nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒06‒11
thirty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Effects of Monetary Policy on Corporations in Brazil. An Empirical Analysis of the Balance Sheet Channel By Fernando N. de Oliveira; Marco Antônio Costa
  2. A General Schema for Optimal Monetary Policymaking: Objectives and Rules By Huiping Yuan; Stephen M. Miller
  3. Inflation persistence: alternative interpretations and policy implications By Argia M. Sbordone
  4. Monetary Policy with Liquidity Frictions By Oscar Mauricio VALENCIA A.
  6. On Keynesian effects of (apparent) non-Keynesian fiscal policies By Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
  7. Estimating the Inflation-Output Variability Frontier with Inflation Targeting: A VAR Approach By W. Douglas McMillin; James S. Fackler
  8. The Relative Importance of Symmetric and Asymmetric Shocks: the Case of United Kingdom and Euro Area By Gert Peersman
  9. Monetary policy, structural break, and the monetary transmission mechanism in Thailand By Hesse, Heiko
  10. Monetary Policy with Model Uncertainty: Distribution Forecast Targeting By Svensson, Lars E O; Williams, Noah
  11. Macroeconomic Policy in a Heterogeneous Monetary Union By Oliver Grimm; Stefan Ried
  12. Inflation Dynamics By Frederic S. Mishkin
  13. Business Cycle and Bank Capital: Monetary Policy Transmission under the Basel Accords By Alvaro Aguiar; Ines Drumond
  14. Exchange Rate Pass-Through and Domestic Inflation: A Comparison between East Asia and Latin American Countries By ITO Takatoshi; SATO Kiyotaka
  15. Inflation-linked bonds from a Central Bank perspective By Juan Angel Garcia; Adrian van Rixtel
  16. Segmented Asset Markets and Optimal Exchange Rate Regimes By Amartya Lahiri; Rajesh Singh; Carlos A. Vegh
  17. The expectations hypothesis of the term structure: some empirical evidence for Portugal By Silva Lopes, Artur C.; M. Monteiro, Olga Susana
  18. Exchange Rate Fundamentals and Order Flow By Martin D. D. Evans; Richard K. Lyons
  19. Openness and inflation By Mark A. Wynne; Erasmus K. Kersting
  20. Interventions in the Foreign Exchange Market: Effectiveness of Derivatives and Other Instruments By Walter Novaes; Fernando N. de Oliveira
  21. The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001. By Travaglini, Guido
  22. ‘This Arbitrary Rearrangement of Riches’: an Alternative Theory of the Costliness of Inflation By William Coleman
  23. Euro area inflation persistence in an estimated nonlinear DSGE model. By Gianni Amisano; Oreste Tristani
  24. A (Lack of) Progress Report on China's Exchange Rate Policies By Morris Goldstein
  25. Memory for prices and the euro cash changeover: An analysis for cinema prices in Italy By Vincenzo Cestari; Paolo Del Giovane; Clelia Rossi-Arnaud
  26. The Quality of Public Information and The Term Structure of Interest Rates By Frederik Lundtofte
  27. Transmission of business cycle shocks between unequal neighbours: Germany and Austria By Gerhard Fenz; Martin Schneider
  28. Choosing the currency structure for sovereign debt : a review of c urrent approaches By Melecky, Martin
  29. Further evidence on the impact of economic news on interest rates By Ielpo, Florian; Guégan, Dominique
  30. Globalization, aggregate productivity, and inflation By W. Michael Cox
  31. Did Impending War in Europe Help Destroy the Gold Bloc in 1936? An Internal Inconsistency Hypothesis By Paul Hallwood; Ronald MacDonald; Ian Marsh
  32. Cost-push impact of motor spirit price on price indices and inflation By Nooraddin Sharify; M. Alejandro Cardenete

  1. By: Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil); Marco Antônio Costa (IBMEC Business School - Rio de Janeiro)
    Abstract: This paper investigates the transmission mechanism of monetary policy in Brazil. It is an empirical analysis of the effects of monetary policy on the behavior of corporations in Brazil. We use the balance sheet theory to investigate how corporations respond to monetary contractions. Our results show that small corporations are more sensitive to monetary contractions than large corporations.
    Keywords: Monetary Transmission Mechanism, Balance Sheet Channel, Central Bank, Monetary Contractions
    JEL: E22 E52 E44
    Date: 2007–06–05
  2. By: Huiping Yuan (Xiamen University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: This paper examines four equivalent methods of optimal monetary policymaking, committing to the social loss function, using discretion with the central bank long-run and short-run loss functions, and following monetary policy rules. All lead to optimal economic performance. The same performance emerges from these different policymaking methods because the central bank actually follows the same (similar) policy rules. These objectives (the social loss function, the central bank long-run and short-run loss functions) and monetary policy rules imply a complete regime for optimal policy making. The central bank long-run and short-run loss functions that produce the optimal policy with discretion differ from the social loss function. Moreover, the optimal policy rule emerges from the optimization of these different central bank loss functions.
    Keywords: Optimal Policy, Central Bank Loss Functions, Policy Rules
    JEL: E42 E52 E58
    Date: 2007–03
  3. By: Argia M. Sbordone
    Abstract: In this paper, I consider the policy implications of two alternative structural interpretations of observed inflation persistence, which correspond to two alternative specifications of the new Keynesian Phillips curve (NKPC). The first specification allows for some degree of intrinsic persistence by way of a lagged inflation term in the NKPC. The second is a purely forward-looking model, in which expectations farther into the future matter and coefficients are time-varying. In this specification, most of the observed inflation persistence is attributed to fluctuations in the underlying inflation trend, which are a consequence of monetary policy rather than a structural feature of the economy. With a simple quantitative exercise, I illustrate the consequences of implementing monetary policy, assuming a degree of intrinsic persistence that differs from the true one. The results suggest that the costs of implementing a stabilization policy when the policymaker overestimates the degree of intrinsic persistence are potentially higher than the costs of ignoring actual structural persistence; the result is more clear-cut when the policymaker minimizes a welfare-based loss function.>
    Keywords: Phillips curve ; Inflation (Finance) ; Monetary policy
    Date: 2007
  4. By: Oscar Mauricio VALENCIA A.
    Abstract: This paper explores the welfare efects of a reduction in the inflation rates in an environment of incomplete markets. We built a dynamic heterogeneous agent model that features idiosyncratic risks in the labor supply and liquidity frictions. The model shows that a disinflation policy results in an income reallocation among debtors and lenders. The changes in the capital returns conveys variations in the precautionary savings and hence, an intertemporal redistribution of wealth and income. The welfare implications are develop according to the incomplete market features and the money plays a role of smoothing consumption when the agents faces income variability without state contingent insurance. The model is calibrated for the Colombian economy in such a way that disinflation episodes are replicated. Early results show that the disinflation monetary policy leads to improvements of liquidity in the economy because the money holdings are used by the agents for wealth transfer over time. This paper shows quantitative evidence in which disin°ation facts are associated with increments in the average real money holdings and average consumption. In addition, the volatility of consumption is reduced as the inflation rate falls, while the volatility of money holdings increases (i.e precautionary demand for money balance).
    Date: 2007–02–15
  5. By: Yuzo Honda (School of Economics, Osaka University); Yoshihiro Kuroki (Chuo University); Minoru Tachibana (Osaka Prefecture University)
    Abstract: Many macroeconomists and policymakers have debated the effectiveness of the quantitative monetary-easing policy (QMEP) that was introduced in Japan in 2001. This paper measures the effect of the QMEP on aggregate output and prices, and examines its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.
    Keywords: Quantitative easing; Money injection; Portfolio rebalancing; Stock price channel; Vector autoregression
    JEL: E44 E52
    Date: 2007–03
  6. By: Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
    Abstract: The aim of the paper is to evaluate the robustness of the theory that claims for restrictive effects of expansionary fiscal policy. It shows that such so-called “non-Keynesian effects” may arise as a consequence of a synchronous and opposite monetary policy intervention. The paper demonstrate this conclusion through a stylized model – supported by an empirical investigation on ECB and FED reaction functions - in which Central Banks take into account deficit spending as an element that generate inflation expectations. The econometric analysis shows also that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.
    Keywords: Fiscal policy; Monetary policy; Central Banks Policy strategies
    JEL: E63 E52 E62 E58
    Date: 2007–05–30
  7. By: W. Douglas McMillin; James S. Fackler
    Abstract: This paper (i) illustrates how a VAR model can be used to evaluate inflation targeting, (ii) derives the policy frontier available to the central bank using counterfactual experiments with real time data, and (iii) estimates how this frontier has changed over time in terms of the position and slope of the available tradeoff between output gap variability and inflation variability under inflation targeting. Various inflation targets are considered as are tolerance bands of varying width around these targets. The results indicate that over time (i) a given reduction in inflation variability is associated with a smaller rise in output variability and that (ii) a given inflation variability is achieved with smaller interest rate volatility. Consistent with the data, our results require federal funds rate persistence, though no instrument instability was observed.
  8. By: Gert Peersman (Ghent University)
    Abstract: In this paper, we show how a simple model with sign restrictions can be used to identify symmetric and asymmetric supply, demand and monetary policy shocks in a two-country structural VAR. The results can be used to deal with several issues that are important in the OCA-literature. Whilst the method can be applied to many countries, we provide evidence for the UK versus the Euro Area which are compared versus the US as a benchmark. An important role for symmetric shocks with the Euro Area in explaining UK output fluctuations is found. However, the relative importance of asymmetric shocks, being around 20 percent in the long-run, cannot be ignored. In contrast, the degree of business cycle synchronization seems to have been higher with the US. Moreover, the historical average reaction of the policy rate to symmetric aggregate demand shocks was stronger in the UK than the Euro Area. We also confirm existing evidence of the exchange rate being an important independent source of shocks in the economy.
    Keywords: optimal currency areas, symmetric and asymmetric shocks, vector autoregressions
    JEL: C32 E42 F31 F33
    Date: 2007–10–05
  9. By: Hesse, Heiko
    Abstract: The paper studies monetary policy and the monetary transmission mechanism in Thailand in light of the Asian crisis in 1997. Existing studies that adopt structural vector auto-regression (VAR) approaches do not give a clear and agreed-upon view how monetary shocks are transmitted to the Thai economy that is subject to structural breaks. This study explicitly models a pre-crisis and post-crisis cointegrated VAR model. This analysis supports arguments that the trinity of open capital markets, pegged exchange rate regime, and monetary policy autonomy is inconsistent in the pre-crisis period. In contrast, the model points to an effective monetary policy in the post-crisis period. Further, the author analyzes the common driving trends of the model.
    Keywords: Economic Stabilization,Economic Theory & Research,Macroeconomic Management,Fiscal & Monetary Policy,Financial Economics
    Date: 2007–06–01
  10. By: Svensson, Lars E O; Williams, Noah
    Abstract: We examine optimal and other monetary policies in a linear-quadratic setup with a relatively general form of model uncertainty, so-called Markov jump-linear-quadratic systems extended to include forward-looking variables and unobservable "modes." The form of model uncertainty our framework encompasses includes: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment about the state of model uncertainty; and so forth. We provide an algorithm for finding the optimal policy as well as solutions for arbitrary policy functions. This allows us to compute and plot consistent distribution forecasts - fan charts - of target variables and instruments. Our methods hence extend certainty equivalence and "mean forecast targeting" to more general certainty non-equivalence and "distribution forecast targeting."
    Keywords: multiplicative uncertainty; Optimal policy
    JEL: E42 E52 E58
    Date: 2007–06
  11. By: Oliver Grimm (Center of Economic Research (CER-ETH) at ETH Zurich); Stefan Ried (at ETH Zurich, Institute of Economic Policy I, Humboldt-Universität zu Berlin)
    Abstract: We use a two-country model with a central bank maximizing union-wide welfare and two fiscal authorities minimizing comparable, but slightly different country-wide losses. We analyze the rivalry between the three authorities in seven static games. Comparing a homogeneous with a heterogeneous monetary union, we find welfare losses to be significantly larger in the heterogeneous union. The best-performing scenarios are cooperation between all authorities and monetary leadership. Cooperation between the fiscal authorities is harmful to both the whole union’s and the country-specific welfare.
    Keywords: monetary union, heterogeneities, policy game, simultaneous policy, sequential policy, coordination, discretionary policies
    JEL: E52 E61 F42
    Date: 2007–05
  12. By: Frederic S. Mishkin
    Abstract: This paper first outlines the key stylized facts about changes in inflation dynamics in recent years: 1) inflation persistence has declined, 2) the Phillips curve has flattened, and 3) inflation has become less responsive to other shocks. These changes in inflation dynamics are interpreted as resulting from an anchoring of inflation expectations as a result of better monetary policy. The paper then goes on to draw implications for monetary policy from this interpretation, as well as implications for inflation forecasts.
    JEL: E31 E50
    Date: 2007–06
  13. By: Alvaro Aguiar (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal); Ines Drumond (CEMPRE, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: This paper improves the analysis of the role of financial frictions in the transmission of monetary policy and in business cycle fluctuations, by focusing on an additional channel working through bank capital. Detailing a dynamic general equilibrium model, in which households require a (countercyclical) liquidity premium to hold bank capital, we find that, together with the financial accelerator, the introduction of regulatory bank capital significantly amplifies monetary shocks through a liquidity premium effect on the external finance premium faced by firms. This amplification effect is larger under Basel II than under Basel I regulatory rules. Indeed, introducing bank capital enhances the role of financial frictions in the propagation of shocks, in line with arguments in related literature.
    Keywords: Bank capital channel; Bank capital requirements; Financial accelerator; Liquidity premium; Monetary transmission mechanism; Basel Accords
    JEL: E44 E32 E52 G28
    Date: 2007–06
  14. By: ITO Takatoshi; SATO Kiyotaka
    Abstract: Currency crises, accompanied by large devaluation, tend to have significant impacts on the domestic economy. If the exchange rate also depreciates in real terms, the economy can take advantage of the export price competitiveness to promote its exports. In contrast, if the currency devaluation induces an increase in domestic inflation, the currency value in real terms will return toward the pre-crisis level, which results in a loss of the export price competitiveness and, hence, a slow recovery from the severe economic downturn. This paper analyzes the degree of domestic price responses to the exchange rate changes in crisis-hit countries in East Asian and Latina American countries and Turkey in order to reveal why the post-crisis inflation performance was very different across countries. The structural vector autoregression (VAR) technique is applied to examining exchange rate pass-through. The degree of exchange rate pass-through is found to be higher in Latin American countries and Turkey than in East Asian countries with a notable exception of Indonesia. In particular, Indonesia, Mexico, Turkey and, to a lesser extent, Argentina show a strong response of CPI to the exchange rate shock. More noteworthy is that excessive supply of base money played an important role in increasing the domestic inflation rate in Indonesia, while such effect is not observed in other countries, which indicates the importance of credible monetary policy committed to price stability in order to prevent the post-crisis inflation. Shock transmission from import prices or PPI to CPI is quite large in Indonesia, Mexico and Turkey. This finding implies that the channel of shocks at different stage of pricing chain may be an additional factor in high domestic inflation.
    Date: 2007–06
  15. By: Juan Angel Garcia (Capital markets and Financial Structure Division, Directorate Monetary Policy, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Adrian van Rixtel (Capital markets and Financial Structure Division, Directorate Monetary Policy, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Inflation-linked bond markets have experienced significant growth in recent years. This growth is somewhat surprising, for inflation-linked bonds cannot be considered a financial innovation and their development has taken place in a period of historically low global inflation and inflation expectations. In this context, the purpose of this paper is twofold. First, it provides a selective survey of the key arguments for and against the issuance of inflation-linked debt, and some of the factors that help to understand their recent growth. Second, it illustrates the use of these instruments to better monitor investors’ inflation expectations and growth prospects from a central bank perspective.
    Date: 2007–06
  16. By: Amartya Lahiri; Rajesh Singh; Carlos A. Vegh
    Abstract: This paper revisits the issue of the optimal exchange rate regime in a flexible price environment. The key innovation is that we analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). Under this friction, alternative exchange rate regimes have different implications for real allocations in the economy. In particular -- and contrary to standard results under sticky prices -- we show that flexible exchange rates are optimal under monetary shocks and fixed exchange rates are optimal under real shocks.
    JEL: F3 F40 F41
    Date: 2007–06
  17. By: Silva Lopes, Artur C.; M. Monteiro, Olga Susana
    Abstract: The purpose of this paper is to test the (rational) expectations hypothesis of the term structure of interest rates using Portuguese data for the interbank money market. The results obtained support only a very weak, long-run or "asymptotic" version of the hypothesis, and broadly agree with previous evidence for other countries. The empirical evidence supports the cointegration of Portuguese rates and the "puzzle" well known in the literature: although its forecasts of future short-term rates are in the correct direction, the spread between longer and shorter rates fails to forecast future longer rates. In the single equation framework, the implications of the hypothesis in terms of the predictive ability of the spread are also clearly rejected.
    Keywords: term structure of interest rates; expectations hypothesis; hypothesis testing; cointegration; Portugal.
    JEL: C32 C22 E43
    Date: 2007–05–31
  18. By: Martin D. D. Evans; Richard K. Lyons
    Abstract: We address whether transaction flows in foreign exchange markets convey fundamental information. Our GE model includes fundamental information that first manifests at the micro level and is not symmetrically observed by all agents. This produces foreign exchange transactions that play a central role in information aggregation, providing testable links between transaction flows, exchange rates, and future fundamentals. We test these links using data on all end-user currency trades received at Citibank over 6.5 years, a sample sufficiently long to analyze real-time forecasts at the quarterly horizon. The predictions are borne out in four empirical findings that define this paper's main contribution: (1) transaction flows forecast future macro variables such as output growth, money growth, and inflation, (2) transaction flows forecast these macro variables significantly better than the exchange rate does, (3) transaction flows (proprietary) forecast future exchange rates, and (4) the forecasted part of fundamentals is better at explaining exchange rates than standard measured fundamentals.
    JEL: F31 G12 G14
    Date: 2007–06
  19. By: Mark A. Wynne; Erasmus K. Kersting
    Abstract: This paper reviews the evidence on the relationship between openness and inflation. There is a robust negative relationship across countries, first documented by Romer (1993), between a country's openness to trade and its long-run inflation rate. However, a key part of the standard explanation for this relationship—that central banks have a smaller incentive to engineer surprise inflations in more-open economies because the Phillips curve is steeper—seems at odds with the facts. While the United States is still not a very open economy by conventional measures, there are channels through which global developments may influence the nation's inflation. We document evidence that global resource utilization may play a role in U.S. inflation and suggest avenues for future research.
    Keywords: Inflation (Finance) ; Trade ; Phillips curve
    Date: 2007
  20. By: Walter Novaes (PUC/RJ); Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil)
    Abstract: This paper discusses the effectiveness in Brazil of the traditional instruments of exchange rate interventions (spot interventions and interest rates) as well as instruments based on exchange rate derivatives (swaps and dollar indexed public bonds). We show that in periods of high volatility of the nominal exchange rate the instruments are not capable of significantly modifying the dynamics of the nominal exchange rate. In periods of low volatility of the nominal exchange rate, in contrast, both the traditional instruments and the derivative instruments are effective. These results are robust to the two techniques of estimation employed: GMM in continuous time and in discrete time.
    Keywords: Central Bank, intervention in the foreign exchange market, foreign exchange derivatives
    JEL: E58 F31 E52
    Date: 2007–06–05
  21. By: Travaglini, Guido
    Abstract: This paper combines two major strands of literature: structural breaks and Taylor rules. At first, I propose a nonstandard t-test statistic for detecting multiple level and trend breaks of I(0) series by supplying theoretical and limit-distribution critical values obtained from Montecarlo experimentation. Thereafter, I introduce a forward-looking Taylor rule expressed as a dynamic model which allows for multiple breaks and reaction-function coefficients of the leads of inflation, of the output gap and of an equity market index. Sequential GMM estimation of the model, applied to the Effective Federal Funds Rate for the period 1984:01-2001:06, produces three main interesting results: the existence of significant structural breaks, the substantial role played by inflation in the FOMC decisions and a marked equity targeting policy approach. Such results reveal departures from rationality, determined by structured and unstructured uncertainty, which the Fed systematically attempts at reducing by administering inflation scares and misinformation about the actual Phillips curve, in order to keep the output and equity markets under control.
    Keywords: Generalized Method of Moments; Monetary Policy Rules; Multiple Breaks.
    JEL: C61 C12 E58
    Date: 2007–06–06
  22. By: William Coleman
    Abstract: This paper develops a model of the costliness of inflation that places the locus of costs in the bond market, rather than the money market. It argues that inflation is costly on account on the contraction of the bond market caused by the riskiness of inflation. The theory is premised upon the social function of bond markets as consisting of the transference of technological risk from those economic interests where risk is most concentrated (and so most painful) to interests where it is less concentrated (and so less painful). Using a Ramsey-Solow model with decision-makers maximising expected utility from consumption and real balances, the paper argues that unpredictable inflation impedes this useful transfer in risks secured by the bond market. Unpredictable inflation makes debt most costly when income is the most needed by debtors (since when the ex post real interest is highest, the debtor is in consequence the poorest), and credit the most remunerative when income is the least needed by creditors (since when the ex post real interest is the highest, the creditor is as a consequence richest). The upshot of these disincentives to borrow and lend is that less risk is transferred. Thus unpredictable inflation reduces the socially beneficial transfer of risks that a bond market secures.
    Keywords: inflation cost, inflation risk, debt
    JEL: E31 E43 E61
    Date: 2007–05
  23. By: Gianni Amisano (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Oreste Tristani (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We estimate the approximate nonlinear solution of a small DSGE model on euro area data, using the conditional particle filter to compute the model likelihood. Our results are consistent with previous findings, based on simulated data, suggesting that this approach delivers sharper inference compared to the estimation of the linearised model. We also show that the nonlinear model can account for richer economic dynamics - the impulse responses to structural shocks vary depending on initial conditions selected within our estimation sample. JEL Classification: C11, C15, E31, E32, E52.
    Keywords: DSGE models, inflation persistence, second order approximations, sequential Monte Carlo, Bayesian estimation.
    Date: 2007–05
  24. By: Morris Goldstein (Peterson Institute for International Economics)
    Abstract: This working paper assesses the progress made in improving China’s exchange rate policies over the past five years (that is, since 2002). I first discuss four indicators of progress on China’s external imbalance and its exchange rate policies—namely, the change in (and level of) China’s global current account position, movements in the real effective exchange rate of the renminbi (RMB), the role of market forces in the determination of the RMB, and China’s compliance with its obligations on exchange rate policy as a member of the International Monetary Fund (IMF). I then discuss why the lack of progress in improving China’s exchange rate policies matters for the economies of the China and the United States and for the international monetary and trading system. I also argue that several popular arguments and excuses for why more cannot be accomplished on removing the large undervaluation of the RMB are unpersuasive. Finally, I consider what can and should be done by China, the United States, and the IMF to accelerate progress over the next year or two.
    Keywords: exchange rate, current account adjustment, China, IMF
    JEL: F31 F32 F41
    Date: 2007–06
  25. By: Vincenzo Cestari (Università Lumsa and CNR); Paolo Del Giovane (Bank of Italy); Clelia Rossi-Arnaud (Università di Roma - La Sapienza)
    Abstract: The question addressed by this study is whether consumers remember past prices correctly. We test Italian citizens’ memory for cinema prices with questionnaires distributed to moviegoers. The analysis concentrates on the memory of pre-euro prices, but the recall for a more recent period is also investigated. The results show that only a small percentage of respondents recalled the correct price, and that the average prices recalled were much lower than the actual pre-euro prices and dated back to years before the changeover. Price recall is less accurate for the respondents who perceive higher and more persistent inflation; it is also worse for the older respondents and for the less frequent movie-goers.
    Keywords: prices, memory, perceptions, euro
    JEL: D12 D8 E31
    Date: 2007–02
  26. By: Frederik Lundtofte (Swiss Institute of Banking and Finance, University of St-Gallen)
    Abstract: This paper analyzes the term structure of interest rates in an exchangeonly Lucas (1978) economy where consumers learn about a stochastic growth rate through observations of the endowment process and an external public signal. We show that there is a premium for noisy external public information in long-term bonds. In contrast to Feldman (1989), where agents learn only through realized outputs, we find that nonstochastic interest rates are not necessary for the expectations hypothesis to hold.
    Keywords: learning, information quality, incomplete information, term structure of interest rates
    JEL: C13 G12
    Date: 2006–02
  27. By: Gerhard Fenz (Oesterreichische Nationalbank, Economic Analysis Division); Martin Schneider (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: This paper analyses the comovement of the German and Austrian economies and the transmission of German shocks to Austria. Static and dynamic correlation measures show a strong comovement and a change of the relative position in time of these two economies. The transmission of German shocks to Austria is analysed with a two-country VAR model. Using sign restrictions on impulse response functions, we identify German supply, demand and monetary policy shocks. We find that the average reaction of the Austrian economy to German shocks amounts to 44% of the German reaction and remains broadly stable over time.
    Keywords: business cycle, synchronization, vector autoregression, shock transmission, Austria, Germany.
    JEL: C32 E32 F41
    Date: 2007–05–14
  28. By: Melecky, Martin
    Abstract: This paper acknowledges the fact that some countries have to borrow in foreign currencies due to the various constraints they face. Starting from this point, the author reviews approaches for trying to determine the currency structure for sovereign debt, and discusses some issues inherent in these approaches. The analysis mainly focuses on the correlations of domestic fundamentals with the actual versus equilibrium exchange rate in light of the long-term perspective of a debt manager and changing exchange rate regimes. In addition, the author makes some observations on the characterization of exchange rate volatilities in the existing approaches.
    Keywords: Economic Theory & Research,External Debt,Financial Intermediation,Strategic Debt Management,Foreign Direct Investment
    Date: 2007–06–01
  29. By: Ielpo, Florian; Guégan, Dominique
    Abstract: US interest rates’ overnight reaction to macroeconomic announcements is of tremendous importance when trading fixed income securities. Most of the empirical studies achieved so far either assumed that the interest rates’ reaction to announcements is linear or independent to the state of the economy. We investigate the shape of the term structure reaction of the swap rates to announcements using several linear and non-linear time series models. The empirical results yield several not-so-well-known stylized facts about the bond market. First, and although we used a daily dataset, we find that the introduction of non linear models leads to the finding of a significant number of macroeconomic figures that actually produce an effect over the yield curve. Most of the studies using daily datasets did not corroborate so far this conclusion. Second, we find that the term structure response to announcements can be much more complicated that what is generally found: we noticed at least four types of patterns in the term structure reaction of interest rates across maturities, including the hump-shaped one that is generally considered. Third, by comparing the shapes of the rates’ term structure reaction to announcements with the first four factors obtained when performing a principal component analysis of the daily changes in the swap rates, we propose a first interpretation and classification of these different shapes. Fourth we find that the existence of some outliers in the one-day changes in interest rates usually leads to a strong underestimation of the reaction of interest rates to announcements, explaining the different results obtained between high-frequency and daily datasets: the first type of study seems to lead to the finding of fewer market mover announcements.
    Keywords: Macroeconomic Announcements; Interest Rates Dynamic; Outliers; Reaction Function; Principal Component Analysis.
    JEL: G12 E43
    Date: 2006–12
  30. By: W. Michael Cox
    Abstract: This paper investigates the effects of globalization on aggregate productivity, output growth, and inflation. I present a simple two-country, two-good, flexible exchange rate model using Fisher Ideal aggregators to examine changes in the mapping from microeconomic to macroeconomic productivity growth as nations globalize. Advances in industry-specific labor productivity are shown to have potentially a much greater passthrough to aggregate productivity, output, and prices the more open nations are to trade. Globalization raises both the level and growth rate of aggregate productivity by allowing more economywide reorganization in response to ongoing technological advances than would be optimal otherwise. ; I develop a globalized version of the quantity equation of money, where inflation in the home country depends on domestic money growth and a weighted average of home and foreign GDP growth. Relative country size, consumer preferences, production technologies, and the openness of trade are the chief determinants of these weights. Calibrating the model to match certain stylized facts about the U.S. and global economies, U.S. consumer price inflation falls from roughly 3.8 percent when economies are closed to under 2 percent in the transition period, eventually settling at around 2.3 percent in free trade. Producer and consumer prices trek a common path under autarky but diverge as the world globalizes. Both home and foreign aggregate productivity growth rates increase—by 0.4 and 0.7 percentage points, respectively. Roughly 30 percent of the output weight in the determination of home inflation shifts from the home to the foreign economy—greater than might be expected from strong home bias.
    Date: 2007
  31. By: Paul Hallwood (University of Connecticut); Ronald MacDonald (University of Glasgow); Ian Marsh (City University)
    Abstract: This paper investigates the gold bloc operated between France, the Netherlands, Switzerland and Belgium, especially over the period after the USA left the gold standard in March 1933 to its end in September 1936. It enquires into the effect of military-political developments in Germany and Italy on the sustainability of the gold bloc between its members. Juxtaposed is the view of leading political scientists, such as Henry Kissinger, who see impending war in Europe as deeply and adversely affecting psychology in Europe, and what may be called the standard ÆeconomistsÇ viewÇ that sees the demise of the gold bloc as being caused almost exclusively by economic factors. Developing concepts of external and internal inconsistency of the gold bloc, this investigation concludes that both economic and military-political developments played important roles in destroying the last vestiges of the gold standard.
    Keywords: French devaluation, German remilitarization, gold bloc, international monetary system
    JEL: F33 N24 N44
    Date: 2007–06
  32. By: Nooraddin Sharify (Department of Economics, University of Mazandaran, Babolsar, Iran.); M. Alejandro Cardenete (Department of Economics, Universidad Pablo de Olavide)
    Abstract: Any increment in the prices of goods or services generally leads to an increase in different products prices indices and inflation. This paper examines the cost-push impact of a motor spirit price increment in Iran on different products prices indices and inflation. An Input-Output (I-O) table adjustment approach is applied. Iran input- output table for the year 2001-2002 is used as database. The empirical results of the model show how the cost-push impact of a 25% increment in the motor spirit price leads to an increment in different products prices indices, but the maximum effect of this increment, which is on transportation services prices, does not exceed 0.7492%. In addition, the cost-push effect of this increase on the Production Prices Index (PPI) is estimated at 0.2540%.
    Keywords: Input-Output, Motor Spirit Pricing, Price model, Iran.
    JEL: C67 D57 E37 E64
    Date: 2007–05

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