nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒06‒27
ten papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Derivative Markets' Impact on Colombian Monetary Policy By Esteban Gómez; Diego Vásquez; Camilo Zea
  2. How does the New Keynesian Monetary Model fit in the ES and the Eurozone?. By Ramón María-Dolores; Jésus Vazquez
  3. Nominal versus Real Convergence with Respect to EMU Accession.How to Cope with the Balassa-Samuelson Dilemma By Paul de Grauwe; Gunther Schnabl
  4. Sticky Prices, Limited Participation or Both? By Niki Papadopoulou
  5. Foreign Exchange Intervention and Monetary Policy in Japan, 2003-2004 By Rasmus Fatum; Michael M. Hutchison
  6. Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency By Wilem H. Buiter
  7. Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version By Stephanie Schmitt-Grohe; Martin Uribe
  8. "Monetary Policy during Japan's Lost Decade" By R. Anton Braun; Yuichiro Waki
  9. Purchasing Power Parity: Granger Causality Tests for the Yen- Dollar Exchange Rate By Gunther Schnabl; Dirk Baur
  10. Credit Crunch in East Asia: A Retrospective By Masahiro Enya; Akira Kohsaka; Mervin Pobre

  1. By: Esteban Gómez; Diego Vásquez; Camilo Zea
    Abstract: Derivatives are contingent claims that complete financial markets. Their use allow agents and firms to ameliorate the impact over con- sumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives gene- rate in some cases a loss in the effectiveness of the traditional monetary transmission channels in the short run, and in others, they promote an increase in the speed of transmission itself. Using an investment model, the impact of the use of interest rate and exchange rate derivatives in the dilution of colombian monetary channels is verified. Empirical exercises suggest that monetary policy has lost effectiveness in the short run.In spite of the surprise this result may offer given the relative im- matureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial mar- kets' imperfections. In addition, not only the hedge directly taken by firms with access to this instruments matter; there could be hedging spill-overs whenever commercial banks use derivatives, which allow for a more stable and cheap credit supply for firms with no access to those markets. The natural recommendation deriving from this conclusion suggests an urgent analysis of the derivatives impact over the speed of monetary transmission in Colombia.
    Keywords: Derivatives; Monetary Policy Transmission Channels;Investment
    JEL: E22 E52 G11
  2. By: Ramón María-Dolores (Universidad de Murcia); Jésus Vazquez (Universidad del País Vasco)
    Keywords: Indirect inference, NKM model, Taylor rule, optimal policy
    JEL: C32 E30 E52
    Date: 2005–06–22
  3. By: Paul de Grauwe; Gunther Schnabl
    Keywords: Euro; EMU; EU-East-Central Europe; enlargement
    Date: 2004–10–15
  4. By: Niki Papadopoulou
    Abstract: This paper investigates the micro mechanisms by which monetary policy affects and is transmitted through the U.S economy, by developing a unified, dynamic, stochastic, general equilibrium model that nests two classes of models. The first sticky prices and the second limited participation. Limited participation is incorporated by assuming that households’ are faced with quadratic portfolio adjustment costs. Monetary policy is characterized by a generalized Taylor rule with interest rate smoothing. The model is calibrated and investigates whether the unified model performs better in replicating empirical stylized facts, than the models that have only sticky price or limited participation. The unified model replicates the second moments of the data better than the other two types of models. It also improves on the ability of the sticky price model to deliver the hump-shaped response of output and inflation. Moreover, it also delivers on the ability of the limited participation model to replicate the fall in profits and wages, after a contractionary monetary policy.
    JEL: E31 E32 E44 E52
  5. By: Rasmus Fatum; Michael M. Hutchison
    Date: 2005–06
  6. By: Wilem H. Buiter
    Abstract: Despite the zero lower bound on the short nominal interest rate in Japan having become a binding constraint, conventional monetary policy in Japan, in the form of generalised open market purchases of government securities of all maturities, has never been pushed to the limit where all outstanding government debt and all current and anticipated future government deficits are (or are confidently expected to be) monetised. Open market purchases of private securities can create serious governance problems. Two ways of overcoming the zero lower bound constraint have been proposed. The first is Gesell's carry tax on currency. The second is Eisler's proposal for the unbundling of the medium of exchange/means of payment function and the numeraire function of money through the creation of a parallel virtual currency. This raises the fundamental issue of who chooses or what determines the numeraire used in private wage and price contracts - an issue that is either not addressed in the literature or addressed incorrectly. On balance, Gesell's proposal appears to be the more robust of the two.
    Keywords: zero bound, deflation, carry tax on currency, parallel virtual currency
    JEL: E31 E42 E52 E58
    Date: 2005–06
  7. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: In this paper, we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation---particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. Simple monetary and fiscal rules are shown to implement a competitive equilibrium that mimics well the one induced by the Ramsey policy. When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital.
    JEL: E52 E61 E63
    Date: 2005–06
  8. By: R. Anton Braun (Faculty of Economics, University of Tokyo); Yuichiro Waki (Graduate School of Economics, University of Tokyo)
    Abstract: We develop a quantitative costly price adjustment model with capital formation for the Japanese Economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3 percent during the 1990s avoids the zero bound and enhances welfare.
    Date: 2005–05
  9. By: Gunther Schnabl (Tuebingen University); Dirk Baur (Tuebingen University)
    Abstract: The paper analyses the causality between the Japanese-US relative export prices and the yen-dollar exchange rate. It explains why the Japanese yen proved strong even during the economic slump of the 1990s. The paper suggests that the appreciation of the Japanese yen forced the Japanese enterprises into price reductions and productivity increases, which put a floor under the high level of the yen and thus initiated rounds of appreciation. This corresponds to the conjecture of a vicious (virtuous) circle of appreciation and price adaptation.
    Keywords: yen, yen-dollar exchange rate, purchasing power parity, Granger causality test
    JEL: F31
    Date: 2005–06–15
  10. By: Masahiro Enya (Faculty of Politics, Economics and Law, Osaka International University); Akira Kohsaka (Osaka School of International Public Policy, Osaka University); Mervin Pobre (Osaka School of International Public Policy, Osaka University)
    Abstract: In this paper, we explore the issue on credit crunch from a comparative perspective. Utilizing longer time series data, we investigate the existence of credit crunch in selected crisis-hit economies in East Asia over the period 1980-2002. We detected some episodes of credit crunch both before and after the Asian economic crisis. These episodes after the Crisis are somewhat different from those detected by previous studies on the issue. We, then, review the credit-crunch episodes in the broad macroeconomic context in order to assess our results in the longer-run perspective. We are well aware that financial liberalization has changed the financial environments of these countries more or less in due course. Even so, the mixed results we obtained on the existence of credit crunch do not suggest that the impact of the austerity programs on financial intermediation after the Asian Crisis was ambiguous. On the contrary, they implied that the impact of the programs were so severe that credit crunch or supply retrenchment was overwhelmed by a sharp fall in credit demand because of real and expected persistent overall economic depression.
    Keywords: human capital; credit crunch, East Asia, Asian Economic Crisis, disequilibrium analysis
    JEL: E5 O11 O53
    Date: 2004–03

This nep-mon issue is ©2005 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.