nep-cba New Economics Papers
on Central Banking
Issue of 2007‒05‒12
39 papers chosen by
Alexander Mihailov
University of Reading

  1. Monetary Policy Today: Sixteen Questions and about Twelve Answers By Alan S. Blinder
  2. Improving Monetary Policy Models By Christopher A. Sims
  3. The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example By Lars E.O. Svensson
  4. Monetary Policy and Japan’s Liquidity Trap By Lars E.O. Svensson
  5. Are shocks to the terms of trade shocks to productivity? By Timothy J. Kehoe; Kim J. Ruhl
  6. Does Inflation Targeting Matter? A Reassessment By Luke B. Willard
  7. Persistent Appreciations and Overshooting: A Normative Analysis By Ricardo J. Caballero; Guido Lorenzoni
  8. The Timing and Magnitude of Exchange Rate Overshooting By Niklas J. Westelius; Mathias Hoffmann; Jens Sondergaard
  9. A New Approach to Forecasting Exchange Rates By Kenneth W Clements; Yihui Lan
  10. Optimal monetary policy under a floating regime with non-atomistic wage setters By Vincenzo Cuciniello
  11. New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks. By Mariam Camarero; Josep Lluis Carrion-i-Silvestre; Cecilio Tamarit
  12. Another Look at the Null of Stationary RealExchange Rates. Panel Data with Structural Breaks and Cross-section Dependence By Syed A. Basher; Josep Lluís Carrion-i-Silvestre
  13. The Stability of Large External Imbalances: The Role of Returns Differentials By Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
  14. Money, output and the payment system: Optimal monetary policy in a model with hidden effort By Joseph H. Haslag; Joydeep Bhattacharya; Antoine Martin
  16. Do fiscal rules cause budgetary outcomes? By Signe Krogstrup; Sébastien Wälti
  17. Measuring Fiscal Decentralisation: An Entropic Approach By Duc Hong Vo
  18. Monetary Policy in an Economy Sick with Dutch Disease By Kirill Sosunov; Oleg Zamulin
  19. Why has Core Inflation Remained so Muted in the Face of the Oil Shock? By Paul van den Noord; Christophe André
  20. Sales and the real effects of monetary policy By Patrick J. Kehoe; Virgiliu Midrigan
  21. "Overcoming the Zero Interest-Rate Bound: A Quantitative Prescription" By Kenneth Lewis; Laurence Seidman
  22. Fonctions de réaction des banques centrales européennes et convergence By Marilyne Huchet-Bourdon
  23. Does single monetary policy have asymmetric real effects in EMU ? By Marilyne Huchet-Bourdon
  24. Commodity Currencies and Currency Commodities By Kenneth W. Clements; Renee Fry
  25. Liquidity-saving mechanisms By Antoine Martin; James McAndrews
  26. Why does overnight liquidity cost more than intraday liquidity? By Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
  27. Reserve levels and intraday federal funds rate behavior By Spence Hilton; Warren B. Hrung
  28. Globalisation and the Macroeconomic Policy Environment By Karine Hervé; Isabell Koske; Nigel Pain; Franck Sédillot
  29. Why are Switzerland's foreign assets so low? The growing financial exposure of a small open economy By Nicolas Stoffels; Cédric Tille
  30. Parametric and Non-parametric Approaches to Exits from Fixed Exchange Rate Regimes By Ahmet Atil Asici
  31. Local linear impulse responses for a small open economy By Alfred A Haug; Christie Smith
  32. Price Elasticities of Demand Are Minus One-half By Kenneth Clements
  33. The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence By Povoledo, Laura
  34. The Continental Dollar: How Much Was Issued and What Happened to It? By Farley Grubb
  35. Weak Instruments: A Guide to the Literature By Adrian Pagan
  36. Exchange Rate Cooperation in East Asia – Why a Basket Approach may be best By Peter Wilson
  37. Ability of the New EU Member States to Fulfill the Exchange Rate Stability Convergence Criterion By Stavarek, Daniel
  38. Crédibilité et currency board : le cas lituanien By Jérôme Blanc; Jean-François Ponsot
  39. Money Demand in Estonia By Boriss Siliverstovs

  1. By: Alan S. Blinder (Princeton University)
    Abstract: My assignment is to survey the main questions swirling around monetary policy today. I emphasize three words in this sentence, each for a different reason. “Main” is because one person’s side issue is another’s main issue. So I had to be both selective and judgmental in compiling my list, else this paper would have been even longer than it is. “Policy” indicates that I have restricted myself to issues that are truly relevant to real-world policymakers, thus omitting many interesting but purely academic issues. “Today” means that I focus on current issues, thus passing over some illustrious past issues. All these omissions still leave a rather long list; so I will treat some issues quite briefly.
    Date: 2006–07
  2. By: Christopher A. Sims (Princeton University and NBER)
    Abstract: If macroeconomic models are to be useful in policy-making, where uncertainty is pervasive, the models must be treated as probability models, whether formally or informally. Use of explicit probability models allows us to learn systematically from past mistakes, to integrate model-based uncertainty with uncertain subjective judgment, and to bind data-bassed forecasting together with theory-based projection of policy effects. Yet in the last few decades policy models at central banks have steadily shed any claims to being believable probability models of the data to which they are fit. Here we describe the current state of policy modeling, suggest some reasons why we have reached this state, and assess some promising directions for future progress.
    Date: 2006–05
  3. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: The introduction of inflation targeting has led to major progress in practical monetary policy. Recent debate has focused on the interest-rate assumption underlying published projections of inflation and other target variables. This paper discusses the role of alternative interest-rate paths in the monetary-policy decision process and the recent publication by Norges Bank (the central bank of Norway) of optimal interest-rate projections with fan charts.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy.
    JEL: E42 E52 E58
    Date: 2006–05
  4. By: Lars E.O. Svensson (Princeton University, CEPR, and NBER)
    Abstract: During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. Therefore, monetarypolicy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level. Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent. In an open economy, the Foolproof Way (consisting of a price-level target path, currency depreciation and commitment to a currency peg and a zero interest rate until the price-level target path has been reached) is likely to be the most effective policy to raise expectations of the future price level, stimulate the economy, and escape from a liquidity trap. It is the first-best policy to end stagnation and deflation in Japan. The Foolproof Way without the explicit exchange-rate policy, namely a price-level target path and a commitment to a zero interest rate until the price-level target path has been reached, would be a second-best policy. The current policy, a commitment to a zero interest rate until inflation has become nonnegative is at best a third-best policy, since it accommodates all deflation that has occurred before inflation turns nonnegative and therefore is not effective in inducing inflation expectations.
    Date: 2006–01
  5. By: Timothy J. Kehoe; Kim J. Ruhl
    Abstract: International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when out is measured as chain-weighted real gross domestic product. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.
    Date: 2007
  6. By: Luke B. Willard (Princeton University)
    Abstract: This paper uses a number of identification approaches (using instrumental variables, assumptions about heteroscedasticity and panel fixed effects) to estimate the effect of inflation targeting on inflation. Generally, it finds the effect is small and insignificant.
    Keywords: Inflation; Monetary policy
    JEL: E31 E52
    Date: 2006–02
  7. By: Ricardo J. Caballero; Guido Lorenzoni
    Abstract: Most economies experience episodes of persistent real exchange rate appreciations, when the question arises whether there is a need for intervention to protect the export sector. In this paper we present a model of irreversible destruction where exchange rate intervention may be justified if the export sector is financially constrained. However the criterion for intervention is not whether there are bankruptcies or not, but whether these can cause a large exchange rate overshooting once the factors behind the appreciation subside. The optimal policy includes ex-ante and ex-post interventions. Ex-ante (i.e., during the appreciation phase) interventions have limited effects if the financial resources in the export sector are relatively abundant. In this case the bulk of the intervention takes place ex-post, and is concentrated in the first period of the depreciation phase. In contrast, if the financial constraint in the export sector is tight, the policy is shifted toward ex-ante intervention and it is optimal to lean against the appreciation. On the methodological front, we develop a framework to study optimal dynamic interventions in economies with financially constrained agents.
    JEL: E0 E2 F0 F4 H2
    Date: 2007–05
  8. By: Niklas J. Westelius (Hunter College); Mathias Hoffmann (University of Cologne); Jens Sondergaard (Johns Hopkins University, Department of International Economics (SAIS))
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to over-shoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a New Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy?s sensitivity to exchange rate dynamic a¤ect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning.
    JEL: F41 F31 E31
    Date: 2007
  9. By: Kenneth W Clements (UWA Business School, The University of Western Australia); Yihui Lan (UWA Business School, The University of Western Australia)
    Abstract: Building on purchasing power parity theory, this paper proposes a new approach to forecasting exchange rates using the Big Mac data from The Economist magazine. Our approach is attractive in three aspects. Firstly, it uses easily-available Big Mac prices as input. These prices avoid several serious problems associated with broad price indexes, such as the CPI, that are used in conventional PPP studies. Secondly, this approach provides real-time exchange-rate forecasts at any forecast horizon. Such real-time forecasts can be made on a day-to-day basis if required, so that the forecasts are based on the most up-to-date information set. These high-frequency forecasts could be particularly appealing to decision makers who want up-to-date forecasts of exchange rates. Finally, as our forecasts are obtained through Monte Carlo simulation, estimation uncertainty is made explicit in our framework which provides the entire distribution of exchange rates, not just a single point estimate. A comparison of our forecasts with the random walk model shows that although the random walk is superior for very short horizons, our approach tends to dominate over the medium to longer term.
    Keywords: Exchange-rate forecasting, Bic Mac prices, purchasing power parity, Monte Carlo simulation
    JEL: F30 C53
    Date: 2006
  10. By: Vincenzo Cuciniello (Facoltà di Economia "Richard M. Goodwin" (Faculty of Economics), Università degli Studi di Siena (University of Siena))
    Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that the monetary policies of the domestic and foreign CB are strategic complements and the presence of an inflation-averse central bank (CB) abroad always increases employment in the home country. We demonstrate that a centralized wage setting and CB conservatism curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. Finally, the welfare analysis reveals that a nationally centralized wage bargaining system always maximizes welfare if monopoly distortions in the labor market are relevant, while the appointment of a populist CB or completely decentralized wage setting is optimal when monopoly distortions are not sizeable.
    Keywords: Central bank conservatism, centralization of wage setting, inflationary bias.
    JEL: E2 E42 E5 F31 F41
    Date: 2007–03–12
  11. By: Mariam Camarero (Departament d'Economia, Universitat Jaume I); Josep Lluis Carrion-i-Silvestre (Grup de Recerca d'Anàlisi Quantitativa Regional (AQR), Institut de Recerca en Economia Aplicada (IREA), Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona); Cecilio Tamarit (Departament d'Economia Aplicada II, Universitat de València)
    Abstract: This paper tests for real interest parity (RIRP) among the nineteen major OECD countries over the period 1978:Q2-1998:Q4. The econometric methods applied consist of combining the use of several unit root or stationarity tests designed for panels valid under cross-section dependence and presence of multiple structural breaks. Our results strongly support the fulfillment of the weak version of the RIRP for the studied period once dependence and structural breaks are accounted for.
    Keywords: Real interest rate parity, economic integration, panel data unit root tests, structural breaks, cross-section dependence
    JEL: C32 C33 F21 F32
    Date: 2006–12
  12. By: Syed A. Basher (Department of Economics. York University.); Josep Lluís Carrion-i-Silvestre (Faculty of Economics, University of Barcelona.)
    Abstract: This paper re-examines the null of stationary of real exchange rate for a panel of seventeen OECD developed countries during the post-Bretton Woods era. Our analysis simultaneously considers both the presence of cross-section dependence and multiple structural breaks that have not received much attention in previous panel methods of long-run PPP. Empirical results indicate that there is little evidence in favor of PPP hypothesis when the analysis does not account for structural breaks. This conclusion is reversed when structural breaks are considered in computation of the panel statistics. We also compute point estimates of half-life separately for idiosyncratic and common factor components and find that it is always below one year.
    Keywords: Purchasing power parity, Half-lives, Panel unit roottests, Multiple structural breaks, Cross-section dependence.
    JEL: C32 C33 E31
    Date: 2007–05
  13. By: Stephanie E. Curcuru; Tomas Dvorak; Francis E. Warnock
    Abstract: Were the U.S. to persistently earn substantially more on its foreign investments ("U.S. claims") than foreigners earn on their U.S. investments ("U.S. liabilities"), the likelihood that the current environment of sizeable global imbalances will evolve in a benign manner increases. However, utilizing data on the actual foreign equity and bond portfolios of U.S. investors and the U.S. equity and bond portfolios of foreign investors, we find that the returns differential of U.S. claims over U.S. liabilities is essentially zero. Ending our sample in 2005, the differential is positive, whereas through 2004 it is negative; in both cases the differential is statistically indecipherable from zero. Moreover, were it not for the poor timing of investors from developed countries, who tend to shift their U.S. portfolios toward (or away from) equities prior to the subsequent underperformance (or strong performance) of equities, the returns differential would be even lower. Thus, in the context of equity and bond portfolios we find no evidence that the U.S. can count on earning more on its claims than it pays on its liabilities.
    JEL: F3
    Date: 2007–05
  14. By: Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Joydeep Bhattacharya; Antoine Martin
    Abstract: We propose a new explanation for the observed difference in the cost of intraday and overnight liquidity. We argue that the low cost of intraday liquidity is an application of the Friedman rule in an environment where a deviation of the Friedman rule is optimal with respect to overnight liquidity. In our environment the cost of overnight liquidity affects output while the cost of intraday liquidity only redistributes resources between money holders and non-money holders. We show that it is optimal to set a high overnight rate to reduce the incentives to overuse money. In contrast, intraday liquidity should have a low cost to provide risk-sharing.
    Keywords: Friedman rule; monetary policy; random-relocation models
    JEL: E31 E51 E58
    Date: 2007–03–14
  15. By: Jan Libich; Petr Stehlik
    Abstract: This paper proposes a simple framework that generalizes the timing structure of macroeconomic (as well as other) games. Building on alternative move games and models of "rational inattention" the players' actions may be rigid, ie optimally chosen to be infrequent. This rigidity makes the game more dynamic/asynchronous and by linking successive periods it can serve as commitment. Therefore, it can enhance cooperation and often eliminate inefficient equilibrium outcomes. We apply the framework to the Kydland-Prescott-Barro-Gordon monetraty policy game and dervice the conditions - the sufficient degree of commitment - under which the influential time-inconsistency problem disappears. Interestingly, (i) this can happen even in a finite game (possibly as short as two periods), (ii) the required degree of commitment may be rather (even infinitesimally) low and (iii) the policymaker's commitment may substitute for his conservatism and/or patience in achieving credibility. The analysis makes several predictions about explicit inflation targeting and central bank dependence (and their relationship) that we show to be empirically supported. In doing so we show that our theoretical results reconcile some conflicting empirical findings of the literature.
    JEL: C70 C72 E42 E61
    Date: 2007–04
  16. By: Signe Krogstrup (The Graduate Institute of International Studies, Geneva); Sébastien Wälti (Department of Economics, Trinity College Dublin)
    Abstract: This paper focuses on the observed empirical relationship between fiscal rules and budget deficits, and examines whether this correlation is driven by an omitted variable, namely voter preferences. We make use of two different estimation methods to capture voter preferences in a panel of Swiss sub-federal jurisdictions. First, we include a recently constructed measure of fiscal preferences. Second, we capture preferences through fixed effects with a structural break as women are enfranchised. We find that fiscal rules continue to have a significant impact on real budget balances.
    Keywords: Fiscal policy, fiscal rules, fiscal institutions, budget deficits, fiscal preferences, endogeneity
    JEL: C2 D7 E6 H6
    Date: 2007–04
  17. By: Duc Hong Vo (UWA Business School, University of Western Australia)
    Abstract: Fiscal decentralisation has attracted attention from government, academic studies, and international institutions with the aims of enhancing economic growth in recent years. One of the difficult issues is to measure satisfactorily the degree of fiscal decentralisation across countries. This study helps resolve the problem by developing the fiscal decentralisation index which accounts for both fiscal autonomy and fiscal importance of subnational governments. While the index is an advance on current practice, it is still not perfect as it assumes there is no dispersion of revenue and expenditure across regions. In response to this weakness, fiscal entropy and fiscal inequality measures are developed using information theory (Theil, 1967). It is shown how fiscal inequality can be decomposed regionally and hierarchically. These ideas are illustrated with Australia data pertaining to federal, state and local levels of governments.
    Keywords: Fiscal Decentralisation, Fiscal Autonomy, Fiscal Importance, Australia
    JEL: H77
    Date: 2006
  18. By: Kirill Sosunov (Higher School of Economics); Oleg Zamulin (New Economic School)
    Abstract: The paper studies monetary policy in an economy, in which the manufacturing sector is ousted completely by the presence of a large natural resource industry. Thus, the economy produces only non-tradable goods, which can complement or substitute imported goods, and the primary shock to the economy comes from the fluctuations in the world price of the exported commodity. A model of such an economy is calibrated using parameters relevant for Russia, which is an example of an economy sick with Dutch Disease, and several conventional policy rules are considered. It is shown that in absence of a well-functioning fiscal stabilization fund, it may be optimal for monetary authorities to respond to the real exchange rate, as the Bank of Russia allegedly does, using purchases of foreign reserves as the policy instrument. The logic of these actions is to replace the absent fiscal stabilization policy. In case monetary policy is conducted using an interest rate instrument, there should be no reaction to the real exchange rate and only slight one - to inflation.
    Keywords: Dutch disease, Monetary Policy, Russia
    JEL: E52 F4
    Date: 2007–05
  19. By: Paul van den Noord; Christophe André
    Abstract: To help policymakers form a judgment on inflation risks and the required monetary policy stance the OECD has developed an analytical framework based on a set of 'eclectic' Phillips curves estimated for the two largest OECD economies, the United States and the euro area, which is presented in this paper. This framework is used in the preparation of the Economic Outlook to explain recent developments in core inflation, excluding food and energy, based on developments in measures of economic slack (the output gap), spill-over effects from energy prices onto core inflation and lagged responses to past inflation via expectations formation. The fact that the knock-on effects from energy shocks onto core inflation appear small in comparison with the 1970s can be explained by the secular fall in energy intensity, a low and stable rate of 'mean inflation' -- to which observed inflation reverts after a shock has worked its way through -- and persistent slack in the aftermath of the bursting of the dotcom bubble. <P>Pourquoi l?inflation sous-jacente est elle restée si modérée en dépit du choc pétrolier ? <BR>Afin d'aider les décideurs politiques à apprécier les risques inflationnistes et l'orientation requise pour la politique monétaire, l'OCDE a développé un cadre analytique fondé sur un ensemble de courbes de Phillips 'éclectiques' estimées pour les deux plus grandes économies de l'OCDE, les États-unis et la zone euro, qui est présenté dans ce document. Ce cadre est utilisé dans la préparation des Perspectives économiques pour expliquer l'évolution récente de l'inflation sous-jacente, hors alimentation et énergie, en fonction de l'évolution de mesures de la robustesse de la conjoncture (l'écart de production), des effets de contagion des prix de l'énergie sur l'inflation sous-jacente et des réponses différées à l'inflation passée à travers la formation des anticipations. Le fait que les effets d'entraînement des prix de l'énergie sur l'inflation sous-jacente apparaissent faibles comparés aux années 1970 peut s'expliquer par la baisse séculaire de l'intensité énergétique, un taux d'inflation 'moyen' faible et stable -- vers lequel l'inflation observée converge une fois qu'un choc a été absorbé -- et par une faiblesse persistante de l'économie à la suite de l'éclatement de la bulle 'dotcom'.
    Keywords: monetary policy, politique monétaire, energy, énergie, inflation, inflation
    JEL: E31 E52 Q40
    Date: 2007–04–23
  20. By: Patrick J. Kehoe; Virgiliu Midrigan
    Abstract: In the data, a sizable fraction of price changes are temporary price reductions referred to as sales. Existing models include no role for sales. Hence, when confronted with data in which a large fraction of price changes are sales related, the models must either exclude sales from the data or leave them in and implicitly treat sales like any other price change. When sales are included, prices change frequently and standard sticky price models with this high frequency of price changes predict small effects from money shocks. If sales are excluded, prices change much less frequently and a standard sticky price model with this low frequency of price changes predict much larger effects of money shocks. This paper adds a motive for sales in a parsimonious extension of existing sticky price models. We show that the model can account for most of the patterns of sales in the data. Using our model as the data generating process, we evaluate the existing approaches and find that neither well approximates the real effects of money in our economy in which sales are explicitly modeled.
    Date: 2007
  21. By: Kenneth Lewis (Department of Economics,University of Delaware); Laurence Seidman
    Abstract: Two recent empirical studies of the 2001 recession published in the American Economic Review imply that an old-fashioned Keynesian fiscal stimulus—a cash transfer (“tax rebate”) or tax cut to households-- can overcome the zero interest-rate bound problem. We provide a quantitative estimate of the cash transfer that would achieve recovery from a severe recession when confronted with the zero bound. We obtain our result by adapting and simulating a macro-econometric model that has been recently econometrically estimated. With the interest rate near zero, a cash transfer equal to 3% of quarterly GDP repeated four times (quarterly) would reduce the unemployment rate nearly a full percentage point.
    Keywords: Recession, Fiscal Policy, Tax Rebate
    Date: 2006
  22. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - [CNRS : UMR6211] - [Université Rennes I][Université de Caen])
    Abstract: Depuis le 1er janvier 2001, douze pays participent à l'UEM. L'instauration de la monnaie unique constitue l'aboutissement d'un long processus de convergence. Le Système Monétaire Européen créé en 1979 visait déjà à établir une coopération monétaire plus étroite. Ensuite, les trois étapes préliminaires à la création de l'UEM ont accéléré le processus d'ajustement. Néanmoins, la question est de savoir s'il existe une convergence des préférences des banques centrales. Pour répondre à cette interrogation, ce papier a pour objet d'estimer les fonctions de réaction des huit principales banques centrales nationales sur la période 1980-1998 mais aussi celle qui aurait représenté au mieux le comportement de la BCE si les pays avaient formé une Union monétaire sur cette période. Les résultats nous permettent ainsi de comparer les comportements des banques centrales et mettent en évidence un processus de convergence de leurs préférences.
    Keywords: Fonctions de réaction, convergence, monnaie unique
    Date: 2007–04–26
  23. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - [CNRS : UMR6211] - [Université Rennes I][Université de Caen])
    Abstract: This article compares reactions of economies in Economic Monetary Union to a single monetary policy. For that, we estimate a reaction function supposed to represent the behaviour of European Central Bank over the period 1980-1998. Then residuals are introduced into the production equation of each country. We break up monetary shocks in two axes: first, anticipated against unanticipated shocks and then positive against negative shocks. These distinctions permit a best evaluation of the degree of homogeneity of the effects of monetary policy. France, Germany, Spain and Austria seem more sensitive to unanticipated interest rates increases contrary to Belgium and Italy. These results illustrate all the problem of single monetary policy.
    Keywords: monetary policy shocks, reaction function, asymmetric effects, Economic Monetary Union.
    Date: 2007–04–26
  24. By: Kenneth W. Clements (UWA Business School, The University of Western Australia); Renee Fry (Centre for Applied Macroeconomic Analysis, The Australian National University & Cambridge Endowment for Research in Finance, The University of Cambridge)
    Abstract: There is a large literature on the influence of commodity prices on the currencies of countries with a large commodity-based export sector such as Australia, New Zealand and Canada (“commodity currencies”). There is also the idea that because of pricing power, the value of currencies of certain commodity-producing countries affects commodity prices, such as metals, energy, and agricultural-based products (“currency commodities”). This paper merges these two strands of the literature to analyse the simultaneous workings of commodity and currency markets. We implement the approach by using the Kalman filter to jointly estimate the determinants of the prices of these currencies and commodities. Included in the specification is an allowance for spillovers between the two asset types. The methodology is able to determine the extent that currencies are indeed driven by commodities, or that commodities are driven by currencies, over the period 1975 to 2005.
    Date: 2006
  25. By: Antoine Martin; James McAndrews
    Abstract: We study the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (queue). Participants in our model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment against the cost of borrowing liquidity from the central bank. The heterogeneity of participants in our model gives rise to a rich set of strategic interactions. The main contribution of our paper is to show that the design of a liquidity-saving mechanism has important implications for welfare, even in the absence of netting. In particular, we find that parameters will determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.
    Keywords: Bank liquidity ; Payment systems ; Banks and banking ; Banks and banking, Central ; Monetary theory
    Date: 2007
  26. By: Joydeep Bhattacharya; Joseph H. Haslag; Antoine Martin
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, the interest charged on overnight liquidity affects output, while the cost of intraday liquidity only affects the distribution of resources between money holders and non?money holders. The low cost of intraday liquidity follows from the Friedman rule, but with respect to overnight liquidity, it is optimal to deviate from the Friedman rule. The cost differential simultaneously reduces the incentive to overuse money and encourages risk sharing.>
    Keywords: Bank liquidity ; Payment systems ; Friedman, Milton ; Banks and banking, Central
    Date: 2007
  27. By: Spence Hilton; Warren B. Hrung
    Abstract: We analyze the impact of aggregate reserve levels on the intraday behavior of the federal funds rate over a sample period extending from 2002 to 2005. We study both how the reserve levels accumulated earlier in a maintenance period influence the morning level of the funds rate relative to the target set by the FOMC, and how same-day reserve levels as well as the reserve levels accumulated earlier affect intraday movements of the funds rate. The impact of recurring calendar events on the behavior of the federal funds rate is also explored. In general, we find a negative relationship between our measures of reserve levels and our two measures of federal funds rate behavior.
    Keywords: Federal funds rate ; Bank reserves ; Monetary policy
    Date: 2007
  28. By: Karine Hervé; Isabell Koske; Nigel Pain; Franck Sédillot
    Abstract: This paper investigates the macroeconomic policy challenges associated with a prospective continuation of international trade and financial integration over the next two decades, making use of a global macroeconomic model newly developed by the OECD. The analysis has several important policy implications. First, with the shares of non-OECD economies in world output, trade, and capital markets rising substantially, global economic developments would become much more dependent on developments in these economies than they used to be. Second, the sustainability of existing global current account imbalances will depend in part on the future build-up and composition of international assets and liabilities. While the imbalances could be sustainable for some time if economic integration continues at its current pace, a slowdown of the globalisation process would raise the likelihood of a disruptive adjustment in financial markets. Third, the increase in trade and financial linkages implies that macroeconomic shocks in a given country or region have a larger impact on other economies in the future than they do today. Policymakers in the OECD may have to act more promptly and more vigorously to economic 'shocks' in the non-OECD economies in order to limit the impact on OECD economies. <P>Mondialisation et environnement de politique macroéconomique <BR>Ce papier étudie les défis de politiques économiques posés par la poursuite éventuelle au cours des deux prochaines décennies de l’intégration commerciale et financière internationales. Cette étude est fondée sur l’utilisation d’un modèle macroéconomique mondial récemment développé par l’OCDE. L’analyse conduit à plusieurs implications politiques importantes. Tout d?abord, avec une part croissante des économies non membres de l’OCDE dans la production mondiale, le commerce et les marchés financiers, les changements économiques mondiaux deviendront beaucoup plus dépendants de ceux de ces économies. Ensuite, la soutenabilité des déséquilibres mondiaux des comptes courants existants dépendra en partie de la construction et de la composition futures des avoirs et engagements internationaux. Alors que les déséquilibres devraient être soutenables un certain temps si l’intégration économique continue à ce rythme, un ralentissement du processus de mondialisation augmenterait la possibilité d’un ajustement brutal des marchés financiers. Enfin, l’accroissement des liens commerciaux et internationaux implique que les chocs macroéconomiques affectant un pays ou une région donnée auront dans le futur un impact plus fort sur les autres économies que maintenant. Les décideurs politiques des pays de l’OCDE devraient donc agir plus rapidement et plus fortement aux chocs économiques affectant les économies non membres de l’OCDE afin d’en limiter l’impact sur les économies membres.
    Keywords: growth, globalisation, croissance, macroeconomic policies, politique macro-économique, current account, compte courant, mondialisation
    JEL: E17 E60 F01 F47
    Date: 2007–05–04
  29. By: Nicolas Stoffels; Cédric Tille
    Abstract: Switzerland's international investment position shows a puzzling feature since 1999: Large and persistent current account surpluses have failed to boost the value of Swiss foreign assets. In this paper, we link this pattern to the substantial increase in the leveraging of Switzerland?s international assets and liabilities over the last twenty years, which we document in detail. We estimate the impact of exchange rate and asset prices movements on Swiss net foreign assets, and show that they led to substantial valuations losses since 1999, accounting for between one-quarter and one-half of the gap between the net foreign assets and cumulated current account flows. We show how these adverse valuation effects have erased Switzerland?s advantage in terms of the yield on its net foreign asset position.
    Keywords: Capital movements ; International finance ; International economic integration ; Switzerland ; Assets (Accounting)
    Date: 2007
  30. By: Ahmet Atil Asici (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Following the demise of the Bretton-Woods increasing number of countries has been opting for flexible exchange rate regimes. Exiting from fixed regimes however is not without costs. Regime transitions have often been occurred in the midst of a crisis which has considerable economic costs in terms of output contraction and exchange rate depreciation. Given the big number of countries having still fixed regimes and financial markets that are fairly close and expected to be liberalized sooner or later, issue of exiting a peg without incurring crisis is a real challenge confronting these countries. The aim of this paper is to determine the conditions under which orderly exit is possible. The paper employs Binary Recursive Tree and standard regression frameworks. Analysis shows that countries with higher output gap and overvalued real exchange rate, among others, are doomed to exit in a disorderly way. Following their exit output collapses and exchange rate depreciates considerably. The ill-managed financial liberalization and macroeconomic stabilization programs seem to lay the seeds of instability. An interesting finding is that the conventional strengths of parametric regression analysis can be dramatically improved by utilizing findings of non-parametric BRT technology. Sample contains all countries depending on the data availability, and covers 1975-2004 period.
    Keywords: Exchange rate regime choice, Exiting, Non-parametric Binary Recursive Tree Methodology
    JEL: C14 C34 F30 F31 F41
    Date: 2007–03–15
  31. By: Alfred A Haug; Christie Smith (Reserve Bank of New Zealand)
    Abstract: Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are robust to this problem, and Monte Carlo evidence suggests they provide reliable estimates of the true impulse responses. We use local linear projections to investigate the dynamic properties of a model for a small open economy, New Zealand. We compare impulse responses from local projections to those from standard techniques, and consider the implications for monetary policy. We pay careful attention to the dimensionality of the model, and focus on the effects of policy on GDP, interest rates, prices and the exchange rate.
    JEL: C51 E52 F41
    Date: 2007–04
  32. By: Kenneth Clements (Business School, The University of Western Australia)
    Abstract: As an empirical regularity for broad commodity groups, we show that price elasticities of demand are scattered around the value of minus one-half. We also show that this finding is not inconsistent with the utility-maximising theory of the consumer under the conditions of preference independence. When nothing is known about the price-sensitivity of a good, a reasonable first approximation to its price elasticity is thus minus one-half.
    Date: 2006
  33. By: Povoledo, Laura
    Abstract: This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: the model-implied standard deviations are consistent with the pattern in the data. In particular, tradeable output is more volatile than nontradeable output. A key role in generating this result is played by the greater responsiveness of tradeable output to monetary shocks. Parameter estimates are obtained by Generalised Method of Moments.
    Keywords: New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles
    JEL: F41 E32
    Date: 2007–04
  34. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: The U.S. Congress issued paper money called Continental Dollars to finance the American Revolution. The story of the Continental Dollar is familiar to all - excessive amounts were issued causing hyper-inflation. It became worthless and was forgotten. However, the details of this story, including its veracity, are less well known. Scholars even disagree over how much was issued. Evidence is gathered to establish the exact amount and time path of Continental Dollars emitted and then remitted to the U.S. Treasury and burned. Why some Dollars were hoarded rather than trashed between 1779 and 1790 is also documented.
    Keywords: Monetary Policy, Economic History
  35. By: Adrian Pagan
    Abstract: Weak instruments have become an issue in many contexts in which econometric methods have been used. Some progress has been made into how one diagnoses the problem and how one makes an allowance for it. The present paper gives a partial survey of this literature, focussing upon some of the major contributions and trying to provide a relatively simple exposition of the proposed solutions.
    Date: 2007–03–03
  36. By: Peter Wilson (Department of Economics, National University of Singapore)
  37. By: Stavarek, Daniel
    Abstract: This paper assesses exchange rate development and volatility in six new EU member states (Cyprus, Czech Republic, Hungary, Poland, Slovakia, and Slovenia) during the period November 1996 - April 2006. The study is motivated by the unavoidable participation of the new member states’ currencies in the Exchange Rate Mechanism II and fulfillment of the exchange rate stability convergence criterion. The development of exchange rates is examined by the calculation of various rates of return and the exchange rate volatility is analyzed using moving average standard deviations of the annualized daily returns of the nominal bilateral exchange rates. The results suggest that the dilemma of “participation or non-participation in ERM II” have been solved properly so far by all countries analyzed. The three ERM II participating currencies (SIT, CYP, SKK) entered into the mechanism at the optimal time of stable exchange rate development and low volatility. On the other hand, the admissible fluctuation band ± 2.25 % seems to be still too narrow for the remaining three currencies (CZK, HUF, PLN), thus the currencies should remain out of ERM II for some time.
    Keywords: exchange rates; rate of return; volatility; ERM II; exchange rate stability criterion; new EU Member States
    JEL: F31
    Date: 2006–05
  38. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II]); Jean-François Ponsot (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: Si le currency board établi en Lituanie en avril 1994 s'est accompagné de la stabilité monétaire, il n'a pas pour autant bénéficié de la crédibilité qu'il était censé apporter. Ce texte s'interroge sur ce défaut de crédibilité. On examine d'abord l'hypothèse courante selon laquelle l'écart entre le modèle pur de currency board, censé apporter par lui-même la crédibilité, et le modèle lituanien, est à l'origine de ce déficit. On interroge ensuite les circonstances et les effets de la crise bancaire systémique de 1995-96. On traite enfin des conséquences des chocs exogènes sur l'économie lituanienne. Le tout conduit à avancer une autre hypothèse : les contraintes du currency board - fût-il impur - ont provoqué le besoin de restauration de marges de manœuvre discrétionnaires, ce qui a été traduit comme une dénaturation. Le défaut de crédibilité est alors le produit du currency board lui-même.
    Keywords: Caisse d'émission. Crédibilité. Politique monétaire. Crise bancaire.
    Date: 2007–04–30
  39. By: Boriss Siliverstovs
    Abstract: This study develops a parsimonious stable coefficient money demand model for Estonia for the period from 1995 till 2006. Using the Johansen Full Information Maximum Likelihood framework the two cointegrating vectors are found among the system variables including the real money balances, the gross domestic product, the long- and short-term interest rates, and the rate of inflation. The first cointegrating vector is identified as the money demand function whereas the second as the interest rate parity. Our study contributes to better understanding of the factors shaping the demand for money in the new Member States of the European Union that committed themselves to adopting of the Euro currency in the near future.
    Keywords: M2 money demand, stability, new EU member states, Estonia
    JEL: C32 E41
    Date: 2007

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