nep-cba New Economics Papers
on Central Banking
Issue of 2008‒01‒26
forty papers chosen by
Alexander Mihailov
University of Reading

  1. Expectations, Learning and Monetary Policy: An Overview of Recent Research By George Evans; Seppo Honkapohja
  2. The FOMC versus the Staff: Where Can Monetary Policymakers Add Value? By Christina D. Romer; David H. Romer
  3. Global Forces and Monetary Policy Effectiveness By Jean Boivin; Marc Giannoni
  4. Globalization and the Sustainability of Large Current Account Imbalances: Size Matters By Joshua Aizenman; Yi Sun
  5. Inflation Targeting, the Natural Rate and Expectations By David Kiefer
  6. Financial Globalization and Monetary Policy By Michael B. Devereux; Alan Sutherland
  7. Solving for Country Portfolios in Open Economy Macro Models By Michael B. Devereux; Alan Sutherland
  8. Country Portfolio Dynamics By Michael B. Devereux; Alan Sutherland
  9. A framework for assessing global imbalances By Thierry Bracke; Matthieu Bussière; Michael Fidora; Roland Straub
  10. Monetary policy implementation frameworks: a comparative analysis By Antoine Martin; Cyril Monnet
  11. Equilibrium Exchange Rates: Assessment Methodologies By Peter Isard
  12. Implementing the Friedman Rule by a Government Loan Program:<br> An Overlapping Generations Model By Benjamin Eden
  13. Loose commitment By Davide Debortoli; Ricardo Nunes
  14. Inflation-Gap Persistence in the U.S. By Timothy Cogley; Giorgio E. Primiceri; Thomas J. Sargent
  15. Forming Priors for DSGE Models (and How it Affects the Assessment of Nominal Rigidities) By Marco Del Negro; Frank Schorfheide
  16. Yesterday's expectation of tomorrow determines what you do today: The role of reference-dependent utility from expectations By Astrid Matthey
  17. Optimal Monetary Policy Rules under Persistent Shocks By Bhattacharya, Joydeep; Singh, Rajesh
  18. Taking stock: global imbalances. Where do we stand and where are we aiming to? By Andrea Fracasso
  19. Monetary Policy and Learning from the Central Bankfs Forecast By Ichiro Muto
  20. Which predictor is the best to predict inflation in Europe: the real money-gap or a nominal money based indicator? By Gilles Dufrénot; Roseline Joyeux; Anne Peguin-Feissolle
  21. Great moderations and U.S. interest rates: unconditional evidence By James M. Nason; Gregor W. Smith
  22. Revisiting money-output causality from a Bayesian logistic smooth transition VECM perspective By Deborah Gefang
  23. Labor Market Rigidities and the Business Cycle: Price vs. Quantity Restricting Institutions By Mirko Abbritti and Sebastian Weber
  24. Price determinacy under non-Ricardian fiscal strategies By Óscar J. Arce
  25. Sui Generis EMU By Barry Eichengreen
  26. The working of the eurosystem - monetary policy preparations and decision-making – selected issues By Philippe Moutot; Alexander Jung; Francesco Paolo Mongelli
  27. Phillips curves, monetary policy, and a labor market transmission mechanism By Robert R. Reed; Stacey L. Schreft
  28. The Taylor rule and the transformation of monetary policy By Pier Francesco Asso; George A. Kahn; Robert Leeson
  29. An Estimated DSGE Model for Monetary Policy analysis in Low-Income Countries By Shanaka J. Peiris; Magnus Saxegaard
  30. Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections By Koray Alper
  31. Admissible Functional Forms in Monetary Economics By Neil Arnwine
  32. The Demand for Currency Substitution By Seater, John J.
  33. Can We Rule Out Speculative Hyperinflations in Maximising Models? Yes, We Can. By William Coleman
  34. Measuring Multifactor Productivity Growth By Anita Wölfl; Dana Hajkova
  35. Merry Sisterhood or Guarded Watchfulness? Cooperation Between the International Monetary Fund and the World Bank By Michael Fabricius
  36. Impact of US Macroeconomic Surprises on Stock Market Returns in Developed Economies By Brian Lucey, Ali Nejadmalayeri and Manohar Singh
  37. Do Reserve Portfolios Respond to Exchange Rate Changes Using a Portfolio Rebalancing Strategy? An Econometric Study Using COFER Data By Ewe-Ghee Lim
  38. A Model of Exchange-Rate-Based Stabilization for Turkey By Ozlem Aytac
  39. The Monetary Transmission Mechanism in Egypt By Andreas Billmeier; Rania Al-Mashat
  40. Modeling Inflation for Mali By Mame Astou Diouf

  1. By: George Evans; Seppo Honkapohja
    Abstract: Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents’ learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.
    Keywords: Imperfect knowledge, learning, interest-rate setting, fluctuations, stability, determinacy.
    JEL: E52 E31 D84
    Date: 2008–01
  2. By: Christina D. Romer; David H. Romer
    Abstract: Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have access to the staff forecasts when they prepare their forecasts. We find that the optimal combination of the FOMC and staff forecasts in predicting inflation and unemployment puts a weight of essentially zero on the FOMC forecast and essentially one on the staff forecast: the FOMC appears to have no value added in forecasting. The results for predicting real growth are less clear-cut. We also find statistical and narrative evidence that differences between the FOMC and staff forecasts help predict monetary policy shocks, suggesting that policymakers act in part on the basis of their apparently misguided information.
    JEL: E37 E52 E58
    Date: 2008–01
  3. By: Jean Boivin; Marc Giannoni
    Abstract: In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the 1984-2005 period, and analyze changes in the monetary policy transmission mechanism. We do so by estimating a Factor-Augmented VAR on a large set of US and international data series. We find that the role of international factors in explaining US variables has been changing over the 1984-2005 period. However, while some US series have become more correlated with global factors, there is little evidence suggesting that these factors have become systematically more important. We don't find strong evidence of a change in the transmission mechanism of monetary policy due to global forces. Taking our point estimates literally, global forces do not seem to have played an important role in the US monetary transmission mechanism between 1984 and 1999. In addition, since the year 2000, the initial response of the US economy following a monetary policy shock --- the first 6 to 8 quarters --- is essentially the same as the one that has been observed in the 1984-1999 period. However, point estimates suggest that the growing importance of global forces might have contributed to reducing some of the persistence in the responses, two or more years after the shocks. Overall, we conclude that if global forces have had an effect on the monetary transmission mechanism, this is a recent phenomenon.
    JEL: C32 C53 E31 E32 E40 F41
    Date: 2008–01
  4. By: Joshua Aizenman; Yi Sun
    Abstract: This paper evaluates the sustainability of large current account imbalances in the era when the Chinese GDP growth rate and current account/GDP exceed 10%. We investigate the size distribution and the durability of current account deficits during 1966-2005, and report the results of a simulation that relies on the adding-up property of global current account balances. Excluding the US, we find that size does matter: the length of current account deficit spells is negatively related to the relative size of the countries' GDP. We conclude that the continuation of the fast growth rate of China, while maintaining its large current account/GPD surpluses, would be constrained by the limited sustainability of the larger current account deficits/GDP of countries that grow at a much slower rate. Consequently, short of the emergence of a new "demander of last resort," the Chinese growth path would be challenged by its own success.
    JEL: F15 F21 F32 F43
    Date: 2008–01
  5. By: David Kiefer
    Abstract: In the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Because they react quickly to inflation shocks, governments can lean against the macroeconomic wind. We develop an econometric test of this characterization of the political-economic equilibrium using the Kalman filter. Applying this methodology to a variety of quadratic social welfare functions, we find that an inflation target functional form is consistent with US history. We also find it more likely that expectations of inflation are adaptive, rather than rational.
    Keywords: endogenous stabilization, policy objectives, adaptive expectations
    JEL: E61 E63
    Date: 2008–03
  6. By: Michael B. Devereux; Alan Sutherland
    Abstract: What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings?. This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and incomplete markets. With endogenous portfolios, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Surprisingly, we find an even stronger case for price stability in this environment. Even without nominal rigidities, price stability has a welfare benefit by enhancing the risk sharing capacity of nominal bond returns.
    Keywords: Globalization , Monetary policy , Capital flows , Exchange rate instability , International capital markets ,
    Date: 2007–12–19
  7. By: Michael B. Devereux; Alan Sutherland
    Abstract: This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
    Keywords: Payments imbalances , Markets , Trade , Bonds ,
    Date: 2007–12–19
  8. By: Michael B. Devereux; Alan Sutherland
    Abstract: This paper presents a general approximation method for characterizing time-varying equilibrium portfolios in a two-country dynamic general equilibrium model. the method can be easily adapted to most dynamic general equilibrium models, it applies to environments in which markets are complete or incomplete, and it can be used for models of any dimension. Moreover, the approximation provides simple, easily interpretable closed form solutions for the dynamics of equilibrium portfolios.
    Keywords: Bonds , International bond markets ,
    Date: 2007–12–19
  9. By: Thierry Bracke (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Bussière (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper, we take a systematic look at global imbalances. First, we provide a definition of the phenomenon, and relate global imbalances to widening external positions of systemically important economies that reflect distortions or entail risks for the global economy. Second, we provide an operational content to this definition by measuring trends in external imbalances over the past decade and putting these in a historical perspective. We argue that three main features set today’s situation apart from past episodes of growing external imbalances - (i) the emergence of new players, in particular emerging market economies such as China and India, which are quickly catching up with the advanced economies; (ii) an unprecedented wave of financial globalisation, with more integrated global financial markets and increasing opportunities for international portfolio diversification, also characterised by considerable asymmetries in the level of market completeness across countries; and (iii) the favourable global macroeconomic and financial environment, with record high global growth rates in recent years, low financial market volatility and easy global financing conditions over a long time period of time, running at least until the summer of 2007. Finally, we provide an analytical overview of the fundamental causes and drivers of global imbalances. The central argument is that the increase in imbalances has been driven by a unique combination of structural and cyclical determinants. JEL Classification: F2, F32, F33, F41.
    Keywords: Gobal imbalances, current account, incomplete financial globalisation, structural factors, cyclical factors.
    Date: 2008–01
  10. By: Antoine Martin; Cyril Monnet
    Abstract: We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Our results also suggest that any such system should pay interest on both required and excess reserves.
    Keywords: Monetary policy ; Open market operations ; Friedman, Milton ; Banks and banking, Central
    Date: 2008
  11. By: Peter Isard
    Abstract: The paper describes six different methodologies that have been used to assess the equilibrium values of exchange rates and discusses their limitations. It applies several of the approaches to data for the United States as of 2006, illustrates that different approaches sometimes provide substantially different assessments, and asks which methodologies deserve the most weight in such situations. It argues that while it is generally desirable to consider the implications of several different approaches, since different approaches provide different types of perspectives, two of the methodologies seem particularly relevant for identifying threats to macroeconomic stability and growth.
    Date: 2007–12–28
  12. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
    Keywords: Government loans, welfare cost of inflation, money substitutes, wealth redistribution, Friedman rule
    JEL: E42 E52 E51 E58 H20 H21 H26
    Date: 2008–01
  13. By: Davide Debortoli; Ricardo Nunes
    Abstract: Due to time-inconsistency or policymakers' turnover, economic promises are not always fulfilled and plans are revised periodically. This fact is not accounted for in the commitment or the discretion approach. We consider two settings where the planner occasionally defaults on past promises. In the first setting, a default may occur in any period with a given probability. In the second, we make the likelihood of default a function of endogenous variables. We formulate these problems recursively, and provide techniques that can be applied to a general class of models. Our method can be used to analyze the plausibility and the importance of commitment and characterize optimal policy in a more realistic environment. We illustrate the method and results in a fiscal policy application.
    Date: 2007
  14. By: Timothy Cogley; Giorgio E. Primiceri; Thomas J. Sargent
    Abstract: We use Bayesian methods to estimate two models of post WWII U.S. inflation rates with drifting stochastic volatility and drifting coefficients. One model is univariate, the other a multivariate autoregression. We define the inflation gap as the deviation of inflation from a pure random walk component of inflation and use both of our models to study changes over time in the persistence of the inflation gap measured in terms of short- to medium-term predicability. We present evidence that our measure of the inflation-gap persistence increased until Volcker brought mean inflation down in the early 1980s and that it then fell during the chairmanships of Volcker and Greenspan. Stronger evidence for movements in inflation gap persistence emerges from the VAR than from the univariate model. We interpret these changes in terms of a simple dynamic new Keynesian model that allows us to distinguish altered monetary policy rules and altered private sector parameters.
    JEL: C11 C15 C32 E3 E52
    Date: 2008–01
  15. By: Marco Del Negro; Frank Schorfheide
    Abstract: The paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models, and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions.
    JEL: C11 C32 E3
    Date: 2008–01
  16. By: Astrid Matthey (Max-Planck-Institute of Economics)
    Abstract: The paper introduces the concept of adjustment utility, that is, reference-dependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unexpectedly costly; people's aversion towards positive but false information, which cannot be explained with previous models; and the increasing acceptance of risks when people get used to them.
    Keywords: utility, expectations, reference-dependent preferences, anticipation, prospect theory, experiments
    JEL: D11 D81 D84 C99
    Date: 2008–01–15
  17. By: Bhattacharya, Joydeep; Singh, Rajesh
    Abstract: The tug-o-war for supremacy between inflation targeting and monetary targeting is a classic yet timely topic in monetary economics. In this paper, we revisit this question within the context of a pure-exchange overlapping generations model of money where spatial separation and random relocation create an endogenous demand for money. We distinguish between shocks to real output and shocks to the real interest rate. Both shocks are assumed to follow AR(1) processes. Irrespective of the nature of shocks, the optimal inflation target is always positive. Under monetary targeting, shocks to endowment require negative money growth rates, while under shocks to real interest rates it may be either positive or negative depending on the elasticity of consumption substitution. Also, monetary targeting welfare-dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk. In sharp contrast, for shocks to the real interest rate, we prove that monetary targeting and inflation targeting are welfare-equivalent only in the limit when the shocks become i.i.d.! The upshot is that persistence of the underlying fundamental uncertainty matters: depending on the nature of the shock, policy responses can either be more or less aggressive as persistence increases.
    Keywords: real shocks, persistence, overlapping generations, random relocation model, monetary targeting, inflation targeting
    JEL: E3 E4 E6
    Date: 2008–01–14
  18. By: Andrea Fracasso
    Abstract: For two and a half decades the US has accumulated large current account deficits, mainly financed (though to different extents at different times) by the savings of the sluggish European and Japanese economies, of the fast-growing Asian countries and of the oil-producing nations. This peculiar situation represents what has been called the global imbalances phenomenon. This work reviews and analyses several contrasting contributions on a series of issues regarding global imbalances, namely their nature, their underlying forces, their past evolution and their expected developments. This work also contributes to the literature in that it distinguishes and clarifies the issues of sustainability and vulnerability of global imbalances. In addition, this work tackles the relationship between global imbalances and the recent reforms and stance of the IMF, the link between global imbalances and international reserve accumulation, the implications of global imbalances on economic theory and modelling, and the compatibility of global imbalances with two alternative and stylized representations of the current international monetary system.
    JEL: F02 F3 F4 F5
    Date: 2007
  19. By: Ichiro Muto (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.
    Keywords: Adaptive Learning, E-stability, New Keynesian Model, Monetary Policy, Taylor principle
    JEL: E52 D84
    Date: 2008–01
  20. By: Gilles Dufrénot (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Roseline Joyeux (Macquarie University - Macquarie University); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: In the literature, two important views concerning the conduct of monetary policy are construed. One view is that the central banks’ monetary policy must be credible if the authorities want to curb inflation. A second view is that central banks set their monetary policy by using all the information relevant for inflation and output projections. In Europe, a controversy has emerged about the role of monetary aggregates as useful indicators of future inflation and output. On one hand, evidence in favour of the usefulness of nominal monetary aggregates as good predictors is provided by the literature. On the other hand, empirical evidence in favour of real money indicators is found. The purpose of this paper is to contribute to the ongoing debate on the role of money aggregates in the setting of monetary policy. The question we are interested in is whether the real money gap contains more information about future inflation in Europe, than an indicator based on the growth rate of nominal money. We use a panel data framework instead of the usual time series methods on aggregate Euro data.
    Keywords: monetary policy ; inflation ; panel data
    Date: 2008–01–18
  21. By: James M. Nason; Gregor W. Smith
    Abstract: The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969–83 Great Inflation to refine the asset pricing implications of the moderations. Asset pricing theory predicts that moderations—real or nominal—influence interest rates. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth.
    Date: 2008
  22. By: Deborah Gefang
    Abstract: This paper proposes a Baysian approach to explore money-output causality within a logistic smooth transition VECM framework. Our empirical results provide substantial evidence that the postwar US money-output relationship is nonlinear, with regime changes mainly governed by the lagged inflation rates. More importantly, we obtain strong support for long-run non-causality and nonlinear Grangercausality from money to output. Furthermore, our impulse response analysis reveals that a shock to money appears to have negative accumulative impact on real output over the next fifty years, which calls for more caution when using money as a policy instrument.
    Date: 2008–01
  23. By: Mirko Abbritti and Sebastian Weber (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: We build a model that combines two types of labor market rigidities: real wage rigidities and labor market frictions. The model is used to analyze the implications of the interaction of different degrees and types of labor market rigidities for the business cycle by looking at three dimensions (i) the persistence of key economic variables; (ii) their volatility; (iii) the length, average duration and intensity of recessions and expansions. We find that real wage rigidities and labor market frictions, while often associated under the same category of "labor market rigidities" may have opposite effects on business cycle fluctuations. When the rigidity lies in the wage determination mechanism, real wages cannot fully adjust and shocks tend to be absorbed through changes in quantities. A higher degree of real wage rigidities thus amplifies the response of the real economy to shocks, shortens the duration of the business cycle but makes it more intense. When the rigidity lies in the labor market, it is more costly for firms to hire new workers and therefore unemployment does not vary as much, thus increasing inflation volatility and smoothening the response of the real economy to shocks. The cycle gets longer but less severe. Analyzing the interaction of institutions we show that these effects are reinforcing if institutions are substitutes - in the sense that countries with high labor market frictions tend to have low real wage rigidities and vice versa - while they are offsetting if institutions are complements. The findings from the model are supported when compared to the data of a range of OECD countries.
    Keywords: monetary policy, labor market search, real wage rigidity, inflation volatility, labour market interactions
    JEL: E32 E24 J01
    Date: 2007–04
  24. By: Óscar J. Arce (Banco de España)
    Abstract: This paper shows that there exist fiscal strategies that deliver equilibrium uniqueness in a monetary economy in which the central bank follows an interest rate peg. In contrast to the fiscal theory of the price level (FTPL), such strategies always satisfy a government intertemporal budget constraint. The government is able to rule out most prices using strategically its fiscal instruments, undercutting the private-market price whenever it is inconsistent with the fiscal targets. In the spirit of the FTPL, along the fiscal strategies of this paper the government does not follow a rule that mechanically links the fiscal surplus to the real value of its outstanding nominal debt. Like in the monetarist paradigm, the fiscal authority is forced to blink in face of an independent monetary policy, although in equilibrium the former achieves its own targets.
    Keywords: Fiscal-monetary interactions, Fiscal Theory of the Price Level, interest rate peg, equilibrium (in)determinacy
    JEL: E31 E42 E61
    Date: 2007–12
  25. By: Barry Eichengreen
    Abstract: The thesis of this paper is that there is no historical precedent for Europe's monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had "union" as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU.
    JEL: F15 N14
    Date: 2008–01
  26. By: Philippe Moutot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Jung (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The ECB’s monetary policy has received considerable attention in recent years. This is less the case, however, for its regular monetary policy preparation and decision-making process. This paper reviews how the factors usually considered as critical for the success of a central banking system and the federal nature of the Eurosystem are intertwined with its overall design and the functioning of its committee architecture. In particular, it examines the procedures for preparing monetary policy decisions and the role of the decision-making bodies and the committees therein. We suggest that technical committees, involving all national central banks (NCBs), usefully contribute to the regular processing of a vast amount of economic, financial and monetary data, as well as to the consensus building at the level of the Governing Council. A federal organisational structure, including a two-tier committee structure with the Executive Board taking the lead in preparing the monetary policy decisions and the Governing Council in charge of the decisions with collective responsibility for them, as well as committee work at the various hierarchical levels, contributes to the efficiency of the ECB’s monetary policy decision-making, and thereby facilitates the maintenance of price stability in the euro area. A fully-fledged committee structure has also contributed to the smooth integration of non-euro area Member States into the Eurosystem’s monetary policy decision-making process. JEL Classification: E42, E58, F33, F42.
    Keywords: European economic and monetary integration, monetary arrangements, central banks and their policies.
    Date: 2008–01
  27. By: Robert R. Reed; Stacey L. Schreft
    Abstract: This paper develops a general equilibrium monetary model with performance incentives to study the inflation-unemployment relationship. A long-run downward-sloping Phillips curve can exist with perfectly anticipated inflation because workers’ incentive to exert effort depend on financial market returns. Consequently, higher inflation rates can reduce wages and stimulate employment. An upward-sloping or vertical Phillips Curve can arise instead, depending on agents’ risk aversion and the possibility of capital formation. Welfare might be higher away from the Friedman rule and with a central bank putting some weight on employment.
    Date: 2007
  28. By: Pier Francesco Asso; George A. Kahn; Robert Leeson
    Abstract: This paper examines the intellectual history of the Taylor Rule and its considerable influence on macroeconomic research and monetary policy. The paper traces the historical antecedents to the Taylor rule, emphasizing the contributions of three prominent advocates of rules--Henry Simons, A.W. H. Phillips, and Milton Friedman. The paper then examines the evolution of John Taylor's thinking as an academic and policy advisor leading up to his formulation of the Taylor rule. Finally, the paper documents the influence of the Taylor rule on macroeconomic research and the Federal Reserve's conduct of monetary policy.
    Date: 2007
  29. By: Shanaka J. Peiris; Magnus Saxegaard
    Abstract: This paper evaluates monetary policy-tradeoffs in low-income countries using a dynamic stochastic general equilibrium (DSGE) model estimated on data for Mozambique taking into account the sources of major exogenous shocks, and level of financial development. To our knowledge this is a first attempt at estimating a DSGE model for Sub-Saharan Africa excluding South Africa. Our simulations suggests that a exchange rate peg is significantly less successful than inflation targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.
    Keywords: Monetary policy , Africa , Currency pegs , Inflation targeting , Low-income developing countries ,
    Date: 2007–12–19
  30. By: Koray Alper
    Date: 2007
  31. By: Neil Arnwine
    Date: 2007
  32. By: Seater, John J.
    Abstract: A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory.
    Keywords: Currency substitution, Dollarization
    JEL: E31 E41 E42
    Date: 2008
  33. By: William Coleman
    Abstract: A critique is advanced of the contention of Obstfeld and Rogoff (1983) that in a fiat money regime, 'speculative hyperinflations can be excluded only through severe restrictions' on preferences. It is maintained here, in contrast, that no more than the infinity of the marginal utility of real balances at zero real balances is sufficient to rule out speculative hyperinflations. What Obstfeld and Rogoff have successfully drawn attention to is the theoretical possibility of money having strictly zero purchasing power. But the phenomenon of zero purchasing power has no explanatory power for historically observed hyperinflations, or any historically observed modern economy.
    JEL: E31 E41
    Date: 2008–01
  34. By: Anita Wölfl; Dana Hajkova
    Abstract: This paper quantifies and examines the contribution of capital, labour and multifactor productivity (MFP) to GDP growth and analyses the role of measurement of capital and labour inputs for the MFP estimate, using a comprehensive growth accounting exercise for 14 OECD countries. For most OECD countries, the strongest contributions to GDP growth over the past decade have come from growth in total capital input and MFP. This is to some extent related to an increasing role of information and telecommunication technologies in economic growth, particularly over the 1995-2003 period. The importance of measurement issues varies substantially with the type of measurement issue being considered. Substantial differences are observed between employment and hours worked based MFP growth rates. Also, the respective weights with which capital and labour enter the growth accounting equation, and thus, the assumptions concerning the efficiency of production and competition in product markets, significantly influence the resulting MFP estimate. Finally, the results suggest that policy conclusions on the basis of different empirical studies should be made very carefully, in particular as regards the time period for which the respective studies have been undertaken, as well as whether actual or trended time series are being considered. <BR>Ce document évalue et examine la contribution du capital, de la main-d'oeuvre et de la productivité globale des facteurs (PGF) à la croissance du PIB, et analyse le rôle de la mesure des apports de capital et de travail dans l'estimation de la PGF, par un travail complet de quantification comptable de la croissance portant sur 14 pays de l'OCDE. Dans la plupart des cas, c'est la croissance des apports totaux de capital et celle de la PGF qui ont contribué le plus fortement à la croissance du PIB ces dix dernières années. Cette évolution est liée dans une certaine mesure au rôle de plus en plus grand des technologies de l'information et de la communication dans la croissance économique, en particulier pendant la période 1995-2003. L'importance des questions de mesure varie beaucoup en fonction de leur type. On observe des différences considérables entre les taux de croissance de la PGF fondés sur l'emploi et sur les heures travaillées. En outre, la part relative du capital et du travail dans l'équation comptable de la croissance et, par conséquent, les hypothèses concernant l'efficacité de la production et la concurrence sur les marchés de produits, influent sensiblement sur l'estimation de la PGF obtenue. Enfin, il semble qu'on ne puisse tirer de conclusions des différentes études empiriques qu'en exerçant la plus grande prudence, en particulier en vérifiant la période à laquelle ces études ont été effectuées, et en déterminant si les séries chronologiques considérées sont des séries réelles ou des séries de tendances.
    Date: 2007–10–15
  35. By: Michael Fabricius
    Abstract: Since their inception at the end of the Second World War, the sister organizations of the World Bank and the International Monetary Fund (IMF) have aimed to consistently speak with one voice vis-à-vis their member governments. However, anecdotal evidence suggests that they often do not speak in one voice. Fabricius draws on field research conducted in Ghana, Pakistan, Peru, and Vietnam to identify the conditions that determine whether or not the organizations are indeed on the same page and to address whether their traditional plea for consistency is always desirable. He recommends which measures seem crucial to ensure Bank-Fund consistency. At the same time he argues that under certain conditions, this consistency may lead to policy choices that are only second-best. He proposes that the Bank and the Fund pursue a case-specific approach in deciding whether they should take the same stance. A more flexible approach may increase not only the ownership of borrowing countries but also the sustainability of policy choices.
    Keywords: World Bank, International Monetary Fund, cooperation, roles, Bretton Woods
    JEL: F02 F33 F34 F35 F42 O19 O20
    Date: 2007–12
  36. By: Brian Lucey, Ali Nejadmalayeri and Manohar Singh
    Date: 2008–01–18
  37. By: Ewe-Ghee Lim
    Abstract: This paper tests whether reserve portfolios respond to exchange rate changes with a portfolio rebalancing strategy, which requires the purchase of depreciating currencies and sale of appreciating ones. The paper finds empirical support for the strategy, in particular that dollar depreciation/appreciation results in rebalancing switches vis-a-vis the other major reserve currency, the euro; valuation changes in the minor currencies tend to result in switches among themselves. The finding implies that currency diversifications in response to exchange rate changes have thus far tended to be stabilizing for exchange markets; it also helps explain the relative stability of reserve currency shares.
    Keywords: Exchange rates , Reserves , euro , U.S. dollar , Exchange markets ,
    Date: 2007–12–27
  38. By: Ozlem Aytac (Indiana University Bloomington)
    Abstract: The literature on the exchange-rate-based stabilization has focused almost exclusively in Latin America. Many other countries however, such as Egypt, Lebanon and Turkey; have undertaken this sort of programs in the last 10-15 years. I depart from the existing literature by developing a model specifically for the 2000-2001 heterodox exchange-rate-based stabilization program in Turkey: When the government lowers the rate of crawl, the rate of domestic credit creation is set equal to the lower rate of crawl, bond sales finance the fiscal deficit, and money growth occurs only through capital inflows. Without appealing to high intertemporal elasticity of substitution, the model does very well at replicating the magnitude of the current account deficit (5.5% of GDP predicted vs. 5% of GNP actual), the peak in total consumption spending (10.08% predicted vs. 9.6% actual), average growth rate in total consumption spending (6.7% predicted vs. 6% actual), the peak in durables spending (37.06% predicted vs. 39.5% actual), and the average growth rate in durables spending (24% predicted vs. 27.4% actual) observed in Turkey following the inception of the program.
    Keywords: inflation, exchange-rate-based stabilization, durables
    JEL: E31 E63 F41
    Date: 2008–01
  39. By: Andreas Billmeier; Rania Al-Mashat
    Abstract: This paper examines the monetary transmission mechanism in Egypt against the background of the central bank's intention to shift to inflation targeting. It first describes the changing transmission channels over the last decade. Second, the channels are evaluated in a VAR model. The exchange rate channel plays a strong role in propagating monetary shocks to output and prices. Most other channels (bank lending, asset price) are rather weak. The interest rate channel is underdeveloped but appears to be strengthening since the introduction of the interest corridor in 2005, which bodes well for adopting inflation targeting over the medium term.
    Keywords: Monetary policy , Egypt, Arab Republic of , Inflation targeting , Exchange rates ,
    Date: 2007–12–19
  40. By: Mame Astou Diouf
    Abstract: This paper investigates how consumer price inflation is determined in Mali for 1979-2006 along three macroeconomic explanations: (1) monetarist theories, emphasizing the impact of excess money supply, (2) the structuralist hypothesis, stressing the impact of supply-side constraints, and (3) external theories, describing the effects of foreign transmission mechanisms on a small open economy. The analysis makes use of cointegration techniques and general-to-specific modeling. Average national rainfall, and to a lesser extent deviations from monetary and external sector equilibrium are found to be the main long-run determinants of inflation. The paper offers policy recommendations for controlling inflation in Mali.
    Keywords: Inflation , Mali , Real effective exchange rates , Demand for money ,
    Date: 2008–01–02

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