nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒02‒17
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features By Hernando Vargas
  2. Can Opacity of a Credible Central Bank Explain Excessive Inflation? By Baeriswyl, Romain; Cornand, Camille
  3. The Maastricht convergence criteria and optimal monetary policy for the EMU accession countries By Lipinska, Anna
  4. The Role of Banks in the Transmission of Monetary Policy in the Baltics By Köhler, Matthias; Hommel, Judith; Grote, Matthias
  5. Monetary Policy Committees in Action: Is There Room for Improvement? By Philipp Maier
  6. Talks, financial operations or both? Generalizing central banks’ FX reaction functions By Oscar Bernal; Jean-Yves Gnabo
  7. Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities By Peter Flaschel; Christian Proano; Willi Semmler
  8. The Suspension of Cash Payments as a Monetary Regime By Elisa Newby
  9. Money Market: Instruments, Products, and Interest Rates By Govori, Fadil
  10. Wage bargaining and monetary policy in a Kaleckian monetary distribution and growth model: trying to make sense of the NAIRU By Eckhard Hein
  11. Instability of the Eurozone? On Monetary Policy, House Prices and Labor Market Reforms By Ansgar Belke; Daniel Gros
  12. Monetary policy, macroeconomic policy mix and economic performance in the Euro area By Eckhard Hein; Achim Truger
  13. Socio-political and economic determinants of de facto monetary institutions and inflationary outcomes By Fabrizio Carmignani; Emilio Colombo; Patrizio Tirelli
  14. Monetary hyperinflations, speculative hyperinflations and modelling the use of money. By Alexandre Sokic
  15. The economic impact of central bank transparency: a survey By Cruijsen,Carin van der; Eijffinger,Sylvester
  16. On the (in-)stability and the endogeneity of the "normal" rate of capacity utilisation in a post-Keynesian/Kaleckian "monetary" distribution and growth model By Eckhard Hein
  17. Inside Money, Credit, and Investment By Dressler, Scott; Li, Victor
  19. Inflation Persistence and Tax-Push Inflation in Germany and in the Euro Area: A Symptom of Macroeconomic Mismanagement? By Joerg Bibow
  20. Evaluating An Estimated New Keynesian Small Open Economy Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Villani, Mattias
  21. Monetary Policy and the Political Support for a Labor Market Reform By Álvaro Aguiar; Ana Paula Ribeiro
  22. On the relationship between inflation persistence and temporal aggregation By Ivan Paya; K Holden; A Duarte
  23. Unemployment, Inflation and Monetary Policy in a Dynamic New Keynesian Model with Hiring Costs By Mirko Abbritti
  24. Money market derivatives and the allocation of liquidity risk in the banking sector By Fecht, Falko; Hakenes, Hendrik
  25. Moneychangers and Commodity Money By Vincent Bignon; Richard Dutu
  26. Inflation persistence in the euro-area, US, and new members of the EU: Evidence from time-varying coefficient models By Zsolt Darvas; Balázs Varga

  1. By: Hernando Vargas
    Abstract: The Colombian economy experienced several shocks in the past ten years. The permanent fall of inflation, the adoption of inflation targeting (IT) and a financial crisis altered the transmission mechanism of monetary policy. Low inflation and IT reduced inflation persistence and contributed to anchor inflation expectations. The evidence is less conclusive with respect to the changes of the responsiveness of inflation to domestic conditions (output or marginal cost gaps). Increased competition may have encouraged a higher degree of price flexibility, but a more stable inflation environment may have raised the sensitivity of aggregate supply to inflation surprises. The short-run money-inflation relationship was broken in the presence of low inflation, exogenous shocks to the demand for money and a policy regime that stabilized short-run interest rates. The sensitivity of aggregate demand to the interest rate varied with the indebtedness of private agents and the credit channel was severed after the financial crisis. The IT regime implied a stabilization of short-run interest rates, making the monetary policy stance and objectives clearer to the public. However, interest rate pass-through appears to be incomplete and seems to respond to the varying importance of the credit channel and the general state of the economy.
    Keywords: Monetary Transmission Mechanisms, Inflation Targeting, Colombian Economy. Classification JEL:E42; E44; E52; E66.
  2. By: Baeriswyl, Romain; Cornand, Camille
    Abstract: Excessive inflation is usually attributed to the lack of central bank’s credibility. In this context, most of the literature considers transparency a means to establish central bank’s credibility. The contribution of this paper is twofold. First, it shows that, even in the absence of inflationary bias, a credible central bank may find it optimal to implement an accommodating monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap, and thereby whether it will implement an expansionary or contractionary policy in response to cost-push shocks. Second, it stresses that transparency is not just a means to achieve credibility but is essential per se for the optimality of monetary policy of a fully credible central bank.
    Keywords: monetary policy; differential information; transparency; cost-push shocks
    JEL: E58 E52 D82
    Date: 2007–02
  3. By: Lipinska, Anna
    Abstract: The EMU accession countries are obliged to fulfill the Maastricht convergence criteria prior to entering the EMU. What should be the optimal monetary policy satisfying these criteria? To answer this question, the paper proposes a DSGE model of a two-sector small open economy. First, I derive the micro founded loss function that represents the objective function of the optimal monetary policy not constrained to satisfy the criteria. I find that the optimal monetary policy should not only target ination rates in the domestic sectors and aggregate output fluctuations but also domestic and international terms of trade. Second, I show how the loss function changes when the monetary policy is constrained to satisfy the Maastricht criteria. The loss function of such a constrained policy is characterized by additional elements penalizing fluctuations of the CPI inflation rate, the nominal interest rate and the nominal exchange rate around the new targets which are different from the steady state of the unconstrained optimal monetary policy. Under the chosen parameterization, the optimal monetary policy violates two criteria: concerning the CPI inflation rate and the nominal interest rate. The constrained optimal policy is characterized by a deflationary bias. This results in targeting the CPI inflation rate and the nominal interest rate that are 0.7% lower (in annual terms) than the CPI inflation rate and the nominal interest rate in the countries taken as a reference. Such a policy leads to additional welfare costs amounting to 30% of the optimal monetary policy loss.
    Keywords: Optimal monetary policy; Maastricht convergence criteria; EMU accession countries
    JEL: F41 E52
    Date: 2006–11
  4. By: Köhler, Matthias; Hommel, Judith; Grote, Matthias
    Abstract: The paper empirically investigates the monetary transmission mechanism in the Baltic States. The analysis of the transmission channels through which monetary policy shocks are transmitted is particularly important for the European Central Bank that makes monetary policy in an enlarged European Monetary Union. The paper focuses on the bank lending channel of monetary transmission due to the importance of banks in the financial system of the Baltic countries. The existence of this transmission channel is tested by using a panel structural approach that distinguishes banks according to size, capitalization, liquidity and ownership structure. The results indicate that a bank lending channel is present in the Baltic States and mainly caused by differences in liquidity.
    Keywords: Monetary Transmission, Bank Lending Channel, Transition Countries
    JEL: E43 E44 G15 G21
    Date: 2006
  5. By: Philipp Maier
    Abstract: More than 80 central banks use a committee to take monetary policy decisions. The composition of the committee and the structure of the meeting can affect the quality of the decision making. In this paper we review economic, experimental, sociological and psychological studies to identify criteria for the optimal institutional setting of a monetary committee. These include the optimal size of the committee, measures to encourage independent thinking, a relatively informal structure of the meeting, and abilities to identify and evaluate individual members’ performances. Using these criteria, we evaluate the composition and operation of monetary policy committees in various central banks. Our findings indicate that e.g. the monetary policy committee of the Bank of England follows committee best-practice, while the committee structure of other major central banks could be improved.
    Keywords: Central bank research; Monetary policy framework
    JEL: C92 D70 E58
    Date: 2007
  6. By: Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur)
    Abstract: This paper generalizes central banks’ FX interventions reaction functions to include oral interventions alongside actual ones. Using Japanese data for the 1991-2004 period, we estimate an ordered probit explaining the occurrence of each type of intervention and evaluating the extent to which oral and actual interventions are substitutes or complements. Our results indicate that monetary authorities tend to adopt progressively stronger measures as the exchange rate behaves in an increasingly unfavorable way. This suggests that words and acts are used as complements only in extreme cases.
    Keywords: Central banks; Foreign exchange market; Interventions; Communication policy
    JEL: E58 F31 G15
    Date: 2007–02
  7. By: Peter Flaschel (University of Bielefeld); Christian Proano (University of Bielefeld, IMK at the Hans Boeckler Foundation); Willi Semmler (New School for Social Research, New York)
    Abstract: The right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.
    Keywords: Mundell-Fleming-Tobin model, liability dollarisation, debt-financed investment, financial crisis, currency crisis, deflation.
    JEL: E31 E32 E37 E52
    Date: 2006–06
  8. By: Elisa Newby
    Abstract: By setting bounds on money growth, the commodity standard is a solution to the monetary authority’s time inconsistency problem, which arises from the fixed wage structure of the economy. If there is a supply shock to the backing commodity, the suspension of the commodity standard may be desirable in terms of stabilisation of production and consumption. By representing a credible commitment to return to the commodity standard, the suspension of cash payments maintains the value and circulation of money. Lessons and evidence are taken from England’s experience of the suspension of cash payments between 1797 and 1821.
    Keywords: Gold standard, Suspension of Cash Payments, Monetary policy, Monetary regimes.
    JEL: C61 E31 E4 E5 N13
    Date: 2007–02
  9. By: Govori, Fadil
    Abstract: The basic function of the money market is to bring these two groups into contact to make borrowing and lending possible. The money market is the mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits. The money market provides a channel for the exchange of financial assets for money. It differs from other parts of financial markets in its emphasis on loans to meet purely short-term cash needs. Money market is defined as the market for securities with less than 1 year to maturity at the original issue date. Money market instruments include the following: Treasury bills; Federal funds (Interbank loans); Repurchase agreements; Certificates of deposit; Commercial paper; Bankers’ acceptance; Eurocurrency Certificates of Deposit; and Money Market Mutual Funds. In practice, each of these instruments has slightly different characteristics, and thus each has a slightly different interest rate. Since many investors regard the individual money market instruments as close substitutes, changes in all the money market interest rates are highly correlated. The money market can also be viewed simply as a collection of financial-service firms that produce, distribute and sell financial products most in demand by the public. Among the money market products most widely sought by the public and supplied by the markets, are the following: Bills; Deposits; Forward rate agreements; Short term interest rate futures; Swaps; Foreign exchange; and Securities borrowing agreement. One of the peculiarities of the money market is its way of quoting interest rates. Some money market instruments are quoted on a discount basis. Other rates are quoted on an add-on basis. Each of these rates is different from the yield to maturity, the rate generally used for comparing coupon-bearing bonds. There are at least five different money market rates: The discount rate; the add-on rate; the bond equivalent yield; the semiannual and annual yields to maturity.
    Keywords: Money Market; Money Market Instruments; Money Market Products; Money Market Interest Rates
    JEL: E51 E52 G32 G12 G14 G13 G21 E58 E43
    Date: 2007–02
  10. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In a Kaleckian monetary distribution and growth model with conflict inflation we assess the role of a Non Accelerating Inflation Rate of Unemployment (NAIRU). The short run stability of a NAIRU is examined taking into account real debt effects of accelerating and decelerating inflation, and the short run effectiveness of monetary policy interventions applying the interest rate tool is analysed. The problem of long run endogeneity of the NAIRU is addressed integrating the long run distribution effects of monetary policies’ real interest rate variations into the model. It is concluded that monetary policy interventions in order to stabilise inflation are either unnecessary or costly in terms of employment in the short run. In the long run, these policies bear the risk of continuously increasing the NAIRU in order to keep inflation under control, which yields a horizontal long run Phillips-curve and latent stagflation. Instead of relying on monetary policies, the cause of inflation should be directly addressed and wage bargaining co-ordination should be applied as an appropriate tool.
    Keywords: Monetary policy, wage bargaining, inflation, distribution, growth
    JEL: E12 E22 E24 E25 E52
    Date: 2005–10
  11. By: Ansgar Belke (University of Hohenheim and IZA); Daniel Gros (Centre for European Policy Studies, Brussels and San Paolo IMI Asset Management, Milan)
    Abstract: This paper deals with potential instabilities in the Eurozone stemming from an insufficient interplay between monetary policy and reform effort on the one hand and the emergence of intra-Euro area divergences on the other. As a first step, we assess the effect of EMU on structural reform and investigate this question by an examination of the relationship between fixed exchange rates and reform in two wider samples of countries. We also stress that loose monetary conditions, which prevailed until some months ago, can also manifest themselves in asset price inflation, notably in the housing market. When these bubbles burst (e.g., when housing prices stop rising) this often leads to a prolonged period of economic instability and weakness rather than consumer price inflation. As a second step, we point out that risks for EMU are not only increasing because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the Euro area which threaten its long-term cohesiveness. The most manifest example of this threat comes from what promises to be a long-term divergence between Germany and Italy, which for the time being was offset by asynchronous developments of house prices in both countries. There are still large differences within the Euro area, with the small countries performing much better than the large ones on almost every indicator. This suggests that better policies can make a large difference even if monetary policy is the same for everybody.
    Keywords: asset prices, international competitiveness, EMU, instabilities, labor markets, monetary policy regime, structural reform
    JEL: D78 E52 E61
    Date: 2007–01
  12. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Achim Truger (IMK at the Hans Boeckler Foundation)
    Abstract: In order to explain slow growth and high unemployment in the Euro area, in particular if compared to the USA, we follow a macroeconomic policy view focussing on the more restrictive stance of monetary, fiscal and wage policies in the Euro area. In the present paper we focus on the particular role of monetary policy, because the European Central Bank (ECB) seems to be the major obstacle to higher growth and employment. Analysing the macroeconomic policy mix, wage policies and fiscal policies are taken into account at the outset, but then the determinants of ECB policies are assessed in more detail. Our analysis confirms that it is the ECB's overemphasising a too low inflation target which is a major problem for macroeconomic performance in the Euro area. The ECB is too exclusively occupied with inflation and wage developments and pays too little attention to the development of real variables. In order to improve growth and employment and to limit the risks of deflation in the largest economy of the Euro area, Germany, it is therefore required that the ECB raises its inflation target and that the central bank focuses more on real economic activity.
    Keywords: Monetary policy, macroeconomic policy mix, Euro area
    JEL: E52 E58 E61 E63 E65
    Date: 2006–05
  13. By: Fabrizio Carmignani (Department of Economics, University of Milan-Bicocca); Emilio Colombo (Department of Economics, University of Milan-Bicocca); Patrizio Tirelli (Department of Economics, University of Milan-Bicocca)
    Abstract: In this paper we estimate a model where in°ation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and bene¯ts from the balance of powers between the executive and the parliament. In°ation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and ¯nancial) a®ects in°ation through the ex- change rate regime channel. Success in controlling in°ation, in turn is crucial to sustain central bank independence and exchange rate stability.
    Keywords: Infation, central bank independence, exchange rate regime, system estimation
    JEL: E52 E58 C31
  14. By: Alexandre Sokic
    Abstract: The aim of this paper is to clarify the failure of the Cagan model with perfect foresight and to draw new axes for investigation of monetary hyperinflation analysis. Firstly, the paper evaluates the relevancy of the Cagan ad-hoc model with perfect foresight as a theoretical framework for investigating hyperinflation processes. We show that deficits can never generate monetary hyperinflations, confirming the results of Buiter (1987). The only hyperinflationary processes that can occur are speculative hyperinflations. Secondly, the paper assesses consistency of hyperinflationary paths with the optimizing behaviour of representative agents within two perfect foresight inflationary finance frameworks modelling the use of money as a medium of exchange. In the context of a money-in-the-utility framework, the results obtained in the Cagan ad-hoc model with perfect foresight are founded and confirmed. This implies restricting the use of the latter model only to speculative hyperinflations analysis. In the context of a transaction costs based model, we show that deficits can generate monetary hyperinflations. Moreover, speculative hyperinflations remain possible. This result is in sharp contrast to that of the money-in-the-utility framework and implies a demand for money different from the Cagan form.
    JEL: E31 E41
    Date: 2007
  15. By: Cruijsen,Carin van der; Eijffinger,Sylvester (Tilburg University, Center for Economic Research)
    Abstract: We provide an up-to-date overview of the literature on the desirability of central bank transparency from an economic viewpoint. Since the move towards more transparency, a lot of research on its effects has been carried out. First, we show how the theoretical literature has evolved, by looking into branches inspired by Cukierman and Meltzer (1986) and by investigating several, more recent, research strands (e.g. coordination and learning). Then, we summarize the empirical literature which has been growing more recently. Last, we discuss whether: -the empirical research resolves all theoretical question marks, -how the findings of the literature match the actual practice of central banks, and -where there is scope for more research.
    Keywords: central bank transparency;monetary policy;survey
    JEL: E31 E52 E58
    Date: 2007
  16. By: Eckhard Hein (IMK at the Hans Boeckler Foundation)
    Abstract: In Kaleckian models of distribution and growth the equilibrium rate of capacity utilisation may persistently diverge from the ‘normal rate’ of utilisation. We assess this problem following the approach by Dumenil/Levy (1999) who consider the ‘normal rate’ of utilisation in a monetary production economy as the rate which is associated with price stability. Since inflation in our model is driven by distribution conflict, the ‘normal rate’ of utilisation is associated with consistent claims of firms and employees. Taking into account real debt effects of changes in inflation and distribution effects of monetary policy interventions we discuss the short-run stability of the ‘normal rate’ and address the issue of long-run endogeneity. Generally, we show that in a Kaleckian monetary distribution and growth model, which takes the major features of a credit economy seriously, the ‘normal rate’ of capacity utilisation is endogenous to distribution conflict and monetary policy intervention in the long run. And we also show that major Kaleckian results, in particular the paradox of costs, can be retained for the short and the long run.
    Keywords: distribution, growth, capacity utilisation, inflation, monetary policy
    JEL: E12 E22 E25 E52 O42
    Date: 2006–02
  17. By: Dressler, Scott; Li, Victor
    Abstract: This paper presents a monetary explanation for several business-cycle facts: (i) household and business investment are procyclical, (ii) business investment lags household investment, (iii) household investment is positively correlated with M1, and (iv) household credit outstanding is positively correlated with and more volatile than household investment. We develop a dynamic general equilibrium model that features financial intermediaries accepting deposits and providing loans, credit-producing firms, and inside (bank-created) money. It is shown that the transmission of monetary shocks facilitated by credit and inside money creation is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.
    JEL: G11 E39 C68
    Date: 2007–01
  18. By: Gerald Epstein (Department of Economics and Political Economy Research Institute, University of Massachusetts-Amherst); James Heintz (Department of Economics and Political Economy Research)
    Abstract: This Country Study summarizes the findings and recommendations of a UNDP-supported study on the linkages among central bank policy, the financial structure and employment outcomes in Ghana. The study maintains that monetary policy must be coordinated with financial sector reforms in order to generate poverty-reducing employment. Its analysis highlights serious problems of restrictive inflation-targeting, a high real interest rate policy and insufficient lending of financial resources for productive private investment. In response, it recommends that monetary policy in Ghana should be specifically geared to promoting economic growth and employment along with maintaining moderate levels of inflation. Targeting such real variables, it maintains, will imply regular collection of data, such as on employment trends. In order to lower the cost of borrowing and foster greater access to credit, the study offers several policy recommendations, including credit guarantee schemes, reducing interest rates on government securities, using asset-based reserve requirements to direct credit and forging stronger links between formal and informal financial institutions. The study’s main point is that monetary and financial sector policies should be recast as crucial instruments of development and be well integrated into Ghana’s Poverty Reduction Strategy.
    Keywords: Poverty, ECONOMIC, GHANA, REDUCTION
    JEL: B41 D11 D12 E31 I32 O54
    Date: 2006–06
  19. By: Joerg Bibow (Franklin College, Lugano, Switzerland)
    Abstract: This study challenges the widely held view that the persistence in Euro area inflation above two percent, which has been observed in the euro area since 2001 despite the economic slump, may have been foremost a reflection of “structural rigidities” in labour and product markets. Accordingly, structural reforms that eliminate these rigidities are presented as necessary and sufficient conditions for boosting growth and purging inflation persistence. This view misses the fact that series of hikes in indirect taxes and administered prices contributed significantly to price increases in the euro area. Governments’ consolidation efforts in view of stagnation-induced budgetary pressures thus caused “tax-push inflation”, i.e. a persistent and sizeable upward distortion in headline inflation. Since inflation above two percent has, in turn, forestalled more growth-supportive monetary policies, the euro area has become stuck in a vicious circle of protracted domestic demand stagnation and budgetary pressures that continue to nurture tax push.
    Date: 2006–01
  20. By: Adolfson, Malin (Research Department, Central Bank of Sweden); Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Research Department, Central Bank of Sweden); Villani, Mattias (Research Department, Central Bank of Sweden)
    Abstract: This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank’s instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.
    Keywords: DSGE; VAR; VECM; Open economy; Bayesian inference
    JEL: C11 C53 E17
    Date: 2007–02–01
  21. By: Álvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ana Paula Ribeiro (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: Lagged benefits relative to costs can politically block an efficiency-enhancing labor market reform, lending support to the two-handed approach. An accommodating monetary policy, conducted alongside the reform, could help bringing the positive effects of the reform to the fore. In order to identify the mechanisms through which monetary policy may affect the political sustainability of a reform, we add stylized features of the labor market to a standard New-Keynesian model for monetary policy analysis. A labor market reform is modeled as a structural change inducing a permanent shift in the flexible-price unemployment and output levels. In addition to the permanent gains, the impact of the timing and magnitude of the reform-induced adjustments on the welfare of workers - employed and unemployed - is crucial to the political feasibility of the reform. Since the adjustments depend, on one hand, on the macroeconomic structure and, on the other hand, can be influenced by monetary policy, we simulate various degrees of output persistence across different policy rules. We find that, if inertias are present, monetary policy, even when conducted by an independent central bank, affects the political support for the reform. In general, the more expansionary (or the less contractionary) the policy is, the faster is the recovery to the new steady-state equilibrium and, thus, the stronger is the political support.
    Keywords: Monetary policy rules; Labor market reforms; Unemployment benefit; Political economy; New-Keynesian models
    JEL: E24 E37 E52 E61
    Date: 2007–02
  22. By: Ivan Paya; K Holden; A Duarte
    Abstract: This paper examines the impact of temporal aggregation on alternative definitions of inflation persistence. Using the CPI and the core PCE deflator of the US, our results show that temporal aggregation from the monthly to the quarterly to the annual frequency induces persistence in the inflation series.
    Keywords: Aggregation, Inflation, Persistence
    Date: 2006
  23. By: Mirko Abbritti (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: The dynamic general equilibrium model with hiring costs presented in this paper delivers involuntary unemployment in the steady state and involuntary fluctuations in unemployment. After calibrating the model, through simulations we are able to show that our model with labour market imperfections outperforms the standard NK model as for the persistence of responses to monetary shocks. Besides, the model can be easily used to assess the impact of different market imperfections on both the steady state and the dynamics of the economy. We are also able to show how two economies, differing in their "degrees of imperfection", react to policy or non policy shocks: a rigid economy turns out to be less volatile than a flexible economy. Something that reflects the actual experience of the US (flexible) and European (rigid) economies.
    Keywords: Hiring Costs, Wage Bargaining, Output Gap, New Keynesian Phillips Curve, Monetary Policy
    JEL: E24 E31 E32 E52 J64
    Date: 2007–01
  24. By: Fecht, Falko; Hakenes, Hendrik
    Abstract: Money markets have two functions, the allocation of liquidity and the processing of information. We develop a model that allows us to evaluate the efficiency of different money market derivatives regarding these two objectives. We assume that due to its size, a large bank receives a more precise signal about the overall liquidity development in the banking sector. In an upcoming liquidity shortage this large bank can exploit its informational advantage in the spot money market by rationing liquidity. Using forward contracts, the large bank can credibly commit not to squeeze small banks in the event of a liquidity shortage. But forward contracts do not provide incentives for the large bank to pass on its information to other banks. In contrast, lines of credit between the large and the small banks ensure that the large bank provides its information to other banks.
    Keywords: Liquidity, money market derivatives, lines of credit, forward contracts, options
    JEL: D82 G21 G33
    Date: 2006
  25. By: Vincent Bignon; Richard Dutu
    Abstract: We study the role played by coin experts, called moneychangers, in the metallic money system. To do that, we introduce intermediaries that can expertise and certify coins into the VeldeWeber and Wright’s (1999) model of commodity money with imperfectly recognizable coins. We show under which conditions buyers have their coins certified, how circulation by weight and circulation by tale equilibria are affected by moneychangers, and whether moneychangers increase welfare.
    Keywords: Commodity money, Search, Information, Moneychangers.
    JEL: D82 E42 N23
    Date: 2006
  26. By: Zsolt Darvas (Corvinus University of Budapest); Balázs Varga (Corvinus University of Budapest)
    Abstract: This paper studies inflation persistence with time-varying-coefficient autoregressions in response to recently discovered structural breaks in historical inflation time series of the euro-area and the US. To this end, we compare the statistical properties of the well known ML estimation using the Kalman-filter and the less known Flexible Least Squares estimator by Monte Carlo simulation. We also suggest a procedure for selecting the weight for FLS based on an iterative Monte Carlo simulation technique calibrated to the time series in question. We apply the methods for the study of inflation persistence of the US, the euro-area and the new members of the EU
    Keywords: flexible least squares, inflation persistence, Kalman-filter, time-varying coefficient models
    JEL: C22 E31
    Date: 2007–02–02

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