nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒04‒24
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Competitiveness, inflation, and monetary policy By Hashmat Khan; Richhild Moessner
  2. Decomposing credit spreads By Rohan Churm; Nikolaos Panigirtzoglou
  3. Inflation Expectations in the Czech Interbank Market By Martin Fukac
  4. Fiscal Consequences of Monetary Integration within the Common Economic Area: the Case of Belarus, Kazakhstan and Russia By Ainura Uzagalieva
  5. Credibility and Inflation Targeting in an Emerging Market: The Case of Chile By Luis F. Céspedes; Claudio Soto
  6. "The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach" By Nobuyuki Oda; Kazuo Ueda
  7. Estimation of continuous-time interest rate models: a nonparametric approach By Orazio Di Miscia
  8. Term structure of interest models: concept and estimation problem in a continuous-time setting By Orazio Di Miscia
  9. MONETARY UNIONS: THE POLICY COORDINATION ISSUE By Giovanni Di Bartolomeo; Jacob Engwerda; Joseph Plasmans; Bas van Aarle
  12. NON-NEUTRALITY OF MONETARY POLICY IN POLICY GAMES By Giovanni Di Bartolomeo; Nicola Acocella
  13. Multilateral Aggregation-Theoretic Monetary Aggregation over Heterogeneous Countries By William Barnett

  1. By: Hashmat Khan; Richhild Moessner
    Abstract: This paper examines the way in which structural changes in the level of steady-state competitiveness and the trend rate of inflation affect inflation responses to monetary policy shocks, in scenarios chosen to capture broadly the conditions of the UK economy in the early 1990s and more recently. Cyclical changes in competitiveness are also considered, since it is not clear empirically whether changes in competitiveness have been predominantly structural or cyclical. A model based on work by Woodford is used, allowing for positive trend inflation and cyclical variations in competitiveness in a tractable manner. This extension enables the separate quantification of the impact of differences in the steady-state level of and cyclical changes in competitiveness on inflation in the short term, in high and low inflation environments. The paper quantifies the extent to which procyclical (countercyclical) changes in competitiveness dampen (amplify) the impulse responses of inflation to a given monetary policy shock. In the calibration used, the inflation response to monetary policy shocks in a low inflation/high competitiveness environment is dampened compared with a high inflation/low competitiveness environment. By contrast, inflation responses to monetary policy shocks in a low inflation/low competitiveness environment are similar to those in a high inflation/high competitiveness environment.
  2. By: Rohan Churm; Nikolaos Panigirtzoglou
    Abstract: This paper investigates the information contained in the yields of corporate debt securities using a structural credit risk model. As previous studies have found, credit risk is not the only factor that affects corporate yield spreads. The aim is to decompose credit spreads, using a structural model of credit risk, into credit and non-credit risk components. The contribution relative to the existing literature is the use of contemporaneous forward-looking information on equity risk premia and equity value uncertainty in a structural model. In particular, implied equity risk premia from a three-stage dividend discount model that incorporates analysts' long-term earnings forecasts are used, together with implied measures of equity value uncertainty from option prices. The paper examines the evolution of the different components of spreads across time as well as the effect of particular events. It also analyses the relationship between the derived components and other financial variables, such as swap spreads and the equity risk premium.
  3. By: Martin Fukac
    Abstract: Monthly data on the inflation expectations of financial analysts in the Czech Republic exhibit a tendency for permanent bias and ineffectiveness which violates the rational expectations hypothesis assumed in macroeconomic models. This paper asks whether the surveyed data include any monetary-policy relevant information, in other words, whether the surveyed expectations correspond to the true market expectations, and hence should be reflected in macro models of the Czech economy instead of the rational expectations hypothesis. Using a methodology based on a simple Fisher rule, it is found that the difference between the surveyed and market expectations is not statistically significant.
    Keywords: Inflation expectations, Nominal interest rate, Fisher rule.
    JEL: C52 E43 E44
    Date: 2005–03
  4. By: Ainura Uzagalieva
    Abstract: The aim of this paper is to analyze the possible impact of planned monetary integration on public sector revenues from seigniorage in three countries: Belarus, Kazakhstan and Russia. Using the concept of total gross seigniorage, we investigate the main sources and uses of the central bank revenues in these countries. Special attention is given to the role of seigniorage revenues in financing public sector expenditures. Amounts of yearly transfers from central banks to the state budget in Belarus, Kazakhstan and Russia are evaluated, and the size of potential gains and looses in seigniorage revenues under different scenarios of monetary integration are estimated.
    Keywords: Seigniorage, Monetary integration, Transition economies.
    JEL: E
    Date: 2005–04
  5. By: Luis F. Céspedes; Claudio Soto
    Abstract: When the monetary authority lacks credibility it faces a larger trade-off between output and inflation. This poses important challenges for the implementation and design of an inflation targeting regime and an inflation stabilization process. In this paper we show how these challenges have determined different implementation phases of an inflation targeting regime in Chile, and how imperfect credibility is consistent with the different features of the disinflationary process followed by Chile during the 90s.
    Date: 2005–04
  6. By: Nobuyuki Oda (Monetary Affairs Department, Bank of Japan); Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper provides an empirical investigation of monetary policy in Japan in the zero interest rate environment that has held sway since 1999. In particular, we focus on the effects of the zero interest rate commitment and of quantitative monetary easing on mediumto long-term interest rates in Japan. In the study we apply a version of the macro-finance approach, involving a combination of estimation of a structural macro-model and calibration of time-variant parameters to the yield curve observed in the market. This enables us to decompose interest rates into expectations and risk premium components and simultaneously to extract the market's perception of the Bank of Japan's (BOJ's) willingness to carry on its zero interest rate policy. In the analysis we make clear the counterfactual policy that would have been practiced in the absence of the actual policies followed by the BOJ since 1999. From this analysis, we tentatively conclude that the BOJ's monetary policy since 1999 has functioned mainly through the zero interest rate commitment, which has led to declines in medium- to long-term interest rates. We also find some evidence that, up until the end of 2003, raising the reserve target may have been perceived as a signal indicating the BOJ's accommodative policy stance although the size of the effect is not large. The portfolio rebalancing effect -- either by the BOJ's supplying ample liquidity or by its purchases of long-term government bonds -- has not been found to be significant.
    Date: 2005–04
  7. By: Orazio Di Miscia (Banca Intesa)
    Abstract: This paper presents a general, nonlinear model for term structure interest rate. The approach is the same of Stanton (1997) but it has been extended to a multifactor model. The novel aspect is that rather than choosing the functional specification of the model, the process is generated from the data using approximation methods for multifactor continuous-time Markov processes. In applying this technique to the short and long end of the term structure for a general two-factor diffusion process for interest rates is possible to find some interesting nonlinearity in the interest rate data that are not considered in almost all parametric specifications of term structure interest rate model of the financial literature.
    Keywords: continuous-time models, nonparametric estimation, multi-factor interest rate model
    JEL: G
    Date: 2005–04–19
  8. By: Orazio Di Miscia (Banca Intesa)
    Abstract: Continuous-time models have a large range of applications. They have been used for a long time to model phenomena evolving randomly and continuously in time. However, data are essentially always recorded at discrete points in time only and this is one of the main source of difficulties when the researcher is interested about their estimation. This paper review some of the estimation problems and focus the attention about the link between continuous-time stochastic process and the estimation of term structure interest rate.
    Keywords: sde, discretization error
    JEL: G
    Date: 2005–04–19
  9. By: Giovanni Di Bartolomeo (Public Economics Department, University of Rome La Sapienza); Jacob Engwerda (Department of Econometrics, Tilburg University); Joseph Plasmans (Faculty of Applied Economics UFSIA-RUCA, University of Antwerp); Bas van Aarle (Faculty of Economics LICOS, Catholic University of Leuven)
    Abstract: In this paper we build a three-country dynamic model of a monetary union (MU), where we focus on how coalitions among policy-makers are formed and what are their effects on the stabilization of output and price. Some preliminary results based on numerical simulations are provided.
    Keywords: Macroeconomic stabilization, coalitions, LQ differential games.
    JEL: E
    Date: 2005–04–16
    Abstract: This paper studies the interaction between two autonomous policymakers, the central bank and the government, in managing public debt as the result of a two-stage game. In the first stage the institutional regime is established. This determines the equilibrium solution to be applied in the second stage, in which a differential game is played between the two policymakers. It is shown that, if the policymakers can communicate before the game is played, (multiple-equilibrium) coordination problems can be solved by using the concept of correlated equilibrium. Unlike Nash equilibrium, which only allows for individualistic and independent behaviour, a correlated equilibrium allows for
    Keywords: monetary and fiscal policies, differential games, correlated equilibrium.
    JEL: C73 E58 F33 F42
    Date: 2005–04–16
    Abstract: This paper examines the information provided to the private sector by central anks. By using the principal component analysis, we investigated the variance of the procedural rules followed by nine major central banks about information reatments. We investigate problems related to the information coming from the entral banks by focusing on the quantity and quality perspectives and highlight the methodological complexity of the investigation. We find that a synthetic uantitative index of transparency is not enough to represent the phenomenon ince it can result misleading in understanding the behavior of institutionally different central banks associated with the same index values.
    Keywords: Central bank transparency, principal components, monetary policy.
    JEL: E52 E58
    Date: 2005–04–16
    Abstract: The main aim of this article is to investigate the sources of non- neutrality in policy games involving one or more trade unions. We use a simple set up in order to clearly expose the basic mechanisms that also work in more complex frameworks. We show that there are common roots in the nonneutrality results so far obtained in apparently different contexts as, e.g., an inflation-averse union playing against the government; a union sharing some other common objective with a policy maker; or when more than one union interacts with monopolistic competitors in the goods market and a policymaker. We finally show that there are other cases where the nonneutrality result can arise.
    Keywords: neutrality, money, unions, policy game.
    JEL: E00 E52 J51
    Date: 2005–04–16
  13. By: William Barnett (Department of Economics, The University of Kansas)
    Abstract: We derive fundamental new theory for measuring monetary service flows aggregated over countries within a multicountry economic union. We develop three increasingly restrictive approaches: (1) the heterogeneous agents approach, (2) the multilateral representative agent approach, and (3) the unilateral representative agent approach. Our heterogeneous agents approach contains our multilateral representative agent approach as a special case. These results are being used by the European Central Bank in the construction of its Divisia monetary aggregates database, with convergence from the most general to the more restrictive approaches expected as economic convergence within the euro area proceeds. Our theory is equally as relevant to other economic unions, with or without a common currency. We use a stochastic approach to aggregation across countries over heterogeneous representative agents. Our theory permits monitoring the effects of policy at the aggregate level over a multicountry economic union, while also monitoring the distribution effects of policy among the countries of the multicountry area. The resulting index number theory assures internal consistency of the data construction methodology with the theory used in applications of the data in modeling and policy.
    Keywords: Monetary Aggregation, Aggregation over Countries, Heterogeneous Agents, Multilateral Aggregation, EMU.
    JEL: C43 C82 E41 E51 F31
    Date: 2004–11

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