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on Monetary Economics |
| By: | Lars E.O. Svensson (Princeton University, CEPR, and NBER) |
| Abstract: | The introduction of inflation targeting has led to major progress in practical monetary policy. Recent debate has focused on the interest-rate assumption underlying published projections of inflation and other target variables. This paper discusses the role of alternative interest-rate paths in the monetary-policy decision process and the recent publication by Norges Bank (the central bank of Norway) of optimal interest-rate projections with fan charts. |
| Keywords: | Forecasts, flexible inflation targeting, optimal monetary policy. |
| JEL: | E42 E52 E58 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:75&r=mon |
| By: | Vasco Cúrdia; Daria Finocchiaro |
| Abstract: | This paper analyzes how changes in monetary policy regimes influence the business cycle in a small open economy. We estimate a dynamic stochastic general equilibrium (DSGE) model on Swedish data, explicitly taking into account the 1993 monetary regime change, from exchange rate targeting to inflation targeting. The results confirm that monetary policy reacted primarily to exchange rate movements in the target zone and to inflation in the inflation-targeting regime. Devaluation expectations were the principal source of volatility in the target zone period. In the inflation-targeting period, labor supply and preference shocks have become relatively more important. |
| Keywords: | Business cycles ; Monetary policy ; Foreign exchange rates ; Inflation (Finance) ; Equilibrium (Economics) ; Stochastic analysis ; Econometric models |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:294&r=mon |
| By: | Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies) |
| Abstract: | March 2007 saw an increase of 3.1 percent in the Consumer Price Index (CPI) annual inflation rate and triggered the first explanatory letter from the Governor of the Bank of England to the Chancellor of the Exchequer since the Bank of England was granted operational independence in May 1997. The letter gave rise to a lively debate on whether policymakers should pay attention to the link between inflation and M4 money growth. Using UK data since the introduction of inflation targeting in October 1992, we show that: (i)~the relationship between inflation and M4 growth is not stable over time, and (ii)~the tendency of M4 to exert inflationary pressures is conditional on annual M4 growth exceeding 10\%. Above this threshold, a 1 percentage point increase in the annual growth rate of M4 increases annual inflation by only 0.09 percentage points, whereas a 1 percentage point increase in the disequilibrium between money and its long-run determinants increases annual inflation by only 0.07 percentage points. Since the money effects are very small, the implication is that the Monetary Policy Committee should not be particularly worried for not paying close attention to M4 money movements when setting interest rates. |
| Keywords: | M4, Money growth, Regime-switching models, UK inflation |
| JEL: | C51 C52 E52 E58 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2007/07&r=mon |
| By: | Luigi Bonatti |
| Abstract: | Previous papers modeling the interaction between the central bank and a monopoly union demonstrated that greater monetary policy uncertainty induces the union to reduce nominal wages. This paper shows that this result does not hold in general, since it depends on peculiar specifications of the union’s objective function. In particular, I show that greater monetary policy uncertainty raises the nominal wage whenever union members tend to be more sensitive to the risk of getting low real wages than to the risk of remaining unemployed. This conclusion appears consistent with the evidence showing that greater monetary authority’s transparency reduces average inflation. |
| Keywords: | Monetary game, transparency in policymaking. |
| JEL: | E31 E58 J51 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0716&r=mon |
| By: | Eleftherios Spyromitros; Blandine Zimmer |
| Abstract: | Recent contributions have shown that in the presence of strategic interactions be- tween non atomistic unions and the central bank, an accommodating monetary policy rule may increase equilibrium unemployment. This note demonstrates that this result can be reversed considering the case where the central bank is not fully transparent concerning its reaction to wage decisions. |
| Keywords: | Monetary regime, Wage setting, Central bank transparency. |
| JEL: | E24 E5 J51 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2007-27&r=mon |
| By: | Boriss Siliverstovs |
| Abstract: | This study develops a parsimonious stable coefficient money demand model for Latvia for the period from 1996 till 2005. A single cointegrating vector between the real money balances, the gross domestic product, the long-term interest rate, and the rate of inflation is found. Our study contributes to better understanding of the factors shaping the demand for money in the new Member States of the European Union that committed themselves to adopting of the Euro currency in the near future. |
| Keywords: | M2 money demand, stability, new EU member states, Latvia |
| JEL: | C32 E41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp703&r=mon |
| By: | Edward Nelson |
| Abstract: | This paper argues that the inflation targeting regime prevailing in the United Kingdom is not the result of a change in policymaker objectives. By conducting an analysis of U.K. policymakers that parallels Romer and Romer's (2004) study of Federal Reserve Chairmen, I demonstrate that policymaker objectives have been essentially unchanged over the past five decades. Instead, the crucial underpinning of U.K. inflation targeting has been an overhaul of doctrine-a changed view of the transmission mechanism. This overhaul can be understood in terms of changes in policymakers' views on the values of a few key parameters in their specifications of the economy's IS and Phillips curves. Specifically, the changed views pertain to the issues of whether interest rates enter the IS equation, and the extent of policymaker influence on those rates; whether the level of the output gap appears in the Phillips curve when the gap is negative; and whether a speed-limit term matters for inflation dynamics. Contrary to conventional wisdom, changing views on the expected-inflation term in the Phillips curve do not play a role. |
| Keywords: | Inflation (Finance) - Great Britain ; Monetary policy - Great Britain |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-026&r=mon |
| By: | Balogun, Emmanuel Dele |
| Abstract: | This study examined the monetary and macroeconomic stability perspective for entering into monetary union, using data available on WAMZ countries. It tests the hypothesis that independent monetary and exchange rate policies have been relatively ineffective in influencing domestic activities (especially GDP and inflation), and that when they do, they are counter productive. Usiing econometric methods, regression result show that, erstwhile domestic monetary policy, as captured by money supply and credit to government hurt real domestic output of these countries. Indeed, rather than promote growth, it was a source of stagnation. It also confirms that there appear to be a two quarters lag in monetary policy transmission effect with regard to real sector output. The results also show that although expansion in domestic output dampened aggregate consumer prices (inflation), it was however, not adequate enough to dampen the fuelling effects of past inflation. This was accentuated by money supply variable (MS2) and aggravated by exchange rate variable which are mostly positive, confirming the a priori expectations that rapid monetary expansion and devaluations fuels domestic inflation. A country by country comparison of the single and simultaneous equations model results show that expansionary monetary policy contributed more to fuelling prices than it did to growth. It also shows that interest rates policy had adverse effects on GDP by exhibiting a positive sign contrary to the theoretical expectation of an inverse relationship. The results also show that exchange rate devaluations manifest mainly in domestic inflation and have no effect at all on the growth variable, in the short term. The study concludes that these countries would be better-off to surrender its independence over these policy instruments to the planned regional body under appropriate monetary union arrangements. |
| Keywords: | International Monetary Economics; Econometric studies |
| JEL: | E5 F42 |
| Date: | 2007–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4308&r=mon |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0712&r=mon |
| By: | Nicolas Barbaroux (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - [CNRS : FRE2938] - [Université Jean Monnet - Saint-Etienne]) |
| Abstract: | Recently, one of the most fruitful debate in monetary macroececonomics that fascinates -and opposed- academics and policymakers has lied in the relevancy of money within the monetary policy analysis. Since the publication of King and Goodfriend 1997’s article that gave birth to a new current -the New Neoclassical Synthesis- money seems to be de-emphasized1. A new step has been reached in 2003 with Woodford’s monetary treatise that legitimates a Cashless framework. Woodford captures the "implied path of the money supply or the determinants of money demand" (Woodford, 2003, p.237) in the determination of the equilibrium of output and prices, without having to model the volume of money explicitly. Woodford gives his theory a Wicksellian flavour by comparing his cashless economy framework with Wicksell’s pure credit economy framework. Such a legacy gives the impression that Wicksell’s original writings downgraduated money for the conduct of monetary policy. |
| Keywords: | Monetary Policy ; De-emphasis of Money ;Monetarism. |
| Date: | 2007–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:ujm-00162418_v1&r=mon |
| By: | Lars E.O. Svensson (Princeton University, CEPR, and NBER) |
| Abstract: | During the long economic slump in Japan, monetary policy in Japan has essentially consisted of a very low interest rate (since 1995), a zero interest rate (since 1999), and quantitative easing (since 2001). The intention seems to have been to lower expectations of future interest rates. But the problem in a liquidity trap (when the zero lower bound on the central bank’s instrument rate is strictly binding) is rather to raise private-sector expectations of the future price level. Increased expectations of a higher future price level are likely to be much more effective in reducing the real interest rate and stimulating the economy out of a liquidity trap than a further reduction of already very low expectations of future interest rates. Therefore, monetarypolicy alternatives in a liquidity trap should be assessed according to how effective they are likely to be in affecting private-sector expectations of the future price level. Expectations of a higher future price level would lead to current depreciation of the currency. Quantitative easing would induce expectations of a higher price level if it were expected to be permanent. The absence of a depreciation of the yen and other evidence indicates that the quantitative easing is not expected to be permanent. In an open economy, the Foolproof Way (consisting of a price-level target path, currency depreciation and commitment to a currency peg and a zero interest rate until the price-level target path has been reached) is likely to be the most effective policy to raise expectations of the future price level, stimulate the economy, and escape from a liquidity trap. It is the first-best policy to end stagnation and deflation in Japan. The Foolproof Way without the explicit exchange-rate policy, namely a price-level target path and a commitment to a zero interest rate until the price-level target path has been reached, would be a second-best policy. The current policy, a commitment to a zero interest rate until inflation has become nonnegative is at best a third-best policy, since it accommodates all deflation that has occurred before inflation turns nonnegative and therefore is not effective in inducing inflation expectations. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:76&r=mon |
| By: | Cengiz, Gulfer; Cicek, Deniz; Kuzubas, Tolga Umut; Olcay, Nadide Banu; Saglam, Ismail |
| Abstract: | We characterize the monetary competitive equilibrium in a two-country monetary union model involving cash-in-advance constraints both in the factor markets and in the good markets. Simulations show that common money inflation in the union have asymmetric effects on the welfare of workers in the two countries which are technologically differentiated. We also find that the distribution of the money stock within the union may affect labor flow across the countries. |
| Keywords: | Monetary union; cash-in-advance; monetary policy |
| JEL: | F22 E24 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4248&r=mon |
| By: | Lawrence Christiano (Northwestern University and National Bureau of Economic Research. Mailing address: Department of Economics, Northwestern University, 2001 Sheridan Road, Evanston, Illinois 60208, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.) |
| Abstract: | The US Federal Reserve cut interest rates more vigorously in the recent recession than the European Central Bank did. By comparison with the Fed, the ECB followed a more measured course of action. We use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading. We find that - because there is greater inertia in the ECB’s policy rule - the ECB’s policy actions actually had a greater stabilizing effect than did those of the Fed. As a consequence, a potentially severe recession turned out to be only a slowdown, and inflation never departed from levels consistent with the ECB’s quantitative definition of price stability. Other factors that account for the different economic outcomes in the Euro Area and US include differences in shocks and differences in the degree of wage and price flexibility. JEL Classification: C51, E52, E58. |
| Keywords: | Policy activism, DSGEmodel, policy inertia, shocks. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070774&r=mon |
| By: | Ian Babetskii (Czech National Bank; CERGE-EI); Fabrizio Coricelli (European Bank for Reconstruction and Development; CEPR); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Keywords: | inflation dynamics, persistence, inflation targeting |
| JEL: | D40 E31 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2007_22&r=mon |
| By: | Alfredo Saad Filho (Centre for Development Policy & Research School of Oriental & African Studies University of London) |
| Abstract: | . |
| Keywords: | Monetary Policy, Economic Policies, MDGs, Povery, Research, Programme |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ipc:pubipc:1417026&r=mon |
| By: | Ippei Fujiwara; Naoko Hara; Naohisa Hirakata; Takeshi Kimura; Shinichiro Watanabe (Bank of Japan (Corresponding author, e-mail: takeshi.kimura@boj.or.jp)) |
| Abstract: | Focusing on policy-making under uncertainty, we analyze the Bank of Japanfs monetary policy in the early 1990s when the bubble economy collapsed. Conducting stochastic simulations with a large-scale macroeconomic model of the Japanese economy, we find that the BOJfs monetary policy at that time was essentially optimal under uncertainty about the policy multiplier. On the other hand, we also find that the BOJfs policy was not optimal under uncertainty about inflation dynamics, and that a more aggressive policy response than actually implemented would have been needed. Thus, optimal monetary policy differs greatly depending upon which type of uncertainty is emphasized. Taking into account the fact that overcoming deflation became an important issue from the latter 1990s, it is possible to argue that during the early 1990s the BOJ should have placed greater emphasis on uncertainty about inflation dynamics and implemented a more aggressive monetary policy. The result from a counter-factual simulation indicates that the inflation rate and the real growth rate would have been higher to some extent if the BOJ had implemented a more accommodative policy during the early 1990s. However, the simulation result also suggests that the effects would have been limited, and that an accommodative monetary policy itself would not have changed the overall image of the prolonged stagnation of the Japanese economy during the 1990s. |
| Keywords: | Collapse of the Bubble Economy, Monetary Policy, Uncertainty |
| JEL: | E17 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:07-e-09&r=mon |
| By: | Benoît Mojon |
| Abstract: | This paper shows how US monetary policy contributed to the drop in the volatility of US output fluctuations and to the decoupling of household investment from the business cycle. I estimate a model of household investment, an aggregate of non durable consumption and corporate sector investment, inflation and a short-term interest rate. Subsets of the models' parameters can vary along independent Markov Switching processes. ; A specific form of switches in the monetary policy regimes, i.e. changes in the size of monetary policy shocks, affect both the correlation between output components and their volatility. A regime of high volatility in monetary policy shocks, that spanned from 1970 to 1975 and from 1979 to 1984 is characterized by large monetary policy shocks contributions to GDP components and by a high correlation of household investment to the business cycle. This contrasts with the 1960's, the 1976 to 1979 period and the post 1984 era where monetary policy shocks have little impact on the fluctuations of real output. |
| Keywords: | Monetary policy ; Business cycles |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-07-07&r=mon |
| By: | Zammit, Robert |
| Abstract: | An undergraduate dissertation in Monetary Economics. The aim of this dissertation is to empirically analyse the effects of the Bank of Japan’s anti-deflationary Quantitative Easing Policy carried out between March 2001 and April 2006. In doing so, this study also reviews the zero bound to interest rates, defined as the primary constraint to the effectiveness of conventional monetary policy at the interest rate floor. The results of the economic models contained in this study confirm the economic significance of a sustained increase in liquidity in fostering a return to inflationary pressures. Moreover, the findings of the study confirm that effective anti-deflationary policies may not necessarily entail extreme measures on the part of a central bank; on the other hand, credibility coupled with a resolved commitment may very well be enough to provide for positive macroeconomic repercussions. |
| Keywords: | Deflation; monetary policy at the zero-bound; quantitative easing |
| JEL: | E58 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3361&r=mon |
| By: | Eijffinger, S.C.W.; Goderis, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature. |
| Keywords: | Currency Crises;Institutions;Monetary Policy;Short-Term Debt;External Debt;Capital Account Openness; |
| Date: | 2007–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:300010740&r=mon |
| By: | Zheng Liu; Daniel F. Waggoner; Tao Zha |
| Abstract: | We assess the quantitative importance of the expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a “bad” regime and a “good” regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric across regimes. In the good regime, the expectation effect is small despite agents’ disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a small probability that monetary policy will switch to the good regime. Although the expectation effect dampens aggregate fluctuations in the bad regime, a switch from the bad regime to the good regime can still substantially reduce the volatility of both inflation and output, provided that we allow some “reduced-form” parameters in the private sector to change with monetary policy regime. Much of the volatility reduction is attributed to a structural break in the persistence of equilibrium dynamics of macroeconomic variables. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:653&r=mon |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | This contribution to the Festschrift for the Centenary of the Swiss National Bank discusses the prospects for monetary stability and financial stability after the creation of the European Monetary Union. Topics covered include the robustness of institutional arrangements and their implications for monetary stability, the implications for a small, nonparticipating country, and the problem of financial stability in a setting in which banking supervision is national and the lender of the last resort is supranational. |
| Keywords: | European Monetary Union, European Central Bank, Monetary Stability, Banking Supervision, Financial Crisis Management |
| JEL: | E58 F41 G28 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2007_9&r=mon |
| By: | David de la Croix (Department of Economics, Université catholique de Louvain, 1, Place de l’Université, B-1348 Louvain-la-Neuve, Belgium.); Gregory de Walque (Department of Economics, University of Namur and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.); Rafael Wouters (Department of Economics, Université catholique de Louvain and National Bank of Belgium (NBB), Boulevard de Berlaimont 14, B-1000, Brussels, Belgium.) |
| Abstract: | We first build a fair wage model in which effort varies over the business cycle. This mechanism decreases the need for other sources of sluggishness to explain the observed high inflation persistence. Second, we confront empirically our fair wage model with a New Keynesian model based on the standard assumption of monopolistic competition in the labor market. We show that, in terms of overall fit, the fair wage model outperforms the New Keynesian one. The extension of the fair wage model with lagged wage is judged insignificant by the data, but the extension based on a rent sharing argument including firm’s productivity gains in the fair wage is not. Looking at the implications for monetary policy, we conclude that the additional trade-off problem created by the inefficient real wage behavior significantly affect nominal interest rates and inflation outcomes. JEL Classification: E4, E5. |
| Keywords: | Efficiency wage, effort, inflation persistence, monetary policy. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070780&r=mon |
| By: | Marika Karanassou (Queen Mary, University of London and IZA); Hector Sala (Universitat Autònoma de Barcelona and IZA); Dennis J. Snower (Kiel Institute for the World Economy, University of Kiel, CEPR and IZA) |
| Abstract: | This paper analyses the relation between US inflation and unemployment from the perspective of "frictional growth," a phenomenon arising from the interplay between growth and frictions. In particular, we examine the interaction between money growth (on the one hand) and various real and nominal frictions (on the other). In this context we show that monetary policy has not only persistent, but permanent real effects, giving rise to a long-run inflation-unemployment tradeoff. We evaluate this tradeoff empirically and assess the impact of productivity, money growth, budget deficit, and trade deficit on the US unemployment and inflation trajectories during the nineties. |
| Keywords: | inflation dynamics, unemployment dynamics, Phillips curve, roaring nineties |
| JEL: | E24 E31 E51 E62 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2900&r=mon |
| By: | Annika Alexius (Uppsala University); Bertil Holmlund (Uppsala University and IZA) |
| Abstract: | A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years. |
| Keywords: | unemployment, monetary policy, structural VAR |
| JEL: | J60 E24 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2933&r=mon |
| By: | John Duffy; Wei Xiao |
| Abstract: | We examine determinancy and expectational stability (learnability) of rational expectations equilibrium (REE) in sticky price `New Keynesian` (NK) models of the monetary transmission mechanism. We consider three different New Keynesian models: a labor-only model and two models that add capital -- one where capital is allocated in an economy-wide rental market and another that supposes that the demand for capital is firm-specific. We find that Bullard and Mitra`s (2002, 2006) findings on determinacy and learnability of REE under various interest rate rules in the labor-only NK model do not always extend to models with capital. In particular, the Taylor principle, that the response of interest rates should be more than proportionate to changes in inflation, will not generally suffice to guarantee determinate and/or learnable equilibria in NK models with capital. |
| JEL: | D83 E43 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:324&r=mon |
| By: | Illing, Gerhard; Cao, Jin |
| Abstract: | The paper models the interaction between risk taking in the financial sector and central bank policy. It shows that in the absence of central bank intervention, the incentive of financial intermediaries to free ride on liquidity in good states may result in excessively low liquidity in bad states. In the prevailing mixed-strategy equilibrium, depositors are worse off than if banks would coordinate on more liquid investment. It is shown that public provision of liquidity improves the allocation, even though it encourages more risk taking (less liquid investment) by private banks. |
| Keywords: | Liquidity Provision; Monetary Policy; Bank Runs |
| JEL: | E5 G21 G28 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2008&r=mon |
| By: | Anna Wong (University of Chicago) |
| Abstract: | This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund’s Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries. |
| Keywords: | Foreign Exchange Reserves, Central Banks, Methodology, Index Numbers, Aggregation |
| JEL: | F31 E58 B41 C43 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp07-6&r=mon |
| By: | Brisne J. V. Céspedes; Elcyon C. R. Lima; Alexis Maka; Mário J. C. Mendonça |
| Abstract: | In this article we use the theory of conditional forecasts to develop a new Monetary Conditions Index (MCI) for Brazil and compare it to the ones constructed using the methodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull (2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches to develop and compute Bayesian error bands for the MCIs. The new indicator we develop is called the Conditional Monetary Conditions Index (CMCI) and is constructed using, alternatively, Structural Vector Autoregressions (SVARs) and Forward-Looking (FL) models. The CMCI is the forecasted output gap, conditioned on observed values of the nominal interest rate (the Selic rate) and of the real exchange rate. We show that the CMCI, when compared to the MCI developed by Batini and Turnbull (2002), is a better measure of monetary policy stance because it takes into account the endogeneity of variables involved in the analysis. The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptual differences, show similarities in their chronology of the stance of monetary policy in Brazil. The CMCI is a smoother version of the BMCI, possibly because the impact of changes in the observed values of the Selic rate is partially compensated by changes in the value of the real exchange rate. The Brazilian monetary policy, in the 2000:9- 2005:4 period and according to the last two indicators, has been expansionary near election months. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:ipe:ipetds:1128&r=mon |
| By: | Alexander Kriwoluzky; Christian Stoltenberg |
| Abstract: | In this paper we propose a novel methodology to analyze optimal policies under model uncertainty in micro-founded macroeconomic models. As an application we assess the relevant sources of uncertainty for the optimal conduct of monetary policy within (parameter uncertainty) and across models (specification uncertainty) using EU 13 data. Parameter uncertainty matters only if the zero bound on interest rates is explicitly taken into account. In any case, optimal monetary policy is highly sensitive with respect to specification uncertainty implying substantial welfare gains of a robustly-optimal rule that incorporates this risk. |
| Keywords: | Optimal monetary policy, model uncertainty, Bayesian model estimation. |
| JEL: | E32 C51 E52 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-040&r=mon |
| By: | Troy Davig |
| Abstract: | This paper assesses the implications for optimal discretionary monetary policy if the slope of the Phillips curve changes. The paper first derives a ‘switching’ Phillips curve from the optimal pricing decision of a monopolistic firm that faces a changing cost of price adjustment. Two states exists, a state with a high cost of price adjustment that generates a ‘flat’ Phillips curve and a low-cost state that generates a relatively ‘steep’ curve. The second aspect of the paper constructs a utility-based welfare criterion. A novel feature of this criterion is that it has a relative weight on output gap deviations that is state dependent, so it changes with the cost of price adjustment. Optimal monetary policy is computed subject to the switching-Phillips curve under both ad-hoc and utility-based welfare criteria. The utility-based criterion instructs monetary policy to disregard the slope of the Phillips curve and keep its systematic actions constant across different states. This stands in contrast to the prescription coming under the ad-hoc criterion, which advises monetary policy to change its systematic behavior according to the slope of the Phillips curve. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp07-04&r=mon |
| By: | Balázs Égert (Oesterreichische Nationalbank, Foreign Research Division) |
| Abstract: | This paper provides a comprehensive review of the factors that can cause price levels to diverge and which are at the root of different inflation rates in Europe including the EU-27. Among others, we study the structural and cyclical factors influencing market and non-market-based service, house and goods prices, and we summarise some stylised facts emerging from descriptive statistics. Subsequently, we set out the possible mismatches between price level convergence and inflation rates. Having described in detail the underlying economic factors, we proceed to demonstrate the relative importance of these factors on observed inflation rates first in an accounting framework and then by relying on panel estimations. Our estimation results provide the obituary notice for the Balassa-Samuelson effect. Nevertheless, we show that other factors related to economic convergence may push up inflation rates in transition economies. Cyclical effects and regulated prices are found to be important drivers of inflation rates in an enlarged Europe. House prices matter to some extent in the euro area, whereas the exchange rate plays a prominent (but declining) role in transition economies. |
| Keywords: | price level, inflation, Balassa-Samuelson, tradables, house prices, regulated prices, Europe, transition |
| JEL: | E43 E50 E52 C22 G21 O52 |
| Date: | 2007–05–07 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:138&r=mon |
| By: | Yap, Josef T. |
| Abstract: | In response to the 1997 East Asian financial crisis many schemes were initiated to reform the international financial architecture. The proposed reforms had two wide-ranging objectives: (i) to prevent currency and banking crises and better manage them when they occur; and (ii) to support adequate provision of net private and public flows to developing countries, particularly low-income ones. Unfortunately the progress has been uneven, asymmetric, and patchy. This is largely because the structural problems related to the supply side of capital flows have not been addressed, particularly the unipolar character of the global financial system. As a result, many East Asian economies face many of the same conditions that prevailed immediately prior to the crisis: huge capital inflows heavily tilted toward hot money, rapid appreciation of currencies in real terms, surging stock prices, and little policy space to implement countercyclical measures in the event of a crisis. The difference is that many countries have accumulated a large amount of foreign exchange reserves but at the expense of domestic investment and economic growth. In order to resolve the problems that are posed by volatile capital flows it is important to accelerate East Asian cooperation and integration, particularly with regard to the objective of using regional savings for regional infrastructure projects. Political rapprochement between China and Japan is a necessary condition both to move regional cooperation and integration forward and to overhaul the unipolar global financial system. |
| Keywords: | capital flows, real effective exchange rate, international financial architecture, disaster myopia |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2007-05&r=mon |
| By: | Mayes, David G (BOFIT); Korhonen, Vesa (BOFIT) |
| Abstract: | We consider the likely economic impact and prospects for monetary integration among Belarus, Kazakhstan, the Russian Federation and Ukraine as part of the Single Economic Space they have agreed to set up. A monetary union among these countries poses three interesting issues for the structure and process of integration: they have already been members of a wider currency union that collapsed, so it is necessary to handle the problems of history; secondly the union would be of very unequal size with the Russian Federation outweighing the others taken together, so we must consider how the national interests would be balanced; lastly natural resources, particularly oil and gas pose problems for dependence and for the determination of the external exchange rate. |
| Keywords: | monetary union; CIS; economic integration |
| JEL: | E42 E63 F16 |
| Date: | 2007–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2007_016&r=mon |
| By: | François Coppens (National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium.); Fernando González (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gerhard Winkler (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1090 Vienna, Austria.) |
| Abstract: | The aims of this paper are twofold: first, we attempt to express the threshold of a single “A” rating as issued by major international rating agencies in terms of annualised probabilities of default. We use data from Standard & Poor’s and Moody’s publicly available rating histories to construct confidence intervals for the level of probability of default to be associated with the single “A” rating. The focus on the single “A” rating level is not accidental, as this is the credit quality level at which the Eurosystem considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks under the Basel II regime. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Eurosystem monetary policy operations. Contrary to the widely used confidence interval approach, our proposal, based on an interpretation of p-values as frequencies, guarantees a convergence to an ex ante fixed probability of default (PD) value. Given the general characteristics of the problem considered, we consider this simple mechanism to also be applicable in other contexts. |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20070065&r=mon |
| By: | Narayana R. Kocherlakota |
| Abstract: | This paper considers four models in which immortal agents face idiosyncratic shocks and trade only a single risk-free asset over time. The four models specify this single asset to be private bonds, public bonds, public money, or private money respectively. I prove that, given an equilibrium in one of these economies, it is possible to pick the exogenous elements in the other three economies so that there is an outcome-equivalent equilibrium in each of them. (The term “exogenous variables” refers to the limits on private issue of money or bonds, or the supplies of publicly issued bonds or money.) |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:393&r=mon |