nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒03‒06
five papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation? By Peter J. Klenow and Oleksiy Kryvtsov
  2. Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States By Amir Kia
  3. Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004 By Mitsuru Iwamura; Takeshi Kudo; Tsutomu Watanabe
  4. Monetary policy transmission mechanisms in the CEECs: How important are the differences with the euro area? By Jerome Creel; Sandrine Levasseur
  5. Welfare Effects of Monetary Policy Rules in a Model with Nominal Rigidities and Credit Market Frictions By PAUSTIAN MATTHIAS

  1. By: Peter J. Klenow and Oleksiy Kryvtsov
    Abstract: Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S. Bureau of Labor Statistics to decompose the variance of consumer price inflation from 1988 through 2003. We find that around 95% of the variance of monthly inflation stems from fluctuations in the average size of price changes, i.e., the intensive margin. When we calibrate a prominent state-dependent pricing model to match this empirical variance decomposition, the model's shock responses are very close to those in time-dependent pricing models.
    Keywords: Inflation and prices
    JEL: E31 E32
    Date: 2005
  2. By: Amir Kia (Department of Economics,Carleton University)
    Keywords: Monetary Policy Transparency, forward looking agents, risk, volatility, money market.
    Date: 2005–02–21
  3. By: Mitsuru Iwamura; 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 1999-2004. First, we find that the Bank of Japan's 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's commitment failed to have suffcient influence on the market's expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999-2002 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.
    Date: 2005–03
  4. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Sandrine Levasseur (Observatoire Français des Conjonctures Économiques)
    Abstract: We use a structural VAR model with short-term restrictions to investigate the relative importance of interest rate, exchange rate and credit channels in the monetary policy transmission (MPT) for the Czech Republic, Hungary and Poland over 1993:1-2004:3. Main results are as follows. First, in the three countries, following a positive shock on the interest rate, prices increase instead of decreasing, due to the immediate depreciation of the nominal exchange rate. The results thus exhibit an "exchange rate" puzzle conducing to the appearance of a "price-puzzle". Second, none channel is very powerful for the MPT in the three countries. Nevertheless, the exchange rate and the interest rate channels play a growing role over the recent period in Poland, compared with the same channels in the Czech Republic and Hungary. As nominal exchange rate fluctuations allow for greater real shocks dampening in Poland, the cost of entering EMU may be more costly for this country than for the Czech Republic or Hungary.
    Keywords: monetary policy transmission, VAR models, exchange rate regimes
    JEL: E52 E58 F47
    Date: 2005
    Abstract: This paper evaluates monetary policy rules in a business cycle model with staggered prices and wage setting a la Calvo and asymmetric information in the credit market. Rules are compared in a utility based welfare metric, the effects of the model's nonlinear dynamics are captured by a quadratic approximation to the policy function. The firms net worth crucially affects the terms of obtaining outside finance. Financial frictions dampen the economy's response to shocks and make them more persistent. For the baseline calibration, the welfare costs of price stickiness are found to be less than 0.04 per cent of steady state consumption. However, wage stickiness can induce welfare costs of up to 0.85 per cent of steady state consumption. An interest rate rule that places high weight on stabilizing wage inflation can eliminate most of these costs. These findings are by and large independent of the existence of other real distortions in the model, namely credit frictions.
    Date: 2004–03

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