nep-mon New Economics Papers
on Monetary Economics
Issue of 2006‒11‒25
seventy papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Transmission Mechanisms of Monetary Policy in Armenia: Evidence from VAR Analysis By Holger Floerkemeier; Era Dabla-Norris
  2. Money Demand and Disinflation in Selected CEECs during the Accession to the EU By Fidrmuc, Jarko
  3. Monetary Transmission Mechanisms in Belarus By Rodolfo Maino; Balázs Horváth
  4. Real-Time Time-Varying Equilibrium Interest Rates: Evidence on the Czech Republic By Horvath, Roman
  5. Testing the Opportunistic Approach to Monetary Policy By Martin, Chris; Milas, Costas
  6. An Optimized Monetary Policy Rule for ToTEM By Jean-Philippe Cayen; Amy Corbett; Patrick Perrier
  7. A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed By Andrew K. Rose
  8. The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market By Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo
  9. "The "New Consensus" View of Monetary Policy: A New Wicksellian Connection?" By Giuseppe Fontana
  10. Monetary policy in a low inflation economy with learning By John C. Williams
  11. The Role of Seasonality and Monetary Policy in Inflation Forecasting By Francis Y. Kumah
  12. Asset Market Participation, Monetary Policy Rules, and the Great Inflation By Roland Straub; Florin Bilbiie
  13. Measures of Underlying Inflation in the Euro Area: Assessment and Role for Informing Monetary Policy By Emil Stavrev
  14. Revealing the secrets of the temple: the value of publishing central bank interest rate projections By Glenn D. Rudebusch; John C. Williams
  15. Anticipation of Monetary Policy and Open Market Operations By Carpenter, Seth; Demiralp, Selva
  16. Banks’ Regulatory Buffers, Liquidity Networks and Monetary Policy Transmission By Christian Merkl; Stéphanie Stolz
  17. The Monetary Policy Regime and Banking Spreads in Barbados By Wendell Samuel; Laura Valderrama
  18. Indexed Bonds and Revisions of Inflation Expectations By Reschreiter, Andreas
  19. The Complex Response of Monetary Policy to the Exchange Rate By Ram Sharan Kharel; Christopher Martin; Costas Milas
  20. Monetary Policy and Inflation Dynamics By Roberts, John M
  21. Monetary Policy and its Informative Value By Camille Cornand; Romain Baeriswyl
  22. The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv By Michel Normandin
  23. Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter? By Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
  24. Exchange Rate Volatility and the Credit Channel in Emerging Markets: A Vertical Perspective By Caballero, Ricardo; Krishnamurthy, Arvind
  25. Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation By Rudiger Ahrend; Pietro Catte; Robert Price
  26. Political Instability and Inflation Volatility By Ari Aisen; Francisco José Veiga
  27. The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence By Jean-Francois Segalotto; Marco Arnone; Bernard Laurens
  28. Term Structure of Interest Rates. European Financial Integration By Elisabet Ruiz Dotras; Hortensia Fontanals Albiol; Catalina Bolance Losilla
  29. The Response of Monetary Policy to Uncertainty: Theory and Empirical Evidence for the US By Christopher Martin; Costas Milas
  30. Fiscal Determinants of Inflation: A Primer for the Middle East and North Africa By Ludvig Söderling; Domenico Fanizza
  31. Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements By Gurkaynak, Refet S; Sack, Brian; Swanson, Eric T
  32. Has Globalization Changed Inflation? By Laurence M. Ball
  33. Money Market Integration By R. Spence Hilton; Alessandro Prati; Leonardo Bartolini
  34. Equilibrium of incomplete markets with money and intermediate banking system. By Monique Florenzano; Stella Kanellopoulou; Yannis Vailakis
  35. Intrinsic and Inherited Inflation Persistence By Fuhrer, Jeffrey
  36. The Performance and Robustness of Interest-Rate Rules in Models of the Euro Area By Adalid, Ramon; Coenen, Gunter; McAdam, Peter; Siviero, Stefano
  37. "On Lower-bound Traps: A Framework for the Analysis of Monetary Policy in the ÒAgeÓ of Central Banks" By Alfonso Palacio-Vera
  38. Implementing an International Lender of Last Resort By Tobias Knedlik
  39. Monetary Policy Analysis in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  40. Learning about Monetary Policy Rules when Long-Horizon Expectations Matter By Preston, Bruce
  41. Measuring the Stance of Monetary Policy in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  42. Measuring the Stance of Monetary Policy in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  43. Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve By Peter Funk; Bettina Kromen
  44. Deflationary Shocks and Monetary Rules: an Open-Economy Scenario Analysis By Douglas Laxton; Papa N'Diaye; Paolo Pesenti
  45. Monetary Policy Analysis in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach By Vitek, Francis
  46. Adaptive learning, endogenous inattention, and changes in monetary policy By William A. Branch; John B. Carlson; George W. Evans; Bruce McGough
  47. The Persistence of Inflation in OECD Countries: A Fractionally Integrated Approach By Gadea, Maria; Mayoral, Laura
  48. The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis By Menkhoff, Lukas; Taylor, Mark P.
  49. One Market, One Money, One Price? By Allington, Nigel FB; Kattuman, Paul A; Waldmann, Florian A
  50. Okun’s Law, Creation of Money and the Decomposition of the Rate of Unemployment By Stéphane Mussard; Bernard Philippe
  51. Beauty Queens and Wallflowers--Currency Unions in the Middle East and Central Asia By Julian Berengaut; Katrin Elborgh-Woytek
  52. Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model: What Is Important and What Is Not By Pau Rabanal; Vicente Tuesta
  53. Micro-aspects of Monetary Policy: Lender of Last Resort and Selection of Banks in Pre-war Japan By Tetsuji Okazaki
  54. Monetary Integration and the Cost of Borrowing By Marta Gomez-Puig
  55. Speculative Attacks with Multiple Sources of Public Information By Frank Heinemann; Camille Cornand
  56. A Small Foreign Exchange Market with a Long-Term Peg: Barbados By Roland Craigwell; Travis Mitchell; DeLisle Worrell
  57. Business cycles and monetary regimes in emerging economies: a role for a monopolistic banking sector By Federico S. Mandelman
  58. Pacific Island Countries--Possible Common Currency Arrangement By Christopher Browne; David William Harold Orsmond
  59. Common Volatility Trends in the Central and Eastern European Currencies and the Euro By Marcus Pramor; Natalia T. Tamirisa
  60. Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market: Austria-Hungary, 1876-1914 By Komlos, John; Flandreau, Marc
  61. FEER for the CFA Franc By Charalambos G. Tsangarides; Yasser Abdih
  62. Pricing-to-Market, the Interest-Rate Rule, and the Exchange Rate By Maurice Obstfeld
  63. Signaling currency crises in South Africa By Tobias Knedlik
  64. Moderate inflation and the deflation-depression link By Jess Benhabib; Mark M. Spiegel
  65. Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies By Jean-Francois Segalotto; Marco Arnone; Bernard Laurens
  66. Payment networks in a search model of money By Antoine Martin; Michael Orlando; David Skeie
  67. An evaluation of inflation forecasts from surveys using real-time data By Dean Croushore
  68. The Optimal Level of International Reserves for Emerging Market Countries: Formulas and Applications By Romain Ranciere; Olivier Jeanne
  69. Forecasting with the yield curve; level, slope, and output 1875-1997 By Michael D. Bordo; Joseph G. Haubrich
  70. Capital Flows to Central and Eastern Europe By Gian Maria Milesi-Ferretti; Philip R. Lane

  1. By: Holger Floerkemeier; Era Dabla-Norris
    Abstract: This paper examines monetary policy transmission in Armenia in light of the authorities' intention to shift to an inflation-targeting regime over the medium term. We find that the capability of monetary policy to influence economic activity and inflation is still limited, as important channels of monetary transmission are not fully functional. In particular, the interest rate channel remains weak, even though there is some evidence of transmission to prices of changes in the repo rate, the central bank's new operating target for inflation. As in other emerging and transition economies with a high degree of dollarization, the exchange rate channel has a strong impact on the inflation rate. Moreover, we find that inflation does respond to broad money shocks, once foreign currency deposits are included.
    Keywords: Armenia , monetary policy , transmission mechanism ,
    Date: 2006–11–03
  2. By: Fidrmuc, Jarko
    Abstract: A panel data set for six countries (Czech Republic, Hungary, Poland, Romania, Slovakia, and Slovenia) is used to estimate money demand with panel cointegration methods over the recent disinflation period. The basic money demand model is able to convincingly explain the long-run dynamics of M2 in the selected countries. However, money demand is found to have been significantly determined by the euro area interest rates and the exchange rate against the euro, which indicates possible instability of money demand functions in the CEECs. Therefore, direct inflation targeting is an appropriate monetary regime before the eventual adoption of the euro.
    Keywords: Money demand; panel unit root tests; panel cointegration; direct inflation targeting; CEECs
    JEL: E41 E58 C23
    Date: 2006–10
  3. By: Rodolfo Maino; Balázs Horváth
    Abstract: We explore monetary policy transmission by estimating VAR impulse response functions to illustrate the Belarusian economy's response to unexpected changes in policy and exogenous variables. We find a significant exchange rate pass-through to prices, and interest rate policy following, rather than leading, financial market developments. Our estimated monetary policy reaction function shows the central bank striking a balance between real exchange rate stability and containing inflation. We discuss dollarization, administrative interventions, and other features complicating monetary policy transmission, review specific constraints and vulnerabilities, and conclude with observations on possible measures that could raise the effectiveness of monetary policy in Belarus.
    Keywords: Monetary policy , inflation , transmission mechanisms , dollarization ,
    Date: 2006–11–02
  4. By: Horvath, Roman
    Abstract: This paper examines (real-time) equilibrium interest rates in the Czech Republic in 2001:1-2005:12 estimating various specifications of simple Taylor-type monetary policy rules. First, we estimate it using GMM. Second, we apply structural time-varying coefficient model with endogenous regressors to evaluate fluctuations of equilibrium interest rate over time. The results suggest that there is substantial interest rate smoothing and central bank primarily responds to inflation (forecast) developments. The estimated parameters seem to sustain the equilibrium determinacy. We find that the equilibrium interest rates gradually decreased over sample period to the levels comparable to those of in the euro area reflecting capital accumulation, smaller risk premium and successful disinflation in the Czech economy.
    Keywords: equilibrium interest rates; Taylor rule; augmented Kalman filter
    JEL: E58 E43 E52
    Date: 2006–10–30
  5. By: Martin, Chris; Milas, Costas
    Abstract: The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1% of the intermediate target but a strong response when inflation is further from the intermediate target.
    JEL: E52
    Date: 2006–10–24
  6. By: Jean-Philippe Cayen; Amy Corbett; Patrick Perrier
    Abstract: The authors propose a monetary policy rule for the Terms-of-Trade Economic Model (ToTEM), the Bank of Canada's new projection and policy-analysis model for the Canadian economy. They consider simple instrument rules such as Taylor-type and inflation-forecast-based rules. The proposed rule minimizes a loss function that reflects the assumed preferences of the monetary authority over inflation and output, as well as over the variability of its instrument. The authors also investigate how robust the proposed rule is with respect to a particular realization of shocks that differs from the historical distribution used to find the optimized rule.
    Keywords: Economic models; Monetary policy framework; Transmission of monetary policy
    JEL: E5 E52
    Date: 2006
  7. By: Andrew K. Rose
    Abstract: A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent “sudden stops” of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.
    JEL: F02 F33
    Date: 2006–11
  8. By: Baba, Naohiko; Nakashima, Motoharu; Shigemi, Yosuke; Ueda, Kazuo
    Abstract: Using the interest rates on negotiable certificates of deposit issued by individual banks, we first show that under the Bank of Japan's zero interest rate policy and quantitative monetary easing policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums.
    Keywords: Monetary policy; Zero Interest Rate Policy; Quantitative Monetary Easing Policy; Negotiable Certificate of Deposit; Credit Risk Premium
    JEL: G00 G0
    Date: 2005–10–17
  9. By: Giuseppe Fontana
    Abstract: One of the greatest achievements of the modern ÒNew ConsensusÓ view in macroeconomics is the assertion of a nonquantity theoretic approach to monetary policy. Leading theorists and practitioners of this view have indeed rejected the quantity theory of money, and defended a return to the old Wicksellian idea of eliminating high levels of inflation by adjusting nominal interest rates to changes in the price level. This paper evaluates these recent developments in the theory and practice of monetary policy in terms of two basic questions: 1) What is the monetary policy instrument controlled by the central bank? and 2) Which macroeconomic variables are affected in the short and long run by monetary policy?
    Date: 2006–10
  10. By: John C. Williams
    Abstract: In theory, monetary policies that target the price level, as opposed to the inflation rate, should be highly effective at stabilizing the economy and avoiding deflation in the presence of the zero lower bound on nominal interest rates. With such a policy, if the short-term interest rate is constrained at zero and the inflation rate declines below its trend, the public expects that policy will eventually engineer a period of above-trend inflation that restores the price level to its target level. Expectations of future monetary accommodation stimulate output and inflation today, mitigating the effects of the zero bound. The effectiveness of such a policy strategy depends crucially on the alignment of the public's and the central bank's expectations of future policy actions. In this paper, we consider an environment where private agents have imperfect knowledge of the economy and therefore continuously reestimate the forecasting model that they use to form expectations. We find that imperfect knowledge on the part of the public, especially regarding monetary policy, can undermine the effectiveness of price-level-targeting strategies that would work well if the public had complete knowledge. For low inflation targets, the zero lower bound can cause a dramatic deterioration in macroeconomic performance with severe recessions occurring with alarming frequency. However, effective communication of the policy strategy that reduces the public's confusion about the future course of monetary policy significantly reduces the stabilization costs associated with the zero bound. Finally, the combination of learning and the zero bound implies the need for a stronger policy response to movements in the price level than would otherwise be optimal and such a rule is effective at stabilizing both inflation and output in the presence of learning and the zero bound even with a low inflation target.
    Keywords: Monetary policy ; Inflation (Finance)
    Date: 2006
  11. By: Francis Y. Kumah
    Abstract: Adequate modeling of the seasonal structure of consumer prices is essential for inflation forecasting. This paper suggests a new econometric approach for jointly determining inflation forecasts and monetary policy stances, particularly where seasonal fluctuations of economic activity and prices are pronounced. In an application of the framework, the paper characterizes and investigates the stability of the seasonal pattern of consumer prices in the Kyrgyz Republic and estimates optimal money growth and implied exchange rate paths along with a jointly determined inflation forecast. The approach uses two broad specifications of an augmented error-correction model-with and without seasonal components. Findings from the paper confirm empirical superiority (in terms of information content and contributions to policymaking) of augmented error-correction models of inflation over single-equation, Box-Jenkins-type general autoregressive seasonal models. Simulations of the estimated errorcorrection models yield optimal monetary policy paths for achieving inflation targets and demonstrate the empirical significance of seasonality and monetary policy in inflation forecasting.
    Keywords: Inflation forecasting , seasonal unit roots , monetary policy stance , erroro-correction models and VAR , Monetary policy , Inflation , Forecasting models ,
    Date: 2006–07–28
  12. By: Roland Straub; Florin Bilbiie
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price dynamic stochastic general equilibrium model, which implies that at low asset-market participation rates, the interest rate elasticity of output (the slope of the IS curve) becomes positive - that is, "non-Keynesian." Remarkably, in that case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Consequently, we argue that the policy of the Federal Reserve System in the pre-Volcker era, often associated with a passive monetary policy rule, was closer to optimal than conventional wisdom suggests and may thus have remained unchanged at a fundamental level thereafter. We provide institutional and empirical evidence for our hypothesis, in the latter case using Bayesian estimation techniques, and show that our model is able to explain most features of the "Great Inflation."
    Keywords: Great inflation , limited asset market participation , passive monetary policy ,
    Date: 2006–09–13
  13. By: Emil Stavrev
    Abstract: The paper evaluates the 24-month ahead inflation forecasting performance of various indicators of underlying inflation and structural models. The inflation forecast errors resulting from model misspecification are larger than the errors resulting from forecasting of exogenous variables. Also, measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.
    Keywords: Underlying inflation , forecast evaluation , composite indicators , forecast risk assessment , Inflation , Euro area , Monetary policy , Economic models ,
    Date: 2006–09–11
  14. By: Glenn D. Rudebusch; John C. Williams
    Abstract: The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.
    Keywords: Monetary policy
    Date: 2006
  15. By: Carpenter, Seth; Demiralp, Selva
    Abstract: Central banking transparency is now a topic of great interest, but its impact on the implementation of monetary policy has not been studied. This paper documents that anticipated changes in the target federal funds rate complicate open market operations. We provide theoretical and empirical evidence on the behavior of banks and the Open Market Trading Desk. We find a significant shift in demand for funds ahead of expected target rate changes and that the Desk only incompletely accommodates this shift in demand. This anticipation effect, however, does not materially affect other markets.
    JEL: G0
    Date: 2006–03–28
  16. By: Christian Merkl; Stéphanie Stolz
    Abstract: Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers.
    Keywords: monetary policy transmission, bank lending channel, bank capital channel, liquidity networks
    JEL: E52 G21 G28 C23
    Date: 2006–11
  17. By: Wendell Samuel; Laura Valderrama
    Abstract: The paper analyzes the determinants of banking spreads in Barbados, with a view to identifying the role of the monetary policy regime in explaining high spreads. The paper finds that interest rate spreads for Barbados are higher than would be suggested by its macroeconomic performance. Banking concentration and bank-specific variables, including bank size and provisions for nonperforming loans, do not have an important role in explaining variations in bank spreads. Rather, it appears that monetary policy variables, such as reserve requirements and capital controls, are the most important determinants of spreads.
    Keywords: Interest rate spreads , monetary policy regime ,
    Date: 2006–10–02
  18. By: Reschreiter, Andreas (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: This paper investigates the impact of revisions in inflation expectations on the prices of UK inflation-indexed and conventional government bonds with a vector autoregressive (VAR) model. Downwards revisions of inflation expectations are associated with unexpected increases in the prices of conventional bonds, but the prices of indexed bonds are not significantly affected. This suggests that indexed bonds protect investors against inflation while nominal bonds are exposed to changing monetary conditions. This is consistent with the view that indexed bonds avoid the inflation risk premium of conventional bonds and reduce the government's long-run borrowing costs.
    Keywords: Conventional and indexed bonds, Inflation, Macroeconomy, VAR
    JEL: E43 G12
    Date: 2006–11
  19. By: Ram Sharan Kharel (Brunel University); Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4\% and over-valuations of more than 5\%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
    Keywords: Monetary policy, asset prices, nonlinearity
    JEL: C51 C52 E52 E58
    Date: 2006–09
  20. By: Roberts, John M
    Abstract: Since the early 1980s, the U.S. economy has changed in some important ways: inflation now rises considerably less when unemployment is low, and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these changes in the economy. The results suggest that changes in monetary policy can account for most or all of the change in the inflationunemployment relationship. In addition, changes in policy can explain a large proportion of the reduction in the volatility of the output gap.
    JEL: G00 G0
    Date: 2006–07–06
  21. By: Camille Cornand; Romain Baeriswyl
    Abstract: This paper analyzes the welfare effects of economic transparency in the conduct of monetary policy. We propose a model of monopolistic competition with imperfect common knowledge on the shocks affecting the economy where the central bank has no inflationary bias. In this context, monetary policy entails a dual role. The instrument of the central bank is both an action that stabilizes the economy and a public signal that partially reveals to firms the central bank's assessment about the state of the economy. Yet, firms are unable toperfectly disentangle the central bank's signals responsible for the instrument and the central bank optimally balances the action and information purposes of its instrument. We derive the optimal monetary policy and the optimal central bank's disclosure. We define transparency as an announcement by the central bank that allows firms to identify the rationale behind the instrument. It turnsout that transparency is welfare increasing (i) when the degree of strategic complementarities is low, (ii) when the economy is not too affected by mark-up shocks, (iii) when the central bank is more inclined towards price stabilization, (iv) when firms have relatively precise private information, and (v) when the central bank's information is relatively precise on demand shocks and relatively imprecise on mark-up shocks. These results rationalize the increase in trans-parency in the current context of relative low sensitivity of the economy to mark-up shocks and of strong central bank's preference for price stability.JEL classification: E52, E58, D82.Keywords: differential information, monetary policy, transparency.
    Date: 2006–07
  22. By: Michel Normandin (IEA, HEC Montréal)
    Abstract: This paper assesses the plausibility of popular models of the monetary transmission mechanism for the G7 countries. For this purpose, flexible structural vector autoregressions are used to relaxe the restrictions behind the traditional identifying schemes of monetary-policy shocks and their effects on macroececonomic variables, and in particular, on real wages. The estimates reveal that expansionary monetary-policy shocks produce declines of real wages for Canada, France, and the United Kingdom. This is consistent with sticky-wage models and suggests that labor-market frictions constitute prime features of these economies. In constrast, positive monetary-policy shocks yield increases of real wages for Germany, Italy, Japan, and the United States. This is consistent with sticky-price models and limited-participation models, so that goods-market frictions and/or financialmarket frictions seem important characteristics of these economies. Finally, the standard identifying restrictions are often statistically rejected and produce severe distortions of real-wage responses.
    Keywords: Conditional heteroscedasticity; monetary-policy indicators; orthogonality conditions.
    JEL: C32 E52
    Date: 2006–04
  23. By: Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
    Abstract: This paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies. First, it explores the interest rate-inflation relationship in economies with different levels of external and domestic public debt using panel- and crosssection data. The results show that interest rate-inflation elasticity weakens with debt/GDP and external debt/GDP. Second, it utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news. The results suggest that when vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates, and the impact of monetary policy is weakened.
    Keywords: Public debt , fiscal policy , monetary policy , Emerging markets , Public debt , Fiscal policy , Monetary policy ,
    Date: 2006–08–14
  24. By: Caballero, Ricardo; Krishnamurthy, Arvind
    Abstract: Firms in emerging markets are exposed to severe financial frictions and credit constraints that are exacerbated by the sudden stop of capital inflows. Can monetary policy offset this external credit squeeze? We show that although this may be the case during moderate contractions (or in partial equilibrium), the expansionary effect of monetary policy vanishes during severe external crises. The exchange rate jumps to reduce the dollar value of domestic collateral until equilibrium in domestic financial markets is consistent with the external constraint. An expansionary monetary policy in this context raises the value of domestic collateral, but it exacerbates the exchange rate depreciation (beyond the standard interest parity effect) and has little effect on aggregate activity. However, there is a dynamic linkage between monetary policy and sudden stops. The anticipation of a dogged defense of the exchange rate worsens the consequences of sudden stops by distorting the private sector incentive to take precautions against these shocks. For similar general equilibrium reasons, dollarization of liabilities has limited impact during a sudden stop, but it has significant underinsurance consequences.
    JEL: G00 G0
    Date: 2005–01–25
  25. By: Rudiger Ahrend; Pietro Catte; Robert Price
    Abstract: This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation “episodes”, it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators -- inflation, the exchange rate and unemployment -- suggest a “crisis” situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued. <P>Interactions entre la politique monétaire et budgétaire : L’effet des conditions monétaires sur les consolidations budgétaires <BR>Cet article, utilisant des données relatives à 24 pays de l’OCDE sur les 25 dernières années, examine comment et dans quelles circonstances des ajustements budgétaires sont affectés par les conditions monétaires. Les ajustements budgétaires interviennent le plus souvent lorsque d’importants déficits menacent la soutenabilité des finances publiques, ou lorsque d'autres indicateurs macroéconomiques -- inflation, taux de change ou niveau de chômage -- sont très dégradés. En contrôlant ces variables, l’article apporte des preuves économétriques robustes suivant lesquelles les efforts de consolidation budgétaire ont davantage de chance d’être mis en oeuvre et couronnés de succès si la politique monétaire est accommodante dans la période initiale de l’ajustement, contribuant ainsi à amortir l’effet défavorable pour la croissance du resserrement budgétaire. Le lien n’est cependant pas mécanique, comme l’atteste l’existence d’épisodes de desserrement monétaire suivis d’un abandon des efforts d’ajustement fiscal. Par ailleurs, si l’indépendance des banques centrales fait explicitement obstacle à une réponse directe de la politique monétaire aux opérations budgétaires, l’article montre que la qualité de l’ajustement fiscal peut indirectement influer sur les banques centrales et les marches financiers. Par exemple, les taux d'intérêt à court et long terme semblent se replier davantage si l’ajustement budgétaire prend la forme d’une maîtrise stricte des dépenses courantes. Au total, l’influence entre l’ajustement budgétaire et la conduite de la politique monétaire est réciproque mais l’article montre que, même en contrôlant la qualité d'ajustement budgétaire, la politique monétaire continue à influencer la probabilité d’une consolidation des finances publiques d’être menée à bien.
    Keywords: financial markets, marchés financiers, fiscal policy, politique budgétaire, monetary policy, politique monétaire, fiscal adjustment, fiscal consolidation, interest rate, taux d'intérêt, fiscal stance, monetary conditions, conditions monétaires, central bank, banque centrale, quality of fiscal adjustment, modalités de l'ajustement budgétaire, policy co-ordination, coordination des politiques économiques, ajustement budgétaire, consolidation budgétaire
    JEL: E58 E63 G12 H62
    Date: 2006–11–03
  26. By: Ari Aisen; Francisco José Veiga
    Abstract: The purpose of this paper is to empirically determine the causes of worldwide diversity of inflation volatility. We show that higher degrees of political instability, ideological polarization, and political fragmentation are associated with higher inflation volatility.
    Keywords: Inflation , volatility , political instability , institutions ,
    Date: 2006–10–04
  27. By: Jean-Francois Segalotto; Marco Arnone; Bernard Laurens
    Abstract: This paper presents a survey of the literature on the measurement of central bank autonomy. We distinguish inputs that constitute the building blocks in the literature, and the literature that builds on them. Issues including sensitivity analysis, robustness, and endogeneity are discussed. The review shows that empirical evidence regarding the beneficial effects of central bank autonomy is substantial, although some technical issues still remain for further research. In particular, central bank autonomy raises the issue of subjecting the monetary authorities to democratic control; this calls for additional research on the linkages between central bank autonomy and accountability and transparency. Additional empirical analysis on the relationship between the financial strength of the central bank and its de facto autonomy, and between its autonomy and financial stability, would also be desirable.
    Keywords: Central bank autonomy , political autonomy , economic autonomy ,
    Date: 2006–10–19
  28. By: Elisabet Ruiz Dotras; Hortensia Fontanals Albiol; Catalina Bolance Losilla (Universitat de Barcelona)
    Abstract: In this paper we estimate, analyze and compare the term structures of interest rates in six different countries over the period 1992-2004. We apply the Nelson-Siegel model to obtain the term structures of interest rates at weekly intervals. A total of 4,038 curves are estimated and analyzed. Four European Monetary Union countriesSpain, France, Germany and Italyare included. The UK is also included as a European non-member of the Monetary Union. Finally the US completes the analysis. The goal is to determine the differences in the shapes of the term structure of interest rates among these countries. Likewise, we can determine the most usual term structure shapes that appear for each country.
    Keywords: european interest rate., level parameter, parsimonious models, slope parameter, term structure of interest rate
    JEL: C14 C51 C82 G15
    Date: 2006
  29. By: Christopher Martin (Brunel University); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: This paper developes a theoretical model to analyse the impact of uncertainty about the true state of the economy on monetary policy. The theoretical model is tested on US data since the early 1980s. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990-91, when uncertainty reduced interest rates by up to 80 basis points and in 1996-2001 when uncertainty reduced interest rates by up to 70 basis points over five years.
    Keywords: Monetary Policy, Uncertainty
    JEL: C51 C52 E52 E58
    Date: 2005–07
  30. By: Ludvig Söderling; Domenico Fanizza
    Abstract: Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.
    Keywords: Fiscal theory of the price level , Algeria , Egypt , Lebanon , Morocco , Tunisia ,
    Date: 2006–10–06
  31. By: Gurkaynak, Refet S; Sack, Brian; Swanson, Eric T
    Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.
    Keywords: Monetary Policy; Asset Prices; Factor Analysis; Multi-dimensional Policy
    JEL: G00 G0
    Date: 2005–02–08
  32. By: Laurence M. Ball
    Abstract: Many observers suggest that the "globalization" of the U.S. economy has changed the behavior of inflation. This essay examines this idea, focusing on several questions: (1) Has globalization reduced the long-run level of inflation? (2) Has it affected the structure of inflation dynamics, as captured by the Phillips curve? (3) Has it contributed substantial negative shocks to the inflation process? The answers to these questions are no, no, and no.
    JEL: E31
    Date: 2006–11
  33. By: R. Spence Hilton; Alessandro Prati; Leonardo Bartolini
    Abstract: We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds and Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous evidence of segmentation of these two markets, showing them to be well integrated even at high intra-day frequency. We document several patterns in the behavior of federal funds and Eurodollar spreads, including liquidity effects from trading volume to yield spreads volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the, much larger, dollar money market as a whole.
    Keywords: Federal funds , Eurodollars , market segmentation ,
    Date: 2006–09–25
  34. By: Monique Florenzano (Centre d'Economie de la Sorbonne); Stella Kanellopoulou (Centre d'Economie de la Sorbonne); Yannis Vailakis (Centre d'Economie de la Sorbonne)
    Abstract: This paper studies a simple stochastic two-period general equilibrium model with money, an incomplete market of nominal assets, and a competitive banking system, intermediate between consumers and a Central Bank. There is a finite number of agents, consumers and banks. Default is not permitted. The public policy instruments are, besides real taxes implicit in the model, public debt and creation of money, both implemented at the first period. The equilibrium existence is established under a "Gains to trade" hypothesis and the assumption that banks have a nonzero endowment of money at each date-event of the model.
    Keywords: Competitive banking system, incomplete markets, nominal assets, money, monetary equilibrium, cash-in-advance constraints, public debt.
    JEL: C61 C62 D20 D46 D51
    Date: 2006–11
  35. By: Fuhrer, Jeffrey
    Abstract: In the conventional view of inflation, the New Keynesian Phillips curve (NKPC) captures most of the persistence in inflation. The sources of persistence are twofold. First, the "driving process" for inflation is quite persistent, and the NKPC implies that inflation must "inherit" this persistence. Second, backward-looking or indexing behavior imparts some "intrinsic" persistence to inflation. This paper shows that, in practice, inflation in the NKPC inherits very little of the persistence of the driving process, and it is intrinsic persistence that constitutes the dominant source of persistence. The reasons are that, first, the coefficient on the driving process is small, and, second, the shock that disturbs the NKPC is large.
    JEL: G00 G0
    Date: 2006–06–19
  36. By: Adalid, Ramon; Coenen, Gunter; McAdam, Peter; Siviero, Stefano
    Abstract: In this paper, we examine the performance and robustness of optimized interest-rate rules in four models of the euro area that differ considerably in terms of size, degree of aggregation, relevance of forward-looking behavioral elements, and adherence to microfoundations. Our findings are broadly consistent with results documented for models of the U.S. economy: backward-looking models require relatively more aggressive policies with, at most, moderate inertia; rules that are optimized for such models tend to perform reasonably well in forward-looking models, while the reverse is not necessarily true; and, hence, the operating characteristics of robust rules (i.e., rules that perform satisfactorily in all models) are heavily weighted towards those required by backward-looking models.
    Keywords: macroeconomic modelling; model uncertainty; monetary policy rules; robustness; euro area
    JEL: G00 G0
    Date: 2005–02–10
  37. By: Alfonso Palacio-Vera
    Abstract: We present a simple theoretical framework that integrates the notion of the natural or neutral interest rate, liquidity preference theory, and the monetary policy practice by modern central banks. We claim that this theory explains the conditions under which an economy will experience an aggregate demand deficiency problem within a modern institutional setting. Contrary to the predictions of the New Consensus View in macroeconomics, the model suggests that ÒstructuralÓ factors such as a high saving rate and, especially, a low ÒnaturalÓ rate of growth increase the chances that an economy experiences an aggregate demand deficiency. Contrary to conventional wisdom, the model predicts that a fall in the NAIRU may lead to a rise in the natural interest rate, and vice versa.
    Date: 2006–11
  38. By: Tobias Knedlik
    Abstract: Current research discusses various general frameworks for installing an international lender of last resort (ILOLR). However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options of construction of an ILOLR who supports central banks in the case of currency crises. The paper concludes that the cost efficient version of the ILOLR would be direct interventions by the IMF by the use of IMF resources and the right to dispose additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems.
    Keywords: International Lender of Last Resort, International Monetary Fund, currency crises
    JEL: F02 F33
    Date: 2006–11
  39. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure.
    Keywords: Monetary policy analysis; Inflation targeting; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 F41 C13 F47 C32
    Date: 2006–03–11
  40. By: Preston, Bruce
    Abstract: This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. In the model considered here, private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Because agents solve a multiperiod decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of Bullard and Mitra (2002) and Evans and Honkapohja (2002). A Taylor rule ensures convergence to the rational expectations equilibrium associated with this policy if the so-called Taylor principle is satisfied. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations.
    JEL: G00 G0
    Date: 2005–11–28
  41. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.
    Keywords: Stance of monetary policy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 C13 E37 C32
    Date: 2006–06–11
  42. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a small open economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Incomplete exchange rate pass through is generated by monopolistic competition and staggered reoptimization in the import market. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.
    Keywords: Stance of monetary policy; Small open economy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 F41 C13 F47 C32
    Date: 2006–06–11
  43. By: Peter Funk; Bettina Kromen
    Abstract: This model analyses the interaction between inflation and the long-run levels of employment and output growth in a Schumpeterian growth model with quality improving innovations under nominal price rigidity. At the unique REE steady state equilibrium, both employment and growth are hump-shaped functions of money growth peaking at positive inflation rates. This is due to four effects of money growth under rigidity: Erosion of its relative price through inflation and the optimal initial mark-up set in anticipation of this influence a firm’s profits. Dispersion in relative prices causes inefficient production while the change in the average mark-up influences aggregate demand.
    Keywords: Inflation, price rigidity, endogenous growth, employment, long-run Phillips curve
    JEL: E24 E31 O31 O42
    Date: 2006–11–14
  44. By: Douglas Laxton; Papa N'Diaye; Paolo Pesenti
    Abstract: The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-a-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.
    JEL: E17 E52 F41
    Date: 2006–11
  45. By: Vitek, Francis
    Abstract: This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive model, while dominating that structural vector autoregressive model in terms of predictive accuracy. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption, adjustment costs in investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and trend components are jointly estimated with a novel Bayesian full information maximum likelihood procedure.
    Keywords: Monetary policy analysis; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation
    JEL: C11 E52 C13 E37 C32
    Date: 2006–03–11
  46. By: William A. Branch; John B. Carlson; George W. Evans; Bruce McGough
    Abstract: This paper develops an adaptive learning formulation of an extension to the Ball, Mankiw, and Reis (2005) sticky information model that incorporates endogenous inattention. We show that, following an exogenous increase in the policymaker’s preferences for price vs. output stability, the learning process can converge to a new equilibrium in which both output and price volatility are lower.
    Keywords: Monetary policy ; Information theory
    Date: 2006
  47. By: Gadea, Maria; Mayoral, Laura
    Abstract: The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate, and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of twenty-one OECD countries which are modeled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although nonpermanent) in most postindustrial countries and that it has remained basically unchanged over the last four decades.
    JEL: G00 G0
    Date: 2005–12–21
  48. By: Menkhoff, Lukas; Taylor, Mark P.
    Abstract: Technical analysis involves the prediction of future exchange rate (or other asset-price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing; and finally that it may provide information on non-fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis.
    Keywords: foreign exchange market, technical analysis, market microstructure
    JEL: F31
    Date: 2006–11
  49. By: Allington, Nigel FB; Kattuman, Paul A; Waldmann, Florian A
    Abstract: The introduction of the euro was intended to integrate markets within Europe further, after the implementation of the 1992 Single Market Project. We examine the extent to which this objective has been achieved, by examining the degree of price dispersion between countries in the euro zone, compared to a control group of EU countries outside the euro zone. We also establish the role of exchange rate risk in hampering arbitrage by estimating the euro effect for subgroups within the euro zone, utilizing differences among EU countries in participation in the Exchange Rate Mechanism. Our results, in contrast with previous empirical research, suggest robustly that the euro has had a significant integrating effect.
    JEL: G00 G0
    Date: 2005–03–21
  50. By: Stéphane Mussard (GREDI, Université de Sherbrooke and GEREM, Université de Perpignan); Bernard Philippe (GEREM, Université de Perpignan)
    Abstract: In this paper, we show that the rate of unemployment in period t depends on GDP and inflation rate in period t-1. We then show that GDP is related to money creation, and subsequently that the rate of unemployment is a decreasing function of this creation.
    Keywords: Creation of Money, Decomposition, GDP, Rate of Unemployment
    JEL: E20 E24
    Date: 2006
  51. By: Julian Berengaut; Katrin Elborgh-Woytek
    Abstract: Against the background of the theory of optimum currency areas, the paper analyzes possible sequences for establishing a currency union (CU) in the Middle East and Central Asia region. Between the corner solutions of independent currencies for all countries in the region and a CU comprising all countries, a large number of combinations of member countries in the CU is possible. The analysis aims to determine the composition of potential CUs as a function of the country initiating the CU, an exogenously determined number of currencies in the region, and the weight attached to the particular selection criteria. Within this framework, the study seeks to establish whether some countries are consistently selected at early stages of the process, while others join only at later stages.
    Keywords: Currency union , optimum currency areas , middle east , central asia ,
    Date: 2006–10–17
  52. By: Pau Rabanal; Vicente Tuesta
    Abstract: We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility but at the cost of overestimating volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in Local Currency Pricing improves the fit of the baseline model but does not improve the fit as much as introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behavior of the real exchange rate, while both demand and technology shocks have been important.
    Keywords: Real exchange rates , Bayesian estimation , model comparison , Euro , U.S. dollar , Real effective exchange rates , Economic models ,
    Date: 2006–08–03
  53. By: Tetsuji Okazaki (Faculty of Economics, University of Tokyo)
    Abstract: This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred.
    Date: 2006–11
  54. By: Marta Gomez-Puig (Universitat de Barcelona)
    Abstract: With the beginning of the European Monetary Union (EMU), euro-area sovereign securities adjusted spreads over Germany (corrected from the foreign exchange risk) experienced an increase that caused a lower than expected decline in borrowing costs. The objective of this paper is to study what explains that rising. In particular, if it took place a change in the price assigned by markets to domestic (credit risk and/or market liquidity) or to international risk factors. The empirical evidence supports the idea that a change in the market value of liquidity occurred with the EMU. International and default risk play a smaller role.
    Keywords: international and domestic credit risk, market liquidity, monetary integration, sovereign securities markets
    JEL: E44 F36 G15
    Date: 2005
  55. By: Frank Heinemann; Camille Cornand
    Abstract: We propose a speculative attack model in which agents receive multiple public signals. It is characterised by its focus on an informational structure, which sets free from the strict separation between public information and private information. Diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post. This process defines players’ private value. The main result is to show that equilibrium uniqueness depends on two conditions: (i) signals are sufficiently dispersed (ii) private beliefs about the relative precision of these signals sufficiently differ. We derive some implications for information dissemination policy. Transparency in this context is multi-dimensional: it concerns the publicity of announcements, the number of signals disclosed as well as their precision. Especially, it seems that the central bank has better not publishing its forecast errors in order to maintain stability. An illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks. Keywords: Speculative attack – coordination game – multiple equilibria – public and private information – transparency. JEL Classification: F31 – D82.
    Date: 2006–06
  56. By: Roland Craigwell; Travis Mitchell; DeLisle Worrell
    Abstract: This paper is a first analysis of daily transactions in the foreign exchange market of Barbados, a small open economy that has had an unchanged peg to the U.S. dollar for over 30 years. As a result of the credibility of the peg, we expect that capital flows will respond to differentials between U.S. and comparable Barbadian interest rates and that this will result in uncovered interest parity, when allowance is made for market frictions and large discrete events. The results are consistent with this hypothesis about the motivation for foreign exchange transactions.
    Keywords: Foreign exchange , exchange rate , interest parity ,
    Date: 2006–10–31
  57. By: Federico S. Mandelman
    Abstract: Starting from a variant of the New Keynesian model for a small open economy, I extend the standard credit channel framework to show that the presence of imperfect competition in the banking system propagates external shocks and amplifies the business cycle. This novel modeling of the banking system captures various well-documented facts in developing economies. I show that strategic limit pricing, aimed at protecting retail niches from potential competitors, generates countercyclical bank markups. Markup increments, as a consequence of sudden capital outflows, end up increasing borrowing costs for firms as well as damaging the financial position of firms’ balance sheets. The recognition of monopoly power in banking allows the model to account for the relatively high investment volatility registered in emerging countries, even in the presence of debt that is fully denominated in local currency and flexible exchange rates.
    Date: 2006
  58. By: Christopher Browne; David William Harold Orsmond
    Abstract: This paper examines the potential advantages and disadvantages of adopting a common currency arrangement among the six IMF member Pacific island countries that have their own national currency. These countries are Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu. The study explains that the present exchange rate regimes-comprising pegging to a basket of currencies for five countries and the floating arrangement for Papua New Guinea-have generally succeeded in avoiding inflationary, balance of payments, external debt, and financial system problems. The study concludes that adopting a common currency in the Pacific would require greater convergence of domestic policies and substantial strengthening of regional policies, which would take time to achieve.
    Keywords: Economic integration , regional currency arrangements , Pacific Island countries ,
    Date: 2006–10–24
  59. By: Marcus Pramor; Natalia T. Tamirisa
    Abstract: How much convergence has been achieved between Central and Eastern European (CEE) economies and the eurozone? We explore this question by comparing long-run volatility trends in CEE currencies and the euro. We find that these trends are closely correlated, pointing to convergence in the economic and financial structures of these economies. Nonetheless, the degree of commonality remains weaker than what had been found for major European currencies before the introduction of the euro. Spillovers of volatility across regional markets appear to have diminished over time, with the exception of the Hungarian forint, which remains a source of volatility shocks to regional currencies.
    Keywords: Exchange rate , volatility , GARCH , convergence , Central Europe ,
    Date: 2006–09–25
  60. By: Komlos, John; Flandreau, Marc
    Abstract: We explore the efficiency of the forward Reichsmark market in Vienna between 1876 and 1914. We estimate ARIMA models of the spot exchange rate in order to forecast the one-month-ahead spot rate. In turn we compare these forecasts to the contemporaneous forward rate, i.e., the market's forecast of the future spot rate. We find that shortly after the introduction of a shadow gold standard in the mid-1890s the forward rate became a considerably better predictor of the future spot rate than during the prior flexible exchange rate regime. Between 1907 and 1914 forecast errors were between a half and one-fourth of their pre-1896 level. This implies that the Austro-Hungarian Bank's policy of defending the gold value of the currency was successful in improving the efficiency of the foreign exchange market.
    Keywords: exchange rate; gold standard; ARIMA; efficiency
    JEL: F31 N23
    Date: 2006–11
  61. By: Charalambos G. Tsangarides; Yasser Abdih
    Abstract: We apply the fundamentals equilibrium exchange rate (FEER) approach and the Johansen cointegration methodology to investigate the behavior of the real effective exchange rates of the two monetary unions of the CFA franc zone (CEMAC and WAEMU) vis-à-vis their long-run equilibrium paths. For both CEMAC and WAEMU, our results indicate that: (i) the fundamentals account for most of the fluctuation of the real effective exchange rates, with increases in the terms of trade, government consumption, and productivity improvements causing the exchange rate to appreciate, and increases in investment and openness leading to a depreciation; (ii) at end-2005 both the CEMAC and WAEMU real effective exchange rates were broadly in line with their long-run equilibrium values; and (iii) following a shock, reversion to equilibrium is twice as fast in WAEMU than in CEMAC.
    Keywords: Equilibrium real exchange rate , FEER , cointegration , WAEMU , CEMAC ,
    Date: 2006–10–26
  62. By: Maurice Obstfeld
    Abstract: Even when the exchange-rate plays no expenditure-switching role, countries may wish to have flexible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing.
    JEL: F41 F42
    Date: 2006–11
  63. By: Tobias Knedlik
    Abstract: Currency crises episodes of 1996, 1998, and 2001 are used to identify common country specific causes of currency crises in South Africa. The paper identifies crises by the use of an Exchange Market Pressure (EMP) index as introduced by Eichengreen, Rose and Wyplosz (1996). It extends the Signals Approach introduced by Kaminsky and Reinhart (1996, 1998) by developing a composite indicator in order to measure the evolution of currency crisis risk in South Africa. The analysis considers the standard suspects from international currency crises and country specifics as identified by the Myburgh Commission (2002) and current literature as potentially relevant indicators.
    Keywords: signals approach, currency crises, South Africa
    JEL: E5 F3 G1
    Date: 2006–11
  64. By: Jess Benhabib; Mark M. Spiegel
    Abstract: In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative-to-moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is non-linear over the entire sample range.
    Keywords: Inflation (Finance)
    Date: 2006
  65. By: Jean-Francois Segalotto; Marco Arnone; Bernard Laurens
    Abstract: This paper presents an update of the Grilli-Masciandaro-Tabellini (GMT) index of central bank (CB) autonomy, based on CB legislation as of end-2003. The index is applied to a set of OECD and developing countries, and emerging market economies. For a smaller set of countries, the paper presents a reconstruction of the GMT index based on Cukierman (1992) and assesses changes in CB autonomy between 1992 and 2003. The results point to a significant increase in CB autonomy, in particular for developing countries. In most cases, this improvement has involved a three-stage process: an initial stage in which the political foundations for CB autonomy are laid; a second stage in which operational autonomy develops; and a final stage in which CBs gain further political autonomy in terms of policy formulation and the appointment of senior management.
    Keywords: Central bank autonomy , political autonomy , economic autonomy ,
    Date: 2006–10–19
  66. By: Antoine Martin; Michael Orlando; David Skeie
    Abstract: In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace.
    Keywords: Payment systems ; Money ; Econometric models
    Date: 2006
  67. By: Dean Croushore
    Abstract: This paper carries out the task of evaluating inflation forecasts from the Livingston Survey and the Survey of Professional Forecasters, using the real-time data set for macroeconomists as a source of real-time data. The author examines the magnitude and patterns of revisions to the inflation rate based on the output price index and describe what data to use as “actuals” in evaluating forecasts. The author then runs tests on the forecasts from the surveys to see how good they are, using a variety of actuals. The author finds that much of the empirical work from 20 years ago was a misleading guide to the quality of forecasts because of unique events during the earlier sample period. Repeating that empirical work over a longer sample period shows no bias or other problems in the forecasts. The use of real-time data also matters for some key tests on some variables. If a forecaster had used the empirical results from the late 1970s and early 1980s to adjust survey forecasts of inflation, forecast errors would have increased substantially.
    Keywords: Inflation (Finance)
    Date: 2006
  68. By: Romain Ranciere; Olivier Jeanne
    Abstract: We present a model of the optimal level of international reserves for a small open economy that is vulnerable to sudden stops in capital flows. Reserves allow the country to smooth domestic absorption in response to sudden stops, but yield a lower return than the interest rate on the country's long-term debt. We derive a formula for the optimal level of reserves, and show that plausible calibrations can explain reserves of the order of magnitude observed in many emerging market countries. However, the recent buildup of reserves in Asia seems in excess of what would be implied by an insurance motive against sudden stops.
    Keywords: Foreign exchange reserves , balance of payments crises , sudden stops , capital flows ,
    Date: 2006–10–20
  69. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: Using the yield curve helps forecast real growth over the period 1875 to 1997. Using both the level and slope of the curve improves forecasts more than using either variable alone. Forecast performance changes over time and depends somewhat on whether recursive or rolling out of sample regressions are used.
    Keywords: Interest rates ; Gross national product
    Date: 2006
  70. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: We examine the evolution of the net external asset positions of Central and Eastern Europe (CEEC) countries over the past decade, with a strong emphasis on the composition of their international balance sheets. We assess the extent of their international financial integration, compared with the advanced economies and other emerging markets, and highlight the salient features of their external capital structure in terms of the relative importance of FDI, portfolio equity, and external debt. In addition, we briefly describe the country and currency composition of their external liabilities. Finally, we explore the implications of the accumulated stock of external liabilities for future trade and current account balances.
    Keywords: trade balance , rates of return , net external position , FDI , Capital flows , Eastern Europe , Balance of trade , Current account , Foreign direct investment ,
    Date: 2006–08–15

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