nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒01‒05
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary policy and core inflation By Michele Lenza
  2. Housing and Monetary Policy By John B. Taylor
  3. A case for interest-rate smoothing By Bask, Mikael
  4. The Explanatory Power of Monetary Policy Rules By John B. Taylor
  5. Identification of Monetary Policy Shocks in the Brazilian Market for Bank Reserves By Adriana Soares Sales; Maria Tannuri-Pianto
  6. The Single Global Currency - Common Cents for the World (2007 Edition) By Bonpasse, Morrison
  7. Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice By Michael Woodford
  8. Should we take inside money seriously? By Livio Stracca
  9. Optimal simple and implementable monetary and fiscal rules By Stephanie Schmitt-Grohé; Martín Uribe
  10. Is Inflation in India an Attractor of Inflation in Nepal? By Edimon Ginting
  11. The Bank Lending Channel of Monetary Transmission: Does It Work in Turkey? By Petya Koeva Brooks
  12. Debt Stabilization Bias and the Taylor Principle: Optimal Policy in a New Keynesian Model with Government Debt and Inflation Persistence By Sven Jari Stehn; David Vines
  13. Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs By Berger, Helge; Österholm, Pär
  14. Simple Monetary Rules Under Fiscal Dominance By Michael Kumhof; Irina Yakadina; Ricardo Nunes
  15. Inflation Transmission in the EMU: A Markov-Switching VECM Analysis By Thams, Andreas
  16. Disentangling from Sterling: Malaysia and the end of the Bretton Woods system 1965-72 By Catherine R Schenk
  17. Measuring the Degree of Central Bank Independence in Egypt By Noha Farrag; Ahmed Kamaly
  18. Relative Goods’ Prices and Pure Inflation By Reis, Ricardo; Watson, Mark W
  19. Optimal monetary policy committee size: Theory and cross country evidence By Szilárd Erhart; Jose-Luis Vasquez-Paz
  21. When is Money Essential? A Comment on Aliprantis, Camera and Puzzello By Ricardo Lagos; Randall Wright
  22. What does the yield curve tell us about the Federal Reserve's implicit inflation target? By Taeyoung Doh
  23. The Short-Run Monetary Equilibrium with Liquidity Constraints By Mierzejewski, Fernando
  24. Taylor Rules for the ECB using Consensus Data By Janko Gorter; Jan Jacobs; Jakob de Haan
  25. Permanent Structural Change in the US Short-Term and Long-Term Interest Rates By Chew Lian Chua; Chin Nam Low
  26. Between The Rock and a Hard Place: Regime Switching in the RelationshipBetween Short-Term Interest Rates and Equity Returns in the UK By Olan T Henry
  27. An Ordering of Measures of the Welfare Cost of Inflation in Economies with Interest-Bearing Deposits By Rubens Penha Cysne; David Turchick
  28. How the credit channel works: differentiating the bank lending channel and the balance sheet channel By Lamont K. Black; Richard J. Rosen
  29. Securitisation and the bank lending channel By Yener Altunbas; Leonardo Gambacorta; David Marqués
  30. Taylor Rules Cause Fiscal Policy Ineffectiveness By Guido Ascari; Neil Rankin
  31. Nominal Debt as a Burden on Monetary Policy By Ramon Marimon; Javier Díaz-Giménez; Giorgia Giovannetti; Pedro Teles

  1. By: Michele Lenza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies optimal monetary policy responses in an economy featuring sectorial heterogeneity in the frequency of price adjustments. It shows that a central bank facing heterogeneous nominal rigidities is more likely to behave less aggressively than in a fully sticky economy. Hence, the supposedly excessive caution in the conduct of monetary policy shown by central banks could be partly explained by the existence of a relevant sectorial dispersion in the frequency of price adjustments. JEL Classification: F31, F4, G1.
    Keywords: Exchange rate, US dollar, cross-rates, shocks heterogeneity, global distribution, transmission channels.
    Date: 2007–12
  2. By: John B. Taylor
    Abstract: Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
    JEL: E22 E43 E52
    Date: 2007–12
  3. By: Bask, Mikael (Bank of Finland Research)
    Abstract: The aim of this paper is to determine whether it would be desirable from the perspective of macroeconomic balance for central banks to take account of nominal exchange rate movements when framing monetary policy. The theoretical framework is a small, open DSGE economy that is closed by a Taylor rule for the monetary authority, and a determinate REE that is least-squares learnable is defined as a desirable outcome in the economy. When the policy rule contains contemporaneous data on the output gap and the CPI inflation rate, the monetary authority does not have to consider the exchange rate as long as there is sufficient inertia in policy-making. In fact, due to a parity condition on the international asset market, interest-rate smoothing and a response to changes in the nominal exchange rate are perfectly intersubstitutable in monetary policy. In other words, we give a rationale for the monetary authority to focus on the change in the nominal interest rate rather than its level in policy-making. Thus, we have a case for interest-rate smoothing.
    Keywords: determinacy; E-stability; foreign exchange; inertia; Taylor rule
    JEL: E52 F31
    Date: 2007–12–19
  4. By: John B. Taylor
    Abstract: This paper shows that the theory of monetary policy rules is able to explain, predict, and help understand a variety of phenomenon in macroeconomics and finance, including the Great Moderation, the correlation between exchange rates and interest rates, and the shift in the response of the term structure of interest rates to inflation and output. Although the theory was originally designed for normative reasons, it has turned out to have positive implications which validate it scientifically. And while initially focused on the United States, it has applied equally well in other countries.
    JEL: E43 E52
    Date: 2007–12
  5. By: Adriana Soares Sales; Maria Tannuri-Pianto
    Abstract: We estimate an identified VAR (SVAR) with contemporaneous restrictions derived from a model of the market for bank reserves, which allows us to disentangle monetary policy shocks from demand shocks for reserves in Brazil. The main results are: i) the Central Bank of Brazil acts in order to smooth the bank reserve market interest rate (Selic); ii) the spread between the Selic rate and the discount rate provides information to estimate the demand curve for borrowed reserves; iii) overidentifying restrictions show that we cannot reject, for any period or model, the interest rate operational target hypothesis, even during the fixed exchange rate regime; iv) the impulse response functions show that shocks to the demand for reserves and to borrowed reserves generate statistically significant responses in real output and the inflation rate; v) all models display the liquidity effect and a small inflation rate puzzle.
    Date: 2007–12
  6. By: Bonpasse, Morrison
    Abstract: This is the 2007 Edition of the only book in print in the world about the Single Global Currency, and is the only book in the world priced in 143 currencies (down from 147 in the 2006 edition.).This number is significant, as it's the number of currencies required among the 192 U.N. members to conduct local business, including the payment of taxes. The book describes the origins of the current worldwide foreign exchange system, and tells how to change it; and save the world - trillions. The multicurrency foreign exchange trading system was developed about 2,500 years ago to enable people of different currency areas to trade. That system has become far more sophisticated in the meantime and handles $3.2 trillion per day; but it is very expensive and risky. It is now time to replace that system with a single global currency. In a 3-G world with a Single Global Currency managed by a Global Central Bank within a Global Monetary Union: - Annual transaction costs of $400 billion will be eliminated. - Worldwide asset values will increase by about $36 trillion. - Worldwide GDP will increase by about $9 trillion. - Global currency imbalances will be eliminated. - All Balance of Payments problems will be eliminated. - Currency crises will be prevented. - Currency speculation will be eliminated. - The need for foreign exchange reserves, with a current annual opportunity cost of approximately $470 billion, will be eliminated. - Worldwide interest rates will be lower than the current average due to the elimination of currency risk. Such gains are realistic and attainable if the world decides to pursue them. The monetary unions of Europe, the Caribbean, Africa and Brunei/Singapore have shown the way. What the people of the world want is sound, stable money and the end to the obsolete multicurrency foreign exchange system. A Single Global Currency is no longer a utopian dream, but a realistic projection of what has been learned from current monetary unions, especially the euro. Each successive annual edition of this book will be priced in the remaining number of currencies until we reach, in the words of Nobel Prize winner, Robert Mundell, that odd number, preferably less than three: one The world needs to set the goal of a Single Global Currency, to be managed by a Global Central Bank, within a Global Monetary Union, and begin planning - now.
    Keywords: single global currency; money; currency; monetary union; currency union; global monetary union; global central bank; global imbalances; current account; balance of payments; transaction charges; transaction costs; foreign exchange derivatives; foreign exchange; foreign exchange reserves; monetary reserves; gold; international monetary fund; SDR; special drawing rights; optimal currency area; OCA; Robert Mundell; John Stuart Mill; dollar; U.S. Dollar; USD; European Monetary Union; euro; European Central Bank; Single Global Currency Association; Bretton Woods; John Maynard Keynes; bancor; DEY; Geo; globo; eartha; dollarization; euroization; exchange rate; exchange rate regime; peg; float; James Tobin; currency crisis; International Monetary Fund; World Bank; Eastern Caribbean Monetary Union; West African Monetary Union; Central African Monetary Union; accession countries; Maastricht criteria; Maastricht Treaty;
    JEL: F0 F33 F32 F5 F2 F3 E5 F53 F31 F36
    Date: 2007–01–01
  7. By: Michael Woodford
    Abstract: Forecast targeting is an innovation in central banking that represents an important step toward more rule-based policymaking, even if it is not an attempt to follow a policy rule of any of the types that have received primary attention in the theoretical literature on optimal monetary policy. This paper discusses the extent to which forecast targeting can be considered an example of a policy rule, and the conditions under which it would represent a desirable rule, with a view to suggesting improvements in the approaches currently used by forecast-targeting central banks. Particular attention is given to the intertemporal consistency of forecast-targeting procedures, the assumptions about future policy that should be used in constructing the forecasts used in such procedures, the horizon with which the target criterion should be concerned, the relevance of forecasts other than the inflation forecast, and the degree of robustness of a desirable target criterion for monetary policy to changing circumstances.
    JEL: E52 E58
    Date: 2007–12
  8. By: Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper presents a dynamic general equilibrium model with sticky prices, in which "inside" money, made out of commercial banks’ liabilities, plays an active, structural role role. It is shown that, in such a model, an inside money shock has a well-defined meaning. A calibrated version of the model is shown to generate small, but non-negligible effects of inside money shocks on output and inflation. I also simulate the effect of a banking crisis in the model. Moreover, I find that it is optimal for monetary policy to react to such shocks, although reacting to inflation alone does not result in a significant welfare loss. JEL Classification: E43.
    Keywords: Endogenous money, inside money, monetary policy, dynamic general equilibrium models, deposit in advance constraint.
    Date: 2007–12
  9. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. We have several main findings. First, the size of the inflation coefficient in the interest rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses. Third, the welfare gains from interest rate smoothing are negligible. Fourth, optimal fiscal policy is passive. Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy.
    Date: 2007
  10. By: Edimon Ginting
    Abstract: The paper attempts to answer some important questions around the inflationary process in Nepal, particularly the transmission of inflation from India. Because the Nepali currency is pegged to the Indian rupee and the two countries share an open border, price developments in Nepal would be expected to mirror to those in India. The results show that inflation in India and inflation in Nepal tend to converge in the long run. Our estimates indicate that the passthrough of inflation from India to Nepal takes about seven months. The paper draws some implications for the conduct of monetary policy in Nepal.
    Keywords: Inflation , Nepal , India , Currency pegs ,
    Date: 2007–11–30
  11. By: Petya Koeva Brooks
    Abstract: Does the bank lending channel of monetary transmission work in Turkey? Using the May- June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's monetary transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.
    Keywords: Liquidity , Turkey , Interest rates on loans ,
    Date: 2007–12–10
  12. By: Sven Jari Stehn; David Vines
    Abstract: We analyse optimal monetary and fiscal policy in a New-Keynesian model with public debt and inflation persistence. Leith and Wren-Lewis (2007) have shown that optimal discretionary policy is subject to a 'debt stabilization bias' which requires debt to be returned to its pre-shock level. This finding has two important implications for optimal discretionary policy. Firstly, as Leith and Wren-Lewis have shown, optimal monetary policy in an economy with high steady-state debt cuts the interest rate in response to a cost-push shock - and therefore violates the Taylor principle. We show that this striking result is not true with high degrees of inflation persistence. Secondly, we show that optimal fiscal policy is more active under discretion than commitment at all degrees of inflation persistence and all levels of debt.
    Keywords: Working Paper , Public debt , Monetary policy , Fiscal policy , Inflation , Economic stabilization ,
    Date: 2007–08–22
  13. By: Berger, Helge (Department of Economics, Free University Berlin); Österholm, Pär (Department of Economics)
    Abstract: We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
    Keywords: Granger Causality; Monetary Aggregates; Monetary Policy; European Central Bank
    JEL: E47 E52 E58
    Date: 2007–12–17
  14. By: Michael Kumhof; Irina Yakadina; Ricardo Nunes
    Abstract: Is aggressive monetary policy response to inflation feasible in countries that suffer from fiscal dominance? We find that if nominal interest rates are allowed to respond to government debt, even aggressive rules that satisfy the Taylor principle can produce unique equilibria. However, resulting inflation is extremely volatile and zero lower bound on nominal interest rates is frequently violated. Within the set of feasible rules the optimal response to inflation is highly negative, and more aggressive inflation fighting is inferior from a welfare point of view. The welfare gain from responding to fiscal variables is minimal compared to the gain from eliminating fiscal dominance.
    Keywords: Monetary policy , Inflation , Interest rates , Debt , Government expenditures ,
    Date: 2007–12–07
  15. By: Thams, Andreas
    Abstract: This paper analyzes the transmission of inflation across the five largest economies in the European Monetary Union, i.e. France, Germany, Italy, Netherlands and Spain. We use monthly CPI inflation rates for the period 1970-2006. Given the long observation period and the continuing economic integration of Europe’s economies, we first try to investigate, if there were changes in inflation dynamics in these countries using univariate Markov-switching models. To assess the inflation transmission mechanism, we first establish a long-run relationship between the five countries using cointegration methods. As implied by the results of the univariate models, we allow for changes in the adjustment coefficients of the cointegrating relationships and the short-run dynamics. Using a Markov-switching vector error correction model we find evidence for multiple regime switches during the early 1970s till the mid 1980s. Exactly during this period we find evidence for Germany being weakly exogenous, which highlights the dominance of German monetary policy at this time. Since the mid-1980s we find evidence for a stable transmission mechanism both in the long- and the short-run characterized by a low degree of inflation persistence.
    Keywords: Inflation transmission; monetary integration; MS-VECM; cointegration; euro area
    JEL: E31 E30 E50
    Date: 2007–11
  16. By: Catherine R Schenk (University of Glasgow)
    Abstract: A decade after independence, the Malaysian government and central bank were faced with a series of challenges that forced them to develop an independent policy, leading to the end of the historic role of sterling in their international monetary regime. Like some economies today that are faced with accumulated reserves largely comprised of a depreciating currency (now the US$), Malaysia had to disentangle itself from sterling at a time when there were no clear alternatives since gold was scarce, the US$ was weak and Germany, Switzerland and Japan resisted the use of their currencies as national reserves. This paper uses new archival evidence to show that external obstacles as well as some misjudgement meant that this was only achieved in June 1972, 15 years after Merdeka. This process also reveals new evidence about the post-colonial relations between Malaysia and Britain and sheds new light on the neo-colonial interpretation of the first decade of independence.
    Date: 2007–12
  17. By: Noha Farrag (Faculty of Management Technology, The German University in Cairo); Ahmed Kamaly (American University in Cairo)
    Abstract: The past few years have witnessed a trend of increased delegation of authority to central banks. Increasing central bank independence is a recommended strategy for governments to establish a credible commitment to price stability as the final objective of the monetary authority, even at the cost of other objectives that may be more appealing to the political authorities. Existing literature on measuring central bank independence focuses on developed countries where quantifying the independence of central banks is easier, since quantifying the legal charter is sufficient to reflect the degree of central bank independence. However, in developing countries this task is thorny as quantifying the legal charter is often insufficient, since laws are often incomplete, ambiguous, or simply not respected. Thus, quantifying other indicators that reflect actual practice is required to capture any divergence between legal and actual practices. This paper attempts to quantify the degree of independence in the central bank of Egypt (CBE), from both a legal and behavioural context, since its establishment in 1961 until 2004. The study uses four indices in line with the work of Jacome (2001), Cukierman, et al. (1992), and Cukierman and Webb (1995), where each index is designed in such a way to capture a somewhat different aspect of independence. This study captures the discrepancies between the degree of independence conferred to the CBE by law and actual practice. The empirical findings of this paper offers insights about the direction of efforts that should be made to enhance central bank independence which is the key to achieving price stability and the stability of the financial system in general.
    Keywords: Central bank independence, Central Bank of Egypt, price stability, central bank credibility, indices of central bank independence, monetary policy
    JEL: E42 E52 E58
    Date: 2007–12
  18. By: Reis, Ricardo; Watson, Mark W
    Abstract: This paper uses a dynamic factor model for the quarterly changes in consumption goods’ prices to separate them into three components: idiosyncratic relative-price changes, aggregate relative-price changes, and changes in the unit of account. The model identifies a measure of “pure” inflation: the common component in goods’ inflation rates that has an equiproportional effect on all prices and is uncorrelated with relative price changes at all dates. The estimates of pure inflation and of the aggregate relative-price components allow us to re-examine three classic macro-correlations. First, we find that pure inflation accounts for 15-20% of the variability in overall inflation, so that most changes in inflation are associated with changes in goods’ relative prices. Second, we find that the Phillips correlation between inflation and measures of real activity essentially disappears once we control for goods’ relative-price changes. Third, we find that, at business-cycle frequencies, the correlation between inflation and money is close to zero, while the correlation with nominal interest rates is around 0.5, confirming previous findings on the link between monetary policy and inflation
    Keywords: Dynamic Factor Models; Inflation; Phillips relation; Relative prices
    JEL: C32 C43 E31
    Date: 2007–12
  19. By: Szilárd Erhart (Magyar Nemzeti Bank); Jose-Luis Vasquez-Paz (Banco Central de Reserva del Peru)
    Abstract: Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.
    Keywords: monetary policy committe, mpc size, decision making.
    JEL: E50 E58
    Date: 2007
  20. By: Mardi Dungey; Renee Fry
    Date: 2007–12
  21. By: Ricardo Lagos; Randall Wright
    Date: 2007–12–26
  22. By: Taeyoung Doh
    Abstract: This paper studies the time variation of the Federal Reserve’s in ation target between 1960 and 2004 using both macro and yield curve data. I estimate a New Keynesian dynamic stochastic general equilibrium model in which the in ation target follows a random-walk process. I compare estimation results obtained from both macroeconomic and yield curve data, two estimates obtained with only macro data, in order to determine what the yield curve tells us about the in ation target. In the joint estimation, the estimated in ation target is much higher during the mid 1980s than in the corresponding macro estimation. Also, some part of the decline in the in ation target during the early or the mid 1980s seems to be perceived as temporary when private agents have to lter out the random walk part of the in ation target from the composite in ation target. My ndings suggest that nancial market participants were skeptical of the Fed’s commitment to low in ation even after the Volcker disin ation period of the early 1980s.
    Keywords: Interest rates ; Inflation (Finance)
    Date: 2007
  23. By: Mierzejewski, Fernando
    Abstract: A theoretical framework is presented to characterise the money demand in deregulated markets. The main departure from the perfect capital markets setting is that, instead of assuming that investors can lend and borrow any amount of capital at a single (and exogenously determined) interest rate, a bounded money supply is considered. The problem of capital allocation can then be formulated in actuarial terms, in such a way that the optimal liquidity demand can be expressed as a Value-at-Risk. Within this framework, the monetary equilibrium determines the rate at which a unit of capital is exchange by a unit of risk, or, in other words, it determines the market price of risk. In a Gaussian setting, such a price is expressed as a mean-to-volatility ratio and can then be regarded as an alternative measure to the Sharpe ratio. Finally, since the model depends on observable variables, it can be verified on the grounds of historical data. The Black Monday (October 1987) and the Dot-Com Bubble (April 2000) episodes can be described (if not explained) on this base.
    Keywords: Money demand; Monetary equilibrium; Economic capital; Distorted- probability principle; Value-at-Risk.
    JEL: G14 G15 E44 E41
    Date: 2007–12–31
  24. By: Janko Gorter; Jan Jacobs; Jakob de Haan
    Abstract: We estimate Taylor rules for the euro area using Consensus expectations for inflation and output growth and we compare these estimates with more conventional specifications in which actual outcomes are used. According to the model with Consensus data, the ECB takes expected inflation and expected output growth into account in setting interest rates, while in the more conventional model specification the coefficient of inflation is not significantly different from zero. Only when using survey data we find that the ECB's policy has been stabilizing. Finally, using a framework suggested by English et al. (2003), we find support for both policy inertia and serially correlated errors in ECB Taylor rules.
    Keywords: Taylor rule; ECB; real-time data; policy inertia; serial correlation
    JEL: C22 E52
    Date: 2007–12
  25. By: Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Chin Nam Low (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper uses a time-varying error correction model to examine the structural changes in the rate of adjustment to the long-run equilibrium and the cointegrating vector of the US short- and long-term interest rates. We show that agents’ expectations of interest rate movements vary according to policy changes as reflected by changes in the direction of movements of the underlying parameters.
    Date: 2007–08
  26. By: Olan T Henry
    Abstract: We examine the relationship between short term interest rates and UK equity returns using a two regime Markov Switching EGARCH model. We find one high-return, low variance regime in which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, highvariance, regime there is evidence that equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimes
    Keywords: Regime switching; Time varying transition probabilities; Newsimpact surfaces; Asymmetric volatility; Interest Rate Spreads
    JEL: G0 C5
    Date: 2007
  27. By: Rubens Penha Cysne (EPGE/FGV); David Turchick
    Date: 2007–12
  28. By: Lamont K. Black; Richard J. Rosen
    Abstract: The credit channel of monetary policy transmission operates through changes in lending. To examine this channel, we explore how movements in the real federal funds rate affect bank lending. Using data on individual loans from the Survey of Terms of Bank Lending, we are able to differentiate two ways the credit channel can work: by affecting overall bank lending (the bank lending channel) and by affecting the allocation of loans (the balance sheet channel). We find evidence consistent with the operation of both internal credit channels. During periods of tight monetary policy, banks adjust their stock of loans by reducing the maturity of loan originations and they reallocate their short-term loan supply from small firms to large firms. These results are stronger for large banks than for small banks.
    Date: 2007
  29. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Banca d’Italia, Economic Outlook and Monetary Policy Department, Via Nazionale 91, I-00184 Rome, Italy.); David Marqués (Correspondence author: European Central Bank, Monetary Policy Directorate, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The dramatic increase in securitisation activity has modified the functioning of credit markets by reducing the fundamental role of liquidity transformation performed by financial intermediaries. We claim that the changing role of banks from “originate and hold” to “originate, repackage and sell” has also modified banks’ abilities to grant credit and the effectiveness of the bank lending channel of monetary policy. Using a large sample of European banks, we find that the use of securitisation appears to shelter banks’ loan supply from the effects of monetary policy. Securitisation activity has also strengthened the capacity of banks to supply new loans but this capacity depends upon business cycle conditions and, notably, upon banks’ risk positions. In this respect, the recent experience of the sub-prime mortgage loans crisis is very instructive. JEL Classification: E44, E55.
    Keywords: Asset securitisation, bank lending channel, monetary policy.
    Date: 2007–12
  30. By: Guido Ascari; Neil Rankin
    Abstract: With the aim of constructing a dynamic general equilibrium model where fiscal policy can operate as a demand management tool, we develop a framework which combines staggered prices and overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make tax cuts, financed by increasing government debt, effective in raising short-run output. Surprisingly, in our baseline model this fails to occur. We trace the cause to the assumption that monetary policy is governed by a Taylor Rule. If monetary policy is instead governed by a money supply rule, fiscal policy effectiveness is restored.
    Keywords: staggered prices, overlapping generations, fiscal policy effectiveness, Taylor Rules.
    JEL: E62 E63
    Date: 2007–11
  31. By: Ramon Marimon; Javier Díaz-Giménez; Giorgia Giovannetti; Pedro Teles
    Abstract: We characterize the optimal sequential choice of monetary policy in economies with either nominal or indexed debt. In a model where nominal debt is the only source of time inconsistency, the Markov-perfect equilibrium policy implies the progressive depletion of the outstanding stock of debt, until the time inconsistency disappears. There is a resulting welfare loss if debt is nominal rather than indexed. We also analyze the case where monetary policy is time inconsistent even when debt is indexed. In this case, with nominal debt, the sequential optimal policy converges to a time-consistent steady state with positive -- or negative -- debt, depending on the value of the intertemporal elasticity of substitution. Welfare can be higher if debt is nominal rather than indexed and the level of debt is not too high.
    JEL: E40 E50 E58 E60
    Date: 2007–12

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