nep-cba New Economics Papers
on Central Banking
Issue of 2008‒02‒23
thirty papers chosen by
Alexander Mihailov
University of Reading

  1. Are Central Bank Preferences Asymmetric? A Comment By Minford, Patrick; Srinivasan, Naveen
  2. Optimal fiscal and monetary policy in customer markets By David M. Arseneau; Sanjay K. Chugh
  3. Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness By Giovanni Di Bartolomeo; Marco Manzo; Francesco Giuli
  4. Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective By Giovanni Di Bartolomeo; Marco Manzo
  5. Central bank policy rate guidance and financial market functioning By Richhild Moessner; William Nelson
  6. A Realistic Model for Official Interest Rates By Juan de Dios Tena; Edoardo Otranto
  7. Mr. Wicksell and the global economy: What drives real interest rates? By Michal Brzoza-Brzezina; Jesus Crespo Cuaresma
  8. On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms By Giorgio Fagiolo; Andrea Roventini
  9. The New Keynesian Phillips curve tested on OECD panel data By Bjørnstad, Roger; Nymoen, Ragnar
  10. Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks By C.S. Bos; S.J. Koopman; M. Ooms
  11. Estimating the effects of fiscal policy under the budget constraint By Claeys Peter
  12. How do Expenditure Rules affect Fiscal Behaviour? By Peter Wierts
  13. Trade Openness, Capital Mobility, and the Sacrifice Ratio By Joseph P. Daniels; David D. VanHoose
  14. The Trade and FDI Effects of EMU Enlargement By Jelle Brouwer; Richard Paap; Jean-Marie Viaene
  15. Some Empirical Evidence on the Effects of U.S. Monetary Policy Shocks on Cross Exchange Rates By Sarantis Kalyvitis; Ifigeneia Skotida
  16. Comovements between US and UK stock prices: the roles of macroeconomic information and timevarying conditional correlations By Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
  17. Ageing and the Relative Price of Nontradeables By Leon Bettendorf; Hans Dewachter
  18. The Impact of the FOMC's Monetary Policy Actions on the growth of Credit Risk: the Monetary Policy - Liquidity Paradox By Kwamie Dunbar
  19. How do nominal and real rigidities interact? A tale of the second best By Duval, Romain; Vogel, Lukas
  20. The Currency Equivalent Index and the Current Stock of Money By Kelly, Logan J
  21. Gender differences in the effect of monetary policy on employment: The case of nine OECD countries. By Takhtamanova, Yelena; Sierminska, Eva
  22. How Banking competition Changed over Time By Jacob Bikker en Laura Spierdijk
  23. How Banking Competition Changed over Time By Jacob A. Bikker; Laura Spierdijk
  24. General equilibrium By Monique Florenzano
  25. Prospects for the Welfare State By Lindbeck, Assar
  26. Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America By Roberto Chang
  27. Exchange Rate Regime Transition Dynamics In East Asia By Monzur Hossain
  28. Real Exchange Rates over a Century: The Case of the Drachma/Sterling Rate, 1833-1939 By Dimitrios Sideris
  29. Dominancia Fiscal versus Dominancia Monetaria: Evidencia para Colombia, 1990-2007 By Ignacio Lozano; Magaly Herrera
  30. The Price Setting Behavior in Colombia:Evidence from PPI Micro Data By Juan Manuel Julio; Héctor Manuel Zárate

  1. By: Minford, Patrick (Cardiff Business School); Srinivasan, Naveen
    Abstract: A recent paper by Ruge-Murcia [European Economic Review 48 (2004), 91-107] on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced form solution for inflation implies a positive (or negative) relation between average inflation and the variance of shocks. We argue that the evidence offered in support of this hypothesis suffers from lack of identification because Phillips curve nonlinearity combined with quadratic central bank preferences yield the same reduced form solution for inflation. If so, estimating reduced form for inflation will not be able to discriminate between these models. Yet they have quite different implications for policy. Other, structural, evidence is needed.
    Keywords: Preference asymmetry; Phillips curve nonlinearity; Identification
    JEL: E52 E58 E61
    Date: 2008–02
  2. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: A growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics. We investigate whether the existence of such customer relationships has important consequences for the conduct of both long-run and short-run policy. Our central result is that when consumers and firms are engaged in long-term relationships, the optimal rate of price inflation volatility is very low even though all prices are completely flexible. This finding is in contrast to those obtained in first-generation Ramsey models of optimal fiscal and monetary policy, which are based on Walrasian markets. Echoing the basic intuition of models based on sticky prices, unanticipated inflation in our environment causes a type of relative price distortion across markets. Such distortions stem from fundamental trading frictions that give rise to long-lived customer relationships and makes pursuing inflation stability optimal.
    Date: 2008
  3. By: Giovanni Di Bartolomeo (University of Teramo); Marco Manzo; Francesco Giuli
    Abstract: This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers¢ output target is equal to the natural level.
    Keywords: Monetary-fiscal policy interactions, uncertainty, symbiosis.
    JEL: E61 E63
    Date: 2008–02–17
  4. By: Giovanni Di Bartolomeo (University of Teramo); Marco Manzo
    Abstract: We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule-of-thumb (liquidity constrained) consumers and capital accumulation by focusing on the inter-action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms¢ monopoly rents reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.
    Keywords: Rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, tax distortions, balanced government budget.
    JEL: E61 E63
    Date: 2008–02–15
  5. By: Richhild Moessner; William Nelson
    Abstract: Central bank communication has changed dramatically over the past decade, with some central banks providing guidance about or explicit forecasts of likely future policy rates. One frequently made argument against the provision by central banks of such guidance or forecasts is that it runs the risk of impairing market functioning. In this paper, we evaluate the behaviour of financial markets in the United States, the euro area and New Zealand in light of the communication strategies of central banks, in order to assess whether the provision of policy rate guidance by central banks impairs market functioning. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that such guidance or forecasts impair market functioning in the United States, the euro area or New Zealand. The results suggest that the risk of impairing market functioning is not a strong argument against central banks' provision of policy rate guidance or forecasts.
    Keywords: Central bank communication, policy rate forecasts, financial market functioning
    Date: 2008–02
  6. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper extends the VAR methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: 1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers; and 2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find evidence of both types of asymmetries. Moreover, the operational independence granted to the Bank of England involved drastic changes on the interpretation of the reaction function of the monetary authority and the consequences of monetary shocks. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.
    Keywords: Monetary shocks, impulse-response functions, monetary policy,
    JEL: C22 C32 E52
    Date: 2008
  7. By: Michal Brzoza-Brzezina (National Bank of Poland and Warsaw School of Economics); Jesus Crespo Cuaresma (Department of Economics, University of Innsbruck)
    Abstract: We use a Bayesian dynamic latent factor model to extract world, regional and country factors of real interest rate series for 22 OECD economies. We find that the world factor plays a privileged role in explaining the variance of real rates for most countries in the sample, and accounts for the steady decrease in interest rates in the last decades. Moreover, the relative contribution of the world factor is rising over time. We also find relevant differences between the group of countries that follow fixed exchange rate strategies and those with flexible regimes.
    Keywords: Real interest rates, natural rate of interest, Bayesian dynamic factor models.
    JEL: E43 C11 E58
    Date: 2008–01–29
  8. By: Giorgio Fagiolo; Andrea Roventini
    Abstract: In the last years, a number of contributions has argued that monetary -- and, more generally, economic -- policy is finally becoming more of a science. According to these authors, policy rules implemented by central banks are nowadays well supported by a theoretical framework (the New Neoclassical Synthesis) upon which a general consensus has emerged in the economic profession. In other words, scientific discussion on economic policy seems to be ultimately confined to either fine-tuning this "consensus" model, or assessing the extent to which "elements of art" still exist in the conduct of monetary policy. In this paper, we present a substantially opposite view, rooted in a critical discussion of the theoretical, empirical and political-economy pitfalls of the neoclassical approach to policy analysis. Our discussion indicates that we are still far from building a science of economic policy. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, etc.). We briefly introduce one of the most successful alternative research projects -- known in the literature as agent-based computational economics (ACE) -- and we present the way it has been applied to policy analysis issues. We conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Post-Walrasian Macroeconomics, Evolutionary Economics.
    Date: 2008–02–14
  9. By: Bjørnstad, Roger; Nymoen, Ragnar
    Abstract: In their work, Galí, Gertler and Lopez-Salido, GGL, assert that the hybrid New Keynesian Phillips curve (NPC) with dominance of forward-looking behavior and real marginal costs is robust to choices of estimation procedure, details of variables definitions and choice of data samples. In an estimation on panel data from OECD countries we replicate the typical empirical NPC from country studies. However, we also test an alternative economic interpretation of the empirical correlations. Specifically we find that the expected rate of future inflation and real marginal costs serve as replacements for equilibrium correction terms that are implied by the general imperfect competition model of wage and price setting. As a explanatory model of OECD inflation, the NPC is encompassed by an existing theory.
    Keywords: New Keynesian Phillips Curve, forward-looking price setting, panel data model, encompassing
    JEL: C23 C52 E12 E31
    Date: 2008
  10. By: C.S. Bos (VU University Amsterdam); S.J. Koopman (VU University Amsterdam); M. Ooms (VU University Amsterdam)
    Abstract: We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.
    Keywords: Time varying parameters; Importance sampling; Monte Carlo simulation; Stochastic Volatility; Fractional Integration
    JEL: C15 C32 C51 E23 E31
    Date: 2007–12–18
  11. By: Claeys Peter
    Abstract: I reconsider the short-term effects of fiscal policy when both government spending and taxes are allowed to respond to the level of public debt. I embed the long-term government budget constraint in a VAR, and apply this common trends model to US quarterly data. The main finding is that fiscal consolidation has expansionary effects on output and inflation. Non-Keynesian effects also dominate when debt expands. The expectation of policy adjustments to guarantee fiscal sustainability by future tax rises or spending cuts contracts output today.
    Keywords: Fiscal policy, sustainability, spending, taxes, common trends, SVAR
    JEL: E42 E63 E65
    Date: 2008–02
  12. By: Peter Wierts
    Abstract: This paper investigates the role of self-enforced national expenditure rules in limiting the expenditure bias and procyclical expenditure increases/decreases due to revenue windfalls/shortfalls. A simple model predicts that expenditure rules can have the intended effects, but only if the political and institutional costs of non compliance are sufficiently large. Empirical estimations provide some support that expenditure rules affect expenditure outcomes in the hypothesised manner, especially when there are revenue shortfalls. We cannot disentangle, however, whether our results reflect a causal effect of expenditure rules on expenditure outcomes, or whether they are driven by a third variable of political preferences for addressing high expenditure to GDP ratios.
    JEL: E62 H50 H61
    Date: 2008–02
  13. By: Joseph P. Daniels (Center for Global and Economic Studies, Marquette University); David D. VanHoose (Hanmaker School of Business, Baylor University)
    Abstract: This paper develops and evaluates empirically the implications of a theoretical model of an open economy in which variations in both trade openness and capital mobility can influence the sacrifice ratio. Key predictions forthcoming from the model are that both forms of globalization can independently affect the capital ratio, once the influences of the level of central bank independence and the degree of wage stickiness in nations‘ economies are taken into account. Examination of cross-country data encompassing 58 disinflations for 16 countries yields evidence consistent with these essential predictions of the theoretical framework.
    Keywords: Openness, Capital Mobility, Sacrifice Ratio
    JEL: F40 F41 F43
    Date: 2007–01
  14. By: Jelle Brouwer; Richard Paap; Jean-Marie Viaene (Erasmus University Rotterdam)
    Abstract: This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. Intuitively, the implementation of a single currency for these countries means replacing several fluctuating currencies by a common currency. This gives rise to both “level” and “risk” effects of reduced currency movements on trade and investment. Another factor is the nature of the link between trade and FDI. This is also important not only because cross-border factor flows are becoming increasingly important, but also the international trade literature has long recognized that cross-border factor flows and trade in goods and services can be substitutes or complements. Given this background, one-way and two-way error component gravity models are estimated to examine for these theoretical expectations within a dataset of unbalanced panel data that combines bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries (including the 10 new EU members). The data generally cover the period from 1990 to 2004. Our empirical results convincingly support: (i) a complementarity between trade and investment, (ii) a relationship between trade and exchange rate volatility that depends on the sign of bilateral trade balances, (iii) a positive effect of EU on trade and investment, and (iv) a positive effect of EMU on foreign investment. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5 percent for Poland and 30 percent for Hungary.
    Keywords: EMU; exchange rate volatility; foreign investment; trade diversion; vertical integration
    JEL: C33 F21 F31 F33 F36
    Date: 2007–10–04
  15. By: Sarantis Kalyvitis (Athens University of Economics and Business); Ifigeneia Skotida (Bank of Greece and Athens University of Economics and Businesso)
    Abstract: This paper examines the impact of U.S. monetary policy shocks on the cross exchange rates of sterling, yen and mark. The main finding of the paper is a ‘delayed overshooting’ pattern for all currency cross rates examined (sterling/yen, yen/mark and mark/sterling) following an unexpected U.S. monetary policy change, which in turn generates excess returns. We also provide evidence that the ‘delayed overshooting’ pattern in cross exchange rates is accompanied by asymmetric interventions by central banks in the foreign exchange markets under consideration triggered by U.S. monetary policy shocks.
    Keywords: Monetary Policy; Delayed Overshooting; Foreign Exchange Intervention
    JEL: E52 F31
    Date: 2008–01
  16. By: Nektarios Aslanidis; Denise R. Osborn; Marianne Sensier
    Date: 2008
  17. By: Leon Bettendorf (Erasmus University Rotterdam); Hans Dewachter (Cath. University of Leuven)
    Abstract: In this paper we identify the effects of ageing on the relative price of nontradeables versus tradeables. We consider two cases. In a first specification, age effects only account for short-run dynamics. An alternative case allows for permanent age effects. Estimating the respective cases by means of an ECM on a panel of OECD countries we find significant effects of demographic composition on the relative prices, even after correcting for the standard explanatory variables. Simulations based on population projections of the UN show that ageing might substantially contribute to inflationary pressures in the near future.
    Keywords: relative price of nontradeables; age-specific effects; productivity differentials
    JEL: F41 E31 J11
    Date: 2007–08–24
  18. By: Kwamie Dunbar (University of Connecticut)
    Abstract: Credit risk is influenced by interest rates and market liquidity. This paper examines the direct and indirect impacts of unexpected monetary policy shifts on the growth of corporate credit risk, with the aim of quantifying the size and direction of the response. The results surprisingly indicate that monetary policy and liquidity impulses move counter to each other in their effects on credit risk ("The monetary policy-liquidity paradox"). The analysis indicates that while contractionary monetary policy creates tight money which subsequently leads to a slowing in the growth of credit risk and a reduction of liquidity in credit markets, reduced liquidity indirectly affects credit risk by accelerating its growth. The net effect of these transitory opposing forces generates the final impact on credit risk. An unexpected policy shifts is captured via a combination of the forward Fed fund rate curve and the Fed's FOMC policy announcements. Following the approach of Bernanke and Kuttner (2005), Hausman and Wongswan (2006) who examined asset prices under FOMC announcements, the study found that the estimated credit risk responses to FOMC announcements vary across credit qualities. Hence the analyses indicates that a typical unanticipated 25 basis point cut in the target fed funds rate generally resulted in an acceleration in the growth of credit risk by 0.50 percent for AAA rated corporate grade debt, and by 3.5 percent for BB rated corporate debt. Moreover, the study found a direct effect of the FOMC's policy instrument on market liquidity which had a significant effect on the growth in credit risk. The results indicate that a 1 percentage point increase in liquidity for AAA and CCC rated bonds resulted in a 0.7% and 52.45% decrease in the rate of growth in credit risk respectively.
    Keywords: Credit Risk, Default Risk, Credit Default Swap, Monetary Policy, Credit Markets, Financial Markets, Vector Autoregressive Model, Federal funds rate.
    Date: 2008–02
  19. By: Duval, Romain; Vogel, Lukas
    Abstract: This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
    Keywords: DSGE model; price stickiness; real wage rigidity; oil price shocks
    JEL: E30 F41 Q43
    Date: 2007–10–31
  20. By: Kelly, Logan J
    Abstract: The currency equivalent index provides an elegant method for measuring the stock of money, but it rests upon assumptions that do not match an important characteristic of the data. Thus, it is unclear what, if anything, the CE measures. This paper attempts to answer this question by deriving the current stock of money (CSM), which is defined to be the discounted present value of the monetary service flows provided by only the current portfolio of monetary assets, and then analyzing the assumptions under which the current stock of money can be measured by the currency equivalent index.
    Keywords: Currency Equilivant Index, Monetary Aggregation, Money Stock
    JEL: C43 E49
    Date: 2008–02–15
  21. By: Takhtamanova, Yelena (Reserve Bank of San Francisco); Sierminska, Eva (CEPS/INSTEAD and DIW Berlin)
    Abstract: In many countries, the focus of monetary policy is increasingly shifting to low and stable inflation as it provides many benefits to the economy. However, there is evidence that costs of inflation reduction are inequitably distributed by gender in developing countries. This paper addresses employment costs of inflation reduction in developed countries. Using quarterly data for 1980-2006, we examine gender and country differences in the effects of interest rate on employment in nine OECD countries. We look at total employment, as well as employment dis-aggregated by three sectors: agriculture, industry and services. We find that the link between monetary policy instruments (short-term interest rates) and employment in the industrial countries under investigation is neither strong nor varies by gender.
    Keywords: employment; IS curve ; interest rates ; monetary policy inflation ; compensation
    JEL: E4 E5 J2
    Date: 2008–02
  22. By: Jacob Bikker en Laura Spierdijk
    Abstract: This paper is the first detailed and world-wide investigation of the developments in banking competition during the past fifteen years. Using the Panzar-Rosse approach, we establish significant changes over time in the competitiveness of the banking industry. The changes in competition over time are small on average, but substantial for several countries and regions. Various Western economies faced a significant decline in banking competition during recent years. In particular, the competitive climate in the euro area was subject to a major break around 2001 - 2002, initiating a period of less competition. Also for the United States and Japan we establish a break during this period. The part of Eastern Europe that now belongs to the European Union experienced a significant but modest decrease in competition during the past ten years. Furthermore, the banking industry in emerging markets became more competitive during the last decade. We attribute the predominantly downward trend in competition to increased bank size and the shift from traditional intermediation to off-balance sheet activities.
    Keywords: competition; banking industry; Panzar-Rosse model; structural breaks.
    JEL: C52 G21 L11 L13
    Date: 2008–02
  23. By: Jacob A. Bikker; Laura Spierdijk
    Abstract: This paper is the first detailed and world-wide investigation of the developments in banking competition during the past fiffteen years. Using the Panzar-Rosse approach, we establish significant changes over time in the competitiveness of the banking industry. The changes in competition over time are small on average, but substantial for several countries and regions. Various Western economies faced a significant decline in banking competition during recent years. In particular, the competitive climate in the euro area was subject to a major break around 2001 - 2002, initiating a period of less competition. Also for the United States and Japan we establish a break during this period. The part of Eastern Europe that now belongs to the European Union experienced a significant but modest decrease in competition during the past ten years. Furthermore, the banking industry in emerging markets became more competitive during the last decade. We attribute the predominantly downward trend in competition to increased bank size and the shift from traditional intermediation to off-balance sheet activities.
    Keywords: competition, banking industry, Panzar-Rosse model, structural breaks
    JEL: C52 G21 L11 L13
    Date: 2008–02
  24. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Unlike partial equilibrium analysis which study the equilibrium of a particular market under the clause "ceteris paribus" that revenues and prices on the other markets stay approximately unaffected, the ambition of a general equilibrium model is to analyze the simultaneous equilibrium in all markets of a competitive economy. Definition of the abstract model, some of its basic results and insights are presented. The important issues of uniqueness and local uniqueness of equilibrium are sketched ; they are the condition for a predictive power of the theory and its ability to allow for statics comparisons. Finally, we review the main extensions of the general equilibrium model. Besides the natural extensions to infinitely many commodities and to a continuum of agents, some examples show how economic theory can accommodate the main ideas in order to study some contexts which were not thought of by the initial model.
    Keywords: Commodity space, price space, exchange economy, production economy, feasible allocations, equilibrium, quasi-equilibrium, Pareto optimum, core, edgeworth equilibrium allocutions, time and uncertainty, continuum economies, non-convexities, public goods, incomplete markets.
    Date: 2007–12
  25. By: Lindbeck, Assar (Institute for International Economic Studies, Stockholm University)
    Abstract: It is useful to distinguish between exogenous and endogenous factors behind contemporary and expected future problems for the welfare state. This paper tries to identify major problems of both types and to indicate alternative reform possibilities to deal with them. At the same time as several governments struggle with such reforms, new demands on the welfare state emerge. Although the basic structure of today’s welfare-state arrangements certainly can be kept, the reforms required are sufficiently large to create considerable conflicts across interest groups.
    Keywords: Welfare state; Social insurance; Human services
    JEL: H40 H50 I38
    Date: 2008–02–18
  26. By: Roberto Chang
    Abstract: This paper examines whether central banks in Latin America have implemented conventional inflation targeting (IT) prescriptions, with a focus on foreign exchange intervention and official reserves accumulation policies. To this end, the paper reviews the experiences of Brazil, Chile, Colombia, and Peru, and finds significant departures from the dominant theory of IT. Foreign exchange intervention has often been used to prevent excessive financial volatility, bubbles, and panics. Ongoing patterns of reserves accumulation have been the outcome of an effort to build “war chests” against speculative attacks and, more recently, of a fight against real exchange appreciation. Possible justifications of the discrepancies between conventional IT theory and practice are discussed and generally found unsatisfactory.
    Date: 2008–02–14
  27. By: Monzur Hossain (American International University Bangladesh)
    Abstract: This paper investigates the currency regime choices of six East Asian emerging countries, namely, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, for the period 1973-99 from the optimum currency area (OCA), macroeconomic stabilization and currency crisis perspectives. It finds that regime transition dynamics in these countries are statistically insignificant for the period under consideration, but static regime choice is largely consistent with the predictions of international macroeconomics. The empirical results suggest that a more fixed or flexible regime is suitable for these East Asian countries.
    Date: 2008–01
  28. By: Dimitrios Sideris (Bank of Greece and University of Ioannina)
    Abstract: Recent studies on real exchange rates advocate the use of long samples in order to reveal the low frequency properties of the processes. The present paper contributes to this strand of the literature by exploiting recently released time series for the drachma/sterling rate for the period 1833-1939. This is an interesting period as it covers different exchange rate regimes and the effects of important historical events. In the paper, the mean-reverting behaviour of the real drachma/sterling exchange rate is initially examined applying univariate unit root tests and then the validity of Purchasing Power Parity (PPP) is tested using cointegration analysis. The results provide support for a weak PPP relationship, which turns out to be robust across different sub-periods characterised by different exchange rate regimes. Adjustment to PPP is reached at a relatively high speed and occurs via movements of the nominal exchange rate.
    Keywords: real exchange rates; cointegration; PPP
    JEL: F31 C32 N23 N24
    Date: 2008–01
  29. By: Ignacio Lozano; Magaly Herrera
    Abstract: Bajo un régimen No-Ricardiano o de dominancia fiscal, el banco central pierde autonomía en el control de la inflación, especialmente en circunstancias de insostenibilidad de las finanzas públicas. En este trabajo se evalúa la presencia de un régimen de esta naturaleza en la economía Colombiana, para el período 1990 a 2007, mediante el uso de un modelo de vectores autorregresivos que toma como fundamento teórico la restricción presupuestaria intertemporal del gobierno consolidado. Los resultados no permiten validar la existencia de este tipo de régimen. Se concluye, por consiguiente, que el régimen Ricardiano, o de dominancia monetaria, es el más apropiado para explicar la relación entre la política fiscal y la política monetaria durante estos años.
    Date: 2008–01–31
  30. By: Juan Manuel Julio; Héctor Manuel Zárate
    Abstract: In this paper we explore the price setting behavior of Colombian producers and importers using a unique database containing the monthly price reports underlying the Colombian PPI from Jun-1999 to Oct-2006. We focus on five particular questions: 1. Are prices sticky or flexible? 2. Is a price increase more likely than a decrease? 3. Are price changes synchronized? 4. Is the pricing rule state or time dependent? 5. Are price changes sizable? Answers to these questions provide some of the micro fundamentals for the design of monetary policy in this country.
    Date: 2008–01–31

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