nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒08‒05
fifty-five papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Do monetary indicators (still) By Hofmann, Boris
  2. Monetary disequilibria and the Euro/Dollar exchange rate By Nautz, Dieter; Ruth, Karsten
  3. A Framework for Independent Monetary Policy in China By Marvin Goodfriend; Eswar Prasad
  4. Monetary Policy in a Channel System By Aleksander Berentsen and Cyril Monet
  5. Inflation and relative price variability in the euro area: evidence from a panel threshold model By Nautz, Dieter; Scharff, Juliane
  6. Inflation in Pakistan: Money or Wheat? By Mohsin S. Khan; Axel Schimmelpfennig
  7. Inflation Targeting in Dollarized Economies By Eric Parrado; Rodolfo Maino; Leonardo Leiderman
  8. The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread By Nautz, Dieter; Offermanns, Christian J.
  9. Setting the Operational Framework for Producing Inflation Forecasts By Eric Parrado; Turgut Kisinbay; Rodolfo Maino; Jorge Iván Canales Kriljenko
  10. Excess Liquidity and the Effectiveness of Monetary Policy: Evidence from Sub-Saharan Africa By Magnus Saxegaard
  12. Identifying Monetary Policy Shocks via Changes in Volatility By Markku Lanne; Helmut Lütkepohl
  13. Practical Model-Based Monetary Policy Analysis--A How-To Guide By Philippe D Karam; Douglas Laxton; Andrew Berg
  14. Monetary Policy Dynamics in Large Oil-Dependent Economies By Wohltmann, Hans-Werner; Winkler, Roland
  15. Catching-up, Inflation Differentials and Credit Booms in a Heterogeneous Monetary Union: Some Implications for EMU and new EU Member States By Ronald MacDonald; Cezary Wójcik
  16. Monetary and Fiscal Policy in a Large Asymmetric Monetary Union - A Dynamic Three-Country Analysis By Clausen, Volker; Wohltmann, Hans-Werner
  17. What is Fuzzy About Clustering in West Africa? By Charalambos G. Tsangarides; Mahvash Saeed Qureshi
  18. Authorities' beliefs about foreign exchange intervention: getting back under the hood By Christopher J. Neely
  19. How costly is exchange rate stabilisation for an inflation targeter? The case of Australia By Mark Crosby; Tim Kam; Kirdan Lees
  20. The role of real wage rigidity and labor market frictions for unemployment and inflation dynamics By Christoffel, Kai; Linzert, Tobias
  21. Transmission Mechanism in Transition Economies: Surveying the Surveyable By Balázs Égert; Ronald MacDonald
  22. Identifying the role of labor markets for monetary policy in an estimated DSGE model By Christoffel, Kai Philipp; Küster, Keith; Linzert, Tobias
  23. Short-Term Fiscal Spillovers in a Monetary Union By Agnes Benassy-Quere
  24. U.S. Inflation Dynamics: What Drives Them Over Different Frequencies? By Ravi Balakrishnan; Sam Ouliaris
  25. Disintermediation and Monetary Transmission in Canada By Jorge Roldos
  26. The Impact of ECB Communication on Financial Market Expectations By Michael Lamla; Sarah M. Rupprecht
  27. A Practical Model-Based Approach to Monetary Policy Analysis--Overview By Philippe D Karam; Douglas Laxton; Andrew Berg
  28. Money demand and macroeconomic uncertainty By Greiber, Claus; Lemke, Wolfgang
  29. Measuring Core Inflation by Multivariate Structural Time Series Models By Tommaso Proietti
  30. World Crude Oil Markets: Monetary Policy and the Recent Oil Shock By Noureddine Krichene
  31. Monetary policy analysis with potentially misspecified models By Marco Del Negro; Frank Schorfheide
  32. The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis By Reitz, Stefan; Taylor, Mark P.
  33. Dynamische Effekte der Geld-und Fiskalpolitik in einem asymmetrischen Drei-Länder-Modell mit einer Währungsunion By Wohltmann, Hans-Werner
  34. International Policy Coordination and Simple Monetary Policy Rules By Wolfram Berger; Helmut Wagner
  35. Price Impacts of Non-Adoption of the Euro for Small European Countries By Sibel Yelten; Harald Anderson
  36. The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data By Ewe-Ghee Lim
  37. Can Affine Term Structure Models Help Us Predict Exchange Rates? By Antonio Diez de los Rios
  38. Modelling the Fisher hypothesis: World wide evidence By Herwartz, Helmut; Reimers, Hans-Eggert
  39. Money and Production, and Liquidity Trap By Pradeep Dubey; John Geanakoplos
  40. Public Debt, Money Supply, and Inflation: A Cross-Country Study and its Application to Jamaica By Lavern McFarlane; Wayne Robinson; Goohoon Kwon
  41. Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers By Leith, Campbell; von Thadden, Leopold
  42. Sudden Stops and Currency Drops: A Historical Look By Luis Catão
  43. Bond pricing when the short term interest rate follows a threshold process By Lemke, Wolfgang; Archontakis, Theofanis
  44. The eurosystem money market auctions: a banking perspective By Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
  45. European inflation expectations dynamics By Döpke, Jörg; Dovern, Jonas; Fritsche, Ulrich; Slacalek, Jirka
  46. Core Inflation Measures and Statistical Issues in Choosing Among Them By Mick Silver
  47. Inflation, Inequality, and Social Conflict By Christopher Crowe
  48. The relationship between expected inflation, disagreement, and uncertainty: evidence from matched point and density forecasts By Robert Rich; Joseph Tracy
  49. An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania By Nkunde Mwase
  50. Some Principles for Development of Statistics for a Gulf Cooperation Council Currency Union By Ettore Kovarich; Russell C. Krueger
  51. Modeling the FIBOR/EURIBOR Swap Term Structure : An Empirical Approach By Blaskowitz, Oliver; Herwartz, Helmut; de Cadenas Santiago, Gonzalo
  52. The Cost of Reserves By Eduardo Levy Yeyati
  53. Forecasting and Combining Competing Models of Exchange Rate Determination By Carlo Altavilla; Paul De Grauwe
  54. Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances By Michael T. Gapen; Ralph Chami; Thomas F. Cosimano
  55. Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia? By Jiro Honda; Liliana Schumacher

  1. By: Hofmann, Boris
    Abstract: This paper assesses the performance of monetary indicators in predicting euro area HICP inflation out-of-sample over the period since the start of EMU considering a wide range of forecasting models, including standard bivariate forecasting models, factor models, simple combination forecasts as well as trivariate two-pillar Phillips Curve type forecasting models. The results suggest that monetary indicators are still useful indicators for inflation in the euro area, but that a thorough and broad based monetary analysis is needed to extract the information content of monetary developments for future inflation.
    Keywords: euro area, inflation, leading indicators, money
    JEL: C32 E31 E40
    Date: 2006
  2. By: Nautz, Dieter; Ruth, Karsten
    Abstract: Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the Euro/Dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on U.S. and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account.
    Keywords: Euro/Dollar Exchange Rate, Monetary Model, Money Demand Functions
    JEL: E41 F31
    Date: 2005
  3. By: Marvin Goodfriend; Eswar Prasad
    Abstract: As China's economy becomes more market based and continues its rapid integration into the global economy, having an independent and effective monetary policy regime oriented to domestic objectives will become increasingly important. Employing modern principles of monetary policy in light of the current state of China's financial institutions, we motivate and present a package of proposals to guide the operation of a new monetary policy regime. Specifically, we recommend an explicit low long-run inflation objective, operational independence for the People's Bank of China (PBC) with formal strategic guidance from the government, and a minimal set of financial sector reforms (to make the Chinese banking system robust against interest rate fluctuations). We argue that anchoring monetary policy with an explicit inflation objective would be the most reliable way for the PBC to tie down inflation expectations, and thereby enable monetary policy to make the best contribution to macroeconomic and financial stability, as well as economic growth. The management and monitoring of money (and credit) growth by the PBC would continue to play a useful role in the stabilization of inflation, but a money target would not constitute a good stand-alone nominal anchor.
    Keywords: Monetary policy , China , Flexible exchange rates , Inflation targeting , Financial sector , Bank reforms , Central bank policy , Central bank role , Money supply , Financial systems , Transition economies ,
    Date: 2006–05–10
  4. By: Aleksander Berentsen and Cyril Monet
    Abstract: This paper studies the theoretical properties of a channel system of interestrate control in a dynamic general equilibrium model. Agents are subject to liquidity shocks which can be partially insured in a secured money market, or at a standing facility operated by the central bank. We show that it is optimal to have a strictly positive interest rate corridor and that a shift of the corridor affects the money market rate one for one. Moreover, the central bank can tighten its policy without changing its policy rate by simply increasing the corridor symmetrically around the policy rate.
    Keywords: Monetary Policy, Interest Rates, Search
    JEL: E40 E50 D83
    Date: 2006–07
  5. By: Nautz, Dieter; Scharff, Juliane
    Abstract: In recent macroeconomic theory, relative price variability (RPV) generates the central distortions of inflation. This paper provides first evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. We find that expected inflation significantly increases RPV if inflation is either very low (below -1.38% p.a.) or very high (above 5.94% p.a.). In the intermediate regime, however, expected inflation has no distorting effects which supports price stability as an outcome of optimal monetary policy.
    Keywords: Inflation, Relative Price Variability, Panel Threshold Models
    JEL: C23 E31
    Date: 2006
  6. By: Mohsin S. Khan; Axel Schimmelpfennig
    Abstract: This paper examines the relative importance of monetary factors and structuralist supply-side factors for inflation in Pakistan. A stylized inflation model is specified that includes standard monetary variables (money supply, credit to the private sector), the exchange rate, as well as the wheat support price as a supply-side factor that has received considerable attention in Pakistan. The model is estimated for the period January 1998 to June 2005 on a monthly basis. The results indicate that monetary factors have played a dominant role in recent inflation, affecting inflation with a lag of about one year. Changes in the wheat support price influence inflation in the short run, but not in the long run. Furthermore, the wheat support price matters only over the medium term if accommodated by monetary policy.
    Date: 2006–03–16
  7. By: Eric Parrado; Rodolfo Maino; Leonardo Leiderman
    Abstract: The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-à-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime.
    Date: 2006–07–07
  8. By: Nautz, Dieter; Offermanns, Christian J.
    Abstract: This paper investigates how the dynamic adjustment of the European overnight rate Eonia to the term spread and the ECB’s policy rate has been affected by rate expectations and the operational framework of the ECB. In line with recent evidence found for the US and Japan, the reaction of the Eonia to the term spread is non-symmetric. Moreover, the response of the Eonia to the policy rate depends on both, the repo auction format and the position of the Eonia in the ECB’s interest rate corridor.
    Keywords: Monetary Policy Impleme ion, Term Structure of Interest Rates, Nonli Cointegration
    JEL: E43 E52
    Date: 2006
  9. By: Eric Parrado; Turgut Kisinbay; Rodolfo Maino; Jorge Iván Canales Kriljenko
    Abstract: How should a central bank organize itself to produce the best possible inflation forecast? This paper discusses elements for building a comprehensive platform for an inflation forecasting framework. It describes the exercise of forecasting inflation as a production process, which induces a strict discipline concerning data management, information gathering, the use of a suitable statistical apparatus, and the exercise of sound communication strategies to reinforce reputation and credibility. It becomes critical how a central bank organizes itself to produce relevant macroeconomic forecasts, with special consideration to product design, the essential requirements needed in the forecasting process, and key related organizational issues. In addition, the paper proposes to factor into the process the authorities' policy responses to previous inflation forecasts in order to be consistent with the spirit of the inflation targeting framework.
    Keywords: Inflation , Central bank organization , Inflation targeting , Monetary policy , Central bank policy , Data collection , Data analysis , Forecasting models ,
    Date: 2006–05–19
  10. By: Magnus Saxegaard
    Abstract: This paper examines the pattern of excess liquidity in sub-Saharan Africa and its consequences for the effectiveness of monetary policy. The paper argues that understanding the consequences of excess liquidity requires quantifying the extent to which commercial bank holdings of excess liquidity exceed levels required for precautionary purposes. It proposes a methodology for measuring this quantity and uses it to estimate a nonlinear structural VAR model for the CEMAC region, Nigeria and Uganda. The study suggests that excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy.
    Keywords: Excess liquidity , Sub-Saharan Africa , Central African Economic and Monetary Community , Nigeria , Uganda , Monetary policy , Money supply , Credit , Economic models ,
    Date: 2006–05–12
  11. By: Edda Claus; Mardi Dungey; Renee Fry
    Abstract: Two impediments to effective monetary policy operation include illiquidity in bond markets and the move towards the zero bound of interest rates. Either or both of these scenarios have been evident in many countries in the last decade, raising the suggestion that alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at a short (2 year) and a long (10 year) time frame as those obtained under current arrangements. The results show that current monetary policy arrangements are least costly in terms of the output loss from achieving lower inflation outcomes. However, if this option ceases to be available the next best alternative is to use the equity market option provided a longer run focus is maintained. Focus on short horizons increases the longer term output costs of the policy in all cases.
    JEL: E52 C51
    Date: 2006–07
  12. By: Markku Lanne; Helmut Lütkepohl
    Abstract: A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions which would make statistical tests of different theories possible. It is pointed out that some progress towards overidentifying monetary policy shocks can be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly US data from 1965-1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks to total reserves cannot be rejected.
    Keywords: monetary policy, structural vector autoregressive analysis, vector autoregressive process, impulse responses
    JEL: C32
    Date: 2006
  13. By: Philippe D Karam; Douglas Laxton; Andrew Berg
    Abstract: This paper provides a how-to guide to model-based forecasting and monetary policy analysis. It describes a simple structural model, along the lines of those in use in a number of central banks. This workhorse model consists of an aggregate demand (or IS) curve, a price-setting (or Phillips) curve, a version of the uncovered interest parity condition, and a monetary policy reaction function. The paper discusses how to parameterize the model and use it for forecasting and policy analysis, illustrating with an application to Canada. It also introduces a set of useful software tools for conducting a model-consistent forecast.
    Keywords: Monetary policy , Canada , United States , Monetary aggregates , Forecasting models , Economic models ,
    Date: 2006–04–10
  14. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the impacts of anticipated and unanticipated monetary policies on two large open economies that are dependent upon raw materials imports from a small third country. The analysis is based on asymmetric behavior on the supply side of both economies and an endogenous commod- ity pricing equation of Phillips' curve type. It is shown that an increase in the growth rate of domestic money supply is not neutral in the long run but induces contractionary output effects in both economies. The paper also dis- cusses the impacts of monetary policy rules that either reduce the in°ationary or contractionary output effects of commodity price shocks.
    Keywords: Monetary Policy, Oil Price Shocks, International Policy Coordination
    JEL: E63 F42 Q43
    Date: 2005
  15. By: Ronald MacDonald; Cezary Wójcik
    Abstract: In this paper we propose an alternative explanation for the nature, sources and consequences of inflation rate differentials in a monetary union, such as EMU. To achieve this, we build on the new neoclassical synthesis (NNS) framework, recently advanced by Goodfriend (2002) and Goodfriend and King (2000). Based on the NNS setup, we discuss the inflationary consequences of the catching-up process in a heterogeneous monetary union. In particular, we explore the interaction between catching-up and inflation differentials and offer an interpretation of the nature of this interaction. Our discussion is in stark contrast to the conventional Balassa-Samuelson (BS) interpretation. In particular, we demonstrate that divergent inflation rates between Member States do not necessarily have to be an equilibrium phenomenon, even if the original shock comes from the supply-side of the economy. Second, we show how a centralized monetary policy may produce such divergence of individual country’s inflation rates when countries differ in size and in trend productivity growth. Against this background, we additionally show how the catching may potentially lead to unsustainable credit booms in a catching-up member country. Finally, we indicate some important deficiencies of the BS model as a guide to short- and medium-run policy making analysis.
    Keywords: inflation differentials, credit booms, new neoclassical synthesis, monetary union, EMU, Balassa-Samuelson model
    JEL: F30
    Date: 2006
  16. By: Clausen, Volker; Wohltmann, Hans-Werner
    Abstract: This paper analyzes the dynamic effects of anticipated monetary and fis- cal policies in a large monetary union, which is characterized by asym- metric interest rate transmission. We explicitly solve the asymmetric three-country model using the decomposition methods of Aoki (1981) and Fukuda (1993). Anticipated monetary and fiscal expansions lead to negative international spillovers and to intertemporal reversals in the re- lative effectiveness of policy on member country outputs. Intertemporal international coordination of monetary policies between Euroland and the US is able to stabilize the output adjustment processes induced by an anticipated unilateral fiscal expansion.
    Keywords: Monetary Union, Fiscal Policy, Monetary Policy, Policy Coordination
    JEL: E58 F41
    Date: 2005
  17. By: Charalambos G. Tsangarides; Mahvash Saeed Qureshi
    Abstract: Applying techniques of clustering analysis to a set of variables suggested by the convergence criteria and the theory of optimal currency areas, this paper looks for country homogeneities to assess membership in the existing and proposed monetary unions of the broader west African region. Our analysis reveals considerable dissimilarities in the economic characteristics of the countries in west and central Africa. In particular, the West African Monetary Zone (WAMZ) countries do not form a cluster with the West Africa Economic and Monetary Union (WAEMU) countries; and, within the WAMZ, there is a significant lack of homogeneity. Furthermore, when west and central African countries are considered together, we find significant heterogeneities within the CFA franc zone, and some interesting similarities between the Economic and Monetary Community of Central Africa (CEMAC) and WAMZ countries. Overall, our findings raise some questions about the geographical boundaries of several existing and proposed monetary unions.
    Keywords: Monetary unions , Africa , West African Economic and Monetary Union , Central African Economic and Monetary Community , Data analysis ,
    Date: 2006–04–14
  18. By: Christopher J. Neely
    Abstract: This paper presents the results of a survey of monetary authorities with respect to their beliefs about foreign exchange intervention. The survey provides evidence on new intervention issues that would be difficult to investigate otherwise, such as conditional response times, non-foreign exchange factors in intervention and beliefs about profitability. At the same time, the survey provides new evidence on issues that have been investigated with other methods, such as channels of effectiveness, effect on currency components, profitability, and motivations for secrecy. Respondents disagreed with the predominant views on intervention*s effect on volatility and common arguments against intervention. The exchange rate regime of a central bank explains its beliefs about several important aspects of intervention, including factors in a successful intervention and the potential profitability of intervention.
    Keywords: Foreign exchange ; Banks and banking, Central
    Date: 2006
  19. By: Mark Crosby; Tim Kam; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: This paper quantifies the costs of mitigating exchange rate volatility within the context of a flexible inflation targeting central bank. Within a standard linearquadratic formulation of inflation targeting, we append a term that penalises deviations in the exchange rate to the central bank’s loss function. For a simple forward-looking New Keynesian model, we show that the central bank can reduce volatility in the exchange rate relatively costlessly by aggressively responding to the real exchange rate. However, when we append correlated shocks – to better match summary statistics of the Australian data – we find that the costs associated with reducing exchange rate volatility are larger: output volatility increases substantially. Finally, we apply our method to a variant of a small backward-looking New Keynesian model of the Australian economy. Under this model, large increases in inflation and output volatility accrue if the central bank attempts to mitigate exchange rate volatility.
    JEL: C51 E52 F41
    Date: 2006–06
  20. By: Christoffel, Kai; Linzert, Tobias
    Abstract: In this paper we incorporate a labor market with matching frictions and wage rigidities into the New Keynesian business cycle model. In particular, we analyze the effect of a monetary policy shock and investigate how labor market frictions affect the transmission process of monetary policy. The model allows real wage rigidities to interact with adjustments in employment and hours affecting inflation dynamics via marginal costs. We find that the response of unemployment and inflation to an interest rate innovation depends on the degree of wage rigidity. Generally, more rigid wages translate into more persistent movements of aggregate inflation. Moreover, the impact of a monetary policy shock on unemployment and inflation depends also on labor market fundamentals such as bargaining power and the flows in and out of employment.
    Keywords: Monetary Policy, Matching Models, Labor Market Search, Inflation Persistence, Real Wage Rigidity
    JEL: E31 E32 E52 J64
    Date: 2006
  21. By: Balázs Égert; Ronald MacDonald
    Abstract: This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels.
    Keywords: monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006
  22. By: Christoffel, Kai Philipp; Küster, Keith; Linzert, Tobias
    Abstract: We focus on a quantitative assessment of rigid labor markets in an environment of stable monetary policy. We ask how wages and labor market shocks feed into the inflation process and derive monetary policy implications. Towards that aim, we structurally model matching frictions and rigid wages in line with an optimizing rationale in a New Keynesian closed economy DSGE model. We estimate the model using Bayesian techniques for German data from the late 1970s to present. Given the pre-euro heterogeneity in wage bargaining we take this as the first-best approximation at hand for modelling monetary policy in the presence of labor market frictions in the current European regime. In our framework, we find that labor market structure is of prime importance for the evolution of the business cycle, and for monetary policy in particular. Yet shocks originating in the labor market itself may contain only limited information for the conduct of stabilization policy.
    Keywords: Labor market, wage rigidity, bargaining, Bayesian estimation
    JEL: C11 E32 E52 J64
    Date: 2006
  23. By: Agnes Benassy-Quere
    Abstract: In this paper, a simple, two-country, static model is developed in order to analyze short-run fiscal spillovers in a monetary union, depending on (i) the way fiscal policy is implemented (expenditures versus net taxes), (ii) the strength of the supply-side channel of tax policies compared to the demand-side channel, and (iii) the extent of central bank accommodation. It is shown that both a spending expansion and a tax cut produce positive spillovers on foreign output provided the central bank accommodates the shock, except if tax cuts have large supply-side effects. If the central bank does not accommodate the shock, the spillovers of a fiscal expansion are generally negative. However fiscal spillovers can be positive in the case of a tax cut because induced disinflation reduces or even reverses the reaction of the central bank. Due to financial liberalization, it is possible that demand-side channels of fiscal policy have become less powerful compared to supply-side channels. To the extent that interest-rate variations are smooth, this could reduce the positive spillover of a spending expansion while turning the spillover of a tax cut into the negative territory.
    Keywords: Fiscal policy; theoretical model; spillovers; monetary union; short run; tax and budget policy; models; monetary block
    JEL: E61 E62 F41
    Date: 2006–07
  24. By: Ravi Balakrishnan; Sam Ouliaris
    Abstract: This paper aims to improve the understanding of U.S. inflation dynamics by separating out structural from cyclical effects using frequency domain techniques. Most empirical studies of inflation dynamics do not distinguish between secular and cyclical movements, and we show that such a distinction is critical. In particular, we study traditional Phillips curve (TPC) and new Keynesian Phillips curve (NKPC) models of inflation, and conclude that the long-run secular decline in inflation cannot be explained in terms of changes in external trade and global factor markets. These variables tend to impact inflation primarily over the business cycle. We infer that the secular decline in inflation may well reflect improved monetary policy credibility and, thus, maintaining low inflation in the long run is closely linked to anchored inflation expectations.
    Date: 2006–07–12
  25. By: Jorge Roldos
    Abstract: This paper studies changes in Canada's monetary policy transmission, associated with the important changes in financial structure experienced in the 1990's, using two methodologies. First, VAR models show a clear break in monetary transmission beginning in 1988, after changes in financial regulation initiated the process of financial disintermediation. Second, estimates of the interest rate elasticity of aggregate demand in IS equations increase in the 1990's, suggesting that the systematic component of monetary policy has become more relevant. The ratio of direct to indirect finance, a measure of disintermediation, contributes to explain changes in the interest rate elasticity, suggesting an increased effectiveness of monetary policy associated with a larger use of market-based sources of finance.
    Date: 2006–04–11
  26. By: Michael Lamla (Department of Management, Technology and Economics, ETH Zurich (Swiss Federal Institute of Technology), Switzerland); Sarah M. Rupprecht (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents.
    Keywords: Central Bank Communication, Expectations, Term Structure of Interest Rates, Yield Curve, ECB.
    JEL: E43 E44 E58
    Date: 2006–04
  27. By: Philippe D Karam; Douglas Laxton; Andrew Berg
    Abstract: This paper motivates and describes an approach to forecasting and monetary policy analysis based on the use of a simple structural macroeconomic model, along the lines of those in use in a number of central banks. It contrasts this approach with financial programming and its emphasis on monetary aggregates, as well as with more econometrically driven analyses. It presents illustrative results from an application to Canada. A companion paper provides a more detailed how-to guide and introduces a set of tools designed to facilitate this approach.
    Keywords: Monetary policy , Canada , United States , Monetary aggregates , Forecasting models , Economic models ,
    Date: 2006–04–10
  28. By: Greiber, Claus; Lemke, Wolfgang
    Abstract: In this study we construct a measure of macroeconomic uncertainty from several observable economic indicators for the euro area. Indicator variables are based on nancial market data, such as medium-term returns, loss and volatility measures but also come from surveys that capture business and consumer sentiment. From these we estimate the path of underlying macroeconomic uncertainty using an unobserved components model. Employing cointegration analysis it is demonstrated that the extracted measures of uncertainty help to explain the increase in euro area M3 over the period 2001 to 2004. Similar evidence can be found for US monetary aggregates.
    Keywords: Money demand, Macroeconomic Uncertainty, Excess Liquidity
    JEL: E41
    Date: 2005
  29. By: Tommaso Proietti (Università degli Studi di Udine - Dipartimento di Scienze Statistiche)
    Abstract: The measurement of core inflation can be carried out by optimal signal extraction techniques based on the multivariate local level model, by imposing suitable restrictions on its parameters. The various restrictions correspond to several specialisations of the model:the core inflation measure becomes the optimal estimate of the common trend in a multivariate time series of inflation rates for a variety of goods and services, or it becomes a minimum variance linear combination of the inflation rates, or it represents the component generated by the common disturbances in a dynamic error component formulation of the multivariate local level model. Particular attention is given to the characterisation of the optimal weighting functions and to the design of signal extraction filters that can be viewed as two sided exponentially weighted moving averages applied to a cross-sectional average of individual inflation rates. An empirical application relative to U.S. monthly inflation rates for 8 expenditure categories is proposed.
    Keywords: common trends, dynamic factor analysis, homogeneity, exponential smoothing
    Date: 2006–05–31
  30. By: Noureddine Krichene
    Abstract: This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.
    Keywords: Oil prices , Interest rates , Exchange rates , Monetary policy , Oil crisis ,
    Date: 2006–03–21
  31. By: Marco Del Negro; Frank Schorfheide
    Abstract: The paper proposes a novel method for conducting policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models and applies it to a New Keynesian DSGE model along the lines of Christiano, Eichenbaum, and Evans (JPE2005) and Smets and Wouters (JEEA2003). We first quantify the degree of model misspecification and then illustrate its implications for the performance of different interest-rate feedback rules. We find that many of the prescriptions derived from the DSGE model are robust to model misspecification.
    Keywords: Monetary policy
    Date: 2005
  32. By: Reitz, Stefan; Taylor, Mark P.
    Abstract: The coordination channel has been proposed as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signaling channels. If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness.
    Keywords: foreign exchange intervention, coordination channel, market microstructure, nonli mean reversion
    JEL: C10 F31 F41
    Date: 2006
  33. By: Wohltmann, Hans-Werner
    Abstract: In diesem Beitrag werden die intertemporalen Wirkungen von antizipierten geld- und fiskalpolitischen Maßnahmen im Rahmen eines asymmetrischen Drei-Länder-Modells vom Mundell-Fleming-Phillips-Typ mit rationalen Preis- und Wechselkursänderungserwartungen charakterisiert. Zwei der drei großen offenen Volkswirtschaften bilden dabei eine Währungsunion, die durch eine gemeinsame Zentralbank, eine Einheitswährung und einen gemeinsamen flexiblen Wechselkurs gegenüber dem Drittland gekennzeichnet ist. Im Unterschied zur bestehenden Literatur zur Theorie einer Währungsunion und zur Theorie der internationalen Politiktransmission sind die beiden Mitgliedsländer der Union nicht vollkommen symmetrisch, sondern weisen sowohl auf der Nachfrageseite als auch auf der Angebotsseite jeweils eine Asymmetrie auf. Dennoch ist es möglich, das dynamische asymmetrische Drei-Länder-Modell mit Hilfe der für vollkommen symmetrische Länder entwickelten Dekompositionsmethode von Fukuda (1993) analytisch zu lösen. This paper analyzes the international transmission of anticipated monetary and fiscal policy in the framework of an asymmetric dynamic three-country model with monetary union. The monetary union consists of two large member countries with an asymmetric macroeconomic structure both on the demand and supply side. The paper explicitly solves the asymmetric macroeconomic model using a generalization of the well-known decomposition method of Aoki (1981) to the three-country case. It is shown that the inter- national transmission both of an anticipated unilateral increase in the growth rate of the union money stock and in government expenditure is negative over a large period of time. Within the monetary union intertemporal reversals in the relative effectiveness of policy on member country outputs occur. It is further shown that an international coordination of monetary policy is able to stabilize the output development in the three countries induced by unilateral fiscal policy expansion.
    Keywords: Monetary Union, Monetary Policy, Fiscal Policy, Policy Coordination
    JEL: E58 F41
    Date: 2005
  34. By: Wolfram Berger; Helmut Wagner
    Abstract: This paper studies the optimal design of monetary policy in an optimizing two-country sticky price model. We suppose that the production sequence of final consumption goods stretches across both countries and is associated with vertical trade. Prices of final consumption goods are sticky in the consumer's currency. Pursuing an inward-looking policy, as suggested in recent work, is not optimal in this set-up. We also ask which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy. The results hinge critically on the degree of price flexibility and the relative importance of cost-push and productivity shocks. In many cases, a strict targeting of price indices like producer or consumer price indices is dominated by rules that allow for some fluctuations in prices such as nominal income or monetary targeting.
    Date: 2006–07–12
  35. By: Sibel Yelten; Harald Anderson
    Abstract: Debates surrounding the adoption of a common currency have focused on its benefits weighed against the long-term costs of losing monetary independence. These debates have assumed that the penalty for not adopting a common currency is the maintenance of the status quo. This paper uses the Sjaastad model to analyze the price-making power of major currencies with regard to the prices of traded goods in small countries that have not adopted the euro and uses the Bayoumi-Eichengreen OCA index methodology to shed further light on changes in Europe. The empirical evidence suggests that small countries that have not adopted the euro have increasingly seen a change in the determinants of their traded goods prices. This seems to contrast with the experience of small countries that adopted the euro. The results need to be interpreted carefully, given the short time series.
    Date: 2006–06–26
  36. By: Ewe-Ghee Lim
    Abstract: This paper examines opposing views on the euro's challenge to the dollar as an international currency. One view emphasizes Europe's large economy and diversification effects as undergirding a vigorous challenge. The other emphasizes "network externalities," particularly undergirding continued dollar dominance. The data to date support the second view but also show the euro has significantly overtaken the legacy currencies as a reserve currency. Generally, large economic size alone is insufficient to challenge the network externalities supporting vehicle currencies, but scope exists for the euro to advance as an international store of value. The paper discusses the euro's medium-term prospects.
    Date: 2006–06–27
  37. By: Antonio Diez de los Rios
    Abstract: The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression. In addition, the model is able to reproduce the forward premium puzzle.
    Keywords: Exchange rates; Interest rates; Econometric and statistical methods
    JEL: E43 F31 G12 G15
    Date: 2006
  38. By: Herwartz, Helmut; Reimers, Hans-Eggert
    Abstract: In this paper we follow an empirical approach to examine the implications of the Fisher hypothesis, namely cointegration linking interest rates and inflation, and stationarity of the real interest rate implying in turn homogeneity of the potential equilibrium relation. The considered sample is an unbalanced panel and comprises monthly time series data from more than 100 economies covering at most a period of about 45 years. In total more than 31000 observations enter our empirical analysis. From cross sectional error correction and dynamic OLS regressions we find that the presumed dynamic relation is hardly homogeneous over the cross section. Therefore, building on cross sectional parameter homogeneity nonstationary panel data models are provided merely as a complement to cross section specific analyses. Apart from standard between regressions we exploit the cross section dimension to infer on parameter homogeneity over particular economic states. For this purpose we rely on semiparametric implementations of so-called functional coefficient models. The latter are suitable to relate key model parameters on economic states, as e.g. periods of higher vs. lower inflation or inflation risk. From the latter approach we find that time or state invariance of key model parameters is not supported empirically. Moreover the evidence in favor of cointegration is weak over periods of high inflation. The Fisher coefficient turns out to be remarkably stable and is, over most considered states, significantly less than unity.
    Keywords: Fisher hypothesis, Panel cointegratio alysis, Functional coefficient models
    JEL: C32 C33 E40
    Date: 2006
  39. By: Pradeep Dubey; John Geanakoplos
    Date: 2006–07–29
  40. By: Lavern McFarlane; Wayne Robinson; Goohoon Kwon
    Abstract: This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace's (1981) "unpleasant monetarist arithmetic" that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed economies. These results are robust to the inclusion of other variables, corrections for endogeneity biases, and relaxation of common-slope restrictions and are invariant over sub-sample periods. We estimate a VAR to trace out the transmission channel and find the impulse responses consistent with the predictions of a forward-looking model of inflation. Wealth effects of public debt could also affect inflation, as posited by the fiscal theory of the price level, but we do not find supportive evidence. The results suggest that the risk of a debt-inflation trap is significant in highly indebted countries, and pure money-based stabilization is unlikely to be effective over the medium term. Our findings stress the importance of institutional and structural factors in the link between fiscal policy and inflation.
    Keywords: Public debt , Jamaica , Money supply , Demand for money , Inflation , Fiscal policy , Economic models ,
    Date: 2006–05–17
  41. By: Leith, Campbell; von Thadden, Leopold
    Abstract: This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral. Naturally, this non-neutrality increases the importance of fiscal aspects for the design of policy rules consistent with determinate dynamics.
    Keywords: Monetary policy, Fiscal regimes
    JEL: E52 E63
    Date: 2006
  42. By: Luis Catão
    Abstract: This paper shows that recent manifestations of sudden stops (SSs) in international capital flows have striking parallels in the early financial globalization era preceding World War I. All main capital-importing countries then faced episodic capital flow reversals averaging some 5 percent of GDP and with a median duration of four years. Most SSs also displayed striking crosscountry synchronization, being immediately preceded by rising world interest rates. Both fixed and floating exchange rate regimes were hit, with no significant differences between them. Yet, not all SSs resulted in currency drops: while some countries experienced currency collapses, others managed to preserve exchange rate stability. These different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.
    Keywords: Financial crisis , Capital flows , Exchange rate regimes ,
    Date: 2006–06–06
  43. By: Lemke, Wolfgang; Archontakis, Theofanis
    Abstract: Using a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields, respectively. This is in contrast to linear short-rate process which imply an affine yield function. The intervals for which convexity or concavity prevails increase with time to maturity.
    Keywords: Threshold process, term structure of interest rates, nonli yield function
    JEL: C63 E43 G12
    Date: 2006
  44. By: Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
    Abstract: This paper analyzes the individual bidding behaviour of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variable that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks' respective bidding behaviour to a large extent. Thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sctor.
    Keywords: Money Market Auctions, Liquidity Management, Interbank Market
    JEL: E51 G21
    Date: 2005
  45. By: Döpke, Jörg; Dovern, Jonas; Fritsche, Ulrich; Slacalek, Jirka
    Abstract: This paper investigates the relevance of the sticky information model of Mankiw and Reis (2002) and Carroll (2003) for four major European economies (France, Germany, Italy and the United Kingdom). As opposed to the benchmark rational expectation models, households in the sticky information environment update their expectations sporadically rather than instantaneously owing to the costs of acquiring and processing information. We estimate two alternative parametrizations of the sticky information model which differ in the stationarity assumptions about the underlying series. Using survey data on households’ and experts’ inflation expectations, we find that the model adequately captures the dynamics of household inflation expectations. Both parametrizations imply comparable speeds of information updating for the European households as was previously found in the US, on average roughly once a year.
    Keywords: Inflation, expectations, sticky information, inflation persistence
    JEL: E31
    Date: 2005
  46. By: Mick Silver
    Abstract: This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.
    Keywords: Inflation , Consumer price indexes , Inflation targeting , Economic models ,
    Date: 2006–04–26
  47. By: Christopher Crowe
    Abstract: This paper presents and then tests a political economy model to analyze the observed positive relationship between income inequality and inflation. The model's key features are unequal access to both inflation-hedging opportunities and the political process. The model predicts that inequality and 'elite bias' in the political system interact to create incentives for inflation. The paper's empirical section focuses on this predicted interaction effect. The identification strategy involves using the end of the Cold War as a source of exogenous variation in the political environment. It finds robust evidence in support of the model.
    Date: 2006–07–07
  48. By: Robert Rich; Joseph Tracy
    Abstract: This paper examines matched point and density forecasts of inflation from the Survey of Professional Forecasters to analyze the relationship between expected inflation, disagreement, and uncertainty. We extend previous studies through our data construction and estimation methodology. Specifically, we derive measures of disagreement and uncertainty by using a decomposition proposed in earlier research by Wallis and by applying the concept of entropy from information theory. We also undertake the empirical analysis within a seemingly unrelated regression framework. Our results offer mixed support for the propositions that disagreement is a useful proxy for uncertainty and that increases in expected inflation are accompanied by heightened inflation uncertainty. However, we document a robust, quantitatively and statistically significant positive association between disagreement and expected inflation.
    Keywords: Inflation (Finance) ; Economic forecasting ; Information theory ; Uncertainty
    Date: 2006
  49. By: Nkunde Mwase
    Abstract: The paper examines the effect of exchange rate changes on consumer prices in Tanzania using structural vector autoregression (VAR) models. Using a data set covering the period 1990-2005, we find that the exchange rate pass-through to inflation declined in the late 1990s despite the depreciation of the currency. This could be partly attributed to the macroeconomic and structural reforms that were implemented during this period. The decline in the pass-through does not necessarily imply that exchange rate fluctuations are less significant in explaining macroeconomic fluctuations. The recent increase in the share of imports in the economy suggests that the pass-through could rise over the medium term. The findings imply that the authorities should remain vigilant in assessing the potential impact of foreign prices on the dynamics of inflation in Tanzania. In this regard, the authorities should seek to maintain low and stable inflation and continue the ongoing structural reforms designed to improve efficiency and increase competition.
    Date: 2006–06–26
  50. By: Ettore Kovarich; Russell C. Krueger
    Abstract: Looking ahead to the creation of a Gulf Cooperation Council (GCC) Currency Union in 2010, the paper covers some implications for the statistical programs of the GCC countries. Despite uncertainty over the structure of the proposed union, the paper envisions several types of mutually reinforcing statistics-convergence criteria, statistics on the core policy variables and instruments, additional macroeconomic data, specialized statistics related to the economic and institutional conditions within the union, and public information. Major changes to national statistical programs are needed that should begin soon.
    Keywords: Statistics , Monetary unions , Cooperation Council for the Arab States of the Gulf ,
    Date: 2006–06–14
  51. By: Blaskowitz, Oliver; Herwartz, Helmut; de Cadenas Santiago, Gonzalo
    Abstract: In this study we forecast the term structure of FIBOR/EURIBOR swap rates by means of recursive vector autoregressive (VAR) models. In advance, a principal components analysis (PCA) is adopted to reduce the dimensionality of the term structure. To evaluate ex–ante forecasting performance for particular short, medium and long term rates and for the level, slope and curvature of the swap term structure, we rely on measures of both statistical and economic performance. Whereas the statistical performance is investigated by means of the Henrikkson–Merton statistic, the economic performance is assessed in terms of cash flows implied by alternative trading strategies. Arguing in favor of local homogeneity of term structure dynamics, we propose a data driven, adaptive model selection strategy to “predict the best forecasting model” out of a set of 100 alternative implementations of the PCA/VAR model. This approach is shown to outperform forecasting schemes relying on global homogeneity of the term structure.
    Keywords: Principal components, Factor Analysis, Ex–ante forecasting, EURIBOR swap rates, Term structure, Trading strategies
    JEL: C32 C53 E43 G29
    Date: 2005
  52. By: Eduardo Levy Yeyati
    Abstract: The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.
    Date: 2006–07
  53. By: Carlo Altavilla; Paul De Grauwe
    Abstract: This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.
    Keywords: non-linearity, exchange rate modelling, forecasting
    JEL: C53 F31
    Date: 2006
  54. By: Michael T. Gapen; Ralph Chami; Thomas F. Cosimano
    Abstract: This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.
    Date: 2006–03–16
  55. By: Jiro Honda; Liliana Schumacher
    Abstract: This paper discusses whether adopting the U.S. dollar as the sole legal tender could help Liberia, a postconflict economy, to boost growth and strengthen fiscal discipline. In view of the performance of exchange rate regimes in many countries and Liberia's own experience with dollarization, we conclude that Liberia should not adopt full dollarization for the following reasons: (i) the alleged benefits voiced by the proponents of dollarization, in terms of enhanced fiscal discipline and faster economic growth, are not supported by the empirical evidence; (ii) dollarization would increase the Liberian economy's vulnerability to external shocks and Liberia's social fragility; (iii) banks in fully dollarized economies face additional capitalization requirements that Liberian banks cannot meet at present; and (iv) dollarization would be costly in terms of real resources because of the loss of seigniorage.
    Date: 2006–04–10

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.