nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒01‒29
seventeen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Structural changes in the US economy: Bad Luck or Bad Policy? By Fabio Canova; Luca Gambetti
  2. Optimal Stabilization Policy with Flexible Prices By Aleksander Berentsen; Christopher Waller
  3. Has Monetary Policy Become More Effective? By Boivin, Jean; Giannoni, Marc
  4. Monetary Policy and the evolution of US economy By Fabio Canova
  5. Inflation Targeting Arrangements in Asia: Exploring the Role of the Exchange Rate By Tony Cavoli; Ramkishen S. Rajan
  6. Monetary Policy in the Euro area: Lessons from 5 years of ECB and implications for Turkey By Fabio Canova; Carlo Favero
  7. Credit Cards and Monetary Policy: Are Households still Liquidity-Constrained? By Ryan R. Brady
  8. Optimal Inflation Stabilization in a Medium-Scale Macroeonomic Model By Schmitt-Grohé, Stephanie; Uribe, Martín
  9. The transmission of US shocks to Latin America By Fabio Canova
  10. Following the yellow brick road? The Euro, the Czech Republic, Hungary and Poland By Jesús Rodríguez López; José Luis Torres Chacón
  11. Central Bank Independence, Accountability and Transparency: Complements or Strategic Substitutes? By Hughes Hallett, Andrew; Libich, Jan
  12. Bubbles, Collateral and Monetary Equilibrium By Aloisio Araujo; Mário R. Páscoa; Juan Pablo Torres-Martínez
  13. Five-Equation Macroeconomics: A Simple View of the Interactions Between Fiscal Policy and Monetary Policy By Kirsanova, Tatiana; Stehn, Sven Jari; Vines, David
  14. Price Differentials in Monetary Unions: The Role of Fiscal Shocks By Fabio Canova; Evi Pappa
  15. The Finnish EMU Buffers and the Labour Market under Asymmetric Shocks By Kari Alho
  16. Time Series Factor Analysis with an Application to Measuring Money By Meijer, Erik; Gilbert, Paul D.
  17. Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard, 1870-1939 By Chernyshoff, Natasha; Jacks, David S.; Taylor, Alan M

  1. By: Fabio Canova; Luca Gambetti
    Abstract: This paper investigates the relationship between time variations in output and inflation dynamics and monetary policy in the US. There are changes in the structural coefficients and in the variance of the structural shocks. The policy rules in the 1970s and 1990s are similar as is the transmission of policy disturbances. Inflation persistence is only partly a monetary phenomena. Variations in the systematic component of policy have limited effects on the dynamics of output and inflation. Results are robust to alterations in the auxiliary assumptions.
    Keywords: Monetary policy, Inflation persistence, Transmission of shocks, Time varying coefficients structural VARs
    JEL: E52 E47 C53
    Date: 2003–05
  2. By: Aleksander Berentsen; Christopher Waller
    Abstract: We construct a dynamic stochastic general equilibrium model to study optimal monetary stabilization policy. Prices are fully flexible and money is essential for trade. Our main result is that if the central bank pursues a long-run price path, thereby controlling inflation expectations, it can improve welfare by stabilizing short-run aggregate shocks. The optimal policy involves smoothing nominal interest rates which effectively smooths consumption across states. Failure to follow a long-run price path makes any stabilization attempt ineffective.
    JEL: E40 E50
    Date: 2005
  3. By: Boivin, Jean; Giannoni, Marc
    Abstract: We investigate the implications of changes in the structure of the US economy for monetary policy effectiveness. Estimating a VAR over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.
    Keywords: dynamic general equilibrium model; habit formation; indeterminacy; minimum distance estimation; transmission of monetary policy; vector autoregression
    JEL: C32 E3 E52
    Date: 2006–01
  4. By: Fabio Canova
    Abstract: This paper investigates the relationship between monetary policy and the changes experienced by the US economy using a small scale New-Keynesian model. The model is estimated with Bayesian techniques and the stability of policy parameter estimates and of the transmission of policy shocks examined. The model fits well the data and produces forecasts comparable or superior to those of alternative specifications. The parameters of the policy rule, the variance and the transmission of policy shocks have been remarkably stable. The parameters of the Phillips curve and of the Euler equations are varying.
    Keywords: New Keynesian model, Bayesian methods, Monetary policy, Great Inflation
    JEL: E52 E47 C53
    Date: 2004–03
  5. By: Tony Cavoli (School of Economics, University of Adelaide, Australia); Ramkishen S. Rajan (School of Public Policy, George Mason University, VA, USA)
    Abstract: Since the Asian crisis it has been recognized that exchange rate and monetary policy strategies must involve a “fairly high” element of flexibility rather than a single-minded defense of a particular rate. One way this flexibility might be introduced is by a country adopting an open economy inflation targeting arrangement. This particular policy regime has been officially implemented in several Asian countries in recent years, but the normative implications of inflation targeting appear at times to be at odds with the requirements regarding exchange rate flexibility. This paper presents an analysis of some of the issues relevant to Asian central banks implementing an inflation targeting arrangement with specific focus on the role of the exchange rate.
    Keywords: Asia, exchange rate regime, inflation targeting arrangement, fear of floating, monetary policy rule, pass through
  6. By: Fabio Canova; Carlo Favero
    Abstract: We examine monetary policy in the Euro area from both theoretical and empirical perspectives. We discuss what theory tells us the strategy of Central banks should be and contrasts it with the one employed by the ECB. We review accomplishments (and failures) of monetary policy in the Euro area and suggest changes that would increase the correlation between words and actions; streamline the understanding that markets have of the policy process; and anchor expectation formation more strongly. We examine the transmission of monetary policy shocks in the Euro area and in some potential member countries and try to infer the likely effects occurring when Turkey joins the EU first and the Euro area later. Much of the analysis here warns against having too high expectations of the economic gains that membership to the EU and Euro club will produce.
    Keywords: Pillars, Communication, Transmission, EU newcomers
    JEL: C11 E12 E32 E62
    Date: 2005–03
  7. By: Ryan R. Brady (United States Naval Academy)
    Abstract: Liquidity-constrained households who borrow heavily on credit cards may be an important propagation source for the transmission of monetary policy, through rising interest rates or through credit channels. However, credit card use also suggests that households are more liquid, which may dampen the propagation of monetary policy. In this paper I estimate non-linear impulse response functions for credit card data from 1990 to 2003 to monetary policy shocks. The data suggests that, 1) households in the aggregate are not liquidity-constrained, and 2) credit cards slow the propagation of monetary policy.
    Date: 2006–01
  8. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: This paper characterizes Ramsey-optimal monetary policy in a medium-scale macroeconomic model that has been estimated to fit well postwar US business cycles. We find that mild deflation is Ramsey optimal in the long run. However, the optimal inflation rate appears to be highly sensitive to the assumed degree of price stickiness. Within the window of available estimates of price stickiness (between 2 and 5 quarters) the optimal rate of inflation ranges from -4.2 percent per year (close to the Friedman rule) to -0.4 percent per year (close to price stability). This sensitivity disappears when one assumes that lump-sum taxes are unavailable and fiscal instruments take the form of distortionary income taxes. In this case, mild deflation emerges as a robust Ramsey prediction. In light of the finding that the Ramsey optimal inflation rate is negative, it is puzzling that most inflation-targeting countries pursue positive inflation goals. We show that the zero bound on the nominal interest rate, which is often cited as a rationale for setting positive inflation targets, is of no quantitative relevance in the present model. Finally, the paper characterizes operational interest-rate feedback rules that best implement Ramsey-optimal stabilization policy. We find that the optimal interest-rate rule is active in price and wage inflation, mute in output growth, and moderately inertial.
    Keywords: interest rate rules; nominal rigidities; Ramsey policy; real rigidities
    JEL: E52 E61 E63
    Date: 2006–01
  9. By: Fabio Canova
    Abstract: I study whether and how US shocks are transmitted to eight Latin American countries. US shocks are identified using sign restrictions and treated as exogenous with respect to Latin American economies. Posterior estimates for individual and average effects are constructed. US monetary shocks produce significant fluctuations in Latin America, but real demand and supply shocks do not. Floaters and currency boarders display similar output but different inflation and interest rate responses. The financial channel plays a crucial role in the transmission. US disturbances explain important portions of the variability of Latin American macrovariables, producing continental cyclical fluctuations and, in two episodes, destabilizing nominal exchange rate effects. Policy implications are discussed.
    Keywords: Shocks, inflation
    Date: 2003–05
  10. By: Jesús Rodríguez López (Universidad Pablo de Olavide de Sevilla); José Luis Torres Chacón (Universidad de Málaga)
    Abstract: This paper uses a combination of VAR and bootstrapping techniques to analyze whether the exchange rates of some New Member States of the EU have been used as output stabilizers (those of the Czech Republic, Hungary and Poland), during 1993-2004. This question is important because it provides prior insights on the costs and benefits from entering the European Monetary Union (EMU). For these countries, joining the EMU is not optional but mandatory, although there is not a definite deadline. Thereby, if the exchange rate works as a shock absorber, monetary independence could be retained for a longer period. Our main finding is that the exchange rate could be a stabilizing tool in Poland and the Czech Republic, although in Hungary it appears as a propagator of shocks. Also, in these three countries, demand and monetary shocks account for most of the variability in both nominal and real exchange rates.
    Keywords: EMU, exchange rate, Structural VAR, stationary bootstraps
    JEL: C31 F31 F33
    Date: 2006
  11. By: Hughes Hallett, Andrew; Libich, Jan
    Abstract: The paper incorporates three institutional design features into a Kydland-Prescott, Barro-Gordon monetary policy game. It shows that goal-independence and goal-transparency (an explicit inflation target) at the central bank are substitute ‘commitment technologies’ that reduce inflation and build credibility. In addition, goal-transparency is shown to be socially superior as it also lowers public’s monitoring cost. Nevertheless, independent central bankers are less likely to embrace it if they perceive public scrutiny (accountability) as intrusive. Combining these findings implies that both goal-transparency and accountability will be negatively related to goal-independence for which we present empirical support using established indices. Our analysis further suggests that, to avoid an inferior equilibrium with opaque objectives and a ‘democratic deficit’, institutional reforms should follow the Bank of England scenario, in which an explicit inflation target is first legislated and only then instrument (but not goal) independence granted.
    Keywords: accountability; central bank independence; inflation targeting; monitoring; transparency
    JEL: C72 E52 E61
    Date: 2006–01
  12. By: Aloisio Araujo; Mário R. Páscoa; Juan Pablo Torres-Martínez
    Date: 2006–01–24
  13. By: Kirsanova, Tatiana; Stehn, Sven Jari; Vines, David
    Abstract: This paper studies the interactions of fiscal and monetary policy when they stabilise a single economy against shocks in a dynamic setting. We assume that fiscal and monetary policies both stabilise the economy only by causing changes to aggregate demand. Our findings are as follows. If the both policymakers are benevolent, then the best outcome is achieved when the fiscal authority allows monetary policy to perform nearly all of the burden of stabilising the economy. If the monetary authorities are benevolent, but the fiscal authorities have distorted objectives, then a Nash equilibrium will result in large welfare losses: unilateral efforts by each authority to stabilise the economy will result in a rapid accumulation of public debt. However, if the monetary authorities are benevolent and the fiscal authorities have distorted objectives, but there is a regime of fiscal leadership, then the outcome will be very nearly as good as it is in the regime in which both policymakers are benevolent.
    Keywords: fiscal policy; macroeconomic stabilisation; monetary policy
    JEL: E52 E61 E63
    Date: 2006–01
  14. By: Fabio Canova; Evi Pappa
    Abstract: We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of deficits and output and construct two estimates for structural price differentials dynamics which optimally weight the information contained in the data for all units. Fiscal shocks explain between 14 and 23 percent of the variability of price differentials both in the US and in the EU. On average, expansionary fiscal disturbances produce positive price differential responses while distortionary balance budget shocks produce negative price differential responses. In a number of units, price differential responses to expansionary fiscal shocks are negative. Spillovers and labor supply effects partially explain this pattern while geographical, political, and economic indicators do not.
    Keywords: Price differentials, Fiscal policy, Monetary unions, Bayesian methods
    JEL: E3 E5 H7
    Date: 2005–06
  15. By: Kari Alho
    Date: 2004–05–25
  16. By: Meijer, Erik; Gilbert, Paul D. (Groningen University)
    Abstract: Time series factor analysis (TSFA) and its associated statistical theory is developed. Unlike dynamic factor analysis (DFA), TSFA obviates the need for explicitly modeling the process dynamics of the underlying phenomena. It also differs from standard factor analysis (FA) in important respects: the factor model has a nontrivial mean structure, the observations are allowed to be dependent over time, and the data does not need to be covariance stationary as long as differenced data satisfies a weak boundedness condition. The effects on the estimation of parameters and prediction of the factors is discussed. The statistical properties of the factor score predictor are studied in a simulation study, both over repeated samples and within a given sample. Some apparent anomalies are found in simulation experiments and explained analytically.
    Date: 2005
  17. By: Chernyshoff, Natasha; Jacks, David S.; Taylor, Alan M
    Abstract: Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? Supporters thought so, critics thought not, and theory offers ambiguous messages. A hard exchange-rate regime such as the gold standard might limit monetary shocks if it ties the hands of policy-makers. But any decision to forsake exchange-rate flexibility might compromise shock absorption in a world of real shocks and nominal stickiness. A simple model shows how a lack of flexibility can be discerned in the transmission of terms of trade shocks. Evidence on the relationship between real exchange rate volatility and terms of trade volatility from the late nineteenth and early twentieth century exposes a dramatic change. The classical gold standard did absorb shocks, but the interwar gold standard did not, and this historical pattern suggests that the interwar gold standard was a poor regime choice.
    Keywords: gold standard
    JEL: F33 F41 N10
    Date: 2006–01

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