nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒08‒19
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. EMU Enlargement, Policy Uncertainty and Economic Reforms By Carsten Hefeker
  2. Central Bank Independence and inflation: the case of Greece By PANAGIOTIDIS, Theodore; TRIAMPELLA, Afroditi
  3. Japanese Foreign Exchange Intervention and the Yen/Dollar Exchange Rate: A Simultaneous Equations Approach Using Realized Volatility By Eric Hillebrand; Gunther Schnabl; Yasemin Ulu
  4. Evidence of Bank Lending Channel for Argentina and Colombia By José Gómez González; Fernando Grosz
  5. Evaluating Inflation Targeting Using a Macroeconometric Model By Ray C. Fair
  6. Credit risk mitigation in central bank operations and its effects on financial markets - the case of the Eurosystem By Ulrich Bindseil; Francesco Papadia
  7. The Timing of Monetary Policy Shocks By Giovanni Olivei; Silvana Tenreyro
  8. The Theory of Money and Financial Institutions: A Summary of a Game Theoretic Approach By Martin Shubik
  9. Response of Venezuelan output to monetary policy, deficit spending, and currency depreciation: a VAR model By HSING, Yu
  10. The Effects of Rounding on the Consumer Price Index By Elliot D. Williams
  11. Collateral Restrictions and Liquidity Under-Supply: A Simple Model By Ana Fostel; John Geanakoplos

  1. By: Carsten Hefeker
    Abstract: The paper analyzes the relation between monetary uncertainty and government incentives to implement economic reforms that reduce structural distortions and make economies more flexible. It is shown that uncertainty about the central bank’s reaction function leads to more reforms. I relate this result to the debate about central bank setup in a larger monetary union.
    Keywords: transparency of monetary policy, ECB voting structure, European Monetary Union, optimal representation, labor market regulation
    JEL: D72 E52 E58 F33
    Date: 2006
  2. By: PANAGIOTIDIS, Theodore; TRIAMPELLA, Afroditi
    Abstract: This paper discusses the argument for Central Bank Independence (CBI) in the case of Greece. Using a time series approach and the last data available before Greece joined the EMU , the hypothesis that Central Bank Independence is important for controlling inflation is examined. Employing two indices, which serve as proxies for CBI and inflation was confirmed. The interactions between the variability of inflation and CBI were also investigated. Furthermore, evidence was found to suggst that the rate of turnover Granger causes inflation.
    Date: 2006–01–01
  3. By: Eric Hillebrand; Gunther Schnabl; Yasemin Ulu
    Abstract: We use realized volatility to study the influence of central bank interventions on the yen/dollar exchange rate. Realized volatility is a technical innovation that allows specifying a system of equations for returns, realized volatility, and interventions without endogeneity bias. We find that during the period 1995 through 1999, interventions of the Japanese monetary authorities did not have the desired effect with respect to the exchange rate level and we measure an increase in volatility associated with interventions. During the period 1999 through 2004, the estimations are consistent with successful interventions, both in depreciating the yen and in reducing exchange rate volatility.
    JEL: C32 E58 F31 F33 G15
    Date: 2006
  4. By: José Gómez González; Fernando Grosz
    Abstract: In this paper we find empirical evidence of bank lending channel for Colombia and Argentina. As for Argentina, we do not find evidence that changes in the interbank interest rate affect the growth rate of total loans directly. However, it does indirectly through interactions: the interbank interest rate affects the loan supply through its interactions with capitalization and liquidity. As for Colombia, there is direct bank lending channel, which is reinforced through interactions with capitalization and liquidity. Also, using a panel data of more than 3300 firms, we provide additional support to the existence of a bank lending channel for Colombia.
    Keywords: Monetary Transmission; Bank Lending Channel; Argentina; Colombia
    JEL: E5 E52 G21
  5. By: Ray C. Fair
    Date: 2006–08–11
  6. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Francesco Papadia (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: This paper reviews the role and effects of the collateral framework which central banks, and in particular the Eurosystem, use in conducting temporary monetary policy operations. First, the paper explains the design of such a framework from the perspective of risk mitigation, which is the purpose of collateralisation. The paper argues that, by means of appropriate risk mitigation measures, the residual risk on any potentially eligible asset can be equalised and brought down to the level consistent with the risk tolerance of the central bank. Once this result has been achieved, eligibility decisions should be based on an economic cost-benefit analysis. Second, the paper looks at the effects of the collateral framework on financial markets, and in particular on spreads between eligible and ineligible assets.
    Date: 2006–08
  7. By: Giovanni Olivei; Silvana Tenreyro
    Abstract: A vast empirical literature has documented delayed and persistent effects of monetary policy shockson output. We show that this finding results from the aggregation of output impulse responses thatdiffer sharply depending on the timing of the shock: when the monetary policy shock takes place inthe first two quarters of the year, the response of output is quick, sizable, and dies out at a relativelyfast pace. In contrast, output responds very little when the shock takes place in the third or fourthquarter. We propose a potential explanation for the differential responses based on uneven staggeringof wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show thata very modest amount of uneven staggering can generate differences in output responses similar tothose found in the data.
    Keywords: monetary policy, wage contracts
    JEL: E1 E52 E58 E32 E31
    Date: 2006–05
  8. By: Martin Shubik
    Date: 2006–08–11
  9. By: HSING, Yu
    Abstract: This study applies the VAR model to find possible responses of real GDP to selected macroeconomic variables in Venezuela. Based on an annual sample during 1961 - 2001, the author finds that the real GDP responds positively to a shcock to real M2 , goverment déficit spending, exchange rate depreciation, and the lagged output and negatively to a shick to the inflation rate during some of the time periods. Except for the lagged output, government deficit spending and the inflation rate are the most influential variable in the first year, and real M2 and the real exchange rate are more influential and have longer - term after the first year.
    Date: 2004–10–01
  10. By: Elliot D. Williams (U.S. Bureau of Labor Statistics)
    Abstract: The Bureau of Labor Statistics rounds the Consumer Price Index (CPI) to a single decimal place before releasing it, and the published CPI inflation series is calculated from those rounded index values. While rounding has only a relatively small effect on the level of the CPI series at present, it can have a significant effct on CPI inflation, the monthly percent changes in the CPI. This paper estimates the impact of rounding error on the published CPI inflation for both contemporaneous and historical data. Using an unrounded CPI series from January 1986 to July 2005 as a benchmark, I find that published CPI inflation differs from its full-precision counterpart approximately 25% of the time, and that reporting the CPI levels to three decimal places would reduce these discrepancies to under 0.5%. Further, the variance introduced by rounding error is large when compared to the sampling variation in CPI inflation. I find that the BLS could reduce total CPI inflation error variance by 42% by simply reporting more digits in the CPI index, resulting in a significantly more accurate reflection of monthly inflation. In order to extend these results to the CPI historical series, I derive the distribution of the rounding error component of inflation. From this analysis, it is possible to estimate the probability of large rounding errors for a given CPI level and rounding precision. Three regimes emerge. Before the 1970’s inflation, discrepancies due to rounding were both frequent and frequently large relative to the underlying inflation rate. During the inflationary period of the mid-1970’s to mid-1980’s, both the probability and relative magnitude of discrepancies decrease dramatically. Finally, the last twenty years are characterized by a slowly falling probability of any rounding-induced error, but a roughly constant probability of an error of a given size.
    Keywords: Consumer Price Index, Variance, Rounding, Inflation
    JEL: C80 E31
    Date: 2006–08
  11. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We show that very little is needed to create liquidity under-supply in equilibrium. Credit constraints on demand by themselves can cause an under-supply of liquidity, without the uncertainty, intermediation, asymmetric information or complicated international financial framework used in other models in the literature. We show that the under-supply is a non-monotone function of the demand distortion that causes it, a result that may have interesting implications for emerging markets economies. Finally, when we make the credit constraint endogenous, the inefficiency can be large due to the presence of a multiplier.
    Keywords: Liquidity under-supply, Credit constraint, Non-monotonicity, Multiplier, Collateral equilibrium
    JEL: D51 E44 F30 G15
    Date: 2004–06

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.