nep-cba New Economics Papers
on Central Banking
Issue of 2010‒09‒18
28 papers chosen by
Alexander Mihailov
University of Reading

  1. The Monetary Economy and the Economic Crisis By David Laidler
  2. Optimal monetary policy when asset markets are incomplete By Richard Anton Braun; Tomoyuki Nakajima
  3. The Welfare Consequences of Monetary Policy and the Role of the Labor Market: a Tax Interpretation By Federico Ravenna; Carl E. Walsh
  4. The Impact of Inflation Targeting: Testing the Good Luck Hypothesis By Federico Ravenna
  5. Optimal Policy Restrictions on Observable Outcomes By Federico Ravenna
  6. Monetary Policy and Financial Conditions Index By Hisashi Harui; Kentaro Iwatsubo
  7. Discretionary policy in a monetary union with sovereign debt By Campbell Leith; Simon Wren-Lewis
  8. Monetary and fiscal policy interactions with central bank transparency and public investment. By Meixing Dai; Moïse Sidiropoulos
  9. Consolidated-Budget Rules and Macroeconomic Stability with Income-Tax and Finance Constraints By Gliksberg, Baruch
  10. The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective By Junko Koeda; Ryo Kato
  11. Securitization and the Balance Sheet Channel of Monetary Transmission By Uluc Aysun; Ralf Hepp
  12. International Transmission of Monetary Shocks in a Ricardian World By Wenli Cheng; Dingsheng Zhang
  13. On Negative Time Preference By M. Casari; D. Dragone
  14. A Triangular Analysis of Exchange Rate Determination and Adjustments - The case of RMB, the US dollar and the euro By Peijie Wang
  15. Central Bank Independence, Bureaucratic Corruption and Fiscal Responses - Empirical Evidence By Ourania Dimakou
  16. Macroeconomic and interest rate volatility under alternative monetary operating procedures By Gerlach-Kristen, Petra; Rudolf, Barbara
  17. Appreciating The Renminbi By Rod Tyers; Ying Zhang
  18. Monetary Transmission Right from the Start: The (Dis)Connection Between the Money Market and the ECB’s Main Refinancing Rates By Puriya Abbassi; Dieter Nautz
  19. The art of central banking of the ECB and the separation principle. By Clerc, L.; Bordes, C.
  20. Business cycle convergence in EMU: A second look at the second moment By Jesús Crespo-Cuaresma; Octavio Fernández-Amador
  21. Business cycle convergence in EMU: A second look at the second moment By Crespo Cuaresma , Jesus; Fernandez Amador, Octavio
  22. Has inflation targeting increased predictive power of term structure about future inflation: evidence from an emerging market ? By Ege, Yazgan; Huseyin, Kaya
  23. A Case for Intermediate Exchange-Rate Regimes By Veronique Salins; Agnes Benassy-Quere
  24. The Role of Consumption-Labor Complementarity as a Source of Macroeconomic Instability By Gliksberg, Baruch
  25. Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5? By Wai Ching Poon
  26. A VAR Model of Monetary Policy and Hypothetical Case of Inflation Targeting in India By Ankita Mishra; Vinod Mishra
  27. Measurement of Inflation in India: Issues and Associated Challenges for the Conduct of Monetary Policy By Nadhanael G V; Sitikantha Pattanaik
  28. A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests By Wai-Ching Poon

  1. By: David Laidler (University of Western Ontario)
    Abstract: The monetary economy has properties that cannot be analyzed using the tools of today's dynamic general equilibrium analysis. Keynes's economics, far from being an aberration in the otherwise orderly evolution of modern macroeconomics from Adam Smith's ideas about the "invisible hand", was a major contribution to an ongoing tradition in monetary theory in whose creation Smith himself had played a part. Retrospective consideration of this tradition suggests that the property of the monetary economy critical to the generation of economic crises and the stagnation that follows them is its capacity to permit trading at "false" prices, a phenomenon ruled out by assumption in dynamic general equilibrium models. Not only Keynes's explanation of depression but also Hayek and Robertson's analysis of the role of unsustainable forced saving in the boom can be thought of as relying on this factor.
    Keywords: crises; money; monetary economy; general equilibrium; cycles; sticky prices; flexible prices; false prices; rate of interest; forced saving; Keynesian economics; Monetarism; New Keynesian economics
    JEL: B12 B22 E12 E13 E32 E40
    Date: 2010
  2. By: Richard Anton Braun (Faculty of Economics, University of Tokyo); Tomoyuki Nakajima (Institute of Economic Research, Kyoto University)
    Abstract: This paper considers the properties of an optimal monetary policy when households are subject to countercyclical uninsured income shocks. We develop a tractable incompletemarkets model with Calvo price setting. Incomplete markets creates a new distortion and that distortion is large in the sense that the welfare cost of business cycles is large in our model. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  3. By: Federico Ravenna; Carl E. Walsh
    Abstract: We explore the distortions in business cycle models arising from inefficiencies in price setting and in the search process matching firms to unemployed workers, and the implications of these distortions for monetary policy. To this end, we characterize the tax instruments that would implement the first best equilibrium allocations and then examine the trade-offs faced by monetary policy when tax instruments are unavailable. Our findings are that the welfare cost of search inefficiency can be large, but the incentive for policy to deviate from the inefficient flexible-price allocation is in general small. Sizable welfare gains are available if the steady state of the economy is inefficient, and these gains do not depend on the existence of an inefficient dispersion of wages. Finally, the gains from deviating from price stability are larger in economies with more volatile labor flows, as in the U.S.
    Keywords: Optimal monetary policy, search inefficiency, job vacancies, unemployment
    JEL: E52 E58 J64
    Date: 2010
  4. By: Federico Ravenna
    Abstract: Over the last twenty years the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “luck hypothesis” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman-filter the historical structural shocks consistent with an estimated DSGE model. The estimated shocks are used to build counterfactual histories. Ex-ante the model predicts inflation volatility to more than halve under inflation targeting. But conditional on the shocks, we show that the luck hypothesis can explain with a high probability Canada’s low inflation volatility since the early 1990s. Any inflation stabilization induced by the shift in policy is accounted for the most part by the impact on expectations. Counterfactuals built neglecting expectations would prove the inflation targeting policy irrelevant.
    Keywords: Business cycle shocks, Kalman filter, Credibility, Inflation targeting
    JEL: E42 E52 E58
    Date: 2010
  5. By: Federico Ravenna
    Abstract: We study the restrictions implied by optimal policy DSGE models for the volatility of observable endogenous variables. Our approach uses a parametric family of singular models to discriminate which volatility sample outcomes have zero probability of being generated by an optimal policy. Thus the set of volatility outcomes generated by the model is not of measure zero even if there are no random deviations from optimal policymaking. This methodology is applied to a new Keynesian business cycle model widely used in the optimal monetary policy literature, and its implications for the assessment of US monetary policy performance over the 1984-2005 period are discussed.
    Keywords: Optimal monetary policy, business cycle, DSGE model, policy performance
    JEL: E30
    Date: 2010
  6. By: Hisashi Harui (School of Economics, Kwansei Gakuin University); Kentaro Iwatsubo (Graduate School of Economics, Kobe University)
    Keywords: Financial conditions index; interest rates; house prices; stock prices; macro-prudential policy
    JEL: E21 E31 E32 E44 E50 E58 R21 R31
    Date: 2010–09
  7. By: Campbell Leith; Simon Wren-Lewis
    Abstract: This paper examines the interactions between multiple national fiscal policy- makers and a single monetary policy maker in response to shocks to govern- ment debt in some or all of the countries of a monetary union. We assume that national governments respond to excess debt in an optimal manner, but that they do not have access to a commitment technology. This implies that national fiscal policy gradually reduces debt: the lack of a commitment technology pre- cludes a random walk in steady state debt, but the need to maintain national competitiveness avoids excessively rapid debt reduction. If the central bank can commit, it adjusts its policies only slightly in response to higher debt, allowing national fiscal policy to undertake most of the adjustment. However if it cannot commit, then optimal monetary policy involves using interest rates to rapidly reduce debt, with significant welfare costs. We show that in these circumstances the central bank would do better to ignore national fiscal policies in formulating its policy.
    Date: 2010–08
  8. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of central bank’s opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity-enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and output gap. In the case where the public investment is not sufficiently productivity-enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.
    Keywords: Distortionary taxes, output distortions, productivity-enhancing public investment, central bank transparency (opacity), fiscal disciplining effect.
    JEL: E52 E58 E62 E63 H21 H30
    Date: 2010
  9. By: Gliksberg, Baruch
    Abstract: In some Business-Cycle models a fiscal policy that sets income taxes counter cyclically can cause macroeconomic instability by giving rise to multiple equilibria and as a result to fluctuations caused by self fulfilling expectations. This paper shows that consolidated budget rules with endogenous income-tax rates can be stabilizing if they exhibit monetary dominance, where monetary policy manages expectations by implementing an active interest rate rule. This result is robust for plausible degrees of externalities in production. The size of the government, however, plays a key role in the degree of activeness that the monetary authority should exhibit in order to stabilize the economy. If government spending are not too large relative to private consumption, a neutral monetary policy [such that the real rate of interest is constant in and off the steady state] is also stabilizing
    Keywords: Fiscal Policy; Capital-Income Tax; Monetary Policy; Macroeconomic Stabilization; Finance Constraint; Arbitrage Channel; Investment-Based Channel; Consumption-Based Channel;
    JEL: E0 E62 E61
    Date: 2010–07
  10. By: Junko Koeda (Faculty of Economics, University of Tokyo); Ryo Kato (Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
    Date: 2010–03
  11. By: Uluc Aysun (University of Connecticut, Department of Economics); Ralf Hepp (Fordham University, Department of Economics)
    Abstract: This paper shows that the balance sheet channel of monetary transmission works mainly through U.S. bank holding companies that securitize their assets. This finding is different, in spirit, from the widely-found negative relationship between financial development and the strength of the lending channel of monetary transmission. Focusing on the balance sheet channel, and using bank-level observations, we find that securitized banks are more sensitive to borrowers’ balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing bank holding companies. The optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates.
    Keywords: balance sheet channel, banks, bank holding companies, securitization.
    JEL: E44 F31 F41 O16
    Date: 2010
  12. By: Wenli Cheng; Dingsheng Zhang
    Abstract: This paper investigates how monetary shocks are transmitted internationally. It shows that where a national currency is used as an international medium of exchange, the international money is non-neutral. In particular, an increase in the supply of international money leads to a transfer of real resources to the international money-issuing country from its trading partner. It induces an expansion of the non-tradable sector in the international money-issuing country, and an expansion the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.
    Keywords: demand for money, demand for international currency, monetary policy, exchange rate, non-neutrality of money
    JEL: F11 F31 E41 E52
    Date: 2010–05
  13. By: M. Casari; D. Dragone
    Abstract: Survey data show that subjects positively discount both gains and losses but discount gains more heavily than losses. This holds for monetary and non-monetary outcomes
    JEL: C91 D90
    Date: 2010–08
  14. By: Peijie Wang (IESEG School of Management)
    Abstract: Exchange rate determination is of phenomenal importance in international economic relations and should be scrutinized with diverse perspectives and from various points of view. While RMB is pegged to the US dollar, the exchange rate between RMB and the euro is not fixed, due to that the exchange rate between the euro and the US dollar is not fixed. Since RMB is not a small currency, its pegging to the US dollar would have a profound effect on the floating exchange rate between the US dollar and the euro, forcing the exchange rate between the US dollar and the euro to depart from a “fair” market determined rate if the exchange rate between the US dollar and RMB is not set right. The above scenario provides us with a means to assess the fairness of exchanges rates resulting from pegs. Our analysis suggests that when RMB is overvalued relative to the US dollar, the euro would tend to be overvalued relative to the US dollar too, and vice versa. This in turn leads to a channel for examining whether RMB is undervalued or overvalued against the US dollar, an argument all stemming from the effective peg of RMB to the US dollar. It is to scrutinize the exchange rate of the US dollar vis-à-vis the euro to establish ultimately whether RMB is undervalued or overvalued vis-à-vis the US dollar. That is, an overvalued euro currency vis-à-vis the US dollar would imply a kind of overvaluation of RMB vis-à-vis the US dollar; or put it another way, an undervalued euro currency vis-à-vis the US dollar would justify that RMB is undervalued vis-à-vis the US dollar. As a corollary derived from the above analysis, if the objective of the monetary authorities is to float RMB at the right exchange rate and at the right time, a triangular rotation approach to anchoring currencies can be appropriate. A peg of RMB to a basket of currencies is unfeasible, inconvenient and moreover, unable to avoid being criticized for pegging at an artificially low value as its peg to the US dollar. While it has been increasingly acknowledged that competitive advantages in international trade in the long run can rarely benefit from distorted exchange rates, a notion of currency undervaluation remains cumbersome.
    Keywords: exchange rate, RMB, US dollar, euro
    JEL: F3
    Date: 2010–07
  15. By: Ourania Dimakou (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper analyses the impact of bureaucratic corruption on fiscal policy outcomes for economies that have constituted to a greater or lessen extent independent central banks. The adverse implications of corruption on debt accumulation are verified using a cross-sectional setting of 77 developed and developing countries. Approximating central bank independence as that point in time that a major central bank reform took effect, we find that more corruption leads to higher debt accumulation. More importantly, complementing the analysis with a measure for the level of independence each reform gave strengthens the results; the impact of corruption is greater, the higher the independence that was granted. The findings are robust to different subsets of the sample and different sets of control variables. Suboptimal institutional quality poses difficulties on the achievement of a balanced debt process, which could obstacle price stability, despite the constitution of independent central banks.
    Date: 2010–09
  16. By: Gerlach-Kristen, Petra (Bank for International Settlements); Rudolf, Barbara (Swiss National Bank)
    Abstract: During the financial crisis of 2007/08 the level and volatility of interest rate spreads increased dramatically. This paper examines how the choice of the target interest rate for monetary policy affects the volatility of inflation, the output gap and the yield curve. We consider three monetary policy operating procedures with different target interest rates: two market rates with maturities of one and three months, respectively, and an essentially riskless one-month repo rate. The implementation tool is the one-month repo rate for all three operating procedures. In a highly stylised model, we find that using a money market rate as a target rate generally yields lower variability of the macroeconomic variables. This holds under discretion as well as under commitment both in times of financial calm or turmoil. Whether the one month or three month rate procedure performs best depends on the maturity of the specific rate that enters the IS curve.
    Keywords: Optimal monetary policy rules; monetary operating procedures; yield curve
    JEL: E43 E52 E58
    Date: 2010–07–31
  17. By: Rod Tyers (UWA Business School, The University of Western Australia); Ying Zhang (SCollege of Business and Economics, Australian National University)
    Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade has tightened China’s labour market. We show that, should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives the consequences would be harmful for both Chinese and global interests.
    Date: 2010
  18. By: Puriya Abbassi (Chair of Financial Economics, Johannes Gutenberg-Universität MAinz, Germany); Dieter Nautz (Institute for Statistics and Econometrics, Freie Universität Berlin, Germany)
    Abstract: The relation between the ECB’s main refinancing (MRO) rates and the money market is key for the monetary transmission process in the euro area. This paper investigates how money market rates respond to the new information revealed by MRO auctions. Our results confirm a stabilizing level relationship between the overnight rate Eonia and MRO rates before the financial crisis. Since the start of the financial crisis, however, we find that MRO auction outcomes even exacerbated the disconnection of money market rates from the policy-intended interest rate level. These findings support the fixed rate full allotment policy introduced by the ECB as an unconventionalmeasure to re-stabilize banks’ refinancing conditions.
    Keywords: Financial Crisis; Monetary transmission process; Central bank auctions; European Central Bank; Money markets
    JEL: E43 E52 E58 D44
    Date: 2010–07–15
  19. By: Clerc, L.; Bordes, C.
    Abstract: This paper examines the art of central banking as practised by the European Central Bank (ECB) through the prism of Goodfriend's (2009) determination of the three policies that fall within the remit of a central bank: monetary policy, which consists in varying the size of the balance sheet, credit policy, which consists in modifying the credit structure, and interest rate policy, which consists in adjusting the interest rates of the marginal lending and deposit facilities. The theoretical literature emphasises the existence of a separation principle between the first policy, which seeks to ensure monetary stability and the other two policies, which are intended to ensure financial stability through the smooth functioning of the interbank money market. This paper shows in particular that a central bank not only has the capacity but indeed must strive to separate the conduct of its monetary policy, which must seek to ensure medium and long-term price stability, from that of its credit policy, which is driven by short-term imperatives and consists in supplying the banking system with liquidity in the event of temporary money demand shocks. During the first part of the crisis, the ECB acted in accordance with the separation principle. However, it became increasingly difficult to apply as interest rates approached the zero-lower-bound. In effect, the unconventional measures adopted by the ECB created interference between its monetary policy, its credit policy and its interest rate policy.
    Keywords: Monetary Policy ; operational framework ; Eurosystem ; separation principle.
    JEL: E51 E52 E58
    Date: 2010
  20. By: Jesús Crespo-Cuaresma; Octavio Fernández-Amador
    Abstract: We analyse the dynamics of the standard deviation of demand shocks and of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and put them in contrast to the cyclical performance of the new members of the EU and other OECD countries. We use the methodology put forward in Crespo-Cuaresma and Fern\'andez-Amador (2010), which makes use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members have also experienced a strong pattern of convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement of the EMU to 22 members would not decrease its optimality as a currency area. There is evidence for some European idiosyncrasy as opposed to a world-wide comovement.
    Keywords: Business cycle synchronization, structural VAR, demand shocks, European Monetary Union
    JEL: E32 E63 F02
    Date: 2010–09
  21. By: Crespo Cuaresma , Jesus (Department of Economics, Vienna University of Economics and Business); Fernandez Amador, Octavio (Department of Economics, University of Innsbruck)
    Abstract: We analyse the dynamics of the standard deviation of demand shocks and of the demand component of GDP across countries in the European Monetary Union (EMU). This analysis allows us to evaluate the patterns of cyclical comovement in EMU and put them in contrast to the cyclical performance of the new members of the EU and other OECD countries. We use the methodology put forward in Crespo-Cuaresma and Fernandez-Amador (2010), which makes use of sigma-convergence methods to identify synchronization patterns in business cycles. The Eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s. The new EU members have also experienced a strong pattern of convergence from 1998 to 2005, when a strong divergence trend appears. An enlargement of the EMU to 22 members would not decrease its optimality as a currency area. There is evidence for some European idiosyncrasy as opposed to a world-wide comovement.
    Keywords: Business cycle synchronization; structural VAR; demand shocks; European Monetary Union
    JEL: E32 E63 F02
    Date: 2010–09–10
  22. By: Ege, Yazgan; Huseyin, Kaya
    Abstract: This paper contributes to the vast literature on the predictive power of term structure about future inflation, by focusing on an emerging market case. The following important result emerged in our paper: Monetary policy change is an important determinant of the relationship between term structure and inflation to the extent that even the existence of the relationship critically depends on the nature of monetary policy regime. In our case, the change in monetary policy is associated with the beginning of the implementation of an inflation targeting (IT) regime. While, before IT regime, the information in term structure does not provide any predictive power for future inflation, this phenomenon seems to be completely reversed after IT. Since the implementation of IT, term structure of interest rates has seemed to gain considerable forecasting power for future inflation.
    Keywords: Term Structure of Interest Rate; Structural Break; Inflation; Monetary Policy; Inflation Targeting
    JEL: E43 C53 E52 G00
    Date: 2010–08
  23. By: Veronique Salins; Agnes Benassy-Quere
    Abstract: Despite increasing capital mobility and the subsequent difficulty in controlling exchange rates, intermediate exchange-rate regimes have remained widespread, especially in emerging and developing economies. This piece of evidence hardly fits the "impossible Trinity" theory arguing that it becomes difficult to control the exchange rate without a "hard" device when capital flows are freed. Calvo and Reinhart (2000) have suggested several explanations for such "fear of floating": exchange rate pass-through, liability dollarization, dollar invoicing of domestic and external transactions, and an underdeveloped market for currency hedging make it more desirable to stabilize the nominal exchange rate. However, the New-Keynesian model, which has become the main workhorse for studying exchange-rate regime choice since the 1990s, typically opposes fixed nominal pegs to free-floating regime, without considering intermediate regimes. We intend to fill this gap here by comparing the performance of "extreme" regimes to that of an intermediate regime where monetary authorities care both about inflation and about nominal exchange-rate deviations from the steady state, when a small economy is hit by several types of shocks. Without nominal wage rigidities, our results are in line with the New-Keynesian literature arguing in favor of inflation-targeting regimes. However, when nominal wage rigidities are taken into account, we find the intermediate regime to be appropriate for an economy that is mainly hit by productivity and foreign-interest shocks, which is often the case in emerging and developing economies. The free-floating regime (with inflation targeting) seems more adequate if the economy experiences mostly demand shocks and foreign prices shock. Finally, the fixed peg regime is always dominated by either the free-floating or the intermediate regime. A fully-fledged analysis of intermediate regimes should of course account for the fear-of-floating-type advantages of such regimes, as well as for their shortcomings in terms of costly reserve-accumulation and/or recurrent crises. Our results however suggest that, by concentrating on two extreme regimes (fixed nominal pegs and free floats), by neglecting wage rigidities and/or by assuming that floating countries can engineer an "optimal" interest-rate feedback rule, the existing New-Keynesian literature may have exaggerated the merits of free-floating regimes to the detriment of "soft" pegs.
    Keywords: Exchange-rate regime; DSGE model
    JEL: F33 F41
    Date: 2010–08
  24. By: Gliksberg, Baruch
    Abstract: The equilibrium ramification of a balanced budget rule are scrutinized in a one sector growth model augmented with investment frictions and a non-separable utility function in consumption and leisure. Edgeworth-complementarity between consumption and labor is formulated so as to generate a positive co-movement of consumption, output, and hours worked, as found in the data. Calibration of the model to the U.S. economy provides evidence that a balanced budget rule with a Taylor type monetary policy induce determinate equilibria.
    Keywords: Fiscal-Monetary policy; Non-Separable Utility; Consumption-Labor Complementarity; Endogenous Labor; Stabilization; Determinacy; Investment;
    JEL: E62 C63 E52 E61 E4 C62
    Date: 2010–06
  25. By: Wai Ching Poon
    Abstract: This paper uses quarterly data from 1980 to 2004 for ASEAN-5 founder countries to estimate the weight of the Augmented Monetary Conditions Index (AMCI), and identifies the key transmission mechanism paths using Pesaran and Pesaran’s (1997) ARDL procedure, and Pesaran et al.’s (2001) bounds procedure. The roles of credit and asset price channels are assessed for aggregate demand conditions and in the transmission of monetary policy. Results reveal evidence of cointegration for all the ASEAN-Five founder countries. The estimate of the interest and exchange rate elasticities of aggregate demand is used to determine the weight of the exchange rate in the AMCI, and ultimately the weight is then used to construct the AMCI ratio. Exchange rate, asset price, and interest rate channels are three key transmission mechanisms in the conduct of monetary policy in Indonesia and Thailand. Meanwhile in Malaysia and Singapore, exchange rate, both the long and short term interest rate, and credit channels are three key transmission mechanisms in the conduct of monetary policy. In the Philippines, four key transmission mechanisms take place, namely the interest rate, exchange rate, credit, and asset price channels, with short rate relatively weaker than the long rate at the margin. The estimated weights of real interest rates and real exchange rate are used to estimate the AMCI ratios. The AMCI ratios range from 0.052 to 0.664 [0.052:1 for Philippines, 0.056:1 for Thailand, 0.073:1 for Indonesia, 0.109:1 for Malaysia; and 0.664 for Singapore]. Monetary conditions during the period under-study are found to be reflected in each of the central banks’ reaction to the prevailing economic situation, which implies that AMCI tracks the movements of the real GDP plausibly on the average, particularly after 1997.
    Keywords: Augmented Monetary Conditions Index; monetary policy; transmission mechanism
    JEL: E52
    Date: 2010–05
  26. By: Ankita Mishra; Vinod Mishra
    Abstract: The empirical VAR literature on identification and measurement of the impact of monetary policy shocks on the real side of the economy is fairly comprehensive for developed economies but very limited for emerging and transition economies. In this study, we propose an identification scheme, for a developing economy taking India as a case study, which is able to capture the monetary transmission mechanism without giving rise to any empirical anomalies. We use a VAR approach with recursive contemporaneous restrictions and identify monetary policy shocks by modelling the reaction function of the central bank and structure of the economy. The effect of monetary policy shocks on the exchange rate and other macroeconomic variables is consistent with the predictions of a broad set of theoretical models. This set-up is used to build a hypothetical case of inflation targeting where the monetary policy instrument is set after looking at the current values of inflation only. This is in contrast with the „multiple indicator approach‟ currently followed by Reserve Bank of India. This hypothetical scenario of inflation targeting suggests a sharper response of the interest rate (monetary policy instrument) to shocks and strengthening of the exchange rate channel in transmission of interest rate impulses. This study also provides some useful implications on the type of theoretical framework which can be used to model the evolution of monetary policy for a developing economy like India.
    Keywords: India, Inflation Targeting, Monetary policy, VAR
    JEL: E52 E58 E47
    Date: 2010–05
  27. By: Nadhanael G V; Sitikantha Pattanaik
    Abstract: In India, there is a large divergence between CPI and WPI inflation trends in the past, wide dispersion in inflation across commodity groups within WPI, and significant volatility in headline WPI inflation under the influence of supply shocks, the statistical limitations of prices data have received increasing attention in the policy debates. This paper presents the key issues in the current context, while also explaining how policy analyses relevant for the conduct of monetary policy could yield ambiguous results if inflation data used in such analyses have serious limitations. [Staff Studies].
    Keywords: supply shocks, volatality, central bank, reserve bank, RBI, statistical issues, Exchange Rate, REER, financial, economic, Inflation Measurement, Monetary policy, India, CPT, WPI, commodity, prices, data, Inflation
    Date: 2010
  28. By: Wai-Ching Poon
    Abstract: This paper constructs the augmented monetary conditions index (AMCI) over 1982:1-2004:4 using UECM and bounds test approach for the Philippines data. Results reveal evidence of cointegration between the real GDP and its determinants, namely short-term interest rate, exchange rate and claims on private sectors that take into account three key transmission mechanisms channels in the conduct of monetary policy, namely the interest rate, exchange rate and credit channels. While asset price channel is found to be insignificant. The monetary conditions during the study periods is reflected in the Bangko Sentral ng Pilipinas’s reaction to the prevailing economic situation, imply that the AMCI tracks the inverse movements of the real GDP growth reasonably well after 1990s. Possible light of policy implications have put forward.
    Keywords: AMCI, monetary policy, cointegration, bounds test, UECM, transmission mechanisms
    Date: 2010–05

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