nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒08‒13
39 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Money Supply and the Implementation of Interest Rate Targets By Schabert, Andreas
  2. Alice Through the Looking Glass: Monetary and Fiscal Policy Interaction in a Liquidity Trap By Sanjit Dhami; Ali al-Nowaihi
  3. On Stability of the Demand for Money in a Developing OECD By Ferda HALICIOGLU; Mehmet UGUR
  4. A Small Monetary System for the Euro Area Based on German Data By Ralf Brueggemann; Helmut Luetkepohl
  5. Modeling bond yields in finance and macroeconomics By Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
  6. Systematic monetary policy and persistence By Luca Bindelli
  7. Long-Run Determinants of Inflation Differentials in a Monetary Union By Altissimo, Filippo; Benigno, Pierpaolo; Rodriguez Palenzuela, Diego
  8. Uncertainty, Wage Setting and Decision Making in a Monetary Union By Carsten Hefeker
  9. The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar By Michael R. King; Rasmus Fatum
  10. Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models By Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
  11. Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness By Giovanni Di Bartolomeo; Francesco Giuli; Marco manzo
  12. Sources of Inflation Persistence in the Euro Area By Boris Cournède; Alexandra Janovskaia; Paul Van den Noord
  13. Voting Transparency in a Monetary Union By Gersbach, Hans; Hahn, Volker
  14. Modelling Cyclical Divergence in the Euro Area: The Housing Channel By Paul Van den Noord
  15. Unions, fiscal policy and central bank transparency By Giuseppe Ciccarone; Giovanni Di Bartolomeo; Enrico Marchetti
  16. Voting and turning out for monetary integration: the case of the French referendum on the Maastricht treaty By Pierre-Guillaume Méon
  17. Uncovered Interest Rate Parity and the Expectations Hypothesis of the Term Structure: Empirical Results for the U.S. and Europe By Ralf Brueggemann; Helmut Luetkepohl
  18. Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road towards a Honeymoon - Some Evidence from the ERM, ERM2 and Selected New EU Member States By Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
  19. Monetary Policy in the Euro Area: Lessons from Five Years of ECB and Implications for Turkey By Canova, Fabio; Favero, Carlo A
  20. Wealth Effects on Money Demand in EMU: Econometric Evidence By Laurence Boone; Fanny Mikol; Paul Van den Noord
  21. The Political Economy of Seigniorage By Ari Aisen; Francisco José Veiga
  22. Is There a Change in the Trade-Off Between Output and Inflation at Low or Stable Inflation Rates?: Some Evidence in the Case of Japan By Hideyuki Ibaragi; Annabelle Mourougane
  23. Why do central banks intervene secretly? Preliminary evidence from the Bank of Japan By Michel Beine; Oscar Bernal
  24. Alternative measures of the Federal Reserve banks’ cost of equity capital By Michelle L. Barnes; Jose Lopez
  25. Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency? By Menzie Chinn; Jeffrey Frankel
  26. The Unemployment Inflation Trade-Off in the Euro Area By Tobias Linzert
  27. What if the UK had Joined the Euro in 1999? An Empirical Evaluation Using a Global VAR By M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
  28. The Ties that Divide. A Network Analysis of the International Monetary System By Flandreau, Marc; Jobst, Clemens
  29. A Trade Model with an Optimal Exchange Rate Motivated by Current Discussion of a Chinese Renminbi Float By Hui Huang; Yi Wang; Yiming Wang; John Whalley; Shunming Zhang
  30. Differences in Resilience Between the Euro-Area and US Economies By Aaron Drew; Mike Kennedy; Torsten Sløk
  31. One Money, One Cycle? Making Monetary Union a Smoother Ride By Christine de la Maisonneuve; Claude Giorno; Peter Hoeller
  32. Competition, the Lisbon Strategy and the Euro By Anindya Banerjee; Bill Russell
  33. Causation Delays and Causal Neutralization: The Money-Output Relationship Revisited By Jonathan B. Hill
  34. Using Copulas to Construct Bivariate Foreign Exchange Distributions with an Application to the Sterling Exchange Rate Index By Hurd, Matthew; Salmon, Mark; Schleicher, Christoph
  35. Risk Premia in Forward Foreign Exchange Markets: A Comparison of Signal Extraction and Regression Methods By Prasad V. Bidarkota
  36. The Impact of Exchange Rate Regimes on Real Exchange Rates in South America, 1990-2002 By Anne-Laure Baldi; Nanno Mulder
  37. Exchange rate overshooting and the costs of floating By Michele Cavallo; Kate Kisselev; Fabrizio Perri; Nouriel Roubini
  38. Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment: Evidence from Dual Exchange Rates in Developing Countries By Yin-Wong Cheung; Kon S. Lai
  39. How to Exit from Fixed Exchange Rate Regimes By Asici, Ahmet Atil; Ivanova, Nadezhda; Wyplosz, Charles

  1. By: Schabert, Andreas
    Abstract: In this paper, we analyze the relation between interest rate targets and money supply in a (bubble-free) rational expectation equilibrium of a standard cash-in-advance model. We examine contingent monetary injections aimed to implement interest rate sequences that satisfy interest rate target rules. An interest rate target with a positive inflation feedback in general corresponds to money growth rates rising with inflation. When prices are not completely flexible, this implies that a non-destabilizing money supply cannot implement a forward-looking and active interest rate rule. This principle also applies for an alternative model version with an interest elastic money demand. The implementation of a Taylor rule then requires a money supply that leads to explosive or oscillatory equilibrium sequences. In contrast, an inertial interest rate target can be implemented by a non-destabilizing money supply, even if the inflation feedback exceeds one, which is often found in interest rate rule regressions.
    Keywords: contingent money supply; interest rate inertia; interest rate rules; macroeconomic stability; policy equivalence
    JEL: E32 E41 E52
    Date: 2005–06
  2. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: In a liquidity trap the nominal interest rate hits its zero floor. Hence, to reduce the real interest rate, and affect an economic recovery, inflationary expectations must increase. If the economy turns out not to be liquidity trapped, the Treasury has an incentive to renege on its promise of high inflation because inflation is costly. Hence, under discretion, a rational private sector keeps its inflation expectations low and the real interest rate remains too high. We suggest an institutional solution that has two main components. First, an inflation target given to an independent Central Bank who has sole control over monetary policy. This provides a commitment to the ‘necessary’ inflation level when the economy is not in a liquidity trap. Second, the Treasury, who retains control of fiscal policy, is given something like a ‘Taylor rule’, which penalizes deviations of output from an output target and inflation from the inflation target. This ensures that fiscal policy is ‘appropriately’ expansionary in a liquidity trap. Overall, this type of delegation keeps inflationary expectations ‘suffi- ciently’ high and achieves the optimal mix of monetary and fiscal policy. We prove that this arrangement achieves the optimal rational expectations (precommitment) solution. It is tempting to conclude that the huge welfare losses associated with the Japanese experience might have been mitigated by the institutional setup suggested here.
    Keywords: liquidity trap; monetary-fiscal coordination; optimal inflation and output targets; the Japanese experience
    JEL: E63 E52 E58 E61
    Date: 2005–07
  3. By: Ferda HALICIOGLU (The University of Greenwich); Mehmet UGUR (The University of Greenwich)
    Abstract: This paper empirically analyses the stability of the narrow money demand function (M1) in Turkey for the period 1950-2002. As part of the IMF-sponsored stabilisation programme, Turkey has been pursuing base money targets. To ascertain whether this policy framework satisfies the necessary condition for effectiveness, we estimate and test for the stability of Turkish M1 by employing a recent single cointegration procedure proposed by Pesaran et al. (2001) along with the CUSUM and CUSUMSQ stability tests. We demonstrate that there is a stable money demand function and it could be used as an intermediate target of monetary policy in Turkey.
    Keywords: co-integration, money demand, stability, Turkey
    JEL: E41 E52
    Date: 2005–08–01
  4. By: Ralf Brueggemann; Helmut Luetkepohl
    Abstract: Previous euro area money demand studies have used aggregated national time series data from the countries participating in the European Monetary Union (EMU). However, aggregation may be problematic because macroeconomic convergence processes have taken place in the countries of interest. Therefore, in this study, quarterly German data until 1998 are combined with data from the euro area from 1999 until 2002 and these series are used for getting a small vector error correction model for the monetary sector of the EMU. A stable long-run money demand relation is found for the full sample period. Moreover, impulse responses do not change much when the sample period is extended by the EMU period provided the break in the extended data series is captured by a simple dummy variable.
    JEL: C32
    Date: 2004
  5. 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
  6. By: Luca Bindelli
    Abstract: Woodford (1999 and 2003) has raised the theoretical possibility that in a standard, forward looking sticky price model, an independent channel of inertia might arise as a result of policy behavior. We analyze this assertion empirically, and estimate a standard model, in which the monetary authority is assumed to commit to an optimal rule. We contribute to the existing literature by identifying the purely policy induced persistence present in the model. We also analyze the role of the structural parameters reflecting policy preferences and price flexibility in altering the policy induced, as well as the overall persistence properties of the model. We find that such a model is able to replicate most of the data's moments. In constrast to previous empirical literature, lagged terms in both modelled Phillips and IS curves are found to be either insignificant or very small. Commitment policy alone can explain a substantial part of output persistence. While the pricing mechanism at the heart of this model helps transfer output persistence into inflation persistence, commitment policy manages to undo this link by undershooting the inflation target following a positive 'cost push' shock so that inflation persistence is slightly reduced compared to the discretionary policy case.
    Keywords: persistence; optimal monetary policy; supply shock; Kalman filter
    JEL: E52 E58
    Date: 2005–05
  7. By: Altissimo, Filippo; Benigno, Pierpaolo; Rodriguez Palenzuela, Diego
    Abstract: This paper analyses the long-run determinants of inflation differentials in a monetary union. First, we aim at establishing some stylized facts relating the regional dispersion in headline inflation rates in the euro area as well as in the main components of the consumer price index. We find that a relatively large proportion of it occurs in the Service category of the EU’s harmonized consumer price index (HICP). We then lay out a model of a monetary union with fully flexible prices, the long-run properties of which are analysed. Our model departs in several respects from the Balassa-Samuelson hypotheses. Our results are in contrast with the result that movements in the real exchange rate are mainly driven by regionally asymmetric productivity shocks in the traded sectors. Our results point instead to relative variations in productivity in the non-traded sector as the primary cause of price and inflation differentials, with shocks to productivity in the traded sector being largely absorbed by movements in the terms of trade in the regional economies. These shocks are also found to largely drive the variability of real wages at the country level.
    Keywords: currency area; PPP; Real Exchange Rate
    JEL: E31 F41
    Date: 2005–07
  8. By: Carsten Hefeker
    Abstract: The enlargement of the European Monetary Union is likely to lead to an increase in uncertainty regarding the transmission of monetary policy for the larger union. Adding new members to the central bank council will in addition imply that the policy reaction of the enlarged council will be uncertain in the initial period. The paper considers the influence of both types of uncertainty on wage-setting behavior in the larger monetary union and its effects on unemployment. In light of these effects, I also derive implications for the adequate structure of the central bank.
    Keywords: monetary policy uncertainty, wage setting, European Central Bank, Euro area, accession countries
    JEL: D72 E58
    Date: 2005
  9. By: Michael R. King; Rasmus Fatum
    Abstract: The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers. The authors investigate the effectiveness of sterilized intervention in the Canadian dollar exchange rate market over the period January 1995 to September 1998. They employ an event study methodology and different criteria for success, and use both daily data and high-frequency (intraday) intervention and exchange rate data. The time period covers two distinct intervention regimes, characterized by mechanistic and discretionary intervention, respectively. Furthermore, the authors address the issue of currency comovements by carrying out the analysis using both the readily observable Canadian dollar/U.S. dollar exchange rate and the Canadian dollar/U.S. dollar exchange rate adjusted for general currency co-movements against the U.S. dollar. When they analyze the high-frequency data, the authors find evidence that intervention systematically affects movements in the Canadian dollar/U.S. dollar exchange rate and in the desired direction, along with some evidence that intervention is associated with a reduction of exchange rate volatility. When investigating exchange rate movements around intervention events using daily data, the authors find some evidence supportive of effectiveness. These effects, however, are weakened when adjusting for currency comovements against the U.S. dollar.
    Keywords: Exchange rates; Financial markets
    JEL: E58 F31 G14 G15
    Date: 2005
  10. By: Andrew T. Levin; Alexei Onatski; John C. Williams; Noah Williams
    Abstract: We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data, and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination.
    JEL: C11 C22 E31 E52 E61 E63
    Date: 2005–08
  11. By: Giovanni Di Bartolomeo (Department of Public Economics, University of Rome 'La Sapienza'); Francesco Giuli (Department of Public Economics, University of Rome 'La Sapienza'); Marco manzo (Department of Public Economics, University of Rome 'La Sapienza')
    Abstract: This paper extends the stabilization game between monetary and fiscal authorities to the case of multiplicative (model) uncertainty. In this context, the “symbiosis assumption”, i.e. fiscal and monetary policy share the same ideal targets, no longer guarantees the achievement of ideal output and inflation, unless the ideal output is equal to its natural level. A time consistency problem arises.
    Keywords: Monetary-fiscal policy interactions, uncertainty, symbiosis.
    JEL: E61 E63
    Date: 2005–08–05
  12. By: Boris Cournède; Alexandra Janovskaia; Paul Van den Noord
    Abstract: In recent years, inflation in the euro area has failed to decelerate decisively while cyclical slack built up in the economy. Is this phenomenon more than a peculiarity in recent data? Is it related to structural policy settings? Econometric analysis conducted on two decades of quarterly data covering 17 countries yields a yes on both counts. First, inflation is shown to respond significantly more weakly to cyclical slack in the euro area than in countries such as the United Kingdom, the United States or Canada. Secondly, this lack of responsiveness is found to be related in a statistically significant way to more rigid structural policy settings. The results pass a wide range of robustness checks. This Working Paper relates to the 2005 OECD Economic Survey of the euro area ( <P>Les causes de la persistance de l'inflation dans la zone euro Au cours des dernières années, l’inflation ne s’est pas ralentie de manière sensible au sein de la zone euro alors même que l’écart de production y devenait de plus en plus négatif. Ce phénomène est-il plus profond qu’une bizarrerie des statistiques économiques récentes ? Y a-t-il un lien avec les caractéristiques structurelles de la zone euro ? L’analyse économétrique de deux décennies de données trimestrielles pour dix-sept pays conduit à répondre oui à chacune de ces questions. Premièrement, il apparaît que, pour un même écart de production négatif, l’inflation ralentit moins dans la zone euro que dans des pays comme le Royaume-Uni, les États-Unis ou le Canada. Deuxièmement, il existe un lien statistiquement significatif entre ce manque de réactivité et une plus grande rigidité des politiques structurelles. La robustesse de ces résultats est confirmée par un large éventail de tests. Ce Document de travail se rapporte à l'Etude économique de l'OCDE de la zone euro, 2005 (
    Keywords: monetary policy, Economic and Monetary Union, Union Économique et Monétaire, politique monetaire, inflation, inflation
    JEL: E31 E32 E52 E58
    Date: 2005–07–20
  13. By: Gersbach, Hans; Hahn, Volker
    Abstract: We examine whether the central bank council of a monetary union should publish its voting records when members are appointed by national politicians. We show that the publication of voting records lowers overall welfare if the private benefits of holding office are sufficiently low. High private benefits of central bankers lower overall welfare under opacity, as they induce European central bankers to care more about being re-appointed than about beneficial policy outcomes. We show that opacity and low private benefits jointly guarantee the optimal welfare level. Moreover, we suggest that non-renewable terms for national central bankers and delegating the appointment of all council members to a European agency would be desirable.
    Keywords: central banks; transparency voting
    JEL: D70 E58
    Date: 2005–07
  14. By: Paul Van den Noord
    Abstract: <P>After the launch of the single currency the euro exchange rate fell and interest rates had converged towards the (low) German level. These shocks have worked out differently for the small and large countries. Housing markets have acted as an important vehicle of transmission of these shocks onto economic activity and inflation. Simulations with a stylised econometric model for the euro area economy, making a distinction between the small and large countries in terms of the estimated parameters, illustrate this mechanism ... </P> <P>Modélisation de la divergence conjoncturelle dans la zone euro : le canal de transmission du logement <P>Après le lancement de la monnaie unique, le taux de change de l’euro avait baissé et les taux d’intérêt avaient convergé vers les taux allemands (qui se situaient à un bas niveau). Ces chocs se sont répercutés de manière différente sur les petites et les grandes économies. Les marchés du logement ont joué un rôle important de canal de transmission de ces chocs, en les répercutant sur l’activité économique et l’inflation. Des simulations effectuées à l’aide d’un modèle économétrique de l’économie de la zone euro, établissant une distinction entre les petites et les grandes économies en termes de paramètres estimés, illustrent ce mécanisme ...</P>
    Keywords: Business cycles, Economic and Monetary Union, Union Économique et Monétaire, cycles macroéconomiques
    JEL: E32 E52 F42
    Date: 2004–09–15
  15. By: Giuseppe Ciccarone (Department of Public Economics, University of Rome 'La Sapienza'); Giovanni Di Bartolomeo (Department of Public Economics, University of Rome 'La Sapienza'); Enrico Marchetti (Department of Public Economics, University of Rome 'La Sapienza')
    Abstract: In a unionised economy with supply-side fiscal policy transparency has two contrasting effects on economic performance. Uncertainty on central bank's preferences induces unions to reduce wages but also produces a fully-anticipated expansionary fiscal policy which favours the setting of higher wages. Even if the net effect depends on the preference parameters of public entities and on the effectiveness of fiscal policy on aggregate supply: (i) the positive effects of opacity in unionised economies without fiscal policy are confirmed when the central bank is populist; (ii) if it is instead sufficiently conservative, transparency reduces inflation and the output gap, but at the cost of higher macroeconomic volatility.
    Keywords: Central bank transparency, Inflation, uncertainty
    JEL: E58
    Date: 2005–08–05
  16. By: Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: This paper analyses the voting and abstention patterns in French departments in the 1992 referendum on the Maastricht treaty, in light of the potential impact of monetary union. We observe that departmental characteristics implying either greater benefits or lower costs from monetary union are significantly correlated with the approval rate. This supports the view that the voting behavior of individual agents depended on their self-interest. The impact of economic characteristics on the abstention rate is less clear. Indeed, the variable that is most significantly correlated with abstention in the referendum is average abstention in other elections.
    Keywords: Monetary union, referendum, voting, abstention
    JEL: D70 F02 F33
    Date: 2005–02
  17. By: Ralf Brueggemann; Helmut Luetkepohl
    Abstract: A system of U.S. and euro area short- and long-term interest rates is analyzed. According to the expectations hypothesis of the term structure the interest rate spreads should be stationary and according to the uncovered interest rate parity the difference between the U.S. and euro area longterm interest rates should also be stationary. If all four interest rates are integrated of order one, one would expect to find three linearly independent cointegration relations in the system of four interest rate series. Combining German and European Monetary Union data to obtain the euro area interest rate series we find indeed the theoretically expected three cointegration relations, in contrast to previous studies based on different data sets.
    Keywords: Unit Roots, Multiple Frequency I(1) Process, Nonrational Transfer Function, Cointegration, VARMA Process, Information Criteria
    JEL: C32
    Date: 2005
  18. 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 the variant of the target zone model proposed by Bartolini and Prati (1999) and 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
  19. By: Canova, Fabio; Favero, Carlo A
    Abstract: We examine monetary policy in the euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and euro club will produce.
    Keywords: communication; EU newcomers; pillars; transmission
    JEL: C11 E12 E32 E62
    Date: 2005–06
  20. By: Laurence Boone; Fanny Mikol; Paul Van den Noord
    Abstract: <P>This paper investigates the determinants of money demand (M3) in the euro area. It specifically examines the potential impact of financial and housing wealth on money demand. It tests the hypothesis, whether wealth associated with increases in asset prices is used to finance liquidity holdings in a standard portfolio context. Regressing velocity on interest rates and a wealth variable (a composite of residential property and stocks) within an error-correction framework provides evidence of positive wealth effects from financial and housing assets on money demand in the long run, but no significant impact in the short run. Tests suggests that the long-run and dynamic money demand equations are stable and have not been disrupted by the adoption of the euro on 1 January 1999, while the impact of wealth on money demand may have increased ...</P> <P>Les effets de richesse sur la demande de monnaie dans l'union économique et monétaire : une analyse économétrique <P>Cet article étudie les facteurs qui déterminent la demande de monnaie (M3) dans la zone euro. Il examine de manière explicite quels sont les effets de richesse liés aux avoirs mobiliers et immobiliers sur la demande de monnaie. Il teste l'hypothèse selon laquelle, dans un contexte classique de choix de portefeuille, la richesse résultant d'une hausse des prix des actifs est employée pour financer la détention de liquidités. Un modèle à correction d'erreur est mis en oeuvre pour effectuer une régression économétrique de la vitesse de circulation de la monnaie sur les taux d'intérêt et sur une variable composite de richesse (qui agrège immeubles et actions), faisant apparaître des effets de richesse liés aux actifs mobiliers et immobiliers sur la demande de monnaie qui sont significatifs à long terme mais non à court terme. Différents tests suggèrent que les équations de demande de monnaie, tant dynamiques que de long terme, sont stables et n'ont pas été perturbées par l'adoption de ...</P>
    Keywords: wealth, richesse, Money demand, inflation, demande de monnaie, inflation
    JEL: E41 E52
    Date: 2004–11–09
  21. By: Ari Aisen (International Monetary Fund); Francisco José Veiga (Universidade do Minho - NIPE)
    Abstract: While most economists agree that seigniorage is one way governments finance deficits, there is less agreement about the political, institutional and economic reasons for relying on it. This paper investigates the main determinants of seigniorage using panel data on about 100 countries, for the period 1960-1999. Estimates show that greater political instability leads to higher seigniorage, especially in developing, less democratic and socially-polarized countries, with high inflation, low access to domestic and external debt financing and with higher turnover of central bank presidents. One important policy implication of study is the need to develop institutions conducive to greater economic freedom as a means to lower the reliance on seigniorage financing of public deficits. Classification-JEL: E31, E63.
    Keywords: Seigniorage, political instability, institutions.
    Date: 2005
  22. By: Hideyuki Ibaragi; Annabelle Mourougane
    Abstract: <P>This paper examines the relationship between the output gap and inflation in Japan by estimating Phillips curves and testing for changes since the advent of low inflation and/or the stabilisation of the rate of change of inflation. The work provides empirical support for the hypothesis of a change in the relationship between output and inflation in an environment of low inflation for Japan. In particular, there is evidence that the slope of the Phillips curve becomes flatter when the inflation rate is below ½ per cent (quarter-on-quarter, non-annualised) and also that there has been a break in the relationship between demand pressures and inflation in Japan since the beginning of the 1990s. Evidence is also found that the relationship changes when the inflation rate is either rising rapidly or falling sharply. At such times, changes in demand pressure have stronger effects on inflation. These results are robust to a wide range of specifications, including corrections for the ...</P> <P>La relation entre indicateurs de demande et inflation change-t-elle dans un contexte de basse ou de stabilité de l’inflation? <P>Cette étude examine la relation entre l’écart de croissance et l’inflation au Japon en estimant des courbes de Phillips et teste si cette relation se modifie dans un contexte d’inflation basse et/ou de stabilité de l’inflation. Les estimations présentées constituent un support empirique relativement détaillé de l’hypothèse d’un changement dans la relation entre indicateur de demande et inflation dans un environnement de basse inflation pour le Japon. En particulier, la pente de la courbe de Phillips s’aplatit quand le taux d’inflation est en dessous d’½ pour cent (taux trimestriel, non annualisé) et il existe un break dans la relation entre indicateur de demande et inflation au Japon au début des années 90. La relation apparaît aussi se modifier quand le taux d’inflation augmente ou baisse rapidement. Durant de telles périodes, les mouvements dans les indicateurs de demande ont un effet plus fort sur l’inflation. Les résultats obtenus sont robustes à la correction des hausses de ...</P>
    Keywords: Japan, Japon, Phillips curves, asymmetry, low inflation environment, Courbes de Phillips, asymétrie, environnement de basse inflation
    JEL: C22 E31
    Date: 2004–02–02
  23. By: Michel Beine (DULBEA, Université libre de Bruxelles, Brussels); Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: This paper empirically investigates the main determinants of secret interventions in the foreign exchange (FX) market. Using the recent experience of the Bank of Japan, we estimate a model that explains the share of secret to reported interventions in the FX market. Two sets of determinants are clearly identified: the first is related to the probability of detection of the central bank orders by market participants; the second, to the central bank’s internal decision to opt for secrecy. Our estimations support the arguments of current microstructure theories that rationalize the use of secret interventions.
    Keywords: Central Bank Interventions, Exchange Rates Market, Secrecy Puzzle.
    JEL: E58 F31 G15
    Date: 2005–04
  24. By: Michelle L. Barnes; Jose Lopez
    Abstract: The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices 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.
    Keywords: Financial services industry ; Federal Reserve banks - Service charges ; Federal Reserve banks - Costs
    Date: 2005
  25. By: Menzie Chinn; Jeffrey Frankel
    Abstract: Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike ten years ago, there now exists a credible competitor: the euro. This paper econometrically estimates determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). We have not found that net international debt position is an important determinant. Network externality theories would predict a tipping phenomenon. Indeed we find that the relationship between currency shares and their determinants is nonlinear (which we try to capture with a logistic function, or else with a dummy “leader” variable for the largest country). But changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The advent of the euro interrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, and then use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in the gap between the dollar and euro over the period 1999-2004. Whether the euro might in the future rival or surpass the dollar as the world’s leading international reserve currency appears to depend on two things: (1) do the United Kingdom and enough other EU members join euroland so that it becomes larger than the US economy, and (2) does US macroeconomic policy eventually undermine confidence in the value of the dollar, in the form of inflation and depreciation. What we learn about functional form and parameter values helps us forecast, contingent on these two developments, how quickly the euro might rise to challenge the dollar. Under two important scenarios the remaining EU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollar persists into the future the euro may surpass the dollar as leading international reserve currency by 2022.
    JEL: F02 F31 F33
    Date: 2005–08
  26. By: Tobias Linzert (European Central Bank and IZA Bonn)
    Abstract: This paper analyzes the relationship between unemployment and wage inflation for 10 of the euro area countries. The combination of low wage inflation and high unemployment in Europe is usually attributed to a rise in the natural rate of unemployment. Using a panel data approach, this paper models directly the specific structural determinants of the natural rate of unemployment that may account for a changing pattern in the unemployment inflation tradeoff. Moreover, it analyzes whether the responsiveness of wages crucially depends on the level of inflation and the level of unemployment. This allows to detect possible downward rigidity of wages and grease or sand effects of positive levels of inflation.
    Keywords: Phillips Curve, unemployment, panel analysis
    JEL: E24 E31 J64 C23
    Date: 2005–07
  27. By: M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
    Abstract: This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.
    Keywords: Global VAR (GVAR), counterfactual analysis, UK and Sweden entry to Euro
    JEL: C32 C35 E17 F15 F42
    Date: 2005
  28. By: Flandreau, Marc; Jobst, Clemens
    Abstract: This paper provides a new methodology to map international monetary relations in the 19th century. We identify an index of international liquidity and, applying techniques borrowed from formal network analysis (in particular, blockmodelling) we produce a formal ranking of currencies according to their degree of international circulation. The resulting indices are powerful tools to study the logic of the emergence of international currencies, as well as useful controls for cross-section regressions.
    Keywords: international monetary system; key currency; networks; pound sterling
    JEL: F31 N32
    Date: 2005–07
  29. By: Hui Huang; Yi Wang; Yiming Wang; John Whalley; Shunming Zhang
    Abstract: We combine a model of combined inter-spatial and inter-temporal trade between countries recently — used by Huang, Whalley and Zhang (2004) to analyze the merits of trade liberalization in services when goods trade is restricted — with a model of foreign exchange rationing due to Clarete and Whalley (1991) in which there is a fixed exchange rate with a surrender requirement for foreign exchange generated by exports. In this model, when services remain unliberalized there is an optimal trade intervention, even in the small open price-taking economy case. Given monetary policy and an endogenously determined premium value on foreign exchange, an optimal setting of the exchange rate can provide the optimal trade intervention. We suggest this model has relevance to the current situation in China where services remain unliberalized and tariff rates are bound in the WTO. Since there is an optimal exchange rate, a move to a free Renminbi float can be welfare worsening. We use numerical simulation methods to explore the properties of the model, since it has no closed form solution. Our analysis provides an intellectual counter argument to those presently advocating a free Renminbi float for China.
    JEL: F00 F11 F31 F40
    Date: 2005
  30. By: Aaron Drew; Mike Kennedy; Torsten Sløk
    Abstract: <P>This paper is concerned with how stylised differences in monetary policy transmission mechanisms and product and labour market rigidities between the US and euro-area economies affect their resilience to temporary shocks. To address this issue, a small general equilibrium model with long-run neoclassical and short-run neo-Keynesian features is calibrated to replicate the key properties of the US economy (as in the US Fed’s FRB-US model). To this model, features of the euro area’s financial and then product and labour markets are added sequentially with a view to replicating what is generally agreed are aspects of the functioning of the euro-area economy (as captured by the ECB’s Area-Wide Model). Most of the analysis is conducted assuming identical monetary policy reaction functions, although the sensitivity of the results to this assumption is tested. The results illustrate the importance of adjustment patterns in financial, product and labour markets for economies’ ...</P> <P>Les différences, en termes de résilience, entre l’économie américaine et celle de la zone euro <P>Ce document étudie les principales différences en matière de transmission de la politique monétaire et de rigidités des marchés des produits et du travail, et leurs effets sur la résilience des économies des États-Unis et de la zone euro aux chocs temporaires. Un petit modèle d’équilibre général, de facture néo-classique sur le long terme et néo-keynésienne sur le court terme, est calibré pour reproduire les comportements clés de l’économie américaine (tels que les décrit le modèle FRB-US de la Banque de réserve fédérale des États-Unis). Des caractéristiques des marchés financiers puis des marchés des produits et du travail de la zone euro sont ensuite incorporées dans le modèle afin de mieux capter certains aspects du fonctionnement de l’économie de la zone euro (tels que les décrit le modèle de la BCE couvrant la zone euro). L’analyse repose largement sur des fonctions de réaction de la politique monétaire identiques, mais l'importance de cette hypothèse est testée. Les résultats ...</P>
    Keywords: modèle EGC, zone euro, euro area, Transmission mechanism, resilience, labour and product market rigidities, CGE modelling, mécanisme de transmission, resilience, rigidités des marchés des produits et du travail
    JEL: E21 E22 E30 E52
    Date: 2004–03–04
  31. By: Christine de la Maisonneuve; Claude Giorno; Peter Hoeller
    Abstract: <P>In recent years the euro area has shown less resilience to the negative and largely OECD-wide common shocks than the English-speaking countries, but most of the smaller euro area countries have fared better than the large ones. This paper reviews policy issues that are important in fostering a speedy adjustment to shocks. We argue that the small countries are well placed to adjust swiftly to asymmetric shocks, because they are well integrated with the rest of the area. An activist fiscal policy is not needed and also not powerful enough to smooth the cycle. However, asset bubbles are a cause of concern as their limited weight means that the common monetary policy is more likely to be out of line with their cyclical position. Large countries are less well placed to cope with shocks and sluggish adjustment can be expected. Reforms should focus on raising trade linkages via the completion of the single market, on improving wage and price flexibility and on making their housing markets ...</P> <P>Même monnaie, même cycle ? Rendre plus souple le fonctionnement de l'union monétaire <P>Au cours des dernières années, la zone euro a fait preuve d'une moindre résistance que les pays nglo-saxons aux chocs négatifs qui ont affecté dans une large mesure l'OCDE dans son ensemble; mais la lupart des plus petits pays de la zone ont mieux tirer leur épingle du jeux que les grands. Cet article passe n revue les questions de politique économique qui sont importantes afin de favoriser un ajustement rapide ux chocs. Nous défendons l'idée que les petits pays sont mieux armés pour s'ajuster promptement à des hocs asymétriques du fait de leur bonne intégration avec le reste de la zone. Une politique budgétaire ctiviste n'est pas nécessaire ni suffisamment puissante pour amortir le cycle. Néanmoins, l'apparition de ulles spéculatives est une source de préoccupation dans leur cas en raison de leur poids limité, lequel mplique que la politique monétaire commune est susceptible d'être plus fréquemment incohérente avec eur position cyclique. Les grands pays sont moins bien armés pour ...</P>
    Keywords: taxation, fiscalité, fiscal policy, politique budgétaire, Business cycles, cycles économiques, Economic and Monetary Union, Union Économique et Monétaire
    JEL: E3 E6 H2 H6
    Date: 2004–09–16
  32. By: Anindya Banerjee; Bill Russell
    Abstract: This paper considers whether the Euro-area economies have become more competitive since the introduction of the Euro and the implementation of the Lisbon strategy. Using a measure of the markup as a proxy for competition we show that while the markup has varied considerably over the past 25 years and declined recently, most of this variation can be explained by movements in inflation and the business cycle. Consequently, based on our data, we find little evidence of a pro-competitive impact of the introduction of the Euro and implementation of the Lisbon strategy.
    Keywords: Inflation, markup, business cycle, competition, Lisbon strategy, Euro
    JEL: C22 C32 C52 D40 E31 E32
    Date: 2004
  33. By: Jonathan B. Hill (Department of Economics, Florida International University)
    Abstract: In this paper, we develop a parametric test procedure for multiple horizon "Granger" causality and apply the procedure to the well established problem of determining causal patterns in aggregate monthly U.S. money and output. As opposed to most papers in the parametric causality literature, we are interested in whether money ever "causes" (can ever be used to forecast) output, when causation occurs, and how (through which causal chains). Our tests are based on new recursive parametric characterizations of causality chains which help to distinguish between mere noncausation (the total absence of indirect causal routes) and causal neutralization, in which several causal routes exists that cancel each other out such that noncausation occurs. In many cases the recursive characterizations imply greatly simplified linear compound hypotheses for multi-step ahead causation, and permit Wald tests with the usual asymptotic chis-squesred distribution. Comparatively, while Dufour, Pelletier and Renault (2002) devise a simple h-step ahead VAR method for testing noncausality at any specific horizon, their method does not provide an effcient compound test of noncausality up to a specific horizon, nor can it be used to analyze causal neutralization in many cases. The approach developed in this paper allows both for compound tests of linear restrictions for multiple horizon noncausality, and permits a direct analysis of causal neutralization. Using monthly data employed in Stock and Watson (1989), and others, we demonstrate that while Friedman and Kuttner’s (1993) result that detrended money growth fails to cause output one month ahead continues into the third quarter of 2003, a significant causal lag may exist through a variety of short-term interest rates: money appears to cause output after at least one month passes, although in some cases using recent data conflicting evidence suggests money may never cause output and be truly irrelevant in matters of real decisions.
    Keywords: multiple horizon causation, multivariate time series, sequential tests
    JEL: C1 C2 C3 C4 C5 C8
    Date: 2004–02
  34. By: Hurd, Matthew; Salmon, Mark; Schleicher, Christoph
    Abstract: We model the joint risk neutral distribution of the euro-sterling and the dollar-sterling exchange rates using option-implied marginal distributions that are connected via a copula function that satisfies the triangular no-arbitrage condition. We then derive a univariate distribution for a simplified sterling effective exchange rate index (ERI). Our results indicate that standard parametric copula functions, such as the commonly used Normal and Frank copulas, fail to capture the degree of asymmetry observed in the data. We overcome this problem by using a non-parametric dependence function in the form of a Bernstein copula, which is shown to produce a very close fit. We further give an example of how our approach can be used to price currency index options.
    Keywords: copulae; exchange rates; option implied pdfs; triangular arbitrage
    JEL: F31 G12
    Date: 2005–06
  35. By: Prasad V. Bidarkota (Department of Economics, Florida International University)
    Abstract: We investigate time varying risk premia in forward dollar/pound monthly exchange rates over the last two decades. We study this issue using a signal plus noise model and separately using regression techniques. Our models account for time varying volatility and non-normalities in the observed series. Our signal plus noise model fails to isolate a statistically significant risk premium component whereas our regression model does. We attribute the discrepancy in the results from the two methods to the low power of the signal plus noise model in discriminating between a time varying risk premium component and a serially uncorrelated spot exchange rate expectational error. An important reason for the low power of the signal plus noise model is its failure to use information on current period forward rates in extracting the risk premium.
    Keywords: spot foreign exchange rates; forward foreign exchange rates; timevarying risk premium; signal extraction; non-normality; volatility persistence
    JEL: F31 C5 G12
    Date: 2005–01
  36. By: Anne-Laure Baldi; Nanno Mulder
    Abstract: <P>This paper analyses the impact of exchange rate regimes on real exchange rates, as defined by the relative price of nontradables to tradables in Argentina, Brazil, Chile (ABC) and Mexico from 1990 to 2002. The real exchange rate is determined in the long-run by the Balassa-Samuelson effect, but in the medium run also by government expenditure and terms of trade. Another determinant is fixed exchange rate regimes, which force exporters to adjust their local price of tradables. Moreover, fixed regimes attract portfolio inflows that increase demand and prices for nontradables. The econometric results of the paper confirm the impact of exchange rate regimes on relative prices in all countries except Chile, which maintained exchange rate flexibly and adopted capital controls ...</P> <P>L'impact des régimes de change sur le taux de change réel en Amérique latine, 1990-2002 <P>Cet article analyse l'impact des régimes de change sur le taux de change réel- défini comme le prix relatif des biens du secteur abrité et des biens du secteur exposé- en Argentine, Brésil, Chili (ABC) et au Mexique de 1990 à 2002. Le taux de change réel est déterminé dans le long terme par l'effet Balassa- Samuelson et à moyen terme par les dépenses du gouvernement et les termes de l'échange. Les régimes de change fixes peuvent constituer un nouveau déterminant car ils forcent les exportateurs à geler le prix local des biens échangeables. Simultanément ils attirent des flux de portefeuille qui exercent une pression à la hausse sur la demande et donc les prix des biens abrités. Les résultats économétriques de l'article confirment l'impact des régimes de change sur les prix relatifs de tous les pays sauf le Chili qui a aintenu une flexibilité de change et imposé des contrôles de capitaux ...</P>
    Keywords: exchange rate policy, real exchange rates, Latin America, politique de change, taux de change reels, Amérique latine
    JEL: E52 N16
    Date: 2004–06–30
  37. By: Michele Cavallo; Kate Kisselev; Fabrizio Perri; Nouriel Roubini
    Abstract: Currency crises are usually associated with large nominal and real depreciations. In some countries depreciations are perceived to be very costly (“fear of floating”). In this paper we try to understand the reasons behind this fear. We first look at episodes of currency crises in the 1990s and establish that countries entering a crisis with high levels of foreign debt tend to experience large real exchange rate overshooting (devaluation in excess of the long-run equilibrium level) and large output contractions. We then develop a model of a small open economy that helps to explain this evidence. The key element of the model is the presence of a margin constraint on the domestic country. Real devaluations, by reducing the value of domestic assets relative to international liabilities, make countries with high foreign debt more likely to hit the constraint. When countries hit the constraint they are forced to sell domestic assets, and this causes a further devaluation of the currency (overshooting) and a reduction of their stock prices (overreaction). This fire sale can have a significant negative wealth effect. The model highlights a key tradeoff when considering fixed versus flexible exchange rate regimes; a fixed exchange regime can, by avoiding exchange rate overshooting, mitigate the negative wealth effect but at the cost of additional distortions and output drops in the short run. There are plausible parameter values under which fixed exchange rates dominate flexible exchange rates from a welfare perspective.
    Keywords: Foreign exchange rates ; Financial crises
    Date: 2005
  38. By: Yin-Wong Cheung; Kon S. Lai
    Abstract: This study investigates whether exchange rate flexibility aids real exchange rate adjustment based on intra-period data on dual exchange rates from developing countries. Specifically, it analyzes whether the flexible parallel market rate produces faster or slower real exchange rate adjustment than the much less flexible official rate does. Half-life estimates of adjustment speeds are obtained using fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce faster or slower real exchange rate adjustment, albeit there is substantial heterogeneity in speed estimates across countries. With officially pegged exchange rates, developing countries often use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment, but the empirical evidence suggests that these parallel markets in most cases fail to help promote real rate adjustment.
    Keywords: real exchange rate, fractional time series, half life
    JEL: C22 F31
    Date: 2005
  39. By: Asici, Ahmet Atil; Ivanova, Nadezhda; Wyplosz, Charles
    Abstract: This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: 1) It allows for two indicators for post-exit macroeconomic conditions, the change in the exchange rate and the change in the output gap; 2) it tests whether the distinction between orderly and disorderly exit is statistically justified, and concludes that it is not; 3) it deals with the sample selection problem. The results, subject to extensive sensitivity analysis, suggest that post-exits are better when de-pegging occur in good macroeconomic conditions – an unnatural move for most policy-makers – when world interest rates decline and in the presence of capital controls. Importantly, ‘good’ macroeconomic policies do not seem to help with post-exit performance.
    Keywords: exchange rate regimes; macroeconomic policy
    JEL: C14 C34 F30 F31 F41
    Date: 2005–07

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