nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒03‒15
twelve papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach By Pelin Ilbas
  2. Modelling bank lending in the euro area: A non-linear approach By Leonardo Gambacorta; Carlotta Rossi
  3. Risk Management in Action. Robust monetary policy rules under structured uncertainty. By Paul Levine; Peter McAdam; Joseph Pearlman; Richard Pierse
  4. Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates? By Anna Naszódi
  5. Endogenous Money in the Age of Financial Liberalization By Gökçer Özgür; Korkut A. Ertürk
  6. Exchange Rate Forecasting: Evidence from the Emerging Central and Eastern European Economies By Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
  7. Foreign Trade Pricing and Stability of a Monetary Union By DRISSI, rdrissi
  8. Does it Matter How to Measure Aggregates? The Case of Monetary Transmission Mechanisms in the Euro Area By Andreas Beyer; Katarina Juselius
  9. China's Exchange Rate Policy: A Survey of the Literature By Robert Lafrance
  10. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  11. Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks By Robert Lavigne
  12. Capital Inflows and Reserve Accumulation: The Recent Evidence By Carmen M. Reinhart; Vincent R. Reinhart

  1. By: Pelin Ilbas (Center for Economic Studies, Catholic University of Leuven)
    Abstract: In this paper we adopt a Bayesian approach towards the estimation of the monetary policy preference parameters in a general equilibrium framework. We start from the model presented by Smets and Wouters (2003) for the euro area where, in the original set up, monetary policy behaviour is described by an empirical Taylor rule. We abandon this way of representing monetary policy behaviour and assume, instead, that monetary policy authorities optimize an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialize our estimates by considering a presample period of 40 quarters. This allows us to approach, empirically, the timeless perspective framework.
    Keywords: optimal monetary policy, commitment, central bank preferences, euro area monetary policy
    JEL: E42 E52 E58 E61
    Date: 2008–03
  2. By: Leonardo Gambacorta (Banca d'Italia); Carlotta Rossi (Banca d'Italia)
    Abstract: This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modelled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money market rate). The main features of the model are the existence of two co-integrating equations representing the long-run credit demand and supply and the possibility for loading and lagged-term coefficients to assume different values depending on the monetary policy regime (easing or tightening). The paper finds that the effect on credit, GDP, and prices of a monetary policy tightening is larger than the effect of a monetary policy easing. This result supports the existence of an asymmetric broad credit channel in the euro area.
    Keywords: monetary policy transmission, credit market, credit view, asymmetries
    JEL: C32 C51 E44 E52
    Date: 2007–11
  3. By: Paul Levine (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.); Peter McAdam (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joseph Pearlman (London Metropolitan University, 31 Jewry Street, London, EC3N 2EY, U.K.); Richard Pierse (Department of Economics, University of Surrey, Guildford, Surrey, GU2 7XH, U.K.)
    Abstract: Recent interest in ‘Risk Management’ has highlighted the relevance of Bayesian analysis for robust monetary-policy making. This paper sets out a comprehensive methodology for designing policy rules inspired by such considerations. We design rules that are robust with respect to model uncertainty facing both the policymaker and private sector. We apply our methodology to three simple interest-rate rules: inflation-forecast-based (IFB) rules with a discrete forward horizon, one targeting a discounted sum of forward inflation, and a current wage inflation rule. We use an estimated DSGE model of the euro area and estimated measures of structured exogenous and parameter uncertainty for the exercise. We find that IFB rules with a long horizon perform poorly with or without robust design. Our discounted future targeting rule performs much better, indicating that policy can be highly forward-looking without compromising stabilization. The wage inflation rule dominates whether it is designed to have good robust properties or not. JEL Classification: E52, E37, E58.
    Keywords: Interest-rate rules, robustness, structured uncertainty.
    Date: 2008–02
  4. By: Anna Naszódi (Magyar Nemzeti Bank)
    Abstract: This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.
    Keywords: Monetary union, eurozone entry, factor model, Kalman filter, exchange rate stabilization, asset-pricing exchange rate model.
    JEL: F31 F36 G13
    Date: 2008
  5. By: Gökçer Özgür; Korkut A. Ertürk
    Abstract: The paper reports results that show a much weakened statistical relationship between total bank credit, total deposits and the broad money supply for the period after 1995 for the US, where no statistical causation can be discerned in either direction. This has been the result of the changing nature of the credit creation process where banks have acquired almost total independence from required reserves and core deposits in extending credit, and even an ability to circumvent the constraint posed by capital requirements through asset securitization, giving rise to an explosive increase in nonbank intermediation. As a result, the expansion of bank credit did not result in a commensurate increase of bank deposits because financial intermediation spilled over to nondepository institutions, and with the growing importance of nonbank deposits in M3, broad money supply became broader than banks’ total deposits.
    Keywords: Endogenous Supply of Money, Broad Money, Financial Intermediation, Asset Securitization
    JEL: B22 E12 E51
    Date: 2008–06
  6. By: Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
    Abstract: There is a vast literature on exchange rate forecasting focusing on developed economies. Since the early 1990s, many developing economies have liberalized their financial accounts, and become an integral part of the international financial system. A series of financial crises experienced by these emerging market economies ed them to switch to some form of a flexible exchange rate regime, coupled with inflation targeting. These developments, in turn, accentuate the need for exchange rate forecasting in such economies. This paper is a first attempt to compile data from the emerging Central and Eastern European (CEE) economies, to evaluate the performance of versions of the monetary model of exchange rate determination, and time series models for forecasting exchange rates. Forecast performance of these models at various horizons are evaluated against that of a random walk, which, overwhelmingly, was found to be the best exchange rate predictor for developed economies in the previous literature. Following Clark and West (2006, 2007) for forecast performance analysis, we report that in short horizons, structural models and time series models outperform the random walk for the six CEE countries in the data set.
    Keywords: Exchange rate forecasting; Out-of-sample forecast performance
    JEL: C53 F31
    Date: 2008–03–06
  7. By: DRISSI, rdrissi
    Abstract: This study, examine the price-setting behaviour of Europe exporters relying on the analytical framework of exchange rate pass-through. Strong dierences as regards the price determination of exports can be seen in the euro zone. Some countries use local pricing: they set their selling price in the purchaser's currency, so local-currency export prices are then very sensitive to exchange-rate uctuations. Others on the contrary nd it easier to impose their price in local currency. We try to modelize this heterogeneity within a simple framework: we g- ure out a two-country monetary union, one of them is price-taker for its exports and the other is price-maker. We then examine the conse- quences of an exchange shock against the rest of the world. As far as reactions to this shock are asymmetric, the Central Bank, having as its objective the average ination of the union, might strengthen the negative impact of such a shock, at least in one of the two countries.
    JEL: F41
    Date: 2007–02–09
  8. By: Andreas Beyer (European Central Bank); Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: Beyer, Doornik and Hendry (2000, 2001) show analytically that three out of four aggregation methods yield problematic results when exchange rate shifts induce relative-price changes between individual countries and found the least problematic method to be the variable weight method of growth rates. This papers shows, however, that the latter is sensitive to the choice of base year when based on real GDP weights whereas not on nominal GDP weights. A comparison of aggregates calculated with different methods shows that the differences are tiny in absolute value but highly persistent. To investigate the impact on the cointegration properties in empirical modelling, the monetary model in Coenen & Vega (2001) based on fixed weights was re-estimated using flexible real and nominal GDP weights. In general, the results remained reasonably robust to the choice of aggregation method.
    Keywords: aggregation; flexible weights; Eurowide money demand; cointegration
    JEL: C32 C42 E41
    Date: 2008–03
  9. By: Robert Lafrance
    Abstract: China's integration into the world economy has benefited its people by reducing poverty and raising living standards, and it has benefited the industrialized world by producing manufactured goods at lower cost. It has also raised geopolitical concerns as China's power grows, economic concerns as the manufacturing base in many industrialized countries erodes, and polemics as proposals of protectionist measures to counter China's export growth are put forward. The author reviews the literature on how China's exchange rate regime could evolve and contribute, through greater flexibility, to tempering domestic inflationary pressures and to facilitating an orderly resolution of global imbalances. His main conclusions are that China would benefit from moving towards a more flexible exchange rate regime and allowing the People’s Bank of China greater independence to pursue an inflation-control objective. In a transition phase, a managed float would be useful to limit volatility as firms adapt to the new system and the banking system is put on a sounder footing, a monetary policy framework is put in place, and capital controls are progressively eased. Shock therapy (a quick and pronounced revaluation) would be ill advised.
    Keywords: Exchange rate regimes
    JEL: F33 F36
    Date: 2008
  10. By: Daunfeldt, Sven-Olov (Högskolan i Gävle); Hellström, Jörgen (Department of Economics, Umeå University); Landström, Mats (Högskolan i Gävle)
    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: Institutional reforms; inflation; time-inconsistency; political stability; probit
    JEL: E31 E42 E52 E58
    Date: 2008–03–10
  11. By: Robert Lavigne
    Abstract: The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.
    Keywords: Financial stability; Exchange rate regimes; International topics
    JEL: F31 E52 O24
    Date: 2008
  12. By: Carmen M. Reinhart; Vincent R. Reinhart
    Abstract: Over the past decade, policymakers in many emerging market economies have opted to limit fluctuations of the value of their domestic currencies relative to the U.S. dollar. A simple interest-parity relationship is used to identify the potential sources of upward pressure on the value of a foreign exchange rate and to explain the policy options to damp them. The paper then documents the extent to which the accumulation of foreign exchange reserves has been sterilized and provides a comprehensive list of major policy initiatives related to stemming forces that would otherwise appreciate the exchange rate in over one hundred countries. This examination of policy efforts shows that a wide variety of tools are used in the attempt to stem the tide of capital flows.
    JEL: E0 F0 F3
    Date: 2008–03

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