nep-mon New Economics Papers
on Monetary Economics
Issue of 2007‒12‒19
nine papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Preference heterogeneity in monetary policy committees By Alessandro Riboni; Francisco Ruge-Murcia
  2. Do Central Banks React to House Prices? By Finocchiaro, Daria; Queijo von Heideken, Virginia
  3. How Inside Money Makes Inflation Costly For Most (but Gainful For Some) By William Coleman
  4. The Expectations Hypothesis of the Term Structure: Some Empirical Evidence for Portugal (revised version) By Silva Lopes, Artur C.; Monteiro, Olga Susana
  5. Does global liquidity help to forecast US inflation? By D'Agostino, A; Surico, P
  6. Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic By Ian Babetskii; Fabrizio Coricelli; Roman Horvath
  7. The Riksbank’s Forecasting Performance By Andersson, Michael K.; Karlsson, Gustav; Svensson, Josef
  8. Monetary circulation, the paradox of profits, and the velocity of money By Olivier Allain
  9. Challenges in macro-finance modeling By Don H Kim

  1. By: Alessandro Riboni; Francisco Ruge-Murcia
    Abstract: This short paper employs individual voting records of the Monetary Policy Committee (MPC) of the Bank of England to study heterogeneity in policy preferences among committee members. The analysis is carried out using a simple generalization of the standard Neo Keynesian framework that allows members to differ in the weight they give to output compared with inflation stabilization and in their views regarding optimal inflation and natural output. Results indicate that, qualitatively, MPC members are fairly homogeneous in their policy preferences, but that there are systematic quantitative differences in their policy reaction functions that are related to the nature of their membership and career background. 
    Keywords: Committees; reaction functions; Bank of England
    JEL: G23 G32
    Date: 2007–12
  2. By: Finocchiaro, Daria (Research Department, Central Bank of Sweden); Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden)
    Abstract: The substantial fluctuations in house prices recently experienced by many industrialized economies have stimulated a vivid debate on the possible implications for monetary policy. In this paper, we ask whether the U.S. Fed, the Bank of Japan and the Bank of England have reacted to house prices. We study the responses of these central banks by estimating a structural model for each country where credit constrained agents borrow against real estate. The main result is that house price movements did play a separate role in the U.K. and Japanese central bank reaction functions, while they did not in the U.S.
    Keywords: House prices; monetary policy; DSGE models; Bayesian estimation
    JEL: E31 E44 E52 E58
    Date: 2007–11–01
  3. By: William Coleman
    Abstract: It is argued that inflation creates private incentives for (socially costly) inside money to supplant (socially costless) outside money. Consequently, the familiar 'shoe leather cost' of inflation, that operates through a reduced demand for money under inflation, is supplemented by a separate social cost of inflation that operates through an increased supply of (inside) money under inflation. It is further argued that allowance of the costliness of an inflation-induced expansion of inside money changes the character of the distribution of the costs of inflation. Certain suppliers of inside money may experience a net gain from an inflation. The upshot is that inflation is no longer necessarily a 'common enemy', but may be welcomed by some economic interests.
    JEL: E42 E51
    Date: 2007–12
  4. By: Silva Lopes, Artur C.; Monteiro, Olga Susana
    Abstract: The purpose of this paper is to test the (rational) expectations hypothesis of the term structure of interest rates using Portuguese data for the interbank money market. The results obtained support only a very weak, long-run or "asymptotic" version of the hypothesis, and broadly agree with previous evidence for other countries. The empirical evidence supports the cointegration of Portuguese rates and the "puzzle" well known in the literature: although its forecasts of future short-term rates are in the correct direction, the spread between longer and shorter rates fails to forecast future longer rates. In the single equation framework, the implications of the hypothesis in terms of the predictive ability of the spread are also clearly rejected, even for the more stable period which emerged in the middle nineties.
    Keywords: term structure of interest rates; expectations hypothesis; hypothesis testing; cointegration; Portugal.
    JEL: C3 E4 C2
    Date: 2007
  5. By: D'Agostino, A; Surico, P
    Abstract: We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of US inflation that are significantly more accurate than the forecasts based on US money growth, Phillips curve, autoregressive and moving average models. The marginal predictive power of global liquidity is strong at three years horizons. Results are robust to alternative measures of inflation.
    JEL: C53 C22 E37 E47
    Date: 2007–11
  6. By: Ian Babetskii; Fabrizio Coricelli; Roman Horvath
    Abstract: The paper provides an empirical analysis of inflation persistence in the Czech Republic using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence.
    Keywords: Inflation dynamics, inflation targeting, persistence.
    JEL: D40 E31
    Date: 2007–11
  7. By: Andersson, Michael K. (Monetary Policy Department, Central Bank of Sweden); Karlsson, Gustav (Monetary Policy Department, Central Bank of Sweden); Svensson, Josef (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper describes the official Riksbank forecasts for the period 2000-06. The forecast variables are those that are important for monetary policy analysis, i.e. inflation, GDP, productivity, employment, labour force, unemployment and financial variables such as interest rate and foreign exchange rate. The Riksbank’s forecasts are presented and analyzed and compared with alternative forecasts, that is, those from other institutions and simple statistical models. One important message from the study is that macroeconomic forecasts are associated with an appreciable uncertainty; the forecast errors are often sizeable. The forecast memory, defined as how far the forecasts are more informative than the variables unconditional mean, is usually limited to the first year. Furthermore, we find that the inflation forecasts exhibit several appealing features, such as a predictability memory that (possibly) includes the second year, relatively low RMSE and weak efficiency. The forecasts for the investigated real variables are shown to be less precise and they have a shorter forecast memory. The exchange rate predictions demonstrate the least accurate (of the investigated variables) forecasts. Compared to other forecasters, the Riksbank’s predictions are often more accurate. This holds for a comparison with the National Institute of Economic Research, even though the differences are statistically insignificant, as well as for a comparison with the participants in the Consensus Forecasts panel, where the Riksbank’s predictions often are among the best. We also find indications that misjudgements for productivity growth have had effects on forecasts for both inflation and GDP, but the results suggest that the Riksbank has considered available information in an acceptable fashion. This is also true for the undertaken revisions (from one forecast occasion to another) of the published forecasts.
    Keywords: Judgements; Forecast Evaluation; Central Bank; Inflation; GDP; RMSE
    JEL: E27 E37 E52
    Date: 2007–12–01
  8. By: Olivier Allain (Universite Paris Descartes - Université Paris Descartes - Paris V, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Recent papers have reconsidered the paradox of profits, that is the difficulty to explain how monetary profits can be generated when firms borrow only the wage bill to finance their production. In this article, we use a stock-flow consistent approach give a solution to this paradox assuming that, when firms sell goods at prices which exceed their unit costs, the realised monetary profits are not used to pay back banks. These profits then remain in the circuit, allowing additional transactions. In a sense, profits result from their own expenditure. According to this interpretation, the velocity of money is higher than one because some monetary units are used in several transactions of goods.
    Keywords: paradox of profits; circulation; endogenous money;velocity of money; stock-flow consistent approach
    Date: 2007–12
  9. By: Don H Kim
    Abstract: This paper discusses various challenges in the specification and implementation of "macro-finance" models in which macroeconomic variables and term structure variables are modeled together in a no-arbitrage framework. I classify macro-finance models into pure latent-factor models ("internal basis models") and models which have observed macroeconomic variables as state variables ("external basis models"), and examine the underlying assumptions behind these models. Particular attention is paid to the issue of unspanned short-run fluctuations in macro variables and their potentially adverse effect on the specification of external basis models. I also discuss the challenge of addressing features like structural breaks and time-varying inflation uncertainty. Empirical difficulties in the estimation and evaluation of macro-finance models are also discussed in detail.
    Keywords: Term structure of interest rates, inflation expectations, macro-finance modeling, no-arbitrage models
    Date: 2007–12

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.