nep-cba New Economics Papers
on Central Banking
Issue of 2011‒01‒23
fifteen papers chosen by
Alexander Mihailov
University of Reading

  1. Exit Strategies By Ignazio Angeloni; Ester Faia; Roland Winkler
  2. Non-standard monetary policy measures and monetary developments By Domenico Giannone; Michele Lenza; Huw Pill; Lucrezia Reichlin
  3. Non‐Standard Monetary Policy Measures By Domenico Giannone; Michèle Lenza; Huw Pill; Lucrezia Reichlin
  4. Money Supply Rules and Exchange Rate Dynamics By Juha Tervala
  5. Interest Rate Policy and Supply-side Adjustment Dynamics By Daniel Kienzler; Kai Daniel Schmid
  6. Sticky Information and Determinacy By Alexander Meyer-Gohde
  7. Bayesian prior elicitation in DSGE models: macro- vs micro-priors By Marco J. Lombardi; Giulio Nicoletti
  8. Monetary policy implementation and overnight rate persistence By Nautz, Dieter; Scheithauer, Jan
  9. Communication for Multi-Taskers: Perspectives on Dealing with Both Monetary Policy and Financial Stability By Pierre L. Siklos
  10. The (in)stability of money demand in the Euro area By Nautz, Dieter; Rondorf, Ulrike
  11. Getting beyond carry trade: what makes a safe haven currency? By Maurizio Michael Habib; Livio Stracca
  12. Money and Memory: Implicit Agents in Search Theories of Money By Heiner Ganßmann
  13. Money Illusion and Rational Expectations: New Evidence from Well Known Survey Data By Novella Maugeri
  14. The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth? By Della Corte, P.; Sarno, L.; Sestieri, G.
  15. Critical Overview of Agent-Based Models for Economics By M. Cristelli; L. Pietronero; A. Zaccaria

  1. By: Ignazio Angeloni; Ester Faia; Roland Winkler
    Abstract: We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using the model of Angeloni and Faia (2010), that combines a standard DSGE framework with a fragile banking sector, suitably modified and calibrated for the euro area. Credibly announced and fast fiscal consolidations dominate – based on simple criteria – alternative strategies incorporating various degrees of gradualism and surprise. The fiscal adjustment should be based on spending cuts or else be relatively skewed towards consumption taxes. The phasing out of monetary accommodation should be simultaneous or slightly delayed. We also find that, contrary to widespread belief, Basel III may well have an expansionary macroeconomic effect
    Keywords: exit strategies, debt consolidation, fiscal policy, monetary policy, capital requirements, bank runs
    JEL: E63
    Date: 2011–01
  2. By: Domenico Giannone (Université Libre de Bruxelles – ECARES, Avenue Roosevelt CP 114 Brussels, Belgium.); Michele Lenza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Huw Pill (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School)
    Abstract: Standard accounts of the Great Depression attribute an important causal role to monetary policy errors in accounting for the catastrophic collapse in economic activity observed in the early 1930s. While views vary on the relative importance of money versus credit contraction in the propagation of this policy error to the wider economy and ultimately price developments, a broad consensus exists in the economics profession around the view that the collapse in financial intermediation was a crucial intermediary step. What lessons have monetary policy makers taken from this episode? And how have they informed the conduct of monetary policy by leading central banks in recent times? This paper sets out to address these questions, in the context of the financial crisis of 2008-09 and with application to the euro area. It concludes that the Eurosystem’s non-standard monetary policy measures have supported monetary policy transmission and avoided the calamity of the 1930s. JEL Classification: E5, E4, E32.
    Keywords: Non-standard monetary policy, monetary policy shocks, Great Recession, money and credit.
    Date: 2011–01
  3. By: Domenico Giannone; Michèle Lenza; Huw Pill; Lucrezia Reichlin
    Date: 2011–01
  4. By: Juha Tervala
    Abstract: This paper examines the implications of monetary policy rules for exchange rate dynamics. I extend a standard New Open Economy Macroeconomics model with the introduction of a simple money supply rule, whereby central banks change their monetary policy if output diverges from potential output or if inflation diverges from the target inflation. A key result is that, in the case of permanent technology and monetary shocks, the nominal exchange rate does not follow a random walk; instead, the exchange rate undershoots its long-run value. An undershooting of the exchange rate derives from the active monetary policy that both countries conduct.
    Keywords: Monetary policy rules, open economy macroeconomics, exchange rate
    JEL: E5 F3 F4
    Date: 2010–12
  5. By: Daniel Kienzler; Kai Daniel Schmid
    Abstract: In contrast to the present consensus view of stabilization policy, theoretical and empirical research strongly support the consideration of supply-side adjustment to pronounced variations of factor-utilization in order to trace a more realistic pattern of macroeconomic adjustment dynamics within simulation studies. Against this background, our paper seeks to illuminate the relevance of endogenous supply-side adjustment for monetary policy research. We modify a basic New Keynesian model by explicitly considering demand-side stimulus on the evolution of productive capacity and analyze stability, impulse response, and welfare issues if the central bank follows a simple monetary policy rule. Thereby, we control for the robustness of our policy implications by various states of output gap mismeasurement the central bank might be confronted with. We find that, in contrast to a basic New Keynesian Model, output gap stabilization plays a more prominent role when potential output is endogenous.
    Keywords: monetary policy, factor-utilization, endogenous potential output, output gap mismeasurement
    JEL: E32 E50 E52
    Date: 2010–12
  6. By: Alexander Meyer-Gohde
    Abstract: The infinite-dimensional sticky-information Phillips curve is cast as a finite-dimensional timevarying system of difference equations in order to directly assess determinacy in the model with demand given by the forward-looking IS equation and monetary policy by an interest rate rule. An equivalence to the model without lagged expectations holds (albeit tenuously) for the particular specification and a common truncation method produces spurious determinacy.
    Keywords: Determinacy, Taylor rule, Sticky Information, Time-Varying Difference Equations
    JEL: C62 E31 E43 E52
    Date: 2011–01
  7. By: Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Giulio Nicoletti (Banca d’Italia, Via Nazionale, 91, 00184 Roma, Italy.)
    Abstract: Bayesian approaches to the estimation of DSGE models are becoming increasingly popular. Prior knowledge is normally formalized either be information concerning deep parameters’ values (‘microprior’) or some macroeconomic indicator, e.g. moments of observable variables (‘macroprior’). In this paper we introduce a non parametric prior which is elicited from impulse response functions. Results show that using either a microprior or a macroprior can lead to different posterior estimates. We probe into the details of our result, showing that model misspecification is to blame for that. JEL Classification: C11, C51, E30.
    Keywords: DSGE Models, Bayesian Estimation, Prior Distribution, Impulse Response Function.
    Date: 2011–01
  8. By: Nautz, Dieter; Scheithauer, Jan
    Abstract: Overnight money market rates are the predominant operational target of monetary policy. As a consequence, central banks have redesigned the implementation of monetary policy to keep the deviations of the overnight rate from the key policy rate small and short-lived. This paper uses fractional integration techniques to explore how the operational framework of four major central banks affects the persistence of overnight rates. Our results suggest that a well-communicated and transparent interest rate target of the central bank is a particularly important condition for a low degree of overnight rate persistence. --
    Keywords: Controllability and Persistence of Interest Rates,Operational Framework of Central Banks,Long Memory and Fractional Integration
    JEL: E52 C22
    Date: 2010
  9. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann European Research Centre, Waterloo, ON, Canada; The Rimini Centre for Economic Analysis (RCEA), Rimini, Italy)
    Abstract: This paper examines the communications challenges facing central banks who will be sharing responsibilities with other agencies for macro-prudential objectives, in addition to conventional monetary policy goals. Following a description and analysis of surveys of central banks, and the attributes that make up an index of central bank transparency, some policy proposals are made. It is argued that a hybrid of inflation and price level targeting, combined with a requirement by the macro-prudential regulators to issue press releases much like central banks publish an announcement and rationale for the setting of monetary policy instruments, may improve the central bank communication in a post-crisis world.
    Keywords: central bank communication, transparency, price level targeting
    JEL: E52 E58 E65
    Date: 2011–01
  10. By: Nautz, Dieter; Rondorf, Ulrike
    Abstract: The instability of standard money demand functions has undermined the role of monetary aggregates for monetary policy analysis in the euro area. This paper uses country-specific monetary aggregates to shed more light on the economics behind the instability of euro area money demand. Our results obtained from panel estimation indicate that the observed instability of standard money demand functions could be explained by omitted variables like e.g. technological progress that are important for money demand but constant across member countries. --
    Keywords: Money demand,cross-country analysis,panel error correction model,euro area
    JEL: E41 E51 E52
    Date: 2010
  11. By: Maurizio Michael Habib (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: There is already a substantial literature documenting the fact that low yield currencies typically appreciate during times of global financial stress and behave as safe havens. The main objective of this paper is to find out what the fundamentals of safe haven currencies are. We analyse a large panel of 52 currencies in advanced and emerging countries over almost 25 years of data. We find that only a few factors are robustly associated to a safe haven status, most notably the net foreign asset position, an indicator of external vulnerability, and to a lesser extent the absolute size of the stock market, an indicator of market size and development. The interest rate spread against the US is significant only for advanced countries, whose currencies are subject to carry trade. More generally, we find that it is hard to predict what currencies would do when global risk aversion is high, as estimates are imprecise and often not stable or robust. This suggests caution in over-interpreting exchange rate movements during financial crises. JEL Classification: E44, F31, G15.
    Keywords: VIX, global risk aversion, safe haven currencies, carry trade, globalisation.
    Date: 2011–01
  12. By: Heiner Ganßmann (Institut für Soziologie, Freie Universität Berlin)
    Abstract: Recent search theoretical models of monetary economies promise micro-foundations and thus a decisive improvement in the theory of money compared to the traditional mainstream approach that starts from a Walrasian general equilibrium framework to introduce money exogenously at the macro level. The promise of micro-foundations is not fulfilled, however. It can be shown that search models implicitly refer to central, most likely collective, agents doing essential work to sustain the monetary economy.
    Keywords: micro-foundations, multi-agent modelling, model, macro, monetary economy, money, information, network
    Date: 2010–07
  13. By: Novella Maugeri
    Abstract: This paper provides further evidence in favor of less than fully rational expectations by making use two instruments, one quite well known, and the other more novel, namely survey data on inflation expectations and Smooth Transition Error Correction Models (STECMs). We use the so called ‘probabilistic approach’ to derive a quantitative measure of expected inflation from qualitative survey data for France, Italy and the UK. The United States are also included by means of the Michigan Survey of Consumers’ expectations series. First, we perform the standard tests to assess the ‘degree of rationality’ of consumers’ inflation forecasts. Afterwards, we specify a STECM of the forecast error, and we quantify the strategic stickiness in the long-run adjustment process of expectations stemming from money illusion. Our evidence is that consumers’ expectations do not generally conform to the prescriptions of the rational expectations hypothesis. In particular, we find that the adjustment process towards the long-run equilibrium is highly nonlinear and it is asymmetric with respect to the size of the past forecast errors. We interpret these findings as supporting the money illusion hypothesis.
    Keywords: Nonlinear error correction, inflation expectations, sticky expectations
    JEL: C22 D84 E31
    Date: 2010–12
  14. By: Della Corte, P.; Sarno, L.; Sestieri, G.
    Abstract: This paper examines the exchange rate predictability stemming from the equilibrium model of international financial adjustment developed by Gourinchas and Rey (2007). Using predictive variables that measure cyclical external imbalances for country pairs, we assess the ability of this model to forecast out-of-sample four major US dollar exchange rates using various economic criteria of model evaluation. The analysis shows that the model provides economic value to a risk-averse investor, delivering substantial utility gains when switching from a portfolio strategy based on the random walk benchmark to one that conditions on cyclical external imbalances.
    Keywords: foreign exchange; predictability; global imbalances; fundamentals.
    JEL: F31 F37 G15
    Date: 2011
  15. By: M. Cristelli; L. Pietronero; A. Zaccaria
    Abstract: We present an overview of some representative Agent-Based Models in Economics. We discuss why and how agent-based models represent an important step in order to explain the dynamics and the statistical properties of financial markets beyond the Classical Theory of Economics. We perform a schematic analysis of several models with respect to some specific key categories such as agents' strategies, price evolution, number of agents, etc. In the conclusive part of this review we address some open questions and future perspectives and highlight the conceptual importance of some usually neglected topics, such as non-stationarity and the self-organization of financial markets.
    Date: 2011–01

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