nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒08‒03
four papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Money and Prices in Estonia By Aurelijus Dabušinskas
  2. Do we really know how inflation targeters set interest rates? By Marcela Meirelles-Aurelio
  3. Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations By Kjell G. Nyborg; Ulrich Bindseil; Ilya A. Strebulaev
  4. The interdealer market and the central bank intervention By Paula Albuquerque

  1. By: Aurelijus Dabušinskas (Bank of Estonia)
    Abstract: This paper examines the relationship between money and prices in Estonia in the period 1997Q1-2003Q3. The concept of a price (or real money) gap suggested by the P-star theory is applied to investigate whether information about the current money stock can be used to explain and/or predict GDP deflator inflation over the sample period. The results show that the money gap measure dominates the output gap as an explanatory variable for inflation in the short run. However, the money gap does not seem to be a proper indicator for predicting inflation over longer horizons, say, 12 months ahead. There are some signs that the output gap is becoming a better indicator of future inflation over time, but more data are needed to confirm this hypothesis.
    Keywords: P-star, inflation, money demand
    JEL: E31 E41
  2. By: Marcela Meirelles-Aurelio
    Abstract: In inflation targeting (IT) regimes, the Monetary Authority announces an explicit objective, the target for inflation. However, other objectives that possibly conflict with the inflation goal are present, such as keeping output close to its potential level and the stability of financial markets. This multiplicity of objectives has spurred a debate on whether inflation targeting really provides a transparent framework for monetary policy. This question is addressed in this paper, focusing on the experience of six countries that adopted IT. The empirical investigation is based on a variety of data sets (including real time data and Central Bank's forecasts), as well as on alternative forward-looking reaction functions. The main finding is that, if transparency is interpreted as the short run predictability of policy actions, consistent with the announced inflation goal, then most of the IT regimes here examined are remarkably transparent. However, this is not necessarily true if a more broad interpretation of transparency is required. The data also reveals a certain degree of heterogeneity across countries and time, and therefore recommends caution with respect to general statements regarding the properties of IT regimes.
    Keywords: Monetary policy ; Inflation (Finance)
    Date: 2005
  3. By: Kjell G. Nyborg (UCLA Anderson School of Management); Ulrich Bindseil (European Central Bank); Ilya A. Strebulaev (Stanford University, Graduate School of Business)
    Abstract: Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfil reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral.
    Keywords: Repo auctions, Multiunit auctions, Reserve requirements, Loser’s nightmare, Money markets, Central bank, Collateral, Open market operations
    JEL: G21 G12 D44 E43 E50
    Date: 2005–07
  4. By: Paula Albuquerque
    Abstract: This paper studies the consequences of having either an interventionist or a non-interventionist central bank in the foreign exchange market, in a market microstructure framework. Although a simple one-period model is used, it allows the characterization of the effect of the central bank intervention on the behaviour of dealers. The model also identifies the conditions for the dealer that acts as the counterpart of the central bank to be better or worse than the other dealers. The price is expected to be more informative with an interventionist central bank.
    Keywords: foreign exchange market; interdealer market; central bank intervention; information; market microstructure.
    JEL: D4 D8 F3 G1

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