|
on Central Banking |
| By: | Söderlind, Paul |
| Abstract: | Nominal and real U.S. interest rates (1997Q1-2008Q2) are combined with inflation expectations from the Survey of Professional Forecasters to calculate time series of risk premia. It is shown that survey data on inflation and output growth uncertainty, as well as a proxy for liquidity premia can explain a large amount of the variation in these risk premia. |
| Keywords: | break-even inflation; liquidity premium; Survey of Professional Forecasters |
| JEL: | E27 E47 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7250&r=cba |
| By: | Fernández-Villaverde, Jesús; Guerron-Quintana, Pablo A.; Rubio-Ramirez, Juan Francisco; Uribe, Martín |
| Abstract: | This paper shows how changes in the volatility of the real interest rate at which small open emerging economies borrow have a quantitatively important effect on real variables like output, consumption, investment, and hours worked. To motivate our investigation, we document the strong evidence of time-varying volatility in the real interest rates faced by a sample of four emerging small open economies: Argentina, Ecuador, Venezuela, and Brazil. We postulate a stochastic volatility process for real interest rates using T-bill rates and country spreads and estimate it with the help of the Particle filter and Bayesian methods. Then, we feed the estimated stochastic volatility process for real interest rates in an otherwise standard small open economy business cycle model. We calibrate eight versions of our model to match basic aggregate observations, two versions for each of the four countries in our sample. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, and hours worked, and a notable change in the current account of the economy. |
| Keywords: | DSGE Models; Small Open Economy; Stochastic Volatility |
| JEL: | C32 C63 F32 F41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7264&r=cba |
| By: | Monika Piazzesi; Martin Schneider |
| Abstract: | In the 1970s, U.S. asset markets witnessed (i) a 25% dip in the ratio of aggregate household wealth relative to GDP and (ii) negative comovement of house and stock prices that drove a 20% portfolio shift out of equity into real estate. This study uses an overlapping generations model with uninsurable nominal risk to quantify the role of structural change in these events. We attribute the dip in wealth to the entry of baby boomers into asset markets, and to the erosion of bond portfolios by surprise inflation, both of which lowered the overall propensity to save. We also show that the Great Inflation led to a portfolio shift by making housing more attractive than equity. Apart from tax effects, a new channel is that disagreement about inflation across age groups drives up collateral prices when credit is nominal. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:423&r=cba |
| By: | Monika Piazzesi; Martin Schneider |
| Abstract: | Common statistical measures of bond risk premia are volatile and countercyclical. This paper uses survey data on interest rate forecasts to construct subjective bond risk premia. Subjective premia are less volatile and not very cyclical; instead they are high, only around the early 1980s. The reason for the discrepancy is that survey forecasts of interest rates are made as if both the level and the slope of the yield curve are more persistent than under common statistical models. The paper then proposes a consumption based asset pricing model with learning to explain jointly the difference between survey and statistical forecasts, and the evolution of subjective premia. Adaptive learning gives rise to inertia in forecasts, as well as changes in conditional volatility that help understand both features. ; This paper is an extension of Monika Piazzesi's and Martin Schneider's work while they were in the Research Department of the Federal Reserve Bank of Minneapolis. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:424&r=cba |
| By: | Menzie D. Chinn (University of Wisconsin, Madison); Shang-Jin Wei (Columbia University) |
| Abstract: | The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation. |
| Keywords: | Floating Exchange Rate, Fixed Exchange Rate, Current Account Imbalances, Real Exchange Rates |
| JEL: | F3 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:122009&r=cba |
| By: | Aleksander Berentsen; Guido Menzio; Randall Wright |
| Abstract: | We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century |
| JEL: | E24 E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1501&r=cba |
| By: | Hans-Werner Wohltmann; Roland Winkler |
| Abstract: | This paper compares the welfare effects of anticipated and unanticipated cost-push shocks within the canonical New Keynesian model with optimal monetary policy. We find that, for empirically plausible degrees of nominal rigidity, the anticipation of a future cost-push shock leads to a higher welfare loss than an unanticipated shock. A welfare gain from the anticipation of a future cost shock may only occur if prices are sufficiently flexible. We show analytically that this result holds although unanticipated shocks lead to higher negative impact effects on welfare than anticipated shocks |
| Keywords: | Anticipated Shocks, Optimal Monetary Policy, Sticky Prices, Welfare Analysis |
| JEL: | E31 E32 E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1497&r=cba |
| By: | Michael Artis; Christian Dreger; Konstantin Kholodilin |
| Abstract: | We examine real business cycle convergence for 41 euro area regions and 48 US states. Results obtained by a panel model with spatial correlation indicate that the relevance of common business cycle factors is rather stable over the past two decades in the euro area and the US. Ongoing business cycle convergence often detected in cross-country data is not confirmed at the regional level. The degree of synchronization across the euro area is similar to that to be found for the US states. Thus, the lack of conver-gence does not seem to be an impediment to a common monetary policy. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:118&r=cba |
| By: | Francesco Drudi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Petra Köhler-Ulbrich (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco Protopapa (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Guido Wolswijk (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ramón Gómez Salvador (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Ruth Magono (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nico Valckx (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Elmar Stöss (Deutsche Bundesbank,Taunusanlage 5, D-60329 Frankfurt am Main, Germany.); Karin Wagner (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1011 Vienna, Austria.); Zoltan Walko (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1011 Vienna, Austria.); Marie Denise Zachary (Banque Nationale de Belgique, Boulevard de Berlaimont 14, B-1000 Brussels, Belgium.); Silvia Magri (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Laura Bartiloro (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Paolo Mistrulli (Banca d'Italia, Via Nazionale 91, I - 00184 Rome, Italy.); Yannis Asimakopoulos (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Vasilis Georgakopoulos (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Maria Kasselaki (Bank of Greece, 21, E. Venizelos Avenue, P. O. Box 3105, GR-10250 Athens, Greece.); Jorge Martínez Pagés (Banco de España, Alcalá 50, E-28014 Madrid, Spain.); Romain Weber (Banque centrale du Luxembourg, 2 boulevard Royal, L - 2983 Luxembourg, Luxembourg.); Christiana Argyridou (Central Bank of Cyprus, 80, Kennedy Avenue, CY-1076 Lekosia, Cyprus.); Wendy Zammit (Bank of Malta, Castille Place, Valetta, CMR 01, Malta.); Nuno Ribeiro (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon, Codex, Portugal.); Daniel Gabrielli (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Nicola Doyle (Central Bank of Ireland, Dame Street, IE Dublin 2, Ireland.); Harri Hasko (Suomen Pankki, P. O. Box 160, FIN-00101 Helsinki, FI.); Vesna Lukovic (Banka Slovenije, Slovenska 35, SL-1505 Ljubljana, SL.) |
| Abstract: | This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy. JEL Classification: D14, E44, E5, G21, R21. |
| Keywords: | bank competition, bank funding, bankruptcy, banks, cost of funding (of banks), cost of housing loans, debt service, ECB monetary policy, foreclosure, household debt, household survey, housing finance, insolvency, loan maturity, loan-to-value ratio, monetary policy transmission, mortgage, mortgage covered bond, mortgage equity withdrawal, mortgage interest rate spread, redemption scheme, rental market, retail deposits, securitisation, taxation, US housing market crisis. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20090101&r=cba |
| By: | Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alexis Meyer-Cirkel (Goethe-Universität Frankfurt am Main, Senckenberganlage 31, D-60325 Frankfurt am Main, Germany.); Daniel Santabárbara (Banco de Espana, Alcala 50, E-28014 Madrid, Spain.) |
| Abstract: | We construct, on the basis of an original methodology and database, composite indices to measure domestic financial development in 26 emerging economies, using mature economies as a benchmark. Twenty-two variables are used and grouped according to three broad dimensions: (i) institutions and regulations; (ii) size of and access to financial markets and (iii) market performance. This new evidence aims to fill a gap in the economic literature, which has not thus far developed comparable time series including both emerging and mature economies. In doing so, we provide a quantitative measure of the – usually considerable – scope for the selected emerging countries and regions to “catch up” in financial terms. Moreover, we find evidence that a process of financial convergence towards mature economies has already started in certain emerging economies. Finally, we conduct an econometric analysis showing that different levels of domestic financial development tend to be associated with the building up of external imbalances across countries. JEL Classification: F3, F4, G1, G2, E21, E22, C82. |
| Keywords: | Financial development, index construction, commodity and oil-exporting countries, G20, major emerging economies, financial catching up, global imbalances. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20090102&r=cba |
| By: | Muellbauer, John; Murata, Keiko |
| Abstract: | This paper documents the role of consumption in explaining the weak interest rate effect of monetary transmission in Japan. Economic theory suggests circumstances in which a rise in short term real interest rates can increase consumption, contrary to much conventional wisdom. This paper suggests that these circumstances are more likely to be prevalent in Japan and finds strong empirical evidence for a positive effect. Life-cycle theory also suggests that housing wealth effects on aggregate consumption including imputed rent are small and negative. Positive effects of the kind found in the UK and the US are due to the role of the credit channel. In countries where consumer access to credit is restricted, these restrictions can enhance the negative effect on consumption of higher house prices because saving for a housing deposit needs to be higher. Our evidence of a negative land price effect for Japan supports this hypothesis. We find no evidence of significant household credit market liberalization from a model for household debt in Japan. We also find evidence for a sizable negative effect on consumption from higher government deficits, suggesting fiscal policy also had limitations. These findings contribute to explanations of Japan's 'lost decade'. |
| Keywords: | interest rate effect on consumption; Japan's lost decade; Land prices and consumption; monetary transmission in Japan |
| JEL: | E21 E32 E44 E51 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7269&r=cba |
| By: | Troy Davig; Eric M. Leeper |
| Abstract: | Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. FWZ's multiple solutions rely on special assumptions about the correlation structure between fundamental shocks and policy regimes, blurring the distinction between "deep" parameters that govern behavior and the parameters that govern the exogenous shock processes, and making it difficult to ascribe any economic interpretation to FWZ's solutions. |
| JEL: | C62 E31 E52 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14919&r=cba |
| By: | Reuven Glick (Federal Reserve Bank of San Francisco); Michael Hutchison (University of California, Santa Cruz) |
| Abstract: | In recent years China has faced an increasing trilemma¡Xhow to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its goods and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth. We estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth lead to less inflation pressure even with a substantial buildup in international reserves. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:252008&r=cba |
| By: | Philip R. Lane; Jay C. Shambaugh |
| Abstract: | A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios. |
| JEL: | F31 F32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14909&r=cba |
| By: | Jim Malley; Ulrich Woitek |
| Abstract: | This paper contributes to the on-going empirical debate regarding the role of the RBC model and in particular of technology shocks in explaining aggregate fluctuations. To this end we estimate the model’s posterior density using Markov-Chain Monte-Carlo (MCMC) methods. Within this framework we extend Ireland’s (2001, 2004) hybrid estimation approach to allow for a vector autoregressive moving average (VARMA) process to describe the movements and co-movements of the model’s errors not explained by the basic RBC model. The results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model’s fit relative to the VAR and AR alternatives. Moreover, despite setting the RBC model a more difficult task under the VARMA specification, our analysis, based on forecast error and spectral decompositions, suggests that the RBC model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post-war U.S. economy. |
| Keywords: | Real Business Cycle, Bayesian estimation, VARMA errors |
| JEL: | C11 C52 E32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_15&r=cba |
| By: | Schmitz, Birgit; von Hagen, Jürgen |
| Abstract: | While the current account of euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries and show that these net flows follow differences in per-capita incomes. Our results show that the elasticity with respect to per-capita incomes of net capital flows between euro-area countries and the euro area has increased. This is not the case for net capital flows between non-euro area countries and the euro area, nor for euro-area countries and the rest of the world. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has lead to some financial diversion. |
| Keywords: | Current Account Imbalances; European Monetary Union; Financial Integration |
| JEL: | F21 F33 F34 F36 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7262&r=cba |
| By: | Michael B Devereux (University of British Columbia, Canada); Alan Sutherland (University of St Andrews, UK) |
| Abstract: | Since the crises of the late 1990's, most emerging market economies have built up substantial positive holdings of US dollar treasury bills, while at the same time experiencing a boom in FDI capital inflows. This paper develops a DSGE model of the interaction between an emerging market economy and an advanced economy which incorporates two-way capital flows between the economies. The novel aspect of the paper is to make use of new methods for analyzing portfolio choice in DSGE models. We compare a range of alternative financial market structures, in each case computing equilibrium portfolios. We find that an asymmetric configuration where the emerging economy holds nominal bonds and issues claims on capital (FDI) can achieve a considerable degree of international risk-sharing. This risk-sharing can be enhanced by a more stable monetary policy in the advanced economy. |
| Keywords: | Country Portfolios, Emerging Markets |
| JEL: | E52 E58 F41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:082009&r=cba |
| By: | Ranaldo, Angelo; Söderlind, Paul |
| Abstract: | We study high-frequency exchange rate movements over the sample 1993-2007. We document that the (Swiss) franc, euro, Japanese yen and the pound tend to appreciate against the U.S. dollar when (a) S&P has negative returns; (b) U.S. bond prices increase; and (c) when currency markets become more volatile. In these situations, the franc appreciates also against the other currencies, while the pound depreciates. The safe haven properties correspond to the carry trader's losses. They materialize over different time granularities (from a few hours to several days), during both "ordinary days" and crisis episodes and show some non-linear features. |
| Keywords: | crisis episodes; high-frequency data; non-linear effects |
| JEL: | F31 G15 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7249&r=cba |
| By: | Hicks, Bruce; Kilian, Lutz |
| Abstract: | Recently developed structural models of the global crude oil market imply that the surge in the real price of oil between mid-2003 and mid-2008 was driven by repeated positive shocks to the demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging Asia. This note evaluates this proposition using an alternative data source and a different econometric methodology. Rather than inferring demand shocks from an econometric model, we utilize a direct measure of global demand shocks based on revisions of professional real GDP growth forecasts. We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline. |
| Keywords: | Demand; EIU; Forecast Revisions; Global Real Activity; News; Oil price; Shocks |
| JEL: | C42 C53 Q43 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7265&r=cba |
| By: | Rudiger von Armin (New School for Social Research, New York, NY) |
| Keywords: | housing crisis; credit crisis |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:epa:cepawp:2008-4&r=cba |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Following Fuhrer and Moore (1995), several authors have proposed alternative mechanisms to ‘hardwire’ inflation persistence into macroeconomic models, thus making it structural in the sense of Lucas (1976). Drawing on the experience of the European Monetary Union, of inflation-targeting countries, and of the new Swiss monetary policy regime, I show that, in the Phillips curve models proposed by Fuhrer and Moore (1995), Gali and Gertler (1999), Blanchard and Gali (2007), and Sheedy (2007), the parameters encoding the ‘intrinsic’ component of inflation persistence are not invariant across monetary policy regimes, and under the more recent, stable regimes they are often estimated to be (close to) zero. In line with Cogley and Sbordone (2008), I explore the possibility that the intrinsic component of persistence many researchers have estimated in U.S. post-WWII inflation may result from failure to control for shifts in trend inflation. Evidence from the Euro area, Switzerland, and five inflation-targeting countries is compatible with such hypothesis. JEL Classification: E30, E32. |
| Keywords: | New Keynesian models, inflation persistence, Bayesian estimation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901038&r=cba |
| By: | David Laidler (C.D. Howe Institute) |
| Abstract: | To encourage new growth in the Canadian economy, the Bank of Canada should be actively irrigating financial markets with a growing money supply. Recovery needs support from the continued credibility of the Bank’s 2 percent inflation target – but there are signs that this credibility is fading over short time horizons, dampening low interest rates’ positive effect on spending. |
| Keywords: | monetary policy, Bank of Canada, money supply growth |
| JEL: | E52 E58 E51 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:77&r=cba |
| By: | Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper sheds new light on the external and domestic dimension of China’s exchange rate policy. It presents an open economy model to analyse both dimensions of macroeconomic adjustment in China under both flexible and fixed exchange rate regimes. The model-based results indicate that persistent current account surpluses in China cannot be rationalized, under general circumstances, by the occurrence of permanent technology or labour supply shocks. As a result, the understanding of the macroeconomic adjustment process in China requires to mimic the effects of potential inefficiencies, which induce the subdued response of domestic absorption to permanent income shocks causing thereby the observed positive unconditional correlation of trade balance and output. The paper argues that these inefficiencies can be potentially seen as a by-product of the fixed exchange rate regime, and can be approximated by a stochastic tax on domestic consumption or time varying transaction cost technology related to money holdings. Our results indicate that a fixed exchange regime with financial market distortions, as defined above, might induce negative effects on GDP growth in the medium-term compared to a more flexible exchange rate regime. JEL Classification: E32, E62. |
| Keywords: | DSGE modelling, China, current account. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901040&r=cba |
| By: | Yu Sheng (The Australian National University); Xinpeng Xu (The Hong Kong Polytechnic University) |
| Abstract: | We extend the classic Balassa-Samuelson model to an environment with search unemployment. We show that the classic Balassa-Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market rigidities affects the strength of the structural relationship between real exchange rate and sectoral productivity and in some circumstances, the standard Balassa-Samuelson effect may not hold. Empirical evidence supports our theory: controlling for the difference in labor market rigidities across countries provides a better fit in estimating the Balassa-Samuelson effect. |
| Keywords: | The Balassa-Samuelson Model, Search Unemployment, Labor Market Rigidities |
| JEL: | F16 F31 J64 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:092009&r=cba |
| By: | Aymen Belgacem |
| Abstract: | The aim of this paper is to study the impact of macroeconomic announcements on asset prices, with the objectives of both measuring the average response of stock returns to macroeconomic news surprises, and explaining the sources of such a reaction. To assess the importance of scheduled French and US macroeconomic announcements, Stock returns are analyzed on the French stock market. It is shown that, according to previous studies, there is little evidence of the reaction of the market to those surprises. News about inflation, U.S consumption and real economic activity are specially expected by investors. It confirms the leading role of the U.S. economy and in particular of U.S. consumers in determining the development of the world economy and the dynamics of stock markets. Results also show that unexpected positive surprise in the unemployment rate causes a cut on future excess returns and future dividends. The opposite reaction is observed from the housing starts indicator. The consumer price index appears to have an impact not only on future excess returns, but also on future real interest rates. |
| Keywords: | Asset Prices; Macroeconomic Announcements, Event-Study |
| JEL: | E44 G14 G12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2009-16&r=cba |
| By: | Pierre L. Siklos (Department of Economics, Wilfrid Laurier University and Viessman Research Centre); Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | The degree to which explicit inflation targets contribute to the success of price stabilization policies has not been conclusively established. To assess the impact of announced inflation targets on the effectiveness of monetary policy, we construct indicators of inflation pressure that allow us to characterize the impact and effectiveness of monetary policy quantitatively. We examine the records of three inflation targeting economies, Australia, Canada, and New Zealand, and compare them to the US. We find that the inflation targeting countries have substantially lower inflation pressure and that inflation targeting reduces the size of interest rate changes needed to moderate inflation. |
| Keywords: | Inflation targeting, monetary policy, inflation pressure, stabilization policy |
| JEL: | E50 E58 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0906&r=cba |
| By: | Riccardo DiCecio; Edward Nelson |
| Abstract: | Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom's monetary policy options using a structural open-economy model. We use the Erceg, Gust, and L¢pez-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending. |
| Keywords: | Monetary policy - European Union countries ; Monetary policy - Great Britain ; Great Britain |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-12&r=cba |
| By: | Stefan Ried |
| Abstract: | In this paper, the following question is posed: Can the New Keynesian Open Economy Model by Galí and Monacelli (2005b) explain “Six Major Puzzles in International Macroeconomics”, as documented in Obstfeld and Rogoff (2000b)? The model features a small open economy with complete markets, Calvo sticky prices and monopolistic competition. As extensions, I explore the effects of an estimated Taylor rule and additional trade costs. After translating the six puzzles into moment conditions for the model, I estimate the five most effective parameters using simulated method of moments (SMM) to fit the moment conditions implied by the data. Given the simplicity of the model, its fit is surprisingly good: among other things, the home bias puzzles can easily be replicated, the exchange rate volatility is formidably increased and the exchange rate correlation pattern is relatively close to realistic values. Trade costs are one important ingredient for this finding. |
| Keywords: | International Macroeconomics, New Keynesian open economy model, trade costs, simulated method of moments (SMM) |
| JEL: | F41 F42 E52 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-020&r=cba |
| By: | Thomas Y. Mathä (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.); Olivier Pierrard (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.) |
| Abstract: | We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is procyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions. JEL Classification: E10, E31, E32. |
| Keywords: | Business cycle, Frictions, Product market, Price bargain. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901036&r=cba |
| By: | Çelik, Sadullah; Deniz, Pınar |
| Abstract: | It has been a long debate whether Fed Funds target interest rate (FFTR) has significant explanatory power on interest rates in other countries. In this paper, we analyze the effects of FFTR on Bank of England (BOE) bank rate and European Central Bank (ECB) key interest rate employing-the rather new and trustworthy technique of-Bounds testing developed by Pesaran (2001). Our empirical results are consistent with a priori expectations as BOE and ECB interest rates are highly dependent on FFTR. This finding can be interpreted as a clear signal of how globally tight-knit the world currencies have been. Moreover, it emphasizes the importance of US dollar as the world currency and rather serves as an argument against alternative global currency propositions. |
| Keywords: | Interest Rates; Monetary Policy; Bounds Testing |
| JEL: | E43 F15 F42 E52 F41 E44 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14750&r=cba |
| By: | Jean Imbs (HEC Lausanne); Isabelle Mˆmjean (Ecole Polytechnique) |
| Abstract: | Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, but substantially larger in disaggregated microeconomic studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify elasticities of substitution in US goods. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 5 - with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy. |
| Keywords: | Trade Elasticities, Aggregation, Calibration, Global Imbalances, International Transmission, International Portfolio, Monetary Policy |
| JEL: | F41 F32 F21 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:242008&r=cba |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | In this paper we specify a multi-factor long-memory process that enables us to estimate the fractional differencing parameters at each frequency separately, and adopt this framework to model quarterly prices in three European countries (France, Italy and the UK). The empirical results suggest that inflation in France and Italy is nonstationary. However, while for the former country this applies both to the zero and the seasonal frequencies, in the case of Italy the nonstationarity comes exclusively from the long-run or zero frequency. In the UK, inflation seems to be stationary with a component of long memory at both the zero and the semi-annual frequencies, especially at the former. |
| Keywords: | Fractional Integration, Long Memory, Inflation |
| JEL: | C22 O40 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp879&r=cba |
| By: | Robert Dekle; Kyoji Fukao |
| Abstract: | In this paper, we focus on the movements of the yen on Japanese industries, and on the sectoral reallocation of Japanese employment. We show that the appreciation episodes of 1985 and 1995 have significantly hurt the ability of Japanese industries to compete with U.S. industries, by raising the relative production costs of Japanese industries. This relative cost gap with U.S. industries narrowed from 1995, owing to faster wage growth in the U.S., and especially to higher productivity growth in some Japanese industries. In fact, in these high productivity Japanese manufacturing industries such as chemicals and transport equipment, relative production costs were essentially back to pre-1985, pre-Plaza Accord levels by 2004. In contrast, the relative production costs of Japanese low productivity manufacturing industries such as textiles and wood products have remained high. Clearly, in the aggregate, the appreciation of the yen was not matched by an increase in Japanese productivity. What then is the appreciation of the aggregate real exchange rate consistent with these Japan-U.S. differences in industrial productivities? To answer this question, we build a three-sector (high productivity manufacturing, low productivity manufacturing, and services) equilibrium macroeconomic-trade model of Japan and the U.S. We find that while the yen was gundervaluedh before 1985, it was significantly govervaluedh after 1985, and especially since 1995. In our model simulations, the Balassa-Samuelson effect is observed: the equilibrium real exchange rate is appreciating over time, owing to strong relative growth in the Japanese high productivity manufacturing sector, but very poor relative productivity growth in the Japanese services sector. Interestingly, the continued appreciation of the equilibrium real exchange rate meant that the actual real exchange rate was near its equilibrium value by 2003-2004, when the nominal yen dollar rate was about 120 yen to the dollar. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd08-047&r=cba |
| By: | Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Keith Kuester (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behaviour and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy. JEL Classification: E32, E52, J64, C11. |
| Keywords: | Labor Market, wage rigidity, bargaining, Bayesian estimation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901035&r=cba |
| By: | Bork, Lasse (Department of Business Studies, Aarhus School of Business) |
| Abstract: | Economy-wide e¤ects of shocks to the US federal funds rate are estimated in a state space model with 120 US macroeconomic and financial time series driven by the dynamics of the federal funds rate and a few dynamic factors. This state space system is denoted a factor-augmented VAR (FAVAR) by Bernanke et al. (2005). I estimate the FAVAR by the fully parametric one-step EM algorithm as an alternative to the two-step principal component method and the one-step Bayesian method in Bernanke et al. (2005). The EM algorithm which is an iterative maximum likelihood method estimates all the parameters and the dynamic factors simultaneously and allows for classical inference. I demonstrate empirically that the same impulse responses but better fit emerge robustly from a low order FAVAR with eight correlated factors compared to a high order FAVAR with fewer correlated factors, for instance four factors. This empirical result accords with one of the theoretical results from Bai & Ng (2007) in which it is shown that the information in complicated factor dynamics may be substituted by panel information |
| Keywords: | monetary policy; large cross-sections; factor-augmented vector autoregression; EM algorithm; state space |
| Date: | 2009–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:aarbfi:2009-03&r=cba |
| By: | Yi Wen |
| Abstract: | This paper reconsiders the welfare costs of inflation and the welfare gains from financial intermediation in a heterogeneous-agent economy where money is held as a store of value (as in Bewley, 1980). The dynamic stochastic general equilibrium model recaptures some essential features of the liquidity-preference theory of Keynes (1930, 1936). Because of heterogeneous liquidity demand, transitory lump-sum money injections can have persistent expansionary effects despite flexible prices, and such effects can be greatly amplified by the banking system through the credit channel. However, permanent money growth can be extremely costly: With log utility functions, consumers are willing to reduce consumption by 15% (or more) to avoid a 10% annual inflation. For the same reason, financial intermediation can significantly improve welfare: The welfare costs of a collapse of the banking system is estimated as about 10-68% of aggregate output. These welfare implications differ dramatically from those of the existing literature. |
| Keywords: | Liquidity (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-19&r=cba |
| By: | Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks |
| Abstract: | This paper examines the interactions between money, consumer prices and commodity prices at a global level from 1970 to 2008. Using aggregated data for major OECD countries and a cointegrating VAR framework, we are able to establish long run and short run relationships among these variables while the process is mainly driven by global liquidity. According to our empirical findings, different price elasticities in commodity and consumer goods markets can explain the recently observed overshooting of commodity over consumer prices. Although the sample period is rather long, recursive tests corroborate that our CVAR fits the data very well. |
| Keywords: | Commodity prices, cointegration, CVAR analysis, global liquidity,inflation, international spillovers |
| JEL: | E31 E52 C32 F42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0102&r=cba |
| By: | Ansgar Belke; Niklas Potrafke |
| Abstract: | This paper examines the effect of government ideology on monetary policy in a quarterly data set of 15 OECD countries in the period 1980.1–2005.4. Our Taylor-rule specification focuses on the interactions of a new time-variant indicator for central bank independence and government ideology. The results suggest that leftist governments did not decrease short term nominal interest rates at all. In contrast, short term nominal interest rates were higher under leftist governments. A potential reason for this finding might be that leftist governments have sought to make a market-oriented policy shift by delegating monetary policy to conservative central bankers. |
| Keywords: | Monetary policy, Taylor rule, government ideology, partisan politics, central bank independence, panel data |
| JEL: | E52 E58 D72 C23 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0094&r=cba |
| By: | Strawczynski, Michel; Zeira, Joseph |
| Abstract: | This paper examines the optimal reaction of fiscal policy to permanent and transitory shocks to output in a model of tax and public consumption smoothing. The model predicts that optimal reaction of public expenditures and deficits to transitory shocks should be countercyclical, while optimal reaction to permanent shocks should be a-cyclical. Using the Blanchard and Quah (1989) methodology for identifying permanent and transitory shocks, we test these predictions for a sample of 22 OECD countries over the years 1963-2006. We find that both expenditures and deficits are countercyclical to transitory shocks, mainly through public transfers and mainly in recessions. We find that government investment is pro-cyclical with respect to permanent shocks, but total expenditures are not. |
| Keywords: | Business Cycles; Fiscal Policy; Permanent and Transitory Shocks |
| JEL: | E32 E61 E62 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7271&r=cba |
| By: | James Yetman (Bank for International Settlements) |
| Abstract: | It is generally believed that prices in Hong Kong are flexible. If this received wisdom is correct then the Currency Board system, which precludes a nominal exchange rate adjustment in response to macroeconomic shocks, may have little macroeconomic cost. However, this belief in price flexibility is based on very little empirical evidence. In this paper, we seek to rectify this in a study the behaviour of sub-indices of the Hong Kong Consumer Price Index. We compare estimated moments in the data against the predictions of models based on flexible prices, capacity constraints, rational inattention, and menu costs. We find evidence in favour of flexible prices. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:052009&r=cba |
| By: | Yin-wong Cheung (University of California, Santa Cruz); Clement Yuk-pang Wong (City University of Hong Kong) |
| Abstract: | Using available annual data of 174 economies since 1957, we examine the similarities and differences of seven international reserve ratios. While individual international reserve ratios display substantial variations across economies, they are associated with an economy's characteristics including geographic location, income level, stage of development, degree of indebtedness, and exchange rate regime. The association pattern varies across time and type of international reserve ratios. Interestingly, there is only limited evidence that Asian and non-Asian economies have significantly different international reserve hoarding behavior. Our results suggest that the inference about whether an economy is hoarding too many or too few international reserves depends on the choice of international reserve ratio. Further, different international reserve ratios exhibit different persistence profiles, but the evidence of dependence on structural characteristics is rather weak. |
| Keywords: | International Reserve Ratios, Structural Characteristics, Cross-Economy Analysis |
| JEL: | F30 F40 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:132008&r=cba |
| By: | Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arthur Saint-Guilhem (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper aims at assessing the role of the United States in the global economy and its evolution over time. The emergence of large economic players, like China, is likely to have weakened the role of the U.S. economy as a driver of global growth. Based on a Global VAR modelling approach, this paper shows first that the transmission of U.S. cyclical developments to the rest of the world tends to fluctuate over time but remains large overall. Second, although the size of the spillovers might have decreased in the most recent periods, the effects of changes in U.S. economic activity seem to have become more persistent. Actually, the increasing economic integration at the world level is likely to have fostered second-round and third-market effects, making U.S. cyclical developments more global. Finally, the slightly decreasing role of the U.S. has been accompanied by an increasing importance of third players. Regional integration might have played a significant role by giving more weights to non-U.S. trade partners in the sensitivity of the various economies to their international environment. JEL Classification: E32, E37, F41. |
| Keywords: | International transmission of shocks, Business cycle, Global VAR (GVAR). |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901034&r=cba |
| By: | Calderon, Cesar; Kubota, Megumi |
| Abstract: | The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis. |
| Keywords: | Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Conditions and Volatility |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4896&r=cba |
| By: | Soyoung Kim (Korea University); Jaewoo Lee (International Monetary Fund) |
| Abstract: | This paper investigates international macroeconomic fluctuations in light of NOEM (New Open Economy Macroeconomics) models. A model with four major economic disturbances (technology shocks, labor supply shocks, preference shocks, and nominal shocks) is analytically solved to derive theoretical long-run identification restrictions. These restrictions are used to estimate a structural VAR model for the three largest economies (the U.S., the Euro Area, and Japan) over the post Bretton Woods period. The main findings are: (1) the signs of the dynamic responses are mostly consistent with theoretical predictions; (2) supply-side shocks (technology and labor supply shocks) explain most of the fluctuations in cross-country output deviations; (3) preference shocks are the dominant source of real exchange rate fluctuations; and (4) productivity shocks played a prominent role in the recent global imbalances (large U.S. external deficit), while the current account has usually been influenced by all four shocks, with no single shock dominant in all periods. |
| Keywords: | New Open Economy Macroeconomics, Structural VAR |
| JEL: | F4 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:232008&r=cba |
| By: | Roberta Colavecchio (Hamburg University); Michael Funke (Hamburg University) |
| Abstract: | This paper estimates switching autoregressive conditional heteroskedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China¡¦s currency forwards markets upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes. |
| Keywords: | China, Renminbi, Asia, Forward Exchange Rates, Non-Deliverable Forward Market, SWARCH Models |
| JEL: | C22 F31 F36 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112009&r=cba |
| By: | Kang Shi (The Chinese University of Hong Kong); Juanyi Xu (Hong Kong University of Science and Technology) |
| Abstract: | This paper explores the determination of the optimal currency basket in a small open economy general equilibrium model with sticky prices. In contrast to traditional literature, we focus on an economy with vertical trade, where one currency is used as the invoicing currency of imported intermediate goods and is called the "input currency", while the other currency is used for the invoicing of exported finished goods and is called the "output currency". We find that in the optimal currency basket the weight between the input currency and the output currency depends critically on the structure of vertical trade. Moreover, we show that if a country decides to choose a single-currency peg, then the choice of pegging currency depends mainly on how other economies respond to external exchange rate fluctuations. In a sense, our paper provides a case for the Chinese RMB peg in some East Asian economies, given the importance of the RMB as an input currency. |
| Keywords: | Input Currency, Output Currency, Currency Basket Peg, Welfare |
| JEL: | F3 F4 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:172008&r=cba |
| By: | Bonpasse, Morrison |
| Abstract: | Abstract This is the 2008 Edition of one of only two book in print in the world about the Single Global Currency, and is the only book in the world priced in 141 currencies (down from 147 in the 2006 edition.).This number is significant, as it's the number of currencies required among the 192 U.N. members to conduct local business, including the payment of taxes. The book describes the origins of the current worldwide foreign exchange system, and tells how to change it; and save the world - trillions. The multicurrency foreign exchange trading system was developed about 2,500 years ago to enable people of different currency areas to trade. That system has become far more sophisticated in the meantime and handles $3.8 trillion per day; but it is very expensive and risky. It is now time to replace that system with a single global currency. In a 3-G world with a Single Global Currency managed by a Global Central Bank within a Global Monetary Union: - Annual transaction costs of $400 billion will be eliminated. - Worldwide asset values will increase by about $36 trillion. - Worldwide GDP will increase by about $9 trillion. - Global currency imbalances will be eliminated. - All Balance of Payments problems will be eliminated. - Currency crises will be prevented. - Currency speculation will be eliminated. - The need for foreign exchange reserves, with a current annual opportunity cost of approximately $470 billion, will be eliminated. - Worldwide interest rates will be lower than the current average due to the elimination of currency risk. Such gains are realistic and attainable if the world decides to pursue them. The monetary unions of Europe, the Caribbean, Africa and Brunei/Singapore have shown the way. What the people of the world want is sound, stable money and the end to the obsolete multicurrency foreign exchange system. A Single Global Currency is no longer a utopian dream, but a realistic projection of what has been learned from current monetary unions, especially the euro. Each successive annual edition of this book will be priced in the remaining number of currencies until we reach, in the words of Nobel Prize winner, Robert Mundell, that odd number, preferably less than three: one The world needs to set the goal of a Single Global Currency, to be managed by a Global Central Bank, within a Global Monetary Union, and begin planning - now. |
| Keywords: | single global currency; money; currency; monetary union; currency union; global monetary union; global central bank; global imbalances; current account; balance of payments; transaction charges; transaction costs; foreign exchange derivatives; foreign exchange; foreign exchange reserves; monetary reserves; gold; international monetary fund; SDR; special drawing rights; optimal currency area; OCA; Robert Mundell; John Stuart Mill; dollar; U.S. Dollar; USD; European Monetary Union; euro; European Central Bank; Single Global Currency Association; Bretton Woods; John Maynard Keynes; bancor; DEY; Geo; globo; eartha; dollarization; euroization; exchange rate; exchange rate regime; peg; float; James Tobin; currency crisis; International Monetary Fund; World Bank; Eastern Caribbean Monetary Union; West African Monetary Union; Central African Monetary Union; accession countries; Maastricht criteria; Maastricht Treaty; |
| JEL: | F02 F3 F31 F33 |
| Date: | 2009–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14756&r=cba |
| By: | Catherine R. Schenk (University of Glasgow) |
| Abstract: | Hong Kong is one of a few economies that operate a variation of a currency board as the basis of their monetary system. This system has persisted despite dramatic changes in the way that the international monetary system operates and despite changes in Hong Kong's political status. The currency board now faces new challenges with the greater flexibility in the RMB exchange rate and the recent depreciation of the USD that has been dramatically reversed as part of the global financial crisis of 2008. This paper examines how the operations of the Exchange Fund were adapted to react to an earlier period of international monetary disorder when the pegged exchange rate system of the 1950s and 1960s collapsed. Based on archival evidence from the HSBC Group Archive, the HSBC Asia Pacific Archive, the Bank of England, UK Treasury and UK Foreign Office, this paper examines how the core rule of issuing currency only against foreign exchange assets was abandoned in 1972. It presents new data on the accounts of the Exchange Fund for this period and describes minutes of the meetings of the Exchange Fund Advisory Committee. The evidence explores the 1972 decision in its longer term policy context and argues that it was the culmination of a series of alterations to the operation of the Exchange Fund during the collapse of the pegged exchange rate system from 1967 onward. The main argument is that the Hong Kong government's response to the crumbling of the international monetary system was to make the Exchange Fund operate as much more than a currency board well before 1972. In particular, it was used to provide forward cover for commercial banks but this proved especially costly in the volatile environment of the end of the global pegged exchange rate system, so that in 1974 the assets of the Exchange Fund fell to 77% of the note issue. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:022009&r=cba |