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on Monetary Economics |
| By: | Petra M. Geraats; Sylvester C.W. Eijffinnger; Carin A.B. van der Cruijsen |
| Abstract: | Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoreticalmodels is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental e¤ect on interest rates. |
| Keywords: | central bank transparency; monetary policy; interest rates. |
| JEL: | E52 E58 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:085&r=mon |
| By: | Mariano Kulish (Reserve Bank of Australia) |
| Abstract: | This paper studies two roles that long-term nominal interest rates can play in the conduct of monetary policy in a New Keynesian model. The first allows long-term rates to enter the reaction function of the monetary authority. The second considers the possibility of using long-term rates as instruments of policy. It is shown that in both cases a unique rational expectations equilibrium exists. Reacting to movements in long yields does not improve macroeconomic performance as measured by the loss function. However, long-term rates turn out to be better instruments when the relative concern of the monetary authority for inflation volatility is high. |
| Keywords: | interest rates, monetary policy |
| Date: | 2005–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:635&r=mon |
| By: | Helge Berger (Free University Berlin, Germany and CESifo, Munich, Germany); Jakob de Haan (University of Groningen, The Netherlands and CESifo, Munich, Germany); Jan-Egbert Sturm (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | We examine the role of money in the policies of the ECB, using introductory statements of the ECB President at the monthly press conferences during 1999-2004. Over time, the relative amount of words devoted to the monetary analysis has decreased. Our analysis of indicators of the monetary policy stance suggests that developments in the monetary sector, while somewhat more important in the later half of the sample, only played a minor role most of the time. Our estimates of ECB interest rate decisions suggest that the ECB’s words (monetary-sector based policy intensions) are not an important determinant of its actions. |
| Keywords: | ECB, communication, monetary policy |
| JEL: | E58 E52 E43 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:06-125&r=mon |
| By: | Agnes Benassy-Quere; Edouard Turkisch |
| Abstract: | In this paper, we provide an assessment of the rotation rule decided by the European Council for the functioning of the ECB Governing council after EMU enlargement. Desired interest rates by each member of the Governing council are calculated on the basis of Fisher, truncated Taylor and Taylor rules successively, and on the basis of a convergence of both GDP per capita and price levels within the EU in 30 years. Then, various decision rules are simulated. We show that moving from the “old” rule (where each member of the Governing council has a vote at each meeting) to the “new” one (where, at a given meeting, only 15 national governors have a vote) does not have much impact on the decisions made by the Governing council in an enlarged Eurozone. However, should rotations be relatively infrequent, the system could end up close to a constituency system. In this case, core Euro12 countries could be better off in a Euro25 than in the Euro12, because they would be in the position of imposing lower interest rates. However, core Euro12 would be worse off in a Euro22 compared to a Euro12 because high inflation countries would be able to impose higher interest rates. On the whole, in a Euro25, the (fast) rotation system which was decided by the European Council appears acceptable by all Euro members because it is never the worst system. However, full centralisation (where the choice of the interest rate is left to the Executive board) would deliver the same results, with much lower transaction costs. |
| Keywords: | ECB; EMU; enlargement; monetary policy; voting |
| JEL: | E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2005-20&r=mon |
| By: | Marwan Elkhoury (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | This paper is an empirical research of a monetary policy rule for a small open economy model, taking Switzerland as a case-study. A time-varying parameter model of a monetary policy reaction function is proposed to integrate various trade-offs to be made about various macroeconomic variables -- inflation, the output gap and the real exchange rate gap. The Kalman filter estimations of the time-varying parameters shows how rational economic agents combine past and new information to make new expectations about the state variables. The uncertainty created by the time-varying parameter model, and estimated by the conditional forecast error and conditional variance, is decomposed into two components, the uncertainty related to the time-varying parameters and the uncertainty related to the purely monetary shock. Most of the monetary shock uncertainty comes from the time-varying parameters and not from the pure monetary shock. The Lucas and Friedman hypotheses about the impact of uncertainty on output are revisited, using a conditional variance to test them. Both hypothesis are confirmed, using the one-step ahead conditional variance of the monetary shock. An inverse relation between the magnitude of the response on output to the nominal shock and the variance of this shock is found, as Lucas had predicted. Moreover, there is a direct negative impact of uncertainty which reduces output in the long-term. |
| Keywords: | time-varying parameter model; Taylor rule; Kalman Filter. |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp01-2006&r=mon |
| By: | Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Webb, Bruce (Cardiff Business School) |
| Abstract: | Macro models generally assume away heterogeneous welfare in assessing policies. We investigate here within two aggregative models - one with a representative agent, the other a long-used forecasting model of the UK - whether allowing for differences in welfare functions (specifically between those in continuous employment and those with frequent unemployment spells) alters the rankings of monetary policies. We find that it does but that a set of policies (money supply targeting implemented by money supply control) can be found that are robust in the sense of avoiding very poor outcomes for either of the two groups. |
| Keywords: | Robustness; heterogenous welfare; money supply rules; interest rate setting; price level targeting |
| JEL: | E52 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2006/12&r=mon |
| By: | Jagjit S. Chadha; Peter Macmillan; Charles Nolan |
| Abstract: | Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was ‘news’ and illustrate that the reduction in medium and long term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policymaker’s aversion to inflation deviations from target. We suggest therefore central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation. |
| Keywords: | Central bank independence; preferences; yield curve. |
| JEL: | E4 E5 N2 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0602&r=mon |
| By: | Jana Hromcová (Universitat de Girona) |
| Abstract: | A stochastic growth model with money introduced via a cash-in-advance constraint is used to analyze the behaviour of the income velocity of real monetary balances. Agents can purchase consumption goods only using government issued money and capital is a credit good. The cash-in-advance constraint may become nonbinding because of the uncertainty about the realization of the state of the economy. Changes in the income velocity of money due to a precautionary money demand are studied. We find that despite the precautionary money demand does not introduce significant changes into the volatility of the income velocity, its presence can alter the relationship between the growth rate of money supply and the income velocity. |
| Keywords: | Cash-in-advance; Income velocity; Precautionary money demand. |
| JEL: | E40 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-21&r=mon |
| By: | Raabe Katharina; Arnold Ivo J.M.; Kool Clemens J.M. (METEOR) |
| Abstract: | This paper presents evidence on the industry effects of bank lending in Germany and asks whether bank lending to single industries depends on industry-specific bank credit demand or on monetary policy as determinant of bank credit supply. To this end, we estimate individual bank lending functions for 17 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models illustrates that industry bank lending responds more to changes in industry-specific bank credit demand than to changes in monetary policy. We report evidence in favor of a credit channel through bank lending, but find the bank lending effects of monetary policy to be very sensitive to the choice of industry. The empirical results, hence, lend strong support to the existence of industry effects of bank lending. In view of this finding, we conclude that bank lending growth and monetary policy effectiveness crucially depend on the industry composition of bank credit portfolios. |
| Keywords: | monetary economics ; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2006005&r=mon |
| By: | Anna Alberini (University of Maryland and Fondazione Eni Enrico Mattei); Aline Chiabai (Fondazione Eni Enrico Mattei) |
| Abstract: | We use data from a survey of residents of five Italian cities conducted in late Spring 2004 to estimate the discount rates implicit in (a) money v. future risk reductions and (b) money v. money tradeoffs. We find that the mean personal discount rate is 2% in (a) and 8.7% in (b). The latter is lower than the discount rates estimated in comparable situations in many recent studies, greater than market interest rates in Italy at the time, and exhibits modest variation with age and gender. The discount rate implicit in money v. risk tradeoffs is in line with estimates from studies in the US and Europe, and does not depend on observable individual characteristics. |
| Keywords: | Value of a statistical life, Latent risk reductions, Individual discount rates, Stated preference questions |
| JEL: | J17 I18 D91 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:fem:femwpa:2006.8&r=mon |
| By: | Christian Hellwig |
| Date: | 2004–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:338&r=mon |