nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒10‒22
85 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy, Monetary Areas, and Financial Development with Electronic Money By Marco Arnone; Luca Bandiera
  2. Explicit and Implicit Targets in Open Economies By Silvia Sgherri
  3. Zimbabwe: A Quest for a Nominal Anchor By Arto Kovanen
  4. A Post-Reflation Monetary Framework for Japan By Charles Frederick Kramer; Mark R. Stone
  5. A New Taxonomy of Monetary Regimes By Ashok Bhundia; Mark R. Stone
  6. Estimating the Implicit Inflation Target: An Application to U.S. Monetary Policy By Daniel Leigh
  7. Singapore's Unique Monetary Policy: How Does it Work? By Eric Parrado
  8. The EURO and Inflation Uncertainty In The EMU By Guglielmo maria Coporale and Alexandros Kontonikas
  9. Governance Structures and Decision-Making Roles in Inflation-Targeting Central Banks By Anita Tuladhar
  10. A Monetary Policy Rule for Jamaica By Yan Sun
  11. 'Inflation Targeting Lite' in Small Open Economies: The Case of Mauritius By James Y. Yao; Nathaniel John Porter
  12. The Monetary Transmission Mechanism By Peter N. Ireland
  13. Monetary and Exchange Rate Policies in Colombia: Progress and Challenges By Sergio Clavijo
  14. On Target? The International Experience with Achieving Inflation Targets By Scott Roger; Mark R. Stone
  15. Inflation Targeting and Exchange Rate Rules in an Open Economy By Eric Parrado
  16. Does Money Matter for Inflation in the Euro Area? By Peter Kugler; Sylvia Kaufmann
  17. The Greenbook and U.S. Monetary Policy By Robert Tchaidze
  18. Deconstructing the Art of Central Banking By Silvia Sgherri; Tamim A. Bayoumi
  19. Interest Rate Defenses of Currency Pegs By Juan Sole
  20. Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy By Julian di Giovanni; Justin McCrary; Till von Wachter
  21. Central Bank Independence and Inflation: The case of Greece By Theodore Panagiotidis; Afrodit Triampella
  22. How Useful Is Monetary Econometrics in Low-Income Countries? The Case of Money Demand and the Multipliers in Rwanda By C. Gabriel Di Bella; David Hauner
  23. Inflation Targeting and Output Growth: Empirical Evidence for the European Union By Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanasios Vamvakidis
  24. Macroeconomic Implications of the Transition to Inflation Targeting and Capital Account Liberalization in Romania By Nikolay Gueorguiev; Pelin Berkmen
  25. Monetary Policy Rules and the U.S. Business Cycle: Evidence and Implications By Pau Rabanal
  26. Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank By Olivier Jeanne; Lars E. O. Svensson
  27. Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy By Silvia Sgherri; Tamim A. Bayoumi
  28. Latin American Central Bank Reform: Progress and Challenges By Agustin Carstens; Luis Ignacio Jácome H.
  29. Interest Rate Pass-Through in Romania and other Central European Economies By Alexander F. Tieman
  30. Money Demand and Inflation in Dollarized Economies: The Case of Russia By Nienke Oomes; Franziska Ohnsorge
  31. Has More Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics By Alexander Mihailov
  32. Inflation Targeting and the Stationarity of Inflation: New Results from an ESTAR Unit Root Test By Andros Gregoriou and Alexandros Kontonikas
  33. Inflation and Monetary Pass-Through in Guinea By Rodolphe Blavy
  34. Monetary and Exchange Rate Dynamics During Disinflation: An Empirical Analysis By Andrés Arias; Lei Zhang; A. Javier Hamann
  35. Inflation Dynamics in the Dominican Republic By Olumuyiwa Adedeji; Oral Williams
  36. Achieving and Maintaining Price Stability in Nigeria By Nicoletta Batini
  37. Monetary Equilibrium with Decentralized Trade and Learning By Luis Araujo; Braz Camargo
  38. Modeling The Non-Linear Behaviour of Inflation Deviations From The Target By Andros Gregoriou and Alexandros Kontonikas
  39. Exchange Rates in Central Europe: a Blessing or a Curse? By Alain Borghijs; Louis Kuijs
  40. Operational Independence, Inflation Targeting and UK Monetary Policy By Alexander Mihailov
  41. Optimal Monetary Policy and Asset Price Misalignments By Alexandros Kontonikas and Alberto Montagnoli
  42. Inflation and Relative Price Dispersion in Canada: An Empirical Assessment By André Binette; Sylvain Martel
  43. On The Relationship Between inflation and Stock Mark Votality By Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
  44. Financial Dollarization Equilibria: A Framework for Policy Analysis By Alain Ize
  45. The Political Economy of Seigniorage By Ari Aisen; Francisco José Veiga
  46. Are Emerging Market Countries Learning to Float? By Dalia Hakura
  47. Inflation in Mainland China - Modelling a Roller Coaster Ride By Michael Funke
  48. Any Link Between Legal Central Bank Independence and Inflation? Evidence from Latin America and the Caribbean By Luis Ignacio Jácome; Francisco F. Vázquez
  49. Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism? By Ari Aisen
  50. Exchange Rate, Money, and Wages: What is Driving Prices in Armenia? By David A. Grigorian; Armine Khachatryan; Grigor Sargsyan
  51. The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them? By Alina Carare; Robert Tchaidze
  52. Monetary Exchange with Multilateral Matching By Benoît Julien; John Kennes; Ian King
  53. What Drives Inflation Expectations in Brazil? An Empirical Analysis By Martin Cerisola; R. Gaston Gelos
  54. Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment By Thomson Fontaine
  55. Capitalizing Central Banks: A Net Worth Approach By Alain Ize
  56. Central Bank Losses and Experiences in Selected Countries By John W. Dalton; Claudia Helene Dziobek
  57. A Common Currency for Belarus and Russia? By Etibar Jafarov; Anne Marie Gulde; Vassili Prokopenko
  58. Transparency in Central Bank Financial Statement Disclosures By Kenneth Sullivan
  59. On the Pattern of Currency Blocs in Africa By Etienne B. Yehoue
  60. From Fixed to Float: Operational Aspects of Moving Towards Exchange Rate Flexibility By Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
  61. Forecasting Thailand's Core Inflation By Tao Sun
  62. Currency Bloc Formation as a Dynamic Process Based on Trade Network Externalities By Etienne B. Yehoue
  63. Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries By Vivian Z. Yue; Samir Jahjah
  64. The Term Spread International Evidence of Non-Linear Adjustment By Alfred A. Haug; Pierre L. Siklos
  65. Three Attempts at Inflation Forecasting in Pakistan By Madhavi Bokil; Axel Schimmelpfennig
  66. Prudential Responses to De Facto Dollarization By Andrew Powell; Alain Ize
  67. Robust versus Optimal Rules in Monetary Policy: A Note By Alexander F. Tieman; Maria Demertzis
  68. Can Higher Reserves Help Reduce Exchange Rate Volatility? By Ketil Hviding; M. Nowak; Luca Antonio Ricci
  69. Does Political Instability Lead to Higher Inflation? A Panel Data Analysis By Ari Aisen; Francisco José Veiga
  70. Choosing the Correct Currency Anchor For a Small Economy: The Case of Nepal By Sibel Yelten
  71. Six Puzzles in Electronic Money and Banking By Saleh M. Nsouli; Connel Fullenkamp
  72. Assessing the Assessment: A Critical Look at the June 2003 Assessment of the United Kingdom's Five Tests for Euro Entry By Carlo Cottarelli; Julio Escolano
  73. The Empirics of Foreign Exchange Intervention in Emerging Markets: The Cases of Mexico and Turkey By Roberto Pereira Guimarães; Cem Karacadag
  74. Balance Sheets, Exchange Rate Policy, and Welfare By Ivan Tchakarov; Selim Elekdag
  75. Financial De-Dollarization: Is It for Real? By Alain Ize; Eduardo Levy Yeyati
  76. The Gains from International Monetary Cooperation Revisited By Ivan Tchakarov
  77. Exits from Heavily Managed Exchange Rate Regimes By Ashoka Mody; Eisuke Okada; Enrica Detragiache
  78. Ten Years After the CFA Franc Devaluation: Progress Toward Regional Integration in the WAEMU By Charalambos G. Tsangarides; Pierre van den Boogaerde
  79. Setting the Stage for a National Currency in the West Bank and Gaza: The Choice of Exchange Rate Regime By S. Beidas; Magda E. Kandil
  80. Assessing and Managing Rapid Credit Growth and the Role of Supervisory and Prudential Policies By Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
  81. Monetary Policy and Corporate Behaviour in India By A. Prasad; Saibal Ghosh
  82. Insurance Value of International Reserves: An Option Pricing Approach By Jaewoo Lee
  83. International Risk Sharing and Currency Unions: The CFA Zones By Etienne B. Yehoue
  84. Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive? By Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual
  85. Measuring Disinflation Credibility in Emerging Markets: A Bayesian Approach with an Application to Turkey By Alessandro Rebucci; Marco Rossi

  1. By: Marco Arnone; Luca Bandiera
    Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.
    Keywords: Money , Monetary policy , Monetary unions , Monetary operations ,
    Date: 2004–07–28
  2. By: Silvia Sgherri
    Abstract: Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation-targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate.
    Keywords: Inflation targeting , Interest rate policy , Exchange rates , Monetary policy ,
    Date: 2005–09–20
  3. By: Arto Kovanen
    Abstract: This study examines the appropriateness of alternative intermediate monetary policy targets for Zimbabwe in light of the stability of the demand for money and the information content of financial variables for predicting price level movements. Results of the study indicate that a well-defined long-run demand relation exists for currency in circulation, but not for other monetary aggregates. Currency in circulation has strong information content for predicting future price level movements. The information content of other financial variables, such as the exchange rate and interest rates, is weaker. Statistical relationships break down of the outset of high inflation.
    Keywords: Monetary policy , Zimbabwe , Demand for money , Inflation ,
    Date: 2004–08–04
  4. By: Charles Frederick Kramer; Mark R. Stone
    Abstract: Modifications to Japan's monetary policy framework will be needed as positive inflation resumes because the current monetary regime and operations are tailored to ending deflation. The paper suggests that the monetary regime should move from an "anti-deflation" objective to an inflation objective, complemented by a shift of monetary operations from a quantitative operating target to an interest rate target. There are also questions about the timing of these shifts and the particulars of such arrangements, but decisive answers are elusive.
    Keywords: Monetary policy , Japan , Monetary operations , Deflation ,
    Date: 2005–04–20
  5. By: Ashok Bhundia; Mark R. Stone
    Abstract: This paper proposes a new taxonomy of monetary regimes defined by the choice and clarity of the nominal anchor. The regimes are as follows: (i) monetary nonautonomy, (ii) weak anchor, (iii) money anchor, (iv) exchange rate peg, (v) full-fledged inflation targeting, (vi) implicit price stability anchor, and (vii) inflation targeting lite. This taxonomy captures the commitment-discretion tradeoffs that lie at the heart of choosing a monetary regime. During the last 15 years the world has moved toward monetary regimes with less discretion. Empirical analysis suggests that country regime choices reflect the level of financial and economic development and recent inflation history.
    Keywords: Monetary policy , Monetary systems , Transparency , Exchange rate regimes ,
    Date: 2004–10–18
  6. By: Daniel Leigh
    Abstract: This paper proposes a new method of estimating the Taylor rule with a time-varying implicit inflation target and a time-varying natural rate of interest. The inflation target and the natural rate are modeled as random walks and are estimated using maximum likelihood and the Kalman filter. I apply this method to U.S. monetary policy over the past 25 years and find considerable time variation in the implicit target, confirming hypotheses about "opportunistic disinflation" and the recent "deflation scare."
    Keywords: Inflation targeting , United States , Monetary policy , Interest rates , Disinflation , Deflation , Economic models ,
    Date: 2005–04–27
  7. By: Eric Parrado
    Abstract: The Monetary Authority of Singapore, instead of relying on short-term interest rates or monetary aggregates as its monetary policy instrument, conducts policy by managing the trade-weighted exchange rate index (TWI). This paper investigates how this operating procedure actually works. For empirical purposes, it assumes the authorities follow a reaction function that aims the TWI at stabilizing expected inflation and maintaining output at potential. A partial adjustment mechanism is included to dampen the actual changes in the exchange rate. The estimates confirm that the major focus of monetary policy in Singapore is controlling inflation. The estimated changes in the TWI track the actual change relatively well, and the estimated parameters are as expected. Accordingly, they support the hypothesis that monetary policy in Singapore can be described by a forward-looking policy rule that reacts to both inflation and output volatility. The results suggest that Singapore's monetary policy has mainly reacted to large deviations in the target variables, which is consistent with monetary policy's medium-term orientation.
    Keywords: Monetary policy , Singapore , Exchange rate policy , Inflation ,
    Date: 2004–02–05
  8. By: Guglielmo maria Coporale and Alexandros Kontonikas
    Abstract: In this paper, we investigate empirically the relationship between inflation and inflation uncertainty in twelve EMU countries. We estimate a time-varying parameter model with a GARCH specification for the conditional volatility of inflation in order to distinguish between short-run (structural and impulse) and steady-state uncertainty. We then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the Euro, and its effects on the links between inflation and inflation uncertainty. We find that the EMU countries have had rather different experiences, and that in the post-Euro period monetary policy might have become less effective in lowering inflation uncertainty, in the sense that a monetary tightening on the part of the ECB might in result in higher uncertainty. This suggests the need for improvements in the ECB’s analytical framework.
    JEL: E31 E52 C22
  9. By: Anita Tuladhar
    Abstract: This paper surveys decision-making roles of governing bodies of central banks that have formally adopted inflation targeting as a monetary framework. Governance practices seek to balance institutional independence needed for monetary policy credibility with accountability required to protect democratic values. Central bank laws usually have price stability as the primary monetary policy objective but seldom require an explicit numerical inflation target. Governments are frequently involved in setting targets, but to ensure operational autonomy, legal provisions explicitly limit government influence in internal policy decision-making processes. Internal governance practices differ considerably with regard to the roles and inter-relationships between the policy, supervisory, and management boards of a central bank.
    Keywords: Inflation targeting , Governance , Central bank role , Price stabilization , Monetary policy ,
    Date: 2005–09–28
  10. By: Yan Sun
    Abstract: Since 1996, the Bank of Jamaica (BoJ) has sought to limit changes in the exchange rate for the Jamaican dollar in the context of its efforts to maintain low inflation. However, with a persistently high public sector deficit, real interest rates have remained generally high, which partly explains the slow pace of growth. This paper discusses an alternative monetary policy mix for achieving low variance for inflation and output through the prism of an empirical macroeconomic model. The simulation results suggest that a monetary policy mix that takes into account the impact of policy on both inflation and output achieves lower variance for inflation and output compared with the current policy mix, which tilts somewhat toward exchange rate stabilization. A case, therefore, can be made for the BoJ to move to a soft inflation targeting regime supported by fiscal consolidation.
    Keywords: Monetary policy , Jamaica , Inflation targeting ,
    Date: 2005–03–11
  11. By: James Y. Yao; Nathaniel John Porter
    Abstract: This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius's experience with 'inflation targeting lite' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its 'inflation targeting lite' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations.
    Date: 2005–09–09
  12. By: Peter N. Ireland (Boston College)
    Abstract: The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment.  Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets.  Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
    Keywords: Monetary transmission mechanism
    JEL: E52
    Date: 2005–10–19
  13. By: Sergio Clavijo
    Abstract: This paper focuses on monetary and exchange rate policies in Colombia, with particular emphasis on the period 1999-2002, when flotation of the peso and inflation targeting were adopted. We argue, first, in favor of adopting "operational inflation target ranges" and, second, in favor of strengthening the current scheme of foreign exchange options. The impact of reductions in the reference rates of the Central Bank of Colombia is also assessed. We find that a lower central bank policy interest rate is likely to affect demand only if mortgage refinancing takes place. We present preliminary estimates of Taylor rules in an openeconomy framework for Colombia.
    Keywords: Monetary policy , Colombia , Exchange rate policy , Central bank role ,
    Date: 2004–09–14
  14. By: Scott Roger; Mark R. Stone
    Abstract: This paper examines the international experience with full-fledged inflation targeting monetary regimes. Stylized facts are brought together from a review of the institutional elements of inflation targeting frameworks, a comparison of actual and targeted inflation outcomes, and case studies of large inflation target misses. Inflation targets are missed about 40 percent of the time and often by substantial amounts and for prolonged periods, yet no country has dropped inflation targeting. The resilience of the inflation targeting regime is attributable to the flexibility of the framework, its high standards of transparency and accountability, and the lack of realistic alternatives.
    Keywords: Inflation targeting , Monetary policy ,
    Date: 2005–08–25
  15. By: Eric Parrado
    Abstract: This paper provides a simple dynamic neo-Keynesian model that can be used to analyze the impact of monetary policy that considers inflation targeting in a small open economy. This economy is characterized by imperfect competition and short-run price rigidity. The main findings of the paper are that, depending on what shocks affect the economy, the effects of inflation targeting on output and inflation volatility depend crucially on the exchange rate regime and the inflation index being targeted. First, in the presence of real shocks, flexible exchange rates dominate managed exchange rates, while for nominal shocks the reverse is true. Second, domestically generated inflation targeting is preferable to CPI inflation targeting, because the former is more stabilizing not only in relation to both measures of inflation, but also to the output gap and the real exchange rate. Finally, flexible inflation targeting outperforms strict inflation targeting in terms of welfare.
    Keywords: Inflation targeting , Exchange rates , Monetary policy , Economic models ,
    Date: 2004–02–20
  16. By: Peter Kugler (University of Basel, Petersplatz 1, CH-4003 Basel,Switzerland); Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division, Otto-Wagner Platz 3, POB 61, A-1011 Vienna)
    Abstract: This paper analyses the role of M3 as an indicator for future inflation and correspondingly for current monetary policy in the euro area. We analyse the short and long run interrelationship between inflation and money growth in an error correction framework taking into account the output gap and short and long term interest rates. We find robust cointegration between money growth and inflation. In the long run, shocks in M3-growth account for 33 percent to 40 percent of the inflation forecast error variance. The effects of output gap and interest rate shocks on inflation are mainly transitory and there forecasting variance shares are negligible for medium term horizons. There is evidence for a second regime prevailing at the end of the seventies and beginning of the eighties which relates to periods of high interest rate and inflation rate levels and decreasing rates in real money growth. Overall, we present firm evidence for a stable dynamic relationship between money growth and inflation which implies that the deviation of the real money growth from its long run average is a good indicator of future inflation acceleration or deceleration. Of course, this finding provides evidence in favour of the recently de-emphasised first pillar of the ECB strategy. According to our results, however, an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%.
    Date: 2005–09–19
  17. By: Robert Tchaidze
    Abstract: Although very attractive both theoretically and empirically, Taylor rules imply mechanical responses by the policy variable (interest rate) to fundamental ones (inflation and output gap). This study looks for empirical evidence of a more sophisticated monetary policy, one which takes into account expected future developments. An important piece of information added is the "Greenbook" forecast series, calculated by the Federal Reserve staff and which allow evaluation of expected inflation shocks. These shocks are significant in the estimated Taylor rule, confirming that policymaking is forward looking. This paper also demonstrates that a simple Taylor rule may be a misspecification if policymakers have in mind a timevarying inflation target.
    Keywords: Monetary Policy , United States ,
    Date: 2004–11–24
  18. By: Silvia Sgherri; Tamim A. Bayoumi
    Abstract: This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
    Keywords: Monetary policy , Inflation , Central Banks , Economic models ,
    Date: 2004–10–21
  19. By: Juan Sole
    Abstract: This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time.
    Keywords: Interest rates , Currency pegs , Exchange rate regimes ,
    Date: 2004–06–08
  20. By: Julian di Giovanni; Justin McCrary; Till von Wachter
    Abstract: Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.
    Keywords: Monetary policy , Germany , Fund , Interest rates ,
    Date: 2005–05–10
  21. By: Theodore Panagiotidis (Dept of Economics Univ. of Loughborough); Afrodit Triampella
    Abstract: This paper investigates the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU, the hypothesis that central bank independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI, LegalCBI and TOR, the inverse relationship between CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggest that the rate of turnover Granger causes inflation.
    Keywords: Central Bank Independence, Inflation, Greece.
    JEL: E58 E52
    Date: 2005–07
  22. By: C. Gabriel Di Bella; David Hauner
    Abstract: This paper revisits the usefulness of econometric monetary analysis in low-income countries in a case study on Rwanda, an interesting case given its floating exchange rate and reliance on indirect monetary policy instruments on the one hand, and its somewhat typical data and institutional shortcomings on the other hand. The findings are generally encouraging for the use of econometric models for monetary analysis in low-income countries. Notwithstanding substantial qualifications, time series and structural models of the money multiplier and money demand yield results that are statistically and economically reasonable enough to usefully inform policymaking.
    Keywords: Demand for money , Rwanda , Monetary policy , Economic models ,
    Date: 2005–09–21
  23. By: Nicholas Apergis; Stephen M. Miller; Alexandros Panethimitakis; Athanasios Vamvakidis
    Abstract: This paper evaluates the performance of two alternative policy rules, a forward-looking rule and a spontaneous adjustment rule, under alternative inflation targets, in terms of output losses in a macroeconomic model, using European Union data. The simulations suggest that forward-looking rules contribute to macroeconomic stability and monetary policy credibility, and that a positive inflation target, as opposed to zero inflation, leads to higher and less volatile output. These results are robust to changes in the specification of the model and time period. The same methodology applied to individual countries supports country-specific flexible inflation targeting.
    Keywords: Inflation targeting , European Union , Economic growth ,
    Date: 2005–05–19
  24. By: Nikolay Gueorguiev; Pelin Berkmen
    Abstract: In the near future, Romania will introduce inflation targeting and fully liberalize its capital account. This paper aims to analyze, in a dynamic general-equilibrium model with sticky prices and monopolistic competition, how these two profound changes will affect the ability of monetary policy to pursue its objective of price stability. In particular, the resilience of the current and future monetary policy regimes to shocks is evaluated against two welfare criteria: a standard central bank loss function containing the deviations of inflation, output, and the real exchange rate from their equilibrium values, and the compensating variation measure of Lucas (1987).
    Keywords: Inflation targeting , Romania , Monetary policy , Capital account liberalization ,
    Date: 2004–12–27
  25. By: Pau Rabanal
    Abstract: This paper estimates Taylor-type interest rates for the United States allowing for both time and state dependence. It provides evidence that the coefficients of the Taylor rule change significantly over time, and that the behavior of the Federal Reserve over the cycle can be explained using a two-state switching regime model. During expansions, the Federal Reserve follows a rule that can be characterized as inflation targeting with a high degree of interest rate smoothing. During recessions, the Federal Reserve targets output growth and conducts policy in a more active manner. The implications of conducting this type of policy are analyzed in a small scale new Keynesian model.
    Keywords: Business cycles , United States , Monetary Policy , Economic models ,
    Date: 2004–09–13
  26. By: Olivier Jeanne; Lars E. O. Svensson
    Abstract: An independent central bank can manage its balance sheet and its capital so as to commit itself to a depreciation of its currency and an exchange rate peg. This way, the central bank can implement the optimal escape from a liquidity trap, which involves a commitment to higher future inflation. This commitment mechanism works even though, realistically, the central bank cannot commit itself to a particular future money supply. It supports the feasibility of Svensson's Foolproof Way to escape from a liquidity trap.
    Keywords: Deflation , Liquidity , Central Banks , Interest rates , Exchange rates ,
    Date: 2004–09–13
  27. By: Silvia Sgherri; Tamim A. Bayoumi
    Abstract: Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve, we find strong evidence that this link exists. These results bring into question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the United States and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy.
    Keywords: Monetary policy , United States , Inflation , Economic models ,
    Date: 2004–02–25
  28. By: Agustin Carstens; Luis Ignacio Jácome H.
    Abstract: This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America.
    Keywords: Inflation , Latin America , Bank reforms , Monetary policy ,
    Date: 2005–06–16
  29. By: Alexander F. Tieman
    Abstract: Interest rate pass-through from policy interest rates to market rates and inflation has been hypothesized to play a lesser role in Romania than in other Central European transition economies. This paper tests this hypothesis and concludes that it cannot be supported by the data. Hence pass-through in Romania is concluded to be in line with that in comparable economies in the region. Moreover, the interest rate pass-through has become more pronounced over time.
    Keywords: Monetary policy , Romania , Transition economies , Interest rates , Economic models ,
    Date: 2004–11–15
  30. By: Nienke Oomes; Franziska Ohnsorge
    Abstract: Money demand in dollarized economies often appears to be highly unstable, making it difficult to forecast and control inflation. In this paper, we show that a stable money demand function for Russia can be found for "effective broad money," which includes an estimate of foreign cash holdings. Moreover, we find that an excess supply of effective broad money is inflationary, while other excess money measures are not, and that effective broad money growth has the strongest and most persistent effect on short-run inflation.
    Keywords: Demand for money , Russian Federation , Inflation , Dollarization , Currency substitution ,
    Date: 2005–08–02
  31. By: Alexander Mihailov
    Abstract: This paper is an empirical investigation into the question of whether increased independence affects central bank behavior, in particular when monetary policy is already in an inflation targeting regime. We take advantage of the unique experience in that sense of the United Kingdom, where the Bank of England was granted operational independence from Her Majesty's Treasury only in May 1997, while inflation targeting had been implemented since October 1992. Our strategy is to estimate Taylor rules employing alternative specifications, econometric methods and variable proxies in search for robust results that survive most of those modifications. The key lesson we extract from UK quarterly data is that the Bank of England has responded to the output gap, and not at all to output growth, the more so after receiving operational independence, when the gap has been positive or close to zero and inflation credibly stabilized at target. We find no unambiguous evidence for any definite change in the Bank's reaction to inflation or in the degree of its interest rate smoothing. Our main import is to argue that both the asymmetry of the monetary policy reaction function across the cycle and the response to the output gap, not growth, are fully consistent with New Keynesian theory, especially under inflation targeting. Anchored inflation and economic expansion during the post-independence period thus complement greater autonomy in influencing the behavior of the Bank of England, yet clear separation of the individual contribution of each of these effects appears challenging given our short sample.
    Date: 2005–10–11
  32. By: Andros Gregoriou and Alexandros Kontonikas
    Abstract: In this paper we examine the time series properties of inflation in seven countries that have adopted inflation targeting. Unlike previous studies we utilize a non-linear mean reverting adjustment mechanism for inflation and we discover that although deviations of inflation from the target can exhibit a region of non-stationary behavior, overall they are stationary indicating successful targeting implementation.
    JEL: E31 C32
  33. By: Rodolphe Blavy
    Abstract: The paper analyzes the dynamics of inflation in Guinea during 1992-2003 applying cointegration and error-correction modeling to a bivariate model that includes consumer price and monetary variables. The empirical results, based on quarterly data, confirm the existence of a long-run relationship between money supply and consumer prices. This paper argues further that the pass-through has increased in recent years. Short-term dynamics are shown to accentuate the long-run impact. Impulse response analysis shows that a shock in the money stock will have an increasing impact over two years and will then stabilize at a higher level.
    Keywords: Inflation , Guinea , Money supply , Consumer prices , Economic models ,
    Date: 2004–12–09
  34. By: Andrés Arias; Lei Zhang; A. Javier Hamann
    Abstract: Based on the observed behavior of monetary aggregates and exchange rates, we classify inflation-stabilization episodes into two categories: de facto exchange rate-based stabilizations (ERBS) and non-ERBS. Unlike the standard de jure ERBS studied in the literature, de facto ERBS encompass cases in which the central bank intervenes in the foreign exchange market but does not preannounce the use of an exchange rate anchor. The number of the de facto ERBS is twice as large as that of de jure ERBS. Output dynamics during disinflation do not differ significantly between these two groups. We conclude that empirical studies on the effects of exchange rate anchors must seek to disentangle the effects of their announcement from those related to their role in the remonetization process.
    Keywords: Monetary policy , Disinflation , Exchange rates , Economic stabilization ,
    Date: 2005–03–01
  35. By: Olumuyiwa Adedeji; Oral Williams
    Abstract: This paper investigates the determinants of inflation in the Dominican Republic during 1991-2002, a period characterized by remarkable macroeconomic stability and growth. By developing a parsimonious and empirically stable error-correction model using quarterly observations, the paper finds that inflation is explained by changes in monetary aggregates, real output, foreign inflation, and the exchange rate. Long-run relationships in the money and traded-goods markets are found to exist, but only the disequilibrium from the money market exerts a significant impact on inflation.
    Keywords: Inflation , Dominican Republic , Economic models ,
    Date: 2004–03–04
  36. By: Nicoletta Batini
    Abstract: This paper reviews the historical performance of monetary policy in Nigeria and discusses the relative merits of alternative monetary policy strategies that Nigeria could adopt in the future, once the many operational issues that today obstruct the conduct of monetary policy have been addressed. An analysis of external and fiscal dominance in Nigeria reveals that none of the candidate strategies is particularly appealing although, on various grounds, a long-run target for inflation combined with a free float seems to be the ultimate option. The paper shows how to design and operationalize such a regime in Nigeria when account is taken for the emerging market features of the economy.
    Keywords: Price stabilization , Nigeria , Inflation targeting , Dollarization , Fiscal management ,
    Date: 2004–06–29
  37. By: Luis Araujo (Michigan State University); Braz Camargo (University of Western Ontario)
    Abstract: This paper analyzes the stability of monetary regimes in an economy where fiat money is endogenously created by the government, information about its value is imperfect, and learning is decentralized. We show that monetary stability depends crucially on the speed of information transmission in the economy. Our model generates a dynamic on the acceptability of fiat money that resembles historical accounts of the rise and eventual collapse of overissued paper money. It also provides an explanation of the fact that, despite its obvious advantages, the widespread use of fiat money is only a recent development.
    Keywords: monetary stability; endogenous money; decentralized trade; learning
    JEL: D82 D83 E00
    Date: 2005
  38. By: Andros Gregoriou and Alexandros Kontonikas
    Abstract: This study tests for and models non-linearities in inflation deviations from the target in five OECD countries that adopted inflation targeting over the 1990s. Our tests reject the linearity hypothesis and we show that the exponential smooth transition autoregressive (ESTAR) model is capable of capturing the non-linear behavior ofinflation misalignments. The extent of inflation deviations from the target varies across the OECD countries, with countries that consistently undershoot the target having a rapid adjustment process, whereas countries that overshoot the target have a slower revision back to equilibrium.
    JEL: E31 E52 C5
  39. By: Alain Borghijs; Louis Kuijs
    Abstract: Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.
    Keywords: Exchange rates , Czech Republic , Hungary , Poland , Slovak Republic , Slovenia ,
    Date: 2004–01–23
  40. By: Alexander Mihailov
    Abstract: This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one - according to our real-time data set - in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration.
    Date: 2005–10–11
  41. By: Alexandros Kontonikas and Alberto Montagnoli
    Abstract: This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value since they may be positively affected by past price changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function.
    JEL: E52 E60 G1
  42. By: André Binette; Sylvain Martel
    Abstract: The authors investigate empirically the relationship between different aspects of inflation and relative price dispersion in Canada using a Markov regime-switching Phillips curve. They examine three theories that explain movements in relative price dispersion: the signal extraction model, the extension of the signal extraction model, and the menu cost model. The authors show that expected inflation, which is captured by the menu cost model, is the aspect of inflation that is most closely associated with relative price dispersion. Furthermore, this result seems robust to different specifications. The authors, however, cannot completely discard inflation uncertainty (the signal extraction model), especially when using core inflation. They also observe a strong asymmetry regarding the impact of positive and negative unexpected inflation on relative price dispersion using total inflation, but this asymmetry is not observed for core inflation. This suggests that the strong asymmetry arises mainly from the presence of components typically associated with supply shocks, and not from the presence of downward nominal rigidities, as Aarstol (1999) proposes, following Ball and Mankiw (1992a,b).
    Keywords: Inflation and prices
    JEL: C32 E31
    Date: 2005
  43. By: Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo
    Abstract: In this paper we investigate the interaction between inflation and stock market volatility. We employ unconditional and conditional volatility measures, the latter derived from a Bivariate GARCH model with the BEKK representation. The results indicate that once the impact of IT is taken into account, the relationship between inflation and stock market volatility ceases to be positive and be comes negative in line with the New Environment Hypothesis. The implication for monetary policy design is that focusing on price stability alone may not be a suffcient condition for financial stability.
    JEL: C22 E31 E44 E52
  44. By: Alain Ize
    Abstract: Rapidly rising dollarization and numerous related financial crises in recent years have heightened the need for policy action. This paper contributes to the policy debate by presenting a common analytic framework that examines the roots of de facto financial dollarization under different economic environments and analyzes its interplay with monetary and prudential policies. In addition to providing a systematic analysis of the existence, stability, and multiplicity of dollarization equilibria, the paper makes a few novel contributions. In particular, it stresses the key role played by monetary policy endogeneity and identifies the underlying determinants of the peso premium that are responsible for inducing a preference for the dollar in financial transactions.
    Keywords: Dollarization , Monetary policy , Financial crisis , Credit , Risk premium , Economic models ,
    Date: 2005–09–30
  45. By: Ari Aisen; Francisco José Veiga
    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 this 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.
    Keywords: Political economy , Currency issuance , Money supply , Economic models ,
    Date: 2005–09–20
  46. By: Dalia Hakura
    Abstract: The paper finds that exchange rate flexibility in emerging market countries has increased over the past decade. This "learning to float" appears to have involved a strengthening of monetary and financial policy frameworks aimed at directly addressing the key vulnerabilities that give rise to the "fear of floating." The results in the paper suggest that the trend toward greater exchange rate flexibility, alongside a strengthening of banking supervision, has afforded emerging market countries more monetary policy independence.
    Keywords: Emerging markets , Developed countries , Floating exchange rates , Monetary policy ,
    Date: 2005–06–01
  47. By: Michael Funke
    Abstract: The New Keynesian Phillips curve (NKPC) posits the dynamics of inflation as forward looking and related to marginal costs. In this paper we examine the empirical relevance of the NKPC for mainland China. The empirical results indicate that an augmented (hybrid) NKPC gives results that are consistent with the data generating process. It is in this respect that the NKPC provides useful insights into the nature of inflation dynamics in mainland China as well as useful insights for the conduct of monetary policy.
    Keywords: China, Inflation, New Keynesian Phillips Curve
    JEL: C22 E31
    Date: 2005–07
  48. By: Luis Ignacio Jácome; Francisco F. Vázquez
    Abstract: This paper reviews central bank legislation in 24 countries in Latin America and the Caribbean during the 1990s. Using panel regressions, we find a negative relationship between legal central bank independence (CBI) and inflation. This result holds for three alternative measures of CBI and after controlling for international inflation, banking crises, and exchange regimes. The result is also robust to the inclusion of a broader indicator of structural reforms that usually go along with changes in central bank legislation, illustrating the complementary nature of various aspects of economic reform. The paper fails, however, to find a causal relationship running from CBI to inflation.
    Keywords: Central bank legislation , Latin America , Central bank role , Inflation , Structural adjustment ,
    Date: 2005–04–21
  49. By: Ari Aisen
    Abstract: In response to high and chronic inflation, countries have adopted different stabilization policies. However, the extent to which these stabilization programs were designed for political motives is not clear. Since exchange-rate-based stabilizations (ERBS) create an initial consumption boom followed by a contraction, whereas money-based stabilizations (MBS) generate a consumption bust followed by a recovery, policymakers may consider the timing of elections when determining the nominal anchor for stabilization. This paper finds strong evidence that the choice of nominal anchor depends on elections, implying the existence of political opportunism. ERBS are, on average, launched before elections while MBS are set after them.
    Keywords: Stabilization measures , Anti-inflation policy , Economic models ,
    Date: 2004–06–22
  50. By: David A. Grigorian; Armine Khachatryan; Grigor Sargsyan
    Abstract: This paper is the first attempt to look at inflation dynamics and monetary transmission mechanisms in Armenia in the context of a full information model containing three interrelated markets: foreign exchange, money, and labor. Using the vector error correction model (VECM) approach, we find that the exchange rate pass-through to prices is very strong relative to credit, wage, and interest rate channels. The analysis suggests a relatively fast adjustment of prices to long-run disequilibria in the exchange rate market, albeit with initial overshooting of the price level. In addition, we find no evidence of prices responding to changes in money and wages in a statistically significant manner.
    Keywords: Price adjustments , Armenia , Exchange markets , Wages , Money markets , Labor markets , Economic models ,
    Date: 2004–12–21
  51. By: Alina Carare; Robert Tchaidze
    Abstract: This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules.
    Keywords: Central banks , Monetary policy , Economic models ,
    Date: 2005–08–08
  52. By: Benoît Julien (Australian Graduate School of Management); John Kennes (Department of Economics, University of Copenhagen); Ian King (University of Otago)
    Abstract: This paper analyzes monetary exchange in a search model allowing for multilateral matches to be formed, according to a standard urn-ballprocess. We consider three physical environments: indivisible goods and money, divisible goods and indivisible money, and divisible goods and money. We compare the results with Kiyotaki and Wright (1993), Trejos and Wright (1995), and Lagos and Wright (2005) respectively. We find that the multilateral matching setting generates very simple and intuitive equilibrium allocations that are similar to those in the other papers, but which have important differences. In particular, surplus maximization can be achieved in this setting, in equilibrium, with a positive money supply. Moreover, with flexible prices and directed search, the first best allocation can be attained through price posting or through auctions with lotteries, but not through auctions without lotteries. Finally, analysis of the case of divisible goods and money can be performed without the assumption of large families (as in Shi (1997)) or the day and night structure of Lagos and Wright (2005).
    Keywords: monetary exchange; directed search; ex post bidding; multilateral matching
    JEL: C78 D44 E40
    Date: 2005–06
  53. By: Martin Cerisola; R. Gaston Gelos
    Abstract: This study examines the macroeconomic determinants of survey inflation expectations in Brazil since the adoption of inflation targeting in 1999. The results suggest that the inflation targeting framework has helped anchor expectations, with the dispersion of inflation expectations declining considerably, particularly during periods of high uncertainty. We also find that apart from the inflation target, the stance of fiscal policy, as proxied by the ratio of the consolidated primary surplus to GDP, has been instrumental in shaping expectations. The importance of past inflation in determining expectations appears to be relatively low, and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process.
    Keywords: Inflation , Brazil , Inflation targeting , Economic models ,
    Date: 2005–06–13
  54. By: Thomson Fontaine
    Abstract: This paper takes a step in empirically testing the implications of a number of theoretical models that attempt to highlight the dynamics behind currency crises. By focusing on countries with broadly disparate economic and political arrangements, the study attempts to determine the extent to which these variables matter in affecting the probabilities of currency crises occurring. The empirical findings provide support for the view that, in general, a deterioration in economic fundamentals and the pursuit of lax monetary policy can contribute to currency crises. The experiences of several emerging market economies suggests that the sustainability of exchange rate policy depends both on adequate policy responses to the shocks to the economy and on the fragility of the economic, financial, and political system.
    Keywords: Currencies , Developed countries , Emerging markets , Financial crisis , Exchange rates ,
    Date: 2005–02–02
  55. By: Alain Ize
    Abstract: This paper provides a simple, quantitative, net worth-based, approach to assessing the need for central bank capital. It derives a concept of "core capital" (a function of the central bank's operating expenditures and the carrying cost of its international reserves) as the minimum capital needed by a central bank to ensure the credibility of its inflation target. The approach is illustrated with the published accounts of three loss-making central banks and selected accounting entries for a broader sample of central banks. Policy implications are explored. In particular, the paper argues that central bank capitalizations cannot be automatic and require instead a broad policy debate.
    Keywords: Central banks , Costa Rica , Chile , Mozambique , Capital , Reserves ,
    Date: 2005–02–02
  56. By: John W. Dalton; Claudia Helene Dziobek
    Abstract: Under normal circumstances, a central bank should be able to operate at a profit with a core level of earnings derived from seigniorage. Losses have, however, arisen in several central banks from a range of activities including monetary operations under extreme conditions and financial sector restructuring. The paper discusses the impact of losses on central bank operations and lays out the principles and practices for handling central bank losses. It is suggested that losses should be disclosed as a reduction of the central bank's net worth unless covered by the government. Governments may cover losses through recapitalization of the central bank, and this will create a new central bank asset, usually in the form of government securities held by the central bank. Six case studies illustrate the circumstances under which losses may arise, their coverage, and central banks' disclosure practices.
    Keywords: Central banks , Brazil , Chile , Czech Republic , Hungary , Korea, Republic of , Thailand , Currency issuance ,
    Date: 2005–04–19
  57. By: Etibar Jafarov; Anne Marie Gulde; Vassili Prokopenko
    Abstract: This paper discusses costs, benefits, and implementation challenges of a possible currency union between Belarus and Russia. It shows that Belarus and Russia are economically closely linked but nevertheless do not fulfill all "optimal currency area" criteria, especially the macroeconomic symmetry condition. Furthermore, we argue that the different speeds of economic liberalization over the past decade have resulted in different economic structures, with Belarus still dependent on monetary financing of budgets and industries. However, a final cost-benefit analysis also needs to consider that currency unification may bring substantial benefits from reduced transaction costs, an improved macroeconomic environment in Belarus, and by acting as a catalyst to advance structural reforms in Belarus.
    Keywords: Monetary unions , Belarus , Russian Federation , Currencies ,
    Date: 2004–12–22
  58. By: Kenneth Sullivan
    Abstract: The IMF's development of the Code of Good Practices on Transparency in Monetary and Financial Policies and the introduction of safeguards assessments have increased emphasis on transparency of the disclosures made in central bank financial statements. This paper, which updates WP/00/186, looks at the disclosure requirements for central banks under International Financial Reporting Standards and provides practical guidance for those responsible for preparing central bank financial statements.
    Keywords: Central banks , Transparency , Bank accounting ,
    Date: 2005–04–29
  59. By: Etienne B. Yehoue
    Abstract: This paper seeks to elucidate the debate over currency union in Africa. The paper examines whether empirical investigation points to the gradual emergence of currency blocs. Based on the historical data on inflation, trade, and the comovements of prices and outputs, I argue that the emergence of large-scale currency blocs in Africa will follow a gradual path and that this dynamic does not lead to the emergence of a single continental currency at this time. Rather, the pattern which emerges seems to suggest three blocs: one in West Africa, a second around South Africa, and a third in Central Africa. Although little evidence is found supporting the emergence of a single African currency at this time, the emergence of an African currency union is not necessarily precluded, since the ultimate decision to surrender a nation's monetary policy to a supranational institution is not made based solely on economic considerations. I then address the issue of a possible anchor for the union, were it to emerge and opt for an anchorage. I find- based on the trade criterion-that the euro seems to be a good choice.
    Keywords: Monetary unions , Africa , Financial crisis , Emerging markets , Production , Trade relations , Economic models ,
    Date: 2005–03–15
  60. By: Gilda Fernandez; Cem Karacadag; Rupa Duttagupta
    Abstract: This paper identifies the institutional and operational requisites for transitions to floating exchange rate regimes. In particular, it explores key issues underlying the transition, including developing a deep and liquid foreign exchange market, formulating intervention policies consistent with the new regime, establishing an alternative nominal anchor in the context of a new monetary policy framework, and building the capacity of market participants to manage exchange rate risks and of supervisory authorities to regulate and monitor them. It also assesses the factors that influence the pace of exit and the appropriate sequencing of exchange rate flexibility and capital account liberalization.
    Keywords: Exchange rate policy , Foreign exchange , Exchange markets , Intervention , Capital account liberalization , Flexible exchange rate policy ,
    Date: 2004–07–29
  61. By: Tao Sun
    Abstract: This paper develops an approach for forecasting in Thailand core inflation. The key innovation is to anchor the projections derived from the short-term time-series properties of core inflation to its longer-run evolution. This involves combining a short-term model, which attempts to distill the forecasting power of a variety of monthly indicators purely on goodness-of-fit criteria, with an equilibrium-correction model that pins down the convergence of core inflation to its longer-run structural determinants. The result is a promising model for forecasting Thai core inflation over horizons up to 10, 24, and 55 months, based on a root mean-squared error criterion as well as a mean absolute error criterion.
    Keywords: Forecasting models , Thailand , Inflation ,
    Date: 2004–06–14
  62. By: Etienne B. Yehoue
    Abstract: The recent experience of the European Economic and Monetary Union (EMU) has stimulated the debate over currency union and reinforced the incentive for the emergence of currency blocs in other regions of the world. This paper builds a dynamic stochastic model-based on network externalities operating through trade channels-to explain the emergence of currency blocs, and specifically, why some countries join a currency union earlier than others. The paper develops and formalizes the intuition that currency bloc formation is path dependent, and that countries join currency blocs sooner the more they trade with the bloc member countries, with each additional member serving in a dynamic way to attract more members into the bloc. Evidence from the current pattern of EMU expansion supports the model, which is later used to elaborate on the pattern of further expansion of the union.
    Keywords: Monetary unions , European Economic and Monetary Union , Trade relations , Economic models ,
    Date: 2004–12–08
  63. By: Vivian Z. Yue; Samir Jahjah
    Abstract: We test the hypothesis of a link between exchange rate policy and sovereign bonds. We analyze the effect of exchange rate policies on supply and credit spreads of sovereign bonds issued by developing countries. An exchange rate policy is captured by the de facto exchange rate regime and the real exchange rate misalignment. The main findings are: (1) real exchange rate overvaluation significantly increases sovereign bond issue probability and raises bond spreads; (2) spreads and the likelihood of issuing bonds depend on the exchange rate regime; (3) exchange rate misalignment under a hard peg significantly increases bond spreads; (4) in time of debt crises, exchange rate policy also greatly affects the sovereign bond market, especially through exchange rate overvaluation.
    Keywords: Exchange rate regimes , Bond issues , Developing countries , Debt , Credit , Financial crisis , Economic models ,
    Date: 2004–11–15
  64. By: Alfred A. Haug (York University, Canada); Pierre L. Siklos (Wilfrid Laurier University, Canada)
    Abstract: This study tests whether changes in the short-term interest rate can best be modelled in a nonlinear fashion. We argue that there are good theoretical and empirical reasons for adopting this strategy. Using monthly data from several industrialized countries, namely Canada, Germany, Sweden, Switzerland, UK, and US, we show that the short-term interest rate movements are better explained, usually via the exponential smooth transition autoregression (ESTR). Unlike the existing literature on non-linear estimation, we consider a number of candidates for the transition variable. These include: an error correction term, estimated from an underlying cointegrating relationship predicted by the expectations hypothesis, the US spread, the domestic spread, inflation and output growth forecasts, and deviations from an inflation target in the case of Canada, the UK and Sweden. The sample spans the period from 1960-1998. We cannot reject non-linearity in the behavior of interest rate changes most often when the (lagged) domestic spread serves as the transition variable. In the case of the inflation targeting countries in our sample, the most appropriate transition variable can be the deviation from the publicly announced inflation target. We supplement estimates with extensive diagnostic testing to ensure that we can reject the linear alternative with reasonable confidence. We believe that changes in central bank policies and in the reaction of market participants over time to such changes argue in favor of the non-linear estimation approach. We would also argue that any model of the term spread over a fairly long span of time necessitates resort to non-linear estimation methods.
    JEL: C22 C11 E30
    Date: 2002–08
  65. By: Madhavi Bokil; Axel Schimmelpfennig
    Abstract: This paper presents three empirical approaches to forecasting inflation in Pakistan. The preferred approach is a leading indicators model in which broad money growth and private sector credit growth help forecast inflation. A univariate approach also yields reasonable forecasts, but seems less suited to capturing turning points. A vector autoregressive (VAR) model illustrates how monetary developments can be described by a Phillips-curve type relationship. We deal with potential parameter instability on account of fundamental changes in Pakistan's economic system by restricting our sample to more recent observations. Gregorian and Islamic calendar seasonality are addressed by using 12-month moving averages.
    Keywords: Forecasting models , Pakistan , Inflation ,
    Date: 2005–06–08
  66. By: Andrew Powell; Alain Ize
    Abstract: We develop a theoretical framework that encompasses four distinct motives for dollarization and discuss appropriate policy responses to help contain dollarization and its attendant risks. "Moral hazard" dollarization provides a clear case for prudential policy activism. However, prudential reform will have only a limited impact on dollarization when the main culprits are fear of floating and lack of monetary credibility. In such cases, a concerted and comprehensive reform agenda, including market-oriented and institutional reforms, would be needed to shift the balance of risks in favor of the domestic currency. While quantitative limits on dollarization could also be used to speed up de-dollarization, risks could be high.
    Keywords: Dollarization , Monetary policy , Financial crisis , Financial systems , Currencies , Exchange risk , Economic models ,
    Date: 2004–05–11
  67. By: Alexander F. Tieman; Maria Demertzis
    Abstract: We provide a framework for analyzing the choice between optimal and robust monetary policy rules in the presence of paradigm uncertainty. We first discuss the conditions on uncertainty that render a robust rule preferable to an optimal rule. Second, we show how the degree of risk aversion of the policymaker increases the region in which the robust rule is preferred.
    Keywords: Monetary policy , Economic models , Risk premium ,
    Date: 2004–06–23
  68. By: Ketil Hviding; M. Nowak; Luca Antonio Ricci
    Abstract: This paper studies the role of an increase in foreign exchange reserves in reducing currency volatility for emerging market countries. The study employs a panel of 28 countries over the period 1986-2002. Several control variables are introduced in the regressions to account for other factors affecting exchange rate volatility (monetary and external indicators as well as conventional macroeconomic fundamentals). The paper controls for the endogeneity induced by the role of the exchange rate regime, since the regime can affect both the level of reserves and exchange rate volatility. The results provide ample support for the proposition that holding adequate reserves reduces exchange rate volatility. The effect is strong and robust; moreover, it is nonlinear and appears to operate through a signaling effect.
    Keywords: Exchange rate variability , Reserves , Reserves adequacy ,
    Date: 2004–10–14
  69. By: Ari Aisen; Francisco José Veiga
    Abstract: Economists generally accept the proposition that high inflation rates generate inefficiencies that reduce society's welfare and economic growth. However, determining the causes of the worldwide diversity of inflationary experiences is an important challenge not yet satisfactorily confronted by the profession. Based on a dataset covering around 100 countries for the period 1960-99 and using modern panel data econometric techniques to control for endogeneity, this paper shows that a higher degree of political instability is associated with higher inflation. The paper also draws relevant policy implications for the optimal design of inflation-stabilization programs and of the institutions favorable to price stability.
    Keywords: Economic conditions , Inflation , Economic models ,
    Date: 2005–03–17
  70. By: Sibel Yelten
    Abstract: This paper uses the Sjaastad model to estimate the optimal currency area for the Nepalese rupee and concludes that, currently, Nepal may be reasonably well off with its peg to the Indian rupee. As its economy opens and its trade base and trading partners expand, it may want to reevaluate whether moving toward an exchange rate basket including the U.S. dollar may be a better policy choice. The regression results indicate that, currently, the prices of imported goods in Nepal are solely influenced by India, suggesting that with the peg to the Indian rupee, Nepal can isolate the import side of its economy completely from external shocks. On the export side, the regression results indicate that Nepalese export prices seem, to a large extent, to be influenced by U.S. prices. However, the export price index had to be constructed, and the construction methodology is likely to entail an overestimation of the impact of the U.S. dollar.
    Keywords: Monetary unions , Nepal , Asia , Financial crisis , Exchange rates , Currencies , Currency pegs , Economic models ,
    Date: 2004–08–16
  71. By: Saleh M. Nsouli; Connel Fullenkamp
    Abstract: The literature on the economic effects of electronic money and banking lacks organization and a common analytical framework. This paper identifies the main issues raised by e-money and e-banking and presents them as six puzzles. Our solutions to the puzzles build a framework for analyzing the effects of e-money and e-banking, and for choosing the appropriate approach to regulating electronic money and banking. Although electronic money and banking will likely not fulfill the more dire predictions in the literature, such as the possible loss of central banks' ability to control the money supply, they nonetheless will need to be regulated carefully.
    Keywords: Banking , Monetary policy ,
    Date: 2004–02–17
  72. By: Carlo Cottarelli; Julio Escolano
    Abstract: This paper provides a framework for evaluating the decision to enter a currency area, including the best timing for entry, and uses it to evaluate the assessment of the five tests for euro entry published by the U.K. Treasury in June 2003. The breadth and depth of its assessment is impressive by any standard. Nonetheless, this paper points at some areas that deserve to be explored further in future assessments. Covering these areas would not necessarily have changed the assessment's conclusion, namely that the case for entry is not yet "clear and unambiguous,." but it would have strengthened any conclusion reached. In addition, the paper highlights that in several areas relevant to the entry decision, the margin for uncertainty will remain significant, regardless of any reasonable attempt to reduce it.
    Keywords: Monetary policy , United Kingdom , Euro area ,
    Date: 2004–07–20
  73. By: Roberto Pereira Guimarães; Cem Karacadag
    Abstract: This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.
    Keywords: Intervention , Mexico , Turkey , Emerging markets , Exchange market developments , Foreign exchange reserves , Floating exchange rates , Capital flows , Economic models ,
    Date: 2004–07–29
  74. By: Ivan Tchakarov; Selim Elekdag
    Abstract: The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.
    Keywords: Exchange rate policy , Capital markets , Economic models ,
    Date: 2004–04–26
  75. By: Alain Ize; Eduardo Levy Yeyati
    Abstract: De facto (unofficial) dollarization, defined as the holding by residents of assets and liabilities denominated in a foreign currency, is a policy concern in an increasing number of developing economies. This paper addresses the dollarization debate from this perspective, with the goal of setting the stage for a more detailed and focused discussion of whether de-dollarization should be a policy objective and, if so, how best to pursue this objective. We review existing theories of de facto dollarization and the extent to which they are supported by the available evidence, presents the main strategies for reform, and proposes a list of policy recommendations.
    Keywords: Dollarization , Monetary policy ,
    Date: 2005–09–30
  76. By: Ivan Tchakarov
    Abstract: This paper examines the issue of whether countries can improve their welfare by coordinating macroeconomic policies. The main purpose is to compute the gains from international monetary cooperation as the difference between the steady state consumption levels associated with the Nash and the cooperative outcomes of the game in which monetary authorities pursue active monetary policy. A numerical second-order approximation makes the solution of the model possible. Contrary to Obstfeld and Rogoff (2002), who claim that the gains from international cooperation in monetary policy are negligible, the paper finds that they could be very significant and reach as high as 2.2 percent of steady state consumption. This suggests that individual countries could experience significant welfare losses if they concentrate only on domestic stabilization policies.
    Keywords: Monetary policy , International cooperation ,
    Date: 2004–01–23
  77. By: Ashoka Mody; Eisuke Okada; Enrica Detragiache
    Abstract: A widely held nostrum is that countries should exit heavily managed exchange rate regimes when the going is good, rather than when the exchange rate is under pressure to depreciate. Have countries followed this advice in practice? And, if so, how good has the going been? We find that in the past 25 years or so, almost all exits to more flexible regimes were followed by a depreciation of the exchange rate, and that exits were about evenly divided between disorderly and orderly cases. A logit econometric model, indicates that the general circumstances of orderly and disorderly exits have been broadly similar: an overvalued real exchange rate, falling reserves, a difficult fiscal position, and high world interest rates. Wellestablished pegs were less likely to end.
    Keywords: Exchange rate regimes , Economic models ,
    Date: 2005–03–07
  78. By: Charalambos G. Tsangarides; Pierre van den Boogaerde
    Abstract: This paper takes stock of the achievements toward integration in the West African Economic and Monetary Union (WAEMU) 10 years after the 1994 devaluation of the CFA franc. It investigates the lessons learned and evaluates progress toward economic convergence, examines the evolution of trade and competitiveness, and points to ways to remove impediments to greater integration. The paper concludes that a continued political commitment will be needed to overcome the important dissimilarities between WAEMU member countries that have limited the degree of convergence achieved to date, and to advance toward a full-fledged economic union.
    Keywords: CFA franc , West African Economic and Monetary Union , Trade Integration Mechanism ,
    Date: 2005–08–04
  79. By: S. Beidas; Magda E. Kandil
    Abstract: This paper sheds light on the quantitative behavioral responses of key economic variables in the Palestinian economy in the face of major economic shocks and draws implications for the choice of an exchange rate regime should a decision be taken to introduce a national currency. Time-series regression analysis shows that (i) wages and prices are flexible in the face of various shocks; (ii) the real wage appears rigid in the face of various shocks and increases despite higher unemployment; (iii) an appreciation of the new Israeli Sheqalim real effective exchange rate decreases exports and imports; and (iv) money demand appears stable in the face of exchange rate shocks. Although a fixed exchange rate system may initially be desirable to establish credibility of the new currency, some flexibility of the exchange rate is desirable over time.
    Keywords: Exchange rate regimes , West Bank and Gaza Strip , Currencies , Currency substitution ,
    Date: 2005–04–15
  80. By: Inci Ötker; Paul Hilbers; Gudrun Johnsen; Ceyla Pazarbasioglu
    Abstract: This paper reviews trends in bank lending to the private sector, with a particular focus on Central and Eastern European countries, and finds that rapid growth of private sector credit continues to be a key challenge for most of these countries. The paper discusses possible implications for economic and financial stability and the policy options available to counter and reduce these risks. It argues that the authorities will need to focus on the implications for both the macro economy and the financial system and, depending on their assessment, may need a comprehensive policy response comprising a mix of macro and prudential policies. In particular where there are limitations to the effective use of monetary and fiscal measures, supervisory and prudential policy responses will have a key role in addressing financial stability concerns.
    Keywords: Credit expansion , Europe , Financial stability , Economic policy ,
    Date: 2005–08–10
  81. By: A. Prasad; Saibal Ghosh
    Abstract: The paper examines the association and corporate behavior for a sample of manufacturing firms in India for the post-reform period 1992-2003. The findings suggest that a contractionary monetary policy lowers overall debt including bank debt, although the lagged response is positive, and listed firms increase their short-term bank borrowings, after monetary tightening. The responses of corporates to a monetary contraction in the post-1997 period has been more pronounced. A disaggregated analysis of responses of firms according to size and leverage largely validates these findings. Two policy implications emerge from the analysis. First, the interest rate transmission channel has strengthened since 1998, and, second, corporates in India, especially listed ones, seem to exhibit relationship lending.
    Keywords: Governance , India , Monetary policy ,
    Date: 2005–02–10
  82. By: Jaewoo Lee
    Abstract: A quantitative framework is developed to bring forward the insurance motive of holding international reserves. The insurance value of reserves is quantified as the market price of an equivalent option that provides the same insurance coverage as the reserves. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.
    Keywords: Insurance , Reserves , Prices ,
    Date: 2004–09–28
  83. By: Etienne B. Yehoue
    Abstract: This paper explores income and consumption smoothing patterns among the member countries of each of the CFA zones-the CEMAC2 and the WAEMU3-during the period 1980-2000. I find that for the CEMAC, only about 15 percent of shocks to GDP are smoothed through the standard channels (that is, capital market, credit market, and remittances). On the other hand, I find that 44 percent of shocks are smoothed via foreign aid from France, and 5 percent via central bank contributions, while reserves pooling provides no shock smoothing. For the WAEMU, I find that only 13 percent of shocks are smoothed through the standard channels, while 63 percent are smoothed via foreign aid from France, 7 percent via central bank contributions, and no smoothing via reserves pooling. I compare these results with the risksharing pattern in the Unites States. I argue that creating public venture capital at a regional level might help promote free capital flows within each zone and alleviate the apparently insufficient degree of risk-sharing observed through the standard channels.
    Date: 2005–05–24
  84. By: Yin-Wong Cheung; Menzie David Chinn; Antonio Garcia Pascual
    Abstract: We reassess exchange rate prediction using a wider set of models that have been proposed in the last decade. The performance of these models is compared against two reference specifications-purchasing power parity and the sticky-price monetary model. The models are estimated in first-difference and error-correction specifications, and model performance is evaluated at forecast horizons of 1, 4, and 20 quarters, using the mean squared error, direction of change metrics, and the "consistency" test of Cheung and Chinn (1998). Overall, model/specification/currency combinations that work well in one period do not necessarily work well in another period.
    Keywords: Exchange rates , Monetary measures , Productivity , Interest rates , Purchasing power parity , Forecasting models ,
    Date: 2004–05–14
  85. By: Alessandro Rebucci; Marco Rossi
    Abstract: This paper presents an empirical measure of disinflation credibility and discusses its evolution in Turkey since the 2001 crisis. The results indicate that credibility has improved markedly over this period, boding well for the future of disinflation in Turkey.
    Keywords: Disinflation , Turkey , Emerging markets ,
    Date: 2004–11–12

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