|
on Monetary Economics |
| By: | Tobías Broer |
| Abstract: | This paper identifies the information content of monetary aggregates for output and inflation in Chile, using a large set of reduced-form statistics and regression specifications. Unlike almost all previous studies on money in Chile, we compare 10 traditional and new definitions of money, rather than just looking at the customary definition M1A. Also, given the changes in the financial system and disinflation in Chile over the last 20 years, as well as contrasting growth rates of GDP and narrow money in recent times, we report recursive estimations for all our statistics to highlight parameter constancy. While there seems to be a strong and often one-to-one association between money growth and inflation on average over the whole sample as indicated by Nelson (2003) type regressions, the relation drops strongly during the last 10 years, and thus seems much lower in times of low inflation. Also, an increase in nominal money growth never causes acceleration of inflation in a Granger sense. However, we do find a significant and positive impact of deviations from (an estimated or HP-filtered) equilibrium level of money holdings on inflation, as indicated by error-correction and Pstar models. But the deviations from a simple estimated equilibrium are very large for both broad money aggregates and M1A at the end of the sample, casting some doubt on the stability of their demand relation. Accordingly, cointegration tests for the existence of a stable demand for money function over the whole sample are somewhat inconclusive. We find a strong Granger causality relationship between money and output, which however vanishes once we control for the effect of past inflation and changes in the monetary policy rate. Also, the information in lags of M1A for GDP drops strongly towards the end of the sample. More generally, M1A does not seem to merit its role as the money sum par excellence in Chile, being inferior in information content for example to Notes and Coin, or a broad money sum excluding bonds (M7 minus Central Bank documents). |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:319&r=mon |
| By: | Joanna Stavins |
| Abstract: | The recent decline in the Federal Reserve’s check volumes has received a lot of attention. Although switching to electronic payments methods and electronic check-processing has been credited for much of that decline, some of it could be caused by changes following bank mergers involving Federal Reserve customer banks. This paper evaluates the effect of bank mergers on Federal Reserve check-processing volumes. ; Using inflow-outflow and regression methods, we find that mergers between two or more Reserve Bank customers have resulted in volume losses, especially during the first quarter following the merger. On average, the estimated cumulative loss of volume during the first five post-merger quarters was 2.6 million checks. While the overall number of checks in the United States has declined during the past few years, the Federal Reserve has lost additional check-processing volume because of bank mergers. |
| Keywords: | Bank mergers ; Check collection systems |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:04-7&r=mon |
| By: | Peter Ireland |
| Abstract: | This paper studies the behavior of the economy and the efficacy of monetary policy under zero nominal interest rates, using a model with population growth that nests, as a special case, a more conventional specification in which there is a single infinitely lived representative agent. The paper shows that with a growing population, monetary policy has distributional effects that give rise to a real balance effect, thereby eliminating the liquidity trap. These same distributional effects, however, can also work to make many agents much worse off under zero nominal interest rates than they are when the nominal interest rate is positive. |
| Keywords: | Monetary policy ; Price levels |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-3&r=mon |
| By: | Ricardo Lagos; Guillaume Rocheteau |
| Abstract: | This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers’ search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates. |
| Keywords: | Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0407&r=mon |
| By: | Aleksander Berentsen; Guillaume Rocheteau; Shouyong Shi |
| Abstract: | In this paper the authors study the inefficiencies of the monetary equilibrium and optimal monetary policies in a search economy. They show that the same frictions that give fiat money a positive value generate an inefficient quantity of goods in each trade and an inefficient number of trades (or search decisions). The Friedman rule eliminates the first inefficiency, and the Hosios rule the second. A monetary equilibrium attains the social optimum if and only if both rules are satisfied. When the two rules cannot be satisfied simultaneously, which occurs in a large set of economies, optimal monetary policy achieves only the second best. The authors analyze when the second-best monetary policy exceeds the Friedman rule and when it obeys the Friedman rule. Furthermore, they extend the analysis to an economy with barter and show how the Hosios rule must be modified in order to internalize all search externalities. |
| Keywords: | Monetary policy - Mathematical models ; Money - Mathematical models |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0408&r=mon |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | This paper reviews three recent books. Two books, one by Carl Walsh and one by Michael Woodford, focus on the development of monetary theory. In contrast, the third book is a collection of papers in an NBER volume on inflation targeting. This volume outlines some of the issues that arise when applying the tools described by Walsh and Woodford to the policy goal of targeting inflation rates. A central theme of all three works is the desirability of abstracting from money demand in the analysis of monetary policy. In our review we focus the bulk of our discussion on the absence of money in these models. |
| Keywords: | Monetary policy ; Money |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0410&r=mon |
| By: | William A. Branch; John Carlson; George W. Evans; Bruce McGough |
| Abstract: | This paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "great moderation" that began in the 1980s. |
| Keywords: | Monetary policy ; Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0411&r=mon |
| By: | Charles T. Carlstrom; Timothy S. Fuerst |
| Abstract: | Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. |
| Keywords: | Monetary policy ; Banks and banking, Central |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0413&r=mon |
| By: | Guillaume Rocheteau; Christopher Waller |
| Abstract: | Search models of monetary exchange have typically relied on Nash (1950) bargaining or strategic games that yield an equivalent outcome to determine the terms of trade. By considering alternative axiomatic bargaining solutions in a simple search model with divisible money, we show how this choice matters for important results such as the ability of the optimal monetary policy to generate an efficient allocation. We show that the quantities traded in bilateral matches are always inefficiently low under the Nash (1950) and Kalai-Smorodinsky (1975) solutions, whereas under strongly monotonic solutions such as the egalitarian solution (Luce and Raiffa, 1957; Kalai, 1977), the Friedman Rule achieves the first best allocation. We evaluate quantitatively the welfare cost of inflation under the different bargaining solutions, and we extend the model to allow for endogenous market composition. |
| Keywords: | Money ; Monetary policy ; Game theory |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0501&r=mon |
| By: | Evan F. Koenig |
| Abstract: | In economies with sticky-information wage setting, policymakers legitimately give attention to output stabilization as well as price-level or inflation stabilization. Consistent with Kydland and Prescott (1990), trend deviations in prices are predicted to be negatively correlated with trend deviations in output. A variant of the Taylor rule is optimal if household consumption decisions are forward-looking. Interestingly, it is essential that policy not be made contingent on the most up-to-date estimates of potential output, potential-output growth, or the natural real interest rate. New results on the “persistence problem” and a new rationalization for McCallum’s P-bar inflation equation are also presented. |
| Keywords: | Productivity |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:04-05&r=mon |
| By: | Mark G. Guzman |
| Abstract: | This paper re-examines the impact that paying interest on reserves has on price level indeterminacy, price level volatility, and overall economic well-being. Unlike previous papers which examined these issues, the model developed in this paper allows the return on reserves to equal the return on government securities, which is less than the prevailing return on storage. Equally important, this model also considers how deficit financing changes the impact that paying interest on reserves has on the economy. I show that the number of steady state equilibria are equal to, or greater than, the number that arise when no interest is paid on reserves. In other words, the level of economic indeterminacy is equal to or greater than in an economy without interest payments. When the level of indeterminacy is the same, then economic volatility is reduced with the introduction of interest payments. However, when there exists greater indeterminacy in the interest-on-reserves economy, then there also exists greater volatility. In addition, under certain conditions, paying interest on reserves can be welfare enhancing. When it is not, an appropriate expansionary open market operation can offset the welfare losses associated with interest payments. Finally, under a narrow set of conditions, unpleasant monetarist arithmetic may obtain. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:04-06&r=mon |
| By: | Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch |
| Abstract: | From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models. |
| Keywords: | Bonds ; Macroeconomics ; Finance ; Econometric models |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfam:2005-04&r=mon |
| By: | Michelle L. Barnes; Jose Lopez |
| Abstract: | The Monetary Control Act of 1980 requires the Federal Reserve System to rovide payment services to depository institutions through the twelve Federal Reserve Banks at rices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the CAPM model and compare them using econometric and materiality criteria. Our results suggests that the benchmark CAPM model applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line-of-business concentration. Thus, a standard implementation of the benchmark CAPM model provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfam:2005-06&r=mon |
| By: | Bruce McGough; Glenn D. Rudebusch; John C. Williams |
| Abstract: | Using a short-term interest rate as the monetary policy instrument can be problematic near its zero bound constraint. An alternative strategy is to use a long-term interest rate as the policy instrument. We find when Taylor-type policy rules are used to set the long rate in a standard New Keynesian model, indeterminacy--that is, multiple rational expectations equilibria--may often result. However, a policy rule with a long rate policy instrument that responds in a "forward-looking" fashion to inflation expectations can avoid the problem of indeterminacy. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfap:2004-22&r=mon |
| By: | Reuven Glick; Xueyan Guo; Michael Hutchison |
| Abstract: | Are countries with unregulated capital flows more vulnerable to currency crises? Efforts to answer this question properly must control for “self selection” bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises. We employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries. Our results suggest that, after controlling for sample selection bias, countries with liberalized capital accounts experience a lower likelihood of currency crises. That is, when two countries have the same likelihood of allowing free movement of capital (based on historical evidence and a very similar set of economic and political characteristics)—and one country imposes controls and the other does not-- the country without controls has a lower likelihood of experiencing a currency crisis. This result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial. |
| Keywords: | Financial crises ; Capital |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-15&r=mon |
| By: | Roberto Chang; Andres Velasco |
| Abstract: | Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating. |
| Keywords: | Monetary policy ; Foreign exchange |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-30&r=mon |
| By: | Mark Aguiar; Gita Gopinath |
| Abstract: | World capital markets have experienced large scale sovereign defaults on a number of occasions, the most recent being Argentina’s default in 2002. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. That is, emerging markets on average borrow more in good times and at lower interest rates as compared to slumps. Our ability to match these facts within the framework of an otherwise standard business cycle model with endogenous default relies on the importance of a stochastic trend in emerging markets. |
| Keywords: | Default (Finance) ; Debt ; Interest rates |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-31&r=mon |
| By: | David Cook; Michael B. Devereux |
| Abstract: | This paper provides a quantitative investigation of the East Asian crisis of 1997-99. The two essential features of the crisis that we focus on are a) the crisis was a regional phenomenon; the depth and severity of the crisis was exacerbated by a large decline in regional demand, and b) the practice of setting export goods prices in dollars (which we document empirically) led to a powerful internal propagation effect of the crisis within the region, contributing greatly to the decline in regional trade flows. We construct a model with these two features, and show that it can do a reasonable job of accounting for the response of the main macroeconomic aggregates in Korea, Malaysia, and Thailand during the crisis. |
| Keywords: | Dollar, American ; Financial crises - Asia ; Prices |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfpb:2004-35&r=mon |
| By: | John M. Roberts |
| Abstract: | Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these phenomena. The results suggest that changes in the parameters and shock volatility of monetary policy reaction functions can account for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy changes can explain only a small portion of the output growth volatility decline. However, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader concept of monetary-policy changes--one that includes improvements in the central bank's ability to measure potential output--enhances the ability of monetary policy to account for the changes in the economy. |
| Keywords: | Monetary policy - United States ; Inflation (Finance) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-62&r=mon |
| By: | Refet Gurkaynak; Brian Sack; Eric Swanson |
| Abstract: | We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor--changes in the federal funds rate target-and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with FOMC statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday dataset going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields. |
| Keywords: | Federal funds rate ; Federal Open Market Committee ; Securities ; Assets (Accounting) - Prices ; Monetary policy |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2004-66&r=mon |
| By: | David E. Lindsey; Athanasios Orphanides; Robert H. Rasche |
| Abstract: | This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC's adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or old-fashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed. |
| Keywords: | Federal Open Market Committee ; Monetary policy - United States |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-02&r=mon |
| By: | Alain P. Chaboud; Owen Humpage |
| Abstract: | We analyze the short-term price impact of Japanese foreign exchange intervention operations between 1991 and 2004, using official data from Japan's Ministry of Finance. Over the period as a whole, we find some evidence of a modest "against the wind" effect, but interventions do not have value as a forecast that the exchange rate will move in a direction consistent with the operations. Interventions conducted between 1995 and 2002, which were large and infrequent, met with a much higher degree of success. For the most recent episode of intervention, in 2003 and 2004, despite the record size and frequency of the overall episode, it is difficult to statistically distinguish the pattern of exchange rate movements on intervention days from that of all the days in that particular subperiod, showing little effectiveness. Still, while the evidence of Japanese intervention effectiveness is modest overall, it appears to be stronger than that found using similar techniques for U.S. intervention operations conducted in the 1980s and 1990s. |
| Keywords: | Foreign exchange administration - Japan |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:824&r=mon |
| By: | Sanjay Chugh |
| Abstract: | Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets. |
| Keywords: | Inflation (Finance) ; Econometric models ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:829&r=mon |
| By: | David W. Berger; Alain P. Chaboud; Sergey V. Chernenko; Edward Howorka; Raj S. Iyer; David Liu; Jonathan H. Wright |
| Abstract: | We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices. |
| Keywords: | Foreign exchange rates ; Electronic trading of securities |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:830&r=mon |
| By: | Bernardino Adão; Isabel Correia; Pedro Teles |
| Abstract: | What instruments of monetary policy must be used in order to implement a unique equilibrium? This paper revisits the issues addressed by Sargent and Wallace (1975) on the multiplicity of equilibria when policy is conducted with interest rate rules. We show that the appropriate interest rate instruments under uncertainty are state- contingent interest rates, i.e. the nominal returns on state-contingent nominal assets. A policy that pegs state-contingent nominal interest rates, and sets the initial money supply, implements a unique equilibrium. These results hold whether prices are flexible or set in advance. |
| Keywords: | Monetary policy ; Interest rates |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-26&r=mon |
| By: | Bernardino Adão; Isabel Correia; Pedro Teles |
| Abstract: | We consider a standard cash in advance monetary model with flexible prices or prices set in advance and show that there are interest rate or money supply rules such that equilibria are unique. The existence of these single instrument rules depends on whether the economy has an infinite horizon or an arbitrarily large but finite horizon. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-04-30&r=mon |
| By: | Marcela Meirelles-Aurelio |
| Abstract: | This paper studies monetary and fiscal policy rules, and investigates the characteristics of optimal policies. The central focus of the paper is on the comparison of two types of fiscal rules: a balanced budget and a target for the primary surplus. Balanced budget rules (or, more generally, numeric ceilings to the overall budget deficit) are criticized because they may dictate higher taxes in periods of weak economic activity. The primary surplus rule, in contrast, has a less pro-cyclical nature, given that it does not require higher fiscal austerity in periods when the cost of servicing public debt is higher. In a nutshell, it allows a higher degree of tax smoothing. It is not clear, however, if (inevitable) fiscal adjustments should be postponed. These issues are investigated in the context of a dynamic stochastic general equilibrium model that describes an open economy, with capital accumulation, and where nominal rigidities are present. The model shows that previous findings drawn from open economy models—in particular with respect to the characteristics of optimal monetary policy—do not hold once the implications of certain fiscal regimes are taken into account, and once different scenarios concerning the degree of capital mobility are considered. The model is calibrated and simulated for the case of Brazil, a country that since 1999 has targets for inflation and for the primary surplus. The main finding is that a fiscal regime characterized by a target for the primary surplus delivers superior economic performance, a property captured by the shape of the efficient policy frontier. |
| Keywords: | Monetary policy ; Fiscal policy ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp05-01&r=mon |
| By: | Kevin L. Kliesen; Frank A. Schmid |
| Abstract: | Real-business-cycle models suggest that an increase in the rate of productivity growth increases the real rate of interest. But economic theory is ambiguous when it comes to the effect of government budget deficits on the real rate of interest. Similarly, little is known about the effect of monetary policy actions on real long-term interest rates. We investigate these questions empirically, using macroeconomic announcement data. We find that the real long-term rate of interest responds positively to surprises in labor productivity growth. However, we do not reject the hypothesis that the real long-term rate of interest does not respond to surprises in the size of the government*s budget deficit (or surplus). Finally, we find no support for the proposition that the Federal Reserve has information about its actions or the state of the real economy that is not in the pubic domain and, hence, priced in the real long-term interest rate. |
| Keywords: | Interest rates ; Monetary policy ; Fiscal policy |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-019&r=mon |
| By: | William T. Gavin; Benjamin D. Keen; Michael R. Pakko |
| Abstract: | This paper revisits the issue of money growth versus the interest rate as the instrument of monetary policy. Using a dynamic stochastic general equilibrium framework, we examine the effects of alternative monetary policy rules on inflation persistence, the information content of monetary data, and real variables. We show that inflation persistence and the variability of inflation relative to money growth depends on whether the central bank follows a money growth rule or an interest rate rule. With a money growth rule, inflation is not persistent and the price level is much more volatile than the money supply. Those counterfactual implications are eliminated by the use of interest rate rules whether prices are sticky or not. A central bank's utilization of interest rate rules, however, obscures the information content of monetary aggregates and also leads to subtle problems for econometricians trying to estimate money demand functions or to identify shocks to the trend and cycle components of the money stock. |
| Keywords: | Monetary policy ; Prices |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-026&r=mon |
| By: | Jian Yang; Hui Guo; Zijun Wang |
| Abstract: | We investigate the international transmission of inflation among G-7 countries using a data-determined vector autoregression analysis, as advocated by Swanson and Granger (1997). Over the period 1973 to 2003, we find that U.S. innovations have a large effect on inflation in the other countries, although they are not always the dominant international factor. Similarly, shocks to some other countries also have a statistically and economically significant influence on U.S. inflation. Moreover, our evidence indicates that U.S. inflation has become less vulnerable to foreign shocks since the early 1990s, mainly because of the diminished influence from Germany and France |
| Keywords: | International finance ; Time-series analysis |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-028&r=mon |
| By: | Christopher J. Neely |
| Abstract: | This paper argues that major governments should act as long-term speculators by intervening to profit from floating exchange rates reversion to fundamentals. Such transactions would improve welfare by transferring risk from private agents to the risk-tolerant government. Interventions explicitly designed to profit the intervening authority would be more likely to be successful and, to the extent that they are, would reduce resource misallocation. |
| Keywords: | Foreign exchange |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2004-031&r=mon |
| By: | Huberto M. Ennis |
| Abstract: | I study a version of the Lagos-Wright (2003) model of monetary exchange in which buyers have private information about their tastes and sellers make take-it-or-leave-it-offers (i.e., have the power to set prices and quantities). The introduction of imperfect information makes the existence of monetary equilibrium a more robust feature of the environment. In general, the model has a monetary steady state in which only a proportion of the agents hold money. Agents who do not hold money cannot participate in trade in the decentralized market. The proportion of agents holding money is endogenous and depends (negatively) on the level of expected inflation. As in Lagos and Wright’s model, in equilibrium there is a positive welfare cost of expected inflation, but the origins of this cost are very different. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmem:142&r=mon |
| By: | Stefano Eusepi |
| Abstract: | This paper explores the effects of central bank transparency on the performance of optimal inflation targeting rules. I assume that both the central bank and the private sector face uncertainty about the "correct" model of the economy and have to learn. A transparent central bank can reduce one source of uncertainty for private agents by communicating its policy rule to the public. ; The paper shows that central bank transparency plays a crucial role in stabilizing the agents' learning process and expectations. By contrast, lack of transparency can lead to expectations-driven fluctuations that have destabilizing effects on the economy, even when the central bank has adopted optimal policies. |
| Keywords: | Monetary policy ; Inflation (Finance) ; Banks and banking, Central ; Uncertainty |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:199&r=mon |
| By: | Linda S. Goldberg; Cedric Tille |
| Abstract: | Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the importer's currency, or a third-country vehicle currency. The model is designed to contrast the contribution of macroeconomic variability with that of industry-specific features in the selection of an invoice currency. We show that producers in industries with high demand elasticities are more likely than producers in other industries to display herding in their choice of currency. This industry-related force is more influential than local macroeconomic performance in determining producers' choices. ; Drawing on data on invoice currency use in exports and imports for twenty-four countries, we document that the dollar is the currency of choice for most transactions involving the United States. The dollar is also extensively used as a vehicle currency in international trade flows that do not directly involve the United States. Consistent with the results of our model, this last finding is largely attributable to international trade in reference-priced goods and goods traded on organized exchanges. Although the magnitude of business cycle volatility matters for invoicing of more differentiated products, it is less central for invoicing nondifferentiated goods. |
| Keywords: | Currency substitution ; International trade ; Dollar, American |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:200&r=mon |
| By: | Argia M. Sbordone |
| Abstract: | This article discusses a more general interpretation of the two-step minimum distance estimation procedure proposed in earlier work by Sbordone. The estimator is again applied to a version of the New Keynesian Phillips curve, in which inflation dynamics are driven by the expected evolution of marginal costs. The article clarifies econometric issues, addresses concerns about uncertainty and model misspecification raised in recent studies, and assesses the robustness of previous results. While confirming the importance of forward-looking terms in accounting for inflation dynamics, it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting. |
| Keywords: | Phillips curve ; Keynesian economics ; Econometric models ; Inflation (Finance) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:204&r=mon |
| By: | Gauti Eggertsson; Eric Le Borgne |
| Abstract: | We propose a theory to explain why, and under what circumstances, a politician endogenously gives up rent and delegates policy tasks to an independent agency. Applied to monetary policy, this theory (i) formalizes the rationale for delegation highlighted by Alexander Hamilton, the first Secretary of the Treasury of the United States, and by Alan S. Blinder, former Vice Chairman of the Board of Governors of the Federal Reserve System; and (ii) does not rely on the inflation bias that underlies most existing theories of central bank independence. Delegation trades off the cost of having a possibly incompetent technocrat with a long-term job contract against the benefit of having a technocrat who (i) invests more effort into the specialized policy task and (ii) has less incentive to pander to public opinion than a politician. Our key theoretical predictions are broadly consistent with the data. |
| Keywords: | Banks and banking, Central ; Monetary policy ; Political science |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:205&r=mon |
| By: | Mervyn King (Bank of England) |
| Abstract: | Mervyn King is the Deputy Governor of the Bank of England and a co-founder of the LSE Financial Markets Group. On Wednesday 29 October 1997 he gave a public lecture at the LSE to mark the 10th anniversary of the Financial Markets Group and the 5th annivesay of the Bank of England Inflation Target. This Special Paper is the Transcript of that lecture. |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp0099&r=mon |
| By: | Bengtsson, Ingemar (Department of Economics, Lund University) |
| Abstract: | This paper presents a model that pictures how inflation is determined in a decentralized market process where prices are set in both simultaneous and sequential contracts. Price setting is seen as a coordination game between the price setters of sequential contracts. An important property of the model is that inflation thus can be explained without any reference to the quantity of money.Following up the finding that inflation is determined in a coordination game, it is subsequently claimed that whenever inflation does not follow a random path, people do seem to follow some rule of thumb when predicting future price levels. In the last section of the paper, it is finally claimed that this rule is best understood as a focal point, and furthermore that the central banks provides the focal point for inflation in the western world today. Central banks could thus be shown to be able to influence inflation rates, although the quantity of money plays no part in this process. |
| Keywords: | Central Banking; Focal Points; Inflation; Monetary Policy; Money; Quantity Theory |
| JEL: | C70 E31 E42 E43 E44 E51 E52 E58 |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_028&r=mon |
| By: | Bengtsson, Ingemar (Department of Economics, Lund University) |
| Abstract: | In the paper, an analogy with length measurement is applied in order to explore the nature of the unit for value measurement, i.e. the unit of account. As the meter is defined as the length traveled by light in vacuum during 1/299 792 458 of a second, the unit of account krona is defined as the purchasing power of the medium of exchange krona. However, one should be cautious when drawing conclusions from this analogy. Our unit of account is defined in our medium of exchange, but it is meaningful only because we can observe prices on real goods expressed in it. As it would be pointless to define the meter as the length traveled by light in vacuum during 1/299 792 458 of a second if we could not compare this length with anything else, it would be pointless to define our unit of account in something that is not priced. In the paper it is explained how different payment techniques help to overcome transaction costs in the market. In particular, following Alchian (1977), it is argued that to reap the full benefit from the use of payment techniques, it has to be combined with the use of both a unit of account and specialist middlemen. The use of payment techniques helps to reduce costs due to sequential payment, but to reduce costs due to sequential quality evaluation, you need unit of account as well as reputable middlemen. |
| Keywords: | Medium of Exchange; Money; Payment Techniques; Quantity Theory; Transaction Costs; Unit of Account |
| JEL: | B52 D23 E31 E41 E42 E51 |
| Date: | 2005–05–16 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2005_029&r=mon |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo); Leitemo, Kai (Norwegian School of Management) |
| Abstract: | We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks. |
| Keywords: | VAR; monetary policy; asset prices; identification |
| JEL: | E43 E52 E61 |
| Date: | 2005–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_012&r=mon |
| By: | Oviedo, P. Marcelo |
| Abstract: | The consensus about the ability of the standard open-economy neoclassical growth model to account for interest-rate driven business cycles has changed over time: whereas early research concluded that business cycles are neutral to interest-rate shocks, more recent investigations suggest that these shocks can explain a large extent of the business cycles of a small open economy when firms borrow to pay for their labor cost before cashing their sales. The first goal of this paper is to show that the recently found effectiveness of interest-rate shocks to cause business cycles rests more on the statistical properties of the shocks than on the working-capital constraint; in particular, recent results are only valid when the level and volatility of the interest rate are high and when the interest rate is negatively correlated with total factor productivity. The paper also shows that interest-rate shocks cannot be the sole driving force of business cycles even when the canonical model is augmented to include a working-capital constraint. The second goal of the paper is to quantitatively explore the dynamic properties of the neoclassical growth model extended to include financial intermediation. It is shown that the extended model with external effects in financial intermediation can match the negative correlation between GDP and a domestic borrowing-lending spread in emerging countries if the economy is subject to productivity shocks but not when the model is subject to both productivity and interest-rate shocks. |
| JEL: | F3 |
| Date: | 2005–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12360&r=mon |
| By: | Barry Eichengreen |
| Abstract: | This paper provides an historical perspective on reserve currency competition and on the prospects of the dollar as an international currency. It questions the conventional wisdom that competition for reserve-currency status is a winner-take-all game, showing that several currencies have often shared this role in the past and arguing that innovations in financial markets make it even more likely that they will do so in the future. It suggests that the dollar and the euro are likely to share this position for the foreseeable future. Hopes that the yuan could become a major international currency 20 or even 40 years from now are highly premature. |
| JEL: | F0 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11336&r=mon |
| By: | Geert Bekaert; Seonghoon Cho; Antonio Moreno |
| Abstract: | This article complements the structural New-Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro-model with an unobservable time-varying inflation target and the natural rate of output which are filtered from macro and term structure data. We obtain large and significant estimates of the Phillips curve and real interest rate response parameters. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks. The inflation target dominates the variation in the "level factor" whereas the monetary policy shocks dominate the variation in the "slope and curvature factors". |
| JEL: | E4 E5 G2 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11340&r=mon |
| By: | Benjamin M. Friedman |
| Abstract: | Under conventional representations of economic policymaking, any innovation is either (1) a change in the objectives that policymakers are seeking to achieve, (2) a change in the choice of policy instrument, or (3) a change in the way auxiliary aspects of economic activity are used to steer policy in the context of time lags. Most public discussion of the 1979 Volcker experiment at the time, and likewise most of the subsequent academic literature, emphasized either the role of quantitative targets for money growth (3) or the use of an open market operating procedure based on a reserves quantity rather than a short-term interest rate (2). With time, however, neither has survived as part of U.S. monetary policymaking. What remains is the question of whether 1979 brought a new, greater weight on the Federal Reserve%u2019s objective of price stability vis-a-vis its objective of output growth and high employment (1). That is certainly one interpretation of the historical record. But the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. |
| JEL: | E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11346&r=mon |
| By: | Joshua Aizenman; Jaewoo Lee |
| Abstract: | This paper tests the importance of precautionary and mercantilist motives in accounting for the hoarding of international reserves by developing countries, and provides a model that quantifies the welfare gains from optimal management of international reserves. While the variables associated with the mercantilist motive are statistically significant, their economic importance in accounting for reserve hoarding is close to zero and is dwarfed by other variables. Overall, the empirical results are in line with the precautionary demand. The effects of financial crises have been localized, increasing reserve hoarding in the aftermath of crises mostly in countries located in the affected region, but not in other regions. We also investigate the micro foundation of precautionary demand, extending Diamond and Dybvig (1983)'s model to an open, emerging market economy where banks finance long-term projects with short-term deposits. We identify circumstances that lead to large precautionary demand for international reserves, providing self-insurance against the adverse output effects of sudden stop and capital flight shocks. This would be the case if premature liquidation of long-term projects is costly, and the economy is de-facto integrated with the global financial system, hence sudden stops and capital flight may reduce deposits sharply. We show that the welfare gain from the optimal management of international reserves is of a first-order magnitude, reducing the welfare cost of liquidity shocks from a first-order to a second-order magnitude. |
| JEL: | F15 F31 F43 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11366&r=mon |
| By: | Balázs Égert; Maroje Lang |
| Abstract: | This paper studies the impact of daily official foreign exchange interventions on the exchange rates of two EU candidate countries, namely Croatia and Turkey for the periods from 1996 to 2004 and from 2001 to 2004, respectively. Using the event study methodology and a variety of GARCH models reveals that both the Croatian and the Turkish central banks were in a position to influence, to some extent, the level of the exchange rate during the period studied. This lends support to the view that foreign exchange intervention may be effective to a limited extent in emerging market economies. |
| Keywords: | central bank intervention, foreign exchange intervention, official interventions, foreign exchange market, effectiveness, exchange rate volatility, emerging economies, transition economies |
| JEL: | F31 |
| Date: | 2005–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-755&r=mon |
| By: | Imed Drine; Christophe Rault; |
| Abstract: | We investigate inflation convergence between the Euro Zone and its CEE partners using panel data methods that incorporate structural shifts. We find strong rejections of the unit root hypothesis, and therefore evidence of PPP, in the East-European countries for the 1995:1 to 2000:4 period. |
| Keywords: | Purchasing power parity, inflation convergence, developing country, panel unit-root tests allowing structural breaks |
| JEL: | E31 F0 F31 C15 |
| Date: | 2005–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-768&r=mon |
| By: | Balázs Égert; László Halpern; |
| Abstract: | This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates. |
| Keywords: | equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-769&r=mon |
| By: | Balázs Égert; ; |
| Abstract: | This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands. |
| Keywords: | Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey |
| JEL: | E31 O11 P17 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-770&r=mon |
| By: | Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald |
| Abstract: | This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies. |
| Keywords: | target zone, ERM, non-linearity, SETAR. |
| JEL: | F31 G15 O10 |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-771&r=mon |
| By: | Axel Dreher (Thurgau Institute of Economics & University of Konstanz); Roland Vaubel (University of Mannheim) |
| Abstract: | By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique. |
| Keywords: | Foreign exchange interventions, political business cycles |
| JEL: | F31 E58 |
| Date: | 2005–05–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505009&r=mon |
| By: | Beth Simmons (Harvard University); Jens Hainmueller (Harvard University) |
| Abstract: | Recent articles in International Organization and elsewhere have explored the role of domestic institutions in shaping exchange rate regime choice. These articles use some variation on the information reported by governments to the International Monetary Fund as their dependent variable. Even more recently, new data have become available that reflect actual (de facto) rather than declaratory (de jure) policies with respect to exchange rate regimes. The findings of the domestic institutionalists are significantly weakened, and in some cases reversed, when this more appropriate measure is used to test their claims. These tests cast doubt on whether a domestic institutional focus is the most fruitful way to study exchange rate regimes. |
| Keywords: | Exchange rate choiche, Political Economy of Monetary Institutions |
| JEL: | F3 F4 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0505011&r=mon |
| By: | William Barnett (University of Kansas) |
| Abstract: | This paper is a comment on Serletis and Shintani, 'Chaotic Monetary Dynamics with Confidence,' which is to appear in a special issue of the Journal of Macroeconomics on chaos in economics. The Editor of the special issue invited comments from discussants of all papers in the special issue, with the comments to be published in the special issue. This invited comment is to appear in the special issue along with Serletis and Shintani's paper. |
| Keywords: | chaos bifurcation Divisia money aggregation |
| JEL: | C14 C22 E37 E32 |
| Date: | 2005–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0505017&r=mon |
| By: | António Portugal Duarte (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF); João Sousa Andrade (Faculty of Economics - University of Coimbra & Group for Monetary & Financial Studies - GEMF) |
| Abstract: | This paper studies the Gold Standard in Portugal. It was the first country in Europe to join Great Britain in 1854. The principle of free gold convertibility was abandoned in 1891. For the purposes of a macroeconomic study, we also extended the analysis up to 1913. Our study points out the mistake of comparing different systems with the same indicators. Examination of demand, supply and monetary shocks in the context of a VAR model confirm the idea that the principles of classical economics are appropriate for the Gold Standard in Portugal. |
| Keywords: | Gold Standard, Macroeconomic Stability, Convertibility, Portugal, VAR and Unit Roots |
| JEL: | B10 C32 E42 E58 F31 F33 N23 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpmh:0505002&r=mon |
| By: | Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco); S. Boragan Aruoba (Department of Economics, University of Maryland) |
| Abstract: | We estimate a model with latent factors that summarize the yield curve (namely, level, slope, and curvature) as well as observable macroeconomic variables (real activity, inflation, and the stance of monetary policy). Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve. We find strong evidence of the effects of macro variables on future movements in the yield curve and much weaker evidence for a reverse influence. We also relate our results to a traditional macroeconomic approach based on the expectations hypothesis. |
| Keywords: | Yield curve, term structure, interest rates, macroeconomic fundamentals, factor model, statespace model |
| JEL: | G1 E4 C5 |
| Date: | 2003–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-024&r=mon |
| By: | Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We compare three pricing mechanisms for monetary economies: bargaining (search equilibrium); price taking (competitive equilibrium); and price posting (competitive search equilibrium). We do this in a framework that, in addition to considering different mechanisms, extends existing work on the microfoundations of money by allowing a general matching technology and endogenous entry. We study how the nature of equilibrium and effects of policy depend on the mechanism. Under bargaining, trades and entry are both inefficient, and inflation implies a first-order welfare loss. Under price taking, the Friedman rule solves the first inefficiency but not the second, and inflation can actually improve welfare. Under posting, the Friedman rule implies first best, and inflation reduces welfare but the effect is second order. |
| Keywords: | Money, Search |
| JEL: | D83 E31 |
| Date: | 2003–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-031&r=mon |
| By: | Guillaume Rocheteau (Department of Research,Federal Reserve Bank of Cleveland); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We study the effects of inflation in models with various trading frictions. The framework is related to recent search-based monetary theory, in that trade takes place periodically in centralized and decentralized markets, but we consider three alternative mechanisms for price formation: bargaining, price taking, and posting. Both the value of money per transaction and market composition are endogenous, allowing us to characterize intensive and extensive margin effects. In the calibrated model, under posting the cost of inflation is similar to previous estimates, around 1% of consumption. Under bargaining, it is considerably bigger, between 3% and 5%. Under price taking, the cost of inflation depends on parameters, but tends to be between the bargaining and posting models. In some cases, moderate inflation may increase output or welfare. |
| Keywords: | Money, Search, Frictions, Inflation |
| JEL: | D83 E31 |
| Date: | 2003–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:03-032&r=mon |