nep-cba New Economics Papers
on Central Banking
Issue of 2009‒10‒10
fifty-six papers chosen by
Alexander Mihailov
University of Reading

  1. Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model By Adolfson, Malin; Laseén, Stefan; Lindé, Jesper; Svensson, Lars E.O.
  2. Banking Crises and the Rules of the Game By Charles Calomiris
  3. How Effective is Fiscal Policy Response in Systemic Banking Crises? By Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
  4. Fiscal Stimulus with Spending Reversals By Giancarlo Corsetti; André Meier; Gernot Müller
  5. The financial crisis and sizable international reserves depletion: From 'fear of floating' to the 'fear of losing international reserves'? By Joshua Aizenman; Yi Sun
  6. International Evidence on Recovery from Recessions By Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
  7. How to Stop a Herd of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis By Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Yacine Aït-Sahalia; Natalia T. Tamirisa
  8. Rescuing Banks from the Effects of the Financial Crisis By Michele Fratianni; Francesco Marchionne
  9. Banking Crises and Crisis Dating: Theory and Evidence By Gianni De Nicoló; John H. Boyd; Elena Loukoianova
  10. Optimal Monetary and Fiscal Policy with Limited Asset Market Participation By Sven Jari Stehn
  11. The Real Effects of Financial Sector Risk By Alexander F. Tieman; Andrea M. Maechler
  12. Setting up a Sovereign Wealth Fund: Some Policy and Operational Considerations By Yinqiu Lu; Udaibir S. Das; Christian B. Mulder; Amadou N. R. Sy
  13. International Risk Sharing: Through Equity Diversification or Exchange Rate Hedging? By Charles Engel; Akito Matsumoto
  14. The Persistence of Capital Account Crises By David Hofman; Ruben Atoyan; Mauro Mecagni
  15. Deteriorating Public Finances and Rising Government Debt: Implications for Monetary Policy By Lillian Cheung; Chi-Sang Tam; Jessica Szeto
  16. A bayesian estimation of a DSGE model with financial frictions By Rossana Merola
  17. Liquidity, Innovation and Growth By Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
  18. In Search of Successful Inflation Targeting: Evidence from an Inflation Targeting Index By Yanliang Miao
  19. Country Experiences with the Introduction and Implementation of Inflation Targeting By Inci Ötker; Charles Freedman
  20. One Money, One Market - A Revised Benchmark By Theo S. Eicher; Christian Henn
  21. The Macroeconomic Performance of the Inflation Targeting Policy: An Approach Based on the Evolutionary Co-spectral Analysis By Zied Ftiti
  22. The Need for Special Resolution Regimes for Financial Institutions—The Case of theEuropean Union By Martin Cihák; Erlend Nier
  23. How large are the effects of tax changes? By Carlo Favero; Francesco Giavazzi
  24. Identification of Macroeconomic Factors in Large Panels By Lasse Bork; Hans Dewachter; Romain Houssa
  25. Monetary Policy and Real Wage Cyclicality By Chandarath Amarasekara; George Bratsiotis
  26. Balance of Payments Anti-Crises By Michael Kumhof; Isabel K. Yan
  27. "What Should Inflation Targeting Countries Do When Oil Prices Rise and Drop Fast?" By Nicoletta Batini; Eugen Tereanu
  28. On-Going versus Completed Interventions and Yen/Dollar Expectations - Evidence from Disaggregated Survey Data By Yushi Yoshida; Jan C. Rülke
  29. The Role of Transparency in the Conduct of Monetary Policy By Makoto Minegishi; Boris Cournède
  30. The Transmission of Financial Stress from Advanced to Emerging Economies By Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
  31. Financial Spillovers to Emerging Markets during the Global Financial Crisis By Heiko Hesse; Nathaniel Frank
  32. Are Hard Pegs Ever Credible in Emerging Markets? Evidence from the Classical Gold Standard By Kris James Mitchener; Marc D. Weidenmier
  33. When is the government spending multiplier large? By Lawrence Christiano; Martin Eichenbaum; Sergio Rebelo
  34. India’s Experience with Fiscal Rules: An Evaluation and The Way Forward By Alejandro Simone; Petia Topalova
  35. Fiscal Policy Rules for Oil-Producing Countries: A Welfare-Based Assessment By Wojciech Maliszewski
  36. UK Macroeconomic Forecasting with Many Predictors: Which Models Forecast Best and When Do They Do So? By Gary Koop; Dimitris Korobilis
  37. Euro Area Monetary Policy in Uncharted Waters By Emil Stavrev; Martin Cihák; Thomas Harjes
  38. Current Accounts in a Currency Union By Emil Stavrev; Jörg Decressin
  39. Modeling with Macro-Financial Linkages: Credit and Policy Shocks in Emerging Markets By Inci Ötker; Jaromir Benes; David Vávra
  40. Will they Sing the Same Tune? Measuring Convergence in the new European System of Financial Supervisors By Donato Masciandaro; Marc Quintyn; María Nieto
  41. Governance Practices at Financial Regulatory and Supervisory Agencies By Alicia Novoa; Steven A. Seelig
  42. Panacea, Curse, or Nonevent? Unconventional Monetary Policy in the United Kingdom By André Meier
  43. Macroeconomic Responses to Terms-of-Trade Shocks: A Framework for Policy Analysis for the Argentine Economy By Pelin Berkmen
  44. What Drives China's Interbank Market? By Nathaniel John Porter; TengTeng Xu
  45. Monetary Policy and Asset Prices in a Small Open Economy: A Factor-Augmented VAR Analysis for Singapore By Hwee Kwan Chow; Keen Meng Choy
  46. Stability of East Asian Currencies during the Global Financial Crisis By Junko Shimizu; Eiji Ogawa
  47. Estimating Default Frequencies and Macrofinancial Linkages in the Mexican Banking Sector By Rodolphe Blavy; Marcos Souto
  48. Monetary Policy and the Central Bank in Jordan By Samar Maziad
  49. Forecasting Inflation in Sudan By Kenji Moriyama; Abdul Naseer
  50. Requirements for Using Interest Rates as an Operating Target for Monetary Policy:The Case of Tunisia By Alexandre Chailloux; Alain Durré; Bernard Laurens
  51. Measures of Underlying Inflation in Sri Lanka By Magnus Saxegaard; Souvik Gupta
  52. The Gambia: Demand for Broad Money and Implications for Monetary Policy Conduct By Subramanian S. Sriram
  53. Broad Money Demand and Asset Substitution in China By Ge Wu
  54. Madagascar: A Competitiveness and Exchange Rate Assessment By Luc Eyraud
  55. Introducing the Euro as Legal Tender - Benefits and Costs of Eurorization for Cape Verde By Patrick A. Imam
  56. Monetary Model of Exchange Rate for Thailand: Long-run Relationship and Monetary Restrictions By Liew, Venus Khim-Sen; Baharumshah, Ahmad Zubaidi; Puah, Chin-Hong

  1. By: Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Laseén, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Division of International Finance); Svensson, Lars E.O. (Executive Board)
    Abstract: This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank’s empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
    Keywords: Optimal monetary policy; instrument rules; open-economy DSGE models; propagation of shocks; impulse responses; output gap; potential output
    JEL: E52 E58
    Date: 2009–08–01
  2. By: Charles Calomiris
    Abstract: When and why do banking crises occur? Banking crises properly defined consist either of panics or waves of costly bank failures. These phenomena were rare historically compared to the present. A historical analysis of the two phenomena (panics and waves of failures) reveals that they do not always coincide, are not random events, cannot be seen as the inevitable result of human nature or the liquidity transforming structure of bank balance sheets, and do not typically accompany business cycles or monetary policy errors. Rather, risk-inviting microeconomic rules of the banking game that are established by government have always been the key additional necessary condition to producing a propensity for banking distress, whether in the form of a high propensity for banking panics or a high propensity for waves of bank failures. Some risk-inviting rules took the form of visible subsidies for risk taking, as in the historical state-level deposit insurance systems in the U.S., Argentina’s government guarantees for mortgages in the 1880s, Australia’s government subsidization of real estate development prior to 1893, the Bank of England’s discounting of paper at low interest rates prior to 1858, and the expansion of government-sponsored deposit insurance and other bank safety net programs throughout the world in the past three decades, including the generous government subsidization of subprime mortgage risk taking in the U.S. leading up to the recent crisis. Other risk-inviting rules historically have involved government-imposed structural constraints on banks, which include entry restrictions like unit banking laws that constrain competition, prevent diversification of risk, and limit the ability to deal with shocks. Another destabilizing rule of the banking game is the absence of a properly structured central bank to act as a lender of last resort to reduce liquidity risk without spurring moral hazard. Regulatory policy often responds to banking crises, but not always wisely. The British response to the Panic of 1857 is an example of effective learning, which put an end to the subsidization of risk through reforms to Bank of England policies in the bills market. Counterproductive responses to crises include the decision in the U.S. not to retain its early central banks, which reflected misunderstandings about their contributions to financial instability in 1819 and 1825, and the adoption of deposit insurance in 1933, which reflected the political capture of regulatory reform.
    JEL: E5 E58 G2 N2
    Date: 2009–10
  3. By: Carlos Mulas-Granados; Emanuele Baldacci; Sanjeev Gupta
    Abstract: This paper studies the effects of fiscal policy response in 118 episodes of systemic banking crisis in advanced and emerging market countries during 1980-2008. It finds that timely countercyclical fiscal measures contribute to shortening the length of crisis episodes by stimulating aggregate demand. Fiscal expansions that rely mostly on measures to support government consumption are more effective in shortening the crisis duration than those based on public investment or income tax cuts. But these results do not hold for countries with limited fiscal space where fiscal expansions are prevented by funding constraints. The composition of countercyclical fiscal responses matters as well for output recovery after the crisis, with public investment yielding the strongest impact on growth. These results suggest a potential trade-off between short-run aggregate demand support and medium-term productivity growth objectives in fiscal stimulus packages adopted in distress times.
    Keywords: Banking crisis , Banking sector , Banks , Cross country analysis , Developed countries , Developing countries , Economic models , External shocks , Financial crisis , Fiscal analysis , Fiscal policy , Time series ,
    Date: 2009–07–29
  4. By: Giancarlo Corsetti; André Meier; Gernot Müller
    Abstract: The impact of fiscal stimulus depends not only on short-term tax and spending policies, but also on expectations about offsetting measures in the future. This paper analyzes the effects of an increase in government spending under a plausible debt-stabilizing policy that links current stimulus to a subsequent period of spending restraint. Accounting for such spending reversals brings an otherwise standard new Keynesian model in line with the stylized facts of fiscal transmission, including the crowding-in of consumption and the 'puzzle' of real exchange rate depreciation. Time series evidence for the U.S. supports the empirical relevance of spending reversals.
    Keywords: Consumption , Data analysis , Economic models , Fiscal policy , Fiscal stability , Government expenditures , Public debt , Real effective exchange rates , Real interest rates , Time series ,
    Date: 2009–05–21
  5. By: Joshua Aizenman; Yi Sun
    Abstract: This paper studies the degree to which Emerging Markets (EMs) adjusted to the global liquidity crisis by drawing down their international reserves (IR). Overall, we find a mixed and complex picture. Intriguingly, only about half of the EMs relied on depleting their international reserves as part of the adjustment mechanism. To gain further insight, we compare the pre-crisis demand for IR/GDP of countries that experienced sizable depletion of their IR, to that of courtiers that didn’t, and find different patterns between the two groups. Trade related factors (trade openness, primary goods export ratio, especially large oil export) seem to be much more significant in accounting for the pre-crisis IR/GDP level of countries that experienced a sizable depletion of their IR in the first phase of the crisis. These findings suggest that countries that internalized their large exposure to trade shocks before the crisis, used their IR as a buffer stock in the first phase of the crisis. Their reserves loses followed an inverted logistical curve – after a rapid initial depletion of reverses, they reached within 7 months a markedly declining rate of IR depletion, losing not more than one-third of their pre crisis IR. In contrast, for countries that refrained from a sizable depletion of their IR during the first crisis phase, financial factors account more than trade factors in explaining their initial level of IR/GDP. Our results indicate that the adjustment of Emerging Markets was constrained more by their fear of losing international reserves than by their fear of floating.
    JEL: F15 F31 F32 F42
    Date: 2009–10
  6. By: Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena
    Abstract: Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus and foreign aid can spur a rebound, with impacts that are asymmetrically stronger than in nonrecovery years. Real depreciation and the exchange rate regime also have asymmetric growth effects in a recovery year relative to other years of expansion. Recoveries are more sluggish in open economies, partly because fiscal policy is less effective than in closed economies.
    Keywords: Banking crisis , Business cycles , Concessional aid , Developed countries , Economic growth , Economic recession , Economic recovery , Emerging markets , Exchange rate regimes , External shocks , Fiscal policy , Monetary policy , Real effective exchange rates , Trade policy ,
    Date: 2009–08–05
  7. By: Jochen R. Andritzky; Andreas Jobst; Sylwia Barbara Nowak; Yacine Aït-Sahalia; Natalia T. Tamirisa
    Abstract: This paper examines the impact of macroeconomic and financial sector policy announcements in the United States, the United Kingdom, the euro area, and Japan during the recent crisis on interbank credit and liquidity risk premia. Announcements of interest rate cuts, liquidity support, liability guarantees, and recapitalization were associated with a reduction of interbank risk premia, albeit to a different degree during the subprime and global phases of the crisis. Decisions not to reduce interest rates and bail out individual banks in an ad hoc manner had adverse repercussions, both domestically and abroad. The results are robust to controlling for the surprise content of announcements and using alternative measures of financial distress.
    Date: 2009–09–21
  8. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche)
    Abstract: This paper examines government policies aimed at rescuing banks from the effects of the great financial crisis of 2007-2009. To delimit the scope of the analysis, we concentrate on the fiscal side of interventions and ignore, by design, the monetary policy reaction to the crisis. The policy response to the subprime crisis started in earnest after Lehman’s failure in mid September 2008, accelerated after February 2009, and has become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. We employ event study methodology to estimate the benefits of government interventions on banks and their shareholders. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets as cumulative abnormal rates of return over the selected window periods. General announcements tend to be associated with positive cumulative abnormal returns and specific announcements with negative ones. General announcements exert cross-area spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks. Our results are also sensitive to the information environment. Specific announcements tend to exert a positive impact on rates of return in the pre-crisis sub-period, when announcements are few and markets have relative confidence in the "normal" information flow. The opposite takes place in the turbulent crisis sub-period when announcements are the order of the day and markets mistrust the "normal" information flow. These results appear consistent with the observed reluctance of individual institutions to come forth with requests for public assistance.
    Keywords: announcements, financial crisis, rescue plans, undercapitalization
    JEL: G21 N20
    Date: 2009–06
  9. By: Gianni De Nicoló; John H. Boyd; Elena Loukoianova
    Abstract: Many empirical studies of banking crises have employed "banking crisis" (BC) indicators constructedusing primarily information on government actions undertaken in response to bank distress. Weformulate a simple theoretical model of a banking industry which we use to identify and constructtheory-based measures of systemic bank shocks (SBS). Using both country-level and firm-level samples, we show that SBS indicators consistently predict BC indicators based on four major BCseries that have appeared in the literature. Therefore, BC indicatorsactually measure lagged government responses to systemic bank shocks, rather than the occurrence of crises per se. We re-examine the separate impact of macroeconomic factors, bank market structure, deposit insurance, andexternal shocks on the probability of a systemic bank shocks and on the probability of governmentresponses to bank distress. The impact of these variables on the likelihood of a government responseto bank distress is totally different from that on the likelihood of a systemic bank shock.Disentangling the effects of systemic bank shocks and government responses turns out to be crucial inunderstanding the roots of bank fragility. Many findings of a large empirical literature need to be re-assessed and/or re-interpreted.
    Keywords: Banking crisis , Banking sector , Banks , Cross country analysis , Deposit insurance , Economic models , External shocks , Financial crisis ,
    Date: 2009–07–10
  10. By: Sven Jari Stehn
    Abstract: This paper characterises the jointly optimal monetary and fiscal stabilisation policy in a new Keynesian model that allows for consumers who lacking access to asset markets consume their disposable income each period. With full asset market participation, the optimal policy relies entirely on the interest rate to stabilise cost-push shocks and government expenditure is not changed. When asset market participation is limited, there is a case for fiscal stabilisation policy. Active use of public spending raises aggregate welfare because it enables a more balanced distribution of the stabilisation burden across asset-holding and non-asset-holding consumers. The optimal response of government expenditure is sensitive to the financing scheme and whether the policymaker has access to a targeted transfer that can directly redistribute resources between consumers.
    Keywords: Capital markets , Economic models , Financial assets , Fiscal policy , Government expenditures , Monetary policy , Stabilization measures ,
    Date: 2009–07–08
  11. By: Alexander F. Tieman; Andrea M. Maechler
    Abstract: This paper estimates the magnitude of key effects on the real economy from financial sector stress. We focus on the short-run feedback effect from market-based indicators of financial sector risk to the real economy through the credit channel, and estimate this effect on an economy-wide (macro) level, as well as on the level of individual large banks. Both estimates yield significant feedback effects of substantial magnitude. The estimates are consistent with other work in this area. Our results suggest that prudential supervision could be enhanced by taking into account the feedback effects of financial instability in the real economy. We also propose a way to integrate feedback effects into stress tests in order to improve realism and accuracy or macroeconomic stress scenarios, as well as a metric to interpret stress testing results.
    Keywords: Banks , Credit expansion , Economic models , European Union , Financial risk , Financial sector , Financial stability ,
    Date: 2009–09–15
  12. By: Yinqiu Lu; Udaibir S. Das; Christian B. Mulder; Amadou N. R. Sy
    Abstract: This paper offers a policy and operational "roadmap" to policymakers considering setting up an SWF. It should also be of interest to policymakers in countries where SWFs are already in place, to review their existing policies and operations. Finally, it offers an opportunity to identify areas where research in macroeconomics and finance should give further answers as to the adequacy of existing practice related to the setting up and management of SWFs, an area where practical considerations often lead theoretical research. For instance, policymakers should optimally consider both their sovereign assets and liabilities together with their macroeconomic objectives, when setting up an SWF.
    Keywords: Financial assets , Fiscal management , Fiscal policy , Fiscal stability , Investment , Investment policy , Public investment , Public sector savings , Reserves , Reserves adequacy , Sovereign wealth funds , Stabilization funds ,
    Date: 2009–08–24
  13. By: Charles Engel; Akito Matsumoto
    Abstract: Well-known empirical puzzles in international macroeconomics concern the large divergence of equilibrium outcomes for consumption across countries from the predictions of models with full risk sharing. It is commonly believed that these risk-sharing puzzles are related to another empirical puzzle-the home-bias in equity puzzle. However, we show in a series of dynamic models that the full risk sharing equilibrium may not require much diversification of equity portfolios when there is price stickiness of the degree typically calibrated in macroeconomic models. This conclusion holds under a range of assumptions about home bias in preferences, price setting as PCP or LCP, and with or without nominal wage stickiness as long as there is some price rigidity.
    Keywords: Asset prices , Bonds , Consumer goods , Domestic investment , Economic models , Exchange rates , Financial risk , Flexible pricing policy , Foreign exchange , Hedge funds , Price elasticity , Prices , Private investment , Stock prices ,
    Date: 2009–07–08
  14. By: David Hofman; Ruben Atoyan; Mauro Mecagni
    Abstract: This study contributes to the literature on capital account crises in two ways. First, our analysis of crisis episodes between 1994 and 2002 establishes a clear relationship between the persistence of crises, their complexity, and the intensity of movement of key macroeconomic variables. Second, we provide a systematic examination of the determinants of crisis duration. Our econometric analysis suggests that initial conditions and the external environment plays a key role in determining crisis persistence. The policy response also matters, but cannot offset a record of poor past policies. Overall, the results underscore the critical importance of crisis prevention efforts.
    Keywords: Capital account , Capital controls , Capital markets , Capital outflows , Data analysis , Economic models , Exchange rate regimes , External sector , Financial crisis , Fiscal policy , Monetary policy ,
    Date: 2009–05–20
  15. By: Lillian Cheung (Research Department, Hong Kong Monetary Authority); Chi-Sang Tam (Research Department, Hong Kong Monetary Authority); Jessica Szeto (Research Department, Hong Kong Monetary Authority)
    Abstract: The sharp rise in government debt in many major economies following the introduction of large fiscal stimulus measures during the global financial crisis of 2008-09 has triggered concerns over its impact on long-term interest rates and the potential negative consequences for future growth and inflation. This paper uses an error-correction model to assess the effect of growing government debt on long-term real interest rates by drawing on empirical evidence from the US. The results show that in the long run, a one-percentage-point increase in the federal debt-to-GDP ratio raises the equilibrium 10-year real US Treasury yield by about six basis points. We also discuss the economic consequences of a rise in the world long-term interest rates, and draw implications for longer-term growth and the conduct of monetary policy in the Asian economies.
    Keywords: Public debt, fiscal policy, monetary policy, long term interest rate, real interest rate, error-correction model
    JEL: E43 E47 E52 E62 H63
    Date: 2009–08
  16. By: Rossana Merola (Université Catholique de Louvain la neuve)
    Abstract: Episodes of crises that have recently plagued many emerging market economies have lead to a wide-spread questioning of the two traditional generations of models of currency crises. Distressed banking system and adverse credit-markets conditions have been pointed as sources of serious macroeconomics contractions, so introducing these imperfections into standard economic models can help to explain the more recent crises. This paper introduces financial frictions à la Bernanke Gertler and Gilchrist in a two-sector small open economy, suited to analyze an emerging country. The model is estimated on simulated data applying both Bayesian techniques and maximum likelihood method and comparing the results under the two di¤erent estimation procedures. First, I analyze the influence of the prior on the estimation outcomes. Results seems to confirm that one of the main advantages of Bayesian approach is the ability of providing a framework for evaluating fundamentally mis-specified models. Second, I test the sensitivity of estimation outcomes to the sample size, showing how, for large samples, results under Bayesian estimation converges asymptotically to those obtained applying maximum likelihood. A further extension would be to perform the estimation on historical data for an emerging economy that have recently experienced a financial crisis.
    Keywords: DSGE models, Bayesian estimation, financial accelerator
    JEL: E30 E44 F34 F41
    Date: 2009–10–01
  17. By: Aleksander Berentsen; Mariana Rojas Breu; Shouyong Shi
    Abstract: Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth. Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts.
    Keywords: Money; Growth; Innovation; Financial intermediation
    JEL: O4 E1 G00
    Date: 2009–09–24
  18. By: Yanliang Miao
    Abstract: In a first attempt to treat inflation targeting (IT) as a continuous variable, we construct IT subindices for 21 full-fledged ITers on three dimensions: flexibility, transparency, and explicitness. Comparing flexibility and transparency we find that (1) the impact of flexibility on both the mean and variation of inflation is more quadratic than that of transparency; (2) after adding the transparency index, the impact of flexibility is no longer significant. The significant and negative association between transparency and the level and variation of inflation is confirmed when we check for robustness by controlling for disinflation stage, subsampling, instrumental variable estimation, and principal component analysis (PCA).
    Keywords: Cross country analysis , Economic models , Inflation , Inflation rates , Inflation targeting , Monetary policy , Transparency ,
    Date: 2009–07–16
  19. By: Inci Ötker; Charles Freedman
    Abstract: This is the tenth chapter of a forthcoming monograph entitled, "On Implementing Full- Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It describes the experiences of a number of countries with the introduction and implementation of inflation targeting regimes. It discusses their motivation for introducing IT; how they fared in meeting the various conditions that some have argued are needed in advance of introducing IT; how they transitioned to a full-fledged IT framework and coordinated their preparations with other economic policies and reforms; the benefits they gained by adopting IT; the challenges they faced in implementation; and the lessons from their experiences.
    Keywords: Cross country analysis , Economic policy , Economic reforms , Inflation , Inflation targeting , Monetary policy ,
    Date: 2009–07–30
  20. By: Theo S. Eicher; Christian Henn
    Abstract: The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose's (2000) initial estimates suggested a tripling of trade and created a literature in search of "more reasonable" CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30-90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose's original benchmark, extend the dataset, and address Baldwin's (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.
    Keywords: Bilateral trade , Economic models , Markets , Monetary systems , Monetary unions , Trade integration , Trade relations ,
    Date: 2009–09–02
  21. By: Zied Ftiti (GATE-CNRS/ENS LSH, University of Lyon, France)
    Abstract: This paper proposes a new methodology to check the economic performance of a monetary policy and in particular the inflation targeting policy (ITP). The main idea of this work is to consider the ITP as economically efficient when it generates a stable monetary environment. The latter is considered as stable when a long-run equilibrium exists to which the paths of economic variables (inflation rate, interest rate and GDP growth) converge. The convergence of the variables’ paths implies that these variables are more predictable and implies a lower degree of uncertainty in the economic environment. To measure the degree of convergence between economic variables, we propose, in this paper, a dynamic time-varying variable presented in the frequency approach named cohesion. This variable is estimated from the evolutionary co-spectral theory as deï¬ned by Priestley and Tong (1973) and Priestley (1988-1996). We apply this theory to the measure of cohesion presented by Croux et al (2001) to obtain a dynamic time-varying measure. In the last step of the study, we apply the Bai and Perron test (1998-2003b) to determine the change in the cohesion path. The results show that the implementation of the ITP generates a high degree of convergence between economic series that implies less uncertainty into the monetary environment. We conclude that the inflation targeting generates a stable monetary environment. This result allows us to conclude that the ITP is relevant in the case of industrialized countries.
    Keywords: segregation, Inflation Targeting, Co-Spectral Analysis, Cohesion, Stability Environment, Economic Performance and Structural Change
    JEL: C16 E52 E63
    Date: 2009
  22. By: Martin Cihák; Erlend Nier
    Abstract: The global financial crisis has demonstrated weaknesses in resolution regimes for financial institutions around the globe, including in the European Union (EU). This paper considers the principles underlying resolution regimes for financial institutions, and draws out how a well-designed resolution regime can expand the toolset available for crisis management. Introducing, or in some cases expanding the scope, of these regimes is pressing to achieve more effective responses to ongoing financial sector weaknesses across the EU.
    Keywords: Bank resolution , Bank supervision , Bankruptcy , Banks , Credit risk , European Union , Financial institutions , Financial risk , Financial sector , Financial stability , Nonbank financial sector , Risk management ,
    Date: 2009–09–17
  23. By: Carlo Favero; Francesco Giavazzi
    Abstract: We use the time series of shifts in U.S. taxes constructed by Romer and Romer to estimate tax multipliers. Differently from the single-equation approach adopted by Romer and Romer, our estimation strategy (a Var that includes output, government spending and revenues, inflation and the nominal interest rate) does not rely upon the assumption that tax shocks are orthogonal to each other as well as to lagged values of other macro variables. Our estimated multiplier is much smaller: one, rather than three at a three-year horizon. When we split the sample in two sub-samples (before and after 1980) we find, before 1980, a multiplier whose size is never greater than one, after 1980 a multiplier not significantly different from zero. Following the findings in Bohn (1998), we also experiment with a model that includes debt and the non-linear government budget constraint. We find that, while in general not very important, the non-linearity that arises from the budget constraint makes a difference after 1980, when the response offiscal variables to the level of the debt becomes stronger.
    Date: 2009
  24. By: Lasse Bork (Finance Research Group, Aarhus School of Business, University of Aarhus and CREATES); Hans Dewachter (CES, University of Leuven, RSM Rotterdam and CESIFO.); Romain Houssa (CRED and CEREFIM, University of Namur, CES, University of Leuven)
    Abstract: This paper presents a dynamic factor model in which the extracted factors and shocks are given a clear economic interpretation. The eco- nomic interpretation of the factors is obtained by means of a set of over- identifying loading restrictions, while the structural shocks are estimated following standard practices in the SVAR literature. Estimators based on the EM algorithm are developped. We apply this framework to a large panel of US monthly macroeconomic series. In particular, we identify nine macroeconomic factors and discuss the economic impact of monetary pol- icy stocks. The results are theoretically plausible and in line with other findings in the literature.
    Keywords: Monetary policy, Business Cycles, Factor Models, EM Algorithm
    JEL: E3 E43 C51 E52 C33
    Date: 2009–09–01
  25. By: Chandarath Amarasekara; George Bratsiotis
    Abstract: Several recent studies highlight the potential bias that may arise in measuring real wage cyclicality. This paper points to the important role of monetary policy in determining the latter. Using a simple model that diverts its focus from relative nominal price and wage rigidities, we show that other things kept equal, the degree and direction of real wage cyclicality is determined by the interaction of (i) the returns to scale in production, (ii) the nature of aggregate shocks, and (iii) monetary policy. Given that production technology is fairly constant in the short run, we suggest that variations in the real wage-output covariance depend largely on the latter two. Empirical evidence from eight major OECD countries appears to be consistent with this claim.
    Date: 2009
  26. By: Michael Kumhof; Isabel K. Yan
    Abstract: Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation. This has been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation. We show that one way to understand these episodes is as manifestations of balance of payments anti-crises, as reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future. The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation.
    Keywords: Balance of payments , Current account surpluses , Data analysis , Economic models , Emerging markets , Exchange rate appreciation , Fiscal policy , Foreign exchange reserves , Inflation , Monetary policy , Reserves accumulation ,
    Date: 2009–07–06
  27. By: Nicoletta Batini; Eugen Tereanu
    Abstract: After a long period of global price stability, in 2008 inflation increased sharply following unprecedented increases in the price of oil and other commodities, notably food. Although inflation remained lower and growth higher in inflation targeting countries than elsewhere, almost everywhere price stability seemed in jeopardy as consumer prices kept surging and central banks struggled to maintain expectations anchored. The rapid drop in energy and food prices that later accompanied the world slowdown helped avert the worse, but inflation stayed high in many inflation targeting countries. This paper uses a small open-economy DSGE model to design the correct monetary policy response to a protracted supply shock of the kind observed today, and explains how to choose optimal policy horizons under such shock. Using a version of the model with Kalman learning, the paper also evaluates the implications of a loss of target credibility, showing how rules must be adjusted when the authorities' commitment to low inflation has been eroded. The appropriate response to future evolutions of the price of oil, including to a large downward correction as recently observed, is also evaluated.
    Keywords: Agricultural commodities , Agricultural prices , Central banks , Commodity price fluctuations , Consumer prices , Demand , Economic models , External shocks , Inflation , Inflation targeting , Monetary policy , Oil prices , Price stabilization ,
    Date: 2009–05–28
  28. By: Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University); Jan C. Rülke (Otto Beisheim School of Management, WHU)
    Abstract: This paper analyzes the effectiveness of Bank of Japan interventions between November 1995 and December 2004. We follow the methodology proposed by Fatum and Hutchison (2006) to determine the success of intervention by measuring prior and posterior exchange rate movements. Conditional on the successful intervention activities, we examine the impact of interventions on exchange rate expectations of market participants using the Foreign Exchange Consensus Forecasts poll in a panel data framework, rather than only focusing on sample average and variance of forecasts. Compared to the existing literature, which argues that interventions have, if at all, only very short-term effects on the exchange rate, we also find medium-term effects of interventions on exchange rate expectations.
    Keywords: Bank of Japan; Central bank intervention; Forecasts; Exchange rate expectations; Successful intervention
    JEL: F31 G15
    Date: 2009–10
  29. By: Makoto Minegishi; Boris Cournède
    Abstract: In contrast to the once prevailing norm of secrecy and opaqueness, transparency has now become one of the main features characterising the conduct of monetary policy. Detailed analysis of eleven OECD central banks shows that communication practices have converged markedly in the direction of ever greater transparency. Empirical evidence is consistent with the hypothesis that transparency contributes to the successful conduct of monetary policy: higher transparency is a typical element of monetary frameworks that are associated with better anchored inflation expectations and more stable inflation outcomes. Despite this general trend toward increased transparency, however, central banks differ in actual communication practices. There is a particular divergence with respect to transparency in the decision-making process and communication regarding future policy inclination. Although the appropriate degree of transparency in these areas is an unsettled issue, the fact that financial dislocation is impairing conventional monetary transmission makes these two areas critical for policy implementation.<BR>À rebours des habitudes de secrets et d’opacité qui ont pu prévaloir par le passé, la transparence constitue désormais un moyen essentiel de mise en œuvre de la politique monétaire. Une étude approfondie des pratiques de onze banques centrales de la zone OCDE confirme la convergence vers toujours plus de transparence. Les résultats empiriques sont cohérents avec l’hypothèse selon laquelle la transparence contribue à l’efficacité de la politique monétaire : en moyenne, les cadres de politique monétaire qui fournissent un meilleur ancrage des anticipations d’inflation et une inflation plus stable s’appuient sur un niveau plus élevé de transparence. Malgré une tendance générale vers davantage de transparence, les pratiques de communication diffèrent encore sensiblement d’une banque centrale à l’autre. Les divergences sont particulièrement marquées s’agissant de la transparence à propos des procédures de décision et de l’orientation future de la politique monétaire. Bien que le degré optimal de transparence sur ces deux sujets demeure un objet de débat, le fait que les troubles financiers actuels obèrent les canaux traditionnels de transmission de la politique monétaire donne à ces deux questions une importance toute particulière.
    Keywords: transparency, transparence, monetary policy, politique monétaire, inflation expectation, anticipation d'inflation, communication, communication
    JEL: E31 E50 E52 E58
    Date: 2009–09–25
  30. By: Irina Tytell; Selim Elekdag; Ravi Balakrishnan; Stephan Danninger
    Abstract: This paper studies how financial stress is transmitted from advanced to emerging economies, using a new financial stress index for emerging economies. An episode of financial stress is defined as a period when the financial system's ability to intermediate may be impaired. Previous financial crises in advanced economies passed through strongly and rapidly to emerging economies. In line with this pattern, the unprecedented spike in financial stress in advanced economies elevated financial stress across emerging economies above levels seen during the Asian crisis, but with significant cross-country variation. The extent of pass-through of financial stress is related to the depth of financial linkages between advanced and emerging economies. The paper finds that higher current account and fiscal balances do little to insulate emerging economies from the transmission of financial stress in advanced economies. However, they may help dampen the impact on the real sector of emerging economies and help reestablish financial stability and foreign capital inflows once financial stress subsides.
    Keywords: Banking crisis , Banking sector , Capital flows , Developed countries , Developing countries , Economic models , Emerging markets , Financial crisis , Financial risk , Spillovers , Transition economies ,
    Date: 2009–06–26
  31. By: Heiko Hesse; Nathaniel Frank
    Abstract: In this paper potential financial linkages between liquidity and bank solvency measures in advanced economies and emerging market (EM) bond and stock markets are analyzedduring the latest crisis. A multivariate GARCH model is estimated in order to gauge the extent of co-movements of these financial variables across markets. The findings indicate that the notion of possible de-coupling (in the financial markets) had been misplaced. While EM stock markets reached their peak in the last quarter of 2007, interlinkages between funding stress and equity markets in advanced economies and EM financial indicators were highly correlated and have seen sharp increases during specific crisis moments.
    Keywords: Banking sector , Bond markets , Capital markets , Cross country analysis , Developed countries , Developing countries , Economic models , Emerging markets , Financial crisis , Liquidity , Spillovers , Stock markets ,
    Date: 2009–05–20
  32. By: Kris James Mitchener; Marc D. Weidenmier
    Abstract: Using a new database of weekly sovereign debt prices of paper currency and pound sterling (or gold) denominated debt, we identify the currency-risk component of sovereign yield spreads for nine of the largest emerging market borrowers for the period 1870-1913. Five years after a country joined the gold standard, paper currency bonds traded at significantly higher interest rates (more than 400 basis points on average) than a country’s foreign currency debt denominated in pound sterling. Investors also expected exchange rates to fall by roughly 20 percent even after emerging market borrowers had joined the gold standard. The presence of persistent positive currency risk premiums long after gold standard adoption suggests that hard pegs for emerging market borrowers may never be fully credible.
    JEL: F2 F33 F36 F41 N10 N20
    Date: 2009–10
  33. By: Lawrence Christiano; Martin Eichenbaum; Sergio Rebelo
    Abstract: When the nominal interest rate is constant.
    JEL: E62
    Date: 2009–10
  34. By: Alejandro Simone; Petia Topalova
    Abstract: This paper examines India's experience with fiscal rules with a view to inform the design of a possible successor fiscal framework to the FRBMA. Among several proposals to strengthen the FRBMA, a framework that focuses medium-term fiscal policy on debt sustainability by the use of a medium term debt target, and annual nominal expenditure growth rules is proposed. This approach tackles the deficit bias at its core and enables countercyclical fiscal policy through automatic stabilizers. Numerical targets should be supported by structural reform measures for both revenues and expenditures, while the coverage of the fiscal rules should be expanded.
    Keywords: Debt sustainability , Fiscal management , Fiscal policy , Fiscal reforms , Fiscal sustainability , India , Public debt ,
    Date: 2009–08–13
  35. By: Wojciech Maliszewski
    Abstract: The paper presents numerical simulations of various fiscal rules for oil-producing countries. Welfare implications are sensitive to the choice of the social welfare function, initial conditions, and non-oil growth prospects. The distribution of non-oil wealth is important for countries with relatively low oil reserves. Corrections for adjustment costs and uncertainty with respect to oil prices should be applied carefully. While avoiding sharp changes in the fiscal policy stance may be appealing, it is not necessarily optimal if the initial position is unsustainable. Ad hoc rules are shown to perform poorly. The analysis abstracts from several issues critical for developing a practical policy advice and should not be treated as a complete framework.
    Keywords: Debt sustainability , Economic growth , Economic models , Fiscal policy , Fiscal sustainability , Nonoil sector , Oil prices , Oil producing countries , Oil revenues , Welfare ,
    Date: 2009–06–12
  36. By: Gary Koop (Department of Economics, University of Strathclyde); Dimitris Korobilis (Department of Economics, University of Strathclyde)
    Abstract: Block factor methods offer an attractive approach to forecasting with many predictors. These extract the information in these predictors into factors reflecting different blocks of variables (e.g. a price block, a housing block, a financial block, etc.). However, a forecasting model which simply includes all blocks as predictors risks being over-parameterized. Thus, it is desirable to use a methodology which allows for different parsimonious forecasting models to hold at different points in time. In this paper, we use dynamic model averaging and dynamic model selection to achieve this goal. These methods automatically alter the weights attached to different forecasting models as evidence comes in about which has forecast well in the recent past. In an empirical study involving forecasting output growth and inflation using 139 UK monthly time series variables, we find that the set of predictors changes substantially over time. Furthermore, our results show that dynamic model averaging and model selection can greatly improve forecast performance relative to traditional forecasting methods.
    Keywords: Bayesian, state space model, factor model, dynamic model averaging
    JEL: E31 E37 C11 C53
    Date: 2009–08
  37. By: Emil Stavrev; Martin Cihák; Thomas Harjes
    Abstract: We analyze the European Central Bank's (ECB's) response to the global financial crisis. Our results suggest that even during the crisis, the core part of ECB's monetary policy transmission-from policy rates to market rates-has continued to operate, but at a decreased efficiency. We also find some evidence that the ECB's non-standard measures, namely the lengthening of the maturity of monetary policy operations and the provision of funds at the fixed rate, reduced money market term spreads, facilitating the pass-through from policy to market rates. Furthermore, the results imply that the substantial increase in the ECB's balance sheet may have contributed to a reduction in government bond term spreads.
    Keywords: Central bank policy , Deflation , Economic models , European Monetary System , European Union , Financial crisis , Inflation , Liquidity controls , Monetary policy , Monetary transmission mechanism ,
    Date: 2009–08–31
  38. By: Emil Stavrev; Jörg Decressin
    Abstract: A fear about EMU was that in the absence of national currencies, country-specific shocks would result in greater current account divergences between member states. This paper finds that divergences across euro-area countries are smaller and have not risen relative to those across 13 other advanced economies with more flexible exchange rates. Also, the size of country-specific current account shocks in EMU countries is smaller and their persistence is greater than in the other advanced economies. However, these differences in current account dynamics do not appear related to different exchange rate dynamics.
    Keywords: Cross country analysis , Current account , Economic models , European Economic and Monetary Union , External shocks , Monetary unions , Real effective exchange rates , Regional shocks ,
    Date: 2009–06–17
  39. By: Inci Ötker; Jaromir Benes; David Vávra
    Abstract: This paper develops a stylized, small, open economy macro model that incorporates an explicit and non-trivial role for financial intermediation. It illustrates how such a model could be used for policy analysis in an emerging market economy where policymakers are concerned about risks associated with rapid credit growth, financial dollarization, and foreign borrowing, while lacking traditional tools to effect monetary policy transmission, and hence could resort to more direct instruments, such as foreign exchange market intervention and regulatory and administrative measures. Calibrating the model to a stylized emerging European economy, the paper simulates real and financial sector implications of various external and policy-related shocks that could be used as input for monetary policy making.
    Keywords: Banks , Central banks , Credit controls , Credit expansion , Credit risk , Dollarization , Economic models , Emerging markets , External borrowing , External shocks , Financial intermediation , Financial sector , Loans , Monetary policy ,
    Date: 2009–06–08
  40. By: Donato Masciandaro; Marc Quintyn; María Nieto
    Abstract: In June 2009 a new financial supervisory framework for the European Union (EU) was endorsed, consisting of a macro- and a micro-prudential pillar. The latter is composed of a Steering Committee, a supranational layer and a network of national supervisory authorities at the bottom, de facto establishing a complex multiple principals-multiple agents network. This paper focuses on the network of national agencies. Starting from an analysis of supervisory architectures and governance arrangements, we assess to what extent lack of convergence could undermine efficient and effective supervision. The main conclusion is that harmonization of governance arrangements towards best practice would better align supervisors' incentive structures and, hence, be beneficial for the quality of supervision.
    Keywords: Bank supervision , Banks , Budgetary policy , Central banks , Economic integration , European Union , Financial sector , Financial systems , Governance , Legislation , Monetary authorities , Transparency ,
    Date: 2009–07–10
  41. By: Alicia Novoa; Steven A. Seelig
    Abstract: This paper summarizes the results of a survey of financial supervisory agencies in IMF member countries conducted in 2007. Responses were received from 140 financial sector supervisors in 103 countries. A majority of these are separate stand-alone agencies, though, a majority of bank supervisors are part of a central bank. The survey asked respondents about their governance structure and practices, as well as practices and policies related to public transparency and accountability. Most agencies reported having operational independence. Bank supervisors were unique in viewing financial stability as part of their mandate.
    Keywords: Bank regulations , Bank supervision , Banks , Central banks , Financial sector , Governance , Monetary authorities , Transparency ,
    Date: 2009–05–28
  42. By: André Meier
    Abstract: The Bank of England's current "quantitative easing" strategy has given rise to a controversial debate about the effects and risks of unconventional monetary policy. The present paper makes two contributions to this debate. First, it provides a systematic overview of unconventional policy options, drawing from existing theoretical and empirical studies. Against this backdrop, it then analyzes the BoE's specific policies, discussing their effectiveness so far and putting them into a cross-country context. Tentative evidence on the BoE's quantitative easing is moderately encouraging, although the strategy is neither guaranteed to succeed nor as perilous as some of its detractors claim.
    Keywords: Asset management , Bonds , Capital markets , Central bank policy , Credit controls , Credit risk , Cross country analysis , Financial risk , Inflation , Interest rate policy , Liquidity management , Monetary policy , Risk management , United Kingdom ,
    Date: 2009–08–05
  43. By: Pelin Berkmen
    Abstract: This paper presents a version of the global integrated monetary fiscal (GIMF) model adapted and calibrated to the Argentine economy. The model replicates the effect of the strong improvement in Argentina's terms of trade stemming from higher world commodity prices as well as other key economic trends in Argentina during the period 2003-2007. The model can be used to assess the potential impact of different combinations of monetary and fiscal policies on output, inflation, and the external trade.
    Keywords: Argentina , Commodity prices , Demand , Economic models , External shocks , Fiscal policy , Inflation , International trade , Monetary policy , Price increases , Revenues , Terms of trade , Time series ,
    Date: 2009–05–29
  44. By: Nathaniel John Porter; TengTeng Xu
    Abstract: Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China's gradual process of interest rate liberalization. We argue, using a theoretical model and empirical analysis, that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy. Further interest rate liberalization should, therefore, strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.
    Keywords: Asset prices , Bank regulations , Banking sector , Bond markets , Capital markets , Central bank policy , China, People's Republic of , Economic models , Interest rates , Interest rates on deposits , Interest rates on loans , Liquidity , Monetary policy , Pricing policy ,
    Date: 2009–09–08
  45. By: Hwee Kwan Chow (School of Economics, Singapore Management University); Keen Meng Choy (School of Humanities and Social Sciences, Nanyang Technological University)
    Abstract: The ongoing global financial turmoil has revived the question of whether central bankers ought to tighten monetary policy preemptively in order to head off asset price misalignments before a sudden crash triggers financial instability. This study explores the issue of the appropriate monetary policy response to asset price swings in the small open economy of Singapore. Empirical analysis of monetary policy based on standard VAR models, unfortunately, is often hindered by the use of sparse information sets. To better reflect the extensive information monitored by Singapore’s central bank, including global economic indicators, we augment a monetary VAR model with common factors extracted from a large panel dataset spanning 122 economic time series and the period 1980q1 to 2008q2. The resulting FAVAR model is used to assess the impact of monetary policy shocks on residential property and stock prices. Impulse response functions and variance decompositions suggest that monetary policy can potentially be used to lean against asset price booms in Singapore.
    Keywords: Monetary Policy; Asset Prices; Dynamic Factors; Vector Autoregression
    JEL: C33 E52
    Date: 2009–10
  46. By: Junko Shimizu; Eiji Ogawa
    Abstract: In this study, we investigate the movements of the nominal effective exchange rates (NEER) of East Asian currencies and the Asian Monetary Unit (AMU), which is the weighted average of East Asian currencies, during the course of the global financial crisis. We found that the NEER were more stable in countries that adopted the currency basket system even during the financial crisis. Comparisons made between the NEER and a combination of the AMU and AMU Deviation Indicators show intra-regional exchange rates among the East Asian currencies, and that there have been strong relationships between them before and after the global financial crisis. Accordingly, monitoring both the AMU and the AMU Deviation Indicators is effective in stabilizing the NEER of East Asian currencies. In this respect, our findings indicate that the AMU Deviation Indicators as well as the AMU will play a very important role in the surveillance of the stability of intra-regional exchange rates.
    Keywords: currency basket system, effective exchange rate, global financial crisis, East Asian currencies
    JEL: F31 F36
    Date: 2009–09
  47. By: Rodolphe Blavy; Marcos Souto
    Abstract: The credit risk measures we develop in this paper are used to investigate macrofinancial linkages in the Mexican banking system. Domestic and external macro-financial variables are found to be closely associated with banking soundness. At the aggregate level, high external volatility and domestic interest rates are associated with higher expected default probability. Though results vary substantially across individual banks, domestic activity and U.S. growth, and higher asset prices, are generally associated with lower credit risks, while increased volatility worsens credit risks. The expected default probability is also found to be a leading indicator of traditional financial stability indicators.
    Keywords: Bank soundness , Banking sector , Banks , Credit risk , Data analysis , Economic models , Mexico ,
    Date: 2009–05–27
  48. By: Samar Maziad
    Abstract: The Central Bank of Jordan (CBJ) and its operational independence changed over time in line with the evolution of the monetary policy framework and as a result of the currency crisis in the late 1980s. The paper examines the developments of the CBJ, its independence in conducting monetary policy and the various instruments at its disposal, with special focus on the certificates of deposit (CDs) market, the main monetary policy instrument, and the treasury bill market. The paper also examines the issue of the autonomy of monetary policy in Jordan given the influence of world interest rates. Although, Jordan operates an exchange rate peg, which has been fixed to the USD since 1995, there is some room for flexibility in operating monetary policy in the short-run, where the CBJ has some autonomy in determining the spread between domestic and US interest rates. VAR and VECM results suggest that the response of the policy rate in Jordan to innovations in the US Federal Fund's rate is less than one-for-one. In the short-run, the CBJ appears to conduct monetary policy in response to domestic inflation and a measure of the domestic output gap.
    Keywords: Central bank autonomy , Central bank role , Central banks , Economic models , Exchange rate regimes , Jordan , Monetary policy , Monetary policy instruments ,
    Date: 2009–09–09
  49. By: Kenji Moriyama; Abdul Naseer
    Abstract: This paper forecasts inflation in Sudan following two methodologies: the Autoregressive Moving Average (ARMA) model and by looking at the leading indicators of inflation. The estimated ARMA model remarkably tracks the actual inflation during the sample period. The Granger causality test suggests that private sector credit and world wheat prices are the leading indicators explaining inflation in Sudan. Inflation forecasts based on both approaches suggest that inflationary pressures for 2009 and 2010 will be modest and that inflation will remain in single-digits, assuming that prudent macroeconomic policies are maintained.
    Keywords: Central banks , Commodity price fluctuations , Credit expansion , Data analysis , External shocks , Forecasting models , Inflation , Inflation targeting , Monetary policy , Money supply , Private sector , Sudan , Wheat ,
    Date: 2009–06–24
  50. By: Alexandre Chailloux; Alain Durré; Bernard Laurens
    Abstract: This paper discusses the use of interest rates as the operating target for monetary policy in Tunisia and the roadmap for establishing the other building blocks of an inflation targeting framework. It argues that strengthening the effectiveness of the current monetary policy framework will facilitate the adoption of inflation targeting over time.
    Keywords: Economic models , Economic reforms , Financial sector , Inflation targeting , Interest rates , Liquidity management , Monetary operations , Monetary policy , Money markets , Tunisia ,
    Date: 2009–07–16
  51. By: Magnus Saxegaard; Souvik Gupta
    Abstract: During the first half of 2008, Sri Lanka witnessed significantly higher inflation than most other emerging Asian countries. Inflation has since declined amid declining world commodity prices and tight monetary policy. Given the sensitivity to global commodity prices, a core inflation measure could be useful for monetary policy. The purpose of this paper is to compare the performance of Sri Lanka's existing official measure of core inflation against alternative measures. Our findings suggest that the existing measure does contain information about the future path of headline information, but may be inadequate as a communication tool for the Central Bank.
    Keywords: Central bank policy , Consumer price indexes , Economic models , Inflation , Monetary policy , Performance indicators , Price structures , Sri Lanka ,
    Date: 2009–08–10
  52. By: Subramanian S. Sriram
    Abstract: This paper evaluates the demand for broad money (M2) in The Gambia for January 1988-June 2007. There appears to be a long-run relationship for demand for real M2, but the relationship is not stable. Exogenous output shocks, financial innovation, changes in income velocity, and inadequate data quality contribute to the instability. The authorities may need to apply the monetary targeting regime flexibly in the overall objective of preserving price stability. A possible option for The Gambia is to become an inflation targeter lite.
    Keywords: Central bank policy , Commercial banks , Demand for money , Economic growth , Economic models , Financial sector , Gambia, The , Inflation targeting , Interest rates on deposits , Liquidity , Monetary policy , Price stabilization , Sub-Saharan Africa , Time series ,
    Date: 2009–09–10
  53. By: Ge Wu
    Abstract: Recent changes to China's financial system, in particular ongoing interest rate liberalization, gradual movement toward a more flexible exchange rate regime, and rapid development of capital markets, have changed substantially the environment in which monetary policy operates. In light of these changes, we estimate an error correction model using a General-to-Specific methodology and confirm that a stable broad money demand function exists taking proper account of asset substitution, with an income elasticity of less than unity. Current inflation is found to have a significant negative impact on the real money demand. However, money demand does not appear very sensitive to interest rates, possibly reflecting their partial liberalization. Changes in the exchange rate also do not affect money demand significantly, but expectations of a further renminbi appreciation since 2005 appears to induce more money demand. Stock prices are statistically insignificant despite recent investors' interest in equity markets.
    Keywords: Capital markets , Central bank policy , China, People's Republic of , Demand for money , Economic models , Exchange rate regimes , Exchange rates , Financial assets , Financial systems , Interest rates , Monetary policy , Private investment ,
    Date: 2009–06–23
  54. By: Luc Eyraud
    Abstract: The purpose of this paper is to assess Madagascar's competitiveness in recent years, using both price and nonprice indicators and an exchange rate assessment of the currency. We estimate the distance between the equilibrium and the actual real exchange rates using three methods: the macroeconomic balance approach, the external sustainability approach, and the reduced-form equilibrium real exchange rate approach. These methods suggest that in the medium term the real exchange rate is only slightly overvalued. We also carry out a comparative analysis of nonprice indicators and find that Madagascar performs less favorably than its competitors on structural competitiveness.
    Keywords: Cross country analysis , Exchange rate assessments , Export markets , Global competitiveness , International trade , Madagascar , Price structures , Real effective exchange rates ,
    Date: 2009–05–21
  55. By: Patrick A. Imam
    Abstract: In recent years, recommendations for countries to unilaterally dollarize/eurorize have become common, particularly when the countries lack economic credibility. After exploring the characteristics of dollarizing/eurorizing economies, we look at the merits and costs of unilateral eurorization for Cape Verde, a highly tourism based economy that has become increasingly integrated into the euro-zone area and that has a strong macroeconomic track record. We illustrate that neither the benefits nor the costs of unilateral eurorization are large and conclude that there is no compelling case to change the current exchange rate arrangement at this point in time. Econometrically, we assess the characteristics of dollarized economies and demonstrate that few of them apply to Cape Verde, further confirming that Cape Verde does not fit the pattern of most dollarizing countries.
    Keywords: Benefits , Cape Verde , Cross country analysis , Currency pegs , Currency substitution , Dollarization , Exchange rate regimes , Fiscal policy , Monetary systems ,
    Date: 2009–07–14
  56. By: Liew, Venus Khim-Sen; Baharumshah, Ahmad Zubaidi; Puah, Chin-Hong
    Abstract: This paper examines the long-run relationship between exchange rate and its determinants based on the flexible-price monetary model. Multivariate cointegration approach (Johansan 1988, 1989 and Johansen-Juselius 1990) is adopted to attain our objective of study. The empirical results provide evidence favoring the monetary approach to exchange rate for a small and open emerging economy, namely Thailand. In addition, the validity of the underlying assumptions of the monetary approach to the determination of exchange rate is established. The above findings suggest that exchange rate players may effectively monitor and forecast the exchange rate movement via the money supplies, incomes, and interest rates variables of both Thailand and Japan. Besides, one has to follow the economic development of Thailand’s major trading partner, Japan, to understanding the movement of exchange rate for Thailand. Moreover, our findings add new insights to accompaniment previous studies that documented the important influence of US in the emerging Asian economies.
    Keywords: Exchange rate; monetary model; Thailand; cointegration
    JEL: C52 F31 C01
    Date: 2009

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