nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒12‒01
forty-nine papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy and Distribution By Stephen D. Williamson
  2. Inflation persistence and monetary policy design - an overview By Andrew T. Levin; Richhild Moessner
  4. Bargaining in Monetary Economies By Christopher Waller; Guillaume Rocheteau
  5. Monetary Policy and the Term Structure of Interest Rates By Juha Seppala; Federico Ravenna
  6. No-Arbitrage Taylor Rules By Andrew Ang; Sen Dong
  7. Taylor Rules, McCallum Rules and the Term Structure of Interest Rates By Michael F. Gallmeyer; Burton Hollifield
  8. Perhaps the FOMC did what it said it did: an alternative interpretation of the Great Inflation By Sharon Kozicki; P.A. Tinsley
  9. Establishing Credibility: Evolving Perceptions of the European Central Bank By Linda S. Goldberg; Michael W. Klein
  11. The Demand for Currency at Low Interest Rates By Alessandro Secchi; Francesco Lippi
  12. Currency Areas and Monetary Coordination By Qing Liu; Shouyong Shi
  13. Monetary Policy, Taxes, and the Business Cycle By Michael R. Pakko; William T. Gavin; Finn E. Kydland
  14. Monetary Policy and the Illusionary Exchange Rate Puzzle By Bjørnland, Hilde C.
  15. An Experimental Test Of Taylor-Type Rules With Inexperienced Central Bankers By Jim Engle-Warnick; Nurlan Turdaliev
  16. Search, Money, and Inflation under Private Information By Huberto M. Ennis
  17. Time Consistent Monetary Policy with Endogenous Price Rigidity By Henry Siu
  18. Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets By Jinhui H. Bai; Ingolf Schwarz
  19. A Likelihood-Based Evaluation of the Segmented Markets Friction in Equilibrium Monetary Models By Filippo Occhino; John Landon-Lane
  20. Monetary Shocks in a Model with Loss of Skills By Julen Esteban-Pretel; Elisa Faraglia
  21. Optimal Monetary Policy in a Small Open Economy under Segmented Asset Markets and Sticky Prices By Juan Pablo Medina; Ruy Lama
  22. Fiscal and Monetary policy Interactions in a New Keynesian Model with Liquidity Constraints By V. Anton Muscatelli, Patrizio Tirelli and Carmine Trescroci
  23. How (Not) to Sell Money By Arup Daripa
  24. Money and Capital By S. Boragan Aruoba; Christopher J. Waller
  26. Currency crisis, monetary policy, and corporate balance sheet vulnerabilities By Eijffinger,Sylvester C.W.; Goderis,Benedikt
  27. Measuring inflation persistence: a structural time series approach By M. DOSSCHE; G. EVERAERT
  28. Inflation, Prices, and Information in Competitive Search By Belen Jerez; Miquel Faig
  29. Optimal Monetary Policy When Lump-Sum Taxes Are Unavailable: A Reconsideration of the Outcomes under Commitment and Discretion By Martin Ellison; Neil Rankin
  30. Regional monetary integration in the member states of the Gulf Cooperation Council By Michael Sturm; Nikolaus Siegfried
  31. The Design of Monetary and Fiscal Policy: A Global Perspective By Stefano Eusepi; Jess Benhabib
  32. Monetary policy, determinancy, and learnability in the open economy By Bullard,James; Schaling,Eric
  33. Fisher Hypothesis Revisited: A Fractional Cointegration Analysis By Saadet Kýrbaþ Kasman; Adnan Kasman; Evrim Turgutlu
  34. Assessing the Money, Exchange Rate, Price Links during Hyperinflationary Episodes in the Democratic Republic of the Congo By Jean-Claude Maswana
  35. The bank lending survey for the euro area By Jesper Berg; Annalisa Ferrando; Gabe de Bondt; Silvia Scopel
  36. Monetary Policy in an Equilibrium Portfolio Balance Model By Stijn van Nieuwerburgh; Michael Kumhof
  37. The Big Problem of Large Bills: The Bank of Amsterdam and the Origins of Central Banking By William Roberds; Stephen Quinn
  38. Is ECB Communication Effective? By Carlo Rosa; Giovanni Verga
  39. Monetary policy and house prices: a cross-country study By Alan G. Ahearne; John Ammer; Brian M. Doyle; Linda S. Kole; Robert F. Martin
  40. Economic and monetary integration of the new Member States - helping to chart the route By Ignazio Angeloni; Michael Flad; Francesco Paolo Mongelli
  41. The Canadian Macroeconomy and the Yield Curve: An Equilibrium-Based Approach By René Garcia; Richard Luger
  42. Output Costs, Currency Crises, and Interest Rate Defense of a Peg By Amartya Lahiri; Carlos A. Vegh
  43. On the Coexistence of Money and Bonds By David Andolfatto
  44. Monetary policy and the house price boom across U.S. states By Marco Del Negro; Christopher Otrok
  45. The U.S. Constitution and Monetary Powers: An Analysis of the 1787 Constitutional Convention and Constitutional Transformation of the Nation's Monetary System Emerged By Farley Grubb
  46. Inflation Differentials and Labor and Product Market Differences in the EMU By Ester Faia; Alessia Campolmi
  47. The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review By Peter Backé; Christian Thimann; Olga Arratibel; Oscar Calvo-Gonzalez; Arnaud Mehl; Carolin Nerlich
  48. Two Theories of Money Reconciled: The Colonial Puzzle Revisited with New Evidence By Farley Grubb
  49. The international role of the euro - evidence from bonds issued by non-euro area residents By André Geis; Arnaud Mehl; Stefan Wredenborg

  1. By: Stephen D. Williamson
    Keywords: monetary policy, monetary theory, Friedman rule, money neutrality
    JEL: E4 E5
    Date: 2005
  2. By: Andrew T. Levin (Federal Reserve Board,Washington, DC 20551 USA); Richhild Moessner (Bank for International Settlements, Basel, Switzerland)
    Abstract: How monetary policy should be set optimally when the structure of the economy exhibits inflation persistence is an important question for policy makers. This paper provides an overview of the implications of inflation persistence for the design of monetary policy.
    Keywords: Inflation persistence; optimal monetary policy; uncertainty.
    JEL: E52 E58
    Date: 2005–11
  3. By: Márcio Holland
    Abstract: After strong currency crisis, in January 1999, Brazil implemented flexible exchange rate regime combined with inflation targeting. Some economists believe that emerging markets do not allow the exchange rate to float as much they had announced and therefore they suffer from the fear of floating. However, in this article there is evidence to believe that central banks in the emerging markets care about inflation ratter than exchange rate. The remarkable result found in this article is that the aggressiveness of the interest rate reaction to inflation explains far more the current monetary and exchange rate policy in Brazil than the idea of the fear of floating.
    JEL: E31 E37 E52 C22
    Date: 2005
  4. By: Christopher Waller; Guillaume Rocheteau (Department of Economics University of Notre Dame)
    Keywords: Money, Search, Bargaining, Inflation
    JEL: E40 E50
    Date: 2005
  5. By: Juha Seppala; Federico Ravenna
    Keywords: Term Structure of Interest Rates, Monetary Policy, Sticky Prices, Habit Formation, Expectations Hypothesis
    JEL: E43 E5 G12
    Date: 2005
  6. By: Andrew Ang; Sen Dong
    Keywords: affine term structure model, monetary policy, interest rate risk
    Date: 2005
  7. By: Michael F. Gallmeyer; Burton Hollifield
    Keywords: term structure, monetary policy, Taylor rule
    JEL: G0 G1 E4
    Date: 2005
  8. By: Sharon Kozicki; P.A. Tinsley
    Abstract: This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of US monetary policy and in the implied central bank target for inflation. Empirical results and FOMC transcripts support a neglected interpretation of policy during the Great Inflation of the 1970’s.
    Date: 2005
  9. By: Linda S. Goldberg; Michael W. Klein
    Abstract: The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.
    JEL: F3 E5 E6
    Date: 2005–11
  10. By: Felipe F. Schwartzman
    Abstract: In a simple new keyenesian model of monetary policy under discretion constraining the Central Bank to put inflation within a pre-specified Inflation Target Zone can eliminate the inflation bias and, at least for certain parameter ranges, significantly reduce the stabilization bias. Also, it is possible to investigate what is the optimal Inflation Target Zone for different economies. These seem to depend of the structural parameters in a non-linear and often non-monotonic way.
    JEL: E42 E52 E61
    Date: 2005
  11. By: Alessandro Secchi; Francesco Lippi
    Keywords: currency, search theory, inflation
    JEL: E5
    Date: 2005
  12. By: Qing Liu; Shouyong Shi
    Keywords: Currency Area; Monetary Coordination
    JEL: F31 C78
    Date: 2005
  13. By: Michael R. Pakko; William T. Gavin (Research Federal Reserve Bank of St. Louis); Finn E. Kydland
    Keywords: Inflation, Taxation, Business Cycle
    JEL: E31 E32 E42
    Date: 2005
  14. By: Bjørnland, Hilde C. (Dept. of Economics, University of Oslo)
    Abstract: Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.
    Keywords: Dornbusch overshooting; VAR; monetary policy; exchange rate puzzle; identification
    JEL: C32 E52 F31 F41
    Date: 2005–11–07
  15. By: Jim Engle-Warnick (McGill University); Nurlan Turdaliev (McGill University)
    Abstract: We experimentally test whether a class of monetary policy decision rules describes decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation. We find that Taylor-type rules fit the choice data well, and are instrumental in characterizing heterogeneity in decision making. Our experiment is the first to begin to organize data experimentally with an eye on monetary policy rules for this, one of the most widely watched and analyzed decisions in economics.
    Keywords: monetary policy, Taylor rule, experimental economics, repeated games
    JEL: C91 E42
    Date: 2005–11–19
  16. By: Huberto M. Ennis (Research Department Federal Reserve Bank of Richmond)
    Keywords: Random Matching, Private Information, Welfare
    JEL: D83 E31
    Date: 2005
  17. By: Henry Siu
    Date: 2005
  18. By: Jinhui H. Bai (Department of Economics, Yale University); Ingolf Schwarz (Max Planck Institute for Research on Collective Goods)
    Abstract: The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate.
    Keywords: Money, incomplete markets, fiscal policy, indeterminacy
    JEL: D52 E40 E50
    Date: 2005–09
  19. By: Filippo Occhino; John Landon-Lane (Economics Rutgers University)
    Keywords: limited participation, segmented markets, Bayesian model comparison, monetary policy shocks.
    JEL: C11 C52 E52
    Date: 2005
  20. By: Julen Esteban-Pretel (Economics University of Tokyo); Elisa Faraglia
    Keywords: Search and Matching, Loss of Skill, Business Cycles, Monetary Policy
    JEL: J41 J31 E32
    Date: 2005
  21. By: Juan Pablo Medina; Ruy Lama
    Keywords: Optimal monetary policy; Asset market segmentation; Sticky prices.
    JEL: E44 E52 F41
    Date: 2005
  22. By: V. Anton Muscatelli, Patrizio Tirelli and Carmine Trescroci
    Abstract: This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between Fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targetingf orm. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers aspects output and inflation variability in the presence of such a monetary policy rule..
    JEL: E58 E62 E63
  23. By: Arup Daripa (School of Economics, Mathematics & Statistics, Birkbeck College)
    Abstract: A repo auction is a multi-unit common value auction in which bidders submit demand functions. Such auctions are used by the Bundesbank as well as the European Central Bank as the principal instrument for implementing monetary policy. In this paper, we analyze a repo auction with a uniform pricing rule. We show that under a uniform pricing rule, the usual intuition about the value of exclusive information can be violated, and implies free riding by uninformed bidders on the information of the informed bidders, lowering payoff of the latter. Further, free riding can distort the information content of auction prices, in turn distorting the policy signals, hindering the conduct of monetary policy. The results agree with evidence from repo auctions, and clarifies the reason behind the Bundesbank’s decision to switch away from the uniform price format. Our results also shed some light on the rationale behind the contrasting switch to the uniform price format in US Treasury auctions.
    Keywords: Repo auction, Informational Free Riding, Monetary Policy Signals.
    JEL: D44 E50
    Date: 2005–11
  24. By: S. Boragan Aruoba (Economics University of Maryland); Christopher J. Waller
    Keywords: money, capital, inflation, welfare
    JEL: E13 E52
    Date: 2005
  25. By: Rodrigo Sekkel; Denisard Alves
    Abstract: The purpose of the present study is to identify the effects of monetary policy and macroeconomic shocks on the dynamics of the Brazilian term structure of interest rates. We estimate a near-VAR under the identification scheme proposed by Christiano et al. (1996, 1999). The results resemble that of the US economy: monetary policy shocks flatten the term structure of interest rates. Nevertheless, we find that monetary policy shocks in Brazil appear to explain a significant larger share of the dynamics of the term structure than in the USA. Finally, we also study the importance of standard macroeconomic variables, as GDP, inflation and specially, a measure of country risk for the dynamics of the term structure in Brazil. The empirical evidence allows us to infer that as the Brazilian term structure of interest rates increase its maturities, the more important will macroeconomic shocks be to its determination.
    JEL: E53
    Date: 2005
  26. By: Eijffinger,Sylvester C.W.; Goderis,Benedikt (Tilburg University, Center for Economic Research)
    Abstract: This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effects on the probability of crisis is ambiguous.
    Keywords: short term debt; currency;financial crisis;monetary policy;foreign debt;balance sheets
    JEL: E52 E58 F34
    Date: 2005
    Abstract: Using a structural time series approach we measure different sorts of inflation persistence allowing for an unobserved time-varying inflation target. Unobserved components are identified using Kalman filtering and smoothing techniques. Posterior densities of the model parameters and the unobserved components are obtained in a Bayesian framework based on importance sampling. We find that inflation persistence, expressed by the half life of a shock, can range from 1 quarter in case of a cost-push shock to several years for a shock to long-run inflation expectations or the output gap.
    Keywords: Inflation Target, State Space Model, Kalman Filter, Bayesian Analysis
    JEL: C11 C22 C32 E31
    Date: 2005–11
  28. By: Belen Jerez; Miquel Faig
    Keywords: inflation, prices, private information, competitive search
    JEL: D83 E41 E52
    Date: 2005
  29. By: Martin Ellison; Neil Rankin
    Abstract: We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we show that the economy will not necessarily tend to the Friedman Rule, as Obstfeld found. Instead it may tend to the critical debt level at which there is no cheating incentive under commitment, and inflation and could well be positive here.
    Keywords: Time consistency; optimal inflation-tax smoothing; discretion; commitment; Friedman Rule.
    JEL: E52 E61
    Date: 2005–08
  30. By: Michael Sturm (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Nikolaus Siegfried (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The Gulf Cooperation Council (GCC) plans to introduce a single currency by 2010 in its six member states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. This paper focuses on selected macroeconomic and institutional issues and key policy choices which are likely to arise during the process of monetary integration. The main findings are that (i) a supranational GCC monetary institution is required to conduct a single monetary and exchange rate policy geared to economic, monetary and financial conditions in the monetary union as a whole; (ii) GCC member states have already achieved a remarkable degree of monetary convergence, but fiscal convergence remains a challenge and needs to be supported by an appropriate fiscal policy framework; and (iii) there is currently a high degree of structural convergence, although this is expected to diminish in view of the process of diversification in GCC economies, which calls for adequate policy responses.
    Date: 2005–06
  31. By: Stefano Eusepi; Jess Benhabib
    Date: 2005
  32. By: Bullard,James; Schaling,Eric (Tilburg University, Center for Economic Research)
    Abstract: We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation. Keywords: Indeterminacy, learning, monetary policy rules, new open economy macroeconomics, exchange rate regimes, second generation policy coordination.
    Keywords: indeterminacy;second generation policy coordination; learning;monetairy policy;open economy;macroeconomics;exchange rate
    JEL: E58 E61 F31 F41
    Date: 2005
  33. By: Saadet Kýrbaþ Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Adnan Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Evrim Turgutlu (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: This paper investigates the validity of the Fisher hypothesis using data from 33 developed and developing countries. Conventional cointegration tests do not provide strong evidence on the relationship between nominal interest rates and inflation. Therefore, we use fractional cointegration analysis to test the long-run relationship between the two variables. The results indicate that the long-run relationship between nominal interest rates and inflation do not exist for most countries in the sample when conventional cointegration test is employed. However, fractional cointegration between the two variables is found for a large majority of countries, implying the validity of the Fisher hypothesis. The results also indicate that the equilibrium errors display long memory.
    Keywords: Fisher hypothesis, interest rates, fractional cointegration, long memory
    JEL: E43 C22
  34. By: Jean-Claude Maswana (Kyoto University)
    Abstract: The determination of the causal pattern among inflation, money growth, and exchange rate has important implications for policymakers regarding appropriate stabilization policies in developing economies. Using Congolese data where the pace of broad money growth and hyperinflation (23,760% annual change) reached record levels in early 1990s, we use single−equation multivariate autoregressive models with the optimal lag selected using Hsiaofs approach to Granger causality. Results indicate feedback causality between inflation and money growth on one side, and unidirectional Granger causality from money growth to the exchange rate and from the exchange rate to inflation on the other. These results suggest that the over−riding goal of disinflation needs to be accomplished initially by exchange rate stabilization, followed by a direct inflation targeting.
    Keywords: Congo Inflation Hsiao's version of Granger Causality
    JEL: O P
    Date: 2005–11–22
  35. By: Jesper Berg (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen K, Denmark.); Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This occasional paper explains why the bank lending survey was developed by the ECB and describes its main features. It discusses the importance of credit developments for both the economy and the functioning of monetary policy, and further clarifies why the survey was introduced. Furthermore, the paper demonstrates that the value added of implementing a bank lending survey for the euro area lies in particular in the way it provides greater insight into developments in credit standards, non-interest rate credit conditions and terms, the risk perception of banks and the willingness of banks to lend. Credit standards are the internal guidelines or criteria of a bank which reflect the bank’s loan policy. The terms and conditions of a loan refer to the specific obligations agreed upon by the lender and the borrower. This occasional paper also considers similar surveys conducted by the Federal Reserve System in the US and by the Bank of Japan.
    Keywords: Survey; Banks; Credit Standards; Credit Markets; European Central Bank; Federal Reserve; Bank of Japan
    JEL: E43 E51 G21
    Date: 2005–02
  36. By: Stijn van Nieuwerburgh; Michael Kumhof
    Keywords: Portfolio balance, sterilized foreign exchange intervention
    JEL: E42 F41
    Date: 2005
  37. By: William Roberds (Research Department Federal Reserve Bank of Atlanta); Stephen Quinn
    Keywords: Central banking, commodity money, debasement
    JEL: E42 N13
    Date: 2005
  38. By: Carlo Rosa; Giovanni Verga
    Abstract: In its Monthly Bulletin of November 2002, the European Central Bank (ECB) stated that themonthly press conference held by its President represents one of its most importantcommunication channels and that it provides a comprehensive summary of the policyrelevant assessment of economic developments. After providing a glossary to translate thequalitative information of the press conferences into an ordered scale, we verify empiricallywhether and to what extent market expectations react to the information released by the ECB.We found that the public not only understand but also believe the signals sent by theEuropean monetary authority.
    Keywords: communication, credibility, ECB, glossary, Repo, Euribor, news approach
    JEL: E50 E52 E58
    Date: 2005–04
  39. By: Alan G. Ahearne; John Ammer; Brian M. Doyle; Linda S. Kole; Robert F. Martin
    Abstract: This paper examines periods of pronounced rises and falls of real house prices since 1970 in eighteen major industrial countries, with particular focus on the lessons for monetary policy. We find that real house prices are pro-cyclical—co-moving with real GDP, consumption, investment, CPI inflation, budget and current account balances, and output gaps. House price booms are typically preceded by a period of easing monetary policy, but then diminishing slack and rising inflation lead monetary authorities to begin tightening policy before house prices peak. In a careful reading of official reports, speeches, and minutes, we find little evidence that foreign central banks have reacted to past episodes of rising real house prices beyond taking into account their implications for inflation and output growth. However, central bankers have expressed a range of opinions in the more recent policy debate with some willing in certain cases to raise policy rates to try to stem current and future surges in asset prices while others favor moral suasion or a hands-off approach. Finally, we characterize the risks associated with house-price reversals. Although mortgage lenders in some countries have significant exposure to house prices, the balance of evidence suggests that this exposure does not, in and of itself, pose a significant risk to financial stability. Nevertheless, the co-movement of both property prices and default rates with the business cycle means that losses on mortgage lending are likely to be higher when banks’ other lines of business are also performing poorly.
    Keywords: Monetary policy ; Housing - Prices
    Date: 2005
  40. By: Ignazio Angeloni (Italian Ministry of Economy and Finance, Rome, Italy.); Michael Flad (Johann Wolfgang Goethe University, 60054 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper examines diverse aspects of the monetary integration of the ten new Member States (NMS) which joined the EU on 1 May 2004 into the euro area. Most NMS have undergone a rapid and deep transformation in all areas with considerable progress in their processes of reform and convergence, and more is underway. While trade integration with the other 15 EU Member States (EU15) has progressed quickly, convergence in output specialisation to EU standards has been slow, especially if measured in real terms. This may influence negatively the pace of real convergence. Most NMS lag significantly behind in building up and deepening their financial systems. There is also evidence that exchange rate flexibility may still be serving as a useful shock absorber for some NMS, and so far the evidence indicates that real exchange rates have moved, broadly speaking, in line with long term fundamental equilibria. On the positive side, many NMS are quite advanced relative to the euro area in the process of labour market and institutional reform (their labour market structures are more flexible than those of the euro area countries). There is also some evidence that a few NMS have a significant degree of business-cycle synchronisation with the euro area: hence, they may become less likely to be affected by different economic shocks. This, however, is not true for all NMS. The monetary policy institutions of the NMS have also converged to some degree - goals and institutional settings of central banks are now much more similar than before. A case-by-case approach to adopting the euro, based on country-specific conditions, seems natural due to the differences between the countries.
    Keywords: Optimum Currency Area, Economic and Monetary Integration, EMU.
    JEL: E42 F13 F33 F42
    Date: 2005–09
  41. By: René Garcia; Richard Luger
    Abstract: The authors develop and estimate an equilibrium-based model of the Canadian term structure of interest rates. The proposed model incorporates a vector-autoregression description of key macroeconomic dynamics and links them to those of the term structure, where identifying restrictions are based on the first-order conditions that describe the representative investor's optimal consumption and portfolio plan. A remarkable result is that the in-sample average pricing errors obtained with the equilibrium-based model are only slightly larger than those obtained with a far more flexible no-arbitrage model. The gains associated with parsimony become obvious out-of-sample, where the equilibrium model delivers much more accurate predictions, especially for yields with longer-term maturities. The preferred equilibrium model has impulse responses that are consistent with long-term inflation expectations being anchored, so a surprise increase in inflation does not necessarily raise expectations of higher future inflation.
    Keywords: Interest rates
    JEL: E43 E44 E47 E52
    Date: 2005
  42. By: Amartya Lahiri; Carlos A. Vegh
    Abstract: Central banks typically raise short-term interest rates to defend currency pegs. Higher interest rates, however, often lead to a credit crunch and an output contraction. We model this trade-off in an optimizing, first-generation model in which the crisis may be delayed but is ultimately inevitable. We show that higher interest rates may delay the crisis, but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect. The optimal interest rate defense involves setting high interest rates (relative to the no defense case) both before and at the moment of the crisis. Furthermore, while the crisis could be delayed even further, it is not optimal to do so.
    JEL: F41 E52
    Date: 2005–11
  43. By: David Andolfatto
    Date: 2005
  44. By: Marco Del Negro; Christopher Otrok
    Abstract: The authors use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in the Office of Federal Housing Enterprise Oversight’s house price movements from state- or region-specific shocks, estimated on quarterly state-level data from 1986 to 2004. The authors find that movements in house prices historically have mainly been driven by the local (state- or region-specific) component. The recent period (2001–04) has been different, however: “Local bubbles” have been important in some states, but overall the increase in house prices is a national phenomenon. The authors then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. The authors find the impact of policy shocks on house prices to be very small.
    Date: 2005
  45. By: Farley Grubb
    Abstract: The monetary powers embedded in the U.S. Constitution were revolutionary and led to a watershed transformation in the nation's monetary structure. They included determining what monies could be legal tender, who could emit fiat paper money, and who could incorporate banks. How the debate at the 1787 Constitutional Convention over these powers evolved and led the Founding Fathers to the specific powers adopted is presented and deconstructed. Why they took this path rather than replicate the successful colonial system and why they codified such powers into supreme law rather than leaving them to legislative debate and enactment are addressed.
    JEL: K10 G20 E50 N21 H10
    Date: 2005–11
  46. By: Ester Faia; Alessia Campolmi (Economics Universitat Pompeu Fabra)
    Keywords: inflation differentials, labor and product market differences, EMU
    JEL: F J
    Date: 2005
  47. By: Peter Backé (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Thimann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Olga Arratibel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Oscar Calvo-Gonzalez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Carolin Nerlich (DG-International and European Relations, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper reviews the strategies announced by the ten countries joining the European Union in May 2004 with regard to their intentions for participation in ERM II and the adoption of the euro. The paper examines the economic rationale of the monetary integration strategies declared by most acceding countries with a view to identifying also their potential risks. It does so by making use of several different approaches, including a short review of nominal convergence and a more extensive discussion from an optimum currency area perspective. An important part of the analysis is devoted to the implications of real convergence – i.e. catching-up growth in income and adjustment of the real economic structures towards those prevailing in the euro area – on the patterns of economic dynamics in acceding countries. Other aspects covered are the risks for external competitiveness in the convergence process and the appropriate pace of fiscal consolidation.
    Date: 2004–02
  48. By: Farley Grubb
    Abstract: The purported failure of the classical quantity theory of money in the colonial economy is shown to be a failure of data and not a failure of theory. When new data on the quantity of specie in circulation is added to the current data on paper money and prices, and econometrically estimated in both short- and long-run monetary models, the long-debated anomaly regarding the performance of the classical quantity theory of money in the colonial economy disappears. How paper money was backed and could be exchanged for specie was important, but not in the way theorists assert.
    JEL: N11 E42
    Date: 2005–11
  49. By: André Geis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefan Wredenborg (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper analyses the main features of the market for euro-denominated bonds issued by non-euro area residents on the basis of a new database. It shows that large private corporations from mature economies have contributed significantly to the internationalisation of the euro since 1999, more than sovereigns in transition and emerging economies, whose part was initially expected to be stronger. It confirms that the euro’s international role is characterised by a strong regional focus, being most prominent in countries located in the immediate vicinity of the euro area. In particular, the paper provides ample evidence that the City of London plays a key role in the market for euro-denominated bonds issued by non-euro area residents, be it on the supply side, the demand side or as an intermediary. When it comes to demand, the paper shows that the euro’s reach in the rest of the world has been more limited thus far, notwithstanding some recent interest in Asia. Finally, the paper finds evidence that the international role of the euro has, to some extent, been driven by the euro area itself, with euro area investors being significant purchasers of euro-denominated bonds issued by non-euro area residents.
    Date: 2004–07

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