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on Monetary Economics |
| By: | Michael Woodford |
| Abstract: | I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long-run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short-run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy. |
| JEL: | E52 E58 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13325&r=mon |
| By: | Jonathan Chiu |
| Abstract: | This paper studies the effects of monetary policy in an inventory theoretic model of money demand. In this model, agents keep inventories of money, despite the fact that money is dominated in rate of return by interest bearing assets, because they must pay a fixed cost to transfer funds between the asset market and the goods market. Unlike the exogenous segmentation models in the literature, the timings of money transfers are endogenous. By allowing agents to choose the timings of money transfers, the model endogenizes the degree of market segmentation as well as the magnitude of liquidity effects, price sluggishness and variability of velocity. First, I show that the endogenous segmentation model can generate the positive long run relationship between money growth and velocity in the data which the exogenous segmentation model fails to capture. Second, I show that the short run effects of money shocks in an exogenous segmentation model (such as the linear inflation response to money shock, the liquidity effect and the sluggish price adjustment) are not robust. In an endogenous segmentation model, the equilibrium response to money shocks is non-linear and non-monotonic. Moreover, for large money shocks, there is no liquidity effect and no sluggish price adjustment. |
| Keywords: | Transmission of monetary policy; Monetary policy framework |
| JEL: | E31 E41 E50 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-46&r=mon |
| By: | Arief Ramayandi (Department of Economics, Padjadjaran University) |
| Abstract: | Empirical studies on the process of monetary policy making in a number of advanced economies have shown that a simple policy reaction function (PRF) performs well in explaining the setting of monetary policy. This paper examines an application of a simple PRF in an attempt to broaden the understanding of monetary policy making processes in ?ve developing ASEAN countries. As found to be the case in the more advanced economies, a simple PRF is also found to perform well in explaining the setting of monetary policy in these countries. Moreover, the ?ndings uncover the main drivers behind the conduct of monetary policy and provide a relatively consistent explanation about the monetary policy episodes in the sample economies. |
| Keywords: | Monetary policy, policy reaction function, ASEAN |
| JEL: | E50 E52 E43 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:unp:wpaper:200707&r=mon |
| By: | Michael Woodford |
| Abstract: | It has recently become popular to argue that globalization has had or will soon have dramatic consequences for the nature of the monetary transmission mechanism, and it is sometimes suggested that this could threaten the ability of national central banks to control inflation within their borders, at least in the absence of coordination of policy with other central banks. In this paper, I consider three possible mechanisms through which it might be feared that globalization can undermine the ability of monetary policy to control inflation: by making liquidity premia a function of "global liquidity" rather than the supply of liquidity by a national central bank alone; by making real interest rates dependent on the global balance between saving and investment rather than the balance in one country alone; or by making inflationary pressure a function of "global slack" rather than a domestic output gap alone. These three fears relate to potential changes in the form of the three structural equations of a basic model of the monetary transmission mechanism: the LM equation, the IS equation, and the AS equation respectively. I review the consequences of global integration of financial markets, final goods markets, and factor markets for the form of each of these parts of the monetary transmission mechanism, and find that globalization, even of a much more thorough sort than has yet occurred, is unlikely to weaken the ability of national central banks to control the dynamics of inflation. |
| JEL: | E31 E52 F41 F42 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13329&r=mon |
| By: | Andrew Atkeson; V. V. Chari; Patrick J. Kehoe |
| Abstract: | The optimal choice of a monetary policy instrument depends on how tight and transparent the available instruments are and on whether policymakers can commit to future policies. Tightness is always desirable; transparency is only if policymakers cannot commit. Interest rates, which can be made endogenously tight, have a natural advantage over money growth and exchange rates, which cannot. As prices, interest and exchange rates are more transparent than money growth. All else equal, the best instrument is interest rates and the next-best, exchange rates. These findings are consistent with the observed instrument choices of developed and less-developed economies. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:394&r=mon |
| By: | Sauer, Stephan |
| Abstract: | This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods. The central bank faces a trade-off between limiting the negative output effects of dramatic asset price declines and more inflation. Furthermore, the anticipation of central bank intervention causes a moral hazard effect with investors. This gives rise to the possibility of an optimal monetary policy under commitment. |
| Keywords: | Liquidity shocks; Financial crises; Liquidity provision principle; Greenspan put; Optimal monetary policy intervention |
| JEL: | E58 E44 G18 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2012&r=mon |
| By: | Hans Genberg (Hong Kong Monetary Authority, Hong Kong Institute for Monetary Research) |
| Abstract: | Financial integration in East Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region. Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed. These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union. This paper argues that this is a dangerous path in the context of highly integrated financial markets. An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework. When this coordination process has progressed to the point where interest rate developments are similar across the region, and if in the meantime the required institutional infrastructure has been build, the next step towards monetary unification can be taken among those central banks that so desire. The claim is that this transition path is likely to be robust and will limit the risk of currency crises. |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:152006&r=mon |
| By: | Michael Bordo; Ali Dib; Lawrence Schembri |
| Abstract: | This paper revisits Canada's pioneering experience with floating exchange rate over the period 1950–1962. It examines whether the floating rate was the best option for Canada in the 1950s by developing and estimating a New Keynesian small open economy model of the Canadian economy. The model is then used to conduct a counterfactual analysis of the impact of different monetary policies and exchange rate regimes. The main finding indicates that the flexible exchange rate helped reduce the volatility of key macroeconomic variables. The Canadian monetary authorities, however, clearly did not understand all of the implications of conducting monetary policy under a flexible exchange rate and a high degree of capital mobility. The paper confirms that monetary policy was more volatile in the post-1957 period and Canada's macroeconomic performance suffered as a result. |
| Keywords: | Exchange rates; Economic models |
| JEL: | E32 E37 F31 F32 N1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:07-45&r=mon |
| By: | Luca Benati (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Giovanni Vitale (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | We jointly estimate the natural rate of interest, the natural rate of unemployment, expected inflation, and potential output for the Euro area, the United States, Sweden, Australia, and the United Kingdom. Particular attention is paid to time-variation in (i) the data-generation process for inflation, which we capture via a time-varying parameters specification for the Phillips curve portion of the model; and (ii) the volatilities of disturbances to inflation and cyclical (log) output, which we capture via break tests. Time-variation in the natural rate of interest is estimated to have been comparatively large for the United States, and especially for the Euro area, and smaller for Australia and the United Kingdom. Overall, natural rate estimates are characterised by a significant extent of uncertainty. JEL Classification: E31, E32, E52. |
| Keywords: | monetary policy, natural rate of interest, time-varying parameters; Monte Carlo integration, median-unbiased estimation, endogenous break tests, bootstrapping. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070797&r=mon |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Stéphane Adjemian (CEPREMAP & GAINS, Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.); Stéphane Moyen (Centre d‘Études des Politiques Économiques (EPEE), Université d‘Évry Val d‘Essonne, 4, bld Francois Mitterand, 91025 Évry Cedex, France.) |
| Abstract: | The objective of this paper is to examine the main features of optimal monetary policy within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a medium scale closed economy DSGE for the euro area. Then, we study the properties of the Ramsey allocation through impulse response, variance decomposition and counterfactual analysis. In particular, we show that, controlling for the zero lower bound constraint, does not seem to limit the stabilization properties of optimal monetary policy. We also present simple monetary policy rules which can "approximate" and implement the Ramsey allocation reasonably well. Such optimal simple operational rules seem to react specifically to nominal wage inflation. Overall, the Ramsey policy together with its simple rule approximations seem to deliver consistent policy messages and may constitute some useful normative benchmarks within medium to large scale estimated DSGE framework. However, this normative analysis based on estimated models reinforces the need to improve the economic micro-foundation and the econometric identification of the structural disturbances. JEL Classification: E4, E5. |
| Keywords: | DSGE models, Monetary policy, Bayesian estimation, Welfare calculations. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070803&r=mon |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change and where private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but are uncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation: rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-33&r=mon |
| By: | Timothy Kam; Kirdan Lees; Philip Liu |
| Abstract: | We estimate 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 stabilizing the real exchange rate. All three central banks share a concern 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: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2006-473&r=mon |
| By: | Nuno Cassola (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Christian Ewerhart (Institute for Empirical Research in Economics (IEW), University of Zurich, Winterthurerstrasse 30, CH-8006, Zurich, Switzerland.); Claudio Morana (Dipartimento di Scienze Economiche e Metodi Quantitativi, Via Perrone 18, 28100, Novara, Italy.) |
| Abstract: | This paper contributes to the existing literature on central bank repo auctions. It is based on a structural econometric approach, whereby the primitives of bidding behavior (individual bid schedules and bid-shading components) are directly estimated. With the estimated parameters we calibrate a theoretical model in order to illustrate some comparative static results. Overall the results suggest that strategic and optimal behavior is prevalent in ECB tenders. We find evidence of a statistically significant bid-shading component, even though the number of bidders is very large. Bid-shading increases with liquidity uncertainty and decreases with the number of participants. JEL Classification: G21, G12, D44, E43, E50. |
| Keywords: | Repo auctions, monetary policy implementation, primary money market market, multi unit auctions, discriminatory auctions, collateral, central bank, nonparametric estimation. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070793&r=mon |
| By: | Ricardo Llaudes (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | This paper studies the effects and the transmission mechanism of unexpected monetary policy shocks in an open economy setting within the context of a VAR framework. It considers an economy with two sectors, a tradable sector and a non-tradable sector. For a given country, economic sectors are defined according to the proportion of output that is exported to other countries. This paper departs from the standard literature in that it tries to isolate the differential effects that monetary policy shocks may have on these two distinct sectors of the economy. The results show that the behavior of these two sectors varies whithin a country, with the tradable sector showing a higher degree of responsiveness to policy shocks than the non-tradable. This result is robust across the different countries in the sample and for a synthetic aggregate. The evidence presented gives an indication that industrial structure may be an important component for the analysis of monetary policy. JEL Classification: C32, E52, F31, F42. |
| Keywords: | Monetary shock, small open economy, structural VAR. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070799&r=mon |
| By: | Hakan Berument; Ebru Yuksel |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0702&r=mon |
| By: | Santiago L.E. Acosta Ormaechea |
| Abstract: | We develop a two-sectors small open economy model with imperfect competition, one-period nominal price rigidities and a financial accelerator mechanism. The latter assumes an asymmetric information problem between lenders and capital good producers (entrepreneurs). Studying the zero-inflation steady state, it is shown that the model with the financial accelerator mechanism nests a fairly standard RBC model; case in which entrepreneurs “disappear" as a differentiated sector from households. It is also explained that credit market imperfections essentially reduce the aggregate supply of capital relative to the RBC case. Turning to the dynamics, we study the effects of an unanticipated and permanent increase in the level of the money supply. In this context the exchange rate jumps immediately to its new steady state level without showing any overshooting process as in Dornbusch (1976). Analysing the case without credit market imperfections but with pre-set prices, it is demonstrated that money is not neutral in the long-run, that capital adds persistence to the initial shock, and that some traditional results of the Mundell-Fleming model still hold. |
| Keywords: | Credit Market Imperfections, Financial Accelerator, Currency Mismatches, Currency Depreciation. |
| JEL: | F3 F4 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c012_035&r=mon |
| By: | Heinz Handler (WIFO) |
| Abstract: | The focus of this paper is on the similarities and differences of German and Austrian monetary and exchange rate policies, which are analysed against the background of the economic forces which eventually resulted in the creation of the European Monetary Union. The frontline of the struggle for achieving monetary integration in Europe ran between Germany and France, which enhances the role of the DM as an anchor currency not just for Austria, but for Europe at large. In contrast to the very active role of Germany in the monetary integration process, Austria remained virtually passive. However, utilising her experience with a hard currency policy, Austria made an essential contribution to the stability of the system as a whole. Given a history of just a few years, the stability of, and the future risks for, the European monetary system are elaborated. |
| Keywords: | History of European monetary integration, role of German and Austrian hard currency policies, future of EMU Europäische Währungsunion Hartwährungspolitik Deutschland Österreich |
| Date: | 2007–07–11 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2007:i:298&r=mon |
| By: | Stan du Plessis (Department of Economics, Stellenbosch University); Ben Smit (Bureau of Economic Research, Stellenbosch University); Federico Sturzenegger (Kennedy School of Government, Harvard University) |
| Abstract: | This paper uses an SVAR approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over ‘neutral’ base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro-cyclicality, especially in the more recent period, though the policy simulations suggest that the pro-cyclicality of fiscal policy has had little destabilising impact on real output. |
| Keywords: | Stabilisation policy, Monetary policy, Inflation targeting, Fiscal policy, Pro-cyclical policy |
| JEL: | E32 E63 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers43&r=mon |
| By: | Taner Yigit; Banu Demir |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0705&r=mon |
| By: | Yifan Hu; Timothy Kam |
| Abstract: | We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds create an endogenous interest-rate spread; affect equilibrium allocations and inflation by altering the Ramsey planner’s sequence of implementability and sticky-price constraints. The trade-off confronting a planner in a sticky-price world, shown in recent literature, between using inflation surprise and labor-income tax is modified by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices and also creates less distortionary and less volatile income taxes by taxing the liquidity service of bonds in order to replicate ex post real state-contingent debt. |
| JEL: | E42 E52 E63 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2006-472&r=mon |
| By: | Michael B. Devereux (University of British Columbia); Hans Genberg (Hong Kong Monetary Authority, Hong Kong Institute for Monetary Research) |
| Abstract: | A central aspect of the recent debate on global imbalances and the US current account deficit is the role of the exchange rate peg being followed by China and other Asian economies. While one view has stressed the need for Asian currency appreciation, another focuses on the importance of fiscal adjustment and more generally adjustment in relative savings rates in the US and Asian economies. This paper develops a simple two-region open economy macroeconomic model to analyze the alternative impacts of currency appreciation and fiscal adjustment on the current account. We stress a number of structural features of emerging Asian economies that may make currency appreciation an ineffective means of current account adjustment relative to fiscal policy changes. In addition, we note that there may be a welfare conflict between regions on the best way to achieve adjustment. |
| Keywords: | Current Account, Currency Appreciation |
| JEL: | E52 E58 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:172006&r=mon |
| By: | Hakan Berument; Yilmaz Akdi; Seyit Mumin Cilasun; Hasan Olgun |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0701&r=mon |
| By: | Taner Yigit |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0706&r=mon |
| By: | Sauer, Stephan |
| Abstract: | Liquidity problems lie at the heart of crises on financial markets as demonstrated in this paper by detailed descriptions of the stock market crash in 1987, the LTCM-crisis in 1998 and the financial market consequences of 11 September 2001. The events also demonstrate that modern central banks, in particular the U.S. Federal Reserve under Alan Greenspan, provided emergency liquidity to limit the negative effects of such crises. However, the anecdotal and empirical evidence from the three crises shows that such emergency liquidity assistance implies risks to goods price stability if it is not focused on the interbank market and quickly sterilised. |
| Keywords: | Liquidity Crises; Financial Stability; Monetary Policy |
| JEL: | E58 E44 G10 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2011&r=mon |
| By: | Charles Engel; Nelson C. Mark; Kenneth D. West |
| Abstract: | Standard models of exchange rates, based on macroeconomic variables such as prices, interest rates, output, etc., are thought by many researchers to have failed empirically. We present evidence to the contrary. First, we emphasize the point that "beating a random walk" in forecasting is too strong a criterion for accepting an exchange rate model. Typically models should have low forecasting power of this type. We then propose a number of alternative ways to evaluate models. We examine in-sample fit, but emphasize the importance of the monetary policy rule, and its effects on expectations, in determining exchange rates. Next we present evidence that exchange rates incorporate news about future macroeconomic fundamentals, as the models imply. We demonstrate that the models might well be able to account for observed exchange-rate volatility. We discuss studies that examine the response of exchange rates to announcements of economic data. Then we present estimates of exchange-rate models in which expected present values of fundamentals are calculated from survey forecasts. Finally, we show that out-of-sample forecasting power of models can be increased by focusing on panel estimation and long-horizon forecasts. |
| JEL: | F31 F41 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13318&r=mon |
| By: | Glenn D. Rudebusch; John C. Williams |
| Abstract: | We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy. |
| Keywords: | Economic forecasting ; Recessions |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-16&r=mon |
| By: | Marco J. Lombardi (University of Pisa, Lungarno Pacinotti 43, 56126 Pisa, Italy.); Silvia Sgherri (De Nederlandsche Bank and International Monetary Fund, Postbus 98, 1000 AB Amsterdam, Netherlands.) |
| Abstract: | Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural neo-Keynesian model, this paper attempts a real-time evaluation of the US monetary policy stance while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using a Sequential Monte Carlo algorithm providing inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Tracking down the evolution of underlying stochastic processes in real time is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. JEL Classification: E43, C11, C15. |
| Keywords: | Natural Interest Rate; DSGE Models; Bayesian Analysis; Particle Filters. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070794&r=mon |
| By: | Peter McAdam (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Alpo Willman (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.) |
| Abstract: | We implement a tractable state-dependent Calvo price-setting signal dependent on inflation and aggregate competitiveness. This allows us to derive a New Keynesian Phillips Curve (NKPC) expressed in terms of the actual levels of variables - rather than in-deviation from “steady state” form - and thus a specification which is not regime-dependent. A consequence of our approach is that ex-ante all firms face the same optimization problem. This state-dependent NKPC nests the conventional hybrid NKPC form as a special case. Finally, we demonstrate the usefulness of our approach by, first, analyzing the persistence and variability of inflation shocks under different inflation regimes and then comparing our state-dependent and timedependent NKPCs on US data. JEL Classification: E31, E32. |
| Keywords: | Calvo Price Staggering, New Keynesian Phillips Curves, State-Dependency, Firm-Level Optimization, Regime Dependency. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070806&r=mon |
| By: | Tony Makin |
| Abstract: | This paper develops a new international monetary framework for analysing the domestic and international repercussions of China’s exchange rate policy in the context of its rapid development. This straightforward framework reveals that misalignment of the yuan against major currencies artificially assists China’s output growth, contributes to global imbalances and limits household consumption, slowing the rise in living standards. Meanwhile, China’s Western trading partners, most notably the United States and the European Union, simultaneously experience external deficits, lower output and saving due to exchange rate misalignment. |
| Keywords: | output, expenditure, economic development, exchange rate misalignment, trading partners, global imbalances |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:deg:conpap:c012_012&r=mon |
| By: | Yin-wong Cheung (University of California, Santa Cruz); Menzie D. Chinn (University of Wisconsin, Madison and NBER); Eiji Fujii (University of Tsukuba) |
| Abstract: | The debate on renminbi (RMB) revaluation has not subsided, despite the policy change announced by the Chinese authorities in July 2005. In this chapter, we show that the evidence of RMB undervaluation may not be as strong as it appears. Specifically, depending on the method used, the evidence ranges from slight overvaluation to undervaluation. Even in the case of undervaluation, the results are not significant in the statistical sense. We also note that China is playing an important economic role in Asia and has established a complex production and trade network with its neighboring economies, which complicates the calculation of the equilibrium exchange rate. Thus, a change in Chinese exchange rate policy in response to demands from foreign countries and short-run considerations may have undesirable effects on the economies of China and the Asian region. |
| Keywords: | exchange rate policy, regional integration, market integration, purchasing power parity, Balassa-Samuelson, currency misalignment. |
| JEL: | F31 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:182006&r=mon |
| By: | Marco Lombardi; Silvia Sgherri |
| Abstract: | Following the 2000 stockmarket crash, have US interest rates been held "too low" in relation to their natural level? Most likely, yes. Using a structural model, this paper attempts a real-time assessment of the US monetary policy while ensuring consistency between the specification of price adjustments and the evolution of the economy under flexible prices. To do this, the model's likelihood function is evaluated using particle filtering, allowing for sequential inference about the time-varying distribution of structural parameters and unobservable, nonstationary state variables. Accounting for real-time expectations and time variation in underlying equilibrium levels is found crucial (i) to explain postwar Fed's policy and (ii) to replicate salient features of the data. |
| Keywords: | Natural Interest Rate; DSGE Models; Bayesian Analysis; Particle Filters |
| JEL: | C33 G3 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:142&r=mon |
| By: | Stephan Schulmeister (WIFO) |
| Abstract: | The study analyses the interaction between the trading behaviour of 1,024 moving average and momentum models and the fluctuations of the yen/dollar exchange rate. I show first that these models would have exploited exchange rate trends quite profitably between 1976 and 1999. I then show that the aggregate transactions and positions of technical models exert an excess demand pressure on currency markets since they are mostly at the same side of the market. When technical models produce trading signals they are either buying or selling, when they maintain open positions they are either long or short. A strong interaction prevails between exchange rate movements and the transactions triggered by technical models. An initial rise of the exchange rate due to news, e.g., is systematically lengthened through a sequence of technical buy signals. |
| Keywords: | Exchange rate, Technical Trading, Speculation, Heterogeneous Agents |
| Date: | 2007–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2007:i:294&r=mon |
| By: | Philippe BACCHETTA; Eric VAN WINCOOP |
| Abstract: | Two well-known, but seemingly contradictory, features of exchange rates are that they are close to a random walk while at the same time exchange rate changes are predictable by interest rate differentials. In this paper we investigate whether these two features of the data may in fact be related. In particular, we ask whether the predictability of exchange rates by interest differentials naturally results when participants in the FX market adopt random walk expectations. We find that random walk expectations can explain the forward premium puzzle, but only if FX portfolio positions are revised infrequently. In contrast, with frequent portfolio adjustment and random walk expectations, we find that high interest rate currencies depreciate much more than what UIP would predict. |
| Keywords: | excess returns; incomplete information; predictability |
| JEL: | E4 F3 G1 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:07.01&r=mon |
| By: | Luca Benati (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Charles Goodhart (London School of Economics and Political Science, Room R414, Houghton Street, London WC2A 2AE, United Kingdom.) |
| Abstract: | We use Bayesian time-varying parameters VARs with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the United States and the United Kingdom, since the Gold Standard era, and in the Eurozone, Canada, and Australia over the post-WWII period. Overall, our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth, the monetary policy-based one, and Harvey’s (1988) ‘real yield curve’ one. Instead, we offer a new conjecture. Journal of Economic Dynamics and Control, forthcoming. JEL Classification: E42, E43, E47. |
| Keywords: | Bayesian VARs, stochastic volatility, time-varying parameters, medianunbiased estimation, Monte Carlo integration. |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070802&r=mon |
| By: | Rajagopal (Tecnológico de Monterrey, Campus Ciudad de México) |
| Abstract: | In the pre-reforms period the trade policy in Latin America had involved very high levels of protection and government intervention. The recent trade liberalization policies of the Latin American countries have sought to reverse the protectionist policies and open the scope for foreign direct investment and joint ventures in the public and private sector industries. This paper discusses the impact of trade openness policy on tariff structure, export competitiveness, inflation and economic growth of Latin American countries. The relationship between the trade openness and general price level as an indicator of inflation and robustness of this relationship has been explored in the study. |
| Keywords: | Trade openness, export competitiveness, institutional reforms, economic growth, trade blocs, trade agreements, neo-regionalism, inflationary trend, foreign investment, and economic welfare |
| JEL: | C21 C33 C51 E31 F13 F F43 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ega:wpaper:200705&r=mon |