nep-cba New Economics Papers
on Central Banking
Issue of 2008‒11‒11
fifty-nine papers chosen by
Alexander Mihailov
University of Reading

  1. Linear-Quadratic Approximation of Optimal Policy Problems By Pierpaolo Benigno; Michael Woodford
  2. Credit frictions and optimal monetary policy By Vasco Cúrdia; Michael Woodford
  3. Credit Frictions and Optimal Monetary Policy By Vasco Curdia; Michael Woodford
  4. Monetary aggregates and liquidity in a neo-Wicksellian framework By Matthew Canzoneri; Robert Cumby; Behzad Diba; David López-Salido
  5. The Classification and Perfomance of Alternative Exchange-Rate Systems By George Tavlas; Harris Dellas; Alan Stockman
  6. Monetary policy and stock market boom-bust cycles By Lawrence Christiano; Cosmin Ilut; Roberto Motto; Massimo Rostagno
  7. Carry Trades and Currency Crashes By Markus K. Brunnermeier; Stefan Nagel; Lasse H. Pedersen
  8. Financial Control of a Competitive Economy without Randomness By Ioannis Karatzas; Martin Shubik; William D. Sudderth
  9. Risk premiums and macroeconomic dynamics in a heterogeneous agent model By Ferre De Graeve; Maarten Dossche; Marina Emiris; Henri Sneessens; Raf Wouters
  10. The bond premium in a DSGE model with long-run real and nominal risks By Glenn D. Rudebusch; Eric T. Swanson
  11. Information in the revision process of real-time datasets By Valentina Corradi; Andres Fernandez; Norman Swanson
  12. The US as the "Demander of Last Resort" and its Implications on China's Current Account By Joshua Aizenman; Yothin Jinjarak
  13. Financial (in)stability, supervision and liquidity injections : a dynamic general equilibrium approach By Gregory de Walque; Olivier Pierrard; Abdelaziz Rouabah
  14. Endogenous Transaction Costs By Martins-da-Rocha, V. F.; Vailakis, Yiannis
  15. Central bank misperceptions and the role of money in interest rate rules By Guenter Beck; Volker Wieland
  16. McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates By Antonio Diez de los Rios
  17. Optimal Central Bank Transparency By Carin A.B. van der Cruijsen; Sylvester C.W. Eijffinger; Lex H. Hoogduin
  18. Long-run relationship between inflation and growth in a New Keynesian framework By Arato, Hiroki
  19. Monetary Policy Committees: meetings and outcomes By Jan Marc Berk; Beata Bierut
  20. Long-run Phillips Curve and Disinfation Dynamics: Calvo vs. Rotemberg Price Setting By Rossi Lorenza; Guido Ascari
  21. Lowering the anchor: how the bank of england's inflation-targeting policies have shaped inflation expectations and perceptions of inflation risk By Meredith J. Beechey
  22. Has the Volatility of U.S. Inflation Changed and How? By Grassi, Stefano; Proietti, Tommaso
  23. Has the Clarity of Humphrey-Hawkins Testimonies Affected Volatility in Financial Markets? By David-Jan Jansen
  24. Monetary policy, asset prices and macroeconomic conditions : a panel-VAR study By Katrin Assenmacher-Wesche; Stefan Gerlach
  25. Liquidity, inflation and asset prices in a time-varying framework for the euro area By Christiane Baumeister; Eveline Durinck; Gert Peersman
  26. Taylor Rules and the Euro. By Tanya, Molodtsova; Nikolsko-Rzhevskyy, Alex; Papell, David
  27. Inflation Persistence and the Taylor Principle By Murray, Christian; Nikolsko-Rzhevskyy, Alex; Papell, David
  28. Monetary Policy Evaluation in Real Time: Forward-Looking Taylor Rules Without Forward-Looking Data By Nikolsko-Rzhevskyy, Alex
  29. Imperfect information, macroeconomic dynamics and the yield curve : an encompassing macro-finance model By Hans Dewachter
  30. Exchange Rate Regime Choice with Multiple Key Currencies By Thomas Plümper and Eric Neumayer
  31. Oil Price Shocks and Stock Market Booms in an Oil Exporting Country By Hilde C. Bjørnland
  32. Money-market segmentation in the Euro area: what has changed during the turmoil? By Zagaglia , Paolo
  33. Nonlinearities in the dynamics of the euro area demand for M1 By Alessandro Calza; Andrea Zaghini
  34. Why Do Countries Peg the Way They Peg?The Determinants of Anchor Currency Choice By Nienke Oomes; Christopher M. Meissner
  35. RBCs and DSGEs: The Computational Approach to Business Cycle Theory and Evidence By Özer Karagedikli; Troy Matheson; Christie Smith; Shaun Vahey
  36. The Introduction of the Euro in Central and Eastern European Countries - Is it Economically Justifiable? By Tanja Broz
  37. Recent Inflationary Trends in World Commodities Markets By Noureddine Krichene
  38. Crude Oil Prices: Trends and Forecast By Noureddine Krichene
  39. The Quantity Theory of Money is Valid. The New Keynesians are Wrong! By Hillinger, Claude; Süssmuth, Bernd
  40. Taux d’intérêt et taux de change réel dans un modèle à horizons finis By Karine GENTE
  41. Aggregation and the PPP puzzle in a sticky-price model By Carlos Carvalho; Fernanda Nechio
  42. The Stock of Money and Why You Should Care By Kelly, Logan J
  43. The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe By Karsten Staehr
  44. (Post) Keynesian alternative to inflation targeting* By Angel Asensio
  45. Semi-Nonparametric Estimates of Currency Substitution Between the Canadian Dollar and the U.S. Dollar By Apostolos Serletis; Guohua Feng
  46. The growing evidence of Keynes's methodology advantage and its consequences within the four macro-markets framework By Angel Asensio
  47. Prices and output co-movements : an empirical investigation for the CEECs By Iuliana Matei
  48. The Benefits and Costs of Monetary Union in Southern Africa: A Critical Survey of the Literature By George S. Tavlas
  49. Which Bank is the "Central" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System By Morten Bech; James T. E. Chapman; Rod Garratt
  50. Institutions Matter: Financial Supervision Architecture, Central Bank and Path Dependence. General Trends and the South Eastern European Countries By Donato Masciandaro; Marc Quintyn
  51. Banking and Central Banking in Pre-WWII Grecce: Money and Currency Developments By Sophia Lazaretou
  52. Monetary Policy Objectives and Istruments used by the Privileged National Bank of the Kingdom of Serbia (1884 - 1914) By Milan Sojic; Ljiljana Djurdjevic
  53. The National Bank of Romania and its Isuue of Banknotes between Necessity and Possibility, 1880 - 1914 By George Virgil Stoenescu; Elisabeta Blejan; Brindusa Costache; Adriana Iarovici Aloman
  54. Banking in Turkey: History and Evolution By Yuksel Gormez
  55. Central Bank Involvement in Banking Crises in Latin America By Luis Ignacio Jácome
  56. Challenges to Monetary Policy from Financial Globalization: The Case of India By A. Prasad; Charles Frederick Kramer; Hélène Poirson
  57. Constraints on the Design and Implementation of Monetary Policy in Oil Economies: The Case of Venezuela By Víctor Olivo; Mercedes da Costa
  58. Modelling the Inflation Process in Nigeria By Olusanya E. Olubusoye; Rasheed Oyaromade
  59. Tanzania's Equilibrium Real Exchange Rate By Niko Hobdari

  1. By: Pierpaolo Benigno (Full Professor, LUISS Guido Carli); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We consider a general class of nonlinear optimal policy problems involving forward-looking constraints (such as the Euler equations that are typically present as structural equations in DSGE models), and show that it is possible, under regularity conditions that are straightforward to check, to derive a problem with linear constraints and a quadratic objective that approximates the exact problem. The LQ approximate problem is computationally simple to solve, even in the case of moderately large state spaces and flexibly parameterized disturbance processes, and its solution represents a local linear approximation to the optimal policy for the exact model in the case that stochastic disturbances are small enough. We derive the second-order conditions that must be satisfied in order for the LQ problem to have a solution, and show that these are stronger, in general, than those required for LQ problems without forward looking constraints. We also show how the same linear approximations to the model structural equations and quadratic approximation to the exact welfare measure can be used to correctly rank alternative simple policy rules, again in the case of small enough shocks.
    Date: 2008
  2. By: Vasco Cúrdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University)
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule," in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.
    Date: 2008–10
  3. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule," in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.
    Date: 2008
  4. By: Matthew Canzoneri (Georgetown University); Robert Cumby (Georgetown University); Behzad Diba (Georgetown University); David López-Salido (Federal Reserve Board)
    Abstract: Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete Banks and Bonds model. We do this by comparing the models’ second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.
    Date: 2008–10
  5. By: George Tavlas (Bank of Greece); Harris Dellas (University of Bern); Alan Stockman (University of Rochester)
    Abstract: Owing to dissatisfaction with the IMF’s de jure classification of exchange-rate regimes, a substantial literature has emerged presenting de facto classifications of exchange-rate systems and using the latter classifications to compare performances of alternative regimes in terms of key macroeconomic variables. This paper critically reviews the literature on de facto regimes. In particular the paper (1) describes the main methodologies that have been used to construct de facto codings, (2) surveys the empirical literature generated by de facto regime codings, and (3) lays-out the problems inherent in constructing de facto classifications. The empirical literature is found to yield few robust findings. We argue that the as-yet unfulfilled objective of this literature, and the major research agenda for the future in this area, lies in the need of a more thorough investigation of the degree of monetary-policy independence without relying exclusively on movements in exchange rates, an agenda the attainment of which is made especially challenging because of the lack of comprehensive and reliable data on reserves and interest rates.
    Keywords: Exchange-rate regimes; Economic growth; Inflation; Bipolar hypothesis
    JEL: F3
    Date: 2008–09
  6. By: Lawrence Christiano (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Cosmin Ilut (Northwestern University, 2003 Sheridan Road, Evanston, IL 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic. We find that it is difficult to generate a boom-bust cycle (a period in which stock prices, consumption, investment and employment all rise and then crash) in response to such a news shock, in a standard real business cycle model. However, a monetized version of the model which stresses sticky wages and a Taylorrule based monetary policy naturally generates a welfare-reducing boom-bust cycle in response to a news shock. We explore the possibility that integrating credit growth into monetary policy may result in improved performance. We discuss the robustness of our analysis to alternative specifications of the labor market, in which wage-setting frictions do not distort on going firm/worker relations. JEL Classification: C11, C51, E5, E13, E32.
    Keywords: DSGE Models, Monetary Policy, Asset price boom-busts.
    Date: 2008–10
  7. By: Markus K. Brunnermeier; Stefan Nagel; Lasse H. Pedersen
    Abstract: This paper documents that carry traders are subject to crash risk: i.e. exchange rate movements between high-interest-rate and low-interest-rate currencies are negatively skewed. We argue that this negative skewness is due to sudden unwinding of carry trades, which tend to occur in periods in which risk appetite and funding liquidity decrease. Funding liquidity measures predict exchange rate movements, and controlling for liquidity helps explain the uncovered interest-rate puzzle. Carry-trade losses reduce future crash risk, but increase the price of crash risk. We also document excess co-movement among currencies with similar interest rate. Our findings are consistent with a model in which carry traders are subject to funding liquidity constraints.
    JEL: E44 F3 F31 G12
    Date: 2008–11
  8. By: Ioannis Karatzas (Columbia University); Martin Shubik (Cowles Foundation, Yale University); William D. Sudderth (University of Minnesota)
    Abstract: The monetary and fiscal control of a simple economy without outside randomness is studied here from the micro-economic basis of a strategic market game. The government's bureaucracy is treated as a public good that provides services at a cost. A conventional public good is also considered.
    Keywords: Dynamic programming, Public goods, Bureaucracy, Taxation
    JEL: D53 H23 H41
    Date: 2008–10
  9. By: Ferre De Graeve (Federal Reserve Bank of Dallas); Maarten Dossche (National Bank of Belgium, Research Department); Marina Emiris (National Bank of Belgium, Research Department); Henri Sneessens (Catholic University of Louvain-La-Neuve); Raf Wouters (National Bank of Belgium, Research Department)
    Abstract: We analyze financial risk premiums and real economic dynamics in a DSGE model with three types of agents - shareholders, bondholders and workers - that differ in participation in the capital market and in terms of risk aversion. Aggregate productivity and distribution risk are shared among these agents via the bond market and via an efficient labor contract. The result is a combination of volatile returns to capital and a highly cyclical consumption process for the shareholders, which are two important ingredients for generating high and countercyclical risk premiums. These risk premiums are consistent with a strong propagation mechanism through an elastic supply of labor, rigid real wages and a countercyclical labor share. We discuss the implications for the real and nominal component of the risk premium on equity and bonds. We show how these premiums react to changes in the volatility of the shocks, as experienced during the great moderation. We also analyze the effects of changes in monetary policy behavior and the resulting inflation dynamics.
    JEL: E32 E44 G12
    Date: 2008–10
  10. By: Glenn D. Rudebusch (Federal Reserve Bank of San Francisco); Eric T. Swanson (Federal Reserve Bank of San Francisco)
    Abstract: The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data - an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors face long-run economic risks and have recursive Epstein-Zin preferences. We show that introducing these two elements into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables.
    Date: 2008–10
  11. By: Valentina Corradi; Andres Fernandez; Norman Swanson
    Abstract: Rationality of early release data is typically tested using linear regressions. Thus, failure to reject the null does not rule out the possibility of nonlinear dependence. This paper proposes two tests which instead have power against generic nonlinear alternatives. A Monte Carlo study shows that the suggested tests have good finite sample properties. Additionally, we carry out an empirical illustration using a real-time dataset for money, output, and prices. Overall, we find strong evidence against data rationality. Interestingly, for money stock the null is not rejected by linear tests but is rejected by our tests.
    Keywords: Real-time data
    Date: 2008
  12. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper evaluates the degree to which current account patterns are explained by the variables suggested by the literature, and reflects on possible future patterns. We start with panel regressions explaining the current account of 69 countries during 1981-2006. We identify an asymmetric effect of the US as the "demander of last resort:" a 1% increase in the lagged US current account deficit is associated with 0.5% increase of current account surpluses of countries running surpluses, but with insignificant changes of current account deficits of countries running deficits. Overall, the panel regressions account for not more than 2/3 of the variation. We apply the regression results to assess China's current account over the next six years, projecting a large drop in its account/GDP surpluses.
    JEL: F15 F32
    Date: 2008–10
  13. By: Gregory de Walque (National Bank of Belgium, Research Department; University of Namur); Olivier Pierrard (Central Bank of Luxembourg; Catholic University of Louvain); Abdelaziz Rouabah (Central Bank of Luxembourg)
    Abstract: This paper develops a dynamic stochastic general equilibrium model with interactions between an heterogeneous banking sector and other private agents. We introduce endogenous default probabilities for both firms and banks, and allow for bank regulation and liquidity injection into the interbankmarket. Our aim is to understand the importance of supervisory and monetary authorities to restore financial stability. The model is calibrated against real data and used for simulations. We show that liquidity injections reduce financial instability but have ambiguous effects on output fluctuations. The model also confirms the partial equilibrium literature results on the procyclicality of Basel II.
    Keywords: DSGE, Banking sector, Default risk, Supervision, Money
    JEL: E13 E20 G21 G28
    Date: 2008–10
  14. By: Martins-da-Rocha, V. F.; Vailakis, Yiannis
    Abstract: The paper proposes an alternative general equilibrium formulation of financial asset economies with transactions costs. Transaction costs emerge endogenously at equilibrium and reflect agents decisions of intermediating financial activities at the expense of providing labor services. An equilibrium is shown to exist in the case of real asset structures.
    Date: 2008–10
  15. By: Guenter Beck (Johann Wolfgang Goethe University Frankfurt); Volker Wieland (Johann Wolfgang Goethe University Frankfurt; CEPR)
    Abstract: Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially.
    Keywords: monetary policy under uncertainty, money, output gap uncertainty, quantity theory and Taylor rules
    JEL: E32 E41 E43 E52 E58
    Date: 2008–10
  16. By: Antonio Diez de los Rios
    Abstract: McCallum (1994a) proposes a monetary rule where policymakers have some tendency to resist rapid changes in exchange rates to explain the forward premium puzzle. We estimate this monetary policy reaction function within the framework of an affine term structure model to find that, contrary to previous estimates of this rule, the monetary authorities in Canada, Germany and the U.K. respond to nominal exchange rate movements. Our model is also able to replicate the forward premium puzzle.
    Keywords: Exchange rates; Interest rates; Transmission of monetary policy
    JEL: E43 F31 G12 G15
    Date: 2008
  17. By: Carin A.B. van der Cruijsen; Sylvester C.W. Eijffinger; Lex H. Hoogduin
    Abstract: Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to thisoptimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight tothe conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of privatesector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 centralbanks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banksthat would benefit from further transparency increases, some might already have reached the limit.
    Keywords: central bank transparency; monetary policy; inflation persistence.
    JEL: E31 E52 E58
    Date: 2008–07
  18. By: Arato, Hiroki
    Abstract: This paper examines the steady-state growth effect of inflation in an endogenous growth model in which the Calvo-type nominal rigidity with endogenous contract duration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of inflation is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible-price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationship between inflation and growth that is consistent with empirical evidence, especially in industrial countries.
    Keywords: Inflation and growth; Sticky prices; Endogenous contract duration
    JEL: O42 E31
    Date: 2008–11–05
  19. By: Jan Marc Berk; Beata Bierut
    Abstract: Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-prepared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. (
    Keywords: monetary policy committee; voting; Bank of England; Federal Open Market Committee
    JEL: F15 F42 J60
    Date: 2008–11
  20. By: Rossi Lorenza (DISCE, Università Cattolica); Guido Ascari (Università di Pavia)
    Abstract: There is widespread agreement that the two most widely used pricing assumptions in the New-Keynesian literature, i.e., Calvo and Rotemberg price-setting mechanisms, deliver equivalent dynamics. We show that, instead, they entail a very di¤erent dynamics of adjustment after a disin?ation, once non linear simulations are employed. In the Calvo model disin?ation implies output gains, while in the Rotemberg model a disin?ation experiment implies output losses. We show that this is due to the di¤erent wedges created by the nominal rigidities in the two models: between output and hours in the Calvo model, while between output and consumption in the Rotemberg model. More- over, unlike the Calvo model, in the Rotemberg model real wage rigidi- ties cause a signi?cant output slump along the adjustment path, thus restoring a dynamics in line both with the conventional wisdom and the empirical evidence.
    Keywords: Disinfation, Sticky Prices, Nonlinearities
    JEL: G3
    Date: 2008–06
  21. By: Meredith J. Beechey
    Abstract: Inflation targeting as practiced by the Bank of England has undergone several changes since its adoption in 1992, including redefinition of the goal, measures to increase transparency and the granting of independence to the central bank. These changes are likely to have affected long-run inflation expectations and perceptions of future inflation risk. To that end, this paper estimates a no-arbitrage, affine, factor model of the term structure of inflation compensation in the United Kingdom. The model yields time series of expected inflation and inflation risk premia at short and long horizons estimated in a theoretically consistent manner. The results reveal that long-run inflation expectations drifted down slowly during the first five years of inflation targeting, but inflation risk premia moved down abruptly only once the Bank of England was granted independence. This event, which arguably signalled more credible commitment by the central bank to its inflation anchor, appears to have been more important in shaping inflation expectations and perceptions of inflation risk than changes in the definition of the target or measures to increase transparency.
    Keywords: Inflation (Finance)
    Date: 2008
  22. By: Grassi, Stefano; Proietti, Tommaso
    Abstract: The local level model with stochastic volatility, recently proposed for U.S. by Stock and Watson (Why Has U.S. Inflation Become Harder to Forecast?, Journal of Money, Credit and Banking, Supplement to Vol. 39, No. 1, February 2007), provides a simple yet sufficently rich framework for characterizing the evolution of the main stylized facts concerning the U.S. inflation. The model decomposes inflation into a core component, evolving as a random walk, and a transitory component. The volatility of the disturbances driving both components is allowed to vary over time. The paper provides a full Bayesian analysis of this model and readdresses some of the main issues that were raised by the literature concerning the evolution of persistence and predictability and the extent and timing of the great moderation. The assessment of various nested models of inflation volatility and systematic model selection provide strong evidence in favor of a model with heteroscedastic disturbances in the core component, whereas the transitory component has time invariant size. The main evidence is that the great moderation is over, and that volatility, persistence and predictability of inflation underwent a turning point in the late 1990s. During the last decade volatility and persistence have been increasing and predictability has been going down.
    Keywords: Marginal Likelihood; Bayesian Model Comparison; Stochastic Volatility; Great Moderation; Inflation Persistence.
    JEL: E31 C22
    Date: 2008–11–07
  23. By: David-Jan Jansen
    Abstract: By applying readability statistics to the Humphrey-Hawkins testimonies given by the Federal Reserve Chairman, I test whether the clarity of central bank communication affects volatility in financial markets. There are three key results. First, when clarity matters, the results are unequivocal: clarity diminishes volatility. Second, clarity of communication matters mostly for volatility of medium-term interest rates. Third, the effects of clarity vary over time. Clarity mattered especially, but not exclusively during Alan Greenspan's term at the Federal Reserve. Overall, the analysis shows the importance of transparent communication on monetary policy.
    Keywords: central bank communication; transparency; readability; financial markets; volatility
    JEL: F15 F42 J60
    Date: 2008–11
  24. By: Katrin Assenmacher-Wesche (Swiss National Bank, Research Department); Stefan Gerlach (Goethe University Frankfurt, Institute for Monetary and Financial Stability)
    Abstract: This paper studies the relationships between inflation, economic activity, credit, monetary policy, and residential property and equity prices in 17 OECD countries, using quarterly data for 1986-2006. Using a panel VAR, we find plausible and significant responses to a monetary policy shock. Shocks to asset prices have a positive, significant effect on GDP and credit after three to four quarters, whereas prices start to increase much later. We also consider the transmission of US shocks from the US to the other economies. While monetary policy shocks are transmitted internationally, other shocks are not, perhaps because of the form of coefficient restrictions used.
    Keywords: asset prices, credit, monetary policy, panel VAR
    JEL: C23 E52
    Date: 2008–10
  25. By: Christiane Baumeister (Ghent University); Eveline Durinck (Ghent University); Gert Peersman (Ghent University)
    Abstract: In this paper, we investigate how the dynamic effects of excess liquidity shocks on economic activity, asset prices and inflation differ over time. We show that the impact varies considerably over time, depends on the source of increased liquidity (M1, M3-M1 or credit) and the underlying state of the economy (asset price boom-bust, business cycle, inflation cycle, credit cycle and monetary policy stance).
    Keywords: Liquidity, asset prices, inflation, time-varying coefficients
    JEL: E31 E32 E44 E51 E52
    Date: 2008–10
  26. By: Tanya, Molodtsova; Nikolsko-Rzhevskyy, Alex; Papell, David
    Abstract: This paper uses real-time data to analyze whether the variables that normally enter central banks’ interest-rate-setting rules, which we call Taylor rule fundamentals, can provide evidence of out-of-sample predictability for the United States Dollar/Euro exchange rate from the inception of the Euro in 1999 to the end of 2007. The major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with Taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression. We also present less formal evidence that, with real-time data, the Taylor rule provides a better description of ECB than of Fed policy during this period. While the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression, the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the U.S. and the Euro Area and to whether or not there is interest rate smoothing. The evidence of predictability is stronger for real-time than for revised data, about the same with inflation forecasts as with inflation rates, and weakens if output gap growth is included in the forecasting regression. Bad news about inflation and good news about real economic activity both lead to out-of-sample predictability through forecasted exchange rate appreciation.
    Keywords: Taylor rule; euro; exchange rate; forecasting; ECB; euro area.
    JEL: F37 E58 E52 F31
    Date: 2008–09–29
  27. By: Murray, Christian; Nikolsko-Rzhevskyy, Alex; Papell, David
    Abstract: Although the persistence of inflation is a central concern of macroeconomics, there is no consensus regarding whether or not inflation is stationary or has a unit root. We show that, in the context of a “textbook” macroeconomic model, inflation is stationary if and only if the Taylor rule obeys the Taylor principle, so that the real interest rate is increased when inflation rises above the target inflation rate. We estimate Markov switching models for both inflation and real-time forward looking Taylor rules. Inflation appears to have a unit root for most of the 1967 – 1981 period, and is stationary before 1967 and after 1981. We find that the Fed’s response to inflation is also regime dependent, with both the pre and post-Volcker samples containing monetary regimes where the Fed both did and did not follow the Taylor principle. This contrasts to recent research that suggests the Fed’s response to inflation has been time invariant, and that changes in monetary policy only occurred with respect to the output gap.
    Keywords: Taylor rule; real-time data; Great inflation; policy regimes; Markov switching
    JEL: E58
    Date: 2008–03
  28. By: Nikolsko-Rzhevskyy, Alex
    Abstract: There is widespread agreement that monetary policy should be evaluated by using forward-looking Taylor rules estimated with real-time data. For the case of the U.S., this analysis can be performed using Greenbook data, but only through 2002. In countries outside the U.S., central banks do not regularly release their forecasts to the public. I propose a methodology for conducting monetary policy evaluation in real-time when forward-looking real-time data is unavailable. I then implement this methodology and estimate the resultant Taylor rules for the U.S., Canada, the U.K., and Germany. The methodology consists of calibrating models to closely replicate Greenbook forecasts, and then applying them to international real-time datasets. The results show that the U.S. output gap series is well described by quadratic detrending, while Greenbook inflation forecasts can be closely replicated using Bayesian model averaging over Autoregressive Distributed Lag models in inflation and the GDP growth rate. German and U.S. Taylor rules are characterized by inflation coefficients increasing with the forecast horizon and a positive output gap response. The U.K. and Canada interest rate reaction functions achieve maximum inflation response at middle-term horizons of about 1/2 year and the output gap coefficient enters the reaction functions insignificantly. Estimating the U.K. and Canadian Taylor rules as forward-looking is crucial, as backward-looking specifications produce nonsensical estimates. This is not the case for the U.S. and Germany.
    Keywords: real-time data; Taylor rule; monetary rules; inflation forecasts; output gap.
    JEL: C53 E58 E52
    Date: 2008–10–19
  29. By: Hans Dewachter (CES, University of Leuven; Rotterdam School of Management, EUR; CESifo)
    Abstract: In this paper we estimate an encompassing Macro-Finance model allowing for time variation in the equilibrium real rate, mispricing and learning dynamics. The encompassing model specification incorporates (i) a small-scale (semi-) structural New-Keynesian model, (ii) flexible price of risk specifications, (iii) liquidity premiums in the form of (constant) deviations from (Gaussian) no-arbitrage and (iv) learning dynamics. This model is estimated on US data using MCMC techniques. We find that the encompassing model outperforms significantly standard Macro-Finance models in terms of marginal likelihood and BIC. Three findings stand out. First, unlike standard Macro-Finance models, a substantial fraction of the variation in long-term yields is attributed to changes in the perceived equilibrium real rate. Second, statistically and economically significant learning effects, especially for inflation expectations, are found. Finally, historical decompositions show that the model can replicate the US yield curve dynamics over the period 1960-2007.
    Keywords: Imperfect information, New-Keynesian macroeconomic dynamics, equilibrium real rate, affine yield curve models
    JEL: E43 E44 E52
    Date: 2008–10
  30. By: Thomas Plümper and Eric Neumayer
    Abstract: Recent scholarship on exchange rate regime choice seeks to explain why some countries fix their exchange rate to an anchor currency, but it neglects the question to which currency countries peg. This article posits that an understanding of the choice of anchor currency also improves political economists’ understanding of the decision for an exchange rate peg itself. Drawing on the ‘fear of floating literature’, we argue that the choice of anchor currency is mainly determined by the degree of dependence of the potentially pegging country on imports from the country or currency union issuing the key currency as well as the degree of dependence on imports from the currency area, that is, from other countries which have already pegged to that key currency. This is because an exchange rate depreciation against the main trading partners’ currency increases domestic inflationary pressures due to exchange-rate pass-through. In addition, our theory claims that central bank independence and de facto fixed exchange rates are complements (rather than substitutes) since independent central banks care more than governments about imported inflation. Analyzing a pooled cross-section of 106 countries over the period 1974 to 2005, we find ample evidence in support of our theoretical predictions.
    Date: 2008–11–04
  31. By: Hilde C. Bjørnland (Norges Bank (Central Bank of Norway) and Norwegian School of Management (BI))
    Abstract: This paper analyses the effects of oil price shocks on stock returns in Norway, an oil exporting country, highlighting the transmission channels of oil prices for macroeconomic behaviour. To capture the interaction between the different variables, stock returns are incorporated into a structural VAR model, as stock prices are an important transmission channel of wealth in an oil abundant country. I find that following a 10 percent increase in oil prices, stock returns increase by 2.5 percent, after which the effect eventually dies out. The results are robust to different (linear and non-linear) transformations of oil prices. The effects on the other variables are more modest. However, all variables indicate that the Norwegian economy responds to higher oil prices by increasing aggregate wealth and demand. The results also emphasize the role of other shocks; monetary policy shocks in particular, as important driving forces behind stock price variability in the short term.
    Keywords: VAR, oil price shocks, monetary policy, stock market.
    JEL: C32 E44 E52
    Date: 2008–10–03
  32. By: Zagaglia , Paolo (Bank of Finland Research)
    Abstract: In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.In this paper we study how the pattern of segmentation in the euro area money market has been affected by the recent turmoil in financial markets. We use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.
    Keywords: money market; high-frequency data; time-series methods
    JEL: C22 E58
    Date: 2008–10–20
  33. By: Alessandro Calza (European Central Bank); Andrea Zaghini (Bank of Italy, Economics, Research and International Relations Area)
    Abstract: The paper finds evidence of non-linearities in the dynamics of the euro-area demand for the narrow aggregate M1. A long-run money demand relationship is first estimated over a sample period covering the last three decades. While the parameters of the relationship are jointly stable, there are indications of non-linearity in the residuals of the error-correction model. This non-linearity is explicitly modelled using a fairly general Markov switching error-correction model with satisfactory results. The empirical findings of the paper are consistent with theoretical predictions of non-linearities in the dynamics of adjustment to equilibrium stemming from "buffer stock" and "target-threshold" models and with analogous empirical evidence for European countries and the US.
    Keywords: Euro area, cointegration, non-linear error-correction, demand for money
    JEL: E41 C22
    Date: 2008–09
  34. By: Nienke Oomes; Christopher M. Meissner
    Abstract: What determines the currency to which countries peg or "anchor" their exchange rate? Data for over 100 countries between 1980 and 1998 reveal that trade network externalities are a key determinant. This implies that anchor currency choice may well be suboptimal in that certain currencies, e.g., the U.S. dollar, could be oversubscribed. It also implies that changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system. Other factors found to be related to anchor choice include the symmetry of output shocks and the currency denomination of liabilities.
    Keywords: Currency pegs , Exchange rates , International monetary system ,
    Date: 2008–05–27
  35. By: Özer Karagedikli (Bank of England); Troy Matheson (Reserve Bank of New Zealand); Christie Smith (Norges Bank (Central Bank of Norway)); Shaun Vahey (Melbourne Business School, Norges Bank (Central Bank of Norway) , and Reserve Bank of New Zealand)
    Abstract: Real Business Cycle (RBC) and Dynamic Stochastic General Equilibrium (DSGE) methods have become essential components of the macroeconomist’s toolkit. This literature review stresses recently developed techniques for computation and inference, providing a supplement to the Romer (2006) textbook, which stresses theoretical issues. Many computational aspects are illustrated with reference to the simple divisible labour RBC model. Code and US data to replicate the computations are provided on the Internet, together with a number of appendices providing background details.
    Keywords: RBC, DSGE, Computation, Bayesian Analysis, Simulation
    JEL: C11 C50 E30
    Date: 2008–10–24
  36. By: Tanja Broz (The Institute of Economics, Zagreb)
    Abstract: This paper aims to analyse the correlation of demand and supply shocks between the EMU and CEECs in order to examine whether there is some degree of business cycle coordination between them. The main objective is to investigate the impact on Croatia and compare it with other CEECs. Croatia is of interest in this paper since there is a lack of empirical studies on this topic which include Croatia in the sample. Information on the correlation of demand and supply shocks between the EMU and CEECs is important if a country wants to introduce the euro since the synchronisation of business cycles and policy coordination will have a significant impact on willingness to enter the monetary union (except if the decision is a political one). Since Croatia has started its path towards the EU, it should be expected that it will introduce the euro, since there is no opt-out clause for new members. In order to gather results, supply and demand shocks are extracted from data using Blanchard and Quah (1989) methodoogy and then the correlations of shocks between the EMU and CEECs are calculated as well as the size of shocks and the speed of adjustments. Results indicate that Croatia is, at the moment, far from being ready for the common monetary policy with the EMU; while other CEE countries such as Slovenia and Latvia, which in fact first applied for the introduction of euro, have the closest correlation of their business cycles with those of the EMU.
    Keywords: supply and demand shocks, European Monetary Union, Central and Eastern European countries
    JEL: E32 E42 F33
    Date: 2008–10
  37. By: Noureddine Krichene
    Abstract: Expansionary monetary policies in key industrial countries and sharply depreciating U.S. dollar exchange rate sent commodities prices soaring at unprecedented rates during 2003-2007. Food prices rose to alarming levels threatening malnutrition and food riots. In contrast, consumer price indices, a leading indicator for monetary policy, were showing almost no inflation and posed a price puzzle insofar their evolution was not responsive to record low interest rates, double digit commodities inflation, and sharp exchange rate depreciation. Commodities prices were shown to be driven by one common trend, identified as a monetary shock. Policy makers may have to face a policy dilemma: maintain monetary policy stance with accelerating commodities price inflation, subsequent world recession, and financial disorder; or tighten monetary policy with subsequent world recession followed by recovery and financial and price stability.
    Keywords: Commodity markets , Commodity prices , Inflation , Exchange rate depreciation , Developed countries , Monetary policy , Consumer price indexes , External shocks ,
    Date: 2008–05–22
  38. By: Noureddine Krichene
    Abstract: Following record low interest rates and fast depreciating U.S. dollar, crude oil prices became under rising pressure and seemed boundless. Oil price process parameters changed drastically in 2003M5-2007M10 toward consistently rising prices. Short-term forecasting would imply persistence of observed trends, as market fundamentals and underlying monetary policies were supportive of these trends. Market expectations derived from option prices anticipated further surge in oil prices and allowed significant probability for right tail events. Given explosive trends in other commodities prices, depreciating currencies, and weakening financial conditions, recent trends in oil prices might not persist further without triggering world economic recession, regressive oil supply, as oil producers became wary about inflation. Restoring stable oil markets, through restraining monetary policy, is essential for durable growth and price stability.
    Keywords: Working Paper , Oil prices , Commodity prices , Exchange rate depreciation , Inflation , Monetary policy ,
    Date: 2008–05–27
  39. By: Hillinger, Claude; Süssmuth, Bernd
    Abstract: We test the quantity theory of money (QTM) using a novel approach and a large new sample. We do not follow the usual approach of first differentiating the logarithm of the Cambridge equation to obtain an equation relating the growth rate of real GDP, the growth rate of money and inflation. These variables must then again be ‘integrated’ by averaging in order to obtain stable relationships. Instead we suggest a much simpler procedure for testing directly the stability of the coefficient of the Cambridge equation. For 125 countries and post-war data we find the coefficient to be surprisingly stable. We do not select for high inflation episodes as was done in most empirical studies; inflation rates do not even appear in our data set. Much work supporting the QTM has been done by economic historians and at the University of Chicago by Milton Friedman and his associates. The QTM was a foundation stone of the monetarist revolution. Subsequently belief in it waned. The currently dominant New Keynesian School, implicitly or explicitly denies the validity of the QTM. We survey this history and argue that the QTM is valid and New Keynesians are wrong.
    Keywords: new Keynesian theory; quantity theory of money
    JEL: B22 E31 E41 E52
    Date: 2008–10–30
  40. By: Karine GENTE (CEDERS)
    Abstract: Dans cette étude, il s'agit de caractériser le taux de change réel d'é¬quilibre de long terme d'une petite économie ouverte à deux secteurs de production, dans laquelle les agents ont une durée de vie finie au sens de Blanchard (1985). Ce cadre théorique permet de relâcher l'hypothèse d'é¬galité entre le taux de préférence pour le présent et le taux d'intérêt mon¬dial. Par ce biais, l'écart entre le taux d'intérêt et le taux de préférence pour le présent détermine la position financière nette de l'économie domes¬tique vis-à-vis du reste du monde. Celle-ci conditionne en retour la réaction des principales variables économiques à une modification exogène du taux d'intérêt. L'impact d'une hausse du taux d'intérêt sur le taux de change réel d'équilibre dépend de la valeur des élasticités de la production par rapport au capital dans les deux secteurs, tandis que la consommation et le stock de capital se comportent différemment selon la position financière du pays.
    Keywords: Taux de change réel d’équilibre, taux d’intérêt mondial, générations imbriquées
    JEL: F31 F41
    Date: 2008–09–01
  41. By: Carlos Carvalho; Fernanda Nechio
    Abstract: We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Firms' price stickiness differs across sectors, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, these differences lead sectoral real exchange rates to exhibit heterogeneous dynamics. We show that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent when compared with a counterfactual one-sector world economy that features the same average frequency of price changes and is otherwise identical to the multisector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of forty-five months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the "PPP strikes back" debate (Imbs et al. [2005a, b] and Chen and Engel [2005]).
    Keywords: Purchasing power parity ; Prices ; Foreign exchange rates
    Date: 2008
  42. By: Kelly, Logan J
    Abstract: In this paper, I will examine the problems created by incorrectly using a simple sum monetary aggregate to measure the monetary stock. Specifically, I will show that simple sum monetary aggregate confounds the current stock of money with the investment stock of money and that this confounding leads the simple sum monetary aggregate to report an artificially smooth monetary stock. This smoothing causes important information about the dynamic movements of the monetary stock to be lost. This may offer at least a partial explanation of why so many studies find that money has little economic relevance. To that end, we will conclude the paper by examining a reduced form backward looking IS equation to determine whether monetary aggregates contain information about real GDP gap. This paper differs from previous work in that it focuses on smoothing of the monetary stock data caused by the use of simple sum methodology, where the previous work focuses on the bias exhibited by simple sum monetary aggregates.
    Keywords: Monetary Aggregation; Money Stock; Currency Equivalent Index
    JEL: C43 E49 E47
    Date: 2008–11–07
  43. By: Karsten Staehr
    Abstract: This paper discusses the prospects of the new EU members from Central and Eastern Europe joining the European Economic and Monetary Union in the short and medium term. The countries must attain and sustain inflation rates sufficiently low to abide by the Maastricht inflation criterion, but this is complicated by the process of real convergence exerting upward pressure on the inflation rate. The paper discusses different strategies which the new EU countries can apply. It is argued that no one-size-fits-all policy is available and that some countries might be better off postponing EMU membership in pursuit of other goals. Still, the special circumstances concerning the Central and Eastern European EU countries suggest that the process of admission of new countries to the EMU should be adaptive and pragmatic
    Keywords: Monetary Union, inflation, Maastricht inflation criterion, CEE
    JEL: E31 E61
    Date: 2008–10–30
  44. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: While the mainstream policies can not be surpassed in the enchanted ‘optimizable’world, (Post) Keynesians have to resign themselves to manage without magic wand inthe uncertain real world. The paper discusses the monetary rules proposed in the recentPost Keynesian literature. It argues that the long-term interest rate is too imperfectlycontrolled for such rules being feasible. Consequently, the quest for credibility isirrelevant, for it makes not much sense to wonder whether authorities will honour theircommitment on an unfeasible ideal target. The right question is whether authoritiespursue convincing objectives so as to move the conventional expectation of the future(and the related interest rate) towards full employment. It is a matter of confidence.The basic principles involved in such an approach to economic policy are discussed.
    Keywords: Interest rate rule; Inflation targeting, PostKeynesian, Monetary policy
    Date: 2008–04–04
  45. By: Apostolos Serletis; Guohua Feng
    Abstract: In this paper we investigate the issue of whether a floating currency is the right exchangerate regime for Canada or whether Canada should consider a currency union with the UnitedStates. In the context of the framework recently proposed by Swofford (2000, 2005), we usea semi-nonparametric fexible functional form - the Asymptotically Ideal Model (AIM),introduced by Barnett and Jonas (1983) - and pay explicit attention to the theoreticalregularity conditions of neoclassical microeconomic theory, following the suggestions by Bar-nett (2002) and Barnett and Pasupathy (2003). Our results indicate that U.S. dollar depositsare complements to domestic (Canadian) monetary assets, suggesting that Canada shouldcontinue the current exchange rate regime, allowing the exchange rate to float freely with nointervention in the foreign exchange market by the Bank of Canada.
    JEL: C22 F33
    Date: 2008–10–27
  46. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Recent developments in econometrics and economic theory attest the growing evidence of strong uncertainty. The paper argues that these developments both question seriously the methodological foundations of the mainstream macroeconomics and support Keynes’s powerful concepts and theory. It emphasizes how replacing ‘risk’ with strong uncertainty suffices to transform the standard four-macro-markets system into a shifting demand-driven system, with the result that price rigidity is not to be considered the cause of the effective demand leadership (although, as Keynes pointed out, some rigidity is required to give us some stability in a monetary economy). As it is not based on a restrictive definition of uncertainty, Keynes’s theory is more realistic than the mainstream. It is also more general, for the equilibrium level of employment depends on the views about the future, instead of having a unique ‘natural’ anchor.
    Keywords: General equilibrium, Uncertainty, Post-Keynesian
    Date: 2008–09–20
  47. By: Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU.
    Keywords: European monetary integration, co-movements, AR models, CEECs.
    Date: 2008–10
  48. By: George S. Tavlas (Bank of Greece)
    Abstract: With the 14 members of the Southern African Development Community (SADC) having set the objective of adopting a common currency for the year 2018, an expanding empirical literature has emerged evaluating the benefits and costs of a common-currency area in Southern Africa. This paper reviews that literature, focusing on two categories of studies; (1) those that assume that a country’s characteristics are invariant to the adoption of a common currency; and, (2) those that assume that a monetary union alters an economy’s structure, resulting in trade creation and credibility gains. The literature review suggests that a relative-small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprised of all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g., fiscal balances) in the region, the potential losses (i.e., higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency.
    Keywords: South African Development Community; monetary union; optimum currency areas
    JEL: E42 E52 F36
    Date: 2008–04
  49. By: Morten Bech; James T. E. Chapman; Rod Garratt
    Abstract: We use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.
    Keywords: Payment, clearing, and settlement systems
    JEL: C11 E50 G20
    Date: 2008
  50. By: Donato Masciandaro (Paolo Baffi Centre, Bocconi University); Marc Quintyn (IMF Institute, International Monetary Fund)
    Abstract: We propose a path dependence approach to analyze the evolution of the financial supervisory architecture, focusing on the institutional role of the central bank, and then apply our framework to describe the institutional settings in a selected sample of countries. The policymaker who decides to maintain or reform the supervisory architecture is influenced by the existing institutional setting in a systematic way: the more the central bank is actually involved in supervision, the less likely a more concentrated supervisory regime will emerge, and vice versa (path dependence effect). We test the path dependence effect describing and evaluating the evolution and the present state of the architecture of six national supervisory regimes in South Eastern Europe (SEE): Albania, Bulgaria, Greece, Romania, Serbia and Turkey. The study of the SEE countries confirms the postulated role of the central bank in the institutional setting. In five cases the high involvement of the central bank in supervision is correlated with a multi–authority regime, while in one case a high degree of financial supervision unification is related with low central bank involvement.
    Keywords: Financial Supervision; Central Banks; Path Dependence; Political Economy; South Eastern Europe.
    JEL: G18 G28 E58
    Date: 2008–09
  51. By: Sophia Lazaretou (Bank of Greece)
    Abstract: This paper aims to trace the history of central banking in pre-WWII Greece. To this end, we first study the country’s financial structure and its process of financial development. Several indices of financial development have been assessed and their evolvement has been studied. The country’s financial development had passed through different stages. Financial depth had increased in the turn of the 19th century and expanded further in the 1920s. However, on the basis of behavioural indices, banks were shown to be poorly asset-liability managed. They were also suffered by capital adequacy and were highly leveraged. The analysis of the composition of money supply and its long run behaviour suggests that monetary base variations were the proximate determinants of money supply movements, whereas money multiplier had a minimum impact. Central banking in pre-WWII Greece is viewed with regard to the monetary policy strategy, the monetary policy implementation framework and state interventions. The balance sheet of the Bank of Greece reveals an excessive focus on the chosen monetary policy strategy of a currency peg. Domestic credit was controlled via liquidity-providing standing facilities, either discounts or advances. Moreover, Bank’s considerable involvement in government re-financing might indicate that state interventions were considerable.
    Keywords: Central banking; Financial intermediation; Money.
    JEL: E50 N23
    Date: 2008–07
  52. By: Milan Sojic (National Bank of Serbia); Ljiljana Djurdjevic (National Bank of Serbia)
    Abstract: In the first thirty years of its operations, key functions of the privileged National Bank of the Kingdom of Serbia (1884-1914) were those of a creditor of the economy, issuer of currency and banker to the government. The National Bank’s success in the performance of its functions was mainly determined by the state of government finances. Peace and stability are a prerequisite for economic development and when we look at Serbia’s history from 1884 to 1914, all we see is a chain of wars. In such circumstances, Serbia did make significant economic headway, and the National Bank did do its best to achieve the goal it was set up to perform – to promote trade and economic activity by providing credits.
    Keywords: National Bank of Serbia; Central banking; Central bank objectives; History of finance; Financial institutions; Monetary policy.
    JEL: E58 N13 N23
    Date: 2008–07
  53. By: George Virgil Stoenescu (National Bank of Romania); Elisabeta Blejan (National Bank of Romania); Brindusa Costache (National Bank of Romania); Adriana Iarovici Aloman (National Bank of Romania)
    Abstract: The paper looks at the National Bank of Romania’s issue of banknotes from 1880 through 1914, highlighting the developments in the notes’ cover, the channels whereby the central bank put its notes into circulation, as well as the behaviour of the issuing house during episodes of crisis. The narrative evidence reveals that the Bank had successfully managed its seignorage right and maintained a stable and trustworthy domestic currency that ensured the country’s economic development in line with the other European economies of the time.
    Keywords: Money circulation; Banknote issue; Cover stock; Mortgage notes; Gold standard
    JEL: N13 N23 E42 E52 G21
    Date: 2008–07
  54. By: Yuksel Gormez (Central Bank of Turkey)
    Abstract: The early stages of banking and finance in Turkey were one of its brightest periods, even though it was the toughest because of lack of capital and unfavourable initial conditions. The finance and banking conception was quite rational and potential crises were eliminated through careful choices. In the following years, boom and bust conditions dominated financial services provision with a crisis in every decade under different economic policy frameworks. Since 2001, European convergence has been leading the way and one may argue that Turkish banking and finance is ready for the challenges of the 21st century, supported by fast-increasing foreign participation that has increased capital adequacy ratios.
    Keywords: Money; Banking and finance; Turkey.
    JEL: E4 G1
    Date: 2008–07
  55. By: Luis Ignacio Jácome
    Abstract: This paper reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards. It finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike. Pouring central bank money into the financial system generally derailed monetary policy, fueled further macroeconomic unrest, and contributed to simultaneous currency crises, thereby aggravating financial instability. In contrast, when central bank money issuance was restricted and bank resolution was timely executed, financial disturbances were handled with less economic cost. However, this strategy worked provided appropriate institutional arrangements were in place, which highlights the importance of building a suitable framework for preventing and managing banking crises.
    Keywords: Working Paper , South America , Latin America , Central America , Central banks , Financial crisis , Banking crisis ,
    Date: 2008–05–29
  56. By: A. Prasad; Charles Frederick Kramer; Hélène Poirson
    Abstract: The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases.
    Keywords: India , Monetary policy , Globalization , Capital inflows , Economic conditions , Domestic liquidity , Liquidity management ,
    Date: 2008–05–22
  57. By: Víctor Olivo; Mercedes da Costa
    Abstract: By definition, fiscal dominance impedes the effective implementation of any monetary strategy aimed at controlling inflation. Economies that exhibit oil dominance-a situation in which oil exports largely affect the main macroeconomic indicators-may also exhibit fiscal dominance. However, in this case, the standard indicators used to gauge the presence of fiscal dominance may fail to give the appropriate signals. The main purpose of this paper is twofold: i) to present a simple framework to analyze fiscal dominance in oil exporting countries and ii) to test the hypothesis of the presence of oil dominance/fiscal dominance (OD/FD) in the case of Venezuela. Using VAR and VEC models it is possible to conclude that there is relevant evidence supporting the validity of the OD/FD hypothesis.
    Keywords: Venezuela, Republica Bolivariana de , Oil exporting countries , Oil exports , Monetary policy , Fiscal policy ,
    Date: 2008–06–12
  58. By: Olusanya E. Olubusoye; Rasheed Oyaromade
    Abstract: This study is motivated by the conviction that inflation entails sizeable economic and social costs, and controlling it is one of the prerequisites for achieving a sustainable economic growth. The study analyses the main sources of fluctuations in inflation in Nigeria. Using the framework of error correction mechanism, it was found that the lagged CPI, expected inflation, petroleum prices and real exchange rate significantly propagate the dynamics of inflationary process in Nigeria. The level of output was found to be insignificant in the parsimonious error correction model. Surprisingly, the coefficient of the lagged value of money supply was found to be negative and significant only at the 10% level. One of the major implications of this result is that efforts of the monetary regulating authorities to stabilize the domestic prices would continuously be disrupted by volatility in the international price of crude oil.
    Date: 2008–08
  59. By: Niko Hobdari
    Abstract: Tanzania's real effective exchange rate (REER) has depreciated sharply since end-2000, reversing the appreciation that took place in the second half of the 1990s. Single-country and panel data estimates, and the external sustainability approach, suggest that Tanzania's REER is currently modestly undervalued relative to its estimated equilibrium level. Looking forward, a modest trend appreciation of the equilibrium REER is expected, consistent with continued high GDP growth and an expected recovery in terms of trade. In addition, capital inflows to Tanzania could be significantly higher than currently expected, to take advantage of Tanzania's natural resources and strong policy framework. If so, these inflows would contribute to an additional appreciation by as much as 20 percent of the equilibrium REER.
    Keywords: Working Paper , Tanzania , Exchange rate depreciation , Exchange rates , Fiscal sustainability , Terms of trade , Capital inflows ,
    Date: 2008–05–30

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