nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒02‒27
six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. U.S. Domestic Money, Inflation and Output By Yunus Aksoy; Tomasz Piskorski
  2. Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy By di Giovanni, Julian; McCrary, Justin; von Wachter, Till
  3. Inflation and Innovation-driven Growth By Peter Funk; Bettina Kromen
  4. Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy By Giorgio Primiceri
  5. Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004 By Mitsuru Iwamara; Takeshi Kudo; Tsutomu Watanabe
  6. How Does a Global Disinflation Drag Inflation in Small Open Economies? By Marco Vega; Diego Winkelreid

  1. By: Yunus Aksoy (School of Economics, Mathematics & Statistics, Birkbeck College); Tomasz Piskorski
    Abstract: Recent empirical research documents that the strong short-term relationship between U.S. monetary aggregates on one side and inflation and real output on the other has mostly disappeared since the early 1980s. Using the direct estimate of flows of USD abroad we find that domestic money (currency corrected for the foreign holdings of dollars) contains valuable information about future movements of U.S. inflation and real output. Statistical evidence suggests that the Friedman-Schwartz stylized facts can be reestablished once the focus of analysis is back on the correct measure of domestic monetary aggregates.
    Keywords: foreign holdings, domestic money, monetary aggregates, information value
    JEL: E3 E4 E5
    Date: 2005–02
  2. By: di Giovanni, Julian (IMF); McCrary, Justin (University of Michigan); von Wachter, Till (Columbia University and IZA Bonn)
    Abstract: Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We compare this identification strategy to the vector autoregression approach, and give an interpretation of our estimates that is appropriate in a dynamic context. Moreover, we show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.
    Keywords: monetary policy, forward looking bias, instrumental variables
    JEL: E52 J60
    Date: 2005–02
  3. By: Peter Funk; Bettina Kromen
    Abstract: This paper models the relationship between inflation and steady state growth in a model combining standard Schumpeterian growth with a standard New Keynesian specification of nominal price rigidity. Positive money growth has two clear-cut countervailing effects on the incentive to innovate. Past price rigidity causes the use of an inefficiently large quantity of cheap old intermediate goods, reducing demand for new ones and hence, the incentive to innovate. Future price rigidity erodes the new good’s relative price, increasing demand and therefore the current incentive to innovate. In numerical calibrations the negative effect of inflation on growth dominates.
    Keywords: Inflation, endogenous growth, price rigidity
    JEL: E31 O30 O42
    Date: 2005–02–15
  4. By: Giorgio Primiceri
    Abstract: This paper provides an explanation for the run-up of U.S. inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s, which standard macroeconomic models have difficulties in addressing. I present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally, conditional on their current beliefs. The steady state associated with the self-confirming equilibrium of the model is characterized by low inflation. However, prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the Phillips curve. I estimate the model using likelihood methods. The estimation results show that the model accounts remarkably well for the evolution of policymakers%u2019 beliefs, stabilization policy and the postwar behavior of inflation and unemployment in the United States.
    JEL: E31 E32 E5
    Date: 2005–02
  5. By: Mitsuru Iwamara; Takeshi Kudo; Tsutomu Watanabe
    Abstract: We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999%u20142004. First, we find that the Bank of Japan%u2019s policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan%u2019s commitment failed to have su.cient influence on the market%u2019s expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999%u20142002 was higher than predicted by the historical regularity, implying that the Japanese government deviated from the Ricardian rule toward fiscal tightening. These findings suggest that inappropriate conduct of monetary and fiscal policy during this period delayed the timing to escape from the liquidity trap.
    JEL: E31 E52 E58 E61 E62
    Date: 2005–02
  6. By: Marco Vega (LSE and Central Bank of Peru); Diego Winkelreid (Central Bank of Peru)
    Abstract: This paper shows how persistent world inflation shocks hitting a small open economy can re-weight the importance of domestic and foreign factors in the determination of prices. In particular, we study why a global disinflation environment may imply a weakening of the channels whereby domestic shocks affect inflation. We derive a state-dependent Phillips curve based on translog preferences that make the elasticity of substitution of domestic goods sensitive to foreign prices. With this approach we are able to replicate this dragging effect of global disinflation on domestic inflation. We also provide empirical evidence from a wide panel of countries to support the significance of such an effect.
    Keywords: Phillips Curve, Translog Aggregator, Competitiveness
    JEL: E31 E52
    Date: 2005–01

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