nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒11‒10
thirty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Policy Words and Policy Deeds: The ECB and the Euro By Costas Milas; Christopher Martin
  2. Does high M4 money growth trigger large increases in UK inflation? Evidence from a regime-switching model By Costas Milas
  3. Optimal monetary policy with a regime-switching exchange rate in a forward-looking model By Fernando Alexandre; Pedro Bação; John Driffill
  4. Alice Through the Looking Glass: Strategic Monetary and Fiscal Policy Interaction in a Liquidity Trap By Sanjit Dhami; Ali al-Nowaihi
  5. Prudent Monetary Policy and Cautious Prediction of the Output Gap By Frederick van der Ploeg
  6. The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  7. An Endogenous Taylor Condition in an Endogenous Growth Monetary Policy Model By Le, Vo Phuong Mai; Gillman, Max; Minford, Patrick
  8. Optimal Monetary Policy and Technological Shocks in the Post-War US Business Cycle By FÈVE, Patrick; MATHERON, Julien; SAHUC, Jean-Guillaume
  9. The Implications of Information Lags for the Stabilization Bias and Optimal Delegation. By Jean-Paul Lam; Florian Pelgrin
  10. How committees reduce the volatility of policy rates By Etienne Farvaque; Norimichi Matsueda; Pierre-Guillaume Méon
  11. How the World Achieved Consensus on Monetary Policy By Marvin Goodfriend
  12. The Complex Response of Monetary Policy to the Exchange Rate By Costas Milas; Christopher Martin; Ram Sharan Kharel
  13. Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule By Pierre L. Siklos; Martin T. Bohl
  14. Optimal monetary policy in economies with dual labor markets By Mattesini Fabrizio; Rossi Lorenza
  15. Welfare-maximizing monetary policy under parameter uncertainty By Rochelle M. Edge; Thomas Laubach; John C. Williams
  16. Do Markets Care About Central Bank Governor Changes? Evidence from Emerging Markets By Christoph Moser; Axel Dreher
  17. A Monetary Approach to Exchange Rate Dynamics in Low-Income Countries: Evidence from Kenya By Nandwa, Boaz; Mohan, Ramesh
  18. Productivity shocks and optimal monetary policy in a unionized labor market economy By Mattesini Fabrizio; Rossi Lorenza
  19. Heterogeneous consumers, demand regimes, monetary policy and equilibrium determinacy By Di Bartolomeo Giovanni; Rossi Lorenza
  20. Identifying the Shocks Driving Inflation in China By Pierre L. Siklos; Yang Zhang
  21. Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models By Robert J. Shiller
  22. The Effects of Monetary Policy in the Czech Republic: An Empirical Study By Magdalena Morgese Borys; Roman Horvath
  23. How Conservative Does the Central Banker Have to Be? On the Treatment of Expectations under Discretionary Policymaking By Alfred V. Guender
  24. Optimal monetary policy in a monetary union with non-atomistic wage setters By Cuciniello Vincenzo
  25. A Post-Keynesian macroeconomic policy mix as an alternative to the New Consensus approach By Eckhard Hein; Engelbert Stockhammer
  26. Professor Becker on Free Banking: A Comment By van den Hauwe, Ludwig
  27. Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery By Dimitrios D. Thomakos; Constantina Kottaridi; Diego MŽndez-Carbajo
  28. Reserve requirement systems in OECD countries By Yueh-Yun C. O’Brien
  29. Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts By James D. Hamilton
  30. Inflation convergence in central and eastern European economies By Alina Spiru
  31. What Are In‡ation Expectations Rational? By David Andolfatto; Scott Hendry; Kevin Moran
  32. Constant Interest Rate Projections without the Curse of Indeterminacy By Jordi Galí

  1. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK)
    Abstract: This paper argues that existing empirical models of interest rate rules are too simplistic. The hybrid Phillips curve implies that policymakers should respond to both current and expected future inflation rates, in contrast to existing models. We provide evidence that UK policymakers do this.
    Keywords: optimal monetary policy; inflation persistence; Phillips curve
    JEL: C51 C52 E52 E58
    Date: 2007–07
  2. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Rimini, Italy.)
    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: Monetary Policy Committee (MPC), M4, inflation targeting, regimeswitching model.
    JEL: C51 C52 E52 E58
    Date: 2007–07
  3. By: Fernando Alexandre (Universidade do Minho - NIPE); Pedro Bação (GEMF and Universidade de Coimbra); John Driffill (Birkbeck College, University of London)
    Abstract: We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.
    Keywords: : Exchange Rates, Monetary Policy, Markov Switching.
    JEL: E52 E58 F41
    Date: 2007
  4. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The recent experience with low inflation has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high inflationary expectations. Using the Dixit-Lambertini (2003) framework of strategic policy interaction, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as leader, is given optimal output and inflation targets. This keeps inflationary expectations sufficiently high and achieves the optimal rational expectations pre-commitment solution. Simulations show that this arrangement is (1) optimal even when the Treasury has no inflation target but follow's the optimal output target and (2) 'near optimal' even when the Treasury follows its own agenda through a suboptimal output target but is willing to follow an optimal inflation target. Finally, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one.
    Keywords: liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules
    JEL: E63 E52 E58 E61
    Date: 2007–10
  5. By: Frederick van der Ploeg
    Abstract: Using the results of risk-adjusted linear-quadratic-Gaussian optimal control with perfect and imperfect observation of the economy, we obtain prudent Taylor rules for monetary policies and also allow for imperfect information and cautious Kalman filters. A prudent central bank adjusts the nominal interest rate more aggressively to changes in the inflation gap, especially if the volatility of cost-push shocks is large. If the interest rate impacts the output gap after a lag, the interest also responds to the output gap, especially with strong persistence in aggregate demand. Prudence pushes up this reaction coefficient as well. If data are poor and appear with a lag, a prudent central bank responds less strongly to new measurements of the output gap. However, prudence attenuates this policy reaction and biases the prediction of the output gap upwards, particularly if output targeting is important. Finally, prudence requires an extra upward (downward) bias in its estimate of the output gap before it feeds into the policy rule if inflation is above (below) target. This reinforces nominal interest rate reactions. A general lesson is that prudent predictions are neither efficient nor unbiased.
    Keywords: prudence, optimal monetary policy, Taylor rules, measurement errors, prediction
    JEL: C6 D8 E4 E5 E6
    Date: 2007
  6. By: Chengsi Zhang (School of Finance, Renmin University of China); Denise R. Osborn (Economics, School of Social Sciences, University of Manchester); Dong Heon Kim (Department of Economics, Korea University)
    Abstract: The New Keynesian Phillips Curve model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the US between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with US monetary policy in that period.
    Keywords: New Keynesian Phillips Curve, inflation survey forecasts, sticky prices, structural breaks, monetary policy
    JEL: E31 E37 E52 E58
    Date: 2007
  7. By: Le, Vo Phuong Mai (Cardiff Business School); Gillman, Max (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: The paper derives a Taylor condition as part of the agent's equilibrium behavior in an endogenous growth monetary economy. It shows the assumptions necessary to make it almost identical to the original Taylor rule, and that it can interchangably take a money supply growth rate form. From the money supply form, simple policy experiments are conducted. A full central bank policy model is derived that includes the Taylor condition along with equations comparable to the standard aggregate-demand/aggregate-supply model.
    Keywords: Taylor Rule ;endogenous growth; money supply; policy model
    JEL: E51 E52 O0
    Date: 2007–11
  8. By: FÈVE, Patrick; MATHERON, Julien; SAHUC, Jean-Guillaume
    JEL: E31 E32 E52
    Date: 2007–10
  9. By: Jean-Paul Lam (University of Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Florian Pelgrin (University of Lausanne, Switzerland)
    Abstract: Many papers for example Jensen (2002) and Walsh (2003) have shown that in a New Keynesian model with a significant degree of forward-looking behaviour, policy regimes that target either the change in the output-gap (speed limit targeting) or nominal income growth can considerably reduce the size of the stabilization biasÐthe inefficiency that arises when a central bank conducts policy under discretion as opposed to commitment. Inflation targeting can also reduce the size of the stabilization bias but unless inflation expectations in the model are predominantly backward-looking, this targeting regime does not perform as well as speed limit or nominal income growth targeting. Jensen (2002) and Walsh (2003) obtain their results using a New Keynesian model where changes in the policy rate affect macroeconomic variables immediately. In this paper, we compare the performance of several targeting regimes by using a New Keynesian model that includes a delayed response of monetary policy as a result of information lags. We find two results that are substantially different from Jensen (2002) and Walsh (2003). First the size of the stabilization bias is considerably reduced. Second, a regime that targets inflation outperforms a regime that targets either the change in the output-gap or the growth in nominal income even when inflation expectations are very forward-looking.
    Keywords: Stabilization bias, Inflation Targeting, Discretion, Commitment, Information Lag
    JEL: E52 E58 E62
    Date: 2007–07
  10. By: Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, France.); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan.); Pierre-Guillaume Méon (DULBEA, Université libre de Bruxelles, Brussels,)
    Abstract: This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling e¤ect. However, members of a monetary union are better off under symmetric rules (voting, consensus, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union.
    Keywords: Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union
    JEL: D70 E43 E58 F33
    Date: 2007–07
  11. By: Marvin Goodfriend
    Abstract: This article tells how the world achieved a working consensus on the core principles of monetary policy. The story begins with the muddled state of affairs in the late 1970s. It then asks: How did Federal Reserve policy produce an understanding of the practical principles of monetary policy? How did formal institutional support abroad for targeting low inflation follow from an international acceptance of these ideas? And how did a consensus theoretical model develop in academia? The article tells how the modern theoretical consensus known as the New Neoclassical Synthesis (aka, the New Keynesian model) reinforces key advances: the priority for price stability, the targeting of core rather than headline inflation, the importance of credibility for low inflation, and preemptive interest rate policy supported by transparent objectives and procedures. The conclusion identifies important practical issues that remain to be explored in theory.
    JEL: E3 E4 E5
    Date: 2007–11
  12. By: Costas Milas (Keele University, UK and The Rimini Centre for Economics Analysis, Italy.); Christopher Martin (Brunel University, UK); Ram Sharan Kharel (Brunel University, UK)
    Abstract: We estimate a flexible non-linear monetary policy rule for the UK to examine the response of policymakers to the real exchange rate. We have three main findings. First, policymakers respond to real exchange rate misalignment rather than to the real exchange rate itself. Second, policymakers ignore small deviations of the exchange rate; they only respond to real exchange under-valuations of more than 4% and over-valuations of more than 5%. Third, the response of policymakers to inflation is smaller when the exchange rate is over-valued and larger when it is under-valued. None of these responses is allowed for in the widely-used Taylor rule, suggesting that monetary policy is better analysed using a more sophisticated model, such as the one suggested in this paper.
    Keywords: monetary policy, asset prices, nonlinearity
    JEL: C51 C52 E52 E58
    Date: 2007–07
  13. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Martin T. Bohl (WestfŠlische Wilhelms-University MŸnster, Germany)
    Abstract: This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.
    Keywords: Monetary policy reaction functions, Asset prices, Instruments, European Central Bank
    JEL: E52 E58 C52
    Date: 2007–07
  14. By: Mattesini Fabrizio; Rossi Lorenza
    Date: 2007–04
  15. By: Rochelle M. Edge; Thomas Laubach; John C. Williams
    Abstract: This paper examines welfare-maximizing monetary policy in an estimated micro-founded general equilibrium model of the U.S. economy where the policymaker faces uncertainty about model parameters. Uncertainty about parameters describing preferences and technology implies not only uncertainty about the dynamics of the economy. It also implies uncertainty about the model's utility-based welfare criterion and about the economy's natural rate measures of interest and output. We analyze the characteristics and performance of alternative monetary policy rules given the estimated uncertainty regarding parameter estimates. We find that the natural rates of interest and output are imprecisely estimated. We then show that, relative to the case of known parameters, optimal policy under parameter uncertainty responds less to natural-rate terms and more to other variables, such as price and wage inflation and measures of tightness or slack that do not depend on natural rates.
    Date: 2007
  16. By: Christoph Moser (University of Mainz, Department of Economics,); Axel Dreher (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: Central bank governor changes in emerging markets may convey important signals about future monetary policy. Based on a new daily data set, this paper examines the reactions of foreign exchange markets, domestic stock market indices and sovereign bond spreads to central bank governor changes. The data cover 20 emerging markets over the period 1992-2006. We find that the replacement of a central bank governor negatively affects financial markets on the announcement day. This negative effect is mainly driven by irregular changes, i.e., changes occurring before the scheduled end of tenure, sending negative signals about perceived central bank independence. Personal characteristics of the central banker, to the contrary, are less important for market reactions. We find no evidence that changes in the central banker’s conservatism affect the reactions of the markets. Finally, market reactions are similar in countries with high and low degrees of central bank independence.
    Keywords: central bank governor turnover, monetary policy, emerging markets, risk premium
    JEL: E58 E42 F30 G14
    Date: 2007–10
  17. By: Nandwa, Boaz; Mohan, Ramesh
    Abstract: The flexible price monetary model assumes that both the purchasing power parity (PPP) and uncovered interest parity (UIP) hold continuously. In addition, the model posits that money market equilibrium exists, which helps to determine the exchange rate. This paper explores exchange rate determination in low-income economies by applying a monetary model to Kenya to examine the exchange rate dynamics in a post-float exchange rate regime. We apply a multivariate cointegration and error correction model (ECM) to investigate whether the long-run exchange rate equilibrium and the rate of adjustment to the long-run equilibrium hold, respectively. Finally, we evaluate the relative performance of ECM versus a random walk framework in the out-of-sample forecasting. We find that the random walk performs better than the restricted model.
    Keywords: Exchange rate; volatility; regime changes; Kenyan Shilling
    JEL: C32 F31 E58 C53
    Date: 2007–11–02
  18. By: Mattesini Fabrizio; Rossi Lorenza
    Abstract: In this paper we analyze a general equilibrium dynamic stochastic New Keynesian model characterized by labor indivisibilities, unemployment and a unionized labor market. The presence of monopoly unions introduces real wage rigidities in the model. We show that as in Blanchard Galì (2005) the so called "divine coincidence" does not hold and a trade-off between inflation stabilization and the output stabilization arises. In particular, a productivity shock has a negative effect on inflation, while a reservation-wage shock has an effect of the same size but with the opposite sign. We derive a welfare-based objective function for the Central Bank as a second order Taylor approximation of the expected utility of the economy's representative household, and we analyze optimal monetary policy under discretion and under commitment. Under discretion a negative productivity shock and a positive exogenous wage shock will require an increase in the nominal interest rate. An operational instrument rule, in this case, will satisfy the Taylor principle, but will also require that the nominal interest rate does not necessarily respond one to one to an increase in the efficient rate of interest. The model is calibrated under different monetary policy rules and under the optimal rule. We show that the correlation between productivity shocks and employment is strongly influenced by the monetary policy regime. The results of the model are consistent with a well known empirical regularity in macroeconomics, i.e. that employment volatility is relatively larger than real wage volatility.
    JEL: E24 E32 E50 J23 J51
    Date: 2007–09
  19. By: Di Bartolomeo Giovanni; Rossi Lorenza
    Abstract: This paper investigates the effects of monetary policy in presence of heterogeneous consumers. We study the effectiveness (quantitative effects) of monetary policy and equilibrium determinacy properties of a New Keynesian DSGE model where a fraction of households cannot smooth consumption. We show that two-demand regimes can emerge (according to the “slope” of IS curve) and that the main unconventional results, stressed by recent literature, only hold in the unconventional case of an IS curve positively sloped.
    Keywords: Heterogeneous consumers, liquidity constraints, determinacy, demand regimes
    JEL: E61 E63
    Date: 2007–09
  20. By: Pierre L. Siklos (Wilfrid Laurier University and Viessmann Research Centre Waterloo, Canada and The Rimini Centre for Economics Analysis, Italy.); Yang Zhang (University of Ottawa, Canada)
    Abstract: The time profile of inflation in China resembles the one experienced in major industrial countries. Given the uncertainty surrounding the sources of economic shocks, this paper compares results from three sets of alternative identification conditions, namely the standard Blanchard-Quah approach, the approach of Cover, Enders, and Hueng (2006), as well as the model considered by Bordo, Landon-Lane and Redish (2004). Our principal finding is that inflation in China has been primarily driven by monetary factors. While aggregate supply factors may have pushed inflation to cross the threshold leading to deflation, monetary policy is primarily responsible for Chinese inflationary outcomes.
    JEL: E31 E32 C32 C52
    Date: 2007–07
  21. By: Robert J. Shiller
    Abstract: There has been a widespread perception in the past few years that long-term asset prices are generally high because monetary authorities have effectively kept long-term interest rates, which the market uses to discount cash flows, low. This perception is not accurate. Long-term interest rates have not been especially low. What has changed to produce high asset prices appears instead to be changes in popular economic models that people actually rely on when valuing assets. The public has mostly forgotten the concept of "real interest rate." Money illusion appears to be an important factor to consider.
    JEL: G12
    Date: 2007–10
  22. By: Magdalena Morgese Borys; Roman Horvath
    Abstract: In this paper, we examine the effects of Czech monetary policy on the economy within VAR and the structural VAR framework. Subject to various sensitivity tests, we find that contractionary monetary policy shock has a negative effect on the degree of economic activity and price level, both with a peak response after one year or so. Regarding the prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price persistence. There is a rationale in using the real-time output gap instead of current GDP growth as using the former results in much more precise estimates. There is no evidence for price puzzle within the system. The results indicate a rather persistent appreciation of domestic currency after monetary tightening with a gradual depreciation afterwards.
    Keywords: Monetary policy transmission, VAR, real-time data, sectoral prices.
    JEL: E52 E58 E31
    Date: 2007–09
  23. By: Alfred V. Guender (University of Canterbury)
    Abstract: This paper explores an issue that arises in the delegation process. The paper shows that a myopic central banker, one who treats expectations as constant in setting discretionary policy, can replicate the behavior of output and inflation under policy from a timeless perspective. For that to happen, society must delegate a price level target or a speed limit policy to a central banker who is more weight-conservative than society.
    Keywords: New Keynesian Model; Price Level Targeting; Speed Limit Policy; Conservative Central Banker
    JEL: E3 E5
    Date: 2007–10–01
  24. By: Cuciniello Vincenzo
    Abstract: In a micro-founded framework in line with the new open economy macroeconomics, the paper shows that a centralized wage setting (CWS) and central bank conservatism (CBC) curb unemployment only if labor market distortions are sizeable. When labor distortions are sufficiently low, employment may be maximized by atomistic wage setters or a populist CB. The comparison between the national monetary policy (NMP) regime and the monetary union (MU) reveals that a move to a MU boosts inflation in the absence of strategic effects. However, when strategic interactions between CB(s) and trade unions are taken into account, the shift to a MU unambiguously increases welfare and employment when monopoly distortions are sizeable either in presence of a sufficiently conservative CB or with fully CWS. Conversely, when labor market distortions are less relevant, the paper shows that an ultra-populist CB or atomistic wage setters are optimal for the society and a shift to a MU regime is unambiguously welfare improving.
    Date: 2007–05
  25. By: Eckhard Hein (IMK at the Hans Boeckler Foundation); Engelbert Stockhammer (Vienna University of Economics and Business Administration)
    Abstract: In a Post-Keynesian (PK) model we show that inflation targeting monetary policies, as the main stabilisation tool proposed by the New Consensus Model (NCM), in the short run are only adequate for certain values of the model parameters, but are either unnecessary, counterproductive, or limited in their effectiveness for other values. Taking into account medium-run cost and distribution effects of interest rate variations renders monetary policies completely inappropriate as an economic stabiliser. Based on these results we argue that the NCM macroeconomic policy assignment should be replaced by a PK assignment. Enhancing employment without increasing inflation will be possible if macroeconomic policies are coordinated along the following lines: The central bank targets distribution between rentiers, on the hand, and firms and employees, on the other hand, and sets low real interest rates, wage bargaining parties target inflation and fiscal policies are applied for short- and medium-run real stabilisation purposes.
    Keywords: Macroeconomic policies, New Consensus Model, Post-Keynesian Model, inflation targeting
    JEL: E12 E50
    Date: 2007
  26. By: van den Hauwe, Ludwig
    Abstract: Professor Becker´s paper about free banking written in 1956 was originally intended as a reaction to the 100-percent reserve proposals that were then popular at the University of Chicago. Today the original paper clearly illustrates how considerably our views and theories about free banking have evolved in the past 50 years. This development is to a considerable extent the result of the work and the writings of economists of the Austrian School. Professor Pascal Salin is one of the most prominent members of the Austrian free banking school. In a new introduction to the 1956 paper written especially for the Festschrift in honor of Professor Pascal Salin, Professor Gary Becker partially repudiates and mitigates some of his previous conclusions. This event offers a fitting opportunity to review some developments in the theory of free banking and related issues and to add a few clarifications concerning the present “state of the art” as regards an acceptable and adequate notion of free banking.
    Keywords: Free Banking; Monetary Regimes; Monetary Standards; Business Cycles
    JEL: E42 E32 E58
    Date: 2007–10–04
  27. By: Dimitrios D. Thomakos (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.); Constantina Kottaridi (University of Peloponnese, Greece); Diego MŽndez-Carbajo (Illinois Wesleyan University, USA)
    Abstract: We explore the connection between inflation and its higher-order moments for three economies in the periphery of the European Union (E.U.), Greece, Portugal and Spain. Motivated by a micro-founded model of inflation determination, along the lines of the hybrid New Keynesian Phillips curve, we examine whether and how much does the cross-sectional skewness in producer prices affect the path of inflation. We develop our analysis with the perspective of economic integration/inflation harmonization (in the E.U.) and discuss the peculiarities of these three economies. We find evidence of a strong positive relation between aggregate inflation and the distribution of relative-price changes for all three countries. A potentially important implication of our results is that, if the cross-sectional skewness of prices is directly related to aggregate inflation, not only the direction but also the magnitude of a nominal shock would influence output and inflation dynamics. Moreover, the effect of such a shock could be received asymmetrically, even when countries share a common currency.
    Keywords: Inflation; Cross-sectional distribution of prices; Greece, Portugal, Spain; European Union; Harmonization.
    JEL: E31
    Date: 2007–07
  28. By: Yueh-Yun C. O’Brien
    Abstract: This paper compares the reserve requirements of OECD countries. Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep in cash or as deposits with their central banks. To facilitate monetary policy implementation, twenty-four of the thirty OECD countries impose reserve requirements to influence their banking systems’ demand for liquidity. These include twelve OECD countries that are also members of the European Economic and Monetary Union (EMU) and twelve non-EMU OECD countries. All EMU countries employ a single reserve requirement system, which is treated as one entity. ; The reserve requirement system for each of the twelve non-EMU countries is discussed separately. The similarities and differences among the thirteen reserve requirement systems are highlighted. The features of reserve requirements covered include: reservable liabilities, required reserve ratios, reserve computation periods, reserve maintenance periods, types of reserve requirements, calculations of required reserves, eligible assets for satisfying reserve requirements, remuneration on reserve balances, non-compliance penalties, carry-over of reserve balances, and required clearing balances.
    Date: 2007
  29. By: James D. Hamilton
    Abstract: This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the fed funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers-- changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities up to ten years.
    JEL: E5
    Date: 2007–11
  30. By: Alina Spiru
    Abstract: In this study, the degree of convergence of inflation rates of Central and East European economies to a variety of measures of European norm inflation is assessed using a range of techniques. These include unit root testing based upon panels of data and - an innovation to the pertinent literature - tests of nonlinear convergence. The results suggest that while convergence can be revealed in a number of cases, there is some sensitivity associated with the testing framework, in particular whether time series or panel methods are used. Furthermore, the inflation convergence performance of the CEE countries is conditional on the chosen inflation benchmark, the composition of the panel and the correlations among members. Moreover, by conducting a battery of linearity tests, it is found that nonlinear inflation convergence is virtually ubiquitous for the period that includes the accession of the Central and Eastern European former transition economies into the EU.
    Keywords: inflation convergence, panel data, linearity tests
    Date: 2007
  31. By: David Andolfatto (Simon Fraser University, Canada and The Rimini Centre for Economics Analysis, Italy.); Scott Hendry (Bank of Canada, Canada); Kevin Moran (UniversitŽ Laval, Canada)
    Abstract: Several recent papers report evidence of an apparent statistical bias in in‡ation expectations and interpret these …ndings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of in‡ation and in‡ation expectations over sample periods corresponding to those tests performed on actual data and …nd evidence of an apparent bias in in‡ation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.
    Keywords: Regime changes; Learning dynamics; Monte Carlo exp eriments; Sample size.
    JEL: E47 E52 E58
    Date: 2007–07
  32. By: Jordi Galí
    Abstract: Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows how to construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework.
    Keywords: Interest rate peg, in.ation targeting, conditional forecasts, interest rate rules, multiple equilibria
    JEL: E37 E58
    Date: 2007–08

This nep-mon issue is ©2007 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.