nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒07‒03
seven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Impulses, Local Output and the Transmission Mechanism By Massimo Caruso
  3. The Contagion Effect of Public Debt on Monetary Policy: The Brazilian Experience By Fernando de Holanda Barbosa
  4. Monetary Policy: From Theory to Practices By Thierry Warin
  5. What Do German Short-Term Interest Rates Tell Us About Future Inflation? By Harald Grech
  6. The European Monetary Union as a Commitment Device for New EU Member States By Federico Ravenna
  7. Monetary Policy, Expectations and Commitment By George W. Evans; Seppo Honkapohja

  1. By: Massimo Caruso (Banca d'Italia, Sede di Roma, Nucleo per la ricerca economica, via XX Settembre 97/e 00187 Rome ITALY)
    Abstract: This paper evaluates the effects of unanticipated monetary policy shocks on Italian output on the basis of highly disaggregated data and a VAR methodology. The impact of unexpected changes in the money market interest rate on the pattern of industrial production - based on qualitative business opinion survey data - has been computed for 164 local industries. The perceived output effects of monetary impulses go up for local industries with higher investment expenditures, less liquid firms and for industrial sectors that have a higher correlation with the aggregate business cycle. The hypothesis that small firms bear a disproportionate burden of monetary policy does not find support in this sample.
    Keywords: monetary policy shocks, business opinion surveys, heterogeneity
    JEL: E52 E58 R12
    Date: 2004–12
  2. 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 consumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives generate 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 immatureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial markets' 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;
    JEL: E22
    Date: 2005–05–31
  3. By: Fernando de Holanda Barbosa (EPGE/FGV)
    Date: 2005–06
  4. By: Thierry Warin
    Abstract: The paper proposes an overview of the literature on monetary policy. It shows the influence of the debates in the theoretical literature on the actual implementation of policies, as well a the counter effect. The European Economic and Monetary Union (EMU) is largely studies a an exampe of this counter effect with regard to the study of the credibility concept in an open economy setting.
    JEL: E50 E52 E58
    Date: 2005–06
  5. By: Harald Grech (Oesterreichische Nationalbank, Economic Studies Division)
    Abstract: In this paper, the author empirically assesses the predictive power of short-term interest rates and term spreads for future inflation in Germany. Based on a multivariate term structure framework, a vector error forecasting equation for inflation forecasts of up to two years is constructed. The results of the alternative error correction reveal that the level of the shortterm interest rates conveys much more information on future inflation than the yield curve spreads. In particular, the one-month and three-month nominal interest rates seem to be informative on future inflation at a two-year horizon.
    Keywords: inflation, interest rates
    JEL: E31 C51
    Date: 2004–12–31
  6. By: Federico Ravenna (Economics Department, University of California)
    Abstract: We show that the credibility gain from permanently committing to a fixed exchange rate by joining the European Monetary Union can outweigh the loss from giving up independent monetary policy if the domestic monetary authority does not enjoy full credibility. Using a DSGE model, this paper shows that when the central bank enjoys only limited credibility a pegged exchange rate regime yields a lower loss compared to an inflation targeting policy, even if this policy ranking would be reversed in a full-credibility environment. There exists an initial stock of credibility that must be achieved for a policy-maker to adopt inflation targeting over a strict exchange rate targeting regime. Full credibility is not a precondition, but exposure to foreign and financial shocks and high steady state inflation make joining the EMU relatively more attractive for a given level of credibility. The theoretical results are consistent with empirical evidence we provide on the relationship between credibility and monetary regimes using a Bank of England survey of 81 central banks.
    Keywords: Inflation targeting, Credibilty, Open Economy, Exchange Rate Regimes, Monetary Policy
    JEL: E52 E31 F02 F41
    Date: 2005–05–12
  7. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge)
    Abstract: This is a revised and shortened version of Working Paper 2002-11. Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs particularly well on both counts.
    Keywords: Commitment, interest rate setting, adaptive learning, stability, determinacy
    JEL: E52 E31 D84
    Date: 2002–05–27

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