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on Monetary Economics |
| By: | Lucjan Orlowski; Kryzstof Rybinski; |
| Abstract: | This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED). |
| Keywords: | inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH |
| JEL: | E58 E61 F33 P24 |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-802&r=mon |
| By: | Tushar Poddar; Hasmik Khachatryan; Randa Sab |
| Abstract: | This paper examines monetary transmission in Jordan using the vector autoregressive approach. We find that the real 3-month CD rate, the Central Bank's operating target, affects bank retail rates and that monetary policy, measured by the spread between the 3-month CD rate and the U.S. Federal Funds rate, is effective in influencing foreign reserves. We do not find evidence of monetary policy affecting output. Output responds very little to changes in bank lending rates. Furthermore, equity prices and the exchange rate are not significant channels for transmitting monetary policy to economic activity. The effect of monetary policy on the stock market seems insignificant. |
| Keywords: | Monetary policy , Jordan , Bank rates , Foreign exchange reserves , Stock markets , Exchange rates , Economic models , |
| Date: | 2006–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/48&r=mon |
| By: | C. Randall Henning (Institute for International Economics) |
| Abstract: | Scholarship on European integration has extensively debated the external character of the monetary union. The institutions of exchange rate policymaking bear substantially on the euro area’s role in international monetary conflict and cooperation. This working paper examines the institutional arrangements for foreign exchange intervention within the euro area and the policymaking surrounding the market operations of autumn 2000—the only case to date of euro area intervention in currency markets. Drawing on interviews of officials in finance ministries, central banks, European institutions, and international organizations, as well as public sources, the paper specifies the division of labor among the European Central Bank (ECB), Eurogroup, and other European actors and compares that arrangement with corresponding arrangements in the G-7 partners. It concludes, among other things, that (1) the interinstitutional understanding within the euro area gives substantial latitude to the ECB, greater latitude than held by central banks in its G-7 partners, (2) but the understanding is susceptible to renegotiation over time, and (3) economic divergence within the euro area potentially threatens the ability of the monetary union to act coherently externally. |
| Keywords: | Foreign Exchange Intervention, Exchange Rate Policy and Policymaking, Economic and Monetary Union, Euro-Dollar Exchange Rate, European Central Bank, Eurogroup, G-7 Cooperation, Transatlantic Monetary Relations, Political Economy of Exchange Rates |
| JEL: | F31 F32 F33 F42 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp06-4&r=mon |
| By: | Andreas Schabert (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam) |
| Abstract: | Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint on stabilizing interest rate policy is tighter the higher the primary deficit and the more open the economy is. If the government cannot borrow from abroad in its own currency, stability requires interest rate policy to be accommodating (passive). Inflation stabilization is nevertheless feasible if the CB uses an instrument not associated with default risk, e.g. money supply. |
| Keywords: | Fiscal-monetary policy interactions; sovereign default risk; foreign debt; inflation targeting; original sin |
| JEL: | E52 E63 F41 |
| Date: | 2006–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060045&r=mon |
| By: | Pau Rabanal; Mario I. Bléjer; Alfredo Mario Leone; Gerd Schwartz |
| Abstract: | This paper argues that the IMF's traditional monetary conditionality-a ceiling on net domestic assets of the central bank and a floor on its net international reserves-should be adapted in IMF-supported adjustment programs with countries which have a framework of explicit inflation targets for the implementation of monetary policy. This adaptation should aim at enhancing correspondence and consistency between the monetary objectives of the central bank and the targets established under the IMF-supported adjustment program, as well as between the different instruments used to achieve the policy objectives and targets. The paper reviews various general options in this regard, and, using the case of Brazil as an example, demonstrates how these options may be implemented in practice. |
| Keywords: | Inflation targeting , Brazil , Monetary policy , Conditionality , Fund-supported adjustment programs , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/31&r=mon |
| By: | Gagik G. Aghajanyan |
| Abstract: | Several non-monetary (mainly supply) factors affect prices in the short-run. It is widely acknowledged that in countries (especially countries in transition), where the price level is highly volatile and seasonal, it is not expedient for central banks to use official inflation index while formulating monetary policy. For this reason, it is crucial for central banks to work out, study and follow the behavior of core inflation that enables to reflect long-run price movements. This paper presents the application of various methods of calculating core inflation to Armenian data (for 1996:1-2002:12). Each measure is calculated at monthly frequencies and evaluated by different criteria. The analysis shows that core inflation indices, calculated by trimming the distribution of prices at 10 or 15%, are the best and most effective indicators for monetary policy-makers in Armenia, since they capture inflation trends and are closely tied to monetary aggregates. However, the median seems to be the best predictor for forecasting inflation of all core inflation measures discussed in this paper |
| JEL: | P2 R5 E31 P3 |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:liu:liucej:16&r=mon |
| By: | Siu, Henry |
| Abstract: | In this paper I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria - one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity. |
| JEL: | E31 E52 E61 |
| Date: | 2006–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ubc:bricol:siu-06-06-15-02-39-39&r=mon |
| By: | Helge Berger; Michael Ehrmann; Marcel Fratzscher |
| Abstract: | Monetary policy in the euro area is conducted within a multicountry, multicultural, and multilingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the European Central Bank (ECB)? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part, this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent. |
| Keywords: | Monetary policy , Europe , European Central Bank , Economic forecasting , Data collection , Data analysis , |
| Date: | 2006–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/41&r=mon |
| By: | Østrup, Finn (Department of Finance, Copenhagen Business School) |
| Abstract: | The article examines how government spending is determined in a closed economy where the nominal wage is pre-set through contracts and the wage setters have perfect foresight regarding subsequent policy decisions. The monetary regime affects government spending because: (i) with a pre-set nominal wage, a given change in government spending has different effects on employment and inflation under different monetary regimes, and (ii) the authorities’ inclination to expand government spending is affected by the inflation rate which depends on the monetary regime. If the costs related to inflation are high, a comparison between monetary regimes suggests that welfare is highest under nominal income targeting where the nominal income target is determined to bring about price stability. |
| Keywords: | Monetary regimes; fiscal policy; monetary non-neutrality |
| JEL: | E42 E61 E62 |
| Date: | 2006–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsfin:2005_002&r=mon |
| By: | Sander Harald; Kleimeier Stefanie (METEOR) |
| Abstract: | We investigate the interest rate pass-through in the four Common Monetary Area (CMA) countries of the South African Customs Union (SACU). We employ an empirical pass-through model that allows for thresholds, asymmetric adjustment, and structural changes. We show that CMA bank lending markets exhibit quite some degree of homogenization as the pass-through is often fast and complete. Deposit markets are somewhat more heterogeneous by showing differing degrees of interest rate stickiness and asymmetric adjustment. Policy makers should therefore be concerned about imperfect competition which may be at the heart of the remaining cross-country differences in monetary transmission in the CMA. |
| Keywords: | monetary economics ; |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2006022&r=mon |
| By: | Armando Méndez Morales |
| Abstract: | This paper surveys concepts, practices and analytical literature to assess benefits and risks for monetary stability of cross-border currency and interest rate derivative operations in calm and turbulent periods, with a view of extracting implications for emerging economies. Monetary authorities must prevent one-sided positions in the currency, favor asset substitutability, and incorporate the enriched information set provided by derivative-based transactions into monetary policy design. In some circumstances, the use of derivatives by monetary authorities may help fulfill this role. By contrast, surcharges to compensate for a downward impact of derivatives on the cost of capital appear neither advisable nor necessary. |
| Keywords: | Financial systems , Currencies , Spot exchange rates , Foreign exchange , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/58&r=mon |
| By: | Hakob Zoryan |
| Abstract: | This paper attempts to estimate the actual (de facto) level of dollarization in Armenia. "Co-circulation" involves the regular use of two or more currencies within an economy. The existence of an unknown amount of foreign currency in circulation makes the outcome of domestic monetary policy uncertain. The volume of foreign currency deposits is easily obtained from the official statistics. However, it is very hard to determine the stock of foreign currency in circulation. The effective money supply may be much larger than the domestic money supply and is subject to behavioral responses which are very different than the movements of the presently measured money supply. The purpose of this paper is to assess the level of dollarization, that is, to evaluate the size and/or proportion of foreign currency in the total money stock of Armenia as a highly dollarized country. |
| JEL: | E5 E4 G21 P3 F3 P2 |
| Date: | 2005–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:liu:liucej:14&r=mon |
| By: | Elena Corallo (Cattaneo University (LIUC)) |
| Abstract: | The main objective of this paper is to focus on the effect of monetary policy on asset prices for Germany and UK. Studying this relationship is complicated because asset prices and interest rates are endogenously determined, behave simultaneously and can be affected by other variables. In order to test this relation and solve these problems we use the heteroskedasticity based approach developed by Rigobon and Sack (2004) which focuses the analysis on the shift in the variance of policy shocks that occurs on the days of the monetary authority's meetings. The assumption of a shift in the variance, which we believe to be weaker than the restrictions imposed in the traditional literature, allows to identify the effect of monetary policy on asset prices solving the endogeneity and simultaneity problem. The result we find indicate that German and UK monetary policy do not affect the stock market behaviour. Monetary policy seems to be neutral on the economy. While for Germany we have no significant effect on the exchange rate, an increase of British interest rate appreciates the sterling. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:liu:liucec:185&r=mon |
| By: | Arto Kovanen |
| Abstract: | We use cross-section and time-series techniques to analyze pricing behavior in Sierra Leone. In cross-sectional data, we find that inflation volatility and product diversification are the main factors explaining differences in the frequency of price adjustments. We show that variance in the fraction of prices subject to change is a key determinant of inflation volatility in Sierra Leone, indicating that retail prices are sensitive to economic events. We explain variations in this fraction over time with past inflation and monetary growth, which are important policy variables. |
| Keywords: | Inflation , Sierra Leone , Price adjustments , |
| Date: | 2006–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/53&r=mon |
| By: | Hélène Poirson |
| Abstract: | This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection. |
| Keywords: | Exchange rate regimes , Developing countries , Dollarization , Monetary unions , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/46&r=mon |
| By: | Axel Lindner |
| Abstract: | This paper analyses the problem of "original sin" (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) in a simple thirdgeneration model of currency crises. The approach differs from alternative frameworks by explicitly modeling the price setting behavior of firms if prices are sticky and the future exchange rate is uncertain. Monetary policy optimally trades off effects on price competitiveness and on debt burdens of firms. It is shown that the proposal by Eichengreen and Hausmann of creating an artificial basket currency as denominator of debt is attractive as a provision against contagion. |
| Keywords: | original sin; currency crises |
| JEL: | F34 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:11-06&r=mon |
| By: | Vivek B. Arora; Olivier Jeanne |
| Abstract: | The Canadian experience with a floating exchange rate regime can shed some light on the question of whether A question of current interest in many parts of the world is whether with growing economic integration among groups of countries makes a fixed exchange rate, or even a common currency, becomes more desirable. This paper looks at the lessons that one may draw from tThe Canadian experience, with a floating exchange rate regime, especially since the inception of the 1989 U.S.-Canada Free Trade Agreement, suggests. We find that exchange rate flexibility has not prevented economic integration between Canada and the United States from increasing substantially, during the 1990s, and has played a useful role in buffering the Canadian economy against asymmetric external shocks. A fixed exchange rate thus does not seem to be a prerequisite for economic integration. It may, however, yield substantial have benefits for some countries that lack monetary credibility or that may be tempted by self-destructive beggar-thy-neighbor policies. |
| Keywords: | Exchange rate regimes , Canada , United States , Floating exchange rates , Trade , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:01/1&r=mon |
| By: | BEN ALI Mohamed Sami; ; |
| Abstract: | Capital account liberalization and exchange rate regime choice, what scope for flexibility in Tunisia? This study evaluates within a game-theoretic framework the exchange rate regime from a welfare perspective. In a tradable-nontradable goods model framework, Tunisia’s exchange rate regime choice is cast in terms of strategic interactions between the monetary authority and domestic enterprises. The monetary authority is assumed to choose an optimal exchange rate regime according to a welfare-related criterion by minimising a loss function defined in terms of external competitiveness and domestic inflation. Simulations outcomes reveal that capital account liberalization in the Tunisian economic context is compatible with a flexible exchange rate regime. |
| Keywords: | Exchange rate regime, Liberalization, Convertibility, Capital Account, Welfare, Tunisia. |
| JEL: | F31 F32 F37 F47 |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2006-815&r=mon |
| By: | Paul R. Masson; Catherine A. Pattillo |
| Abstract: | Could a West African monetary union (either of the non-CFA countries, or all ECOWAS members) be an effective "agency of restraint" on fiscal policies? We discuss how monetary union could affect fiscal discipline and the arguments for explicit fiscal restraints considered in the European Monetary Union literature, and their applicability to West Africa. The empirical evidence, EMU literature, and CFA experience suggest that monetary union could create the temptation for fiscal profligacy through prospects of a bailout, or costs diluted through the membership. Thus, a West African monetary union could promote fiscal discipline only if the hands of the fiscal authorities are also tied by a strong set of fiscal restraints. |
| Keywords: | West African Monetary Union , Africa , Fiscal policy , CFA franc , Trade , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/34&r=mon |
| By: | Ryan Felushko; Eric Santor |
| Abstract: | The authors examine the characteristics of International Monetary Fund (IMF) lending from the 1960s to 2005. They find that there has been an increase in portfolio concentration, that lending terms have effectively lengthened, and that the proportion of total lending that occurs due to exceptional access has risen dramatically. Moreover, the typical IMF borrower represents a greater risk burden than in previous periods. The authors estimate a model of expected credit loss for the IMF's portfolio and find that the credit risk being borne on the IMF's balance sheet is rising over time. This increase in the risk burden is supported by the use of alternative measures of balance-sheet risk: both the Basel II capital requirement approach and the market-based interest rate approach produce similar results. |
| Keywords: | International topics |
| JEL: | F3 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-21&r=mon |
| By: | Raghuram Rajan; Eswar Prasad |
| Abstract: | In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms. |
| Keywords: | Capital account liberalization , Capital controls , Capital inflows , Reserves , |
| Date: | 2005–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:05/7&r=mon |