nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒04‒03
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  2. An empirical examination of exchange-rate credibility determinants in the EMS By Francisco Ledesma-Rodríguez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
  3. Testing the BalassA-Samuelson hypothesis in two different groups of countries: OECD and Latin America By José García Solanes; Fernando Torrejón Flores
  4. What Happens After the Central Bank of Brazil Increases the Target Interbank Rate by 1%? By Rubens Penha Cysne
  5. US Monetary Police 1988-2004: An Empirical Analysis By Anders Møller Christensen; Heino Bohn Nielsen
  6. Inflation Targeting and Output Growth: Evidence from Aggregate European Data By Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanassios Vamvakidis
  7. Monetary Aggregation By William Barnett
  8. Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience By Tomáš Holub
  9. Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners By Aleš Bulíř; Kateřina Šmídková
  10. EU Enlargement and Endogeneity of some OCA Criteria: Evidence from the CEECs By Ian Babetskii
  11. The Role of Banks in the Czech Monetary Policy Transmission Mechanism By Anca Pruteanu
  12. Re-examining inflation and inflation uncertainty in developed and emerging countries By Daal, Elton; Naka, Atsuyuki; Sanchez, Benito
  13. Aggregate vs Disaggregate Data Analysis — A Paradox in the Estimation of a Money Demand Function of Japan Under the Low Interest Rate Policy By Cheng Hsiao; Yan Shen; Hiroshi Fujiki
  14. Monetary Policy Transparency:Too Good to be True? By Iris Biefang-Frisancho Mariscal; Peter Howells

  1. By: Rebeca Albacete; Antoni Espasa
    Abstract: Economic agents and financial authorities require frequent updates to a path of accurate inflation forecasts and need forecasts to include an explanation of the factors by which they are determined. This paper studies how to approach this need, developing a method for analysing inflation in the euro area, measured according to HICP. Time series models using the most recent information on prices and an important functional and geographically disaggregation can provide monthly forecasts which are reasonably accurate, but they do not provide an explanation of the factors by which the forecast is determined. In this respect, it is important to enlarge the data set used considering explanatory variables and build congruent econometric models including variables which, following previous works by D. Hendry, capture disequilibria on different markets, goods and services, labour, monetary and international. The final result of this work shows that combining the forecasts from a monthly time series vector model, constructed on price subindexes from a disaggregation of the HICP by countries and sectors, with the forecasts derived from a quarterly econometric vector model on aggregate inflation and other economic variables, very accurate forecasts are obtained. Both vector models are specified including empirical cointegration restrictions, which in the first case capture the constrains necessary present between the trends of the price subindexes and in the second approximate the long-run restrictions postulated by economic theory.
    Date: 2005–01
  2. By: Francisco Ledesma-Rodríguez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
  3. By: José García Solanes; Fernando Torrejón Flores
  4. By: Rubens Penha Cysne (EPGE/FGV)
    Date: 2005–03
  5. By: Anders Møller Christensen (Danmarks Nationalbank); Heino Bohn Nielsen (Institute of Economics, University of Copenhagen)
    Abstract: Relationships between the Federal funds rate, unemployment, inflation, and the long-term government-bond rate are investigated with cointegration techniques. We find a stable long-term relationship between the Federal funds rate, unemployment, and the bond rate. This relationship is interpretable as a policy target because deviations are corrected primarily via the Federal funds rate. A traditional Taylor-type rule is clearly rejected by the data. Inflation does thus only influence the instrument indirectly via the bond rate, but we find that inflation is controllable with the Federal funds rate. The results are in accordance with recent developments in monetary theory stressing management of expectations as an important transmission channel.
    Keywords: cointegration; equilibrium correction; monetary policy; Taylor rule; Bond rate
    JEL: C32 E52
    Date: 2005–02
  6. By: Nicholas Apergis (University of Macedonia, Greece); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Alexandros Panethimitakis (University of Athens); Athanassios Vamvakidis (International Monetary Fund)
    Abstract: This paper evaluates inflation targeting and assesses its merits by comparing alternative targets in a macroeconomic model. We use European aggregate data to evaluate the performance of alternative policy rules under alternative inflation targets in terms of output losses. We employ two major alternative policy rules, forward-looking and spontaneous adjustment, and three alternative inflation targets, zero percent, two percent, and four percent inflation rates. The simulation findings suggest that forward-looking rules contributed to macroeconomic stability and increase monetary policy credibility. The superiority of a positive inflation target, in terms of output losses, emerges for the aggregate data. The same methodology, when applied to individual countries, however, suggests that country-specific flexible inflation targeting can improve employment prospects in Europe.
    JEL: E31 E32 E37 E52
    Date: 2005–03
  7. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: This entry on monetary aggregation will appear under that title in The New Palgrave Dictionary of Economics, 2nd edition, edited by Steven Durlauf and Lawrence Blume. The entry provides an up-to-date overview of state-of-the-art research on monetary aggregation and index number theory, from its origins in 1980 to the current time. At the end of this dictionary entry, emphasis is placed on ongoing research on extensions to risk and to multilateral aggregation within multicountry areas, such as the euro area. Research on monetary aggregation theory has been especially successful in solving the 'puzzles' that have appeared in the monetary economics literature over the past 35 years.
    Keywords: monetary aggregation, Divisia index, money demand, monetary policy, dictionary, Divisia monetary aggregates
    JEL: E41 G12 C43 C22
    Date: 2005–03
  8. By: Tomáš Holub
    Abstract: This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. While the CNB’s interventions in mid- 1998 and in 2002 pass these criteria easily, the judgement might be more uncertain concerning the interventions in early-1998 and in 1999/2000. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions. This contrasts with the procedures guiding the interest rate decisions under the inflation targeting regime, which may occasionally create tensions in the policy regime, as demonstrated by the Czech experience, too. The interventions’ effectiveness in the Czech Republic is also discussed. It seems that sometimes they might have had an immediate impact lasting up to 2 or 3 months, but no strategy can be identified that would work in all episodes. Moreover, even many of the “successful” interventions were not able to prevent quite prolonged periods of exchange rate overvaluation in 1998 and in 2002. It is concluded that the signalling role of foreign exchange interventions is more important than their “market-equilibrating effect”, implying a rather unstable transmission between the central bank actions and the market reactions. Finally, the paper analyses the sterilisation costs, which are shown to have been quite substantial in the Czech Republic. It is argued that the financial sustainability of the interventions is quite important for their credibility and effectiveness.
    Keywords: Exchange rate, foreign exchange interventions, inflation targeting, sterilisation.
    JEL: E42 E44 E52 E58 E65 F31
  9. By: Aleš Bulíř; Kateřina Šmídková
    Abstract: Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-2010. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries.
    Keywords: ERM2, Foreign direct investment, Sustainable real exchange rates.
    JEL: F31 F33 F36 F47
    Date: 2004–12
  10. By: Ian Babetskii
    Abstract: There are two opposite points of view on the link between economic integration and business cycle synchronization. De Grauwe (1997) classifies these competing views as “The European Commission View” and “The Krugman View”. According to the European Commission (1990), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. On the other hand, for Krugman (1993) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries which have experienced a notable increase in trade openness and economic integration with the European Union during the past decade, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time-varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks; the effect of integration on supply shock asymmetry varies from country to country; (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results for demand shocks can be interpreted in favor of “The European Commission View”, also known as the endogeneity argument by Frankel and Rose (1998) in the OCA criteria discussion, according to which trade links reduce asymmetries between countries. Overall, our results support Kenen’s (2001) argument that the impact of trade integration on shock asymmetry depends on the type of shock.
    Keywords: EU enlargement, business cycle, trade, OCA (optimal currency area)
    JEL: E32 F30 F42
  11. By: Anca Pruteanu
    Abstract: With this work, we aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, we study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market’s supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. We find that changes in monetary policy alter the growth rate of loans with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, we conclude that the lending channel was operative in the period 1996–1998: we find cross-sectional differences in the lending reactions to monetary policy shocks due to degree of capitalization and liquidity. For the subsequent period 1999– 2001, the results also show distributive effects of monetary policy due to bank size and a bank’s proportion of classified loans. In the context of steadily decreasing interest rates, this bolsters the supposition of credit rationing and hence that of an operative broad credit channel. At the same time, we find evidence of linear relationships between bank characteristics and the growth rate of loans, and again these relationships change between the two time periods. This bodes well with the changes in the structure and attitude towards lending of the Czech commercial banks.
    Keywords: Bank lending channel, broad credit channel, credit rationing, monetary transmission mechanism.
    JEL: E52 E51 E58 G21
  12. By: Daal, Elton; Naka, Atsuyuki; Sanchez, Benito
    Abstract: This study examines the relationship between inflation and inflation uncertainty for both developed and emerging countries using the asymmetric power GARCH model. We find new evidence that suggests that positive inflationary shocks have stronger impacts on inflation uncertainty for mainly Latin American countries. We also find that inflation causes inflation uncertainty for most countries but the evidence for causality of the opposite direction is mixed.
    Keywords: Inflation, Emerging nations, Latin America
    JEL: C22 E31
    Date: 2004
  13. By: Cheng Hsiao; Yan Shen; Hiroshi Fujiki
    Abstract: We use Japanese aggregate and disaggregate money demand data to show that conflicting inferences can arise. The aggregate data appears to support the contention that there was no stable money demand function. The disaggregate data shows that there was a stable money demand function. Neither was there any indication of the presence of a liquidity trap. Possible sources of discrepancy are explored and the diametrically opposite results between the aggregate and disaggregate analysis are attributed to the neglected heterogeneity among micro units. We provide necessary and sufficient conditions for the existence of cointegrating relations among aggregate variables when heterogeneous cointegration relations among micro units exist. We also conduct simulation analysis to show that when such conditions are violated, it is possible to observe stable micro relations, but unit root phenomenon among macro variables. Moreover, the prediction of aggregate outcomes, using aggregate data is less accurate than the prediction based on micro equations and policy evaluation based on aggregate data ignoring heterogeneity in micro units can be grossly misleading.
    Date: 2004–02
  14. By: Iris Biefang-Frisancho Mariscal (School of Economics, University of the West of England); Peter Howells (School of Economics, University of the West of England)
    Abstract: In the last fifteen years or so the conduct of monetary policy in developed economies has converged in a number of ways which include an increasing emphasis on ‘openness’ and ‘transparency’ in policy-making. There is a widespread belief that transparency in the conduct of UK monetary policy has increased substantially since, and because of, the introduction of inflation targeting and associated institutional reforms in 1992. A large measure of this belief is based upon studies which reveal the increased ability of money market agents to anticipate accurately the change in official rates. In this paper, we have updated one of those studies and show that the findings are largely unaffected by events of the last five years. More interestingly, perhaps, we have floated the possibility that this improved anticipation may be the result of developments other than institutional reforms. For example, it is notable that the Bank of England has made fewer and smaller interest changes since 1992. It is also widely believed (and the behaviour of many macro variables suggests this) that economies have generally become more stable since 1992. If this is true, then macroeconomic forecasts in general should have improved and the increased anticipation would be, partly at least, due to this rather than institutional changes. We test both theses hypotheses with negative results.
    JEL: E58
    Date: 2004–05

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