nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒05‒13
ten papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. When does an interest rate path “look good”? Criteria for an appropriate future interest rate path By Jan F. Qvigstad
  2. Monetary Regimes, Labour Mobility and Equilibrium Employment By Larsson, Anna
  3. Measuring Monetary Policy for A Small Open Economy : Turkey By Hakan Berument
  4. Stabilization of Effective Exchange Rates Under Common Currency Basket Systems By Eiji Ogawa; Junko Shimizu
  5. Inflation Uncertainty and Interest Rates : Is The Fisher Relation Universal? By Hakan Berument; Hasan Olgun; Baþak Ceylan
  6. "Taylored" rules. Does one fit (or hide) all? By Cinzia Alcidi, Alessandro Flamini, Andrea Fracasso
  7. One World Money, Then and Now By Michael Bordo; Harold James
  8. Is There a Unit Root in East-Asian Short-Term Interest Rates? By Chew Lian Chua; Sandy Suardi
  9. Did inflation really soar after the euro cash changeover? Indirect evidence from ATM withdrawals By Paolo Angelini; Francesco Lippi
  10. Ineffective controls on capital inflows under sophisticated financial markets: Brazil in the nineties By Márcio Gomes Pinto Garcia; Bernando S. de M. Carvalho

  1. By: Jan F. Qvigstad (Norges Bank (Central Bank of Norway))
    Abstract: Svensson (2004) suggested that a monetary policy committee of a central bank (MPC) should “find an instrument-rate path such that projections of inflation and output gap ‘look good’.” Academic literature on monetary policy gives guidance as to what the words “look good” means. However, there is a need for a translation of the theoretical framework into concrete criteria when an MPC shall evaluate interest rate paths in practice. Six criteria for an appropri-ate interest rate path are presented. In the November 2005 Inflation Report, Norges Bank presented for the first time an optimal interest rate path including a fan chart illustrating the uncertainty of the forecast using these criteria. Ex-amples used in explaining the criteria are drawn from Norwegian experiences.
    Keywords: Forecasts, flexible inflation targeting, optimal monetary policy
    JEL: E42 E52 E58
    Date: 2006–05–09
  2. By: Larsson, Anna (Institute for International Economic Studies, Stockholm University)
    Abstract: This paper analyses the impact of the monetary regime on labour markets in a small open economy, by considering the game between large wage setters and an independent central bank in a two-sector model with potential labour mobility between sectors. Two monetary regimes are considered: membership in a monetary union and an inflation target combined with a flexible exchange rate. A key result is that when there is perfect labour mobility between sectors, the monetary regime does not matter for real wages, employment or profits. Moreover, introducing labour mobility substantially reduces wages and increases employment. Other findings are that when labour is immobile between sectors: (i) the real wage in the tradables sector is higher under inflation targeting than in a monetary union, while the reverse applies to the non-tradables sector; (ii) inflation targeting generates higher employment and profits than membership in a monetary union; and (iii) both workers and firms in the two sectors in general prefer inflation targeting to membership in a monetary union.
    Keywords: Inflation Targeting; Monetary Union; Equilibrium Employment; Labour Mobility
    JEL: E24 J50
    Date: 2006–05–02
  3. By: Hakan Berument
    Date: 2005
  4. By: Eiji Ogawa; Junko Shimizu
    Abstract: We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others.
    JEL: E6 F3 F4
    Date: 2006–05
  5. By: Hakan Berument; Hasan Olgun; Baþak Ceylan
    Date: 2006
  6. By: Cinzia Alcidi, Alessandro Flamini, Andrea Fracasso (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Modern monetary policymakers consider a huge amount of information to evaluate events and contingencies. Yet most research on monetary policy relies on simple instrument rules and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We investigate the way the coefficients of the Taylor-type rules change over time according to the evolution of general economic conditions. We model the Federal Reserve reaction function during the Greenspan’s tenure as a Logistic Smoothing Transition Regime model in which a series of economic meaningful transition variables drive the transition across monetary regimes. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Accordingly, an estimated linear Taylor-type reaction function tends to resemble the rule adopted in the longest regime. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules. These latter, by hiding the specific rules at work in the various finer regimes, lose utility directly with the uncertainty in the economy.
    Keywords: Instrument Rules, LSTR, Monetary Policy Regime, Risk Management, Taylor Rule
    Date: 2005–09–01
  7. By: Michael Bordo; Harold James
    Abstract: The case for monetary simplification and unification has been made since the middle of the nineteenth century. It rests on four principal arguments ;reduced transaction costs; establishing credibility; preventing bad policy in other states; political integration via money. In this paper we argue that the case for monetary integration is becoming increasingly less persuasive. In making our case we posit a different concept of money to the one that underlay the nineteenth century discussions which we term "Newtonian" since it was based on the assumption of a single reference external to the state reflected in the definition of value in terms of precious metals. In the twentieth century, views of money have shifted to a more " Einsteinian" or relativistic conception. Measures of value that move relative to each other are helpful in terms of dealing with large shifts in relative prices that affect different countries very differently. In the current age of globalization, "Einsteinian" money is capable of accommodating shifts that were politically destructive in the " Newtonian" world.
    JEL: N20 F33 E42
    Date: 2006–05
  8. By: Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sandy Suardi (School of Economics, The University of Queensland)
    Abstract: This paper tests for the presence of nonlinear dynamics in selected Asian short rates and employs a regime varying unit root test to detect non-stationarity for distinct regimes. Nonlinearities in the form of Markov-switching dynamics are found in all short rates sample. The mean-reverting behaviour of interest rates is dependent on both the level and volatility of interest rates. The occasional random walk and mean-reverting dynamics of short rates are attributed to the macroeconomic fundamentals, exchange rate regimes and monetary policy objectives in these economies.
    Date: 2005–09
  9. By: Paolo Angelini (Bank of Italy, Economic Research Department); Francesco Lippi (Bank of Italy, Economic Research Department)
    Abstract: The introduction of the euro notes and coins in the first two months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behavior of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis.
    Keywords: banknotes, currency, euro, inflation.
    JEL: E41 E31 E51
    Date: 2006–03
  10. By: Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Bernando S. de M. Carvalho (Gávea Investimentos)
    Abstract: We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy.
    JEL: E44 F32 F34 F36 G15
    Date: 2006–03

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