|
on Monetary Economics |
| By: | Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception. |
| Keywords: | Taylor rule, monetary policy, ECB, European Monetary Union |
| JEL: | E5 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mar:volksw:200610&r=mon |
| By: | Filippo Altissimo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | This paper provides a summary of current knowledge on inflation persistence and price stickiness in the euro area, based on research findings that have been produced in the context of the Inflation Persistence Network. The main findings are - i) Under the current monetary policy regime, the estimated degree of inflation persistence in the euro area is moderate; ii) Retail prices in the euro area are more sticky than in the US; iii) There is significant sectoral heterogeneity in the degree of price stickiness; iv) Price decreases are not uncommon. The paper also investigates some of the policy implications of these findings. JEL Classification: E31, E42, E52. |
| Keywords: | Price setting, inflation persistence, monetary policy, EMU. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060046&r=mon |
| By: | Darmoul Mokhtar (Centre d'Economie de la Sorbonne) |
| Abstract: | In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility. |
| Keywords: | Exchange rates, official interventions, monetary policy, GARCH models. |
| JEL: | C22 E52 F31 G15 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:bla06049&r=mon |
| By: | Yuriy Gorodnichenko; Matthew D. Shapiro |
| Abstract: | The Fed kept interest rates low and essentially unchanged during the late 1990s despite a booming economy and record-low unemployment. These interest rates were accommodative by historical standards. Nonetheless, inflation remained low. How did the Fed succeed in sustaining rapid economic growth without fueling inflation and inflationary expectations? In retrospect, it is evident that the productive capacity of the economy increased. Yet as events unfolded, there was uncertainty about the expansion of the capacity of the economy and therefore about the sustainability of the Fed’s policy. This paper provides an explanation for the success of the Fed in accommodating growth with stable inflation in the late 1990s. It shows that if the central bank is committed to reverse policy errors it makes because of unwarranted optimism, inflation can remain in check even if the central bank keeps interest rates low because of this optimism. In particular, a price level target—which is a simple way to model a commitment to offset errors—can serve to anchor inflation even if the public does not share the central bank’s optimism about shifts in potential output. The paper shows that price level targeting is superior to inflation targeting in a wide range of situations. The paper also provides econometric evidence that, in contrast to earlier periods, the Fed has recently put substantial weight on the price level in setting interest rates. Moreover, it shows that CPI announcement surprises lead to reversion in the price level. Finally, it provides textual evidence that Alan Greenspan puts relatively more weight on the price level than inflation. |
| JEL: | E52 E58 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12268&r=mon |
| By: | John Bluedorn (Nuffield College and Department of Economics, University of Oxford); Christopher Bowdler (Nuffield College and Department of Economics, University of Oxford) |
| Abstract: | We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices. |
| JEL: | E52 F31 F41 |
| Date: | 2006–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0604&r=mon |
| By: | Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper compares the communication strategies of the Fed and the ECB and their impact on financial markets. Interest rates options were used to calculate daily probability distributions of market expectations and to examine how they are modified by central banks’ announcements. We found that Greenspan’s speeches have a stronger influence on rate levels and market uncertainty than Duisenberg’s. Moreover, market expectations most significant reaction is to economic indicators central banks mention as being important. Monetary decisions are regularly anticipated thanks to speeches and economic releases and the dominant speech themes were shown to be “monetary policy” and “domestic economy”. |
| Keywords: | central bank communication, risk neutral density, futures option pricing, event studies. |
| JEL: | E43 E58 G13 G14 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:06-009&r=mon |
| By: | Boel, Paola; Camera, Gabriele |
| Abstract: | We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with both money and nominal government bonds, but all trades must be monetized. We demonstrate that a deflationary policy a la Friedman cannot sustain the efficient allocation. The reason is that no-arbitrage imposes a stringent bound on the return money can pay. The efficient allocation can be sustained when bonds have positive yields and – under certain conditions – only if they are illiquid. Illiquidity – meaning bonds cannot be transformed into consumption as efficiently as cash – is necessary to eliminate arbitrage opportunities. |
| Keywords: | Money ; Heterogeneity ; Friedman Rule ; Illiquid Assets |
| JEL: | E4 E5 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1171&r=mon |
| By: | Eiji Ogawa; Kentaro Kawasaki |
| Abstract: | East Asian countries, for example "ASEAN plus three countries" (China, Korea, and Japan), have been well cognizant of importance of the regional financial cooperation since the Asian currency crisis in 1997. They have established the Chiang Mai Initiative (CMI) to manage currency crises. However, the CMI is not designed for "crisis prevention" because it includes no more than soft surveillance process as well as a network of currency swap arrangements. The surveillance process should be conducted over intra-regional exchange rates and exchange rate policies of the regional countries in order to stabilize intra-regional exchange rates in a situation of a strong economic relationship among the regional countries. On one hand, the regional exchange rate stability is related with an optimum currency area. Based on a Generalized PPP model, which detects a cointegration relationship among real effective exchanges rates, we investigate whether the region composed of "ASEAN plus three countries" is an optimum currency area. In the investigation, our interest is focused on an issue whether the Japanese yen could be regarded as an "insider" currency as well as other East Asian currencies. Or, is the Japanese yen still an "outsider" which is used as a target currency of foreign exchange rate policy for other East Asian countries. We employ a Dynamic OLS to estimate the long-term relationship among the East Asian currencies in a currency basket. Our empirical results indicate that the Japanese yen works as an exogenous variable in the cointegration system during a pre-crisis period while it works as an endogenous one during a post-crisis period. It implies that the Japanese yen could be regarded as an insider currency as well as other East Asian currencies after the crisis although it is regarded as an outsider currency as well as the US dollar and the euro before the Asian crisis. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06028&r=mon |
| By: | Reginaldo P. Nogueira Jnr |
| Abstract: | The paper presents evidence on the exchange rate pass-through for a set of emerging and developed economies before and after the adoption of Inflation Targeting. We use an ARDL model for a sample of developed and emerging market economies to estimate the short-run and the long-run effects of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. This reduction, however, does not mean that the pass-through is no longer existent for developed and emerging market economies, especially when it comes to the long-run. This finding highlights the importance of using dynamic models when dealing with the inflation-depreciation relationship. The results also show the important role of foreign producer costs for the imports pricing behaviour in developed economies, and of inflation stability in emerging markets. |
| Keywords: | Inflation Targeting, Exchange Rate Pass-through |
| JEL: | E31 E52 F31 F41 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0602&r=mon |
| By: | Habib Ahmed (Islamic Development Bank); C. Paul Hallwood (University of Connecticut); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas) |
| Abstract: | We develop an open economy macroeconomic model with real capital accumulation and microeconomic foundations. We show that expansionary monetary policy causes exchange rate overshooting, not once, but potentially twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firmsâ decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities. |
| Keywords: | physical capital, open economy macroeconomic, monetary policy, exchange rate |
| JEL: | F31 F32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2006-15&r=mon |
| By: | Rajesh Singh; Joydeep Bhattacharya |
| Keywords: | banking crises, fixed versus flexible regimes |
| JEL: | F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed005:820&r=mon |
| By: | Rudiger Ahrend; Pietro Catte; Robert Price |
| Abstract: | Long-term bond yields have been low in recent years both in nominal and real terms, and . especially in the United States - they have reacted differently to shifts in monetary and fiscal stances relative to previous cycles. This article examines various possible explanations for this behaviour, such as the effects of changes in monetary policy frameworks on inflation and interest rate expectations; developments in ex ante saving-investment balances, and shifts in investors. portfolio preferences (including official reserve accumulation, .petro-dollar. recycling and pension fund demand for longer maturities). The paper finds that it is unlikely that any individual explanation can account for the level and profile of bond yields in recent years, but that an important element has been a compression in term premia, together with shifts in expected short rates. Even though bond yields have started to rise in the early part of 2006, they are unlikely to go back to the levels that prevailed in the 1980s or the early 1990s, as several of the factors that drove them lower are set to persist. <P>Éléments à l’origine de la faiblesse des taux d’intérêt à long terme Au cours des années récentes les rendements des obligations à long terme ont été faibles tant en termes nominaux qu’effectifs. Par rapport aux cycles économiques antérieurs, ils ont réagi différemment aux changements de politique monétaire et budgétaire, notamment aux États-Unis. Cet article examine plusieurs explications potentielles de ces comportements comme les effets d’un changement de cadre de la politique monétaire sur l’inflation et les anticipations de taux d’intérêt; l’évolution des soldes ex ante d’épargne et d’investissement et les changements de préférence dans les placements des investisseurs (y compris l’accumulation des réserves officielles, le recyclage des « pétrodollars » et la demande des fonds de pension pour des obligations à maturité longue). L’article conclut qu’il est improbable qu’une seule explication puisse rendre compte du niveau et du profil des rendements obligataires au cours des dernières années. Toutefois, un élément clef a été la réduction de la prime de risque, accompagnée par des changements dans les anticipations de taux d’intérêt à court terme. Néanmoins, bien que les rendements des obligations aient commencé à remonter au début de l’année 2006, il est peu vraisemblable qu’ils atteignent les niveaux enregistrés dans les années 1980 et au début des années 1990, dans la mesure où plusieurs des facteurs qui ont entraîné leur déclin sont amenés à perdurer. |
| Keywords: | financial markets, marchés financiers, capital flows, flux de capitaux, credibility, monetary policy, crédibilité, politique monétaire, risk premia, current account |
| JEL: | E43 F2 G11 G15 |
| Date: | 2006–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:490-en&r=mon |
| By: | Vitor Gaspar; Anil K. Kashyap |
| Abstract: | In this paper, we review Otmar Issing's career as the ECB's inaugural chief economist and we document many notable successes. We try to infer some general principles that contributed to these successes and draw some lessons. In doing so, we review the evidence using Woodford’s (2003) recent revival of the Wicksellian approach to monetary policy making. Suitably interpreted the baseline model can rationalize Issing’s three guiding principles for successful policymaking. This baseline model, however, fails to account for the important role that monetary and financial analysis played in the conduct of policy during Issing’s tenure. We propose an extension of the model to account for financial developments and show that this extended model substantially improves our understanding of ECB practice. We conclude by listing six open questions, relevant for the future of central banking in Europe that Issing may want to consider in case leisure allows. |
| JEL: | E31 E52 E58 E44 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12277&r=mon |
| By: | Ángel León (Universidad de Alicante); Francis Benito (Universidad de Alicante); Juan Nave (Universidad de Castilla-La Mancha) |
| Abstract: | This paper describes the evolution of the daily Euro overnight interestrate (EONIA) by using several models containing the jump component such asa single regime ARCH-Poisson-Gaussian process, with either a piecewisefunction or an autoregressive conditional specification (ARJI) for the jumpintensity, and a two regime-switching process with jumps and time varyingtransition probabilities. To model the jump intensity, we include the followingeffects which are significant for the occurrence of jumps such as: (1) the end ofmaintenance period effect because of reserve requirements, (2) the end ofmonth effect, also known as the calendar day effect, caused mainly by theaccounting adjustments and finally, (3) the meeting effect caused by thefortnightly meetings of the Governing Council of the European Central Bank(ECB). These effects lead to a better performance and several of them are alsoincluded for the behavior of the transition probabilities. Since the target of theECB is keeping the EONIA rate close to the official rate, we have modeled theconditional mean of the overnight rate series as a reversion process to theofficial rate distinguishing two alternative speeds of reversion, in concrete, adifferent speed if EONIA is higher or lower than the official rate. We also studythe jumps of the EONIA rate around the ECB’s meetings by using the ex-postprobabilities of the ARJI model. Finally, we develop an out-of-sampleforecasting analysis to measure the performance of the different candidatemodels. |
| Keywords: | ARCH-Poisson-Gaussian; Regime switching; mean reversion; Autoregressive conditional jump intensity; Maintenance period; Calendar day effect; ECB’s meeting. |
| JEL: | C13 C22 E43 E52 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2006-11&r=mon |
| By: | Aliprantis, C.D.; Camera, Gabriele; Puzzello, D. |
| Abstract: | We study an infinite-horizon economy with two basic frictions that are typical in monetary models. First, agents’ trading paths cross at most once due to pairwise trade and other meeting obstacles. Second, actions must be compatible with individual incentives due to commitment and enforcement limitations. We find that, with patient agents, relaxing the first friction by introducing centralized markets, opens the door to an informal enforcement scheme sustaining a non-monetary efficient allocation. Hence, we present a matching environment in which agents repeatedly access large markets and yet the basic frictions are retained. This allows the construction of models based on competitive markets in which money plays an essential role. |
| Keywords: | Money ; Infinite games ; Matching models ; Social norms |
| JEL: | C72 C73 D80 E00 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1179&r=mon |
| By: | Clive G. Bowsher (Nuffield College, University of Oxford); Roland Meeks (Nuffield College, University of Oxford) |
| Abstract: | It is a widely encountered misconception that the vector of spreads between longer-term interest rates and the short rate is stationary under the Expectations Theory (ET). By considering a complete term structure of maturities it is shown that the ET determines the conditional mean of the VAR process followed by the yield curve. We prove that under this process, the zero-coupon yield curve is I(2), immediately casting doubt on the empirical usefulness of the ET. Furthermore, the yield spreads are shown to be a non-stationary, cointegrated I(1) process. This result invalidates many existing approaches to evaluating and formally testing the ET. Finally, time series features of yield curve data simulated under the ET are compared with those of actual US Treasury zero-coupon yield curves. |
| Keywords: | Expectations theory, term structure, yield curve, I(2) process, I(1) process, cointegration. |
| JEL: | C32 C33 G12 |
| Date: | 2006–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0605&r=mon |
| By: | Joseph P Joyce (Department of Economics, Wellesley College); Ilan Noy (Department of Economics, University of Hawaii) |
| Abstract: | Using data from a panel of developing economies from the 1982-98 period, the claim that the International Monetary Fund precipitated financial crises during the 1990s by pressuring countries to liberalize their capital accounts prematurely is evaluated. Examining whether the changes in the regime governing capital flows took place during participation in IMF programs, evidence finds that IMF program participation is correlated with capital account liberalization episodes during the 1990s. Alternative indicators of capital account openness were used to test the robustness of the results by comparing the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently to determine whether decontrol was premature. |
| JEL: | F3 |
| URL: | http://d.repec.org/n?u=RePEc:ewc:wpaper:wp84&r=mon |
| By: | Michael D. Bordo; Christopher M. Meissner; Marc D. Weidenmier |
| Abstract: | It is generally very difficult to measure the effects of a currency depreciation on a country’s balance sheet and financing costs given the endogenous properties of the exchange rate. History provides at least one natural experiment to test whether an exogenous exchange rate depreciation can be contractionary (via an increased real debt burden) or expansionary (via an improved current account). France’s decision to suspend the free coinage of silver in 1876 played a paramount role in causing a large exogenous depreciation of the nominal exchange rates of all silver standard countries versus gold-backed currencies such as the British pound—the currency in which much of their debt was payable. Our identifying assumption is that France’s decision to end bimetallism was exogenous from the viewpoint of countries on the silver standard. To deal with heterogeneity we implement a difference in differences estimator. Sovereign yield spreads for countries on the silver standard increased in proportion to the potential currency mismatch. Yield spreads for silver countries increased ten to fifteen percent in the wake of the depreciation. Basic growth models suggest that the accompanying reduction in investment could have decreased output per capita by between one and four percent relative to the pre-shock trajectory. This also illustrates that a substantial proportion of the decrease in spreads gold standard countries identified in the “Good Housekeeping” literature could be attributable to the increase in exchange rate stability. Finally, if emerging markets are going to embrace international capital flows, the most export oriented countries will manage to mitigate the negative effects of a currency mismatch. |
| JEL: | N1 N2 F3 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12299&r=mon |