nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒04‒09
58 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Are Euro Interest Rates led by FED Announcements? By Andrea Monticini; Giacomo Vaciago
  2. Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis By Bernd Hayo
  3. Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics By Alexander Mihailov
  4. Monetary Transmission Mechanism in the New Economy: Evidence from Turkey (1997-2006) By Cifter, Atilla; Ozun, Alper
  5. Optimal Monetary Policy Rules for the Euro Area in a DSGE Framework By Pelin Ilbas
  6. Is Bad News About Inflation Good News for the Exchange Rate? By Richard Clarida; Daniel Waldman
  7. A New Cost Channel of Monetary Policy By M. Alper Cenesiz
  8. Assessing Inflation Targeting Through Intervention Analysis By Alvaro Angeriz; Philip Arestis
  9. The narrative approach for the identification of monetary policy shocks in small open economies By Eleni Angelopoulou
  11. Money and Monetary Policy in DSGE Models By Arnab Bhattacharjee; Christoph Thoenissen
  12. Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability By Claudia Kwapil; Johann Scharler
  14. Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan By Paul Mizen; Tae-Hwan Kim; Alan Thanaset
  15. Caution or Activism? Monetary Policy Strategies in an Open Economy By Martin Ellison; Lucio Sarno; Jouko Vilmunen
  16. The Eurosystem, the US Federal Reserve and the Bank of Japan - similarities and differences By Dieter Gerdesmeier; Francesco Paolo Mongelli; Barbara Roffia
  17. The Complex Response of Monetary Policy to Asset Prices By Ram Kharel; Chris Martin; Costas Milas
  18. Monetary Policy Amplification Effects through a Bank Capital Channel By Alvaro Aguiar; Inês Drumond
  19. Financial Systems and the Cost Channel Transmission of Monetary Policy Shocks By Johann Scharler; Sylvia Kaufmann
  20. Monetary Stabilisation Policy and Long-run Growth By Galindev Ragchaasuren
  21. The predictive content of the real interest rate gap for macroeconomic variables in the euro area By Jean-Stéphane MESONNIER
  22. ``Taylored'' Rules. Does One Fit All? By Cinzia Alcidi; Alessandro Flamini; Andrea Fracasso
  23. Risk and Uncertainty in Central Bank Signals: An Analysis of MPC Minutes By Sheila Dow; Matthias Klaes; Alberto Montagnoli
  24. Endogenous Cycles in Optimal Monetary Policy with a Nonlinear Phillips Curve By Gomes, O.; Mendes, D. A.; Mendes, V. P.; Sousa Ramos, J.
  25. Monetary policy implementation: A European Perspective By Bindseil, Ulrich; Nyborg, Kjell G.
  26. Transition economy convergence in a two-country model - implications for monetary integration By Jan Bruha; Jirí Podpiera
  27. Inflation, inflation uncertainty, and Markov regime switching heteroskedasticity: Evidence from European countries By Donal Bredin; Stilianos Fountas
  29. Bank Behaviour and the Cost Channel of Monetary Transmission By Eric Mayer; Oliver Hülsewig; Timo Wollmershäuser
  30. Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies By Enrique Alberola; José María Serena
  31. Argentina: The Central Bank in the Foreign Exchange Market By Roberto Frenkel
  32. Inflation Targeting and Fear of Floating By Reginaldo Pinto Nogueira Junior
  34. Central Bank Transparency: Where, Why, and with What Effects? By N. Nergiz Dincer; Barry Eichengreen
  35. Fiscal Discipline and Stability under Currency Board Systems By Oliver Grimm
  36. Credit Cycles in a OLG Economy with Money and Bequest By Agliari Anna; Assenza Tiziana; Delli Gatti Domenico; Santoro Emiliano
  37. Simple Pricing Rules, the Phillips Curve and the Microfoundations of Inflation Persistence By Richard Mash
  38. The Costs of EMU for Transition Countries By Alexandra Ferreira Lopes
  39. Hot Money Inflows and Monetary Stability in China: How the People's Bank of China Took up the Challenge By Vincent Bouvatier
  40. A No-Arbitrage Analysis of Macroeconomic Determinants of Term Structures and the Exchange Rate<br> By Fousseni Chabi-Yo; Jun Yang
  42. Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models* By Matthew Canzoneri
  43. The Future of the Euro : A Public Choice Perspective By Vaubel, Roland
  44. Commodity prices, money and inflation By Frank Browne; David Cronin
  45. Regional Monetary Integration among Developing Countries: New Opportunities for Macroeconomic Stability beyond the Theory of Optimum Currency Areas? By Barbara Fritz; Laurissa Mühlich
  46. Optimal Monetary Policy in a Dual Labor Market Economy By Rossi, Lorenza; Mattesini, Fabrizio
  48. Real-Time Effects of Central Bank Interventions in the Euro Market By Rasmus Fatum; Jesper Pedersen
  49. The foundations of money, payments and central banking: A review essay By Stephen Millard
  50. From Currency Unions to a World Currency: A Possibility? By Davide Furceri
  51. The monetary model of hyperinflation : limits of the model validity By Alexandre SOKIC
  52. Monetary Policy under Rule-of-Thumb Consumers and External Habits By Giovanni Di Bartolomeo; Lorenza Rossi; Massimiliano Tancioni
  53. Price setting in the euro area: some stylised facts from individual producer price data By Dias, Daniel; Sabbatini, Roberto; Dossche, Maarten; Stahl, Harald; Gautier, Erwan; Vermeulen, Philip; Hernando, Ignacio
  54. Sectoral money demand models for the euro area based on a common set of determinants By Julian von Landesberger
  55. Price setting in the euro area : some stylised facts from individual producer price data By Philip Vermeulen; Daniel Dias; Maarten Dossche; Erwan Gautier; Ignacio Hernando; Roberto Sabbatini; Harald Stahl
  56. Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information By De Pooter, Michiel; Ravazzolo, Francesco; van Dijk, Dick
  57. Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK By Christian Mose Nielsen

  1. By: Andrea Monticini (University of Exeter); Giacomo Vaciago (Universita' Cattolica Milano)
    Abstract: This paper investigates, for the first time, the reactions of markets to the monetary policy decisions of their own Central Bank and to the decisions of the Central Banks of other countries. In particular, using daily interest rates to estimate the impact of the monetary policy announcements of a Central Bank, we analyse the effect of the FED, ECB, and BoE monetary policy announcements on their own markets, and on the others. Surprisingly, we find that while the US rates respond only to FED announcements, and the British rates respond mainly to BoE announcements and marginally to FED announcements, the response of Euro bond rates to the FED announcements is stronger than their response to ECB announcements
    Keywords: Monetary Policy, Term structure of interest rates, Interdependence
    JEL: E4 E43 E52 F42
    Date: 2007–02–02
  2. By: Bernd Hayo (University of Marburg)
    Abstract: This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception.
    Keywords: Taylor rule, monetary policy, ECB, European Monetary Union
    JEL: E5
    Date: 2007–02–02
  3. By: Alexander Mihailov (University of Essex)
    Abstract: We investigate whether increased independence affects central bank behavior when monetary policy is already in an inflation targeting regime. Taking advantage of the recent UK experience to identify such an exogenous change, we estimate Taylor rules via alternative methods, specifications and proxies. Our contribution is to detect two novel results: the Bank of England has responded to the output gap, not growth; and in a stronger way after receiving operational independence. Both findings are consistent with the Bank's mandate and New Keynesian monetary theory. Economic expansion and anchored inflation have thus complemented greater autonomy in influencing the Bank's policy feedback
    Keywords: asymmetry of monetary policy reaction function across the business cycle, response to output gap vs output growth, Taylor rules, operational independence, inflation targeting, United Kingdom
    JEL: E52 E58 F41
    Date: 2007–02–02
  4. By: Cifter, Atilla; Ozun, Alper
    Abstract: This study aims to test the money base, money supply, credit capacity, industrial production index, interest rates, inflation and real exchange rate data of Turkey during the years 1997 – 2006 through the monetary transmission mechanism and passive money hypothesis using the vector error correction model based causality test. Empirical findings show that the passive money supply hypothesis of the new Keynesian economy is supported in part by accommodationalist views and they do not confirm to the view points of structuralist and liquidity preference theorist. However, according to the monetary transmission mechanism it has been established that long-term money supply only affects general price levels and production is influenced by interest rates in the new economy period for Turkish economy. Empirical findings show that in the new economy period interest transmission mechanism are brought to the fore.
    Keywords: Monetary transmission mechanism; money supply endogeneity; Credit; New Keynesian Economy
    JEL: E4 E52 E58 C32
    Date: 2007–01–01
  5. By: Pelin Ilbas (Catholic University of Leuven)
    Abstract: This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period's inflation rate seem to perform relatively worse.
    Keywords: monetary policy, discretion, commitment
    JEL: E52 E58
    Date: 2007–02–02
  6. By: Richard Clarida; Daniel Waldman
    Abstract: We show in a simple -- but robust -- theoretical monetary exchange rate model that the sign of the covariance between an inflation surprise and the nominal exchange rate can tell us something about how monetary policy is conducted. Specifically, we show that 'bad news' about inflation -- that it is higher than expected -- can be 'good news' for the nominal exchange rate -- that it appreciates on this news -- if the central bank has an inflation target that it implements with a Taylor Rule. The empirical work in this paper examines point sampled data on inflation announcements and the reaction of nominal exchange rates in 10 minute windows around these announcements for 10 countries and several different inflation measures for the period July 2001 through March 2005. When we pool the data, we do in fact find that bad news about inflation is indeed good news for the nominal exchange rate, that the results are statistically significant, and that the r-square is substantial, in excess of 0.25 for core measures of inflation. We also find significant differences comparing the inflation targeting countries and the two non-inflation targeting countries.
    JEL: E31 F3 F31
    Date: 2007–04
  7. By: M. Alper Cenesiz (Saarland University, University of Kiel)
    Abstract: In this paper, I developed a new cost channel of monetary policy transmission in a small scale, dynamic, general equilibrium model. The new cost channel of monetary policy transmission implies that the frequency of price adjustment increases in the nominal interest rate. I found that allowing for the new cost channel can account both for the muted and delayed inflation response and for the persistence of the output response to monetary policy shocks. Without any additional assumption, my model can also generate the delayed output response, though for a slightly more competitive goods market calibration
    Keywords: Price stickiness, Monetary policy, Price adjustment, Persistence
    JEL: E31 E32 E52
    Date: 2007–02–02
  8. By: Alvaro Angeriz (CCEPP and Wolfson College, University of Cambridge); Philip Arestis (CCEPP and Wolfson College, University of Cambridge)
    Abstract: The aim of this paper is to deal with the empirical aspects of the ‘new’ monetary policy framework, known as Inflation Targeting. Applying Intervention Analysis to multivariate Structural Time Series models, new empirical evidence is produced in the case of a number of OECD countries,. These results demonstrate that although Inflation Targeting has gone hand-in hand with low inflation, the strategy was introduced well after inflation had begun its downward trend. But, then, Inflation Targeting ‘locks in’ low inflation rates. The evidence produced in this paper suggests that non-IT central banks have also been successful on this score.
    Keywords: Inflation targeting, Intervention Analysis, Multivariate Structural Time Series
    JEL: E31 E52
    Date: 2007–02–02
  9. By: Eleni Angelopoulou (Bank of Greece and Athens University of Economics and Business)
    Abstract: This paper reviews 22 years of UK monetary policy (1971-1992) using official record from the Quarterly Bulletin of the Bank of England. A definition of policy shocks, which allows for the exclusion of cases of interest rate increases, which were unrelated to the monetary policy objectives, is used. The empirical analysis shows that output displays the usual hump-shaped response after a shock to the policy indicator but adjustment to pre-shock levels is slow. Other variables also display theory-consistent behaviour. Based on this policy indicator monetary policy is found to cause very limited output fluctuation in a four year horizon. The policy indicator is found to outperform the intervention rate as a measure of policy
    Keywords: monetary policy shocks, narrative approach, UK
    JEL: E52 E58
    Date: 2007–02–02
  10. By: Hsiao Chink Tang
    Abstract: This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12-variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off, the interest rate channel is found to be the most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.
    Date: 2006–08
  11. By: Arnab Bhattacharjee (University of St Andrews); Christoph Thoenissen (University of St Andrews)
    Abstract: We compare three methods of motivating money in New Keynesian DSGE Models: Money-in-the-utility function, shopping time and cash-in-advance constraint, as well as two ways of modelling monetary policy, interest rate feedback rule and money growth rules. We use impulse response analysis, and a set of econometric distance measures based on comparing model and data variance-covariance matrices to compare the different models. We find all models closed by an estimated interest rate feedback rule imply counter-cyclical policy and inflation rates, which is at odds with the data. This problem is robust to the introduction of demand side shocks, but is not a feature of models closed by an estimated money growth rule. Drawing on our econometric analysis, we argue that the cash-in-advance model, closed by a money growth rule, comes closest to the data
    Keywords: Intertemporal Macroeconomics, monetary policy, role of money, model selection, model selection
    JEL: C13 E32 E52
    Date: 2007–02–02
  12. By: Claudia Kwapil (Oesterreichische Nationalbank); Johann Scharler (Oesterreichische Nationalbank)
    Abstract: In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area.
    Keywords: Interest Rate Pass-Through, Equilibrium Determinacy, Stability
    JEL: E32 E52 E58
    Date: 2007–02–02
  13. By: Edda Claus; Mardi Dungey; Renee Fry
    Abstract: Two impediments to effective monetary policy operation include illiquidity in bond markets and the move towards the zero bound of interest rates. Either or both of these scenarios have been evident in many countries in the last decade, raising the suggestion that alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at a short (2 year) and a long (10 year) time frame as those obtained under current arrangements. The results show that current monetary policy arrangements are least costly in terms of the output loss from achieving lower inflation outcomes. However, if this option ceases to be available the next best alternative is to use the equity market option provided a longer run focus is maintained. Focus on short horizons increases the longer term output costs of the policy in all cases.
    JEL: E52 C51
    Date: 2006–07
  14. By: Paul Mizen (University of Nottingham); Tae-Hwan Kim (University of Nottingham); Alan Thanaset (University of Nottingham)
    Abstract: Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution corresponding to different levels of interest rates. We find support for the Taylor principle at all but low rates in normal times for the US and the UK, but an increasingly aggressive (nonlinear) response to inflation as rates increase. This is robust to the inflation horizon, instrument choice and use of a real time output gap data. In abnormal times, described by events in Japan, we find strong support for the Taylor principle, and increasing aggression to inflation when rates increase. We confirm that increasing aggression towards inflation can be observed as interest rates approach zero. The results have implications for the modeling of economies when inflation is very low, and provides some insights into Japanese monetary policy in particular
    Keywords: Taylor Principle, policy rules, quantile regression, low inflation, Japan
    JEL: E42 E52
    Date: 2007–02–02
  15. By: Martin Ellison (University of Warwick); Lucio Sarno (Warwick Business School); Jouko Vilmunen (Bank of Finland)
    Abstract: We examine optimal policy in an open-economy model with uncertainty and learning, where monetary policy actions affect the economy through the real exchange rate channel. Our results show that the degree of caution or activism in optimal policy depends on whether central banks are in coordinated or uncoordinated equilibrium. If central banks coordinate their policy actions then activism is optimal. In contrast, if there is no coordination, caution prevails. In the latter case caution is optimal because it helps central banks to avoid exposing themselves to manipulative actions by other central banks
    Keywords: learning; monetary policy, open economy
    JEL: D83 E52 F41
    Date: 2007–02–02
  16. By: Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper provides a systematic comparison of the Eurosystem, the US Federal Reserve and the Bank of Japan. These monetary authorities exhibit somewhat different status and tasks, which reflect different historical conditions and national characteristics. However, widespread changes in central banking practices in the direction of greater independence and increased transparency, as well as changes in the economic and financial environment over the past 15-20 years, have contributed to reduce the differences among these three world’s principal monetary authorities. A comparison based on simple “over-the-counter” policy reaction functions shows no striking differences in terms of monetary policy implementation. JEL Classification: E40, E52, E58.
    Keywords: Monetary policy, central banks and their policies, monetary policy committees.
    Date: 2007–03
  17. By: Ram Kharel (Economics and Finance Brunel University); Chris Martin (Economics and Finance Brunel University); Costas Milas (Keele)
    Abstract: There is a large literature on monetary policy and asset prices. There are 2 aspects to this literature: do monetary policymakers respond to asset prices? should monetary policymakers respond to asset prices? This paper addresses the first of thes
    Date: 2007–02–02
  18. By: Alvaro Aguiar (Faculdade de Economia, Universidade do Porto); Inês Drumond (Faculdade de Economia, Universidade do Porto)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy, by bringing together the borrowers' balance sheet channel with an additional channel working through bank capital, considering capital adequacy regulations and households' preferences for liquidity. Detailing a dynamic new Keynesian general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that the introduction of bank capital amplifies monetary shocks to the macroeconomy through a liquidity premium effect on the external finance premium. This effect, together with the financial accelerator, generates quantitatively large amplification effects
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism
    JEL: E44 E32 E52 G28
    Date: 2007–02–02
  19. By: Johann Scharler (Oesterreichische Nationalbank); Sylvia Kaufmann (Oesterreichische Nationalbank)
    Abstract: In this paper we study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We analyze the different effects that monetary policy has on the economy, in particular on output and inflation, which are due to differences in country-specific financial systems. For a plausible calibration of the model, differences in financial systems have a rather limited effect on the transmission mechanism and do not appear to give rise to cross country differences in the strength of the cost channel
    Keywords: Financial Systems, Cost Channel, Transmission Mechanism
    JEL: E40 E50
    Date: 2007–02–02
  20. By: Galindev Ragchaasuren (Department of Economics University of Essex)
    Abstract: This paper presents a stochastic monetary growth model with nominal rigidities and active monetary policy in which technological change contains both deliberate (internal) and serendipitous (external) learning mechanisms. The model is used to describe how the implications of monetary stabilization policy for the long-run economic performance could change due to the ambiguity on the relationship between secular growth and cyclical volatility
    Keywords: growth, cyclies, money, stabilisation policy
    JEL: E32 E52 O42
    Date: 2007–02–02
  21. By: Jean-Stéphane MESONNIER (Banque de France)
    Abstract: The real interest rate gap -IRG-, i.e. the gap between the short term real interest rate and its “natural†level, is a theoretical concept of potential policy relevance for central banks, at least to evaluate the monetary policy stance, at best as a guideline for policy moves. This paper aims at clarifying the practical relevance of IRG indicators for monetary policy. To this end, it provides an empirical assessment of the usefulness of various univariate and multivariate estimates of the real IRG for predicting inflation, real activity and real credit growth in the euro area. On the basis of out-of-sample evidence using real-time data, I find that IRG measures are globally of little help to improve our knowledge of future inflation in the euro area. By contrast, some of the estimated IRG measures exhibit a significant predictive power for future real activity, in line with the intuition from a traditional IS curve, as well as for credit growth. Nevertheless, in most cases, the forecasting models that include estimated IRG do not outperform a simpler AR model augmented with the first difference of the nominal interest rate
    Keywords: natural rate of interest, monetary policy, forecasting
    JEL: C53 E37 E52
    Date: 2007–02–02
  22. By: Cinzia Alcidi (Graduate Institute of International Studies, Geneva); Alessandro Flamini (Keele University, Centre for Economic Research); Andrea Fracasso (Graduate Institute of International Studies, Geneva)
    Abstract: Modern monetary policymakers consider a huge amount of information in their evaluation of events and contingencies. However, most research on monetary policy relies on simple rules, and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We model the Federal Reserve reaction function during the Greenspan tenure as a Logistic Smoothing Transition Regime model in which a series of economically meaningful transition variables drive the transition across monetary regimes and allow the coefficients of the rule to change over time. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules.
    Keywords: Judgement, LSTR, Monetary Policy Regime, Risk Management, Taylor Rule.
    JEL: E4 E5
    Date: 2005–04
  23. By: Sheila Dow (Department of Economics, University of Stirling); Matthias Klaes (Keele University, Centre for Economic Research); Alberto Montagnoli (Department of Economics, University of Stirling)
    Abstract: This paper analyses the signal uncertainty implicit in the communications of the Bank of England's Monetary Policy Committee (MPC). Unlike previous studies, which seek to construct a qualitative uncertainty index that heavily relies on subjective interpretations of key expressions, we limit ourselves to lexical frequencies of those expressions. We establish seasonality in the term 'risk' that coincides with Inflation Report publication dates, and matches what we identify as a surprising degree of prima facie seasonality in interest rate changes. Our findings suggest that frequencies of key terms expressing signal uncertainty in MPC minutes may either yield proxy measures to the amount of information at the disposal of the MPC, or offer evidence for the presence of an irreducible kind of signal uncertainty that shows up as white noise, casting doubt on the soundness of the various qualitative uncertainty indices found in the literature.
    Keywords: MPC, signal uncertainty, central bank uncertainty, word frequencies, uncertainty index, seasonality
    JEL: E52 E58 E12 D81
    Date: 2007–02
  24. By: Gomes, O. (IPL, Lisbon); Mendes, D. A. (ISCTE, Lisbon); Mendes, V. P. (ISCTE, Lisbon); Sousa Ramos, J. (IST, Lisbon)
    Abstract: There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy with sticky prices a la Calvo and forward looking behavior. In this paper we extend this standard model by introducing nonlinearity into the Phillips curve. As the linear Phillips curve may be questioned on theoretical grounds and seems not to be favoured by empirical evidence, a similar procedure has already been undertaken in a series papers over the last few years, e.g., Schaling (1999), Semmler and Zhang (2004), Nobay and Peel (2000), Tambakis (1999), and Dolado et al. (2004). However, these papers were mainly concerned with the analysis of the problem of inflation bias, by deriving an interest rate rule which is nonlinear, leaving the issues of stability and the possible existence of endogenous cycles in such a framework mostly overlooked. Under the specific form of nonlinearity proposed in our paper (which allows for both convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into a fully deterministic structure of the standard model produces significant changes to the major conclusions regarding stability and the efficiency of monetary policy in the standard model. We should emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable and chaotic fixed points (endogenous cycles); (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem interesting. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate may have a lower mean and is certainly less volatile; secondly, for changes in the degree of price stickiness the results are not are clear cut as in the previous case, however, we can also observe that when such stickiness is high the inflation rate tends to display a somewhat larger mean and also higher volatility; and thirdly, it shows that the target values for inflation and the output gap (π^,x^), both crucially affect the dynamics of the economy in terms of average values and volatility of the endogenous variables --- e.g., the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility --- while in the linear case only the π^ does so (obviously, only affecting in this case the level of the endogenous variables). Moreover, the existence of endogenous cycles due to chaotic motion may raise serious questions about whether the old dictum of monetary policy (that the Central Bank should conduct policy with discretion instead of commitment) is not still very much in the business of monetary policy.
    Keywords: Optimal monetary policy, Interest Rate Rules, Nonlinear Phillips Curve, Endogenous Fluctuations and Stabilization
    JEL: E52 E58
    Date: 2007–02–02
  25. By: Bindseil, Ulrich (European Central Bank, Germany); Nyborg, Kjell G. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Monetary policy implementation is one of the most significant areas of interaction between central banking and financial markets. Historically, how this interaction takes place has been viewed as having an important impact on the ultimate objective of monetary policy, for example price stability or stimulating economic growth. In this article, we survey different approaches to monetary policy implementation. We cover briefly some of the historical trends, but give particular attention to the practice that is now (again) very common world-wide; namely, targeting short term interest rates. We discuss various ways this can be done and the implications for financial markets. We emphasize different European approaches, while also providing comparisons with the Fed.
    Keywords: Monetary policy; short term interest rates; financial markets
    JEL: E52 G10
    Date: 2007–03–27
  26. By: Jan Bruha (External Economic Relations Division, Czech National Bank, Na P??kop? 28, 115 03 Praha 1, Czech Republic.); Jirí Podpiera (External Economic Relations Division, Czech National Bank, Na P??kop? 28, 115 03 Praha 1, Czech Republic.)
    Abstract: In this paper we present a two-country dynamic general equilibrium model of ex ante unequally developed countries. The model explains a key feature recently observed in transition economies – the long-run trend real exchange rate appreciation – through investments into quality. Our exchange-rate projections bear important policy implications, which we illustrate on the collision between the price and nominal exchange rate criterion for the European Monetary Union in a set of selected transition economies in Central and Eastern Europe. JEL Classification: E58, F15, F43.
    Keywords: Two-country modeling, Convergence, Monetary Policy, Currency area.
    Date: 2007–03
  27. By: Donal Bredin (University College Dublin); Stilianos Fountas (University of Macedonia and National University of Ireland)
    Abstract: We use a Markov regime-switching heteroskedasticity model in order to examine the association between inflation and inflation uncertainty in four European countries over the last forty years. This approach allows for regime shifts in both the mean and variance of inflation in order to assess the association between inflation and its uncertainty in short and long horizons. We find that this association differs (i) between transitory and permanent shocks to inflation and (ii) across countries. In particular, the association is positive or zero for transitory shocks and negative or zero for permanent shocks. Hence, Friedman's belief that inflation is positively associated with inflation uncertainty is only partially supported in this study, i.e., by short-run inflation uncertainty
    Keywords: Inflation, Inflation uncertainty, Markov process, regime-switching heteroskedasticity
    JEL: E31 C22
    Date: 2007–02–02
  28. By: Timo Henckel
    Abstract: Some authors have argued that multiplicative uncertainty may be beneficial to society as the cautionary move reduces the inflation bias. Contrary to this claim, I show that, when there are non-atomistic wage setters, an increase in multiplicative uncertainty rises the real wage premium and unemployment and hence may reduce welfare. Furthermore, since central bank preferences also affect real variables, delegating policy to an independent central banker with an optimal degree of conservatism cannot, in general, deliver a second-best outcome.
    JEL: E52
    Date: 2006–07
  29. By: Eric Mayer (University of Wuerzburg); Oliver Hülsewig (Ifo Institute, Munich); Timo Wollmershäuser (Ifo Institute, Munich)
    Abstract: This paper provides a micro-foundation of the behavior of the banking industry in a Stochastic Dynamic General Equilibrium model of the New Keynesian style. The role of banks is reduced to the supply of loans to ¯rms that must pay the wage bill before they receive revenues from sell- ing their products. This leads to the so-called cost channel of monetary policy transmission. Our model is based on the existence of a bank{client relationship which provides a rationale for monopolistic competition in the loan market. Using a Calvo-type staggered price setting approach, banks decide on their loan supply in the light of expectations about the future course of monetary policy, implying that the adjustment of loan rates to a monetary policy shock is sticky. This is in contrast to Ravenna and Walsh (2006) who focus primarily on banks operating under perfect competition, which means that the loan rate always equals the money market rate. The structural parameters of our model are determined using a minimum distance estimation, which matches the theoretical impulse responses to the empirical responses of an estimated VAR for the euro zone to a monetary policy shock
    Keywords: New Keynesian Model, monetary policy transmission, bank behavior, cost channel, minimum distance estimation
    JEL: E44 E52 E58
    Date: 2007–02–02
  30. By: Enrique Alberola (Banco de España); José María Serena (Banco de España)
    Abstract: This paper assesses whether domestic costs of reserve accumulation -and in particular monetary costs- constitute an eventual limit to the process in emerging markets. We find that sterilization is the first measure to deal with these costs. Then, we turn to study whether diminishing ability to deal with the monetary inflows through sterilization is an effective limit to the process, Indeed, when the scope for sterilization is reduced, accumulation diminishes. However, this constraint, albeit relevant in practice, has not constituted an effective limit to accumulation, hitherto.
    Keywords: international reserves, monetary policy, central banks, sterilization, internal costs
    JEL: E58 F36 G15
    Date: 2007–03
  31. By: Roberto Frenkel
    Abstract: This article, originally published in Spanish in La Nación, December 31, 2006, explains the mechanics of the Argentine Central Bank's intervention in exchange rates markets to target a stable and competitive exchange rate, a macroeconomic policy that has played a significant role in Argentina's economic growth since 2002.
    JEL: E58 E52 E42
    Date: 2007–02
  32. By: Reginaldo Pinto Nogueira Junior (University of Kent at Canterbury)
    Abstract: The paper presents evidence on the “Fear of Floating†hypothesis in an Inflation Targeting regime. We use the methodologies of Calvo and Reinhart (2002) and Ball and Reyes (2004) for a set of developed and emerging market economies to examine the existence of a possible trend of greater exchange rate flexibility after the adoption of the new regime. This exercise shows a strong movement of the economies towards a more flexible exchange rate regime after the adoption of Inflation Targeting. We also analyse interventions in the foreign exchange market using a structural VAR, and conclude that although “Fear of Floating†cannot be totally discarded it is not the only explanation for interventions, as the exchange rate pass-through still is an important issue for the attainment of the inflation targets for many economies
    Keywords: Inflation Targeting, Exchange Rate Pass-through, Fear of Floating
    JEL: E42 E52 E58
    Date: 2007–02–02
  33. By: Timothy Kam; Kirdan Lees; Philip Liu
    Abstract: We estimate the underlying macroeconomic policy objectives of three of the earliest explicit inflation targeters - Australia, Canada and New Zealand - within the context of a small open economy DSGE model. We assume central banks set policy optimally, such that we can reverse engineer policy objectives from observed time series data. We find that none of the central banks show a concern for stablizing the real exchange rate. All three central banks share a cocnern for minimizing the volatility in the change in the nominal interest rate. The Reserve Bank of Australia places the most weight on minimizing the deviation of output from trend. Joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective.
    JEL: C51 E52 F41
    Date: 2006–11
  34. By: N. Nergiz Dincer; Barry Eichengreen
    Abstract: Greater transparency in central bank operations is the most dramatic change in the conduct of monetary policy in recent years. In this paper we present new information on its extent and effects. We show that the trend is general: a large number of central banks have moved in the direction of greater transparency since the late 1990s. We then analyze the determinants and effects of central bank transparency in an integrated empirical framework. Transparency is greater in countries with more stable and developed political systems and deeper and more developed financial markets. Our preliminary analysis suggests broadly favorable if relatively weak impacts on inflation and output variability.
    JEL: E0 E4 F0
    Date: 2007–03
  35. By: Oliver Grimm (Center of Economic Research (CER-ETH) at ETH Zurich)
    Abstract: In economic discussions, currency board systems are frequently described as arrangements with self-binding character to the monetary authorities by their strict rules and establishments by law. Hard pegs and especially currency boards are often seen as remedies to overcome economic and financial turmoils and to return to low inflation. A sustainable debt level closely linked to a disciplined fiscal policy is, however, a premise for medium-term success. We show in a two-period model that the choice of a currency board can increase fiscal discipline compared to a standard peg regime. We derive, furthermore, the conditions for a currency boards to gain a stability advantage compared to a common peg system.
    Keywords: currency board, fixed exchange rate, commitment, inflation bias, fiscal discipline, public debt, time-inconsistency problem
    JEL: E52 E58 E62 F33
    Date: 2007–03
  36. By: Agliari Anna (Catholic University of Piacenza); Assenza Tiziana (Catholic University of Piacenza); Delli Gatti Domenico (Catholic University of Piacenza); Santoro Emiliano (University of Cambridge and University of Trento)
    Abstract: In this paper we develop an extended version of the original Kiyotaki and Moore's model ("Credit Cycles" Journal of Political Economy, vol. 105, no 2, April 1997)(hereafter KM) using an overlapping generation structure instead of the assumption of infinitely lived agents adopted by the authors. In each period the population consists of two classes of heterogeneous interacting agents, in particular: a financially constrained young agent (young farmer), a financially constrained old agent (old farmer), an unconstrained young agent (young gatherer), an unconstrained old agent (old gatherer). By assumption each young agent is endowed with one unit of labour. Heterogeneity is introduced in the model by assuming that each class of agents use different technologies to pro- duce the same non durable good. If we study the effect of a technological shock it is possible to demonstrate that its effects are persistent over time in fact the mechanism that it induces is the reallocation the durable asset ("land")among agents. As in KM we develop a dynamic model in which the durable asset is not only an input for production processes but also collateralizable wealth to secure lenders from the risk of borrowers'default. In a context of intergenerational altruism, old agents leave a bequest to their offspring. Money is a means of payment and a reserve of value because it enables to access consumption in old age. For simplicity we assume that preferences are defined over consumption and bequest of the agent when old. Money plays two different and contrasting roles with respect to landholding. On the one hand, given the bequest, the higher the amount of money the young wants to hold, the lower landholding. On the other hand the higher the money of the old, the higher the resources available to him and the higher bequest and landholding. We study the complex dynamics of the allocation of land to farmers and gatherers - which determines aggregate output - and of the price of the durable asset. If a policy move does not change the ratio of money of the farmer and of the gatherer, i.e. if the central bank changes the rates of growth of the two monetary aggregates by the same amount, monetary policy is superneutral, i.e. the allocation of land to the farmer and to the gatherer does not change, real variables are unaffected and the only e¤ect of the policy move is an increase in the rate of inflation, which is pinned down to the (uniform) rate of change of money, and of the nominal interest rate. If, on the other hand, the move is differentiated, i.e. the central bank changes the rates of growth of the two monetary aggregates by different amounts so that the rates of growth are heterogeneous, money is not superneutral, i.e. the allocation of land changes and real variables are permanently affected, even if the rates of growth of the two aggregates go back to the original value afterwards
    Keywords: Credit Cycles, monetary policy
    JEL: E3 E4
    Date: 2007–02–02
  37. By: Richard Mash (Oxford University)
    Abstract: Models in which pricing decisions depend on indexing or rule of thumb behaviour have become prominent in the monetary policy literature and tend to match macroeconomic data well given their prediction of inflation persistence. The extent to which firms index their prices to past inflation has been assumed constant. We explore the consequences of endogenising the degree of indexing such that firms move closer to constrained optimal prices and find that the degree of indexing depends sensitively on firms’ perceptions of the degree of persistence in the economy. This has striking implications. Firstly models in which the degree of indexing is fixed are vulnerable to the Lucas critique since that parameter will change in different regimes. Secondly we study the interactions between perceived persistence, which governs indexing and thus the quantitative significance of lagged inflation in the Phillips curve, and actual persistence which depends on the latter. We find that if firms adjust their indexing behaviour to actual persistence, lagged inflation disappears from the Phillips curve and the models no longer predict persistence
    Keywords: Monetary policy, Phillips curve, Inflation Persistence, Microfoundations, Indexing
    JEL: E52 E58 E22
    Date: 2007–02–02
  38. By: Alexandra Ferreira Lopes (ISEG, ISCTE and DINÂ MIA)
    Abstract: Czech Republic, Hungary and Poland will have to join the European and Monetary Union. Surprisingly, there is very little work on the welfare consequences of the loss of monetary policy flexibility for these countries. This paper fills this void by providing a framework to evaluate quantitatively the economic costs of joining the EMU. Using a two country dynamic general equilibrium model with sticky prices we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each country. The main contribution of our general equilibrium approach is that we can evaluate the effects of monetary policy in terms of welfare. Our findings suggest that these economies may experience sizable welfare losses as a result of joining the EMU. Results show that the cost associated with the loss of the monetary policy flexibility is bigger in the presence of persistence technological shocks, weak correlation of monetary shocks, strong risk aversion and a small trade share with the EMU
    Keywords: Monetary Policy, Eastern and Central Europe Countries, Euro, Open Economy Macroeconomics, General Equilibrium
    JEL: C68 E52 F41
    Date: 2007–02–02
  39. By: Vincent Bouvatier (Universite Paris 1)
    Abstract: Non-foreign direct investment capital inflows in China were particularly strong in 2003 and 2004. They were even stronger than current account surpluses or net foreign direct investment inflows. As a result, the pace of international reserves accumulation in China increased significantly. This paper investigates if the rapid build up of international reserves in 2003 and 2004 was a source of monetary instability in China. The relationship between international reserves and domestic credit is examined with a Vector Error Correction Model (VECM), estimated on monthly data from March 1995 to December 2005. Empirical results show that this relationship was stable and consistent with monetary stability. Direct and indirect Granger causality tests are implemented to show how the People's Bank of China (PBC) achieved this monetary stability
    Keywords: hot money inflows, international reserves, VECM, Granger causality
    JEL: C32 E5
    Date: 2007–02–02
  40. By: Fousseni Chabi-Yo; Jun Yang
    Abstract: We study the joint dynamics of macroeconomic variables, bond yields, and the exchange rate in an empirical two-country New-Keynesian model complemented with a no-arbitrage term structure model. With Canadian and US data, we are able to study the impact of macroeconomic shocks from both countries on their yield curves and the exchange rate. The variance decomposition of the yield level shows that the US monetary policy and aggregate supply shocks explain a majority of the unconditional variations in Canadian yields. They also explain up to 50% of the variations in the expected excess holding period returns of Canadian bonds. In addition, Canadian monetary policy shocks explain more than 70% of the variations in Canadian yields over short and medium forecast horizons. It also explains around 40% of the expected excess holding period returns of Canadian bonds. Both Canadian and US macroeconomic shocks help explain the dynamics of the exchange rate and the time-varying exchange risk premium.
    Keywords: Debt management; Exchange rates; Interest rates; Financial markets; Econometric and statistical methods
    JEL: E12 E43 F41 G12 G15
    Date: 2007
  41. By: Jan Libich
    Abstract: This paper shows an avenue through which a numerical inflation target ensures low inflation and high credibility: one that is independent of the usual Walsh incentive contract. Our novel game theoretic framework - a generalization of alternating move games - formalizes the fact that since the target is explicit/legislated, it cannot be frequently reconsidered. The "explicitness" therefore serves as a commitment device. There are two key results. First, it is shown that if the inflation target is sufficiently rigid (explicit) relative to the public's wages, low inflation is time consistent and hence credible even if the policymaker's output target is above potential. Second, it is found that the central banker's optimal explicitness level is decreasing in the degree of her patience/independence (due to their substitutability in achieving credibility). Our analysis therefore offers an explanation for the "inflation and credibility convergence" over the past two decades as well as the fact that inflation targets were legislated primarily by countries that had lacked central bank independence like New Zealand, Canada and the UK rather than the US, Germany, or Switzerland. We show that there exists fair empirical support for all the predictions of our analysis.
    JEL: E42 E61 C70 C72
    Date: 2006–09
  42. By: Matthew Canzoneri (Department of Economics Georgetown University)
    Abstract: Non
    Date: 2007–02–02
  43. By: Vaubel, Roland (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: Judging from past inflation and opinion poll data, France occupies the inflation median in the ECB Council if real exchange rate changes are ignored. Central bank independence does not have a significant effect on inflation if the population's sensitivity to inflation is controlled for. Owing to a clustering of election dates, the economy of the euro-zone is likely to be booming from May 2002 to June 2004. Between the euro-zone and the U.S. dollar, nominal exchange-rate trends are increasingly in line with the required real exchange rate trends. In this respect, exchange-rate flexibility has outperformed the Bretton Woods system. Of all 15 EU members, Britain is the least suitable candidate for joining the euro-zone as far as the need for real exchange rate adjustment is concerned. Most of the Eastern European countries require even considerably larger real exchange rate adjustments vis-à-vis the euro-zone. The European System of Central Banks is highly overstaffed by international standards. Its personnel has to be cut by at least 12 per cent (6,520 persons), notably in France, Belgium and Italy.
  44. By: Frank Browne (Monetary Policy and Financial Stability Department, Central Bank and Financial Services Authority of Ireland, P.O. Box 559, Dame Street, Dublin 2, Ireland.); David Cronin (Corresponding author: Monetary Policy and Financial Stability Department, Central Bank and Financial Services Authority of Ireland, P.O. Box 559, Dame Street, Dublin 2, Ireland.)
    Abstract: The influence of commodity prices on consumer prices is usually seen as originating in commodity markets. We argue, however, that long run and short run relationships should exist between commodity prices, consumer prices and money and that the influence of commodity prices on consumer prices occurs through a money-driven overshooting of commodity prices being corrected over time. Using a cointegrating VAR framework and US data, our empirical findings are supportive of these relationships, with both commodity and consumer prices proportional to the money supply in the long run, commodity prices initially overshooting their new equilibrium values in response to a money supply shock, and the deviation of commodity prices from their equilibrium values having explanatory power for subsequent consumer price inflation. JEL Classification: E31, E51, E52.
    Keywords: Overshooting, VECM, impulse response analysis.
    Date: 2007–03
  45. By: Barbara Fritz (Department of Economics and at the Latin American Institute of Freie Universität Berlin); Laurissa Mühlich (Department of Economics and at the Latin American Institute of Freie Universität Berlin)
    Abstract: Optimum Currency Area (OCA) approaches turn to be inadequate in the analysis of the new regional monetary integration schemes that have sprung up among developing and emerging market economies. Instead, in accordance with the concept of ‘original sin’ (Eichengreen et al.) we argue that regional monetary South-South integration schemes that, unlike North-South arrangements, involve none of the international reserve currencies, have specific monetary constraints and implications which need to be duly considered. A first comparative analysis of three cases of monetary South-South cooperation in South Africa (CMA), East Asia (ASEAN) and Latin America (Mercosur) shows that these can indeed provide macroeconomic stability gains but that this strongly depends on the existence of economic hierarchies within these integration schemes.
    Keywords: regional monetary integration, monetary integration theory, development theory, ASEAN, Mercosur, CMA
    JEL: F33 F36 O11
    Date: 2006–12
  46. By: Rossi, Lorenza; Mattesini, Fabrizio
    Abstract: We analyze, in this paper, DSNK general equilibrium model with indivisible labor where firms may belong to two different final goods producing sectors: one where wages and employment are determined in competitive labor markets and the orther where wages and employment are the result of a contractual process between unions and firms. The presence of monopoly unions introduces real wage rigidity in the model and this implies a trade-off between output stabilization and inflation stabilization i.e., as in Blanchard and Galì (2005), the so called "divine coincidence" does not hold. We show that the negative effect of a productivity shock on inflation and the positive effect of a cost-push shock is crucially determined by the proportion of firms that belong to the competitive sector. The larger is this number, the smaller are these effects. We derive a welfare based objective function as a second order Taylor approximation of the expected utility of the economy's representative agent and we analyze optimal monetary policy under discretion and under constrained commitment. We show that the larger is the number of firms that belong to the competitive sector, the smaller should be the response of the nominal interest rate to exogenous productivity and cost-push shocks. If we consider, however, an instrument rule where the interest rate must react to inflationary expectations, the rule is not affected by the structure of the labor market. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is larger than real wage volatility.
    Keywords: optimal Monetary Policy; Taylor Rule; Dual Labor Market; Monopolist Union
    JEL: E32 E24 J51 J23 E52
    Date: 2007–01–09
  47. By: Riccardo Bonci (Bank of Italy); Francesco Columba (Bank of Italy)
    Abstract: We study in a VAR model the effects of monetary policy shocks with new Italian flow of funds data for 1980-2002. First, our results are consistent with the literature, without being affected by commonly found puzzles. Second, new features of the transmission of monetary policy shocks to the Italian economy are provided. We do not find evidence of financial frictions which prevent firms from reduction of nominal expenditures. Households quickly adjust portfolios leading to a careful evaluation of limited participation hypothesis. Finally, the public sector increases net borrowing after the shock, improving on puzzling opposite results in the literature.
    Keywords: flow of funds, monetary policy, VAR.
    JEL: E32 E52
    Date: 2007–02–02
  48. By: Rasmus Fatum (University of Alberta); Jesper Pedersen (Department of Economics, University of Copenhagen)
    Abstract: This paper investigates the real-time effects of foreign exchange intervention using official intraday intervention data provided by the Danish central bank. Denmark is currently pursuing an active intervention policy under the provisions of the Exchange Rate Mechanism (ERM II) and intervenes on a discretionary basis when considered necessary. Prior participation in ERM II is a requirement for adoption of the Euro. Therefore, our study is of particular relevance for the new European Union member states that are either currently participating in ERM II or expected to do so at a later date as well as for Denmark. Our analysis employs the two-step weighted least squares estimation procedure of Andersen, Bollerslev, Diebold and Vega (2003) and an array of robustness tests. We find that intervention exerts a statistically and economically significant influence on exchange rate returns when the direction of intervention is consistent with fundamentals and intervention is carried out during a period of high exchange rate volatility. We also show that the exchange rate does not adjust instantaneously to the unannounced and discretionary interventions under study. We conclude that intervention can be an important short-term policy instrument for exchange rate management.
    Keywords: foreign exchange intervention; intraday data; ERM II
    JEL: D53 E58 F31 G15
    Date: 2007–03
  49. By: Stephen Millard (Bank of England)
    Abstract: The purpose of this paper is to understand the economics behind the evolution of payments where by payments I mean the ‘transfer of monetary value’ (in return for goods, services, or real or financial assets). It is clear from this definition of payments that, in order for there to be payments, there first needs to be money. So, the paper first discusses why money might evolve as a result of some frictions inherent in real-world economies. It then discusses the evolution of banks, arguing that banks developed in order to provide payment services (making ‘money’ work more efficiently). The paper then discusses how banks can save on the use of collateral to make payments – collateral that they can convert into loans to earn a return – by the development of ‘payment systems’. Such systems will involve some form of netting of payments (clearing) and final settlement in some asset. ‘Central banks’ fit into this picture by providing, in their liabilities, a settlement asset that the other banks are happy to use. In so doing, they are incentivised to worry about monetary and financial stability
    Keywords: Money, banks, payment systems, central banks
    JEL: E42 E58
    Date: 2007–02–02
  50. By: Davide Furceri (University of Illinois at Chicago)
    Abstract: The purpose of this paper is to analyze the main macroeconomic determinants of benefits and costs by undertaking processes of monetary integration, and investigate the possibility that currency unions could be lead to the creation of a global currency in the future. In particular, we will consider two main costs and benefits predicted by the theory of Optimum Currency Areas: (i) the business-cycle correlation between the candidate’s economy and that of the currency zone as a whole, and (ii) the candidate economy’s inflationary bias. Using this methodology, the results of the paper provide empirical evidence of the existence of several optimal currency areas in the world. Moreover, the creation of a world common currency area is not as unrealistic as it might seem at first sight.
    Keywords: Currency Unions, World Currency
    JEL: E32 F33 F41
    Date: 2007–02–02
  51. By: Alexandre SOKIC (Centre Interdisciplinaire de Recherche sur le Commerce Extérieur et l’Economie Ecole Supérieure du Commerce Extérieur Pôle Universitaire Léonard de Vinci 92916 Paris La Défense)
    Abstract: The Cagan monetary model of hyperinflation has a relatively simple structure and a rich set of solutions. However, the wealth of possible solutions of this model does not constitute an asset for it. The introduction of rational expectations into the model was often at the origin of these validity problems as shown in Buiter (1987) or Kiguel (1989). Then, this model has usually been associated with the adaptive expectations assumption in the literature. In the same spirit Evans (1995) stressed that the assumption of adaptive expectations is a sufficient condition to ensure its validity. This articles aims at highlighting the strict association met in the literature between the assumption of adaptive expectations and the correct running of the monetary model of hyperinflation. A complete resolution of the model under the assumption of adaptive expectations is carried out. This approach completes the analyses made in Bruno & Fisher (1987, 1990), taken up again in Blanchard and Fischer (1990) and still recently in Walsh (2003). The aim is to show that the way inflationary expectations are formed is not crucial for the validity of the model. Rather crucial is the adjustment lag of real cash balances to their desired level
    Keywords: hyperinflation, seigniorage, hyperinflationary bubbles
    JEL: E31 E41
    Date: 2007–02–02
  52. By: Giovanni Di Bartolomeo (University of Rome I and University of Teramo); Lorenza Rossi (University of Rome II and ISTAT); Massimiliano Tancioni (University of Rome I)
    Abstract: This paper develops and estimates a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with rule-of-thumb consumers and external habits. Our theoretical model has a closed-form solution which allows the analytical derivation of its dynamical and stability properties. These properties are analyzed and discussed in the light of their implications for the efficacy and the calibration of the conduct of the monetary policy. The model is then evaluated empirically, employing numerical simulations based on Monte Carlo Bayesian estimates of the structural parameters and impulse response analyses based on weakly identified SVECMs. The estimates are repeated for each of the G7 national economies. Providing single country estimates and simulations, we derive some indications on the relative efficacy of monetary policy and of its potential asymmetric effects resulting from the heterogeneity of the estimated models.
    Keywords: Rule-of-thumb, habits, monetary policy transmission, price puzzle, DSGE New Keynesian model, monetary policy, SVECM and Monte Carlo Bayesian estimators.
    Date: 2007–02–02
  53. By: Dias, Daniel; Sabbatini, Roberto; Dossche, Maarten; Stahl, Harald; Gautier, Erwan; Vermeulen, Philip; Hernando, Ignacio
    Abstract: This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently : each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in nondurable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: Price-setting, producer prices
    JEL: C25 D40 E31
    Date: 2007
  54. By: Julian von Landesberger (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Empirical money demand analysis undertaken at the aggregate level may obscure behavioural differences between the financial, non-financial corporation and household sectors. Looking at the individual and more homogenous sectors may allow more clearly interpretable empirical relationships between money holding, scale variables and opportunity costs to be estimated. Two possible approaches can be taken to address this issue: aggregate and sectoral money holdings are explained either by a common set of determinant variables or by specific determinants, which may differ across sectors. In this analysis, the first approach has been chosen in order to highlight the different elasticities of the long-run money demand with respect to a common set of macroeconomic determinants and thereby to allow comparison of the model for the aggregate M3 with corresponding models for households, non-financial corporations and non-monetary financial intermediaries. This paper presents results for cointegrated VAR systems estimated over a sample of quarterly data from 1991 to 2005. A SUR system is estimated to cross-check the robustness of the findings and to analyse the importance of common shocks across sectors. JEL Classification: E41, C32, E59.
    Keywords: Sectoral money holdings, money demand, cointegrated VAR systems.
    Date: 2007–03
  55. By: Philip Vermeulen (European Central Bank); Daniel Dias (Banco de Portugal); Maarten Dossche (National Bank of Belgium); Erwan Gautier (Banque de France); Ignacio Hernando (Banco de España); Roberto Sabbatini (Banca d’Italia); Harald Stahl (Deutsche Bundesbank)
    Abstract: This paper documents producer price setting in 6 countries of the euro area: Germany, France, Italy, Spain, Belgium and Portugal. It collects evidence from available studies on each of those countries and also provides new evidence. These studies use monthly producer price data. The following five stylised facts emerge consistently across countries. First, producer prices change infrequently: each month around 21% of prices change. Second, there is substantial cross-sector heterogeneity in the frequency of price changes: prices change very often in the energy sector, less often in food and intermediate goods and least often in non-durable non- food and durable goods. Third, countries have a similar ranking of industries in terms of frequency of price changes. Fourth, there is no evidence of downward nominal rigidity: price changes are for about 45% decreases and 55% increases. Fifth, price changes are sizeable compared to the inflation rate. The paper also examines the factors driving producer price changes. It finds that costs structure, competition, seasonality, inflation and attractive pricing all play a role in driving producer price changes. In addition producer prices tend to be more flexible than consumer prices.
    Keywords: Price-setting, producer prices
    JEL: E31 D40 C25
    Date: 2007–03
  56. By: De Pooter, Michiel; Ravazzolo, Francesco; van Dijk, Dick
    Abstract: We forecast the term structure of U.S. Treasury zero-coupon bond yields by analyzing a range of models that have been used in the literature. We assess the relevance of parameter uncertainty by examining the added value of using Bayesian inference compared to frequentist estimation techniques, and model uncertainty by combining forecasts from individual models. Following current literature we also investigate the benefits of incorporating macroeconomic information in yield curve models. Our results show that adding macroeconomic factors is very beneficial for improving the out-of-sample forecasting performance of individual models. Despite this, the predictive accuracy of models varies over time considerably, irrespective of using the Bayesian or frequentist approach. We show that mitigating model uncertainty by combining forecasts leads to substantial gains in forecasting performance, especially when applying Bayesian model averaging.
    Keywords: Term structure of interest rates; Nelson-Siegel model; Affine term structure model; forecast combination; Bayesian analysis
    JEL: C53 E47
    Date: 2006–11–06
  57. By: Christian Mose Nielsen (Department of Economics, Politics and Public Administration, Aalborg University)
    Abstract: Using UK data for the period 1997:3 to 2005:5, this paper examines whether the expectations hypothesis is supported by recent UK data when the short-end of the term structure of interest rates is considered and whether the results of the tests of the expectations hypothesis are sensitive to the choice of data. The main results can be nicely summarized by considering five virtual researchers who test the expectations hypothesis using five different data sets for the 1997:3 to 2005:5 period for the 1 to 12-month maturity spectrum and who get quite different results. The main conclusion to be drawn from the analysis in this paper is thus that robustness check may be very important when testing the expectations hypothesis using the 1 to 12-month maturity spectrum of the term structure. Furthermore, the results suggest that the specific data set used in tests of the expectations hypothesis may be a candidate explanation of a rejection of the expectations hypothesis - along with the possibility that a time-varying term premium and/or a structural break are responsible for the rejection
    Keywords: Expectations hypothesis
    Date: 2007–02–02
  58. By: Philip Liu
    Abstract: The importance of the time-consistency poblem depends critically on the model one is working with and its parameterizations. This paper attempts to quantify the magnitude of stabilization bias for a small open economy using an empirically estimated micro-founded dynamic stochastic general equilibrium model. The resultant model is used to investigate the degree to which precommitment policy can improve welfare. Rather than presenting a point estimate of the welfare gain measures, the paper maps out the entire distribution of the welfare gain using the Bayesian posterior distribution of the model's parameters. The welfare improvement is an increasing function of the weight the central bank places on exchange rate variability. However, there is no simple relationship between the gains from precommitment and the degree of openness of the economy.
    JEL: C15 C51 E17 E61
    Date: 2006–12

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