nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒04‒29
35 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps By Ragna Alstadheim; Dale Henderson
  2. Term Structure Rules for Monetary Policy By Mariano Kulish
  3. Which inflation to target? A small open economy with sticky wages indexed to past inflation By Alessia Campolmi
  4. Monetary and Fiscal Policy Interactions: the Impact on the Term Structure of Interest Rates. By M. Marzo
  5. An Equilibrium Approach to the Term Structure of Interest rates with the Interaction between Monetary and Fiscal Policy. By M. Marzo
  6. Asymmetric Information and Monetary Policy in Common Currency Areas. By L. Bottazzi; P. Manasse
  7. The road to price stability By Athanasios Orphanides
  8. Evaluating Monetary Policy Regimes: the Role of Nominal Rigidities. By M. Marzo
  9. On the Dynamic Consistency of Optimal Monetary Policy By R. Cellini; L. Lambertini
  10. Inflation targeting under imperfect knowledge By Athanasios Orphanides; John C. Williams
  11. Interest Rate Rules and Inflation Targeting in Three Transition Countries. By R. Golinelli; R. Rovelli
  12. Fiscal multipliers and policy coordination By Gauti B. Eggertsson
  13. Money and modern banking without bank runs By David R. Skeie
  14. An Idealized View of Financial Intermediation By Carolyn Sissoko
  15. AN ASIAN MONETARY UNION? By Hsiao Chink Tang
  16. Optimal Fiscal Stabilization Policy With Credible Central Bank Independence. By L. Lambertini; R. Rovelli
  17. The Friedman Rule: A Reinterpretation By Carolyn Sissoko
  18. The daily liquidity effect By Daniel L. Thornton
  19. Capital Flows and Monetary Policy By Javier Guillermo Gómez
  20. Interpreting Euro Area Inflation at High and Low Frequencies By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  21. How Much Information should Interest Rate-Setting Central Banks Reveal? By Pierre Gosselin; Aileen Lotz; Charles Wyplosz
  22. Monetary and fiscal policy coordination and macroeconomic stabilization. A theoretical analysis. By L. Lambertini; R. Rovelli
  23. Do interactions between political authorities and central banks influence FX interventions? Evidence from Japan By Oscar Bernal
  24. Volatility Regimes in Central and Eastern European Countries' Exchange Rates By Frömmel, Michael
  25. Another look at long-horizon uncovered interest parity By Antonio Montañés; Marcos Sanso-Navarro
  26. Short-Term Credit: A Monetary Channel Linking Finance to Growth By Carolyn Sissoko
  28. The Dynamics of European Inflation Expectations By Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
  29. Swedish Intervention and the Krona Float, 1993-2002 By Humpage, Owen F.; Ragnartz, Javiera
  30. Chinese Exchange Rate Regimes and the Optimal Basket Weights for the Rest of East Asia By Etsuro Shioji
  31. Transparency, expectations, and forecasts By Andrew Bauer; Robert A. Eisenbeis; Daniel F. Waggoner; Tao Zha
  32. The yield curve and predicting recessions By Jonathan H. Wright
  33. Determinants of Interest Margins in Colombia By Dairo Estrada; Esteban Gómez; Inés Orozco
  34. Uncovering Yield Parity: A new insight into the UIP puzzle through the stationarity of long maturity forward rates By Zsolt Darvas; Gábor Rappai; Zoltán Schepp
  35. Expectations and contagion in self-fulfulling currency attacks By Todd Keister

  1. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Dale Henderson (Federal Reserve Board)
    Abstract: We consider standard monetary-policy rules with inflation-rate targets and interest-rate or money-growth instruments using a flexible-price, perfect-foresight model. There is always a locally-unique target equilibrium. There are also below-target equilibria (BTE) with inflation always below target and constant asymptotically approaching or eventually reaching a below-target value. Liquidity traps are neither necessary or sufficient for BTE which can arise if monetary policy keeps the interest rate above a lower bound. We construct monetary-policy rules that preclude BTE, some which are monotonic in inflation but all of which are non-differentiable at a point. For standard monetary-policy rules, there are plausible fiscal policies that insure uniqueness by precluding BTE; those policies exclude perpetual surpluses and, possibly, perpetual balanced budgets.
    Keywords: Zero bound, liquidity trap, inflation targeting, determinancy
    JEL: E31 E41 E52 E62
    Date: 2006–04–18
  2. By: Mariano Kulish (Reserve Bank of Australia)
    Abstract: This paper studies two types of interest rate rules that involve long-term nominal interest rates in the context of a New Keynesian model. The first type considers the possibility of adding longer-term rates to the list of variables the central bank reacts to in setting its short-term rate. The second type considers Taylor-type rules that are expressed in terms of interest rates of different maturities, which are operationally equivalent to more complex rules expressed in terms of the short-term rate. It is shown that both types of rules can give rise to a unique rational expectations equilibrium in large regions of the policy-parameter space. The normative evaluation shows that under certain preferences of the monetary authority, policy rules of the second type produce better results than the standard Taylor-type rule.
    Keywords: term structure of interest rates; monetary policy rules
    JEL: E43 E52 E58
    Date: 2006–04
  3. By: Alessia Campolmi
    Abstract: In a closed economy context there is common agreement on price inflation stabilization being one of the objects of monetary policy. Moving to an open economy context gives rise to the coexistence of two measures of inflation: domestic inflation (DI) and consumer price inflation (CPI). Which one of the two measures should be the target variable? This is the question addressed in this paper. In particular, I use a small open economy model to show that once sticky wages indexed to past CPI inflation are introduced, a complete inward looking monetary policy is no more optimal. I first, derive a loss function from a second order approximation of the utility function and then, I compute the fully optimal monetary policy under commitment. Then, I use the optimal monetary policy as a benchmark to compare the performance of different monetary policy rules. The main result is that once a positive degree of indexation is introduced in the model the rule performing better (among the Taylor type rules considered) is the one targeting wage inflation and CPI inflation. Moreover this rule delivers results very close to the one obtained under the fully optimal monetary policy with commitment.
    Keywords: Inflation, open economy, sticky wages, indexation
    JEL: E12 E52
    Date: 2006–03
  4. By: M. Marzo
  5. By: M. Marzo
  6. By: L. Bottazzi; P. Manasse
  7. By: Athanasios Orphanides
    Abstract: Nearly a quarter-century after Paul Volcker's declaration of war on inflation on October 6, 1979, Alan Greenspan declared that the goal had been achieved. Drawing on the extensive historical record, I examine the views of Chairmen Volcker and Greenspan on some aspects of the evolving monetary policy debate and explore some of the distinguishing characteristics of the disinflation.
    Keywords: Anti-inflationary policies ; Monetary policy ; Greenspan, Alan ; Volcker, Paul A.
    Date: 2006
  8. By: M. Marzo
  9. By: R. Cellini; L. Lambertini
  10. By: Athanasios Orphanides; John C. Williams
    Abstract: A central tenet of inflation targeting is that establishing and maintaining well-anchored inflation expectations are essential. In this paper, we reexamine the role of key elements of the inflation targeting framework towards this end, in the context of an economy where economic agents have an imperfect understanding of the macroeconomic landscape within which the public forms expectations and policymakers must formulate and implement monetary policy. Using an estimated model of the U.S. economy, we show that monetary policy rules that would perform well under the assumption of rational expectations can perform very poorly when we introduce imperfect knowledge. We then examine the performance of an easily implemented policy rule that incorporates three key characteristics of inflation targeting: transparency, commitment to maintaining price stability, and close monitoring of inflation expectations, and find that all three play an important role in assuring its success. Our analysis suggests that simple difference rules in the spirit of Knut Wicksell excel at tethering inflation expectations to the central bank's goal and in so doing achieve superior stabilization of inflation and economic activity in an environment of imperfect knowledge.
    Date: 2006
  11. By: R. Golinelli; R. Rovelli
  12. By: Gauti B. Eggertsson
    Abstract: This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is "goal independent," the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression.
    Keywords: Fiscal policy ; Government spending policy ; Deficit financing ; Monetary policy
    Date: 2006
  13. By: David R. Skeie
    Abstract: In the literature, bank runs take the form of withdrawals of real demand deposits that deplete a fixed reserve of goods in the banking system. However, in a modern banking system, large withdrawals take the form of electronic payments that shift balances among banks within a clearinghouse system, with no analog of a depletion of a scarce reserve. In a model of nominal demand deposits repayable in money within a clearinghouse, I show that interbank lending and monetary prices imply that traditional bank runs do not occur. This finding suggests that deposit insurance may not be needed to prevent bank runs in a modern economy.
    Keywords: Financial crises ; Clearinghouses (Banking) ; Bank deposits ; Bank reserves
    Date: 2006
  14. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This paper develops a monetary model based on a standard infinite horizon general equilibrium endowment economy by relaxing the general equilibrium assumption that every agent buys and sells simultaneously. The paper finds that fiat money can implement a Pareto optimum only if taxes are type-specific. We then consider intermediated money by assuming that financial intermediaries whose liabilities circulate as money have an important identifying characteristic: they are widely viewed as default-free. The paper demonstrates that default-free intermediaries who issue credit cards to consumers can resolve the monetary problem without type-specific policy. We argue that our idealized financial environment is a starting point for studying the monetary use of credit.
    JEL: E5
    Date: 2006–03
  15. By: Hsiao Chink Tang
    Abstract: This study empirically examines whether a group of 12 Asian countries is suitable to form an Asian Monetary Union (AMU). The criteria of suitability are based on the Optimum Currency Area (OCA) literature whereby countries experiencing symmetrical shocks, have smaller size of shock and faster speed of adjustment are considered as potentially good partners in a monetary union. The Blanchard and Quah (BQ) structural vector autoregression (SVAR) methodology is used to identify the demand and supply shocks. The overall finding provides no support for the formation of a full-fledged AMU. Instead, what appears more feasible initially is the formation of smaller sub-groupings within the region.
    Date: 2006–04
  16. By: L. Lambertini; R. Rovelli
  17. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This note observes that in a simple infinite horizon economy with heterogeneous endowments and a cash-in-advance constraint the Friedman Rule holds, but can be implemented only with type-specific taxation. By contrast, if credit contracts are enforceable, the same allocation can be reached in equilibrium without type specific policy. The Friedman Rule is reinterpreted as a statement that fiat money is inferior to credit as a form of money.
    JEL: E4 E5
    Date: 2006–03
  18. By: Daniel L. Thornton
    Abstract: Motivated, on the one hand, by the belief that the Fed controls the short-term rate through open market operations, and on the other, by "the lack of convincing proof that this is what happens," Hamilton (1997) suggested that more convincing evidence of the liquidity effect could be obtained with the use of high-frequency (daily) data. Thornton*s (2001a) detailed analysis of Hamilton*s results and evidence using both Hamilton*s and an alternative methodology indicates a quantitatively unimportant daily liquidity effect. Recently, Carpenter and Demiralp (2006) report "clear evidence" of a daily liquidity effect using a more comprehensive reserve-supply-shock measure than that used by Hamilton. This paper investigates the daily liquidity effect using Carpenter and Demiralp*s new measure.
    Keywords: Interest rates ; Open market operations ; Monetary policy
    Date: 2006
  19. By: Javier Guillermo Gómez
    Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under different policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.
    Date: 2006–03–01
  20. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: Several authors have recently interpreted the ECB's two-pillar framework as separate approaches to forecast and analyse inflation at different time horizons or frequency bands. The ECB has publicly supported this understanding of the framework. This paper presents further evidence on the behaviour of euro area inflation using band spectrum regressions, which allow for a natural definition of the short and long run in terms of specific frequency bands, and causality tests in the frequency domain. The main finding is that variations in inflation are well explained by low-frequency movements of money and real income growth and high-frequency fluctuations of the output gap.
    Keywords: frequency domain; inflation; money growth; quantity theory; spectral regression
    JEL: C22 E3 E5
    Date: 2006–04
  21. By: Pierre Gosselin; Aileen Lotz; Charles Wyplosz (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to reveal its information. This paper extends their model to the more realistic case where the central bank must anyway convey some information by setting the interest rate. This situation radically changes the conclusions. In many cases, full transparency is socially optimal. In other instances the central bank can distill information to either manipulate private sector expectations in a way that reduces the common knowledge effect or to reduce the unavoidable information content of the interest rate. In no circumstance is the option of only setting the interest rate socially optimal.
    Keywords: Central Bank Transparency
    Date: 2006–04–10
  22. By: L. Lambertini; R. Rovelli
  23. By: Oscar Bernal (DULBEA, Université libre de Bruxelles, Brussels)
    Abstract: In the United States, Japan and the Euro Zone, FX interventions are institutionally decided by specific political authorities and implemented by central banks on their behalf. Bearing in mind that these specific political authorities and central banks might not necessarily pursue the same exchange rates objectives, the model proposed in this paper takes account explicitly of this institutional organisation to examine its effects on FX intervention activity. The empirical relevance of our theoretical model is assessed by developing a friction model on the Japanese experience between 1991 and 2004 which reveals how the magnitude of that country’s FX interventions is the outcome of the Japanese Ministry of Finance’s trade-off between attaining its own exchange rate target and one of the Bank of Japan’s.
    Keywords: Central banks; Foreign exchange interventions; Interactions; Friction models.
    JEL: E58 E61 F31 G15
    Date: 2006–04
  24. By: Frömmel, Michael
    Abstract: We investigate the exchange rate volatility of six Central and Eastern European countries (CEEC) between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching Model (Hamilton 1989). We discover switches between high and low volatility regimes which are consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture. Slovenia, finally, shows some kind of anticipation of the wide fluctuation margins in ERM2.
    Keywords: CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies
    JEL: E42 F31 F36
    Date: 2006–04
  25. By: Antonio Montañés; Marcos Sanso-Navarro
    Abstract: Long-horizon uncovered interest parity during the post-Bretton Woods era in the G7 countries is analyzed in this paper. The main di¤erence with previous studies relies in the use of cointegration methods due to the non-stationary behavior of the variables involved. Moreover, the consideration of structural breaks becomes a key element for this relationship to hold. These shifts are identi.ed as sharp changes in the time-varying risk premium as a consequence of turning points in monetary policy and exchange rates regimes. Finally, the robustness of the obtained results to recent developments in the Eurozone is checked.
  26. By: Carolyn Sissoko (Department of Economics, Occidental College)
    Abstract: This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The mechanism is based on an analysis of the late 18th century British environment. At this time the money supply was composed mainly of circulating private debt, which was liquid because of the intermediation of bankers. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright’s search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth. Because the growth rate of the economy is increasing in the quantity of credit in the economy, the model provides a theoretic explanation for the empirical findings of Levine, Loayza and Beck and Rousseau and Wachtel.
    JEL: E5 O3 O4
    Date: 2002–08
  27. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks’ decisions and their consequences.
    Date: 2006–04
  28. By: Jörg Döpke; Jonas Dovern; Ulrich Fritsche; Jirka Slacalek
    Abstract: We investigate the relevance of the Carroll's sticky information model of inflation expectations for four major European economies (France, Germany, Italy and the United Kingdom). Using survey data on household and expert inflation expectations we argue that the model adequately captures the dynamics of household inflation expectations. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Our baseline stationary estimation suggests that the average frequency of information updating for the European households is roughly once in 18 months. The vector error-correction model implies households update information about once a year.
    Keywords: Inflation expectations, sticky information, inflation persistence
    JEL: D84 E31
    Date: 2006
  29. By: Humpage, Owen F. (Research Department, Federal Reserve Bank of Cleveland); Ragnartz, Javiera (Handelsbanken Asset Management)
    Abstract: Using a set of standard success criteria, we show that Riksbank foreign-exchange interventions between 1993 and 2002 lacked forecast value; that is, the observed number of successes was not significantly greater—and usually substantially smaller—than the number one would anticipate given the martingale nature of exchange-rate movements. Under some success criteria, the Riksbank exhibited negative forecast value, implying that the market could have profited by taking a position opposite that of the bank. Moreover, the likelihood of success was independent of such conditioning factors as the amount of a transaction, the time lapses between interventions, or the number of foreign currencies involved. As such, Riksbank intervention could not operate through an expectations or signaling channel.
    Keywords: Intervention; Foreign-exchange rates; Swedish Riksbank; Krona
    JEL: F30 G15
    Date: 2006–04–01
  30. By: Etsuro Shioji
    Abstract: China has recently announced its intention to fundamentally reform its currency regime in the future. This paper studies how the country's choice of its exchange rate regime interacts with the rest of East Asia's choice. For that purpose, I build a four country new open economy macroeconomic model that consists of East Asia, China, Japan and the US. It is assumed that both East Asia and China peg their respective currencies to certain weighted averages of the Japanese yen and the US dollar. Each side takes the other's choice as given and chooses its own basket weight. The game is characterized by strategic complementarity. It is shown that the currency in which the traded goods prices are quoted plays an important role. The paper considers two alternative cases, the standard producer currency pricing (PCP) case and the vehicle currency pricing (VCP) case in which all the prices of traded goods are preset in the units of US dollars. In the PCP case, trade volume is the important determinant of the equilibrium basket weights, and the balances of trade are inconsequential. However, in the VCP case, trade balances between the four economies are shown to play an important role. Under VCP, and starting from realistic initial trade balances, the equilibrium basket weights far exceed what are implied by Japan's presence in international trade.
    Date: 2006–04
  31. By: Andrew Bauer; Robert A. Eisenbeis; Daniel F. Waggoner; Tao Zha
    Abstract: In 1994, the Federal Open Market Committee (FOMC) began to release statements after each meeting. This paper investigates whether the public’s views about the current path of the economy and of future policy have been affected by changes in the Federal Reserve’s communications policy as reflected in private sector’s forecasts of future economic conditions and policy moves. In particular, has the ability of private agents to predict where the economy is going improved since 1994? If so, on which dimensions has the ability to forecast improved? We find evidence that the individuals’ forecasts have been more synchronized since 1994, implying the possible effects of the FOMC’s transparency. On the other hand, we find little evidence that the common forecast errors, which are the driving force of overall forecast errors, have become smaller since 1994.
    Date: 2006
  32. By: Jonathan H. Wright
    Abstract: The slope of the Treasury yield curve has often been cited as a leading economic indicator, with inversion of the curve being thought of as a harbinger of a recession. In this paper, I consider a number of probit models using the yield curve to forecast recessions. Models that use both the level of the federal funds rate and the term spread give better in-sample fit, and better out-of-sample predictive performance, than models with the term spread alone. There is some evidence that controlling for a term premium proxy as well may also help. I discuss the implications of the current shape of the yield curve in the light of these results, and report results of some tests for structural stability and an evaluation of out-of-sample predictive performance.
    Keywords: Economic indicators ; Economic forecasting ; Interest rates
    Date: 2006
  33. By: Dairo Estrada; Esteban Gómez; Inés Orozco
    Abstract: This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saunders (1981), interest margins are modelled as a function of the pure spread and bank-specific institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly affected by credit institutions' inefficiency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be oriented towards creating the necessary market conditions for banks to enhance their efficiency.
    Date: 2006–02–01
  34. By: Zsolt Darvas; Gábor Rappai; Zoltán Schepp
    Abstract: Results and models of this paper are based on a strikingly new empirical observation: long maturity forward rates between bilateral currency pairs of the US, Germany, UK, and Switzerland are stationary. Based on this result, we suggest a new explanation for the UIP-puzzle maintaining rational expectations and risk neutrality. The model builds on the interaction of foreign exchange and fixed income markets. Ex ante short run and long run UIP and the EHTS is assumed. We show that ex post shocks to the term structure could explain the behavior of the nominal exchange rate including its volatility and the failure of ex post short UIP regressions. We present evidence on ex post validity of long run UIP and strikingly new evidence on the stationarity of the long forward exchange rates of major currencies. We set up, calibrate and simulate a stylized model that well captures the observed properties of spot exchange rates and UIP regressions of major currencies. We define the notion of yield parity and test its empirical performance for monthly series of major currencies with favorable results.
    Keywords: EHTS; forward discount bias; stationarity of long maturity forward rates; UIP; yield parity
    JEL: E43 F31
    Date: 2006–04
  35. By: Todd Keister
    Abstract: This paper presents a model in which currency crises can spread across countries as a result of the self-fulfilling beliefs of market participants. An incomplete-information approach is used to overcome many undesirable features of existing multiple-equilibrium explanations of contagion. If speculators expect contagion across markets to occur, they have an incentive to trade in both currency markets to take advantage of this correlation. These actions, in turn, link the two markets in such a way that a sharp devaluation of one currency will be propagated to the other market, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables that are broadly consistent with existing empirical evidence.
    Keywords: Financial crises ; Foreign exchange market ; Devaluation of currency
    Date: 2006

This nep-mon issue is ©2006 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.