nep-cba New Economics Papers
on Central Banking
Issue of 2008‒08‒14
25 papers chosen by
Alexander Mihailov
University of Reading

  1. Is inflation an international phenomenon? By Christopher J. Neely; David E. Rapach
  2. Some preliminary evidence on the globalization-inflation nexus By Sophie Guilloux; Enisse Kharroubi
  3. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective By Marika Karanassou; Hector Sala; Dennis Snower
  4. Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy By Marzo, Massimiliano; Zagaglia, Paolo
  5. The Natural Rate Hypothesis and Real Determinacy By Alexander Meyer-Gohde
  6. A Continuous-Time Model of the Term Structure of Interest Rates with Fiscal-Monetary Policy Interactions By Marzo, Massimiliano; Romagnoli , Silvia; Zagaglia, Paolo
  7. Trend inflation as a workers disciplining device in a general equilibrium model By Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella
  8. The Optimal Monetary Instrument for Prudential Purposes By Charles Goodhart; Dimitrios Tsomocos; Pojanart Sunirand
  9. Oil Price Shocks, Macroeconomic Stability and Welfare in a Small Open Economy By Deren Unalmis; Ibrahim Unalmis; Derya Filiz Unsal
  10. Fiscal policy in real time By Jacopo Cimadomo
  11. Conditional Efficacy of Sterilized Intervention By Jun, Jongbyung
  12. Endogenous Money - On Banking Behaviour in New and Post Keynesian Models By Co-Pierre Georg; Markus Pasche
  13. The real exchange rate in sticky price models: does investment matter? By Enrique Martinez-Garcia; Jens Søndergaard
  14. Optimal reserve composition in the presence of sudden stops - the euro and the dollar as safe haven currencies By Roland Beck; Ebrahim Rahbari
  15. Financial globalization and monetary policy discipline By Mark M. Spiegel
  16. Monetary and financial integration in the EMU: Push or pull? By Mark M. Spiegel
  17. An investigation on the effect of real exchange rate movements on OECD bilateral exports By Antoine Berthou
  18. The role of the IMF in recent sovereign debt restructurings: Implications for the policy of lending into arrears By Javier Díaz-Cassou; Aitor Erce-Domínguez; Juan J. Vázquez-Zamora
  19. A review of nonfundamentalness and identification in structural VAR models By Lucia Alessi; Matteo Barigozzi; Marco Capasso
  20. Russia, EU enlargement and the euro By Zbigniew Polanski; Adalbert Winkler
  21. Comprehensive macro-model for the U.S. economy By Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
  22. The Future of the Renminbi and Its Impact on the Hong Kong Dollar By Yue, Eddie; He, Dong
  23. Regional Inflation Persistence: Evidence from Italy By Andrea Vaona; Guido Ascari
  24. Expectations, Communication and Monetary Policy in Turkey By Soner Baþkaya; Hakan Kara; Defne Mutluer
  25. The Monetary Model of Exchange Rate: Evidence from the Philippines Using ARDL Approach By Long, Dara; Samreth, Sovannroeun

  1. By: Christopher J. Neely; David E. Rapach
    Abstract: Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes inflation for 65 countries into world, regional, and idiosyncratic components. The world component accounts for 34% of inflation variability on average across countries, although the importance of this global factor differs substantially across countries. Variables that reflect policy as well as economic and financial development strongly explain the cross-section variation in the relative importance of global influences. A parsimonious model of time variation in the factor loadings shows that most countries became more sensitive to international inflation influences over 1951 2006. In addition, European-specific influences became more important over time for countries participating in European economic and monetary integration.
    Keywords: Inflation (Finance)
    Date: 2008
  2. By: Sophie Guilloux; Enisse Kharroubi
    Abstract: The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports. This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process.
    Keywords: Globalization ; Inflation (Finance) ; Time-series analysis ; International trade
    Date: 2008
  3. By: Marika Karanassou; Hector Sala; Dennis Snower
    Abstract: The conventional wisdom that inflation and unemployment are unrelated in the long-run implies the compartmentalisation of macroeconomics. While one branch of the literature models inflation dynamics and estimates the unemployment rate compatible with inflation stability, another one determines the real economic factors that drive the natural rate of unemployment. In the context of the new Phillips curve (NPC), we show that frictional growth, i.e. the interplay between lags and growth, generates an inflation-unemployment tradeoff in the long-run. We thus argue that a holistic framework, like the chain reaction theory (CRT), should be used to jointly explain the evolution of inflation and unemployment. A further attraction of the CRT approach is that it provides a synthesis of the traditional structural macroeconometric models and the (structural) vector autoregressions (VARs)
    Keywords: Natural rate of unemployment, new Phillips Curve, frictional growth, inflationunemployment, tradeoff, inflation dynamics, unemployment dynamics, impulse response function
    JEL: E24 E31
    Date: 2008–07
  4. By: Marzo, Massimiliano (Universita di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless variant of their model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed.
    Keywords: Monetary Policy; Fiscal Policy; Government Bonds; Determinacy
    JEL: C68 E52
    Date: 2008–08–11
  5. By: Alexander Meyer-Gohde
    Abstract: The uniqueness of bounded local equilibria under interest rate rules is analyzed in a model with sticky information `a la Mankiw and Reis (2002). The main results are tighter bounds on monetary policy than in sticky-price models, irrelevance of the degree of output-gap targeting for determinacy, independence of determinacy regions from parameters outside the interest-rate rule, and equivalence between real determinacy in models satisfying the natural rate hypothesis and nominal determinacy in the associated full-information, flex-price equivalent. The analysis follows from boundedness considerations on the nonautonomous recursion that describe the MA(¥) representation of variables’ reaction to endogenous fluctuations.
    Keywords: Nonautonomous difference equations; Indeterminacy; Taylor rule; Sticky information; Sticky prices
    JEL: C62 E31 E52 E58 E61
    Date: 2008–07
  6. By: Marzo, Massimiliano (Universita di Bologna;); Romagnoli , Silvia (Universita di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds.
    Keywords: Bond Pricing; Fiscal Policy; Mathematical Methods
    JEL: D90 G12
    Date: 2008–07–29
  7. By: Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella
    Abstract: ient outcomes. Our paper reverses this view: properly designed monetary policies may take advantage of predetermined nominal wages to discipline monopolistic wage setters. This, in turn, requires accepting a non-zero in- flation rate. Discretionary monetary policy is e¤ective when wage setters are non atomistic. In?ation targeting has real e¤ects irrespective of the degree of labor market centralization.
    Keywords: inflation bias, discretionary monetary policy, non-zero inflation targeting, unemployment, strategic wage setters
    JEL: E52 E58 J51 E24
    Date: 2008–07
  8. By: Charles Goodhart; Dimitrios Tsomocos; Pojanart Sunirand
    Abstract: The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility.
    Date: 2008–08
  9. By: Deren Unalmis; Ibrahim Unalmis; Derya Filiz Unsal
    Date: 2008
  10. By: Jacopo Cimadomo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper argues that any assessment on the intentional stance of fiscal policy should be based upon all the information available to policymakers at the time of fiscal planning. In particular, real-time data on the discretionary fiscal policy "instrument", the structural primary balance, should be used in the estimation of fiscal policy reaction functions. In fact, the ex-post realization of discretionary fiscal measures may end up to be drastically different from what was planned by fiscal authorities in the budget law. When fiscal policy rules are estimated on real-time data, our results indicate that OECD countries often planned a counter-cyclical fiscal stance, especially during economic expansions, whereas conventional findings based on revised data point towards pro-cyclicality. This finding calls into question the effectiveness of discretionary fiscal policies to fine tune the business cycle, as (pro-cyclical) actual outcomes tend to deviate from (counter-cyclical) fiscal plans. Furthermore, we test whether threshold effects might be at play in the reaction of fiscal policy to the economic cycle and to public debt accumulation. It emerges that the intended cyclical behavior of fiscal policy is characterized by two regimes, and that the switch between them is likely to occur when output is close to its equilibrium level. On the other hand, the use of revised data does not allow to identify any threshold effect. JEL Classification: C23, E30, E62, H30, H60.
    Keywords: Fiscal policy, real-time data, revision errors, endogenous threshold models.
    Date: 2008–07
  11. By: Jun, Jongbyung (Suffolk University, Department of Economics)
    Abstract: The noise-trading or coordination channel hypothesis implies that sterilized intervention in the foreign exchange market is effective if certain conditions are satisfied, but ineffective otherwise. The hypothesis is tested with a three-regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend-chasing behaviors of noise traders, such strategic intervention is effective in moving the exchange rate in the desired direction.
    Keywords: Central bank intervention; Threshold model; Coordination channel
    JEL: C22 E58 F31
    Date: 2008–01–15
  12. By: Co-Pierre Georg (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät); Markus Pasche (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät)
    Abstract: In New Keynesian as well as in Post Keynesian macroeconomic models, money supply is assumed to be endogenous. The reasons for the endogeneity and the role of the financial sector in the supply process, however, are seen very different. In this paper we explicitly derive the behaviour of the banking sector regarding the supply of loans and the demand for reserves from portfolio and liquidity considerations. As a result, the money multiplier as well as the money base are endogenously determined. Although the microeconomics of the bank behaviour is quite simple, credit and money as well as bonds demand depend on policy variables in a non-linear and non-monotonous way.
    Keywords: endogenous money, loans market, bonds market, central banking
    JEL: E51 E44 B22
    Date: 2008–08–12
  13. By: Enrique Martinez-Garcia; Jens Søndergaard
    Abstract: This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well.
    Keywords: Globalization ; Foreign exchange ; International finance ; Forecasting ; Mathematical models
    Date: 2008
  14. By: Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ebrahim Rahbari (London Business School, Economics Department, Regent’s Park, London, NW1 4SA, United Kingdom.)
    Abstract: We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and "transaction demands" caused by sudden stops in capital inflows. In this model, the transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 24 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt to reserve ratios, introducing transactions demand has a relatively modest effect. We also find that euro and dollar bonds act as "safe haven currencies" during sudden stops. Dollars are better hedges for global sudden stops and for regional sudden stops in Asia and Latin America, while the euro is a better hedge for sudden stops in Emerging Europe. We reproduce qualitatively the recent decline in the share of the dollar in emerging market reserves and find that the denomination of foreign currency debt has very little importance for optimal reserve portfolios. JEL Classification: F31, F32, F33, G11.
    Keywords: Foreign exchange reserves, currency composition, sudden stops.
    Date: 2008–07
  15. By: Mark M. Spiegel
    Abstract: The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences.
    Keywords: Monetary policy ; Inflation (Finance) ; Globalization
    Date: 2008
  16. By: Mark M. Spiegel
    Abstract: A number of studies have recently noted that monetary integration in the European Monetary Union (EMU) has been accompanied by increased financial integration. This paper examines the channels through which monetary union increased financial integration, using international panel data on bilateral international commercial bank claims from 1998-2006. I decompose the relative increase in bilateral commercial bank claims among union members following monetary integration into three possible channels: A "borrower effect," as a country's EMU membership may leave its borrowers more creditworthy in the eyes of foreign lenders; a "creditor effect," as membership in a monetary union may increase the attractiveness of a nation's commercial banks as intermediaries, perhaps through increased scale economies enjoyed by commercial banks themselves or through an improved regulatory environment after the advent of monetary union; and a "pairwise effect," as joint membership in a monetary union increases the quality of intermediation between borrowers and creditors when both are in the same union. This pairwise effect could be attributed to mitigated currency risk stemming from monetary integration, but may also indicate that monetary union integration increases borrowing capacity. I decompose the data into a series of difference-in-differences specifications to isolate these three channels and find that the pairwise effect is the primary source of increased financial integration. This result is robust to a number of sensitivity exercises used to address concerns frequently associated with difference-in-differences specifications, such as serial correlation and issues associated with the timing of the intervention.
    Keywords: Banks and banking - Europe ; Euro ; European Monetary System (Organization)
    Date: 2008
  17. By: Antoine Berthou (CES, University Paris 1 and Paris School of Economics, 106-112, Bd de l’Hôpital - 75647 Paris Cedex 13, France.)
    Abstract: The reaction of exports to real exchange rate movements can differ according to the nature of the destination country. We derive and estimate a gravity equation for 20 OECD exporting countries and 52 developed and developing importing countries. We test how trade costs dampen the effect of real exchange rate movements on bilateral exports, and show that the elasticity on the real exchange rate is reduced when (i) the destination country has a low quality of institutions, (ii) this country is more distant, and (iii) the efficiency of customs is low in both the importing and exporting countries. These results are highly consistent with the existence of an hysteresis effect of real exchange rate movements on trade, as suggested by Baldwin and Krugman (1989). JEL Classification: F10, F32, D73.
    Keywords: Trade, Exchange Rate Movements, Institutions.
    Date: 2008–07
  18. By: Javier Díaz-Cassou (Banco de España); Aitor Erce-Domínguez (Banco de España); Juan J. Vázquez-Zamora (Banco de España)
    Abstract: This paper analyzes the role played by the IMF in eight recent sovereign debt restructurings from a comparative perspective: Argentina (2001-2005), the Dominican Republic (2004-2005), Ecuador (1999-2000), Pakistan (1998-2001), the Russian Federation (1998-2001), Serbia (2000-2004), Ukraine (1998-2000) and Uruguay (2004). Our objective is to identify the various dimensions of the IMF's potential involvement during those processes, and to extract some relevant policy implications to reform the Policy of Lending Into Arrears. We find that the IMF can potentially exert a substantial influence on sovereign debt restructurings by influencing countries' decision to restructure when the debt burden is deemed unsustainable, by providing official finance to substitute for a loss of access to international financial markets, by setting a medium-term domestic adjustment path through conditionality, by providing 'independent' information at a time of heightened uncertainty, and by providing incentives both to creditors and debtors. However, a lack of consistency has tended to characterize the role of the IMF in recent sovereign debt restructurings. In part, this reflects the flexibility with which the IMF has adapted its intervention to country-specific factors. However, we argue that this lack of consistency has tended to exacerbate the uncertainty and information asymmetries that are often associated with sovereign debt restructurings, and that a more systematic approach is needed.
    Keywords: IMF, sovereign debt, restructurings, default, solvency
    JEL: E65 F34 H63
    Date: 2008–08
  19. By: Lucia Alessi (Laboratory of Economics and Management (LEM), Sant’Anna School of Advanced Studies, Piazza Martiri della Libertà, 33, 56127 Pisa, Italy.); Matteo Barigozzi (Max Planck Institute of Economics, Kahlaische Strasse, 10, 07745 Jena, Germany.); Marco Capasso (Urban & Regional research centre Utrecht (URU), Faculty of Geosciences, Utrecht University, and Tjalling C. Koopmans Institute (TKI), Utrecht School of Economics, Utrecht University, The Netherlands.)
    Abstract: We review, under a historical perspective, the development of the problem of nonfundamentalness of Moving Average (MA) representations of economic models. Nonfundamentalness typically arises when agents’ information space is larger than the econometrician’s one. Therefore it is impossible for the latter to use standard econometric techniques, as Vector AutoRegression (VAR), to estimate economic models. We restate the conditions under which it is possible to invert an MA representation in order to get an ordinary VAR and identify the shocks, which in a VAR are fundamental by construction. By reviewing the work by Lippi and Reichlin [1993] we show that nonfundamental shocks may be very different from fundamental shocks. Therefore, nonfundamental representations should not be ruled out by assumption and indeed methods to detect nonfundamentalness have been recently proposed in the literature. Moreover, Structural VAR (SVAR) can be legitimately used for assessing the validity of Dynamic Stochastic General Equilibrium models only if the representation associated with the economic model is fundamental. Factor models can be an alternative to SVAR for validation purposes as they do not have to deal with the problem of nonfundamentalness. JEL Classification: C32, C51, C52.
    Keywords: Nonfundamentalness, Structural VAR, Dynamic Stochastic General Equilibrium Models, Factor Models.
    Date: 2008–07
  20. By: Zbigniew Polanski (Narodowy Bank Polski and Warsaw School of Economics, ul. Swietokrzyska 11/21, 00-919 Warsaw, Poland.); Adalbert Winkler (Frankfurt School of Finance and Management, Sonnemannstrasse 9-11, 60314 Frankfurt am Main, Germany.)
    Abstract: This paper reviews selected aspects of economic relations between the EU and Russia, focusing on the impact that the last two waves of EU enlargement have had on Russia, as well as the role of the euro in Russia. The analysis suggests that if EU enlargement has had any diversion effects on trade between the EU and Russia at all, they have been minimal, while robust growth in both the EU and Russia, as well as high oil and gas prices, has boosted trade. Likewise, FDI to and from Russia has increased, with the direct impact of enlargement again difficult to disentangle from other factors. Use of the euro by Russian residents and authorities in international transactions has increased, albeit at an uneven pace. While, in general, the US dollar remains the major foreign currency used by Russian residents, the euro has gained importance as an anchor and reserve currency in Russian exchange rate policies. This has happened in the context of an overall monetary policy strategy aiming at a gradual shift from an exchange rate-oriented monetary policy to inflation targeting. JEL Classification: F14, F15, F21, F36.
    Keywords: Economic integration, trade diversion, foreign direct investment, international currencies.
    Date: 2008–08
  21. By: Kitov, Ivan; Kitov, Oleg; Dolinskaya, Svetlana
    Abstract: We present a comprehensive macroeconomic model for the U.S. There exist strict long-term relations between real GDP, price inflation, labor force participation, productivity, and unemployment. The evolution of real GDP depends only on exogenous demographic forces. Other macro-variables follow up the real GDP. The links between the variables have been valid during the last several decades. All relations were (successfully) tested for cointegration. Statistical estimates are also presented. The relationships allow a reliable prediction of the macroeconomic state at very large (more than 9 years) time horizons.
    Keywords: US economy; macroeconomic model; real GDP; inflation; unemployment; labor force; productivity; demography
    JEL: E2 D3 J1 J2 E3
    Date: 2008–08–03
  22. By: Yue, Eddie; He, Dong
    Abstract: This article outlines our thoughts on the following three issues. First, will the renminbi become an international currency in the foreseeable future? Second, what does the international use of the renminbi mean for Hong Kong? Third, should the Hong Kong dollar exchange rate be repegged to the renminbi? We argue that the renminbi is likely to become a major international currency in the future, but the process will most likely be a gradual one, reflecting the particular approach that the authorities in the Mainland have taken to capital account liberalization. We also argue that Hong Kong is well positioned to benefit from the process of the renminbi becoming an international currency. At the same time, we continue to believe in the appropriateness of the link of the Hong Kong dollar exchange rate to the U.S. dollar.
    JEL: E58 F36
    Date: 2008–08
  23. By: Andrea Vaona (Facoltà di Economia, Università di Lugano, Svizzera); Guido Ascari (Dipartimento di Economia e Metodi Quantitativi, Facoltà di Economia, Università di Pavia, Italia)
    Abstract: Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial disaggregation (NUTS3). Our results show that economically backward regions display greater inflation persistence. Moreover, we show that higher persistence is linked to a lower degree of competitiveness in the retail sector.
    Keywords: inflation persistence, retail sector, regions.
    JEL: E0 E30 R0 R10
    Date: 2007–07–28
  24. By: Soner Baþkaya; Hakan Kara; Defne Mutluer
    Date: 2008
  25. By: Long, Dara; Samreth, Sovannroeun
    Abstract: In this paper, we re-examine the validity of both short and long run monetary models of exchange rate for the case of the Philippines by using new approach called Autoregressive Distributed Lag (ARDL) to cointegration. From our analysis, some findings are obtained. First, there are robust short and long run relationships between variables in the monetary exchange rate model. Second, the stability of the estimated parameters is confirmed by CUSUM and CUMSUQ stability tests. Third, the Purchasing Power Parity (PPP) condition is not hold for the Philippines. Last, all the monetary restrictions are rejected. Therefore, this result seems to suggest that the estimation result of the monetary model of exchange rate, in which monetary restrictions are assumed to be satisfied beforehand, might suffer from a number of deficiency; it is not appropriate to estimate the exchange rate model before the monetary restrictions are confirmed as also mentioned in Haynes and Stone (1981).
    Keywords: Exchange rate model; ARDL approach to cointegration
    JEL: F31 F33
    Date: 2008–06

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