nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒03‒13
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Who was in the driving seat in Europe during the nineties, International financial markets or the BUBA? By Roger Hammersland
  2. Central bank power is a matter of faith By Bengtsson, Ingemar
  3. Monetary Policy in Real Time By Domenico Giannone; Lucrezia Reichlin; Luca Sala
  4. A less effective monetary transmission in the wake of EMU? Evidence from lending rates pass-through By Gianluca Di Lorenzo; Giuseppe Marotta
  5. Stocks, Bonds, Money Markets and Exchange Rates: Measuring International Financial Transmission By Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
  6. Monetary Policy with Judgment: Forecast Targeting By Lars E.O. Svensson
  7. Measuring the Institutional Change of the Monetary Regime in a Political Economy Perspective (Groups of interest and monetary variables during the Currency Board introduction in Bulgaria) By Nikolay Nenovsky; Yorgos Rizopoulos
  8. From a currency board to the euro: Public attitudes toward unilateral euroization in Bulgaria By Neven T. Valev
  9. Inflation Targeting, Between Rhetoric and Reality. The Case of Transition Economies By Daniel Daianu; Laurian Lungu
  10. Targeting Relative Inflation Forecast as Monetary Policy Framework for Adopting the Euro By Lucjan T. Orlowski
  11. Market inflation seasonality management By Nabyl Belgrade

  1. By: Roger Hammersland (Norges Bank)
    Abstract: The purpose of this paper is to reexamine empirically the relationship between long-term interest rates in well integrated ?nancial markets. The analysis focuses on long-term interest rates in the US and Germany and has been carried out within the framework of a ?ve dimensional VAR for the simultaneous determination of short- and long-term interest rates in the US and Germany and the rate of exchange rate depreciation. The results strongly support the existence of a long-run relationship between the long-term German and the longterm US interest rate and imply a full pass-through of changes in the long-term US rate into the corresponding German rate. The analysis also substantiates that the direction of causality goes from the longterm US to the long-term German interest rate. With regard to the possibility of controlling the long end of the market on the part of the Bundesbank, the paper apparently takes on a rather pessimistic view, as there is nothing to indicate a long-run relationship between shortand long-term German interest rates. However, the strong in?uence that short-term German interest rates exhibit on German long-term interest rates in the very short run according to the structural model of this paper, might be taken to indicate that the opposite is the case, as e ects originating from expectations of future short-term interest rates might totally neutralize an unequivocally positive short-run portfolio e ect in the long run. If this is the case, there is nothing strange to the fact that one is unable to identify a long-run relationship between short- and long-term German interest rates. On the contrary, it is exactly what to be expected if the monetary transmission mechanism works appropriately.
    Keywords: Cointegration, Simultaneous Equation Models, International Interest Rate Linkages, Transmission Mechanism
    JEL: C32 E43 E52 E58
    Date: 2004–12–31
  2. By: Bengtsson, Ingemar (Department of Economics, Lund University)
    Abstract: This paper reconsiders how central banks get involved in the process of determining nominal variables such as market interest rates and inflation rates. It is argued that the traditional story deriving central bank power from its monopoly of issuing base money is flawed. That story - in its various guises - is based on the quantity equation. This equation, however, is only applicable in the hypothetical only-cash-world, i.e. in a world where all transactions has to be paid for with central bank issued notes and coins. Nevertheless, the vast majority of economists would agree that, in practice, central banks seem to influence interest and inflation rates. Here, we suggest that the explanation is that central banks have acquired a role as focal point for those variables. It is possible because interest setting is a coordination game, in which agents have to predict each others expectations.
    Keywords: entral Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory
    JEL: C70 E31 E42 E43 E44 E51 E52 E58
    Date: 2005–03–04
  3. By: Domenico Giannone; Lucrezia Reichlin; Luca Sala
    Abstract: We analyse the panel of the Greenbook forecasts (sample 1970-1996) and a large panel of monthly variables for the US (sample 1970-2003) and show that the bulk of dynamics of both the variables and their forecasts is explained by two shocks. Moreover, a two factor model which exploits, in real time, information on many time series to extract a two dimensional signal, produces a degree of forecasting accuracy of the federal funds rate similar to that of the markets, and, for output and inflation, similar to that of the Greenbook forecasts. This leads us to conclude that the stochastic dimension of the US economy is two. We also show that dimension two is generated by a real and nominal shock, with output mainly driven by the real shock and inflation by the nominal shock. The implication is that, by tracking any forecastable measure of real activity and price dynamics, the Central Bank can track all fundamental dynamics in the economy.
  4. By: Gianluca Di Lorenzo; Giuseppe Marotta
    Abstract: A new approach to search for structural breaks in the retail lending rates pass-through in the wake of EMU is proposed and implemented for Italy and Portugal. The econometric exercise shows that breakpoints cluster in the second semester 1999 and that the pass-through on short term lending is, in contrast with earlier research, sizeably lower in the post-break period. The recently proposed distinction between monetary policy and cost-of-funds approaches in the passthrough analysis does not yield different breakpoints. These results challenge the widely held view that EMU has in its wake enhanced the effectiveness of monetary transmission via the banking sector and made it more uniform across countries, because of rising and converging PTs. A strengthened relationship lending could at least partly explain the reduced passthrough in the Italian case.
    Keywords: Interest rates; Monetary policy; European Monetary Union; Relationship lending; Cointegration analysis; Structural breaks
    JEL: E43 E52 E58 F36
    Date: 2005–03
  5. By: Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon
    Abstract: The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers.
    JEL: E44 F3 C5
    Date: 2005–03
  6. By: Lars E.O. Svensson
    Abstract: "Forecast targeting," forward-looking monetary policy that uses central-bank judgment to construct optimal policy projections of the target variables and the instrument rate, may perform substantially better than monetary policy that disregards judgment and follows a given instrument rule. This is demonstrated in a few examples for two empirical models of the U.S. economy, one forward looking and one backward looking. A complicated infinite-horizon central-bank projection model of the economy can be closely approximated by a simple finite system of linear equations, which is easily solved for the optimal policy projections. Optimal policy projections corresponding to the optimal policy under commitment in a timeless perspective can easily be constructed. The whole projection path of the instrument rate is more important than the current instrument setting. The resulting reduced-form reaction function for the current instrument rate is a very complicated function of all inputs in the monetary-policy decision process, including the central bank's judgment. It cannot be summarized as a simple reaction function such as a Taylor rule. Fortunately, it need not be made explicit.
    JEL: E42 E52 E58
    Date: 2005–03
  7. By: Nikolay Nenovsky; Yorgos Rizopoulos
    Abstract: The paper explores the possibilities to measure the institutional change in the monetary field. A political economy theoretical framework is built up, where the change of the monetary regime is analyzed as the outcome of the debtors - creditors interactions. In this perspective, the value of some traditional monetary variables during the period before and after the introduction of the Currency Board in Bulgaria, in 1997, reveals the main actors' evolving relative positions.
    Keywords: institutional change, monetary regime, Currency Board, transition, Bulgar
    JEL: E42 E52 O10 P30
    Date: 2004–12–01
  8. By: Neven T. Valev
    Abstract: Bulgaria has operated a currency board since 1997. It is expected to join the EU in 2007 and the EMU thereafter. This paper uses survey data to analyze public attitudes toward adoption of the euro in advance of EMU membership. Bulgarians are equally split in support for and opposition to euroization. The reasons to support euroization include the eliminated risk of currency devaluation and the perception that the euro is already widely used in the economy. The opposition derives from people’s attachment to the national currency and from concerns about the conversion costs involved in a switch to the euro.
    Keywords: Euroization; Dollarization; Euro; Survey Data; Bulgaria; Currency Boards
    JEL: P2 F3
    Date: 2005–01–01
  9. By: Daniel Daianu; Laurian Lungu
    Abstract: The paper examines the inflation targeting regime in the context of transition economies. Recent years have witnessed an increasing number of central banks in these countries moving towards the implementation of inflation targeting regimes. However, the success of such a regime depends largely on the degree to which certain general requirements are met. As experience in a number of transition economies has shown so far, targeting inflation is not an easy task. The ongoing restructuring process in these economies makes the inflation forecasting process more difficult and introduces an additional source of uncertainty in the system. By unequivocally choosing inflation as a nominal anchor the central banks could face potential dilemmas if, for example, exchange rate appreciated too much under the pressure of massive capital inflows. The paper presents the broad framework in which inflation targeting could operate efficiently and attempts to assess the extent to which such a regime, when applied to transition economies, could fit into this framework.
    Keywords: Inflation Targeting, Eastern Europe
    JEL: E52 E60
    Date: 2005–01–01
  10. By: Lucjan T. Orlowski
    Abstract: This study proposes relative inflation forecast targeting as an operational framework of monetary policy for adopting the euro by the EU new Member States. This strategy assumes containing differentials between the domestic and the eurozone inflation forecasts as an operational target. A model prescribing the RIFT framework is presented along with a set of appropriate policy indicator variables and instrument rules. The proposed framework advances the strategy based on relatively strict inflation targeting that is currently pursued by some NMS. Several ARCHclass tests in various functional forms are employed for providing preliminary empirical evidence on convergence of inflation differentials relative to the euro area for Poland, Czech Republic and Hungary.
    Keywords: Inflation targeting; Monetary convergence; Euro adoption; EU new Member States.
    JEL: E42 E52 E61 F36 P24
    Date: 2005–02–01
  11. By: Nabyl Belgrade (CERMSEM et CDC IXIS-CM,R&D)
    Abstract: In this paper, we examine various methods in discrete time to extract and estimate the seasonality component of the CPI curve. One estimated, we show how to include this effect in the construction of the forward CPI curve. We then explain how to link it to a continuous time market model. Last but not least, we study the consistency between the various estimation methods, based on the cycle theory.
    Keywords: Historical & forward CPI curve; decomposition scheme; trend; regular & irregular cycle; replication
    Date: 2004–06

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