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on Monetary Economics |
| By: | Petra M. Geraats |
| Abstract: | Transparency has become one of the main features of monetary policymaking during the last decade. This paper establishes some stylized facts. In addition, it provides a systematic overview of the practice of monetary policy transparency around the world. It shows much diversity in information disclosure, even for central banks with the same monetary policy framework, including inflation targeting. Nevertheless, the paper finds significant differences in transparency across monetary policy frameworks. The empirical findings are explained using key insights distilled from the theoretical literature. Thus, this paper aims to bridge the gap between the theory and practice of monetary policy transparency. |
| Keywords: | : Transparency, monetary policy, central bank communication |
| JEL: | E58 D82 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0549&r=mon |
| By: | Philip Arestis; Kostas Mouratidis |
| Abstract: | This paper examines the performance of monetary policy in eleven EMU countries for the whole period of the EMS. This is based on the trade-off between inflation variability and output-gap variability. To this end, we examine whether the introduction of an implicit inflation targeting by the EMU member countries after the Maastricht Treaty, changed the trade-off between inflation variability and output-gap variability. We employ a stochastic volatility model for two sub-periods of the EMS (i.e. before and after the Maastricht Treaty). We find that the trade-off varies amongst EMU countries. The implication of these findings is that there are asymmetries in the euro area, due to different economic structures among the member countries of the EMU. |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:238&r=mon |
| By: | Andreas Schabert; Christian Stoltenberg |
| Abstract: | This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-ofperiod money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. |
| Keywords: | Real balance effects, predetermined money, price level determination, real determinacy, monetary policy rules |
| JEL: | E32 E41 E52 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-027&r=mon |
| By: | Almuth Scholl; Harald Uhlig |
| Abstract: | Past empirical research on monetary policy in open economies has found evidence of the ’delayed overshooting’, the ’forward discount’ and the ’exchange rate’ puzzles. We revisit the effects of monetary policy on exchange rates by applying Uhlig’s (2005) identification procedure that involves sign restrictions on the impulse responses of selected variables. We impose no restrictions on the exchange rate to leave the key question as open as possible. The sign restriction methodology avoids the “price puzzles” of the identification strategies used by Eichenbaum-Evans (1995) and by Grilli-Roubini (1995, 1996), which are particularly pronounced, when using an updated data set. We find that the puzzles regarding the exchange rates are still there, but that the quantitative features are different. In response to US monetary policy shocks, the peak appreciation happens during the first year after the shock for the US-German and the US-UK pair, and during the first two years for the US-Japan pair. This is consirably quicker than the three-year horizon found by Eichenbaum-Evans. There is a robust forward discount puzzle implying a large risk premium. We study this issue, introducing and calculating conditional Sharpe ratios for a Bayesian investor investing in a hedged position following a US monetary policy shock. For foreign monetary policy shocks, we find more robust results than with the Grilli-Roubini recursive identification strategy: the posterior distribution regarding the exchange reaction looks rather similar across countries and VAR specifications. In particular, we find that there seems to be considerable uncertainty regarding the initial reaction of the exchange rate. Quantitatively, monetary policy shocks seem to have a minor impact on exchange rate fluctuations. |
| Keywords: | vector autoregressions, agnostic identification, forward discount bias puzzle, exchange rate puzzle, exchange rates, monetary policy |
| JEL: | C32 E58 F31 F42 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-037&r=mon |
| By: | Ricardo de Oliveira Cavalcanti (EPGE/FGV); Ed Nosal |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:603&r=mon |
| By: | Clemens J.M. Kool |
| Abstract: | In this paper I have analyzed ECB interest rate setting in the first 5 years of its existence. Contrary to popular belief and continuous ECB statements, the ECB has not acted has as an obsessed inflation fighter. By any measure, output considerations do play a significant role in the ECB's policy rule. If anything, the ECB has been on the loose side, especially since 2001, when taking economic development in the euro area as a whole as the starting point. Actual interest rates have been consistent with German (and to a lesser extent French) preferences, however. It suggests the ECB puts a dominant weight on German economic developments. Small peripheral countries receive too low weight rather than too high. In case the ECB actually focuses on euro area wide developments, its looseness is comparable to that of the Fed. In case ECB policy actually is geared towards Germany's preferences or perhaps the average German-French preferences -- the ECB has been much closer to a standard Taylor-rule interest rate setting than the Fed. In that scenario, the Fed indeed has been much more aggressive in the lowering of its interest rates in the face of adverse economic shocks. |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0503&r=mon |
| By: | Patrick Minford (Cardiff Business School); Prakriti Sofat; Eric Nowell; Naveen Srinivasan (Cardiff Business School) |
| Abstract: | A large econometric literature has found that post-war US inflation exhibits very high persistence, approaching that of a random walk process. Given similar evidence for other OECD countries, many macroeconomists have concluded that high inflation persistence is a 'stylized fact'. The objective of this paper is to show that degree of inflation persistence is not</i> an inherent structural characteristic of an economy, but in fact a function of the stability and transparency of monetary policy regime in place. We begin by estimating univariate processes for inflation across different periods, allowing for structural breaks based on a priori</em> knowledge of the UK economy. Then we examine whether, a rather straightforward model, easily micro-founded in a standard classical set-up can generate the facts such as we find them. We calibrate our structural model for each of the regimes and solve it analytically for the implied persistence in the inflation process. We compare this theoretical prediction with the estimated persistence for each regime. Finally we bootstrap our model to generate pseudo inflation series and check whether the actual persistence coefficients lie within the 95 percent confidence limits implied by the bootstraps. As a robustness exercise we do the same for the Liverpool model. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2005/1&r=mon |
| By: | Ralf Brüggemann; Helmut Lütkepohl |
| 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: | Expectations hypothesis of the term structure, uncovered interest rate parity, unit roots, cointegration analysis |
| JEL: | C32 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-035&r=mon |
| By: | Ivo J.M. Arnold; Clemens J.M. Kool |
| Abstract: | Within a monetary union, regional inflation differentials lead to a competition between the real interest rate and wealth channels on the one hand and the real exchange rate channel on the other hand in the transmission of regional shocks. This may have implications for the length and vehemence of regional business cycles. This paper tries to quantify how these forces work against each other using regional data for the United States. Our estimates indicate that, following an increase in the regional inflation rate, in the short run the pro-cyclical effect through the real interest rate and wealth channels is strongest. After a period of about 3-4 years the cumulative worsening of the competitive position asserts its influence. Regional cycles in the housing market have a clear pro-cyclical effect and are, on their part, affected by regional real interest rates and real growth. |
| Keywords: | monetary union, regional effects, inflation differentials, monetary transmission |
| JEL: | E58 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0413&r=mon |
| By: | Ivo J.M. Arnold; Clemens J.M. Kool; Katharina Raabe |
| Abstract: | This paper employs US state level data on manufacturing and non-manufacturing industries to present new evidence on the transmission of US interest rate shocks. Part one of our study analyzes the interest rate sensitivity of industry earnings over the period 1958-2000/01. The vector autoregressive evidence points to differences in the interest rate sensitivity of industries and, hence, to the existence of an industry channel of monetary transmission. Building on these results, the second part investigates whether the industry characteristics business size and capital intensity can explain the cross-industry heterogeneity of monetary policy effects. We find that the conclusions strongly depend on the treatment of the mining industry. Including a dummy variable for the mining industry significantly reduces the explanatory power of business size but brings to the fore the effect of capital intensity. |
| Keywords: | Monetary transmission, industry effects, regional effects, business size |
| JEL: | E50 E52 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0511&r=mon |
| By: | Ansgar Belke; Daniel Gros |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:266&r=mon |
| By: | Oliver Blaskowitz; Helmut Herwartz; Gonzalo de Cadenas Santiago |
| Abstract: | In this study we forecast the term structure of FIBOR/EURIBOR swap rates by means of recursive vector autoregressive (VAR) models. In advance, a principal components analysis (PCA) is adopted to reduce the dimensionality of the term structure. To evaluate ex–ante forecasting performance for particular short, medium and long term rates and for the level, slope and curvature of the swap term structure, we rely on measures of both statistical and economic performance. Whereas the statistical performance is investigated by means of the Henrikkson–Merton statistic, the economic performance is assessed in terms of cash flows implied by alternative trading strategies. Arguing in favor of local homogeneity of term structure dynamics, we propose a data driven, adaptive model selection strategy to ’predict the best forecasting model’ out of a set of 100 alternative implementations of the PCA/VAR model. This approach is shown to outperform forecasting schemes relying on global homogeneity of the term structure. |
| Keywords: | Principal components, Factor Analysis, Ex–ante forecasting, EURIBOR swap rates, Term structure, Trading strategies |
| JEL: | C32 C53 E43 G29 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2005-024&r=mon |