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on Monetary Economics |
| By: | Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich Switzerland and CESifo); Timo Wollmershäuser (Ifo Institute for Economic Research, Munich Germany and CESifo) |
| Abstract: | This paper estimates forward-looking Taylor rules for the euro area. Using the asymmetries in inflation and cyclical output developments across countries, we investigate the adequacy of the single monetary policy for each of the European Monetary Union (EMU) member countries. Notable differences emerge across the countries. Taking a euro area perspective, we also show that it depends upon the underlying country weighting scheme in the monetary decision process of the ECB whether or not there has been a synchronisation of business and inflation cycles among the EMU member countries over the years. Finally, we produce an estimate of the actual policy weights the ECB has implicitly attached to each of the member countries. Developments in small member countries have received more than proportional weights in actual monetary policy decisions of the ECB. |
| Keywords: | Taylor rule, monetary policy, ECB, stress, business cycle synchronisation |
| JEL: | C22 E32 E52 E58 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-190&r=mon |
| By: | Ibrahim Chowdhury (Swiss National Bank); Andreas Schabert (University of Dortmund, University of Amsterdam) |
| Abstract: | Federal Reserve nonborrowed reserve supply systematically responded to changes in inflation and in the output gap over the period 1969-2000. While the feedback from output gap is always negative, the response of money supply to changes in inflation varies considerably across time. Nonborrowed reserves decreased with inflation in the post-1979 period and increased in the pre-1979 period. Applying a standard macro-model, the estimated reaction functions are shown to ensure equilibrium determinacy. Viewed through the money supply lens, Federal Reserve policy substantially changed over time, but has never allowed for endogenous fluctuations, which contrasts conclusions drawn from federal funds rate analyses. |
| Keywords: | Money supply; reaction functions; nonborrowed reserves; real-time data; equilibrium determinacy |
| JEL: | E51 E52 E32 |
| Date: | 2008–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20080023&r=mon |
| By: | Aleksander Berentsen (Department of Economics, University of Basel); Guido Menzio (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania) |
| Abstract: | We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit micro-foundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment — by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century. |
| Keywords: | inflation, unemployment, search |
| JEL: | E24 E52 |
| Date: | 2008–03–18 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:08-012&r=mon |
| By: | Kenneth B. Petersen (Laffer Associates and University of Connecticut); Vladimir Pozdnyakov (University of Connecticut) |
| Abstract: | Predicting the federal funds rate and beating the federal funds futures market: mission impossible? Not so. We employ a Markov transition process and show that this model outperforms the federal funds futures market in predicting the target federal funds rate. Thus, by using purely historical data we are able to better explain future monetary policy than a forward looking measure like the federal funds futures rate. The fact that the federal funds futures market can be beaten by a statistical model, suggests that the federal funds futures market lacks eciency. The mar- ket allocates too much weight to current Federal Reserve communication and other real-time macro events, and allocates too little weight to past monetary policy behavior. |
| Keywords: | Monetary policy, Federal funds futures market, Markov modeling |
| JEL: | E44 E47 E52 E58 G13 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2008-07&r=mon |
| By: | Wohltmann, Hans-Werner; Winkler, Roland |
| Abstract: | This paper studies the welfare effects of severalmonetary policy rules in the presence of anticipated and unanticipated oil price shocks. Our analysis is based on a stylized New Keynesian model of a small open economy. Our main findings are the following: i) Standard interest rate rules amplify the welfare loss compared to neutral monetary policies. ii) The optimal policy under commitment, by contrast, dampens the welfare loss. iii) Optimized simple rules can replicate the outcome under the optimal unrestricted rule if they are history-dependent, contain the exchange rate and, in the anticipated case, forward-looking elements. iv) Anticipated oil shocks lead to a higher welfare loss than unanticipated shocks. |
| Keywords: | Anticipated Shocks, Oil Price Shocks, Open Economy, Optimal Monetary Policy, Simple Policy Rules |
| JEL: | E32 E52 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:7112&r=mon |
| By: | Mark David Witte (Department of Economics and Finance, College of Charleston); |
| Abstract: | If a country’s imports are invoiced in a foreign currency then the import prices paid by consumers, and the importing country’s inflation rate, are vulnerable to exchange rate movements. Using a unique multiple market model I exam a representative firm’s currency denomination decision when selling to different countries. The simulation studies the impact of EU expansion on the currency denomination of trade. Results suggest that when preferences are similar across countries EU expansion decreases the likelihood of price discrimination and could decrease the use of the euro as an invoicing currency in the original EU’s imports. |
| Keywords: | currency invoicing, exchange rate, inflation, EU expansion, price discrimination |
| JEL: | F14 F31 |
| URL: | http://d.repec.org/n?u=RePEc:coc:wpaper:3&r=mon |
| By: | Hillinger, Claude |
| Abstract: | The most important economic measures are monetary. They have many different names, are derived in different theories and employ different formulas; yet, they all attempt to do basically the same thing : to separate a change in nominal value into a ‘real part’ due to the changes in quantities and an inflation due to the changes in prices. Examples are: real national product and its components, the GNP deflator, the CPI, various measures related to consumer surplus, as well as the large number of formulas for price and quantity indexes that have been proposed. The theories that have been developed to derive these measures are largely unsatisfactory. The axiomatic theory of indexes does not make clear which economic problem a particular formula can be used to solve. The economic theories are for the most part based on unrealistic assumptions. For example, the theory of the CPI is usually developed for a single consumer with homothetic preferences and then applied to a large aggregate of diverse consumers with non-homothetic preferences. In this paper I develop a unitary theory that can be used in all situations in which monetary measures have been used. The theory implies a unique optimal measure which turns out to be the Törnqvist index. I review, and partly re-interpret the derivations of this index in the literature and provide several new derivations. The paper also covers several related topics, particularly the presently unsatisfactory determination of the components of real GDP. |
| Keywords: | Consumer price index, consumer surplus, money metric, price and quantity indexes, welfare measurement |
| JEL: | C43 C82 D61 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7095&r=mon |
| By: | Entrop, Oliver; Memmel, Christoph; Wilkens, Marco; Zeisler, Alexander |
| Abstract: | This paper describes the first thorough analysis of the interest risk of German banks on an individual bank level. We develop a new method that is based on time series of accountingbased data to quantify the interest risk of banks and apply it to analyze the German banking system. We find evidence that our model yields a significantly better fit of banks' internally quantified interest rate risk than a standard approach that relies on one-point-in-time data, and that the interest rate risk differs between banks of different size and banking group. Additionally, we find structural differences between trading book and non-trading book institutions. |
| Keywords: | German financial institutions, interest rate risk, accounting-based approach, maturity transformation, banking supervision, model evaluation |
| JEL: | G18 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp2:7118&r=mon |