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on Monetary Economics |
| By: | Joshua Aizenman (University of California, Santa Cruz); Yeonho Lee (Chungbuk National University, Korea); Yeongseop Rhee (Sookmyung Women's University, Korea) |
| Abstract: | This paper characterizes the precautionary demand for international reserves driven by the attempt to reduce the incidence of costly output decline induced by sudden reversal of short-term capital flows. It validates the main predictions of the precautionary approach by investigating changes in the patterns of international reserves in Korea in the aftermath of the 1997-8 crisis. This crisis provides an interesting case study, especially because of the rapid rise in Korea's financial integration in the aftermath of the East- Asian crisis, where foreigners' shareholding has increased to 40% of total Korean market capitalization. We show that the crisis led to structural change in the hoarding of international reserves, and that the Korean monetary authority gives much greater attention to a broader notion of 'hot money,' inclusive of short-term debt and foreigners' shareholding. |
| Keywords: | short-term capital flows, foreigners' shareholding, precautionary demand for international reserves, |
| Date: | 2004–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:scciec:1032&r=mon |
| By: | Rasmus Fatum (University of Alberta; University of California, Santa Cruz); Michael Hutchison (University of California Santa Cruz Economics Department) |
| Abstract: | Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recently published official daily data and an event study methodology. The event study better fits the stochastic properties of intervention and exchange rate data, i.e. intense and sporadic bursts of intervention activity juxtaposed against a yen/dollar rate continuously changing, than standard time-series approaches. Focusing on daily Japanese and US official intervention operations, we identify separate intervention "episodes" and analyze the subsequent effect on the exchange rate. Using the non-parametric sign test and matched-sample test, we find strong evidence that sterilized intervention systemically affects the exchange rate in the short-run (less than one month). This result holds even when intervention is not associated with (simultaneous) interest rate changes, whether or not intervention is "secret" (in the sense of no official reports or rumors of intervention reported over the newswires), and against other robustness checks. Large-scale (amounts over $1 billion) intervention, coordinated with the Bank of Japan and the Federal Reserve working in unison, give the highest success rate. During the period that the Bank of Japan has reduced interbank rates to 0.5 percent and below (from September 1995), however, only one intervention operation has been coordinated with the Fed and the success rate has been correspondingly low. |
| Date: | 2003–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:scciec:1034&r=mon |
| By: | Rasmus Fatum (University of Alberta; University of California, Santa Cruz); Michael King (Bank of Canada) |
| Abstract: | This paper contains an empirical analysis of high-frequency data on official Bank of Canada intervention and exchange rates (quoted at the end of every 5-minute interval over every 24-hour period). The data-set covers the January 1995 to September 1998 period and is of particular interest as it spans over two distinctly different intervention regimes one characterized by purely rules-based ("mechanistic") intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for a test of the hypothesis that discretionary intervention is more effective than rules-based intervention. Additionally, the paper introduces the issue of currency co-movements to the intervention literature. Employing an event-study methodology and different criteria for success, we find that intervention does not systematically affect movements in the CAD/USD or reduce realized price volatility. This is the case for both rules-based and discretionary intervention |
| Keywords: | Foreign Exchange Intervention; Intraday Data; Event Studies; Currency Co-movement, |
| Date: | 2004–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:scciec:1047&r=mon |
| By: | Rasmus Fatum (University of Alberta; University of California, Santa Cruz); Michael Hutchison (University of California Santa Cruz Economics Department) |
| Abstract: | Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recently published official daily data and an event study methodology. The event study better fits the stochastic properties of intervention and exchange rate data, i.e. intense and sporadic bursts of intervention activity juxtaposed against a yen/dollar rate continuously changing, than standard time-series approaches. Focusing on daily Japanese and US official intervention operations, we identify separate intervention "episodes" and analyze the subsequent effect on the exchange rate. Using the non-parametric sign test and matched-sample test, we find strong evidence that sterilized intervention systemically affects the exchange rate in the short-run (less than one month). This result holds even when intervention is not associated with (simultaneous) interest rate changes, whether or not intervention is "secret" (in the sense of no official reports or rumors of intervention reported over the newswires), and against other robustness checks. Large-scale (amounts over $1 billion) intervention, coordinated with the Bank of Japan and the Federal Reserve working in unison, give the highest success rate. During the period that the Bank of Japan has reduced interbank rates to 0.5 percent and below (from September 1995), however, only one intervention operation has been coordinated with the Fed and the success rate has been correspondingly low. |
| Date: | 2003–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1025&r=mon |
| By: | Menzie Chinn (University of Wisconsin, Madison); Jeffrey Frankel (Harvard University) |
| Abstract: | We analyze the behavior of world interest rates, focusing on the ramifications of European Monetary Union. Our analysis indicates that nominal US interest rates tend to drive European rates at both the short and long horizons. There is some evidence that US rates are becoming increasingly influenced by European rates, but the relationship is still far from symmetric, despite EMU. We also investigate the empirical determinants of real interest rates over the past decade and a half. Real US interest rates also have an influence upon European rates, although German rates do not appear to have a similar effect upon US rates. Conditioning on foreign interest rates, we find that real interest rates on government debt depend significantly upon current and expected levels of debt, in Europe as in the US. |
| Date: | 2003–11–22 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucscec:1031&r=mon |
| By: | Radim Bohacek; Hugo Rodriguez Mendizabal |
| Abstract: | This paper analyzes the propagation of monetary policy shocks through the creation of credit in an economy. Models of the monetary transmission mechanism typically feature responses which last for a few quarters contrary to what the empirical evidence suggests. To propagate the impact of monetary shocks over time, these models introduce adjustment costs by which agents find it optimal to change their decisions slowly. This paper presents another explanation that does not rely on any sort of adjustment costs or stickiness. In our economy, agents own assets and make occupational choices. Banks intermediate between agents demanding and supplying assets. Our interpretation is based on the way banks create credit and how the monetary authority affects the process of financial intermediation through its monetary policy. As the central bank lowers the interest rate by buying government bonds in exchange for reserves, high productive entrepreneurs are able to borrow more resources from low productivity agents. We show that this movement of capital among agents sets in motion a response of the economy that resembles an expansionary phase of the cycle. |
| Keywords: | Credit, Monetary policy shock, Heterogeneous agents |
| JEL: | E50 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp244&r=mon |
| By: | Alexandre MINDA (LEREPS-GRES) |
| Abstract: | This paper will analyse the debate about official dollarization in Latin America. Because of the opportunity cost of dollarization, replacing a national currency by a foreign currency is a solution of last resort to the financial instability of emerging economies. To clarify the discussion, a taxonomy of dollarization regimes is drawn up in order to make an inventory of officially dollarized countries, territories and dependencies. The foundations for adopting complete dollarization are analysed through three elements : an account of the limits to corner solutions, the identification of the economic contexts which are favourable to the adoption of foreign currencies and the reasons behind the legitimacy crisis of national currencies. To determine what is at stake in such decisions, cost advantage analysis mentions, first of all, the expected benefits highlighted by the advocates of complete dollarization. A detailed study of its potential impact will then allow us to evaluate the induced costs of the disappearance of national currencies. Finally, by looking at emerging countries that have adopted this exchange regime, the limits of adopting such a solution are underlined, particularly by the fact that the disappearance of national currencies implies an abandonment of monetary sovereignty and a loss of a powerful symbol of national assertion and identity. |
| Keywords: | Dollarization, Latin America, exchange rate regime, monetary sovereignty |
| JEL: | E E F F |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:grs:wpegrs:2005-02&r=mon |
| By: | Byström, Hans (Department of Economics, Lund University); Olofsdotter , Karin (Department of Economics, Lund University); Söderström, Lars (Department of Economics, Lund University) |
| Abstract: | This paper analyzes regional differences across Chinese regions, employing an optimum currency area framework. Empirically, we consider the cross-sectional correlation measure of Solnik & Roulet (2000) when examining data on GDP, trade, inflation and regional budget between 1991 and 2001. Our preliminary results suggest that China probably is more of an optimum currency area than first expected. It is debatable, though, whether Hong Kong and Macao are appropriate as candidates. The results also indicate that there might be other constellations of regions that could be closer to an optimum currency area than the current Yuan area. |
| Keywords: | China; optimum currency area; regional developments; cross-sectional correlation |
| JEL: | C32 F33 O53 |
| Date: | 2005–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_006&r=mon |
| By: | Westerlund, Joakim (Department of Economics, Lund University) |
| Abstract: | Recent empirical studies suggest that the Fisher hypothesis, stating that inflation and nominal interest rates should cointegrate with a unit parameter on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be explained in part by the low power inherent in univariate cointegration tests and that the use of panel data should generate more powerful tests. In doing so, we propose two new panel cointegration tests, which are shown by simulation to be more powerful than other existing tests. Applying these tests to a panel of monthly data covering the period 1980:1 to 1999:12 on 14 OECD countries, we find evidence supportive of the Fisher hypothesis. |
| Keywords: | Fisher Hypothesis; Residual-Based Panel Cointegration Test; Monte Carlo Simulation. |
| JEL: | C12 C15 C32 C33 E40 |
| Date: | 2005–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_010&r=mon |
| By: | Nelson C. Mark; |
| Abstract: | When central banks set nominal interest rates according to an interest rate reaction function, such as the Taylor rule, and the exchange rate is priced by uncovered interest parity, the real exchange rate is determined by expected inflation differentials and output gap differentials. In this paper I examine the implications of these Taylor-rule fundamentals for real exchange rate determination in an environment where market participants are ignorant of the numerical values of the model's coefficients but attempt to acquire that information using least-squares learning rules. I find evidence that this simple learning environment provides a plausible framework for understanding real dollar--DM exchange rate dynamics from 1976 to 2003. The least-squares learning path for the real exchange rate implied by inflation and output gap data exhibits the real depreciation of the 70s, the great appreciation (1979.4-1985.1) and the subsequent great depreciation (1985.2-1991.1) observed in the data. An emphasis on Taylor-rule fundamentals may provide a resolution to the exchange rate disconnect puzzle. |
| JEL: | F4 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11061&r=mon |
| By: | Mats Persson; Torsten Persson; Lars E.O. Svensson |
| Abstract: | This paper demonstrates how time consistency of the Ramsey policy - the optimal fiscal and monetary policy under commitment - can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004). |
| JEL: | E31 E52 H21 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11088&r=mon |
| By: | Francis X. Diebold; Monika Piazzesi; Glenn Rudebusch |
| Abstract: | From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affne no-arbitrage term structure models. |
| JEL: | G1 E4 E5 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11089&r=mon |
| By: | Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism. The results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker. |
| Keywords: | Central bank conservatism, central bank independence, inflation bias, liberal central banker |
| JEL: | E52 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0502&r=mon |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania); Monika Piazzesi (Graduate School of Business, University of Chicago); Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco) |
| Abstract: | From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models. |
| Keywords: | term structure, yield curve, Nelson-Siegel model, affine equilibrium model |
| JEL: | G1 E4 E5 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:05-008&r=mon |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Jin (Ginger) Wu (Department of Economics, University of Pennsylvania) |
| Abstract: | We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals. |
| Keywords: | Realized volatility, realized beta, conditional CAPM, business cycle |
| JEL: | G12 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:05-009&r=mon |