nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒03‒08
ten papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  2. Linear-Quadratic Approximation to Unconditionally Optimal Policy: The Distorted Steady-State By Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
  3. Tips from TIPS: the informational content of Treasury Inflation-Protected Security prices By Stefania D'Amico; Don H Kim; Min Wei
  4. Euro Area Enlargement and Euro Adoption Strategies By Zsolt Darvas; György Szapáry
  5. Beggar Thy Neighbour Exchange Rate Regime Misadvice  from Misapplications of Mundell (1961) and the Remedy By Robin Pope
  7. Exchange Rate Determination: A Model of the Decisive Role of Central Bank Cooperation and Conflict By Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
  8. Credit Expansion, the Prisoner´s Dilemma and Free Banking as Mechanism Design By van den Hauwe, Ludwig
  9. Consumer Price Inflation across the Income Distribution in South Africa By Morné Oosthuizen

  1. By: Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Hellström, Jörgen (Department of Economics); Landström, Mats (Department of Economics)
    Abstract: It is something of a puzzle that politicians around the world have chosen to give up power to independent central banks, thereby reducing their possibilities to fine-tune the economy. In this paper the determinants of central bank independence (CBI) reforms are studied using a new data set on the possible event of such reforms in 119 countries. According to the data, as much as 81 countries had implemented CBI-reforms during the study period. The results indicate, moreover, that policymakers are more likely to delegate power to independent central banks when the foreign debt is relatively high. In non-OECD countries, the likelihood of a CBI-reform also seems to increase when policymakers face a high probability of getting replaced.
    Keywords: Central bank independence; political economy
    JEL: E42 E58 E61 P16
    Date: 2008–02–29
  2. By: Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive.
    Keywords: Unconditional expectations, Optimal monetary policy.
    JEL: E20 E32 F32 F41
    Date: 2008–02
  3. By: Stefania D'Amico; Don H Kim; Min Wei
    Abstract: We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations.
    Keywords: term structure model, inflation expectation, inflation risk premium, SPF, Treasury Inflation-Protected Securities (TIPS)
    Date: 2008–02
  4. By: Zsolt Darvas (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest and Argenta ZRt.); György Szapáry (Central European University and former Deputy Governor of Magyar Nemzeti Bank)
    Abstract: The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic.
    Keywords: euro area enlargement, convergence, exchange rate, inflation, Maastricht
    JEL: E31 E52 E60 F30
    Date: 2008–01–28
  5. By: Robin Pope
    Abstract: Economists invoke Mundell (1961) in arguing for the general policy of   a flexible exchange rate regime as a means of restoring equilibria   after shocks. But there is a discrepancy between the intent of the   general policy and attempts at its implementation as identified by   specific changes in exchange rates.  When we assemble the set of   specific changes called for by distinct economists operating as   advocates for individual countries, these are uniformly in the form   of beggar-thy-neighbour advice – ie travesties of objectively   identifying disequilibria and a menace to international cooperation   and peace.  This paper traces the unintended travesties to problems   of complexity and uncertainty, problems that implicitly are assumed   absent in Mundell (1961) rendering the situation so simple that   equilibria are transparent.  The problems remained essentially   unaddressed when economists extended Mundell (1961) via expected   utility theory since this theory also ignores the impossibility of   maximising and the complexities of central bankers, private firms and   others in doing the evaluation stage in reaching decisions.  The   problems can be overcome by modelling within SKAT, the Stages of   Knowledge Ahead Theory.  This paper points to experimental evidence   in support of the view that under all sorts of disequilibrating   shocks, currency unions outperform flexible currencies by eliminating   the inefficiencies generated by exchange rate uncertainty.
    Keywords: optimal currency area; exchange rate regime; certainty effects;   policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness.
    JEL: D80 F31
    Date: 2007–11
  6. By: Andrew Hughes Hallet; Jan Libich; Petr Stehlik
    Abstract: The paper considers a simple model in which monetary and fi?scal policies are formally independent, but still interdependent - through their spillovers onto the macroeconomic targets to which they are not primarilly assigned. It shows that the average equilibrium levels of inflation, deficit, debt, and output depend on the two policies' (i) potency (elas- ticity of output with respect to the policy instruments); (ii) ambition (the level of their output target); and (iii) conservatism (inflation vs output volatility aversion). However, it is the relative degrees of these characteristics that matter, rather than the absolute degrees for each policy. Therefore, and as expected, coordination of monetary and ?fiscal policy is found to be superior to non-cooperative Nash behaviour for both policymakers. Interestingly though, it is coordination in terms of the policies' ambition, rather than conservatism, that is essential. That is a new result. Furthermore, ambition-coordination can be welfare improving even if the policymakers' objectives are idiosyncratic, and/or even their coordinated output targets differ from the socially optimal one.
    JEL: E61 E63
    Date: 2008–03
  7. By: Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen
    Abstract: Opinion is divided on whether it is better to have a single world   money or variable exchange rates.  Pope, Selten and von Hagen (2003)   propose that fresh light would be shed via an analysis that allows   for seven complexity impacts on the exchange rate that are   underplayed (where not entirely absent) from current analyses: 1) the   role of official sector, including its central bank; 2) the numerous   official and private sector goals; 3) the disparate degrees of market   power of different sorts of private agents; 4) the documentation that   essentially all shocks to the exchange rate are generated by human   decisions; 5) the non-maximising heuristics that in the complex   economy agents use; 6) heterogenous beliefs.  This paper analyses a   closed form game theoretic solution of version 1 of a model that   combines impacts 1 to 4 with the conventional finance assumption that   all agents maximise their utility.  Impact 1) precludes private   agents being able to destabilise the exchange rate against the   cooperation of the central banks required by the game theoretic   solution.  Impact 4) excludes random events and other exogenous   shocks such as meteors falling from the sky.  The rational maximising   assumption in turn precludes all other sources of shocks and thus any   need for a variable exchange rate to equilibrate after shocks.  We   then modify version 1 of our model substituting for the maximising   assumption impacts 5 to 7, impacts that allow shocks from humans to   be consistently incorporated.  We do so by means of an experimental   investigation which indicates that central bankers less than fully   cooperate, leaving scope for private speculators to support their   preferred currency.  From the viewpoint of the game theoretic   equilibrium, the resultant exchange rate changes render equilibrium   unspecified.  A single world money avoids disruptive exchange rate   changes from less than fully cooperating central banks, exchange rate   changes caused by central bank conflicts and that cannot be   classified as equilibrating.
    Keywords: central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers
    JEL: F31 F33 B40 B59 C79 C90 C91 C92
    Date: 2007–12
  8. By: van den Hauwe, Ludwig
    Abstract: Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge.
    Keywords: Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design;
    JEL: E32 E66 E58 E42 E31 G18 E52 D01 K39
    Date: 2008–02–21
  9. By: Morné Oosthuizen (Development Policy Research Unit, University of Cape Town)
    Abstract: Abstract: By monitoring the price changes experienced by some representative household, consumer price indices provide an important measure of changing purchasing power within a given economy. Group price indices offer one method of more accurately reflecting the inflation experiences of specific types of households, such as poor households, elderly households or households with children, for example. This study uses expenditure data from the 2000 Income and Expenditure Survey and price indices from Statistics South Africa to calculate inflation rates for expenditure deciles for the period 1998 to 2006. As a result, price indices and inflation rates calculated on the basis of these weights can not accurately reflect the rates of inflation experienced by what would be viewed as the ‘average’ household.
    Keywords: South Africa: consumer price index, Income distribution (South Africa), purchasing
    JEL: A1
    Date: 2007–11
  10. By: Matić, Branko
    Abstract: The author researches a singular monetary situation connected with the common issue of commemorative coin age by two states: Ireland, an EU member state that belongs to the Euro-system, and Croatia, an EU membership candidate. Although they belong to two different monetary systems, the two countries created a precedent by issuing a common commemorative coin on the grounds of ahistoric artistic design. This under­taking is affirmation of Croatian coinage, artistic and numismatic activities.
    Keywords: money; monetary solutions;issuing profit; European union
    JEL: E42 E5 E44 F31
    Date: 2007

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