nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒02‒06
eight papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Bank Loan Supply and Monetary Policy Transmission in Germany: An Assessment Based on Matching Impulse Responses By Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
  2. Gains from Coordination in a Multi-Sector Open Economy: Does It Pay to Be Different? By Zheng Liu; Evi Pappa
  3. Monetary and Exchange Rate Stability at the EU Mediterranean Borders By Christian Bauer; Bernhard Herz
  4. Central Bank independence: Taylor Rule and Fiscal policy By Luis Alberto Alonso González; Pilar García Martínez
  5. Liquidity and growth traps: a framework for the analysis of macroeconomic policy in the 'age' of Central Banks By Alfonso Palacio-Vera
  6. Investigating the Relationships between the Yield Curve, Output and Inflation using an Arbitrage-Free Version of the Nelson and Siegel Class of Yield Curve Models By Leo Krippner
  7. Core Inflation and Inflation Targeting in a Developing Economy By Luis A. Rivas
  8. Government Leadership and Central Bank Design By Andrew Hughes Hallett; Diana N. Weymark

  1. By: Oliver Hülsewig; Eric Mayer; Timo Wollmershäuser
    Abstract: This paper addresses the credit channel in Germany by using aggregate data. We present a stylized model of the banking firm in which banks decide on their loan supply in light of uncertainty about the future course of monetary policy. Applying a vector error correction model (VECM), we estimate the response of bank loans after a monetary policy shock taking into account the reaction of the output level and the loan rate. We estimate our model to characterize the response of bank loans by matching the theoretical impulse responses with the empirical impulse responses to a monetary policy shock. Evidence in support of the credit channel can be reported.
    Keywords: monetary policy transmission, credit channel, loan supply, loan demand, minimum distance estimation
    JEL: E44 E51
    Date: 2005
  2. By: Zheng Liu; Evi Pappa
    Abstract: Do countries gain by coordinating their monetary policies if they have different economic structures? We address this issue in the context of a new open-economy macro model with a traded and a non-traded sector and more importantly, with a across-country asymmetry in the size of the traded sector. We study optimal monetary policy under independent and cooperating central banks, based on analytical expressions for welfare objectives derived from quadratic approximations to individual preferences. In the presence of asymmetric structures, a new source of gains from coordination emerges due to a terms-of-trade externality. This externality affects unfavorably the country that is more exposed to trade and its effects tend to be overlooked when national central banks act independently. The welfare gains from coordination are sizable and increase with the degree of asymmetry across countries and the degree of openness, and decrease with the within-country correlation of sectoral shocks.
    Date: 2005–01
  3. By: Christian Bauer; Bernhard Herz
    Abstract: Stabilizing the exchange rate is a major monetary policy goal in a number of Mediterranean countries.We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize de facto exchange rate regimes and to derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of seven non European Mediterranean countries, Algeria, Egypt, Israel, Libya, Morocco, Turkey and Tunisia, with the benchmark of four European non EU countries namely Albania, Bulgaria, Croatia, and Romania. Our results indicate that the fundamental volatility of the market based ex- change rates is quite moderate and that markets assign a moderate degree of credibility to the exchange rate management of most of the countries.
    Keywords: monetary policy, exchange rate policy, credibility, Mediterranean, Eastern Europe, technical trading
    JEL: D84 E42 F31
    Date: 2004–12
  4. By: Luis Alberto Alonso González (Universidad Complutense, Madrid); Pilar García Martínez (Universidad de Salamanca)
    Abstract: In this article we will show that independence is not enough to impose a given inflation target when the Central Bank is following a Taylor rule, moreover in such a case, the fiscal authority will be able to set a different objective from the one sought by the monetary authority. On the other hand, if the fiscal authority is acting in accordance with a rule in which there is a estimated equilibrium expenditure G* similar to the estimated real interest rate r* in the Taylor rule, neither the government will be able to establish its inflation target value. In this sense, the type of rule that the economic authorities implement is essential for stabilization purposes. The different periods of implementation in fiscal and monetary policy are taken into account although they did not change the main conclusions.
    Date: 2004
  5. By: Alfonso Palacio-Vera (Universidad Complutense de Madrid.)
    Abstract: Conventional explanations of how a growing potential output generates an equi-proportional increase in aggregate demand in the long run usually rely on the real balance effect. Yet this mechanism has a negligible size and an uncertain sign. We present a theoretical framework for the analysis of the power of conventional monetary policy to take the economy down its potential output path. We develop a simple model that predicts the behavior of the ‘neutral’ interest rate and the ‘pseudo-warranted’ interest rate in the wake of different types of shocks. We identify several different scenarios according to whether the behavior of the ‘neutral’ real interest rate enhances or weakens the power of conventional monetary policy. Likewise, we identify several regimes depending on whether a rise in the target rate of inflation in steady growth yields faster or slower output growth when the ‘natural’ rate is not (fully) exogenous. In addition, we provide a formal definition of the concept of the ‘growth trap’ which complements the notion of the ‘liquidity trap’. Finally, we propose a taxonomy of monetary policy regimes.
    Date: 2005
  6. By: Leo Krippner (AMP Capital Investors)
    Abstract: This article provides a theoretical economic foundation for the popular Nelson and Siegel (1987) class of yield curve models (which has been absent up to now). This foundation also offers a new framework for investigating and interpreting the relationships between the yield curve, output and inflation that have already been well-established empirically in the literature. Specifically, the level of the yield curve as measured by the VAO model is predicted to have a cointegrating relationship with inflation, and the shape of the yield curve as measured by the VAO model is predicted to correspond to the profile (that is, timing and magnitude) of future changes in the output gap (that is, output growth less the growth in potential output). These relationships are confirmed in the empirical analysis on 50 years of United States data.
    Keywords: yield curve; term structure of interest rates; Nelson and Siegel model; inflation, output
    JEL: E43 E31 E32
    Date: 2005–02–01
  7. By: Luis A. Rivas (Department of Economics, Vanderbilt University and Banco Central de Nicaragua)
    Abstract: This paper is concerned with inflation targeting as a potential monetary policy objective in a developing economy. Using data from Nicaragua, it first studies the extent to which the Consumer Price Index (CPI) could be used to formulate short-run inflation targets. It is found that due to the particular cross-sectional properties of the relative-price distributions, the rate of change in the CPI may not be the best index for this purpose. As a consequence, the paper is also concerned with the choice of alternative indicators of inflation and their statistical properties. These alternative measures are ranked according to their ability to forecast the rate of change in the price level. Finally, the relationship between the dispersion and skewness of the relative-price distribution and generalized inflation is studied using time series analysis.
    Keywords: Core inflation, developing economies, forecasting, monetary policy, price index, tiem-series
    JEL: C22 C43 E31 E37 E52 O23 O54
    Date: 2003–05
  8. By: Andrew Hughes Hallett (Department of Economics, Vanderbilt University); Diana N. Weymark (Department of Economics, Vanderbilt University)
    Abstract: This article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government with both distributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared to a regime in which monetary and fiscal policy is determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities. The implications of these results for a country deciding whether to join a monetary union are also considered.
    Keywords: Central bank independence, monetary policy delegation, policy coordination, policy game, policy leadership
    JEL: E52 E61 F42
    Date: 2002–05

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