nep-cba New Economics Papers
on Central Banking
Issue of 2007‒08‒08
fifty-one papers chosen by
Alexander Mihailov
University of Reading

  1. The Instrument-Rate Projection under Inflation Targeting: The Norwegian Example By Lars E.O. Svensson
  2. Monetary Policy and Japan’s Liquidity Trap By Lars E.O. Svensson
  3. Shocks, structures or monetary policies? The euro area and US after 2001 By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  4. Switzerland and Euroland: European Monetary Union, Monetary Stability and Financial Stability By Martin Hellwig
  5. Money and bonds: an equivalence theorem By Narayana R. Kocherlakota
  6. Asymmetric Expectation Effects of Regime Shifts and the Great Moderation By Zheng Liu; Daniel F. Waggoner; Tao Zha
  7. Asymmetric expectation effects of regime shifts and the Great Moderation By Zheng Liu; Daniel F. Waggoner; Tao Zha
  8. An overhaul of doctrine: the underpinning of U.K. inflation targeting By Edward Nelson
  9. Investment and Monetary Policy: Learning and Determinacy of Equilibrium By John Duffy; Wei Xiao
  10. The Rationality and Reliability of Expectations Reported by British Households: Micro Evidence from the British Household Panel Survey By James Mitchell; Martin Weale
  11. Optimal Policy Under Model Uncertainty: A Structural-Bayesian Estimation Approach By Alexander Kriwoluzky; Christian Stoltenberg
  12. Monetary policy, output composition and the Great Moderation By Benoît Mojon
  13. The long-run determinants of U.S. external imbalances By Andrea Ferrero
  14. Correcting US Imbalances By Ray Barrell; Dawn Holland; Ian Hurst
  15. Aggregating Phillips curves By Jean Imbs; Eric Jondeau; Florian Pelgrin
  16. Phillips Curve instability and optimal monetary policy By Troy Davig
  17. Towards harmonised balance of payments and international investment position statistics – the experience of the European compilers By Jean Marc Israël; Carlos Sánchez Muñoz
  18. The use of portfolio credit risk models in Central Banks. By Ulrich Bindseil; Han van der Hoorn; Ken Nyholm; Henrik Schwartzlose; Pierre Ledoyen; Wolfgang Föttinger; Fernando Monar; Bérénice Boux; Gigliola Chiappa; Noëlle Honings; Ricardo Amado; Kai Sotamaa; Dan Rosen
  19. Capital Flows, Financial Integration, and International Reserve Holdings: The Recent Experience of Emerging Markets and Advanced Economies By Maria Stromqvist; Sunil Sharma; Woon Gyu Choi
  20. Rules versus discretion in fiscal policy By C. Bianchi; M. Menegatti
  21. The Effect of Monetary Policy on Exchange Rates during Currency Crises; The Role of Debt, Institutions and Financial Openness By Eijffinger, S.C.W.; Goderis, B.
  22. A framework for identifying the sources of local currency price stability with an empirical application By Pinelopi K. Goldberg; Rebecca Hellerstein
  23. Liquidity Shortages and Monetary Policy By Illing, Gerhard; Cao, Jin
  24. Two-Country New Keynesian DSGE Model: A Small Open Economy as a Limit Case By Marcos Antonio C. da Silveira
  25. Monetary regime change and business cycles By Vasco Cúrdia; Daria Finocchiaro
  26. Monetary accommodation and unemployment: Why central bank transparency matters. By Eleftherios Spyromitros; Blandine Zimmer
  27. Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model By Costas Milas
  28. Fiscal sustainability across government tiers: an assessment of soft budget constraints. By Peter Claeys; Raúl Ramos; Jordi Suriñach
  29. Understanding the dynamics of labor shares and inflation By Martina Lawless; Karl Whelan
  30. Exchange rate volatility and growth in small open economies at the EMU periphery By Gunther Schnabl
  31. Woodford and Wicksell: a Cashless Economy or a Moneyless Economy Framework ? By Nicolas Barbaroux
  32. Modeling the impact of external factors on the euro area’s HICP and real economy - a focus on pass-through and the trade balance By Luigi Landolfo
  33. How strong is the case for downward real wage rigidity? By Steinar Holden; Fredrik Wulfsberg
  34. Downward nominal wage rigidity in the OECD By Steinar Holden; Fredrik Wulfsberg
  35. The interaction between the central bank and a monopoly union revisited: does greater uncertainty about monetary policy reduce average inflation? By Luigi Bonatti
  36. Dynamics and monetary policy in a fair wage model of the business cycle By David de la Croix; Gregory de Walque; Rafael Wouters
  37. The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties By Marika Karanassou; Hector Sala; Dennis J. Snower
  38. Measurement and Inference in International Reserve Diversification By Anna Wong
  39. Real Convergence, Price Level Convergence and Inflation Differentials in Europe By Balázs Égert
  40. A Monetary Union Model with Cash-in-Advance Constraints By Cengiz, Gulfer; Cicek, Deniz; Kuzubas, Tolga Umut; Olcay, Nadide Banu; Saglam, Ismail
  41. Sticky wages and rule of thumb consumers. By Andrea Colciago
  42. Monetary Policy and Swedish Unemployment Fluctuations By Annika Alexius; Bertil Holmlund
  43. Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policy-making under Uncertainty By Ippei Fujiwara; Naoko Hara; Naohisa Hirakata; Takeshi Kimura; Shinichiro Watanabe
  44. Understanding the New Zealand current account: A structural approach By Anella Munro; Rishab Sethi
  45. Monetary Policy By Alfredo Saad Filho
  46. Japanese quantitative easing: The effects and constraints of anti-deflationary monetary expansions By Zammit, Robert
  47. The CIS – does the regional hegemon facilitate monetary integration? By Mayes, David G; Korhonen, Vesa
  48. Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic By Ian Babetskii; Fabrizio Coricelli; Roman Horváth
  49. Measuring Monetary Policy Stance in Brazil By Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
  50. Dynamic Modelling of the Demand for Money in Latvia By Boriss Siliverstovs
  51. Monetary policy and economic performance of West African Monetary Zone Countries By Balogun, Emmanuel Dele

  1. 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
  2. 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
  3. By: Lawrence Christiano (Northwestern University and National Bureau of Economic Research. Mailing address: Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.)
    Abstract: The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB’s policy rule - the ECB’s policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB’s quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility. JEL Classification: C51, E52, E58.
    Keywords: Policy activism, DSGEmodel, policy inertia, shocks.
    Date: 2007–07
  4. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This contribution to the Festschrift for the Centenary of the Swiss National Bank discusses the prospects for monetary stability and financial stability after the creation of the European Monetary Union. Topics covered include the robustness of institutional arrangements and their implications for monetary stability, the implications for a small, nonparticipating country, and the problem of financial stability in a setting in which banking supervision is national and the lender of the last resort is supranational.
    Keywords: European Monetary Union, European Central Bank, Monetary Stability, Banking Supervision, Financial Crisis Management
    JEL: E58 F41 G28
    Date: 2007–07
  5. By: Narayana R. Kocherlakota
    Abstract: This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term “exogenous variables” refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.)
    Date: 2007
  6. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime.
    Date: 2007–07
  7. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We assess the quantitative importance of the expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a “bad” regime and a “good” regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric across regimes. In the good regime, the expectation effect is small despite agents’ disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a small probability that monetary policy will switch to the good regime. Although the expectation effect dampens aggregate fluctuations in the bad regime, a switch from the bad regime to the good regime can still substantially reduce the volatility of both inflation and output, provided that we allow some “reduced-form” parameters in the private sector to change with monetary policy regime. Much of the volatility reduction is attributed to a structural break in the persistence of equilibrium dynamics of macroeconomic variables.
    Date: 2007
  8. By: Edward Nelson
    Abstract: This paper argues that the inflation targeting regime prevailing in the United Kingdom is not the result of a change in policymaker objectives. By conducting an analysis of U.K. policymakers that parallels Romer and Romer's (2004) study of Federal Reserve Chairmen, I demonstrate that policymaker objectives have been essentially unchanged over the past five decades. Instead, the crucial underpinning of U.K. inflation targeting has been an overhaul of doctrine-a changed view of the transmission mechanism. This overhaul can be understood in terms of changes in policymakers' views on the values of a few key parameters in their specifications of the economy's IS and Phillips curves. Specifically, the changed views pertain to the issues of whether interest rates enter the IS equation, and the extent of policymaker influence on those rates; whether the level of the output gap appears in the Phillips curve when the gap is negative; and whether a speed-limit term matters for inflation dynamics. Contrary to conventional wisdom, changing views on the expected-inflation term in the Phillips curve do not play a role.
    Keywords: Inflation (Finance) - Great Britain ; Monetary policy - Great Britain
    Date: 2007
  9. By: John Duffy; Wei Xiao
    Abstract: We examine determinancy and expectational stability (learnability) of rational expectations equilibrium (REE) in sticky price `New Keynesian` (NK) models of the monetary transmission mechanism. We consider three different New Keynesian models: a labor-only model and two models that add capital -- one where capital is allocated in an economy-wide rental market and another that supposes that the demand for capital is firm-specific. We find that Bullard and Mitra`s (2002, 2006) findings on determinacy and learnability of REE under various interest rate rules in the labor-only NK model do not always extend to models with capital. In particular, the Taylor principle, that the response of interest rates should be more than proportionate to changes in inflation, will not generally suffice to guarantee determinate and/or learnable equilibria in NK models with capital.
    JEL: D83 E43 E52
    Date: 2007–07
  10. By: James Mitchell; Martin Weale
    Abstract: This paper assesses the accuracy of individuals’ expectations of their financial circumstances, as reported in the British Household Panel Survey, as predictors of outcomes and identifies what factors influence their reliability. Bivariate ordered probit models, appropriately identified, are estimated to draw out the differential effect of information on expectations and realisations. Rationality is then tested and we seek to explain deviations of realisations from expectations at a micro-economic level, possibly with reference to macroeconomic shocks. A bivariate regime-switching ordered probit model, distinguishing between states of rationality and irrationality, is then estimated to try and explain departures from rationality and identify whether certain individual characteristics are associated with rational behaviour.
    Date: 2007–02
  11. By: Alexander Kriwoluzky; Christian Stoltenberg
    Abstract: In this paper we propose a novel methodology to analyze optimal policies under model uncertainty in micro-founded macroeconomic models. As an application we assess the relevant sources of uncertainty for the optimal conduct of monetary policy within (parameter uncertainty) and across models (specification uncertainty) using EU 13 data. Parameter uncertainty matters only if the zero bound on interest rates is explicitly taken into account. In any case, optimal monetary policy is highly sensitive with respect to specification uncertainty implying substantial welfare gains of a robustly-optimal rule that incorporates this risk.
    Keywords: Optimal monetary policy, model uncertainty, Bayesian model estimation.
    JEL: E32 C51 E52
    Date: 2007–07
  12. By: Benoît Mojon
    Abstract: This paper shows how US monetary policy contributed to the drop in the volatility of US output fluctuations and to the decoupling of household investment from the business cycle. I estimate a model of household investment, an aggregate of non durable consumption and corporate sector investment, inflation and a short-term interest rate. Subsets of the models' parameters can vary along independent Markov Switching processes. ; A specific form of switches in the monetary policy regimes, i.e. changes in the size of monetary policy shocks, affect both the correlation between output components and their volatility. A regime of high volatility in monetary policy shocks, that spanned from 1970 to 1975 and from 1979 to 1984 is characterized by large monetary policy shocks contributions to GDP components and by a high correlation of household investment to the business cycle. This contrasts with the 1960's, the 1976 to 1979 period and the post 1984 era where monetary policy shocks have little impact on the fluctuations of real output.
    Keywords: Monetary policy ; Business cycles
    Date: 2007
  13. By: Andrea Ferrero
    Abstract: This paper develops a tractable two-country model with life-cycle structure to investigate analytically and quantitatively three potential determinants of the U.S. external imbalances in the last three decades: productivity growth, demographic factors, and fiscal policy. The results suggest that (1) productivity growth differentials are the main driving force at high frequencies, (2) the different evolution of demographic factors across countries accounts for a large portion of the long-run trend, and (3) fiscal policy plays, at best, a minor role. The main prediction of the analysis is that among industrialized countries, capital should generally be expected to flow toward relatively young and rapidly growing economies. In addition, the paper shows that international demographic trends might be partly responsible for the recent declining pattern of the world real interest rate and therefore shed new light on the real side of the interest rate conundrum.
    Keywords: Capital movements ; Productivity ; Demography ; Fiscal policy ; Interest rates
    Date: 2007
  14. By: Ray Barrell; Dawn Holland; Ian Hurst
    Abstract: The US current account deficit is in excess of 6 per cent of GDP, and is leading to an accumulation of debts. We use NiGEM to evaluate the causes of the decline, and suggest that domestic absorption in the US has increased markedly. Nominal realignments and monetary expansions elsewhere are shown to be only short term palliatives. A sustained change in the current account must come either from a real realignment associated with a rise in risk premia on US assets or from a change in domestic absorption in the US and elsewhere. Any adjustment must be associated with a significant change in eth US real exchange rate to induce expenditure switching as well.
    Date: 2007–03
  15. By: Jean Imbs (Corresponding author: Department of Economics, Institute of Banking and Finance - HEC Lausanne, CH-1015 Lausanne, Switzerland.); Eric Jondeau (Institute of Banking and Finance, Ecole des HEC - University of Lausanne, Extranef 232, CH-1015 Lausanne, Switzerland.); Florian Pelgrin (Enseignement et recherche – HEC, Quartier UNIL-Dorigny, Bâtiment Extranef 246, CH-1015 Lausanne, Switzerland.)
    Abstract: The New Keynesian Phillips Curve is at the center of two raging empirical debates. First, how can purely forward looking pricing account for the observed persistence in aggregate inflation. Second, price-setting responds to movements in marginal costs, which should therefore be the driving force to observed inflation dynamics. This is not always the case in typical estimations. In this paper, we show how heterogeneity in pricing behavior is relevant to both questions. We detail the conditions under which imposing homogeneity results in overestimating a backward-looking component in (aggregate) inflation, and underestimating the importance of (aggregate) marginal costs for (aggregate) inflation. We provide intuition for the direction of these biases, and verify them in French data with information on prices and marginal costs at the industry level. We show that the apparent discrepancy in the estimated duration of nominal rigidities, as implied from aggregate or microeconomic data, can be fully attributable to a heterogeneity bias. JEL Classification: C10, C22, E31, E52.
    Keywords: New Keynesian Phillips Curve, Heterogeneity, Inflation Persistence, Marginal Costs.
    Date: 2007–07
  16. By: Troy Davig
    Abstract: This paper assesses the implications for optimal discretionary monetary policy if the slope of the Phillips curve changes. The paper first derives a ‘switching’ Phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment. Two states exists, a state with a high cost of price adjustment that generates a ‘flat’ Phillips curve and a low-cost state that generates a relatively ‘steep’ curve. The second aspect of the paper constructs a utility-based welfare criterion. A novel feature of this criterion is that it has a relative weight on output gap deviations that is state dependent, so it changes with the cost of price adjustment. Optimal monetary policy is computed subject to the switching-Phillips curve under both ad-hoc and utility-based welfare criteria. The utility-based criterion instructs monetary policy to disregard the slope of the Phillips curve and keep its systematic actions constant across different states. This stands in contrast to the prescription coming under the ad-hoc criterion, which advises monetary policy to change its systematic behavior according to the slope of the Phillips curve.
    Date: 2007
  17. By: Jean Marc Israël (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carlos Sánchez Muñoz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: External statistics – specifically balance of payments and international investment position statistics – are among the primary statistics on which policy-making bodies and markets rely as a basis for their decisions in globalised economies. Monitoring and enhancing data quality in the context of rapidly changing economies impose heavy constraints on compilers of these statistics. As it becomes increasingly important worldwide to adhere to a set of international statistical standards in order to ensure the comparability of statistics, the elaboration of meaningful EU/ euro area aggregates hinges critically on attaining a high degree of homogeneity across countries’ contributions. In addition to offering their own value for analysis, the euro area external statistics are the main source for the compilation of the rest-of-the-world account in the quarterly euro area (financial and nonfinancial) accounts. Bearing this in mind, a lot has been achieved since the inception of the euro area to harmonise concepts and definitions in line with international statistical standards, to review the data collection and compilation systems, as well as to enhance the overall data quality. However, asymmetries1 both across euro area countries and with counterparts elsewhere still need to be overcome. Additionally, new challenges lie ahead for compilers of statistics, with the steady process of globalisation and the increasing role of financial innovation (in terms of both new instruments and new institutional vehicles) observed in financial markets. While the compilation of euro area statistics continues to be based on country contributions, which are mostly derived from national collection systems in accordance with the principle of subsidiarity, common tools are built up and maintained by the European Central Bank and national compilers. In particular, the Centralised Securities Database is playing a pivotal role in the move towards security-by-security reporting and should greatly enhance the quality of security-related information, i.e. portfolio investment flows, stocks and income. The tremendous work of European statisticians towards producing harmonised euro area statistics that are fit for purpose has also benefited statisticians elsewhere and is playing an important role in the current updating of international standards (the 1993 System of National Accounts and the International Monetary Fund’s Balance of Payments Manual, fifth edition). Statisticians have worked in close cooperation in various European fora to clarify concepts and identify best practices with a view to enhancing data quality and reducing the reporting burden. This paper aims to make this experience widely available.
    Date: 2007–07
  18. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Han van der Hoorn (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Henrik Schwartzlose (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Ledoyen (National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium.); Wolfgang Föttinger (Deutsche Bundesbank, Hauptverwaltung Frankfurt am Main, Postfach 11 12 32, 60047 Frankfurt / Main.); Fernando Monar (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.); Bérénice Boux (Banque de France,39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Gigliola Chiappa (Banca d'Italia, Via Nazionale 91, I-00184 Rome, Italy.); Noëlle Honings (De Nederlandsche Bank, Westeinde 1, NL - 1017 ZN Amsterdam, The Nederlands.); Ricardo Amado (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon Condex, Portugal.); Kai Sotamaa (Suomen Pankki, P.O. Box 160, FIN-00101 Helsinki, Finland.); Dan Rosen (University of Toronto, McMurrich Building, Administration, 12 Queen's Park Crescent West, Toronto, Ontario M5S 1A8, Canada.)
    Abstract: This report summarises the findings of the task force. It is organised as follows. Section 2 starts with a discussion of the relevance of credit risk for central banks. It is followed by a short introduction to credit risk models, parameters and systems in Section 3, focusing on models used by members of the task force. Section 4 presents the results of the simulation exercise undertaken by the task force. The lessons from these simulations as well as other conclusions are discussed in Section 5.
    Date: 2007–07
  19. By: Maria Stromqvist; Sunil Sharma; Woon Gyu Choi
    Abstract: This paper examines the interaction between capital flows and international reserve holdings in the context of increasing financial integration. For emerging markets the sensitivity of reserves to net capital flows was negative in the 1980s, but became positive after the Asian crisis when these countries used net capital flows to build up reserves. For advanced countries, net capital flows had a negative effect on reserves, especially in recent years. Using measures of financial globalization, we also provide evidence that the sensitivity of reserves to net capital flows increased with globalization for emerging markets while it decreased for advanced countries.
    Date: 2007–07–11
  20. By: C. Bianchi; M. Menegatti
    Abstract: This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.
    Keywords: rules, discretion, time inconsistency, fiscal policy
    JEL: E61 E62 H62 H63 H68
    Date: 2007
  21. By: Eijffinger, S.C.W.; Goderis, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature.
    Keywords: Currency Crises;Institutions;Monetary Policy;Short-Term Debt;External Debt;Capital Account Openness;
    Date: 2007–03–22
  22. By: Pinelopi K. Goldberg; Rebecca Hellerstein
    Abstract: The inertia of traded goods' local currency prices in the face of exchange rate changes is a well-documented phenomenon in the field of international economics. This paper develops a framework for identifying the sources of local currency price stability. The empirical approach exploits manufacturers' and retailers' first-order conditions, in conjunction with detailed information on the frequency of price adjustments in response to exchange rate changes, to quantify the relative importance of fixed costs of repricing, local-cost nontraded components, and markup adjustment by manufacturers and retailers in the incomplete transmission of exchange rate changes to prices. The approach is applied to micro data from the beer market. We find that (a) wholesale prices appear more rigid than retail prices; (b) price adjustment costs on average account for up to 0.5 percent of revenue at the wholesale level but only 0.1 percent of revenue at the retail level; (c) overall, 54.1 percent of the incomplete exchange rate pass-through is due to local nontraded costs, 33.7 percent to markup adjustment, and 12.2 percent to the existence of price adjustment costs.
    Keywords: Foreign exchange rates ; Prices ; Beer industry ; Wholesale price indexes ; International trade
    Date: 2007
  23. By: Illing, Gerhard; Cao, Jin
    Abstract: The paper models the interaction between risk taking in the financial sector and central bank policy. It shows that in the absence of central bank intervention, the incentive of financial intermediaries to free ride on liquidity in good states may result in excessively low liquidity in bad states. In the prevailing mixed-strategy equilibrium, depositors are worse off than if banks would coordinate on more liquid investment. It is shown that public provision of liquidity improves the allocation, even though it encourages more risk taking (less liquid investment) by private banks.
    Keywords: Liquidity Provision; Monetary Policy; Bank Runs
    JEL: E5 G21 G28
    Date: 2007–07
  24. By: Marcos Antonio C. da Silveira
    Abstract: We build a two-country version of the model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain DSGE model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new Keynesian Phillips curve as a new pushing-cost variable feeding the inflation. Furthermore, home bias in households’ preferences allows for real exchange rate fluctuation, giving rise to alternative channels of monetary transmission. Unlike most part of the literature, the small domestic open economy is derived as a limit case of the two-coutry model, rather than assuming exogenous processes for the foreign variables. This procedure preserves the role played by foreign nominal frictions in the way as international monetary policy shocks are conveyed into the small domestic economy.
    Date: 2006–02
  25. By: Vasco Cúrdia; Daria Finocchiaro
    Abstract: This paper analyzes how changes in monetary policy regimes influence the business cycle in a small open economy. We estimate a dynamic stochastic general equilibrium (DSGE) model on Swedish data, explicitly taking into account the 1993 monetary regime change, from exchange rate targeting to inflation targeting. The results confirm that monetary policy reacted primarily to exchange rate movements in the target zone and to inflation in the inflation-targeting regime. Devaluation expectations were the principal source of volatility in the target zone period. In the inflation-targeting period, labor supply and preference shocks have become relatively more important.
    Keywords: Business cycles ; Monetary policy ; Foreign exchange rates ; Inflation (Finance) ; Equilibrium (Economics) ; Stochastic analysis ; Econometric models
    Date: 2007
  26. By: Eleftherios Spyromitros; Blandine Zimmer
    Abstract: Recent contributions have shown that in the presence of strategic interactions be- tween non atomistic unions and the central bank, an accommodating monetary policy rule may increase equilibrium unemployment. This note demonstrates that this result can be reversed considering the case where the central bank is not fully transparent concerning its reaction to wage decisions.
    Keywords: Monetary regime, Wage setting, Central bank transparency.
    JEL: E24 E5 J51
    Date: 2007
  27. By: Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: March 2007 saw an increase of 3.1 percent in the Consumer Price Index (CPI) annual inflation rate and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i)~the relationship between inflation and M4 growth is not stable over time, and (ii)~the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 10\%. Above this threshold, a 1 percentage point increase in the annual growth rate of M4 increases annual inflation by only 0.09 percentage points, whereas a 1 percentage point increase in the disequilibrium between money and its long-run determinants increases annual inflation by only 0.07 percentage points. Since the money effects are very small, the implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates.
    Keywords: M4, Money growth, Regime-switching models, UK inflation
    JEL: C51 C52 E52 E58
    Date: 2007–06
  28. By: Peter Claeys (Faculty of Economics, University of Barcelona.); Raúl Ramos (Faculty of Economics, University of Barcelona.); Jordi Suriñach (Faculty of Economics, University of Barcelona.)
    Abstract: This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of adjustment, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.
    Keywords: fiscal policy, fiscal rules, EMU, SGP, fiscal federalism
    JEL: E61 E62 H11 H72 H77
    Date: 2007–07
  29. By: Martina Lawless (Central Bank and Financial Services Authority of Ireland, PO Box 559/Dame Street, Dublin 2, Ireland.); Karl Whelan (Central Bank and Financial Services Authority of Ireland, PO Box 559/Dame Street, Dublin 2, Ireland.)
    Abstract: Calvo-style models of nominal rigidities currently provide the dominant paradigm for understanding the linkages between wage and price dynamics. Recent empirical implementations stress the idea that these models link inflation to the behavior of the labor share of income. Gali, Gertler, and Lopez-Salido (2001) argue that the model explains the combination of declining inflation and labor shares in Euro area. In this paper, we show that with realistic parameters, the canonical Calvo-style model cannot explain this outcome. In addition, we show that the model fails very badly in sectoral data. We examine the elements underlying the decline in the labor share in Europe, and conclude that the key factors are related to technological and labor market developments not accounted for in the standard New-Keynesian framework. JEL Classification: E31.
    Keywords: Labor Share, Phillips Curve, Sectoral Data.
    Date: 2007–07
  30. By: Gunther Schnabl (Leipzig University, Marschnerstr. 31, 04109 Leipzig, Germany)
    Abstract: Since the introduction of the euro in January 1999, exchange rate stability at the periphery of the euro area is growing. The paper investigates the impact of exchange rate stability on growth for a sample of 41 mostly small open economies at the EMU periphery. It identifies international trade, international capital flows and macroeconomic stability as important transmission channels from exchange rate stability to more growth. It is argued that fixed exchange rates provide a more stable framework for the adjustment of asset and labour markets of countries in the economic catchup process thereby accelerating growth. Panel estimations reveal a robust negative relationship between exchange rate volatility and growth for countries in the economic catch-up process with open capital accounts. JEL Classification: F43, F31, E42.
    Keywords: Exchange Rate Regimes, Exchange Rate Volatility, Growth, EMU Periphery, International Role of the Euro.
    Date: 2007–07
  31. By: Nicolas Barbaroux (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - [CNRS : FRE2938] - [Université Jean Monnet - Saint-Etienne])
    Abstract: Recently, one of the most fruitful debate in monetary macroececonomics that fascinates -and opposed- academics and policymakers has lied in the relevancy of money within the monetary policy analysis. Since the publication of King and Goodfriend 1997’s article that gave birth to a new current -the New Neoclassical Synthesis- money seems to be de-emphasized1. A new step has been reached in 2003 with Woodford’s monetary treatise that legitimates a Cashless framework. Woodford captures the "implied path of the money supply or the determinants of money demand" (Woodford, 2003, p.237) in the determination of the equilibrium of output and prices, without having to model the volume of money explicitly. Woodford gives his theory a Wicksellian flavour by comparing his cashless economy framework with Wicksell’s pure credit economy framework. Such a legacy gives the impression that Wicksell’s original writings downgraduated money for the conduct of monetary policy.
    Keywords: Monetary Policy ; De-emphasis of Money ;Monetarism.
    Date: 2007–07–13
  32. By: Luigi Landolfo (Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom.)
    Abstract: This paper aims to analyze the impact of external factors, such as the nominal effective exchange rate, foreign demand and the terms of trade, on the euro area real economy. In particular, the paper estimates the quantitative impact that changes in these factors have on net trade, real GDP and the Harmonized Consumer Price Index (HICP). To this end, we estimate a Dynamic Simultaneous Equation Model (DSEM) accounting for the presence of key exogenous variables. The tool utilized here to measure the impact of various shocks on the real economy is the impulse response function. The study is also conducted at sub-components level. First, we estimate the model replacing net trade with its sub-components, namely, the volume of exports and the volume of imports. Then, we re-estimate the model by dividing the terms of trade index into import and export prices. Overall, we estimate three models. Two of these models show consistent results. We found that the nominal effective exchange rate and foreign demand are the main determinants of the trade balance. Nevertheless, while foreign demand strongly affects real GDP, the nominal effective exchange rate affects it only slightly. Among the external factors, foreign demand has the strongest impact on real GDP. Regarding the impact of the nominal effective exchange rate on import prices and HICP, we found that the exchange rate pass-through for the euro area is not very high. This result is broadly in line with the findings presented in Hahn (2003). JEL Classification: C32, E52.
    Keywords: Net trade, Real economy, ECB.
    Date: 2007–07
  33. By: Steinar Holden; Fredrik Wulfsberg
    Abstract: This paper explores the existence of downward real wage rigidity (DRWR) in 19 OECD countries, over the period 1973-1999, using data for hourly nominal earnings at the industry level. Based on a nonparametric statistical method, which allows for country- and year-specific variation in both the median and the dispersion of industry wage changes, we find evidence of some DRWR in OECD countries overall, as well as for specific geographical regions and time periods. There is some evidence that real wage cuts are less prevalent in countries with strict employment protection legislation and high union density. Generally, we find stronger evidence for downward nominal wage rigidity than for downward real wage rigidity.
    Keywords: Wages
    Date: 2007
  34. By: Steinar Holden (University of Oslo, Norges Bank and CESifo, Department of Economics, University of Oslo, Box 1095 Blindern, 0317 Oslo, Norway.); Fredrik Wulfsberg (Norges Bank and Federal Reserve Bank of Boston, Box 1179 Sentrum, 0107 Oslo, Norway.)
    Abstract: Recent micro studies have documented extensive downward nominal wage rigidity (DNWR) for job stayers in many OECD countries, but the effect on aggregate variables remains disputed. Using data for hourly nominal wages, we explore the existence of DNWR on wages at the industry level in 19 OECD countries, over the period 1973–1999. Based on a novel method, we reject the hypothesis of no DNWR. The fraction of wage cuts prevented due to DNWR has fallen over time, from 61 percent in the 1970s to 16 percent in the late 1990s, but the number of industries affected by DNWR has increased. DNWR is more prevalent when unemployment is low, union density is high, and employment protection legislation is strict. JEL Classification: E3, J3, J5.
    Keywords: Downward nominal wage rigidity, oecd, employment protection legislation, wage setting.
    Date: 2007–07
  35. By: Luigi Bonatti
    Abstract: Previous papers modeling the interaction between the central bank and a monopoly union demonstrated that greater monetary policy uncertainty induces the union to reduce nominal wages. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union’s objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority’s transparency reduces average inflation.
    Keywords: Monetary game, transparency in policymaking.
    JEL: E31 E58 J51
    Date: 2007
  36. By: David de la Croix (Department of Economics, Université catholique de Louvain, 1, Place de l’Université, B-1348 Louvain-la-Neuve, Belgium.); Gregory de Walque (Department of Economics, University of Namur and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.); Rafael Wouters (Department of Economics, Université catholique de Louvain and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.)
    Abstract: We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affect nominal interest rates and inflation outcomes. JEL Classification: E4, E5.
    Keywords: Efficiency wage, effort, inflation persistence, monetary policy.
    Date: 2007–07
  37. By: Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Kiel Institute for the World Economy, University of Kiel, CEPR and IZA)
    Abstract: This paper analyses the relation between US inflation and unemployment from the perspective of "frictional growth," a phenomenon arising from the interplay between growth and frictions. In particular, we examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long-run inflation-unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties.
    Keywords: inflation dynamics, unemployment dynamics, Phillips curve, roaring nineties
    JEL: E24 E31 E51 E62
    Date: 2007–07
  38. By: Anna Wong (University of Chicago)
    Abstract: This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund’s Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries.
    Keywords: Foreign Exchange Reserves, Central Banks, Methodology, Index Numbers, Aggregation
    JEL: F31 E58 B41 C43
    Date: 2007–07
  39. By: Balázs Égert (Oesterreichische Nationalbank, Foreign Research Division)
    Abstract: This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-market-based service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework and then by relying on panel estimations. Our estimation results provide the obituary notice for the Balassa-Samuelson effect. Nevertheless, we show that other factors related to economic convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies.
    Keywords: price level, inflation, Balassa-Samuelson, tradables, house prices, regulated prices, Europe, transition
    JEL: E43 E50 E52 C22 G21 O52
    Date: 2007–05–07
  40. By: Cengiz, Gulfer; Cicek, Deniz; Kuzubas, Tolga Umut; Olcay, Nadide Banu; Saglam, Ismail
    Abstract: We characterize the monetary competitive equilibrium in a two-country monetary union model involving cash-in-advance constraints both in the factor markets and in the good markets. Simulations show that common money inflation in the union have asymmetric effects on the welfare of workers in the two countries which are technologically differentiated. We also find that the distribution of the money stock within the union may affect labor flow across the countries.
    Keywords: Monetary union; cash-in-advance; monetary policy
    JEL: F22 E24
    Date: 2007–07
  41. By: Andrea Colciago (Department of Economics, University of Milan-Bicocca)
    Abstract: I introduce sticky wages in the model with credit constrained or “rule of thumb” consumers advanced by Galì, Valles and Lopez Salido (2005). I show that wage stickiness i) restores, in contrast with the results in Bilbiie (2005), the Taylor Principle as a necessary condition for equilibrium determinacy; ii) implies that a a rise in consumption in response to an unexpected rise in government spending is not a robust feature of the model. In particular, consumption increses just when the elasticity of marginal disutility of labor supply is low. Results are robust to most of Taylor-type monetary rules used in the literature, including one which responds to wage inflation.
    Keywords: Sticky Prices, Sticky Wages, Rule of Thumb Consumers
    JEL: E32 E62
    Date: 2006–09
  42. By: Annika Alexius (Uppsala University); Bertil Holmlund (Uppsala University and IZA)
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: unemployment, monetary policy, structural VAR
    JEL: J60 E24
    Date: 2007–07
  43. By: Ippei Fujiwara; Naoko Hara; Naohisa Hirakata; Takeshi Kimura; Shinichiro Watanabe (Bank of Japan (Corresponding author, e-mail:
    Abstract: Focusing on policy-making under uncertainty, we analyze the Bank of Japanfs monetary policy in the early 1990s when the bubble economy collapsed. Conducting stochastic simulations with a large-scale macroeconomic model of the Japanese economy, we find that the BOJfs monetary policy at that time was essentially optimal under uncertainty about the policy multiplier. On the other hand, we also find that the BOJfs policy was not optimal under uncertainty about inflation dynamics, and that a more aggressive policy response than actually implemented would have been needed. Thus, optimal monetary policy differs greatly depending upon which type of uncertainty is emphasized. Taking into account the fact that overcoming deflation became an important issue from the latter 1990s, it is possible to argue that during the early 1990s the BOJ should have placed greater emphasis on uncertainty about inflation dynamics and implemented a more aggressive monetary policy. The result from a counter-factual simulation indicates that the inflation rate and the real growth rate would have been higher to some extent if the BOJ had implemented a more accommodative policy during the early 1990s. However, the simulation result also suggests that the effects would have been limited, and that an accommodative monetary policy itself would not have changed the overall image of the prolonged stagnation of the Japanese economy during the 1990s.
    Keywords: Collapse of the Bubble Economy, Monetary Policy, Uncertainty
    JEL: E17 E52
    Date: 2007–07
  44. By: Anella Munro; Rishab Sethi (Reserve Bank of New Zealand)
    Abstract: In this paper we use a small open economy model to identify the causal factors that drive New Zealand's current account. The model features nonseparable preferences, habit in consumption, imperfect capital mobility, permanent productivity shocks, fiscal shocks and two foreign shocks to explore features that are important in understanding the dynamics of the current account. The results suggest that permanent technology shocks and world cost of capital shocks account for the bulk of variation in the current account at short horizons; at longer horizons, external valuation shocks (reflecting terms of trade and exchange rate developments) account for most of the variance. Habit in consumption and a debt-sensitive risk premium are features that improve overall model it as measured by posterior odds ratios. These features, and the contribution of foreign and permanent technology shocks, help to explain why the one shock present value model of the current account fails to appropriately characterise the dynamics of the New Zealand current account, as discussed in Munro and Sethi (2006).
    JEL: C51 E52 F41
    Date: 2007–07
  45. By: Alfredo Saad Filho (Centre for Development Policy & Research School of Oriental & African Studies University of London)
    Abstract: .
    Keywords: Monetary Policy, Economic Policies, MDGs, Povery, Research, Programme
    Date: 2007–07
  46. By: Zammit, Robert
    Abstract: An undergraduate dissertation in Monetary Economics. The aim of this dissertation is to empirically analyse the effects of the Bank of Japan’s anti-deflationary Quantitative Easing Policy carried out between March 2001 and April 2006. In doing so, this study also reviews the zero bound to interest rates, defined as the primary constraint to the effectiveness of conventional monetary policy at the interest rate floor. The results of the economic models contained in this study confirm the economic significance of a sustained increase in liquidity in fostering a return to inflationary pressures. Moreover, the findings of the study confirm that effective anti-deflationary policies may not necessarily entail extreme measures on the part of a central bank; on the other hand, credibility coupled with a resolved commitment may very well be enough to provide for positive macroeconomic repercussions.
    Keywords: Deflation; monetary policy at the zero-bound; quantitative easing
    JEL: E58
    Date: 2006–10
  47. By: Mayes, David G (BOFIT); Korhonen, Vesa (BOFIT)
    Abstract: We consider the likely economic impact and prospects for monetary integration among Belarus, Kazakhstan, the Russian Federation and Ukraine as part of the Single Economic Space they have agreed to set up. A monetary union among these countries poses three interesting issues for the structure and process of integration: they have already been members of a wider currency union that collapsed, so it is necessary to handle the problems of history; secondly the union would be of very unequal size with the Russian Federation outweighing the others taken together, so we must consider how the national interests would be balanced; lastly natural resources, particularly oil and gas pose problems for dependence and for the determination of the external exchange rate.
    Keywords: monetary union; CIS; economic integration
    JEL: E42 E63 F16
    Date: 2007–07–24
  48. By: Ian Babetskii (Czech National Bank; CERGE-EI); Fabrizio Coricelli (European Bank for Reconstruction and Development; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Keywords: inflation dynamics, persistence, inflation targeting
    JEL: D40 E31
    Date: 2007–08
  49. By: Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça
    Abstract: In this article we use the theory of conditional forecasts to develop a new Monetary Conditions Index (MCI) for Brazil and compare it to the ones constructed using the methodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull (2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches to develop and compute Bayesian error bands for the MCIs. The new indicator we develop is called the Conditional Monetary Conditions Index (CMCI) and is constructed using, alternatively, Structural Vector Autoregressions (SVARs) and Forward-Looking (FL) models. The CMCI is the forecasted output gap, conditioned on observed values of the nominal interest rate (the Selic rate) and of the real exchange rate. We show that the CMCI, when compared to the MCI developed by Batini and Turnbull (2002), is a better measure of monetary policy stance because it takes into account the endogeneity of variables involved in the analysis. The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptual differences, show similarities in their chronology of the stance of monetary policy in Brazil. The CMCI is a smoother version of the BMCI, possibly because the impact of changes in the observed values of the Selic rate is partially compensated by changes in the value of the real exchange rate. The Brazilian monetary policy, in the 2000:9- 2005:4 period and according to the last two indicators, has been expansionary near election months.
    Date: 2005–10
  50. By: Boriss Siliverstovs
    Abstract: This study develops a parsimonious stable coefficient money demand model for Latvia for the period from 1996 till 2005. A single cointegrating vector between the real money balances, the gross domestic product, the long-term interest rate, and the rate of inflation is found. 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, Latvia
    JEL: C32 E41
    Date: 2007
  51. By: Balogun, Emmanuel Dele
    Abstract: This study examined the monetary and macroeconomic stability perspective for entering into monetary union, using data available on WAMZ countries. It tests the hypothesis that independent monetary and exchange rate policies have been relatively ineffective in influencing domestic activities (especially GDP and inflation), and that when they do, they are counter productive. Usiing econometric methods, regression result show that, erstwhile domestic monetary policy, as captured by money supply and credit to government hurt real domestic output of these countries. Indeed, rather than promote growth, it was a source of stagnation. It also confirms that there appear to be a two quarters lag in monetary policy transmission effect with regard to real sector output. The results also show that although expansion in domestic output dampened aggregate consumer prices (inflation), it was however, not adequate enough to dampen the fuelling effects of past inflation. This was accentuated by money supply variable (MS2) and aggravated by exchange rate variable which are mostly positive, confirming the a priori expectations that rapid monetary expansion and devaluations fuels domestic inflation. A country by country comparison of the single and simultaneous equations model results show that expansionary monetary policy contributed more to fuelling prices than it did to growth. It also shows that interest rates policy had adverse effects on GDP by exhibiting a positive sign contrary to the theoretical expectation of an inverse relationship. The results also show that exchange rate devaluations manifest mainly in domestic inflation and have no effect at all on the growth variable, in the short term. The study concludes that these countries would be better-off to surrender its independence over these policy instruments to the planned regional body under appropriate monetary union arrangements.
    Keywords: International Monetary Economics; Econometric studies
    JEL: E5 F42
    Date: 2007–07–31

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