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on Monetary Economics |
| By: | Michael T. Kiley |
| Abstract: | The degree to which inflation expectations are anchored at long horizons is important for many issues in macroeconomics and finance. There has been little research examining observable measures of long-run inflation expectations. We investigate the evolution of survey measures of long-run inflation expectations in the United States. Our analysis emphasizes the role of a time-varying inflation objective of monetary policymakers. This focus makes monetary policy actions a key determinant of long-run inflation expectations. Our results have important implications for work on inflation dynamics, monetary policy rules, the costs of disinflation, and the term structure of interest rates. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-03&r=mon |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | John Crow's 1988 Hanson Lecture argued for making price stability the goal of Canada's monetary policy, but in the early 1990s, political and economic circumstances led policy makers to settle for a 2 percent inflation target instead. The recently instituted review of the Inflation Control Program has put price stability on the policy menu again, and the current relevance of Crow's 1988 case is assessed in the light of the past 20 years' experience. |
| Keywords: | price stability; inflation targeting; Bank of Canada; monetary policy |
| JEL: | E42 E58 E61 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20081&r=mon |
| By: | Giancarlo Corsetti |
| Abstract: | What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at unionwide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area. |
| Keywords: | Optimum Currency Area, optimal monetary policy, costs of business cycle, exchange rate regime, international policy cooperation, New Open Economy Macroeconomics |
| JEL: | E31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/12&r=mon |
| By: | Michael D. Bordo; Harold James |
| Abstract: | This study grounds the establishment of EMU and the euro in the context of the history of international monetary cooperation and of monetary unions, above all in the U.S., Germany and Italy. The purpose of national monetary unions was to reduce transactions costs of multiple currencies and thereby facilitate commerce; to reduce exchange rate volatility; and to prevent wasteful competition for seigniorage. By contrast, supranational unions, such as the Latin Monetary Union or the Scandinavian Currency Union were conducted in the broader setting of an international monetary order, the gold standard. There are closer parallels between EMU and national monetary unions. Historical monetary unions also were associated with fiscal unions (fiscal federalism). Both fiscal and monetary unions were an important part of the process of political unification. In the past, central banks, and the currencies they managed, have been discredited or put under severe strain as a result of: severe or endemic fiscal problems creating pressures for the monetization of public debt; low economic growth may produce demands for central banks to pursue more expansionary policies; regional strains producing a demand for different monetary policies to adjust to particular regional pressures; severe crises of the financial system; and tensions between the international and the domestic role of a leading currency. In particular, there is the possibility for the EMU that low rates of growth will produce direct challenges to the management of the currency, and a demand for a more politically controlled and for a more expansive monetary policy. Such demands might arise in some parts or regions or countries of the euro area, but not in others and would lead to a politically highly difficult discussion of monetary governance. |
| JEL: | F02 F33 N20 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13815&r=mon |
| By: | RIBONI, Alessandro; RUGE-MURCIA, Francisco J. |
| 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 dier in the weight they give to output compared with in ation 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 dierences in their policy reaction functions that are related to the nature of their membership and career background. |
| Keywords: | Committees, reaction functions, Bank of England |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2007-05&r=mon |
| By: | Wasim Shahid Malik (Pakistan Institute of Development Economics, Islamabad); Musleh-ud Din (Pakistan Institute of Development Economics, Islamabad) |
| Abstract: | This paper analyses monetary policy transparency of the central bank (SBP) using the Eijffinger and Geraats (2006) index. The results show that the SBP scores 4.5 out of 15, which is lower than any of the central banks’ score in Eijffinger and Geraats (2006). The SBP is completely opaque on the procedural issues, whereas it is the least transparent in the policy transparency. On the political and the economic matters, the SBP is partially transparent. An area where the SBP is quite transparent, with moderate score, is operational transparency. In comparison with the other central banks, the SBP is at par with some of the central banks in political and operational transparency but ranks behind in all other respects. |
| Keywords: | Monetary Policy Transparency, State Bank of Pakistan, Developing Countries |
| JEL: | E52 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2008:44&r=mon |
| By: | Hatipoglu, Ozan; Alper, C. Emre |
| Abstract: | Design of policy rules for an an emerging market central bank (EMCB) operating in an inflation-targeting framework presents additional challenges beyond those for describing the behavior of a central bank in a developed economy. Even though an inflation-targeting regime entails abolishing the exchange rate target in favor of an inflation target, it is more difficult for an EMBC to ignore movements in exchange rates given the relatively shallow depth of financial markets and the the high degree of dollarization. Additionally the EMCB may be forced to change the pursued exchange rate regime following a capital account reversal so that linear Taylor rules may be inadequate for describing EMCB reactions. We develop an empirical framework that addresses these issues and propose a new methodology to estimate unobserved variables such as expected inflation and potential output within the rule. Specifically, we employ a structural, nonlinear Kalman filter algorithm to estimate time-dependent parameters and unobserved variables, and we experiment with various exchange rate mechanisms that can be employed by an EMCB. This approach allows us to track any changes in EMCB behavior - including regime shifts - following a switch to inflation targeting. Using post-2001 data from Turkey, which is a fairly dollarized small open economy, we document that the Central Bank of Turkey has given relatively more importance to the inflation gap than to the output gap or to exchange rates, but not until some time after it had switched to an inflation-targeting framework. |
| Keywords: | Dual Extended Kalman Filter; Taylor Rule; inflation targeting; emerging markets |
| JEL: | C32 C50 E52 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7107&r=mon |
| By: | Linda S. Goldberg; Cédric Tille |
| Abstract: | The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy. |
| JEL: | F3 F4 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13820&r=mon |
| By: | Horst Siebert |
| Abstract: | Financial crises can have a severe impact on the real side of the economy with countries losing up to 20 percent of GDP. The paper studies rules that prevent financial instability and currency crises. These include institutional arrangements for a solid banking system, prudent regulations and appropriate principles of monetary policy. The paper studies the role of the IMF in light of the past experience in preventing currency crises and a systemic breakdown of the world’s financial system and points out necessary IMF reforms. It discusses how the IMF should adjust to the structural changes in the world economy. |
| Keywords: | Financial instability, rules for monetary stability, hedge funds, exchange rate crises, IMF, IMF quotas |
| JEL: | E5 F33 G2 P00 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1401&r=mon |
| By: | Lamont Black; Diana Hancock; Wayne Passmore |
| Abstract: | We consider the business strategy of some banks that provide relationship loans (where they have loan origination and monitoring advantages relative to capital markets) with core deposit funding (where they can pass along the benefit of a sticky price on deposits). These "traditional banks" tend to lend out less than the deposits they take in, so they have a "buffer stock" of core deposits. This buffer stock of core deposits can be used to mitigate the full effect of tighter monetary policy on their bank-dependent borrowers. In this manner, the business strategy of "traditional banks" acts as a "core deposit mitigation channel" to provide funds to bank-dependent borrowers when there are monetary shocks. In effect, there is no bank lending channel of monetary policy associated with these traditional banks. ; In contrast, other banks mainly rely on managed liabilities that are priced at market rates. These banks do not have to shift from insured deposits to managed liabilities in response to tighter monetary policy. At the margin, their loans are already funded with managed liabilities. For these banks as well, there is no unique bank lending channel of monetary policy. ; The only banks that are likely to raise loan rates substantially in response to an increase in the federal funds rate are banks with a high proportion of relationship loans that are close to a loan-to-core deposit ratio of one. These banks must substitute higher cost nondeposit liabilities, which have an external finance premium, for core deposits, which do not because of deposit insurance. Some of these banks may also face higher marginal costs as their loan-to-core deposit ratio approaches one because of the costs associated with lending to default-prone relationship borrowers. It is among these banks (which we refer to as high relationship lenders), and only these banks, that we find evidence of a bank lending channel - they significantly reduce lending in response to a monetary contraction. Importantly, these banks hold only a small fraction of U.S. banking assets. Thus, in the United States, the bank lending channel seems limited in scope and importance, mainly because so few banks that specialize in relationship lending switch from core deposits to managed liabilities in response to changes in interest rates. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2007-65&r=mon |
| By: | Refet S. Gürkaynak; Brian Sack; Jonathan H. Wright |
| Abstract: | For over ten years, the U.S. Treasury has issued index-linked debt. Federal Reserve Board staff have fitted a yield curve to these indexed securities at the daily frequency from the start of 1999 to the present. This paper describes the methodology that is used and makes the estimates public. Comparison with the corresponding nominal yield curve allows measures of inflation compensation (or breakeven inflation rates) to be computed. We discuss the interpretation of inflation compensation and its relationship to inflation expectations and uncertainty, offering some empirical evidence that these measures are affected by an inflation risk premium that varies considerably at high frequency. In addition, we also find evidence that inflation compensation was held down in the early years of the sample by a premium associated with the illiquidity of TIPS at the time. We hope that the TIPS yield curve and inflation compensation data, which are posted here and will be updated periodically, will provide a useful tool to applied economists. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-05&r=mon |
| By: | Tarron Khemraj |
| Abstract: | Evidence about commercial banks’ liquidity preference says the following about the loan market in LDCs: (i) the loan interest rate is a minimum mark-up rate; (ii) the loan market is characterized by oligopoly power; and (iii) indirect monetary policy, a cornerstone of financial liberalization, can only be effective at very high interest rates that are likely to be deflationary. The minimum rate is a mark-up over an exogenous foreign interest rate, marginal transaction costs and a risk premium. The paper utilizes and extends the oligopoly model of the banking firm. A calibration exercise tends to replicate the observed stylized facts. |
| Keywords: | excess bank liquidity, oligopoly loan market, monetary policy |
| JEL: | O10 O16 E52 G21 L13 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:une:wpaper:64&r=mon |
| By: | Gregor W. Smith (Queen's University) |
| Abstract: | The new Keynesian Phillips curve (NKPC) restricts multivariate forecasts. I estimate and test it entirely within a panel of professional forecasts, thus using the time-series, cross-forecaster, and cross-horizon dimensions of the panel. Estimation uses 13,193 observations on quarterly US inflation forecasts since 1981. The main finding is a significantly larger weight on expected future inflation than on past inflation, a finding which also is estimated with much more precision than in the standard approach. Inflation dynamics also are stable over time, with no decline in inflation inertia from the 1980s to the 2000s. But, as in historical data, identifying the output gap is difficult. |
| Keywords: | forecast survey, new Keynesian Phillips curve |
| JEL: | E31 E37 C23 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1155&r=mon |
| By: | Kim, Jinill; Ruge-Murcia, Francisco J. |
| Abstract: | This paper studies Tobin's proposition that inflation "greases" the wheels of the labor market. The analysis is carried out using a simple dynamic stochastic general equilibrium model with asymmetric wage adjustment costs. Optimal inflation is determined by a benevolent government that maximizes the households' welfare. The Simulated Method of Moments is used to estimate the nonlinear model based on its second-order approximation. Econometric results indicate that nominal wages are downwardly rigid and that the optimal level of grease inflation for the U.S. economy is about 1.2 percent per year, with a 95% confidence interval ranging from 0.2 to 1.6 percent. |
| Keywords: | Oimal inflation, asymmetric adjustment costs, nonlinear dynamics |
| JEL: | E4 E5 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montde:2007-10&r=mon |
| By: | Stéphane Auray; Aurélien Eyquem |
| Abstract: | In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national inflation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption. |
| Keywords: | Monetary union, Asymmetric shocks, Price stickiness, Financial market incompleteness, welfare |
| JEL: | E51 E58 F36 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0748&r=mon |
| By: | Don 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. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-06&r=mon |
| By: | Marco Malgarini (ISAE - Institute for Studies and Economic Analyses) |
| Abstract: | Since February 2003 ISAE collects quantitative inflation opinions, within its monthly survey on Italian consumers. Data confirms the severe overestimation of inflation already emerged in previous studies. Quantitative replies are in line with more traditional qualitative evaluations, indicating that overestimation is not a sort of random outcome derived from casual answers. A first explanation calls for inadequate knowledge of inflation statistics: however, scarce information does not explain per se overestimation. Indeed, overestimation varies across personal characteristics and it is strongly correlated with assessments on economic conditions, with those being more optimistic generally showing lower inflation opinions. It is possible that given a scarce statistical knowledge consumers attribute to high inflation an “economic distress” mainly determined by slow growth of disposable income and psychological factors linked to socio-economic conditions. |
| Keywords: | Inflation Expectations, Survey data |
| JEL: | D12 D8 E31 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:isa:wpaper:90&r=mon |