nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒03‒25
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary policy and core inflation By Lenza, Michele
  2. Monetary Policy Regimes and the Volatility of Long-Term Interest Rates By Queijo von Heideken, Virginia
  3. A Bayesian-Estimated Model of InflationTargeting in South Africa By Thomas Harjes; Luca Antonio Ricci
  4. Excess money growth and inflation dynamics By Barbara Roffia; Andrea Zaghini
  5. Communication, decision-making and the optimal degree of transparency of monetary policy committees By Weber, Anke
  6. Central Bank Financial Strength, Policy Constraints and Inflation By Peter Stella
  7. Optimal Monetary Policy under Uncertainty in DSGE Models: A Markov Jump-Linear-Quadratic Approach By Lars E.O. Svensson; Noah Williams
  8. Does Money Growth Granger-Cause Inflation in the Euro Area? Evidence from Out-of-Sample Forecasts Using Bayesian VARs By Helge Berger; Pär Österholm
  9. Governing the Governors: A Clinical Study of Central Banks By Frisell, Lars; Roszbach, Kasper; spagnolo, giancarlo
  10. Money and the natural rate of interest: structural estimates for the United States and the euro area By Javier Andrés; David López-Salido; Edward Nelson
  11. Hard peg and monetary unions.Main lessons from the Argentine experience By Carrera, Jorge Eduardo/J.E.
  12. Observed Inflation Forecasts and the New Keynesian Phillips Curve By Chengsi Zhang; Denise R. Osborn; Dong Heon Kim
  13. Helicopter Drops and Japanfs Liquidity Trap By Laurence Ball
  14. Characterizing the Brazilian Term Structure of Interest Rates By Osmani T. Guillen; Benjamin M. Tabak
  15. Labor Markets and Monetary Policy: A New-Keynesian Model with Unemployment By Olivier Blanchard; Jordi Gali
  16. Sterilization, Monetary Policy, and Global Financial Integration By Joshua Aizenman; Reuven Glick
  17. Imperfect Central Bank Communication - Information versus Distraction. By Pär Österholm; Spencer Dale; Athanasios Orphanides
  18. What’s behind “inflation perceptions”? A survey-based analysis of Italian consumers By Paolo Del Giovane; Silvia Fabiani; Roberto Sabbatini
  19. A "double coincidence" search model of money By Amendola, Nicola
  20. Search frictions, real rigidities and inflation dynamics By Carlos Thomas
  21. Do monetary rewards undermine intrinsic motivations of volunteers? Some empirical evidence for Italian volunteers By Fiorillo, Damiano
  22. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises By Carmen M. Reinhart; Kenneth S. Rogoff
  23. International Reserve Trends in the South Caucasus and Central Asia Region By Holger Floerkemeier; Mariusz A. Sumlinski
  24. Monetary Policy, Market Excesses and Financial Turmoil By Rudiger Ahrend; Boris Cournède; Robert Price
  25. Euro-zone Inflation Rates: Stationary or Regime-wise Stationary Processes By Claude Lopez
  26. Can Exchange Rates Forecast Commodity Prices? By Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi
  27. The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Share the Burden? By Fabia A. de Carvalho; Cyntia F. Azevedo

  1. By: Lenza, Michele
    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.
    Keywords: core inflation, elasticity of intertemporal substitution, heterogeneity, nominal rigidity
    JEL: E43 E52 E58
    Date: 2007
  2. By: Queijo von Heideken, Virginia (Research Department, Central Bank of Sweden)
    Abstract: This paper addresses two important questions that have, so far, been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data, which is hard to replicate using standard macro models. Building a small-scale macroeconomic model and estimating it on U.S. and U.K. data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes and that U.S. monetary policy is best understood as originating from a discretionary regime since 1960.
    Keywords: long-term interest rates; optimal monetary policy; discretion; commitment; Bayesian estimation
    JEL: C11 C13 C15 E32 E42 E43 E47 E50
    Date: 2008–02–01
  3. By: Thomas Harjes; Luca Antonio Ricci
    Abstract: This paper estimates a small dynamic macroeconomic model for the South African economy with Bayesian methods. The model is tailored to assessing the impact of domestic as well as external shocks on inflation within an inflation targeting framework, by incorporating forward-looking behavior of private agents and of the monetary authority. The model is able to display important empirical features of the monetary transmission mechanism that have been found in other studies. It helps to integrate the short-term inflation outlook into a consistent medium-term framework and to design the policy response for various shocks that affect inflation.
    Keywords: Inflation targeting , South Africa , Inflation , Energy prices , Exchange rate instability , Demand ,
    Date: 2008–02–29
  4. By: Barbara Roffia (European Central Bank, DG Economics); Andrea Zaghini (Bank of Italy, Economic Research Department)
    Abstract: The paper analyzes the short-run impact of periods of strong monetary growth on inflation dynamics for 15 industrialized economies. We find that when robust money growth is accompanied by large increases in stock and house prices and loose credit conditions, the probability of recording an inflationary outburst over a three-year horizon is significantly increased. In contrast, significant money stock expansions which are not associated with sustained credit increases and strong dynamics in other asset prices seem to be less likely to have inflationary consequences and thus, less worrying from a policy perspective.
    Keywords: Inflation, money growth, quantity theory of money
    JEL: E31 E40
    Date: 2008–01
  5. By: Weber, Anke
    Abstract: This paper develops a theoretical model of dynamic decision-making of a monetary policy committee with heterogeneous members. It investigates the optimal transparency, and the optimal way of transmitting information of committees, by analysing the effects different communication strategies have on financial markets. It is shown that the communication strategy of the central bank committee has a significant effect on the predictability of monetary policy decisions when there is asymmetric information between the committee and market agents. Transparency about the diversity of views of the committee surrounding the economic outlook makes future monetary policy more predictable. However, communicating the diversity of views regarding monetary policy decisions may lead to less predictability of monetary policy in the short term. In addition, it is shown that communication in the form of voting records has the greatest effect on market participants' near term policy expectations. These results support findings of the empirical literature and have strong implications for the optimal communication strategies of committees including the question whether individual voting records should be published.
    Keywords: Monetary Policy Committees, Uncertainty, Communication, Transparency
    JEL: E50 E52 E58
    Date: 2008
  6. By: Peter Stella
    Abstract: Central bank financial strength is positively associated with good policy performance. Financially weak central banks generate losses which undermine macroeconomic stability and call into question the credibility of their policies. In assessing central bank financial strength a careful examination of the policy regime and the volatility of the economic environment is necessary. Conventional measures of private enterprise financial strength- profitability and capital-can be very misleading when applied to central banks. The way in which a central bank balance sheet is strengthened matters. Providing the central bank with marketable government debt that can be used to develop a money market that in turn may become the locus of central bank monetary operations serves both to directly strengthen the institution and improve the quality of the environment in which it operates, thereby facilitating the attainment of its ultimate performance objectives.
    Keywords: Central banks , Transparency , Fiscal policy , Fiscal stability , Inflation ,
    Date: 2008–02–29
  7. By: Lars E.O. Svensson; Noah Williams
    Abstract: We study the design of optimal monetary policy under uncertainty in a dynamic stochastic general equilibrium models. We use a Markov jump-linear-quadratic (MJLQ) approach to study policy design, approximating the uncertainty by different discrete modes in a Markov chain, and by taking mode-dependent linear-quadratic approximations of the underlying model. This allows us to apply a powerful methodology with convenient solution algorithms that we have developed. We apply our methods to a benchmark New Keynesian model, analyzing how policy is affected by uncertainty, and how learning and active experimentation affect policy and losses.
    JEL: E42 E52 E58
    Date: 2008–03
  8. By: Helge Berger; Pär Österholm
    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: Inflation , Euro Area , Demand for money , Monetary policy , Monetary aggregates ,
    Date: 2008–03–04
  9. By: Frisell, Lars (Financial Stability Department, Central Bank of Sweden); Roszbach, Kasper (Research Department, Central Bank of Sweden); spagnolo, giancarlo (University of Rome)
    Abstract: We study the specific corporate governance problems of central banks in their complex role of inflation guardians, bankers’ banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review the current institutional arrangements of a number of central banks, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information. Research on central bank governance appears to have focused almost only on their monetary policy task. As shown by the sub-prime loan market turmoil, central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their stability. In this paper, we contrast the current governance practices at central banks with the structures suggested in the corporate governance literature. Our analysis highlights a number of specific issues that appear to have been unsatisfactorily addressed by existing research, such as the incentive structure for governors and board members, the balance between central banks’ multiple objectives and the need for term limits.
    Keywords: accountability; bank regulation; board structure; central banks; corporate governance; central bank independence; governor remuneration; term limits
    JEL: E58 G18 G34 G38
    Date: 2008–03–01
  10. By: Javier Andrés (Universidad de Valencia); David López-Salido (Federal Reserve Board); Edward Nelson (Federal Reserve Bank of St. Louis)
    Abstract: We examine the role of money in three environments: the New Keynesian model with separable utility and static money demand; a nonseparable utility variant with habit formation; and a version with adjustment costs for holding real balances. The last two variants imply forward-looking behavior of real money balances, with forecasts of future interest rates entering current portfolio decisions. We conduct a structural econometric analysis of the U.S. and euro area economies. FIML estimates confirm the forward-looking character of money demand. A consequence is that real money balances are valuable in anticipating future variations in the natural interest rate.
    Keywords: Money, natural rate, New Keynesian models
    JEL: E51 E52
    Date: 2008–03
  11. By: Carrera, Jorge Eduardo/J.E.
    Abstract: Currency board (CB) was a corner solution for Argentine hyperinflation, however its balance is controversial. How does a CB work as a long run regime? After evaluating the result of ten years CB regime, we obtain important lessons for a monetary union and for dollarization proposals. We discuss: 1) the capacity of such a regime to deal with real and nominal volatility, 2) fiscal problems and debt dynamics, 3) financial problems under currency substitution, 4) CB regime compared with dollarization and 5) the feasibility of a single–peg CB in a flexible exchange rate world.
    Keywords: Currency board; Dollarization; Monetary union; Fiscal policy and Monetary policy
    JEL: F34 F32 F41
    Date: 2004
  12. By: Chengsi Zhang (School of finance, Renmin University of China, China); Denise R. Osborn (Center for Growth and Business Cycle Research, Economics,University of Manchester, UK); Dong Heon Kim (Department of Economics, Korea University, Seoul, South Korea)
    Abstract: Empirical estimations of the micro-founded New Keynesian Phillips Curve (NKPC) using rational inflation expectation proxies have often found that the output gap is an invalid measure of inflation pressure. This paper investigates the empirical success of the NKPC in explaining US inflation when observed measures of inflation expectations are used in conjunction with the output gap. The paper also contributes to the literature by addressing the important problem of serial correlation in the stylized NKPC and developing an extended model to account for this serial correlation. Contrary to recent results indicating no role for the output gap, we find it to be a statistically significant driving variable for inflation, with this finding robust to whether the inflation expectations series used relates to individual consumers, professional forecasters or the US Fed. In most of our estimations, however, lagged inflation dominates the role of inflation expectations, casting doubt on the extent to which price setting is forward-looking over the period 1968 to 2005. From an econometric perspective, the paper uses GMM estimation to account for endogeneity while also addressing concerns raised in recent studies about weak instrumental variables used in estimating NKPC models.
    Keywords: New Keynesian Phillips Curve, serial correlation, GMM, inflation forecasts
    JEL: E31 E58
    Date: 2008
  13. By: Laurence Ball (Johns Hopkins University (E-mail:
    Abstract: This paper examines the effects of a money-financed fiscal expansion -- a helicopter drop -- when an economy is in a liquidity trap. It uses a textbook-style model calibrated to fit Japan's economic slump and deflation as of 2003. According to the results, money-financed transfers totaling 9.4% of GDP end the output slump and guide the economy to a steady state with 2% inflation. By raising output and inflation, the policy also reduces the ratio of government debt to GDP. The policy's long-run effects are the same as those of a bond-financed fiscal expansion, but money finance prevents a short-run rise in debt.
    Keywords: Helicopter Drop, Liquidity Trap, Deflation
    JEL: E31 E52 E58 E63
    Date: 2008–03
  14. By: Osmani T. Guillen; Benjamin M. Tabak
    Abstract: This paper studies the Brazilian term structure of interest rates and characterizes how the term premia has changed over time. We employ a Kalman filter approach, which is extended to take into account regime switches and overlapping forecasts errors. Empirical evidence suggests that term premia depends on international global liquidity and domestic factors such as the composition of public debt and inflation volatility. These results provide guidance for the formulation of fiscal and monetary policies.
    Date: 2008–08
  15. By: Olivier Blanchard; Jordi Gali
    Abstract: We construct a utility-based model of fluctuations, with nominal rigidities and unemployment, and draw its implications for the unemployment-inflation tradeoff and for the conduct of monetary policy.<br><br>We proceed in two steps. We first leave nominal rigidities aside. We show that, under a standard utility specification, productivity shocks have no effect on unemployment in the constrained efficient allocation. We then focus on the implications of alternative real wage setting mechanisms for fluctuations in unemployment. We show the role of labor market frictions and real wage rigidities in determining the effects of productivity shocks on unemployment.<br><br>We then introduce nominal rigidities in the form of staggered price setting by firms. We derive the relation between inflation and unemployment and discuss how it is influenced by the presence of labor market frictions and real wage rigidities. We show the nature of the tradeoff between inflation and unemployment stabilization, and its dependence on labor market characteristics. We draw the implications for optimal monetary policy.
    JEL: E3 E31 E32 E52
    Date: 2008–03
  16. By: Joshua Aizenman; Reuven Glick
    Abstract: This paper investigates the changing patterns and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net exports and various forms of capital flows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.
    JEL: F15 F21 F31
    Date: 2008–03
  17. By: Pär Österholm; Spencer Dale; Athanasios Orphanides
    Abstract: Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. There is a risk that the central bank can distract the public; this means that the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public's understanding to the extent that it "crowds out" a role for communicating imperfect information.
    Keywords: Central banks , Transparency ,
    Date: 2008–03–18
  18. By: Paolo Del Giovane (Banca d'Italia); Silvia Fabiani (Banca d'Italia); Roberto Sabbatini (Banca d'Italia)
    Abstract: This study investigates inflation perceptions in both qualitative and quantitative terms and their relationship with factors likely to affect them. This has been done in a unified framework through a survey of a representative sample of Italian consumers carried out at the end of 2006. The results show that reported inflation is, on average, much higher than measured by official statistics. Inflation perceptions are higher for women, the unemployed and less educated individuals, as well as for consumers with some forms of financial distress. A very low knowledge of the inflation concept and related statistics and an inaccurate memory of past prices turn out to play a significant role in explaining the highest class of perceptions. In contrast, the characteristics of individual shopping activity do not result to be significant. All in all, these results suggest that when consumers express their opinions on what they report as “inflation”, they are incorporating a complex combination of forces that go well beyond the phenomena measured by official inflation statistics.
    Keywords: inflation, consumers, perceptions, euro
    JEL: D12 E31
    Date: 2008–01
  19. By: Amendola, Nicola
    Abstract: According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share.
    Keywords: Money; Search; Double Coincidence; Bargaining
    JEL: C78 E40
    Date: 2008–03–19
  20. By: Carlos Thomas (Banco de España)
    Abstract: I analyze the effect of search frictions on inflation dynamics, in a New Keynesian model where firms make both pricing and vacancy posting decisions. I find that search frictions create real rigidities in price setting. This mechanism flattens the New Keynesian Phillips curve, relative both to the standard model with a frictionless labor market and a model where pricing and vacancy posting decisions are made by different subsets of firms. This helps the model improve its empirical performance along a number of dimensions. First, inflation becomes more persistent. Second, output responses to monetary shocks become larger and more persistent. Finally, unemployment becomes more volatile.
    Keywords: search and matching, real rigidities, New Keynesian Phillips curve
    JEL: E32 J40
    Date: 2008–03
  21. By: Fiorillo, Damiano
    Abstract: Empirical studies show that intrinsic motivations increase the volunteer labour supply. This paper studies how monetary rewards to volunteers affect their intrinsic motivations. Using a sample of Italian volunteers, allowing to distinguish the type of volunteer, the paper shows that monetary rewards (extrinsic motivations) influence positively the choice to donate voluntary hours, while a low intrinsic motivation seems to decrease hours per week. Moreover, monetary rewards increase the hours per week of individuals with low intrinsic motivation. Thus, a crowding in effect on low intrinsic motivation might emerge for continuative volunteers.
    Keywords: Monetary rewards; intrinsic motivations; volunteer labour supply
    JEL: Z13
    Date: 2007
  22. By: Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper offers a “panoramic†analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that "this time is different" among policymakers and investors. A recent example of the "this time is different" syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.
    JEL: E6 F3 N0
    Date: 2008–03
  23. By: Holger Floerkemeier; Mariusz A. Sumlinski
    Abstract: In recent years, the South Caucasus and Central Asia countries (CCA-6) have received significant foreign exchange inflows. While a healthy reserve buffer is desirable to selfinsure against external crises, holding international reserves also involves costs. We analyze the adequacy of CCA-6 reserves using widely recognized rules of thumb, and simulate optimal reserve levels applying the Jeanne (2007) model. Both the adequacy measures and the model-based simulations indicate that, with the exception of Tajikistan, CCA-6 reserves had increased to broadly comfortable levels by 2006. More recently, reserve adequacy has been tested in Kazakhstan, which has been affected by the 2007 global liquidity crunch.
    Date: 2008–02–19
  24. By: Rudiger Ahrend; Boris Cournède; Robert Price
    Abstract: This paper addresses the question of whether and how monetary policy ease may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and consequent financial imbalances -- the (partial) unwinding of which helped trigger the 2007 financial market turmoil. Moreover, the paper points out that in certain situations policy rates may be a rather blunt tool for dealing with both the build-up and aftermath of financial imbalances, raising the question whether “macro-prudential” regulation could be useful. <P>Politique monétaire, excès des marchés et troubles financiers <BR>Dans quelle mesure la politique monétaire a-t-elle pu conduire à des excès dans les marchés d'actifs réels et financiers et in fine mener aux récentes perturbations financières ? Cette étude aborde cette question en fournissant des éléments qui laissent à penser que, lorsque les taux courts se trouvent de manière durable nettement au-dessous de ce que prescrirait une règle de Taylor, les prix des actifs, notamment immobiliers, ont tendance à s'élever (hormis ceux des actions). D'importantes augmentations des prix des actifs sont aussi observées lors des périodes de dérégulation ou d'innovation financières. Cette étude avance des arguments selon lesquels le relâchement monétaire observé en 2002-2005, se combinant à une rapide innovation financière, apparaît rétrospectivement comme l'un des facteurs ayant contribué à l'envolée des prix des actifs et au gonflement des déséquilibres financiers qui en a résulté, un processus dont la résorption a alimenté les troubles financiers de 2007. En outre, cette étude souligne que, dans certaines situations, les taux directeurs sont un instrument peu adapté pour répondre à la formation et au dégonflement de déséquilibres financiers, ce qui soulève la question de savoir si la réglementation « macro-prudentielle » ne serait pas alors plus utile.
    Keywords: financial markets, marchés financiers, housing, logement, house prices, regulation, monetary policy, politique monétaire, asset prices, prix des actifs, interest rate, taux d'intérêt
    JEL: E44 E5 F3 G15
    Date: 2008–03–10
  25. By: Claude Lopez
    Abstract: This study investigates the stationary behavior of the inflation rates for the Euro- zone members and some neighboring countries, for the 1957:2 to 2007:3 period. The analysis uses univariate unit root tests with enhanced small-sample performances that allow up to two breaks in the intercept, namely those of Elliott et al. (1996) and Lopez (2008). The results strongly reject the unit root null hypothesis for all the countries. Furthermore, they demonstrate that some of the Euro-zone inflation rates are stationary and others are regime-wise stationary. While such results may reconcile some of the literature findings and provide empirical evidence that the Maastricht criterion is respected, they also highlight the importance of accounting for breaks when studying these series.
    Date: 2008
  26. By: Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi
    Abstract: This paper demonstrates that "commodity currency" exchange rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.
    JEL: C52 C53 F31 F47
    Date: 2008–03
  27. By: Fabia A. de Carvalho; Cyntia F. Azevedo
    Abstract: There is consensus in the economic literature that the reserve requirements are a tax levied upon financial intermediation, yet the incidence of the tax remains controversial. In this paper, we test whether changes in reserve requirements in Brazil impact the stock returns of the financial system distinctly from the rest of the economy. We find evidence that Brazilian bank stock returns were affected by changes in reserve requirements on both time deposits and transaction accounts, which implies that the tax burden of required reserves was not fully passed through to banks' borrowers or clients. Stock returns of non-financial firms were also affected by these changes, suggesting that in some cases, reserve requirements on time deposits and transaction accounts served as a non-neutral instrument of monetary or fiscal policy in Brazil.
    Date: 2008–02

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