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on Monetary Economics |
| By: | Marina Emiris (National Bank of Belgium, Research Department) |
| Abstract: | The paper evaluates the implications of the Smets and Wouters (2004) DSGE model for the US yield curve. Bond prices are modelled in a way that is consistent with the macro model and the resulting risk premium in long term bonds is a function of the macro model parameters exclusively. When the model is estimated under the restriction that the implied average 10-year term premium matches the observed premium, it turns out that risk aversion and habit only need to rise slightly, while the increase in the term premium is achieved by a drop in the monetary policy parameter that governs the aggressiveness of the monetary policy rule. A less aggressive policy increases the persistence of the reaction of inflation and the short interest rate to any shock, reinforces the covariance between the marginal rate of substitution of consumption and bond prices, turns positive the contribution of the inflation premium and drives the term premium up. The paper concludes that by generating persistent inflation the presence of nominal rigidities can help in reconciling the macro model with the yield curve data. |
| Keywords: | term structure of interest rates, policy rules, risk premia |
| JEL: | E43 E44 G12 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200607-2&r=mon |
| By: | Takatoshi Ito; Kiyotaka Sato |
| Abstract: | Macroeconomic consequences of a large currency depreciation among the crisis-hit Asian economies had varied from one country to another. Inflation did not soar in most Asian countries, including Thailand and Korea, after the exchange rate depreciated during the crisis. Indonesia, however, suffered very high inflation following a very large nominal depreciation of the rupiah. As a result, price competitive advantage by the rupiah depreciation was lost in the real exchange rate terms. The objective of this paper is to examine the pass-through effects of exchange rate changes on the domestic prices in the East Asian economies using a VAR analysis. Main results are as follows: (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit economies; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large, and statistically significant. Thus, Indonesia’s accommodative monetary policy, coupled with the high degree of the CPI responsiveness to exchange rate changes was an important factor in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period. |
| JEL: | F12 F31 F41 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12395&r=mon |
| By: | Balázs Égert (Oesterreichische Nationalbank; EconomiX at the University of Paris X-Nanterre and William Davidson Institute.); Ronald MacDonald (University of Glasgow and CESIfo.) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/5&r=mon |
| By: | Ansgar Belke; Daniel Gros |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:271&r=mon |
| By: | L. Randall Wray |
| Abstract: | This paper briefly summarizes the orthodox approach to banking, finance, and money, and then points the way toward an alternative based on socioeconomics. It argues that the alternative approach is better fitted to not only the historical record, but also sheds more light on the nature of money in modern economies. In orthodoxy, money is something that reduces transaction costs, simplifying “economic life” by lubricating the market mechanism. Indeed, this is the unifying theme in virtually all orthodox approaches to banking, finance, and money: banks, financial instruments, and even money itself originate to improve market efficiency. However, the orthodox story of money's origins is rejected by most serious scholars outside the field of economics as historically inaccurate. Further, the orthodox sequence of “commodity (gold) money” to credit and fiat money does not square with the historical record. Finally, historians and anthropologists have long disputed the notion that markets originated spontaneously from some primeval propensity, rather emphasizing the important role played by authorities in creating and organizing markets. By contrast, this paper locates the origin of money in credit and debt relations, with the money of account emphasized as the numeraire in which credits and debts are measured. Importantly, the money of account is chosen by the state, and is enforced through denominating tax liabilities in the state’s own currency. What is the significance of this? It means that the state can take advantage of its role in the monetary system to mobilize resources in the public interest, without worrying about “availability of finance.” The alternative view of money leads to quite different conclusions regarding monetary and fiscal policy, and it rejects even long-run neutrality of money. It also generates interesting insights on exchange rate regimes and international payments systems. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_459&r=mon |
| By: | K. Huang; Z. Liu; L. Phaneuf |
| Abstract: | This paper investigates the contributions of staggered price contracts, staggered wage contracts, and an input-output production structure in generating the observed persistence of real output and inflation, and the weak but persistent response of real wages following monetary shocks. It examines the interactions of these three mechanisms in a dynamic general equilibrium (DGE) environment, with pricing decision and wage setting rules derived from individual optimization. Following a monetary shock, (i) a staggered wage model generates more persistence in both inflation and output than does a staggered price model when intermediate goods are used in production; (ii) adding intermediate goods causes a tradeoff between output persistence and inflation persistence: it magnifies the autocorrelations of output while reducing those of inflation in both the short and medium horizons; (iii) a combination of staggered prices and staggered wages is required to generate the observed weak but persistent response of real wages to a monetary shock, and incorporating intermediate goods in such a model is essential to make the real wage response weakly procyclical. |
| Keywords: | Staggered contracts, input-output structure, business cycle persistence, monetary policy |
| JEL: | E31 F32 F52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-20&r=mon |
| By: | K. Huang; Z. Liu |
| Abstract: | Recent empirical studies reveal that monetary shocks cause persistent fluctuations in inflation and aggregate output. In the literature, few mechanisms have been identified to generate such persistence. In this paper, we propose a new mechanism that does so. Our model features an input-output structure and staggered price contracts. Working through the input-output relations and the timing of firms’ pricing decisions, the model generates smaller fluctuations in marginal cost facing firms at later stages than at earlier stages and hence persistent responses of both the inflation rate and aggregate output following a monetary stock. The persistence is larger, the greater the number of production stages. With a sufficient number of stages, the real persistence is arbitrarily large. |
| Keywords: | Input-output structure, staggered price contracts, persistence, monetary policy |
| JEL: | E31 E32 E52 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-10&r=mon |
| By: | Frederic S. Mishkin; Niklas J. Westelius |
| Abstract: | In this paper we examine how target ranges work in the context of a Barro-Gordon (1983) type model, in which the time-inconsistency problem stems from political pressures from the government. We show that target ranges turn out to be an excellent way to cope with the time-inconsistency problem, and achieve many of the benefits that arise under practically less attractive solutions such as the conservative central banker and optimal inflation contracts. Our theoretical model also shows how an inflation targeting range should be set and how it should respond to changes in the nature of shocks to the economy. |
| JEL: | E52 E58 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12384&r=mon |
| By: | Joerg Bibow |
| Abstract: | This paper investigates the phenomenon of persistent macroeconomic divergence that has occurred across the eurozone in recent years. Optimal currency area theory would point toward asymmetric shocks and structural factors as the foremost candidate causes. The alternative hypothesis pursued here focuses on the working of the Maastricht regime itself, making it clear that the regime features powerful built-in destabilizers that foster divergence as well as fragility. Supposed adjustment mechanisms actually have turned out to undermine the operation of the currency union by making it less “optimal,” that is, less subject to a “one-size-fits-all” monetary policy and common nominal exchange rate, in view of the resulting business cycle desynchronization and related build-up of financial imbalances. The threats of fragility and divergence reinforce each other. Without regime reform these developments could potentially spiral out of control, threatening the long-term survival of EMU. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_460&r=mon |
| By: | Zoltán M. Jakab (Magyar Nemzeti Bank); Viktor Várpalotai (Magyar Nemzeti Bank); Balázs Vonnák (Magyar Nemzeti Bank) |
| Abstract: | This paper assesses the effect of monetary policy on major components of aggregate demand. We use three different macromodels, all estimated on Hungarian data of the past 10 years. All three models indicated that after an unexpected monetary policy tightening investments decrease quickly. The response of consumption is more ambiguous, but it is most likely to increase for several years, which may be explained by the slow adjustment of nominal wages. On the other hand, we could not detect any significant change in net exports during the first couple of years after the shock. The weak response of net exports can be due to the fact that the drop in exports is coupled with a fall in imports of almost the same magnitude, highlighting the relative importance of the income-absorption effect, as opposed to the expenditure-switching effect. |
| Keywords: | monetary transmission mechanism, macromodels, VAR, impulse responses. |
| JEL: | E20 E27 E52 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2006/4&r=mon |
| By: | K. Huang; Z. Liu |
| Abstract: | This paper analyzes a two-country general equilibrium model with multiple stages of production and sticky prices. Working through the cross-country input-output relations and endogenous price stickiness, the model generates the observed patterns in international aggregate comovements following monetary shocks. In particular, both output and consumption comove across countries, and output correlation is larger than consumption correlation, as in the data. The model also generates persistent fluctuations of real exchange rates. Thus, vertical international trade plays an important role in propagating monetary shocks in an open economy. |
| Keywords: | Vertical international trade, monetary policy, international comovements, real exchange rate persistence |
| JEL: | E32 F31 F41 |
| URL: | http://d.repec.org/n?u=RePEc:usu:wpaper:2000-07&r=mon |
| By: | Refet S. Gurkaynak; Brian Sack; Jonathan H. Wright |
| Abstract: | The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website http://www.federalreserve.gov/pubs/feds/2006 and which will be updated periodically, will provide a benchmark yield curve that will be useful to applied economists. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2006-28&r=mon |
| By: | Kenneth W. Clements; Renee Fry |
| Abstract: | There is a large literature on the influence of commodity prices on the currencies of countries with a large commodity-based export sector such as Australia, New Zealand and Canada ("commodity currencies"). There is also the idea that because of pricing power, the value of currencies of certain commodity-producing countries affects commodity prices, such as metals, energy, and agricultural-based products ("currency commodities"). This paper merges these two strands of the literature to analyse the simultaneous workings of commodity and currency markets. We implement the approach by using the Kalman filter to jointly estimate the determinants of the prices of these currencies and commodities. Included in the specification is an allowance for spillovers between the two asset types. The methodology is able to determine the extent that currencies are indeed driven by commodities, or that commodities are driven by currencies, over the period 1975 to 2005. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-19&r=mon |