nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒09‒03
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Imperfect Transparency and Shifts in the Central Bank's Output Gap Target By Niklas J. Westelius
  2. Inflation Band Targeting and Optimal Inflation Contracts By Niklas J. Westelius; Frederic S. Mishkin
  3. The euro as invoicing currency in international trade. By Annette Kamps
  4. Optimal Monetary Policy with Collateralized Household Debt and Borrowing Constraints By Tommaso Monacelli
  5. International Exchange Rate Systems - Where do we Stand? By Horst Siebert
  6. Declining valuations and equilibrium bidding in central bank refinancing operations. By Christian Ewerhart; Nuno Cassola; Natacha Valla
  7. Which inflation to target? A small open economy with sticky wages indexed to past inflation. By A. Campolmi
  8. On the Usefulness of the Constrained Planning Problem in a Model of Money By Bhattacharya, Joydeep; Singh, Rajesh
  9. Conventional and Unconventional Approaches to Exchange Rate Modeling and Assessment By Menzie D. Chinn; Ron Alquist
  10. International Evidence on the Efficacy of new-Keynesian Models of Inflation Persistence By Oleg Korenok; Stanislav Radchenko; Norman R. Swanson
  11. Exchange market pressure and the credibility of Macau's currency Board By Macedo, Jorge Braga de; Braz, José; Pereira, Luis brites; Nunes, Luis C.

  1. By: Niklas J. Westelius (Hunter College)
    Abstract: Despite a drastic increase in transparency in recent years, most central banks remain reluctant to reveal their future intended course of policy. This paper analyzes the case where the central bank’s output gap target is private information. It is assumed that the target is subject to temporary and persistent shocks motivated either by measurement errors of potential output or as a result of political pressure. Under imperfect transparency the public cannot observe the true degree of persistence of the shock to the target and must learn by observing past data. In this setting, the paper shows that the welfare implications of imperfect transparency critically depend on whether monetary policy is characterized by discretion or commitment. Indeed, under discretion imperfect transparency decreases inflation and output gap variability and thus increases welfare. Under commitment, the effect on inflation and output variability is ambiguous and depends on the degree of persistence of the shifts in the output target. Welfare, however, is shown to unambiguously decline under imperfect transparency and commitment.
    Keywords: Transparency, Monetary Policy, Discretion, Commitment
    JEL: E5 E52 E61
    Date: 2006
  2. By: Niklas J. Westelius (Hunter College); Frederic S. Mishkin (Graduate School of Business Columbia University)
    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
    Keywords: Inflation Band Targeting, Inflation Contract, Time-inconsistent policy
    JEL: E52 E58
    Date: 2006
  3. By: Annette Kamps (Kiel Institute for the World Economy, Düsternbrooker Weg 120, 24105 Kiel, Germany.)
    Abstract: This paper investigates the determinants of currency invoicing in international trade. Although the currency of invoicing is central for the transmission of monetary policy, empirical research on this topic is scarce due to a lack of data. With a new extensive invoicing dataset and a panel model analysis this paper shows that a country’s membership or prospective membership of the EU plays a decisive role in the choice of the euro as invoicing currency. The role of the euro as vehicle currency is increasing but still limited when compared to the U.S. dollar. Monetary instability and low product differentiation favour vehicle pricing in U.S. dollar. An increase of euro invoicing due to higher exchange rate volatility supports the role of the euro as vehicle currency, however. High market power defined as the share of a country’s total exports to world exports and membership of the euro area make invoicing in the home currency (euro) more likely. JEL Classification: F41, F42, L11.
    Keywords: International trade, currency invoicing, panel data.
    Date: 2006–08
  4. By: Tommaso Monacelli
    Abstract: We study optimal monetary policy in an economy with nominal private debt, borrowing constraints and price rigidity. Private debt reflects equilibrium trade between an impatient borrower, who faces an endogenous collateral constraint, and a patient saver, who engages in consumption smoothing. Since inflation can positively affect borrower's net worth, monetary policy optimally balances the incentive to offset the price stickiness distortion with the one of marginally relaxing the borrower's collateral constraint. We find that the optimal volatility of inflation is increasing in three key parameters: (i) the borrower's weight in the planner's objective function; (ii) the borrower's impatience rate; (iii) the degree of price flexibility. In general, however, deviations from price stability are small for a small degree of price stickiness. In a two-sector version of our model, in which durable price movements can directly affect the ability of borrowing, the optimal volatility of (non-durable) inflation is more sizeable. In our context, and relative to simple Taylor rules, the Ramsey-optimal allocation entails a partial smoothing of real durable goods prices.
    JEL: E24 E44 E5
    Date: 2006–08
  5. By: Horst Siebert
    Abstract: This paper analyzes institutional arrangements for exchange rate systems and reviews what we know. It looks at the foreign exchange market, different balance of payment situations in which countries find themselves and the necessary exchange rate adjustments. It studies the options that are available to countries in choosing their exchange rate system (type of nominal anchor, nominal anchor versus real target and the degree of sovereignty to be given up) and reviews the historical experience for multilateral options. The actual system is a fragile low-inflation central bank dominated arrangement. Options for the future rest on quite a few idealistic ideas. In addition to choosing the exchange rate system, adopting the right exchange rate is also addressed.
    Keywords: Exchange rate systems, Balance of payments situations, External and internal equilibrium, Choosing the exchange rate system, Unilateral and multilateral arrangements, Options for the future, Universal money
    JEL: E E5 E42 E58 E61 F31 F32 F33
    Date: 2006–08
  6. By: Christian Ewerhart (Institute for Empirical Research in Economics (IEW), Winterthurerstrasse 30, CH-8006 Zurich, Switzerland.); Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Natacha Valla (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.)
    Abstract: It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area. JEL Classification: D44, E52.
    Keywords: Open market operations, uniform price auction, discriminatory auction, Eurosystem.
    Date: 2006–08
  7. By: A. Campolmi
    Date: 2005
  8. By: Bhattacharya, Joydeep; Singh, Rajesh
    Abstract: In this paper, we study a decentralized monetary economy with a specified set of markets, rules of trade, an equilibrium concept, and a restricted set of policies and derive a set of equilibrium (monetary) allocations. Next we set up a simpler constrained planning problem in which we restrict the planner to choose from a set that contains the set of equilibrium allocations in the decentralized economy. If there is a government policy that allows the decentralized economy to achieve the constrained planner's allocation, then it is the optimal policy choice. To illustrate the power of such analyses, we solve such planning problems in three monetary environments with limited communication. The upshot is that solving constrained planning problems is an extremely "efficient" (easy and quick) way of deriving optimal policies for the corresponding decentralized economies.
    Keywords: planning problems, overlapping generations, random relocation model
    JEL: E4
    Date: 2006–08–23
  9. By: Menzie D. Chinn; Ron Alquist
    Abstract: We examine the relative predictive power of the sticky price monetary model, uncovered interest parity, and a transformation of net exports and net foreign assets. In addition to bringing Gourinchas and Rey’s new approach and more recent data to bear, we implement the Clark and West (forthcoming) procedure for testing the significance of out-of-sample forecasts. The interest rate parity relation holds better at long horizons and the net exports variable does well in predicting exchange rates at short horizons in-sample. In out-of-sample forecasts, we find evidence that our proxy for Gourinchas and Rey’s measure of external imbalances outperforms a random walk at short horizons as do some of other models, although no single model uniformly outperforms the random walk forecast.
    JEL: F31 F47
    Date: 2006–08
  10. By: Oleg Korenok (Department of Economics, VCU School of Business); Stanislav Radchenko (Department of Economics, University of North Carolina at Charlotte); Norman R. Swanson (Department of Economics, Rutgers University)
    Abstract: In this paper we take an agnostic view of the Phillips curve debate, and carry out an empirical investigation of the relative and absolute efficacy of Calvo sticky price (SP), sticky information (SI), and sticky price with indexation models (SPI), with emphasis on their ability to mimic inflationary dynamics. In particular, we look at evidence for a group of 13 OECD countries, and we consider three alternative measures of inflationary pressure, including the output gap, labor share, and unemployment. We find that the Calvo SP and the SI models essentially perform no better than a strawman constant inflation model, when used to explain inflation persistence. Indeed, virtually all inflationary dynamics end up being captured by the residuals of the estimated versions of these models. We find that SPI model is preferable because it captures the type of strong inflationary persistence that has in the past characterized the economies of the countries in our sample. However, two caveats to this conclusion are that improvement in performance is driven mostly by the time series part of the model (i.e. lagged inflation) and that the SPI model overemphasizes inflationary persistence. Thus, there appears to be room for improvement via either modified versions of the above models, or via development of new models, that better "track" inflation persistence.
    Keywords: sticky price, sticky information, empirical distribution, model selection
    JEL: E12 E3 C32
    Date: 2006–06
  11. By: Macedo, Jorge Braga de; Braz, José; Pereira, Luis brites; Nunes, Luis C.
    Abstract: In this study, we assess the credibility of the currency board arrangement (CBA) of the Macau Special Administrative Region by studying the relationship between exchange market pressure (EMP) and the anchors of a rule-based CBA, namely, interest rate arbitrage, exchange rate arbitrage and economic discipline. A pure CBA signals its credibility by allowing the first two anchors to function automatically and by pursuing sound fiscal policies. The analysis’ results suggest that Macau’s CBA has been characterised by a state of low volatility since late 1992, with the brief exception of the East Asian financial crisis period. The paper’s main finding is that fiscal fundamentals seem to have a more pronounced role in reducing EMP’s variability during periods of low volatility whilst interest rate arbitrage is more important in periods of high volatility. We conclude that Macau’s CBA is credible at present as reflected in the low frequency of observed EMP, in the narrowing of Macau’s interest rate differential vis-à-vis U.S. interest rates and in Macau’s substantial fiscal reserves.
    Date: 2006

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