nep-mon New Economics Papers
on Monetary Economics
Issue of 2005‒12‒14
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Political Pressures and Monetary Mystique By Petra M. Geraats
  2. The natural real interest rate and the output gap in the euro area: A joint estimation By Julien Garnier; Bjørn-Roger Wilhelmsen
  3. INFORMEDNESS OF ECONOMIC AGENTS AND THE QUANTITY THEORY OF MONEY By Stanley C. W. Salvary
  4. Money Demand in an EU Accession Country: A VECM Study of Croatia By Gillman, Max; Cziráky, Dario
  5. Expectations, Bond Yields and Monetary Policy By Albert Lee Chun
  6. The Incredible Volcker Disinflation By Marvin Goodfriend; Robert G. King
  7. Inflation Premium and Oil Price Volatility By Paul Castillo; Carlos Montoro; Vicente Tuesta
  8. A New Framework for Yield Curve, Output and Inflation Relationships By Leo Krippner
  9. THE ASYMMETRIC EFFECTS OF A COMMON MONETARY POLICY IN EUROPE By Guglielmo Maria Caporale; Alaa M. Soliman
  10. Measurement Bias in the Canadian Consumer Price Index By James Rossiter
  11. The Impact of the Strong Euro on the Real Effective Exchange Rates of the Two Francophone African CFA Zones By Ali Zafar
  12. Quantity, Quality, and Relevance: Central Bank Research, 1990-2003 By Pierre St-Amant; Greg Tkacz; Annie Guérard-Langlois; Louis Morel
  13. An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia By Marc-André Gosselin; Nicolas Parent

  1. By: Petra M. Geraats
    Abstract: Central bank independence and transparency have become best practice in monetary policy. This paper cautions that transparency about economic information may not be beneficial in the absence of central bank independence. The reason is that it reduces monetary uncertainty, which could make the government less inhibited to interfere with monetary policy. In fact, a central bank could use monetary mystique to obtain greater insulation from political pressures, even if the government faces no direct cost of overriding. As a result, economic secrecy could be beneficial and provide the central bank greater political independence.
    Keywords: Transparency, monetary policy, political pressures
    JEL: E58 E52 D82
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:cam:camdae:0557&r=mon
  2. By: Julien Garnier (European University Institute and University of Paris X-Nanterre); Bjørn-Roger Wilhelmsen (Norges Bank (Central Bank of Norway))
    Abstract: The notion of a natural real rate of interest, due to Wicksell (1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a consept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method recently suggested by T. Laubach and J. C. Williams to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s.
    Keywords: Real interest rate gap, output gap, Kalman filter, euro area
    JEL: C32 E43 E52 O40
    Date: 2005–12–06
    URL: http://d.repec.org/n?u=RePEc:bno:worpap:2005_14&r=mon
  3. By: Stanley C. W. Salvary
    Abstract: Historically, informedness of economic agents via price stability has been the rationale for the money supply rule derived from the Quantity Theory of Money. The monetarists place the emphasis on the level of the money supply in the determination of price level changes and a money supply rule is adopted as the means of informing agents of expected price level changes. This paper advances an alternative, to the monetarist explanation of the determination of the price level, which does not rely on changes in the supply of money but on changes in the composition of aggregate demand and supply. In the absence of monetary dislocation or revaluation, change in the general price level is attributed to the net effect of the realignment of relative prices. Further, it is argued that economic agents are better informed under the relativist approach than under the monetarist approach.
    Keywords: price instability, monetary policy, monetary authority, price signalling, fiscal policy, the endogeneity of money, the money supply, the rate of inflation, nominal interest rates, the velocity of money, repudiation of paper money, the supply of credit, 'fully informed agents'.
    JEL: E
    Date: 2005–12–07
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512005&r=mon
  4. By: Gillman, Max (Cardiff Business School); Cziráky, Dario
    Abstract: The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found and adjustment to the standard money demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate, as in the "pass-through" literature on exchange rates. The results provide a basis for inflaton rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank "inflation bias".
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:cdf:wpaper:2005/7&r=mon
  5. By: Albert Lee Chun (Stanford University)
    Abstract: Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage- free model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about in°ation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about in°ation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coe±cients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to in°ationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements.
    Keywords: term structure, interest rates, affine model, forward-looking policy rule, macro-finance, no-arbitrage, blue-chip forecasts, survey data
    JEL: E40 E43 E44 G12 D84 E52 E58
    Date: 2005–12–06
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512006&r=mon
  6. By: Marvin Goodfriend (Federal Reserve Bank of Richmond); Robert G. King (Department of Economics, Boston University)
    Abstract: The reduction in inflation that occurred in the early 1980s, when the Federal Reserve was headed by Paul Volcker, is arguably the most widely discussed and visible macroeconomic event of the last 50 years of U.S. history. Inflation had been dramatically rising, but under Volcker, the Fed first contained and then reversed this process. Using a simple modern macroeconomic model, we argue that the real effects of the Volcker disinflation were mainly due to its imperfect credibility. In our view, the observed upward volatility and subsequent stubborn elevation of long-term interest rates during the disinflation are key indicators of its imperfect credibility. Studying transcripts of the Federal Open Market Committee recently released to the public, we find — to our surprise — that Volcker and other FOMC members likewise regarded the long-term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy. Drawing from the transcripts and other contemporary sources, we consider the interplay of monetary targets, operating procedures, and credibility during the Volcker disinflation.
    Keywords: credibility, disinflation, monetary policy, Volcker
    JEL: E3 E4 E5 N1
    Date: 2005–06
    URL: http://d.repec.org/n?u=RePEc:bos:macppr:wp2005-007&r=mon
  7. By: Paul Castillo (Central Bank of Peru & London School of Economics); Carlos Montoro (Central Bank of Peru & London School of Economics); Vicente Tuesta (Central Bank of Peru)
    Abstract: In this paper we establish a link between the volatility of oil price shocks and a positive expected value of inflation in equilibrium (inflation premium). In doing so, we implement the perturbation method to solve up to second order a benchmark New Keynesian model with oil price shocks. In contrast with log linear approximations, the second order solution relaxes certainty equivalence providing a link between the volatility of shocks and inflation premium. First, we obtain analytical results for the determinants of the level of inflation premium. Thus, we find that the degree of convexity of both the marginal cost and the phillips curve is a key element in accounting for the existence of a positive inflation premium. We further show that the level of inflation premium might be potentially large even when a central bank implements an active monetary policy. Second, we evaluate numerically the second order solution of the model to explain the episode of high and persistent inflation observed in the US during the 70's. We find, in contrast with Clarida, Gali and Gertler (QJE, 2000), that even when there is no difference in the monetary policy rules between the pre-Volcker and post-Volcker periods, oil price shocks can generate high inflation levels during the 70's through a positive high level of inflation premium. As by product, our analysis shows that oil price shocks along with a distorted steady state can generate a time- varying endogenous trade-off between inflation and deviations of output from its efficient level. The previous trade-off, once uncertainty is taking into account, implies that a positive level of inflation premium is an optimal response to oil price shocks.
    Keywords: Phillips Curve, Second Order Solution, Oil Price shocks, Endogenous Trade off
    JEL: E52 E42 E12 C63
    Date: 2005–12–07
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512004&r=mon
  8. By: Leo Krippner (AMP Capital Investors)
    Abstract: This article develops a theoretically-consistent and easy-to-apply framework for interpreting, investigating, and monitoring the relationships between the yield curve, output, and inflation. The framework predicts that steady-state inflation plus steady-state output growth should be cointegrated with the long-maturity level of the yield curve as estimated by a arbitrage-free version of the Nelson and Siegel (1987) model, while the shape of the yield curve model from that model should correspond to the profile (that is, the timing and magnitude) of expected future inflation and output growth. These predicted relationships are confirmed empirically using 51 years of United States data. The framework may be used for monitoring expectations of inflation and output growth implied by the yield curve. It should also provide a basis for using the yield curve to value and hedge derivatives on macroeconomic data.
    Keywords: yield curve; term structure of interest rates; inflation; real output growth; Nelson and Siegel model; Heath-Jarrow-Morton framework
    JEL: E31 E32 E43
    Date: 2005–12–08
    URL: http://d.repec.org/n?u=RePEc:wai:econwp:05/07&r=mon
  9. By: Guglielmo Maria Caporale; Alaa M. Soliman
    Abstract: This paper examines the monetary transmission mechanism in eight EU member states. It provides useful empirical evidence for assessing the impact of a common monetary policy in the early stages of EMU, and enables us to form a view on how the regime change represented by EMU is likely to be translated into changes in policy multipliers in the various EU countries. The empirical analysis applies techniques recently developed by Wickens and Motto (2001) for identifying shocks by estimating a VECM for the endogenous variables, and a stationary VAR in first differences for the exogenous variables. Our findings suggest that there are significant differences between EU countries in the transmission mechanism of monetary policy.
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:bru:bruedp:05-20&r=mon
  10. By: James Rossiter
    Abstract: The consumer price index (CPI) is the most commonly used measure of inflation in Canada. As an indicator of changes in the cost of living, however, the CPI is subject to various types of measurement bias. The author updates previous Bank of Canada estimates of the bias in the Canadian CPI by examining four different sources of potential bias. He finds that the total measurement bias has increased only slightly in recent years to 0.6 percentage points per year, and is low when compared with other countries.
    Keywords: Inflation et prix; Cibles en matière d'inflation
    JEL: E31 E52
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:05-39&r=mon
  11. By: Ali Zafar (The World Bank)
    Abstract: The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–10–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3751&r=mon
  12. By: Pierre St-Amant; Greg Tkacz; Annie Guérard-Langlois; Louis Morel
    Abstract: The authors document the research output of 34 central banks from 1990 to 2003, and use proxies of research inputs to measure the research productivity of central banks over this period. Results are obtained with and without controlling for quality and for policy relevance. The authors find that, overall, central banks have been hiring more researchers and publishing more research since 1990, with the United States accounting for more than half of all published central bank research output, although the European Central Bank is rapidly establishing itself as an important research centre. When controlling for research quality and relevance, the authors generally find that there is no clear relationship between the size of an institution and its productivity. They also find preliminary evidence of positive correlations between the policy relevance and the scientific quality of central bank research. There is only very weak evidence of a positive correlation between the quantity of external partnerships and the productivity of researchers in central banks.
    Keywords: Central bank research
    JEL: E59
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:05-37&r=mon
  13. By: Marc-André Gosselin; Nicolas Parent
    Abstract: Over the past few years, the ability of the United States to finance its current account deficit has been facilitated by massive purchases of U.S. Treasury bonds and agency securities by Asian central banks. In this process, Asian central banks have accumulated large stockpiles of U.S.-dollar foreign exchange reserves. How far is the current level of reserves from that predicted by the standard macroeconomic determinants? The authors answer this question by using Pedroni's (1999) panel cointegration tests as the basis for the estimation of a long-run reserve-demand function in a panel of eight Asian emerging-market economies. This is a key innovation relative to the existing research on international reserves modelling: although the data are typically I(1), the literature ignores this fact and makes statistical inference based on unadjusted standard errors. While the authors find evidence of a positive structural break in the demand for international reserves by Asian central banks in the aftermath of the financial crisis of 1997-98, their results indicate that the actual level of reserves accumulated in 2003-04 was still in excess relative to that predicted by the model. Therefore, as long as historical relationships hold, a slowdown in the rate of accumulation of reserves is likely. This poses negative risks for the U.S. dollar. However, both the substantial capital losses that Asian central banks would incur if they were to drastically change their holding policy and the evidence that the currency composition of reserves evolves only gradually mitigate the risks of a rapid depreciation of the U.S. dollar triggered by Asian central banks.
    Keywords: Econometric and statistical methods; International topics; Financial stability
    JEL: C23 F31 G15
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:05-38&r=mon

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