nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒10‒08
29 papers chosen by
Carolina Valiente
London South Bank University

  1. Does the stock market affect income distribution? Some empirical evidence for the US By Andrea Beltratti; Claudio Morana
  2. Horizontally Differentiated Market Makers By Simon Loertscher
  3. La neutralidad del dinero y la dicotomía clásica en la macroeconomía By Andrés Felipe Giraldo Palomino
  4. Structural Breaks and Common Factors in the Volatility of the Fama-French Factor Portfolios By Andrea Beltratti; Claudio Morana
  5. Uninsured Idiosyncratic Production Risk with Borrowing Constraints By Francisco Covas
  6. El sector real en Antioquia: una evaluación financiera en escenario de crisis By Octavio Antonio Zuluaga Rivera; Francisco Villadiego Yanes
  7. Trade Invoicing in the Accession Countries: Are They Suited to the Euro? By Linda Goldberg
  8. Pillar 1 vs. Pillar 2 Under Risk Management By Loriana Pelizzon; Stephen Schaefer
  9. Capital inflows and investment in developing countries By Ajit K. Ghose
  10. Does Financial Liberalization Improve the Allocation of Investment? Micro Evidence from Developing Countries By Arturo Galindo; Fabio Schiantarelli; Andrew Weiss
  11. Deficits and Debt in the Short and Long Run By Benjamin M. Friedman
  12. Trusting the Stock Market By Luigi Guiso; Paola Sapienza; Luigi Zingales
  13. What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm By Doris Neuberger
  14. What’s Common to Relationship Banking and Relationship Investing? Reflections within the Contractual Theory of the Firm By Doris Neuberger
  15. Pegged Exchange Rate Regimes %u2013 A Trap? By Joshua Aizenman; Reuven Glick
  16. Monetary policy and asset prices: To respond or not? By Q. Farook Akram; Gunnar Bårdsen; Øyvind Eitrheim
  17. Demand for Money in India: 1953-2003 By B Bhaskara Rao; Singh Rup
  18. The Calculus of Dollarization, Central Banking (U.K.), Vol.XI, No. 2, (November 2000), 45-58. By Zeljko Bogetic
  19. Seignirage Sharing and Dollarization, Central Banking (U.K.), Vol. X, No.4, 77-88. By Zeljko Bogetic
  20. Collateral, Access to Credit, and Investment in Bulgaria, chap. 8 in D. Jones and J. Miller (eds) THE BULGARIAN ECONOMY: LESSONS FROM REFORM DURING EARLY TRANSITION, Ashgate 97. By Zeljko Bogetic
  21. Financial Dollarization and the Size of the Fear By Juan F. Castro; Eduardo Morón
  22. Interest, debt and capital accumulation - a Kaleckian approach By Eckhard Hein
  24. Monetary Policy and its Theoretical Foundations By David Laidler
  26. Fear of Floating: An optimal discretionary monetary policy analysis By Madhavi Bokil
  27. Official Dollarization: Current Experiences and Issues, Cato Journal, Vol. 20, No. 2 (Fall 2000), 179-213. By Zeljko Bogetic
  28. Credit and Monetary Policy: An Australian SVAR By Leon Berkelmans
  29. The End of Large Current Account Deficits, 1970-2002: Are There Lessons for the United States? By Sebastian Edwards

  1. By: Andrea Beltratti; Claudio Morana (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont)
    Abstract: What is the relation between the stock market and income distribution? There are many potential links between the two, some of which associated with the relations of each of these with the rate of economic growth. An empirical analysis set in the framework of the neoclassical growth model shows that the key mechanisms explaining income distribution in the US operate through the labour market rather than through the stock market, even though stock market shocks appear to have some short time relevance for the dynamics of income distribution.
    Keywords: common trends model, economic growth, stock market, income distribution
    JEL: C32 O41 G10 D3
    Date: 2005–08
  2. By: Simon Loertscher
    Abstract: I present a model of competition between two market makers who are horizontally differentiated. I first show that absent a search market for buyers and sellers, there is a continuum of symmetric equilibria. These equilibria are payoff equivalent for market makers, but affect buyers' and sellers' welfare in opposite ways. Second, I analyze the model when buyers and sellers can also exchange the good in search markets. The model with search markets shares many features with existing models, yet allows competing intermediaries to net a profit in equilibrium. Interestingly, the model exhibits a complementarity between intermediaries' profits in the presence of search markets. Third, I show that every equilibrium in a game with market makers is also an equilibrium in an appropriately defined game with matchmakers
    Keywords: Market making; intermediation and search; horizontal differentiation; market microstructure
    JEL: C72 D41 D43 L13
    Date: 2005–09
  3. By: Andrés Felipe Giraldo Palomino
    Abstract: El efecto de las variables nominales, en particular el dinero, sobre las variables reales es uno de los temas centrales en la macroeconomía. En este documento se presenta una revisión teórica de las principales escuelas que tratan sobre la neutralidad del dinero y la dicotomía clásica. Este debate tiene consecuencias para la política monetaria y, junto al debate de reglas y discreción, constituye uno de los elementos clave para su ejecución y el análisis de su efectividad.
    Keywords: neutralidad del dinero
    JEL: E49
    Date: 2005–10–06
  4. By: Andrea Beltratti; Claudio Morana (SEMEQ Department - Faculty of Economics - University of Eastern Piedmont)
    Abstract: We study the time series properties of the Fama-French factor returns volatility processes. Among the original findings of this paper, we point to structural breaks in the volatility of the factors, and strong coincidence between the timing of the breaks in the volatility of the market portfolio and the timing of the breaks in the volatility of SMB. Moreover, analyses of the break free series show that two common long memory factors drive the long-run evolution of the series. The first factor mainly affects the volatility of the market and the volatility of SMB, while the second one mainly affects the volatility of HML. These results imply that the time-varing volatility of stocks is driven mainly by the time-varying volatility of the market as a whole and of the HML portfolio, while the volatility of SMB does not seem to be an independent driving force.
    Keywords: risk factors, structural change, long memory, fractional cointegration, portfolio allocation
    JEL: C32 F30 G10
    Date: 2005–07
  5. By: Francisco Covas
    Abstract: The author analyzes a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk. In particular, he addresses the impact of these frictions on entrepreneurial investment and illustrates the trade-off between production risk and precautionary savings faced by the entrepreneur. In contrast to other studies, the author's results suggest that, when entrepreneurs' earnings are poorly diversified and production risk mainly affects the total output produced, the underaccumulation of capital in the entrepreneurial sector of the model economy is less likely to hold, because of a strong precautionary savings motive. Furthermore, the presence of these frictions on entrepreneurial investment exacerbates the overaccumulation of capital in the corporate sector of the economy that is reported in Bewley models with uninsurable labour income risk.
    Keywords: Economic models; Financial institutions; Financial markets
    JEL: E22 G11 M13
    Date: 2005
  6. By: Octavio Antonio Zuluaga Rivera; Francisco Villadiego Yanes
    Abstract: Basados en los indicadores financieros de los balances consolidados de un conjunto de empresas antioqueñas pertenecientes al sector real, en este documento se analizan las posturas financieras para enfrentar los cambios en el entorno con ocasión del ciclo recesivo y de precaria actividad económica entre los años 1998 y 2003. Destacamos la diferencia en las respuestas financieras entre las MIPYMES y las grandes empresas. Las MIPYMES del sector industrial no sanearon su estructura financiera y por el contrario, aumentaron sus niveles de endeudamiento en los años que siguieron a la crisis, en tanto que las grandes empresas de los sectores agropecuarios, industria y comercio mantuvieron sus niveles de endeudamiento. También se advierte una menor capacidad de acceder a los créditos del sistema financiero por parte de las MIPYMES de los sectores industriales y comerciales, considerando los menores niveles de concentración de endeudamiento financiero asociado a mayores niveles de endeudamiento. Por último, cabe destacar que los diferentes sectores económicos del sector real en Antioquia exhibieron deterioro en los indicadores de rentabilidad y en los niveles de activos durante la crisis de 1998 y 1999. Durante el periodo 1998-2003 las MIPYMES exhiben una peor tendencia en la evolución del patrimonio y el activo en comparación con la gran empresa.
    Keywords: Balances de empresas,
    Date: 2005–02–28
  7. By: Linda Goldberg
    Abstract: The accession countries to the euro area are increasingly binding their economic activity, external and internal, to the euro area countries. One aspect of this phenomenon concerns the currency invoicing of international trade transactions, where accession countries have reduced their use of the US dollar in invoicing international trade transactions. Theory predicts that the optimal invoicing choices for accession countries depend on the composition of goods in exports and imports and on the macroeconomic fluctuations of trade partners, both bearing on the role of herding and hedging considerations within exporter profitability. These considerations yield country-specific estimates about the degree of euro-denominated invoicing of exports. I find that the exporters of some accession countries, even in their trade transactions with the euro zone and other European Union countries, might be pricing too much of their trade in euros rather than in dollars, thus taking on excessive risk in international markets.
    JEL: F3 F4
    Date: 2005–10
  8. By: Loriana Pelizzon; Stephen Schaefer
    Abstract: Under the New Basel Accord bank capital adequacy rules (Pillar 1) are substantially revised but the introduction of two new "Pillars" is, perhaps, of even greater significance. This paper focuses on Pillar 2 which expands the range of instruments available to the regulator when intervening with banks that are capital inadequate and investigates the complementarity between Pillar 1 (risk-based capital requirements) and Pillar 2. In particular, the paper focuses on the role of closure rules when recapitalization is costly. In the model banks are able to manage their portfolios dynamically and their decisions on recapitalization and capital structure are determined endogenously. A feature of our approach is to consider the costs as well as the benefits of capital regulation and to accommodate the behavioral response of banks in terms of their portfolio strategy and capital structure. The paper argues that problems of capital adequacy are minor unless, in at least some states of the world, banks are able to violate the capital adequacy rules. The paper shows how the role of Pillar 2 depends on the effectiveness of capital regulation, i.e., the extent to which banks can "cheat".
    JEL: G21 G28
    Date: 2005–10
  9. By: Ajit K. Ghose (International Labour Office, Employment Strategy Department)
    Date: 2004
  10. By: Arturo Galindo; Fabio Schiantarelli (Boston College); Andrew Weiss (Boston University)
    Abstract: Using firm level panel data from twelve developing countries we explore if financial liberalization improves the efficiency with which investment funds are allocated. A summary index of the efficiency of investment allocation that measures whether investment funds are going to firms with a higher marginal return to capital is developed. We examine the relationship between this and various measures of financial liberalization and find that liberalization increases the efficiency with which investment funds are allocated. This holds after various robustness checks and is consistent with firm level evidence that a stronger association between investment and fundamentals after financial liberalization.
    Keywords: financial liberalization, investment, efficiency, reform, development
    JEL: E22 E44 G28 O16
    Date: 2005–10–04
  11. By: Benjamin M. Friedman
    Abstract: This paper begins by examining the persistence of movements in the U.S. Government’s budget posture. Deficits display considerable persistence, and debt levels (relative to GDP) even more so. Further, the degree of persistence depends on what gives rise to budget deficits in the first place. Deficits resulting from shocks to defense spending exhibit the greatest persistence and those from shocks to nondefense spending the least; deficits resulting from shocks to revenues fall in the middle. The paper next reviews recent evidence on the impact of changes in government debt levels (again, relative to GDP) on interest rates. The recent literature, focusing on expected future debt levels and expected real interest rates, indicates impacts that are large in the context of actual movements in debt levels: for example, an increase of 94 basis points due to the rise in the debt-to-GDP ratio during 1981-93, and a decline of 65 basis point due to the decline in the debt-to-GDP ratio during 1993-2001. The paper next asks why deficits would exhibit the observed negative correlation with key elements of investment. One answer, following the analysis presented earlier, is that deficits are persistent and therefore lead to changes in expected future debt levels, which in turn affect real interest rates. A different reason, however, revolves around the need for markets to absorb the increased issuance of Government securities in a setting of costly portfolio adjustment. The paper concludes with some reflections on “the Perverse Corollary of Stein’s Law”: that is, the view that in the presence of large government deficits nothing need be done because something will be done.
    JEL: E62
    Date: 2005–10
  12. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.
    JEL: D1 D8
    Date: 2005–10
  13. By: Doris Neuberger (University of Rostock)
    Abstract: The financial systems in continental Europe are subject to profound changes in the institutions of market exchange. Banks traditionally holding close relationships with firms are substituted by non-bank institutional investors. The present paper examines whether this implies a substitution of relationship finance by arm’s length finance or of firm-like organization by market exchange. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid organizations, whose comparative advantages depend on two kinds of asset specificity. They are complements to finance and control firms with different redeployability and information opaqueness of assets.
    Keywords: banks, institutional investors, financial systems, corporate governance, markets vs. hierachies, theory of the firm
    JEL: G20 G30 L14 L22
    Date: 2005–10–01
  14. By: Doris Neuberger (University of Rostock)
    Abstract: The financial systems in continental Europe are subject to profound changes in the institutions of market exchange. Banks traditionally holding close relationships with firms are substituted by non-bank institutional investors. The present paper examines whether this implies a substitution of relationship finance by arm’s length finance or of firm-like organization by market exchange. Within the contractual theory of the firm, we seek common features of relationship banking and relationship investing. Extending the governance structure approach, we show that both are hybrid organizations, whose comparative advantages depend on two kinds of asset specificity. They are complements to finance and control firms with different redeployability and information opaqueness of assets.
    Keywords: banks, institutional investors, financial systems, corporate governance, markets vs. hierachies, theory of the firm
    JEL: G20 G30 L14 L22
    Date: 2005–10–03
  15. By: Joshua Aizenman; Reuven Glick
    Abstract: This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. We confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases with the duration of the peg before the crisis. We explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability, but multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well-known time inconsistency problem, but also to steer the economy away from the high inflation equilibria. These gains, however, come at a cost in the form of the monetary authority’s lesser responsiveness to output shocks. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a “trap” whereby the regime initially confers gains in anti-inflation credibility, but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy. We also show that the more conservative is the regime in place and the larger is the cost of regime change, the longer will be the average spell of the fixed exchange rate regime, and the greater the output contraction at the time of a regime change.
    JEL: F15 F31 F43
    Date: 2005–10
  16. By: Q. Farook Akram (Norges Bank (Central Bank of Norway)); Gunnar Bårdsen (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway))
    Abstract: We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.
    Keywords: Monetary policy, asset prices, simple interest rate rules, econometric model
    JEL: C51 C52 C53 E47 E52
    Date: 2005–10–03
  17. By: B Bhaskara Rao (University of the South Pacific); Singh Rup (University of the South Pacific)
    Abstract: The demand for money, especially in the developing countries, is an important relationship for formulating appropriate monetary policy and targeting monetary variables. In this paper we estimate the demand for narrow money in India and evaluate its robustness. It is found that there is a stable demand for money for almost half a century from 1953 to 2003. There is no evidence for any significant effects of the $1991$ financial reforms.
    Keywords: Demand for money, Developing countries, Income and interest rate elasticities, Cointegration, Financial reforms.
    JEL: C1 C5 C8
    Date: 2005–10–02
  18. By: Zeljko Bogetic (The World Bank)
    Abstract: The paper compares the costs and benefits of dollarization for the dollarizing country and the 'anchor' country.
    Keywords: dollarization, dollarisation, costs and benefits, monetary unions
    JEL: F3 G E O P
    Date: 2005–10–05
  19. By: Zeljko Bogetic (The World Bank)
    Abstract: Dollarization is becoming a viable option for a number of countries, but the loss of seigniorage is a major obstacle. The paper looks at the major seigniorage sharing arrangements available and issues that arise in the design of the new arrangements.
    Keywords: dollarization, dollarisation, seigniorage, monetary unions
    JEL: F3 G O P
    Date: 2005–10–05
  20. By: Zeljko Bogetic (The World Bank)
    Abstract: The paper measures economic loss from the problem of inadequate collateral in Bulgaria and proposes solutions consisting of creation of security interests, perfection, and enforcement.
    Keywords: collateral, finance, access to credit, investment, Bulgaria
    JEL: G D6 D5 D7 H O P
    Date: 2005–10–05
  21. By: Juan F. Castro (Universidad del Pacífico); Eduardo Morón (Universidad del Pacífico)
    Abstract: Based on the significance of a Minimum Variance Portfolio (MVP) for the understanding of dollarization equilibria, a significant strand of the debate concerned with the driving forces behind this phenomenon has focused on analyzing the determinants of the relative volatility of inflation vis-à-vis real depreciation. This analysis contributes in the identification of those factors by extending the basic CAPM formulation via the introduction of credit risk that is directly linked to the shock that determines real returns for dollar denominated assets: unanticipated shifts in the real exchange rate. We show this ingredient can end up altering the perceived relative volatility of peso and dollar assets in a way that fuels financial dollarization (by increasing the relative hedging opportunities offered by the latter). We calibrate our model using Peruvian data for the period 1998-2004, and its predictions show a better fit with observed financial dollarization ratios than those of the basic CAPM model.
    Keywords: Financial dollarization, Minimum Variance Portfolio, Peru
    JEL: E44 E58 C34
    Date: 2005–09–30
  22. By: Eckhard Hein (Macroeconomic Policy Institute IMK in the Hans Boeckler Foundation)
    Abstract: In the present paper we explicitly introduce interest payments and debt into a Kaleckian distribution and growth model with an investment function very close to Kalecki’s original writings. The effects of interest rate variations on the short-run equilibrium values of capacity utilisation, capital accumulation and the rate of profit are derived, and the long run effects on the equilibrium debt-capital-ratio are also analysed. It is shown, that the effects of interest variations on the endogenously determined equilibrium values of the model do not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and in some cases on initial conditions with respect to the interest rate and the debt- capital-ratio. If the conditions for short-run ‘normal’ effects of interest rate variations are given, the economy will be characterised by a long-run unstable debt-capital-ratio and by the macroeconomic ‘paradox of debt’. These results are similar to other models and hint to the robustness of Kaleckian ‘monetary’ models of distribution and growth with respect to the specification of the investment function.
    Keywords: Interest rate, debt, capital accumulation, Kaleckian model
    JEL: E12 E22 E25 E44 O42
    Date: 2005–10–05
  23. By: Benu Schneider
    Abstract: After the crises in emerging market economies beginning with that of Mexico in the mid-1990s, the adoption of internationally recognized standards and codes (S&C) of financial best practices came to be seen as a way to strengthen the international financial system. The S&C initiative was launched as such in 1999 but included within its scope work on standards for the different subjects included which had often already been under way for some time. This paper evaluates the progress made so far and considers some of the basic assumptions of the S&C initiative. In particular it examines how far S&C can be instrumental in preventing financial crises, and focuses on issues raised by the initiative from a developing-country perspective. It devotes special attention to both the process of surveillance of S&C by the Bretton Woods institutions (BWI) and to the information which this process generates. In this context it appraises the use of this information by the private sector whose increased engagement with emerging markets is a major part of the rationale of the exercise.
    Date: 2005
  24. By: David Laidler (University of Western Ontario)
    Abstract: This paper briefly discusses why a monetary policy framework that emphasises interest rates has become standard in recent years, and why so many economists have been persuaded simultaneously to downgrade the importance of monetary aggregates. Then it describes Michael Woodford's particular contribution to these developments, and contrasts it with a more traditional approach to the theory of money that stresses its means of exchange role. It suggests that, though there are difficulties aplenty with the latter, Woodford's cashless simplification of the monetary economy presents problems of its own, both for monetary theory per se, and for the discussion of currently relevant monetary policy questions. It concludes that the theoretical basis for monetary policy should embrace wary eclecticism.
    Keywords: money; interest rates; inflation; monetarism; cashless economy; open-market operations rates; unemployment; multiplier
    JEL: E10 E31 E42 E44 E52 E58
    Date: 2005
  25. By: Andrew Cornford
    Abstract: A major aim of Basel II has been to revise the rules of the 1988 Basel Capital Accord in such a way as to align banks´ regulatory capital more closely with their risks, taking account of progress in the measurement and management of risk and of the opportunities which these provide for strengthened supervision. Achievement of this aim has involved the incorporation in Basel II of methods for quantifying banking risks introduced since the late 1980s. The task of the designers of Basel II has been complicated by the way in which the BCBS´s rules for banks´ capital, originally intended for the internationally active banks of its member countries, have become a global standard widely applied in developing as well as developed countries. Acceptance of this role by the BCBS has entailed a global consultation process, whose results have been reflected in three consultative papers and the RF, and the different approaches and options for setting numerical capital requirements which are intended to accommodate banks and supervisors of different levels of sophistication. As well as providing a commentary on the main features of the RF this paper documents the response of the BCBS to some of the more important points which were raised during this consultation process, including the outcome of decisions taken at a meeting in Madrid in October 2003 following comments on the consultative paper of April 2003, and summarises the results of the most recent of the BCBS´s initiatives to estimate the quantitative impact of the Basel II rules on banks´ capital. This discussion includes a review of papers issued by the BCBS as part of the last stage of its work preceding the RF.
    Date: 2005
  26. By: Madhavi Bokil (Clark University)
    Abstract: This paper explores the idea that “Fear of Floating” and accompanying pro-cyclical interest rate policies observed in the case of some emerging market economies may be justified as an optimal discretionary monetary policy response to shocks. The paper also examines how the differences in monetary policies may lead to different degrees of this fear. These questions are addressed with a small open economy, new- Keynesian model with endogenous capital accumulation and sticky prices. The economy consists of two sectors- traded and non-traded. International credit markets are assumed to be imperfect, so that only the traded sector enjoys the ability to borrow internationally in foreign currency. The firms in the traded sector could potentially hold a large proportion of their debt in foreign currency, while the liabilities of the non-traded sector firms are entirely denominated in the domestic currency. Domestic exchange rate volatility adversely affects the balance sheets of the traded sector firms, while interest rate volatility creates problems for the firms in the non-traded sector. In such a situation, the monetary authorities face a dilemma when reacting to shocks. The numerical solution of the model indicates that the central bank’s reaction to shocks depends not only on the net effect of exchange rate movements on output gap and inflation, but also on the relative weight the central bank allocates to stabilizing output in the traded sector as against the non-traded sector. A central bank that assigns relatively higher importance to output stability in the traded goods sector also displays greater aversion for exchange rate volatility.
    Keywords: fear of floating, exchange rates, exchnage rate volatility, monetary policy, emerging countries
    JEL: F3 F4
    Date: 2005–10–04
  27. By: Zeljko Bogetic (The World Bank)
    Abstract: The paper reviews the salient features of officially dollarized economies (with particular reference to Panama) and discusses costs and benefits of official dollarization. Also, the paper reviews existing and some potential seigniorage sharing arrangements and discusses conditions that are conducive to official dollarization, especially in Latin America.
    Keywords: dollarization monetary unions seigniorage Panama Latin America
    JEL: F3 E O P
    Date: 2005–10–05
  28. By: Leon Berkelmans (Reserve Bank of Australia)
    Abstract: Credit is an important macroeconomic variable that helps to drive economic activity and is also dependent on economic activity. This paper estimates a small structural vector autoregression (SVAR) model for Australia to examine the intertwined relationships of credit with other key macroeconomic variables. At short horizons, shocks to the interest rate, the exchange rate, and past shocks to credit are found to be important for credit growth. Over longer horizons, shocks to output, inflation and commodity prices play a greater role. The response of credit to changes in monetary policy is found to be relatively slow, similar to that of inflation and slower than that of output. The model suggests that an unexpected 25 basis point increase in the interest rate results in the level of credit being almost half of a percentage point lower than it otherwise would have been after a bit over one year, and almost 1 per cent lower after four years. Estimates from the model indicate that in responding to the macroeconomic consequences of a credit shock, monetary policy appears to stabilise the economy effectively. As a result of monetary policy’s response, output and the exchange rate are barely affected by a credit shock. The credit shock results in higher inflation for about two years, but it would be higher still over this period in the absence of a monetary policy response. Changes in credit are also moderated as a result of monetary policy’s response.
    Keywords: credit; credit channel; monetary policy
    JEL: E51
    Date: 2005–09
  29. By: Sebastian Edwards
    Abstract: The future of the U.S. current account -- and thus of the U.S. dollar -- depend on whether foreign investors will continue to add U.S. assets to their investment portfolios. However, even under optimistic scenarios, the U.S. current account deficit is likely to go through a significant reversal at some point in time. This adjustment may be as large of 4% to 5% of GDP. In order to have an idea of the possible consequences of this type of adjustment, I have analyzed the international evidence on current account reversals using both non-parametric techniques as well as panel regressions. The results from this empirical investigation indicate that major current account reversals have tended to result in large declines in GDP growth. I also analyze the large U.S. current account adjustment of 1987-1991.
    JEL: F02 F43 O11
    Date: 2005–10

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