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on Monetary Economics |
| By: | Driffill, John; Rotondi, Zeno |
| Abstract: | The inertia found in econometric estimates of interest rate rules is a continuing puzzle. Many reasons for it have been offered, though unsatisfactorily, and the issue remains open. In the empirical literature on interest rate rules, inertia in setting interest rates is typically modelled by specifying a Taylor rule with the lagged policy rate on the right hand side. We argue that inertia in the policy rule may simply reflect the inertia in the economy itself, since optimal rules typically inherit the inertia present in the model of the economy. Our hypothesis receives some support from US data. Hence we agree with Rudebusch (2002) that monetary inertia is, at least partly, an illusion, but for different reasons. |
| Keywords: | expectations hypothesis; Interest Rate Rules; Interest Rate Smoothing; Monetary Policy; Monetary Policy Inertia; Predictability of interest rates; Taylor rule; term structure |
| JEL: | E52 E58 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6570&r=mon |
| By: | Pietro Alessandrini (Department of Economics, Università Politecnica delle Marche, Ancona); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) |
| Abstract: | There is a broad consensus that the current, large U.S. current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem. |
| Keywords: | Keynes Plan, external imbalances, exchange rates, international monetary system, key currency, supranational bank money |
| JEL: | E42 E52 F33 F36 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2007-19&r=mon |
| By: | Burkhart, Lucas; Fischer, Andreas M |
| Abstract: | This paper examines a special episode in communication practices of the Swiss National Bank (SNB) when short-term interest rates reached the zero bound. A particular feature of SNB communication policy at the time was to talk openly about alternative policy instruments despite the fact that they were never implemented. Non-sterilized FX interventions were frequently mentioned as a potential instrument. We ask how did financial markets respond to the SNB's repeated references of non-sterilized interventions? The empirical results with high frequency data provide strong evidence that SNB intervention references depreciated the domestic currency for several hours. The case study supports the view that communication is an effective tool for monetary policy. |
| Keywords: | Central Bank Communication; Exchange Rate; zero bound |
| JEL: | E58 F31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6563&r=mon |
| By: | Guender, Alfred V. |
| Abstract: | This paper proposes an open-economy Phillips Curve that features a real exchange rate channel. The resulting target rule under optimal policy from a timeless perspective (TP) involves additional history dependence in the form of lagged inflation. The target rule also depends on the discount factor as well as IS and Phillips Curve parameters. This is in sharp contrast to a closed economy where the target rule depends only on the change in the output gap, the current rate of inflation and the structural parameter in the Phillips Curve. Because of the additional history dependence in an open economy, price level targeting is no longer consistent with optimal policy. If a real exchange rate channel does not exist in the Phillips Curve, monetary policy eases in the wake of a positive cost-push disturbance under policy from a TP and is thus diametrically opposed to same under discretion. Maximum gains accrue from commitment relative to discretion in an open economy where the real exchange rate is absent from the Phillips Curve and the policymaker places strong emphasis on maintaining price stability. |
| Keywords: | Timeless Perspective, Discretion, Price Level Targeting, Exchange Rate Channel |
| JEL: | E52 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6479&r=mon |
| By: | Quoc Hung Nguyen (University of British Columbia) |
| Abstract: | This paper addresses the question of whether "fear of floating" in developing countries can be justified as optimal discretionary monetary policy in a dollarized economy with Bernanke-type credit constraints in the import sector and nominal rigidities. Balance sheet effects magnify the macroeconomic consequences of the economy that experiences external and techolonogy shocks. It can be shown that the fixed exchange rate regime dominates the inflation targeting regime in both the role of cushioning shocks and in welfare terms. |
| Keywords: | Liability Dollarizaion, Fear of Floating, Imported Goods |
| JEL: | F0 F4 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:dpc:wpaper:1607&r=mon |
| By: | Tatiana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | We develop a simple and intuitive approach for analytically deriving unconditionally optimal (UO) policies, a topic of enduring interest in optimal monetary policy analysis. The approach can be employed to both general linear-quadratic problems and to the underlying non-linear environments. We provide a detailed example using a canonical New Keynesian framework. |
| Keywords: | Unconditional expectations, optimal monetary policy. |
| JEL: | E20 E32 F32 F41 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0721&r=mon |
| By: | Kohnert, Dirk |
| Abstract: | About five decades the Franc CFA-Zone in Western and Central Africa was praised as incarnation of economic and political stability in Africa, backed by France. But free convertibility and fixed parity, guaranteed by the French Treasury, mainly served the interest of a small elite of the Messieurs Afrique, both in France and in Africa. Generations of French entrepreneurs and of their African counterparts maintained a profitable self-service shop on expense of the African poor and the French taxpayer. In the aftermath of the devaluation of the Franc CFA in 1994, and of the peg of the currency to the Euro in 1998, the socio-economic divide between rich and poor, urban and rural regions, the formal and the informal sector even widened. However, the perpetuation of the established monetary structure of the CFA-Zone became increasingly anachronistic. As far as the political stability, previously guaranteed by the neo-colonial French Africa policy, becomes obsolete, the base for economic stability of the traditional arrangement of the currency union is threatened as well. The more so, as the CFA-Zone never fulfilled the most crucial preconditions of an optimal currency area. The peg to the EMU, orientated at the interests of highly industrialized European countries, led to an overvaluation of the real exchange rate of the CFA, and will increasingly constitute an obstacle to sustainable indigenous development in francophone Africa. |
| Keywords: | Monetary Union; regional integration; Optimum Currency Areas; Franc CFA-Zone; Francophone Africa; Euro; EMU |
| JEL: | F15 F35 E42 E52 F33 F31 F54 F36 |
| Date: | 1998 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5777&r=mon |
| By: | Masson, Paul R. |
| Abstract: | More than eight years after the introduction of the euro, impacts on developing countries have been relatively modest. Overall, the euro has become much more important in debt issuance than in official foreign exchange reserve holdings. The former has benefited from the creation of a large set of investors for which the euro is the home currency, while demand for euro reserves has been held back by the dominance of the dollar as a vehicle and intervention currency, and the greater liquidity of the market for US treasury securities. Fears of further dollar decline may fuel some shifts out of dollars into euros, however, with the potential for a period of financial instability. |
| Keywords: | Debt Markets,Emerging Markets,Fiscal & Monetary Policy,Currencies and Exchange Rates, |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4381&r=mon |
| By: | Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J. |
| Abstract: | Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy's sensitivity to exchange rate dynamic affect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting Phenomenon. |
| Keywords: | Exchange rate overshooting, Partial information, Learning |
| JEL: | E31 F31 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6478&r=mon |
| By: | Engdahl, Torbjörn (Department of Economic History Stockholm University); Ögren, Anders (EHFF - Institute for Economic and Business History at the Stockholm School of Economics and HTE EconomiX (UMR 7166) CNRS Université de Paris X - Nanterre) |
| Abstract: | Complementarity of money mean that two or more kinds of monies together fulfil the demand of the users better than they would without the existence of the other(-s). In this paper we study complementarity between paper monies in Sweden. We address four questions: 1) What was used as money on a macro level (money supply) and on a micro level (monetary remittances)? 2) What was the relative value of different monies in parallel circulation? 3) Was there seasonal variations in use and/or value? 4) Was there geographical variations in use and value? What we find is that the complementarity helped to solve the problem of providing sufficient liquidity domestically over time and space and thus and to keep a stable value of the currency. |
| Keywords: | Complementarity; Liquidity; Money Supply; Money Remittances; Paper Money; Parallel Circulation of Money; Variations in Money Demand |
| JEL: | E50 G21 N13 N23 |
| Date: | 2007–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0678&r=mon |
| By: | Barnett, William A.; Chauvet, Marcelle; Tierney, Heather L. R. |
| Abstract: | This paper compares the different dynamics of simple sum monetary aggregates and the Divisia indexes over time, over the business cycle, and across high and low inflation and interest rate phases. Although the traditional comparison of the series may suggest that they share similar dynamics, there are important differences during certain times and around turning points that can not be evaluated by their average behavior. We use a factor model with regime switching that offers several ways in which these differences can be analyzed. The model separates out the common movements underlying the monetary aggregate indexes, summarized in the dynamic factor, from individual variations in each one series, captured by the idiosyncratic terms. The idiosyncratic terms and the measurement errors represent exactly where the monetary indexes differ. We find several new results. In general, the idiosyncratic terms for both the simple sum aggregates and the Divisia indexes display a business cycle pattern, especially since 1980. They generally rise around the end of high interest rate phases – a couple of quarters before the beginning of recessions – and fall during recessions to subsequently converge to their average in the beginning of expansions. We also find that the major differences between the simple sum aggregates and Divisia indexes occur around the beginning and end of economic recessions, and during some high interest rate phases. |
| Keywords: | Measurement Error; Divisia Index; Aggregation; State Space; Markov Switching; Monetary Policy |
| JEL: | E4 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5770&r=mon |
| By: | Ricardo Cavalcanti; Ed Nosal |
| Abstract: | We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to eliminate counterfeiting activity completely. We do not appeal to lottery devices, and we argue that this is consistent with imperfect monitoring. |
| Keywords: | Counterfeits and counterfeiting ; Money |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0716&r=mon |
| By: | Hartogh, Matthew |
| Abstract: | Abstract If the financial press had been paying attention to some crucial barometers of currency instability in Thailand last year, the ensuing crisis in Asia would perhaps not have been so much of a surprise. On July 2,1997, the Thai government allowed the Baht to float against the Dollar for the first time in a decade. As we all now know, this effective devaluation set of a train of events which would shock all of the Asian economies which had hitherto enjoyed unqualified growth and prosperity for the last several years. |
| Keywords: | Exchange Rates Currency Baht |
| JEL: | E42 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5772&r=mon |
| By: | David C. Mills, Jr. |
| Abstract: | One of the fundamental questions concerning inside money is whether its issuers should be regulated and how. This paper evaluates the efficiency of one prevalent regulatory recommendation -- a requirement that private issuers redeem inside money on demand at par -- in a random-matching model of money where the issuers of inside money are only imperfectly monitored. I find that for sufficiently imperfect monitoring, a par redemption requirement leads to lower social welfare than if private money were redeemed at a discount. A central message of the paper is that if inside money and outside money are not perfect substitutes for one another, as is the case if there is sufficiently imperfect monitoring, a par redemption requirement may not be socially optimal because such a requirement effectively binds them to circulate as if they are. Such an outcome is a version of Gresham's law that bad money drives out good money. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-58&r=mon |
| By: | Bersch, Julia; Klüh, Ulrich H. |
| Abstract: | We study the apparent disconnect between what countries announce to be their exchange rate regime and what they de facto implement. Even though discrepancies between announcements and de facto polices are frequent, there is a lack of understanding of actual patterns and underlying reasons. We contribute to the literature by identifying a number of robust stylized facts by means of an in-depth analysis of a large cross-country dataset. A key insight is that countries that operate under intermediate de facto regimes tend to announce fixed or flexible exchange rate regimes. The exact nature of deviations is related to country characteristics such as trade structure, financial development, and financial openness. Furthermore, regime discrepancies have followed secular trends, which are most likely related to financial globalization and changes in monetary policy design. |
| Keywords: | Exchange rate regimes; de facto versus de jure; exchange rate policy |
| JEL: | F31 F33 F41 |
| Date: | 2007–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2072&r=mon |
| By: | Tanasie, Anca; Fratostiteanu , Cosmin |
| Abstract: | For most Eastern European countries that experienced former communist regimes, the EU accession and the use of European symbols – such as the EURO currency – represents both the integration into a strong and efficient economic system, but also the guarantee of a system based on real democratic values. Romania has been the first of this category of states, that has expressed the real and strong attachment for the European Union, its symbols and values. This paper wishes to analyze the key elements concerning Romania’s accession to the EMU and finally the EURO adoption: Romania’s actual macroeconomic situation, the situation of the real and nominal convergence to the accession criteria – in a fuzzy clustering approach in order to determine optimum sequencing of the Euro adoption and the envisaged official calendar for the EURO adoption. |
| Keywords: | Romania; Euro; monetary convergence; fuzzy clustering |
| JEL: | F47 F33 F36 |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5832&r=mon |
| By: | Michael Kühl |
| Abstract: | The aim of this paper is to investigate the market efficiency on the foreign exchange market since the introduction of the Euro by applying the cointegration analysis to exchange rates. The introduction of the Euro has changed the structure of the global foreign exchange market to the extent that the second most important currency in the world with the highest credibility in the foreign exchange market, namely the Deutsche Mark, has been assimilated into the Euro. In order to evaluate if the introduction of a new currency has resulted in inefficient markets, a bivariate cointegration analysis should be applied to the seven most important exchange rates. The empirical analysis predominantly draws on the Johansen (1988, 1991) approach and the Gregory-Hansen (1996) approach whereas the latter takes endogenous structural breaks into account. We show that the foreign exchange market is broadly consistent with the market efficiency hypothesis. A very important result is that we can find a longrun relationship between the exchange rate pairs EUR/USD and GBP/USD whereas the no-arbitrage condition is satisfied. Since the EUR/USD exchange rate is weakly exogenous the GBP/USD exchange rate takes the burden of adjustment to the long-run equilibrium. |
| Keywords: | Foreign Exchange Market, Market Efficiency, Cointegration |
| JEL: | C32 F31 F33 G14 G15 |
| Date: | 2007–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:68&r=mon |
| By: | Manoel Bittencourt (School of Economics, University of Cape Town / South Africa) |
| Abstract: | We examine the impact of inflation on financial development in Brazil and the data available permit us to cover the period between 1985 and 2002. The results–based initially on time-series and then on panel time-series data and analysis, and robust for different estimators and financial development measures–suggest that inflation presented deleterious effects on financial development at the time. The main implication of the results is that poor macroeconomic performance, exemplified in Brazil by high rates of inflation, have detrimental effects to financial development, a variable that is important for affecting, e.g. economic growth and income inequality. Therefore, low and stable inflation, and all that it encompasses, is a necessary first step to achieve a deeper and more active financial sector with all its attached benefits. |
| Keywords: | Financial development, inflation, Brazil |
| JEL: | E31 E44 O11 O54 |
| Date: | 2007–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:got:iaidps:165&r=mon |
| By: | Robert J Shiller |
| Date: | 2007–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001682&r=mon |