Nominal Wage Rigidity
    JEL: E52 E58 J41
    Date: 2007–04–01
  9. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: The FOMC has changed its way of communication twice, recently: from 2000-2003, the Committee imparted information about its assessment on the economic outlook (the balance-of-risk statements) and since August 2003 the FOMC informs additionally about its outlook’s implications on the future federal funds target rate (forward-looking language). The result should be that agents do not need to deduce FOMC’s likely policy move on every twitch of central bank communication and macroeconomic news. Markets have anticipated FOMC policy decisions on the day of the meeting very well since 1994. Therefore, the focus of the paper is on the behaviour of market rates between FOMC meetings and on testing for greater ‘smoothness’ and lower volatility of market rates since 2000. We apply an EGARCH model to forward rates at the short end of the yield curve. The model is used to test for the effects of the three disclosure regimes (pre-2000, 2000-2003, post-2003) on the dependence of previous and current changes of the market rates in the conditional mean equation. It is expected to observe higher inertia during the periods when market participants are better informed. Furthermore, generally, news increases interest rate volatility, since markets adjust interest rates in response to relevant news. However, other FOMC communication (other than the press statements after the FOMC meeting), may have a lower news value in the new disclosure regimes than it had in the pre-2000 period. Therefore, ‘other’ central bank communication may affect the volatility of interest rates differently in the three different regimes. This effect is tested for in the conditional variance of the regression model. We find that there is evidence of differences in smoothness between the period until 2000 and the period of the balance-of-risk statement. Furthermore, we find that the effect of other than Fed press statements after FOMC meetings varies in the three periods. This is particularly so for Fed communication concerning economic outlook and speeches by the chairman of the Board.
    Keywords: Macroeconomics; Post Keynesian;
    JEL: E12
    Date: 2007–03
  10. By: CARRILLO, Julio; FÈVE, Patrick; MATHÉRON, Julien
    JEL: L52 E31 E32 E52
    Date: 2007–02
  11. By: Kirdan Lees; Troy Matheson; Christie Smith
    Abstract: We evaluate the performance of an open economy DSGE-VAR model for New Zealand along both forecasting and policy dimensions. We show that forecasts froma DSGE-VAR and a "vanilla" DSGE model are competitive with, and in some dimensions superrior to, the Reserve Bank of New Zealand's official forecasts. We also use the estimated DSGE-VAR structure to identify optimal policy rules that are consistent with the Reserve bank's Policy Targets Agreement. Optimal policy rules under parameter certainty prove to be relatively similar to the certainty case. The optimal policies react aggressively to inflation and contain a large degree of interest rate smoothing, but place a low weight on responding to output or the change in the nominal exchange rate.
    JEL: C51 E52 F41
    Date: 2007–01
  12. By: Eklund, Jana (Bank of England); Karlsson, Sune (Department of Business, Economics, Statistics and Informatics)
    Abstract: The increasing availability of data and potential predictor variables poses new challenges to forecasters. The task of formulating a single forecasting model that can extract all the relevant information is becoming increasingly difficult in the face of this abundance of data. The two leading approaches to addressing this "embarrassment of riches" are philosophically distinct. One approach builds forecast models based on summaries of the predictor variables, such as principal components, and the second approach is analogous to forecast combination, where the forecasts from a multitude of possible models are averaged. Using several data sets we compare the performance of the two approaches in the guise of the diffusion index or factor models popularized by Stock and Watson and forecast combination as an application of Bayesian model averaging. We find that none of the methods is uniformly superior and that no method performs better than, or is outperformed by, a simple AR(p) process.
    Keywords: Bayesian model averaging; Diffusion indexes; GDP growth rate; Inflation rate
    JEL: C11 C51 C52 C53
    Date: 2007–03–31
  13. By: Katarzyna Bien (University of Konstanz); Ingmar Nolte (University of Konstanz); Winfried Pohlmeier (University of Konstanz)
    Abstract: In this paper we propose a model for the conditional multivariate density of integer count variables defined on the set Zn. Applying the concept of copula functions, we allow for a general form of dependence between the marginal processes which is able to pick up the complex nonlinear dynamics of multivariate financial time series at high frequencies. We use the model to estimate the conditional bivariate density of the high frequency changes of the EUR/GBP and the EUR/USD exchange rates.
    Keywords: Integer Count Hurdle, Copula Functions, Discrete Multivariate, Distributions, Foreign Exchange Market
    JEL: G10 F30 C30
    Date: 2006–11–14
  14. By: Peter Howells (School of Economics, University of the West of England)
    Abstract: Since Basil Moore published Horizontalists and Verticalists in 1988, there have been numerous attempts to model an endogenous money supply within a graphical framework which would also facilitate discussion of some of the controversial issues surrounding it. These have not generally been very successful until Fontana’s recent (2003, 2006) adoption of a pure flow of funds framework. More recently, the ‘New Keynesian consensus’ in macroeconomics has finally forced a rejection of the exogenous money paradigm and the LM part of the familiar IS/LM/AS model. In this paper we show how, with some modification, Fontana’s approach can be combined with ‘mainstream’ replacements of IS/LM (Carlin and Soskice, 2006; Bofinger, Mayer and Wollmerhäuser, 2006) to produce a model of the monetary sector which illustrates both the current wisdom about monetary policy (e.g. Woodford, 2003) and the post-Keynesian insights that have been developed over the last twenty years.
    Keywords: Macroeconomics; Post Keynesian;
    JEL: E12
    Date: 2007–03
  15. By: Flandreau, Marc
    Abstract: This paper studies the evolution of monetary policy targets over the course of the past 200 years. We argue that policy targets are set as part of an assignment procedure that is intended to address both time consistency and monitoring problems. As a result, central banks, after having been assigned to target the exchange rate in the 19th century, are now entrusted with targeting the rate of inflation. Critical advances in the measurement of inflation have proved decisive in bringing about this radical transformation.
    Keywords: central banks; exchange rates; inflation; monetary policy targets
    JEL: E1 E3 E5
    Date: 2007–04
  16. By: Robert Dekle; Jonathan Eaton; Samuel Kortum
    Abstract: We incorporate trade imbalances into a quantitative model of bilateral trade in manufactures, dividing the world into forty countries. Fitting the model to 2004 data on GDP and bilateral trade we calculate how relative wages, real wages, and welfare would differ in a counterfactual world with all current accounts balancing. Our results indicate that closing the current accounts requires modest changes in relative wages. The country with the largest deficit (the United States) needs its wage to fall by around 10 percent relative to the country with the largest surplus (Japan). But the prevalence of nontraded goods means that the real wage in Japan barely rises while the U.S. real wage falls by less than 1 percent. The geographic barriers implied by the current pattern of trade are sufficiently asymmetric that large bilateral deficits remain even after current accounts balance. The U.S. manufacturing trade deficit with China falls to $65 billion from its 2004 level of $167 billion.
    JEL: F17 F32 F41
    Date: 2007–04
  17. By: Ricardo J Caballero; Kevin N Cowan; Eduardo M.R.A. Engel; Alejandro Micco
    Date: 2007–04–13
  18. By: Eran Yashiv (Tel Aviv University, CEPR, CEP (LSE) and IZA)
    Abstract: The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: how are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and - when inserted into business cycle models - improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts.
    Keywords: search, matching, macroeconomics, business cycles, worker flows, growth, policy
    JEL: E24 E32 E52 J23 J31 J41 J63 J64 J65
    Date: 2007–04
  19. By: Edda Claus; Iris Claus
    Abstract: Understanding the transmission channels of shocks is critical for successful policy response. This paper develops a dynamic general equilibrium model to assess the relative importance of the interest rate, the exchange rate and the credit channels in transmitting shocks in an open economy. The relative contribution of each channel is determined by comparing the impulse responses when the relevant channel is suppressed with the impulse responses when all three channels are operating. The results suggest that all three channels contribute to business cycle fluctuations and the transmission of shocks to the economy. But the magnitude of the impact of the interest rate channel crucially depends on the inflation process and the structure of the economy.
    JEL: E32 E44 E50 F41
    Date: 2007–02
  20. By: Xavier Freixas; José Jorge
    Abstract: This paper analyses the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has three major implications: first, it reconciles the irresponsiveness of business investment to the user cost of capital with the large impact of monetary policy (magnitude puzzle), second, it shows that monetary policy affects long term credit (composition puzzle) and finally, that banks’ liquidity positions condition their reaction to monetary policy (Kashyap and Stein liquidity puzzle).
    Keywords: Banking, Rationing, Monetary Policy
    JEL: E44 G21
    Date: 2007–03
  21. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.
    Keywords: Capital Taxation, Ramsey, Commitment, Markov-Perfect equilibrium, Time consistent policy, Overlapping Generations
    JEL: H3 H6 H21 E62
    Date: 2006
  22. By: Christoph M. Schmidt (RWI Essen, Ruhr University Bochum and IZA)
    Abstract: Arguably, one of the most important developments in the field of applied economics during the last decades has been the emergence of systematic policy evaluation, with its distinct focus on the establishment of causality. By contrast to the natural sciences, the objects of our scientific interest typically exert some influence on their treatment status under the policy to be evaluated and on their economic outcomes. Thus, economic policy advice can only be successful, if it is based on an appropriate study design, experimental or observational. It will strive in societies that provide liberal access to data, accept the merits of randomized assignment and guard the independence of research institutions.
    Keywords: policy evaluation, applied economics, causality, policy advice
    JEL: A11 C01 H50
    Date: 2007–03
  23. By: Sergio de Nardis (ISAE - Institute for Studies and Economic Analyses); Roberta De Santis (ISAE - Institute for Studies and Economic Analyses); Claudio Vicarelli (ISAE - Institute for Studies and Economic Analyses)
    Abstract: This paper provides an update of de Nardis and Vicarelli (2003) estimates of the euro effect on trade integration of EMU economies, taking into account aggregate bilateral exports of 23 OECD countries for the sample period 1988-2003. In this paper we utilize the dynamic panel data estimator proposed by Blundell and Bond (1998) and introduce controls for heterogeneity. The results of our dynamic specification of the gravity equation lead to an estimate of the intra-Eurozone pro-trade effect, following the adoption of the single currency, as high as around 4%. This finding, slightly lower than our previous work results, is in line with very recent empirical literature using dynamic specification of gravity equation. It is also consistent with the already tight trade links characterizing the economies that embraced the euro and with the possibility that the trade impact involved the introduction of new goods rather than the expansion, due to lower transaction costs, of the incumbent products.
    Keywords: International Trade, Currency Unions, Gravity models, Dynamic Panel Data
    JEL: F14 F15 F4 F33 C33
    Date: 2007–04
  24. By: Levy, Daniel
    Abstract: The price system, the adjustment of prices to changes in market conditions, is the primary mechanism by which markets function and by which the three most basic questions get answered: what to produce, how much to produce and for whom to produce. To the behaviour of price and price system, therefore, have fundamental implications for many key issues in microeconomics and industrial organization, as well as in macroeconomics and monetary economics. In microeconomics, managerial economics, and industrial organization, economists focus on the price system efficiency. In macroeconomics and monetary economics, economists focus on the extent to which nominal prices fail to adjust to changes in market conditions. Nominal price rigidities play particularly important role in modern monetary economics and in the conduct of monetary policy because of their ability to explain short-run monetary non-neutrality. The behaviour of prices, and in particular the extent of their rigidity and flexibility, therefore, is of central importance in economics. This introductory essay briefly summarizes the eight studies of price rigidity that are included in this special issue.
    Keywords: Price Rigidity; Price Flexibility; Cost of Price Adjustment; Menu Cost; Managerial and Customer Cost of Price Adjustment; New Keynesian Economics; Price System
    JEL: E31 E50 M30 D21 D40 M20 L11 E12 E52 L16
    Date: 2007–04–17
  25. By: Levy, Daniel
    Abstract: The marketplace, along with its price system, is the single most important institution in a western-style free enterprise economy. The ability of prices to adjust to changes in supply and demand conditions enables the market to function efficiently and lies behind the magical invisible hand mechanism. To the behaviour of prices and in particular to the ability of prices to adjust to changes in market conditions, therefore, have fundamental implications for many key issues in many areas of both microeconomics as well as macroeconomics. It is, therefore, critical to study and understand whether there are barriers to price adjustments, what are the nature of these barriers, how the barriers lead to price rigidity, what are possible implications of these rigidities, etc. This introductory essay briefly summarizes the fourteen empirical studies of price rigidity that are included in this special issue.
    Keywords: Price Rigidity; Price Flexibility; Cost of Price Adjustment; Menu Cost; Managerial and Customer Cost of Price Adjustment; Pricing; Price System; Price Setting; New Keynesian Economics; Store-Level Data; Micro-Level Data
    JEL: E31 E50 M30 D21 D40 M20 E58 L11 E12 E52 L16
    Date: 2007–04–17
  26. By: Péter Benczúr (Magyar Nemzeti Bank); István Kónya (Magyar Nemzeti Bank)
    Abstract: This paper develops a flexible price, two-sector nominal growth model, in order to study the role of the exchange rate regime in capital accumulation (convergence). We adopt a standard model of a small open economy with traded and nontraded goods, and enrich its structure with costly investment and a preference for real money holdings. We find that (i) the choice of exchange rate regime influences the transition dynamics of a small open economy, (ii) a one-sector model does not adequately capture the channels through which the nominal side interacts with real variables, and (iii) as a consequence, sectoral asymmetries are important for understanding the effects of the exchange rate regime on capital accumulation.
    Keywords: two-sector growth model, small open economy, capital accumulation, household portfolios, real effects of nominal shocks.
    JEL: F32 F41 F43
    Date: 2007
  27. By: Jonathan Chiu; Alexandra Lai
    Abstract: Payments systems play a fundamental role in an economy by providing the mechanisms through which payments arising from transactions can be settled. The existing literature on the economics of payments systems is large but loosely organized, in that each model uses a distinct set-up and sometimes a distinct equilibrium concept. As a result, it is not easy to generalize how model features are related to model implications. The authors conduct a non-technical survey of the literature and discuss some of these connections. They organize the literature according to three general classes of modelling approaches, and compare those approaches in terms of their strengths and weaknesses. They also describe the policy implications across the three model classes and relate them to the model environment/assumptions. The authors summarize what can be learned from the literature with respect to policy issues and identify areas for future research.
    Keywords: Payment, clearing, and settlement systems
    JEL: E42 E58 G21
    Date: 2007
  28. By: Elisabeth Ledrut
    Abstract: This paper assesses the impact of an operational failure at one of the biggest participants in the Dutch interbank payment system, varying the time at which the disruption takes place. Liquidity levels equal historical levels. The impact of such a disruption is quantified in terms of the additional liquidity needed in order to settle all payments than can settle given the banks' intraday reserves and collateral facilities. Assuming the disruption lasts for the remainder of the day, banks are faced with costs, as they need to borrow this additional liquidity overnight from the market or from the central bank. As could be expected, the second-round effect (the number of unsettled payments among healthy banks) of an operational disruption is highest when it occurs early during the day and lasts for the remainder of the day. So are the additional overnight liquidity needed and the costs of overnight credit. Furthermore, the paper introduces different possible reaction patterns from the stricken bank's counterparties. These counterparties can react according to two basic rules: they stop sending payments to the stricken bank either after some pre-determined time or after their exposure to the stricken bank reaches a certain level. From a cost perspective, reacting is more effective when determined by the individual exposure of the stricken banks' counterparties. However, even an immediate reaction does not prevent banks from running losses following the failure of a major participant. This leads to a reflection about the bilateral relations between the stricken bank, considered to be a node in a partial star network, and the other banks. How much each payment system participant can control its exposure to the stricken bank depends on the degree of reciprocity in the value of bilateral payments.
    Keywords: payment system; operational disruption; liquidity
    Date: 2007–04
  29. By: Aliprantis, C.D.; Camera, G.; Ruscitti, F.
    Abstract: We present a new proof of the interiority of the policy function based on the Inada conditions. It is based on supporting properties of concave functions.
    Keywords: Interior Optima ; Inada Conditions
    JEL: E00 C61
    Date: 2007–04
  30. By: David Stockman (Department of Economics,University of Delaware); Judy Kennedy (Department of Mathematics,University of Delaware)
    Abstract: Some economic models like the cash-in-advance model of money or overlapping generations model have the property that the dynamics are ill-defined going forward in time, but well-defined going backward in time. In such instances, what does it mean for an ill-defined dynamical system to be chaotic? Furthermore, under what conditions are such dynamical systems chaotic? In this paper, we provide a definition of chaotic that is in the spirit of Devaney for a dynamical system with ill-defined forward dynamics. We utilize the theory of inverse limits to provide necessary and sufficient conditions for such a dynamical system to be chaotic
    Keywords: cash-in-advance, overlapping generations, chaos, inverse limits
    JEL: C6 E3 E4
    Date: 2006
  31. By: David Stockman (Department of Economics,University of Delaware); Judy Kennedy (Department of Mathematics,University of Delaware); James Yorke (Institute for Physical Science and Technology, University of Maryland)
    Abstract: Some economic models like the cash-in-advance model of money have the property that the dynamical system characterizing equilibria is multi-valued going forward in time, but single-valued going backward in time, i.e., the model has backward dynamics. In this paper, we apply the theory of inverse limits to characterize topologically the set of equilibria in a dynamic economic model with this property. We show that such techniques are particularly well-suited for analyzing the dynamics going forward in time even though the dynamics are multi-valued in this direction. In particular, we analyze the inverse limit of the cash-in-advance model of money and illustrate how information about the inverse limit is useful for detecting or ruling out complicated dynamics.
    Keywords: backward dynamics, chaos, inverse limits, continuum theory, cash-in advance
    JEL: C6 E3 E4
    Date: 2006
  32. By: Roberto Tamborini
    Abstract: This paper considers recent proposals of introductory-level macroeconomic models that drop the LM apparatus in favour of the straightforward use of the Taylor rule as a means to determine the nominal interest rate and to link the monetary block with the real block of the economy. Whilst one can only agree with the various complaints made against the traditional treatment of the LM apparatus that still survives in modern textbooks, the new IS-AS-TR workhorse has several drawbacks as well, the most serious one being that it completely hides the concept of monetary equilibrium from view, transmitting the faulty idea that the central bank can set the (real!) interest rate at will, with no connection at all with money demand and supply. The paper suggest how a Macro course could be structured around a model of New Keynesian inspiration where the LM block is amended rather than suppressed. Section 2 surveys the foundations of the macro-model. Section 3 deals with the foundations of the role of money in the model, and shows how to derive a consistent LM "gap function" in relation to "output gaps" and "inflation gaps" according to current practice. Section 4 expands upon the monetary block, highlighting that it admits of two monetary policy regimes, the "exogenous-money regime", and the "endogenous-money regime". The latter leads quite naturally to the Taylor rule, while making it clear that this is a particular choice of the central bank, and that it implies an endogenous path of the money stock determined by the underlying money market equilibrium. Section 5 concludes.
    Date: 2007
  33. By: Andreas Freytag (University of Jena, School of Busniess and Economics); Friedrich Schneider (Department of Economics, Johannes Kepler University Linz)
    Abstract: Central bank independence (CBI) is a very important precondition for price stability. However, the empirical evidence for a correlation between both is relatively weak. In this paper, this weakness is countered with a) an extended measure of monetary commitment, which includes well-known criteria for CBI and external criteria such as convertibility and exchange rate regimes and b) the argument that monetary commitment can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment with data from four decades confirms the crucial role of monetary commitment for price stability.
    Keywords: central bank independence, price stability, monetary commitment
    JEL: E50
    Date: 2007–03–30
  34. By: Balázs Égert
    Abstract: This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically inuence the exchange rate.
    Keywords: central bank intervention, communication, foreign exchange intervention, verbal intervention
    JEL: F31
    Date: 2006–11–01
  35. By: Balázs Égert; Jesus Crespo-Cuaresma; Thomas Reininger
    Abstract: In this study, we seek to better understand the interest rate pass-through in five Central and Eastern European countries – the Czech Republic, Hungary, Poland, Slovakia and Slovenia, the CEE-5. Our pass-through estimates for several retail rates are generally lower than those reported in the literature, given the absence of cointegration between policy rates and long- or even short-term market rates. In addition, the pass-through has been declining over time in the CEE-5, and we argue that it is likely to decrease further in the future. Finally, the pass-through appears similar in the CEE-5 than in Spain and is higher than in core euro area countries. Hence, euro adoption by the CEE-5 would not further increase heterogeneity within the euro area with regard to the interest rate passthrough. However, substantially more research is needed to establish commonalities and differences between the CEE-5 and the euro area with respect to the reaction of prices and output to monetary policy action.
    Keywords: interest rate pass-through, monetary transmission mechanism, transition economies, Central and Eastern Europe, Austria, Germany, Spain.
    JEL: E43 E50 E52 C22 G21 O52
    Date: 2006–11–01
  36. By: Balázs Égert; Kirsten Lommatzsch; Amina Lahrèche-Révil
    Abstract: We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.
    Keywords: real exchange rate, equilibrium exchange rate, productivity, tradables, Balassa-Samuelson effect
    JEL: C15 E31 F31 O11 P17
    Date: 2007–01–01
  37. By: Kolver Hernandez (Department of Economics,University of Delaware)
    Abstract: Experiences of high-inflation economies suggest that exchange rate-based (ERB) and money-based (MB) disinflations induce sharply different dynamics in consumption and GDP. I study the role of nominal rigidities to explain such dynamics. I build on Calvo pricing to introduce elements of state-dependent into an otherwise standard small open economy. This new feature delivers state-dependent nominal rigidities (SDNR). Nonlinear simulations show that the model with SDNR generates a dynamic behavior consistent with both ERB and MB disinflations; however the model’s special case with constant nominal rigidities is not successful rationalizing ERB disinflations.
    Keywords: Nominal rigidities, disinflations, state-dependent pricing, exchange-rate based stablizations
    JEL: E31 E32 E37
    Date: 2006
  38. By: Jan Filácek; Roman Horváth; Michal Skorepa
    Abstract: This article analyzes the main issues for monetary policy in new EU member states before their euro adoption. These are typically rooted in the challenge of fulfilling concurrently of the Maastricht inflation and exchange rate criterion, as these countries are experiencing equilibrium real exchange rate appreciation. In this article we first distinguish between the wording, written interpretation and “revealed” interpretation of the inflation and exchange rate criteria. Then we discuss the options for monetary policy in the period of fulfilment of these criteria in terms of its transparency, its continuity with the previous monetary policy regime, the choice of central parity for the ERM II, the setting of the fluctuation bandwidth, the probability of fulfilment of both criteria and the impact on economic stability.
    Keywords: monetary policy, euro adoption, ERM II, EU
    JEL: E58 E52 F42 F33
    Date: 2006–11–01
  39. By: Fabrizio Coricelli; Balázs Égert; Ronald MacDonald
    Abstract: This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical ndings for Central and Eastern Europe are then briey compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
    Keywords: Monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006–11–01
  40. By: Aliprantis, C.D.; Camera, G.; Ruscitti, F.
    Abstract: In this study we offer a new approach to proving the differentiability of the value function, which complements and extends the literature on dynamic programming. This result is then applied to the analysis of equilibrium in the recent class of monetary economies developed in [13]. For this type of environments we demonstrate that the value function is differentiable and this guarantees that the marginal value of money balances is well defined.
    Keywords: Monetary Equilibrium ; Differentiability ; Value Function
    JEL: E00 C61
    Date: 2007–04
  41. By: Mierzejewski, Fernando
    Abstract: An important concern of macroeconomic analysis is how interest rates affect the cash balance demanded at a certain level of nominal income. In fact, the interest-rate- elasticity of the liquidity demand determines the effectiveness of monetary policy, which is useless under absolute liquidity preference, i.e. when the money demand is perfectly elastic. An actuarial approach is developed in this paper for dealing with random income. Assuming investors face liquidity constraints, a level of surplus exists which maximises expected value. Moreover, the optimal liquidity demand is expressed as a Value at Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the interest-rate-elasticity depends on the kind of risks and expectations. The more unstable the economy, the greater the interest-rate-elasticity of the money demand. Moreover, part of the adjustment to reestablish the short-run monetary equilibrium may be performed through volatility shocks.
    Keywords: Money demand; Monetary policy; Economic capital; Distorted risk principle; Value-at-Risk.
    JEL: E40 E44 E41 E58 E0 E52 E12
    Date: 2006–11–30
  42. By: Burton A. Abrams (Department of Economics,University of Delaware)
    Abstract: Evidence from the Nixon tapes, now available to researchers, shows that President Richard Nixon pressured the chairman of the Federal Reserve, Arthur Burns, to engage in expansionary monetary policies in the run up to the 1972 election. This paper quotes the relevant conversations from the Nixon tapes. Questions remain as to whether Burns followed an expansionary policy in an already-inflationary environment out of conviction or because of political pressure.
    Date: 2006
  43. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: Paper money has often been controversial and misunderstood. Why it has value, why that value changes over time, how it influences economic activity, who should be allowed to make it, how its use and creation should be controlled, and whether it should exist at all—are questions that have perplexed the public, vexed politicians, and puzzled economic experts. Knowing how, when, and why paper money first became commonplace in America and the nature of the institutions propagating it, can help us better comprehend paper money’s role in society. Benjamin Franklin (1706-1790) dealt often with this topic and his writings can teach us much about it.
    Keywords: Monetary Policy, Economic History
  44. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: The War for Independence (1775-1783) left the federal government deeply in debt. The spoils from winning that war also gave it an empire of land. So, post-1783 was the federal government solvent, or at what point did it become solvent? Did winning the war, in effect, pay for the war? While these questions have not been addressed before, knowing the answer is important for understanding why a particular method was chosen for funding the national debt, how the new Constitution adopted by Congress in 1789 affected public finance, and how this new untried government - that was deeply in debt and had been in default on this debt for half a decade after independence - could garner an excellent credit rating by the early 1790s. Evidence is gathered on the government's liabilities and assets to estimate its net worth and so answer these questions.
    Keywords: Monetary Policy, Economic History
  45. By: Aleksander Aristovnik
    Abstract: The article examines the question of whether the current account deficits seen in selected transition economies in recent years mainly as a symptom of the dynamic economic activity of the catching-up process are a source of potential macroeconomic destabilisation. Given the possible significant reduction of capital flows, as well as restrictions and lessons from recent financial crises, current account deficits must be closely monitored in the region. In this respect, the issue of ‘current account sustainability’ in seventeen transition economies is investigated. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems of their external sustainability.
    Keywords: transition economies, current account deficits, sustainability, FDI
    JEL: C33 F32
    Date: 2006–11–01
  46. By: Aleksander Aristovnik
    Abstract: The article investigates the main factors of current account deficits in order to assess the potential excessiveness of current account deficits in selected countries of Eastern Europe and former Soviet Union. According to the simulated benchmark calculated on the basis of selected determinants (in period 1992-2003), the results confirm that the actual current account balances are generally close to their estimated levels in the 2000-2003 period in the transition region. This notion is in line with the intertemporal approach to the current account balance, suggesting that higher external deficits are a natural outcome when permanent domestic output exceeds the current one and when current investments and government consumption exceed their permanent levels. Hence, the results suggest that most countries in Eastern Europe and former Soviet Union are justified in running relatively high current account deficits.
    Keywords: transition countries, current account deficits, excessiveness, determinants, dynamic panel data
    JEL: C33 F32
    Date: 2006–06–01
  47. By: Neves, J. Anchieta; Stocco, Leandro; Da Silva, Sergio
    Abstract: We find that generalized purchasing power parity does not hold for Mercosur, and thus that the South American trade group does not constitute an optimum currency area. We also find that the role of the United States cannot be neglected in the region, and that high short run volatility of real exchange rates is accompanied by slow adjustment processes of between 2 and 16 years (PPP puzzle).
    Keywords: generalized purchasing power parity; optimum currency area; Mercosur; PPP puzzle
    JEL: F31 F36
    Date: 2007–04–16
  48. By: Roman Horváth
    Abstract: This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1- 2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest 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 equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.
    Keywords: equilibrium interest rates, Taylor rule, augmented Kalman filter
    JEL: E43 E52 E58
    Date: 2006–10–01
  49. By: Balázs Vonnák (Magyar Nemzeti Bank)
    Abstract: This paper attempts to aggregate and summarise fresh results concerning the monetary transmission mechanism in Hungary. Within a research project at the MNB nine studies have been published investigating the channels through which Hungarian monetary policy affects the economy. We create a framework for synthesising particular results based on Mishkin’s (1996) classification. We analyse how aggregate demand is affected through those channels. Our conclusion is that during the past ten years monetary policy did exert a measurable influence on real activity and prices. The dominance of the exchange rate channel explains why prices respond faster and output responds more mildly than in closed developed economies like the U.S. or the euro area. We expect that after adopting the euro the absence of exchange rate will be compensated by the fact that the interest rate channel will work through foreign demand as well. Therefore, no significant asymmetries can be expected inside the euro area in terms of monetary transmission.
    Keywords: monetary transmission mechanism, monetary policy shock, exchange rate channel.
    JEL: E44 E52 E58
    Date: 2007
  50. By: Alexandre Lowenkron (Banco BBM); Marcio Gomes Pinto Garcia (Department of Economics, PUC-Rio)
    JEL: E58 E44 G12 E65
    Date: 2007–04
  51. By: Roman Horváth
    Abstract: The paper examines a financial accelerator mechanism in analyzing determinants of corporate interest rates. Using a panel of the financial statements of 448 Czech firms from 1996–2002, we find that balance sheet indicators matter for the interest rates paid by firms. Market access is particularly important in this regard. The strength of corporate balance sheets seem to vary with firm size. There is also evidence that monetary policy has a stronger effect on smaller than on larger firms. On the other hand, we find no asymmetry in the monetary policy effects over the business cycle.
    Keywords: balance sheet channel, financial accelerator, interest rates, monetary policy transmission
    JEL: G11 G32
    Date: 2006–11–01

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