nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒02‒23
nineteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Some Empirical Evidence on the Effects of U.S. Monetary Policy Shocks on Cross Exchange Rates By Sarantis Kalyvitis; Ifigeneia Skotida
  2. Gender differences in the effect of monetary policy on employment: The case of nine OECD countries. By Takhtamanova, Yelena; Sierminska, Eva
  3. A Realistic Model for Official Interest Rates By Juan de Dios Tena; Edoardo Otranto
  4. Policy Uncertainty, Symbiosis, and the Optimal Fiscal and Monetary Conservativeness By Giovanni Di Bartolomeo; Marco Manzo; Francesco Giuli
  5. The Currency Equivalent Index and the Current Stock of Money By Kelly, Logan J
  6. Emissions Standard System: A monetary regime for provision of global public goods By KOBAYASHI Keiichiro
  7. Central bank policy rate guidance and financial market functioning By Richhild Moessner; William Nelson
  8. The Impact of the FOMC's Monetary Policy Actions on the growth of Credit Risk: the Monetary Policy - Liquidity Paradox By Kwamie Dunbar
  9. Are Central Bank Preferences Asymmetric? A Comment By Minford, Patrick; Srinivasan, Naveen
  10. Optimal fiscal and monetary policy in customer markets By David M. Arseneau; Sanjay K. Chugh
  11. Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America By Roberto Chang
  12. Monatery Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve By Selva Demiralp
  13. Mr. Wicksell and the global economy: What drives real interest rates? By Michal Brzoza-Brzezina; Jesus Crespo Cuaresma
  14. Long Memory Modelling of Inflation with Stochastic Variance and Structural Breaks By C.S. Bos; S.J. Koopman; M. Ooms
  15. On the Scientific Status of Economic Policy: A Tale of Alternative Paradigms By Giorgio Fagiolo; Andrea Roventini
  16. How do nominal and real rigidities interact? A tale of the second best By Duval, Romain; Vogel, Lukas
  17. Analyzing the Term Structure of Interest Rates using the Dynamic Nelson-Siegel Model with Time-Varying Parameters By Siem Jan Koopman; Max I.P. Mallee; Michel van der Wel
  18. Exchange Rate Regime Transition Dynamics In East Asia By Monzur Hossain
  19. Financial Accelerator Mechanism: Evidence for Colombia By Martha R. López; Norberto Rodríguez N.

  1. By: Sarantis Kalyvitis (Athens University of Economics and Business); Ifigeneia Skotida (Bank of Greece and Athens University of Economics and Businesso)
    Abstract: This paper examines the impact of U.S. monetary policy shocks on the cross exchange rates of sterling, yen and mark. The main finding of the paper is a ‘delayed overshooting’ pattern for all currency cross rates examined (sterling/yen, yen/mark and mark/sterling) following an unexpected U.S. monetary policy change, which in turn generates excess returns. We also provide evidence that the ‘delayed overshooting’ pattern in cross exchange rates is accompanied by asymmetric interventions by central banks in the foreign exchange markets under consideration triggered by U.S. monetary policy shocks.
    Keywords: Monetary Policy; Delayed Overshooting; Foreign Exchange Intervention
    JEL: E52 F31
    Date: 2008–01
  2. By: Takhtamanova, Yelena (Reserve Bank of San Francisco); Sierminska, Eva (CEPS/INSTEAD and DIW Berlin)
    Abstract: In many countries, the focus of monetary policy is increasingly shifting to low and stable inflation as it provides many benefits to the economy. However, there is evidence that costs of inflation reduction are inequitably distributed by gender in developing countries. This paper addresses employment costs of inflation reduction in developed countries. Using quarterly data for 1980-2006, we examine gender and country differences in the effects of interest rate on employment in nine OECD countries. We look at total employment, as well as employment dis-aggregated by three sectors: agriculture, industry and services. We find that the link between monetary policy instruments (short-term interest rates) and employment in the industrial countries under investigation is neither strong nor varies by gender.
    Keywords: employment; IS curve ; interest rates ; monetary policy inflation ; compensation
    JEL: E4 E5 J2
    Date: 2008–02
  3. By: Juan de Dios Tena; Edoardo Otranto
    Abstract: This paper extends the VAR methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: 1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers; and 2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find evidence of both types of asymmetries. Moreover, the operational independence granted to the Bank of England involved drastic changes on the interpretation of the reaction function of the monetary authority and the consequences of monetary shocks. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.
    Keywords: Monetary shocks, impulse-response functions, monetary policy,
    JEL: C22 C32 E52
    Date: 2008
  4. By: Giovanni Di Bartolomeo (University of Teramo); Marco Manzo; Francesco Giuli
    Abstract: This paper extends a well-known macroeconomic stabilization game between monetary and fiscal authorities introduced by Dixit and Lambertini (American Economic Review, 93: 1522-1542) to multiplicative (policy) uncertainty. We find that even if fiscal and monetary authorities share a common output and inflation target (i.e. the symbiosis assumption), the achievement of the common targets is no longer guaranteed; under multiplicative uncertainty, in fact, a time consistency problem arises unless policymakers¢ output target is equal to the natural level.
    Keywords: Monetary-fiscal policy interactions, uncertainty, symbiosis.
    JEL: E61 E63
    Date: 2008–02–17
  5. By: Kelly, Logan J
    Abstract: The currency equivalent index provides an elegant method for measuring the stock of money, but it rests upon assumptions that do not match an important characteristic of the data. Thus, it is unclear what, if anything, the CE measures. This paper attempts to answer this question by deriving the current stock of money (CSM), which is defined to be the discounted present value of the monetary service flows provided by only the current portfolio of monetary assets, and then analyzing the assumptions under which the current stock of money can be measured by the currency equivalent index.
    Keywords: Currency Equilivant Index, Monetary Aggregation, Money Stock
    JEL: C43 E49
    Date: 2008–02–15
  6. By: KOBAYASHI Keiichiro
    Abstract: This paper theoretically examines an imaginary monetary regime in which the private provision of global public goods that reduce greenhouse gases ("emissions reducers," e.g., forests) is enhanced and the public goods are held in the private sector as monetary assets. We consider a monetary regime where the government or the central bank makes public goods a means of payment by committing itself to conversion of emissions reducer into cash (and probably by adopting appropriate banking regulations). Using a simple cash-in-advance setting, we show that the monetary regime internalizes the externality of public goods by endowing them with a private function as a means of payment. In the monetary regime, private agents buy and hold emissions reducers voluntarily, and the government need not impose caps on emissions nor pay any costs for public goods provision. Moreover, in an economic boom when greenhouse gas emissions increase, emissions reducers may also increase automatically. Due to the network externalities of money, emissions reducers may become used as money internationally and thus the international free-rider problem may be mitigated. Our results imply that the monetary regime may be a promising extension of existing policy plans for global warming.
    Date: 2008–02
  7. By: Richhild Moessner; William Nelson
    Abstract: Central bank communication has changed dramatically over the past decade, with some central banks providing guidance about or explicit forecasts of likely future policy rates. One frequently made argument against the provision by central banks of such guidance or forecasts is that it runs the risk of impairing market functioning. In this paper, we evaluate the behaviour of financial markets in the United States, the euro area and New Zealand in light of the communication strategies of central banks, in order to assess whether the provision of policy rate guidance by central banks impairs market functioning. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that such guidance or forecasts impair market functioning in the United States, the euro area or New Zealand. The results suggest that the risk of impairing market functioning is not a strong argument against central banks' provision of policy rate guidance or forecasts.
    Keywords: Central bank communication, policy rate forecasts, financial market functioning
    Date: 2008–02
  8. By: Kwamie Dunbar (University of Connecticut)
    Abstract: Credit risk is influenced by interest rates and market liquidity. This paper examines the direct and indirect impacts of unexpected monetary policy shifts on the growth of corporate credit risk, with the aim of quantifying the size and direction of the response. The results surprisingly indicate that monetary policy and liquidity impulses move counter to each other in their effects on credit risk ("The monetary policy-liquidity paradox"). The analysis indicates that while contractionary monetary policy creates tight money which subsequently leads to a slowing in the growth of credit risk and a reduction of liquidity in credit markets, reduced liquidity indirectly affects credit risk by accelerating its growth. The net effect of these transitory opposing forces generates the final impact on credit risk. An unexpected policy shifts is captured via a combination of the forward Fed fund rate curve and the Fed's FOMC policy announcements. Following the approach of Bernanke and Kuttner (2005), Hausman and Wongswan (2006) who examined asset prices under FOMC announcements, the study found that the estimated credit risk responses to FOMC announcements vary across credit qualities. Hence the analyses indicates that a typical unanticipated 25 basis point cut in the target fed funds rate generally resulted in an acceleration in the growth of credit risk by 0.50 percent for AAA rated corporate grade debt, and by 3.5 percent for BB rated corporate debt. Moreover, the study found a direct effect of the FOMC's policy instrument on market liquidity which had a significant effect on the growth in credit risk. The results indicate that a 1 percentage point increase in liquidity for AAA and CCC rated bonds resulted in a 0.7% and 52.45% decrease in the rate of growth in credit risk respectively.
    Keywords: Credit Risk, Default Risk, Credit Default Swap, Monetary Policy, Credit Markets, Financial Markets, Vector Autoregressive Model, Federal funds rate.
    Date: 2008–02
  9. By: Minford, Patrick (Cardiff Business School); Srinivasan, Naveen
    Abstract: A recent paper by Ruge-Murcia [European Economic Review 48 (2004), 91-107] on asymmetric central bank objectives provides a new perspective on the policy roots of inflation in developed economies. More precisely, the paper demonstrates that if the distribution of the supply shocks is normal, then the reduced form solution for inflation implies a positive (or negative) relation between average inflation and the variance of shocks. We argue that the evidence offered in support of this hypothesis suffers from lack of identification because Phillips curve nonlinearity combined with quadratic central bank preferences yield the same reduced form solution for inflation. If so, estimating reduced form for inflation will not be able to discriminate between these models. Yet they have quite different implications for policy. Other, structural, evidence is needed.
    Keywords: Preference asymmetry; Phillips curve nonlinearity; Identification
    JEL: E52 E58 E61
    Date: 2008–02
  10. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: A growing body of evidence suggests that ongoing relationships between consumers and firms may be important for understanding price dynamics. We investigate whether the existence of such customer relationships has important consequences for the conduct of both long-run and short-run policy. Our central result is that when consumers and firms are engaged in long-term relationships, the optimal rate of price inflation volatility is very low even though all prices are completely flexible. This finding is in contrast to those obtained in first-generation Ramsey models of optimal fiscal and monetary policy, which are based on Walrasian markets. Echoing the basic intuition of models based on sticky prices, unanticipated inflation in our environment causes a type of relative price distortion across markets. Such distortions stem from fundamental trading frictions that give rise to long-lived customer relationships and makes pursuing inflation stability optimal.
    Date: 2008
  11. By: Roberto Chang
    Abstract: This paper examines whether central banks in Latin America have implemented conventional inflation targeting (IT) prescriptions, with a focus on foreign exchange intervention and official reserves accumulation policies. To this end, the paper reviews the experiences of Brazil, Chile, Colombia, and Peru, and finds significant departures from the dominant theory of IT. Foreign exchange intervention has often been used to prevent excessive financial volatility, bubbles, and panics. Ongoing patterns of reserves accumulation have been the outcome of an effort to build “war chests” against speculative attacks and, more recently, of a fight against real exchange appreciation. Possible justifications of the discrepancies between conventional IT theory and practice are discussed and generally found unsatisfactory.
    Date: 2008–02–14
  12. By: Selva Demiralp (Koç University)
    Abstract: We test the expectations hypothesis by analyzing changes in three month T-Bill rates (TB3) after FOMC meetings. By estimating the revisions in expectations of future overnight rates, we find a one-to-one relationship between changes in TB3 and path revisions.
    Keywords: Expectations Hypothesis, Policy Path Revisions
    JEL: E43
    Date: 2008–02
  13. By: Michal Brzoza-Brzezina (National Bank of Poland and Warsaw School of Economics); Jesus Crespo Cuaresma (Department of Economics, University of Innsbruck)
    Abstract: We use a Bayesian dynamic latent factor model to extract world, regional and country factors of real interest rate series for 22 OECD economies. We find that the world factor plays a privileged role in explaining the variance of real rates for most countries in the sample, and accounts for the steady decrease in interest rates in the last decades. Moreover, the relative contribution of the world factor is rising over time. We also find relevant differences between the group of countries that follow fixed exchange rate strategies and those with flexible regimes.
    Keywords: Real interest rates, natural rate of interest, Bayesian dynamic factor models.
    JEL: E43 C11 E58
    Date: 2008–01–29
  14. By: C.S. Bos (VU University Amsterdam); S.J. Koopman (VU University Amsterdam); M. Ooms (VU University Amsterdam)
    Abstract: We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.
    Keywords: Time varying parameters; Importance sampling; Monte Carlo simulation; Stochastic Volatility; Fractional Integration
    JEL: C15 C32 C51 E23 E31
    Date: 2007–12–18
  15. By: Giorgio Fagiolo; Andrea Roventini
    Abstract: In the last years, a number of contributions has argued that monetary -- and, more generally, economic -- policy is finally becoming more of a science. According to these authors, policy rules implemented by central banks are nowadays well supported by a theoretical framework (the New Neoclassical Synthesis) upon which a general consensus has emerged in the economic profession. In other words, scientific discussion on economic policy seems to be ultimately confined to either fine-tuning this "consensus" model, or assessing the extent to which "elements of art" still exist in the conduct of monetary policy. In this paper, we present a substantially opposite view, rooted in a critical discussion of the theoretical, empirical and political-economy pitfalls of the neoclassical approach to policy analysis. Our discussion indicates that we are still far from building a science of economic policy. We suggest that a more fruitful research avenue to pursue is to explore alternative theoretical paradigms, which can escape the strong theoretical requirements of neoclassical models (e.g., equilibrium, rationality, etc.). We briefly introduce one of the most successful alternative research projects -- known in the literature as agent-based computational economics (ACE) -- and we present the way it has been applied to policy analysis issues. We conclude by discussing the methodological status of ACE, as well as the (many) problems it raises.
    Keywords: Economic Policy, Monetary Policy, New Neoclassical Synthesis, New Keynesian Models, DSGE Models, Agent-Based Computational Economics, Agent-Based Models, Post-Walrasian Macroeconomics, Evolutionary Economics.
    Date: 2008–02–14
  16. By: Duval, Romain; Vogel, Lukas
    Abstract: This paper analyses the importance of real wage rigidities, in particular through their interaction with price stickiness, for optimal monetary policy in a calibrated small open economy DSGE model including oil in production and consumption. Blanchard and Galí (2007a) show real rigidities to introduce a trade-off between stabilising inflation and the welfare-relevant output gap. The present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions. In a typical “tale of the second best”, we also show that in the presence of real wage rigidities, price stickiness can be welfare-enhancing.
    Keywords: DSGE model; price stickiness; real wage rigidity; oil price shocks
    JEL: E30 F41 Q43
    Date: 2007–10–31
  17. By: Siem Jan Koopman (VU University Amsterdam); Max I.P. Mallee (VU University Amsterdam); Michel van der Wel (VU University Amsterdam)
    Abstract: In this paper we introduce time-varying parameters in the dynamic Nelson-Siegel yield curve model for the simultaneous analysis and forecasting of interest rates of different maturities, known as the term structure. The Nelson-Siegel model has been recently reformulated as a dynamic factor model where the latent factors are interpreted as the level, slope and curvature of the term structure. The factors are modelled by a vector autoregressive process. We propose to extend this framework in two directions. First, the factor loadings are made time-varying through a simple single step function and we show that the model fit increases significantly as a result. The step function can be replaced by a spline function to allow for more smoothness and flexibility. Second, we investigate empirically whether the volatility in interest rates across different time periods is constant. For this purpose, we introduce a common volatility component that is specified as a spline function of time and scaled appropriately for each series. Based on a data-set that is analysed by others, we present empirical evidence where time-varying loadings and volatilities in the dynamic Nelson-Siegel framework lead to significant increases in model fit. Improvements in the forecasting of the term structure are also reported. Finally, we provide an illustration where the model is applied to an unbalanced dataset. It shows that missing data entries can be estimated accurately.
    Keywords: Yield Curve; Time-varying Volatility; Spline Functions; Kalman Filter; Missing Values
    JEL: C32 C51 E43
    Date: 2007–12–07
  18. By: Monzur Hossain (American International University Bangladesh)
    Abstract: This paper investigates the currency regime choices of six East Asian emerging countries, namely, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, for the period 1973-99 from the optimum currency area (OCA), macroeconomic stabilization and currency crisis perspectives. It finds that regime transition dynamics in these countries are statistically insignificant for the period under consideration, but static regime choice is largely consistent with the predictions of international macroeconomics. The empirical results suggest that a more fixed or flexible regime is suitable for these East Asian countries.
    Date: 2008–01
  19. By: Martha R. López; Norberto Rodríguez N.
    Abstract: Colombia experienced a deep recession in 1999-2003. Growth slowed by 4.2%, and investment by 34.6%. Was the severity of the recession due to a ¯nan- cial accelerator mechanism µa la Bernanke, Gertler, and Gilchrist (1999)? To answer this question, this paper estimates a dynamic stochastic general equilib- rium model with credit-market imperfections for the Colombian economy using Bayesian methods. The results show that balance-sheet e®ects played an im- portant role in explaining recent Colombian recession; the ¯nancial accelerator mechanism turns out to be quantitatively signi¯cant accounting for about 50 percent of the total reduction in output after a monetary policy tightening.
    Date: 2008–01–30

This nep-mon issue is ©2008 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.