|
on Monetary Economics |
| By: | Hans Dewachter; Marco Lyrio; Konstantijn Maes |
| Abstract: | This paper uses reprojection to develop a benchmark to assess ECB monetary policy since January 1999, the start of EMU. We first estimate an essentially affine term structure model for the German SWAP yield curve between 1987:04-1998:12. The German monetary policy is then reprojected onto the EMU period (1999:01-2001:08). We find that the German real interest rate in place during the EMU period is significantly lower than it would have been in case the Bundesbank were still in charge of monetary policy. We also show the effect of EMU on the German SWAP\ yield curve. Short- and medium-term bonds seem to have been more affected than long-term bonds. |
| Keywords: | EMU, ECB, Bundesbank, central bank monetary policy rule, essentially affine term structure model. |
| JEL: | E43 E44 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0205&r=mon |
| By: | Assenmacher-Wesche, Katrin; Gerlach, Stefan; Sekine, Toshitaka |
| Abstract: | Recently, the Bank of Japan outlined a “two perspectives” approach to the conduct of monetary policy that focuses on risks to price stability over different time horizons. Interpreting this as pertaining to different frequency bands, we use band spectrum regression to study the determination of inflation in Japan. We find that inflation is related to money growth and real output growth at low frequencies and the output gap at higher frequencies. Moreover, this relationship reflects Granger causality from money growth and the output gap to inflation in the relevant frequency bands. |
| Keywords: | frequency domain; Phillips curve; quantity theory; spectral regression |
| JEL: | C22 E3 E5 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6650&r=mon |
| By: | Pelin Ilbas |
| Abstract: | This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period’s inflation rate seem to perform relatively worse. |
| Keywords: | optimal rules, commitment, discretion, stabilization bias |
| JEL: | E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0613&r=mon |
| By: | Favero, Carlo A; Giavazzi, Francesco |
| Abstract: | The European Economic and Monetary Union (EMU) has created a new economic area, larger and closer with respect to the rest of the world. Area-specific shocks are thus more important in EMU than country-specific shocks used to be in the previous states, e.g. in Germany. It is thus not surprising that the models built by the staff of the European Central Bank (ECB) to study optimal monetary policy in the Euro area (for instance Smets and Wouters, 2004a, 2004b) typically assume that this works essentially as a closed economy, hit by domestic shocks - the same assumption made in standard models of U.S. monetary policy (see e.g. Christiano et al., 1999 ), where all shocks are domestic with the only possible exception of energy price shocks. Two-country models exist at the ECB (e.g. de Walque, Smets, Wouters, 2005) but they overlook asset price fluctuations and their international comovements. This paper studies monetary policy in the Euro area looking at the variable most directly related to current and expected monetary policy, the yield on long term government bonds. We explore how the behaviour of European long-term rates has been affected by EMU and whether the response of long-term rates to monetary policy has got any closer to that consistent with a closed economy. We find that the level of long-term rates in Europe is almost entirely explained by U.S. shocks and by the systematic response of U.S. and European variables (inflation, short term rates and the output gap) to these shocks. Our results suggest in particular that U.S. variables are more important than local variables in the policy rule followed by European monetary authorities: this was true for the Bundesbank before EMU and has remained true for the ECB, at least so far. Using closed economy models to analyze monetary policy in the Euro is thus inconsistent with the empirical evidence on the determinants of Euro area long-term rates. It is also inconsistent with the way the Governing Council of the ECB appears to make actual policy decisions. We also find that Euro area long rates respond more to financial shocks, in particular shocks to term premia, than they do to monetary policy "shocks" - i.e. instances when the ECB deviates from its rule. This finding point to the importance of incorporating into the analysis of Euro area monetary policy of the effects of fluctuations in international asset prices. |
| Keywords: | DSGE models; ECB; monetary policy; yield curve |
| JEL: | E43 E52 E58 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6654&r=mon |
| By: | Annick Bruggeman; Marie Donnay |
| Abstract: | In this paper we gradually construct a monthly encompassing monetary model on the basis of its two constituting components: a money demand and a loan demand model. Each of the three models pays special attention to the intermediation role of banks by modelling the relation between the retail bank interest rates and the short-term market interest rate. The encompassing monetary model accounts for the possible interactions between money and loans induced by the intermediation role of the banking sector, which is represented in this paper by its interest rates setting behaviour. Our analysis indicates that, over the period January 1981-September 2001, our monthly money demand model corroborates the existing quarterly evidence. The same does not hold for our loan demand model where a correcting variable for the mergers and acquisitions wave of 1999-2000 is added as an exogenous variable to stabilise the loan demand equation. Our encompassing monetary model rejects the frequently used assumption of complete separability in the pricing of loans and deposits. It provides also some evidence on the existence of a bank lending channel in the euro area, although there is some indication of a possible instability in the link between money and loans towards the end of the sample period. The estimation of the Structural-VECM highlights very rich dynamics in the system. The common trends method results in the identification of seven shocks: an aggregate supply shock, an inflation objective shock, an institutional shock, a money demand shock, a loan demand shock, a banking shock and a monetary policy instrument shock. The first three shocks are permanent shocks, responsible for the main variability in the macro-economic variables in the long run; while the last four shocks are temporary ones, affecting the economy only in the short and medium run. |
| Keywords: | Euro area, Cointegration, Structural VECM, Money demand, Loan demand, Banking intermediation. |
| JEL: | C32 E41 E43 E50 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0309&r=mon |
| By: | Wieland, Volker |
| Abstract: | This paper introduces adaptive learning and endogenous indexation in the New-Keynesian Phillips curve and studies disinflation under inflation targeting policies. The analysis is motivated by the disinflation performance of many inflation-targeting countries, in particular the gradual Chilean disinflation with temporary annual targets. At the start of the disinflation episode price-setting firms' expect inflation to be highly persistent and opt for backward-looking indexation. As the central bank acts to bring inflation under control, price-setting firms revise their estimates of the degree of persistence. Such adaptive learning lowers the cost of disinflation. This reduction can be exploited by a gradual approach to disinflation. Firms that choose the rate for indexation also re-assess the likelihood that announced inflation targets determine steady-state inflation and adjust indexation of contracts accordingly. A strategy of announcing and pursuing short-term targets for inflation is found to influence the likelihood that firms switch from backward-looking indexation to the central bank's targets. As firms abandon backward-looking indexation the costs of disinflation decline further. We show that an inflation targeting strategy that employs temporary targets can benefit from lower disinflation costs due to the reduction in backward-looking indexation. |
| Keywords: | disinflation; indexation; inflation targeting; learning; monetary policy; New-Keynesian model; recursive least squares |
| JEL: | E32 E41 E43 E52 E58 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6749&r=mon |
| By: | Corsetti, Giancarlo |
| Abstract: | What can be learnt from revisiting the Optimal Currency Areas (OCA) theory 50 years from its birth, in light of recent advances in open economy macro and monetary theory? This paper presents a stylized micro-founded model of the costs of adopting a common currency, relative to an ideal benchmark in which domestic monetary authorities pursue country-specific efficient stabilization. Costs from (a) limiting monetary autonomy and (b) giving up exchange rate flexibility are examined in turn. These costs will generally be of the same magnitude as the costs of the business cycle. However, to the extent that exchange rates do not perform the stabilizing role envisioned by traditional OCA theory, a common monetary policy can be as efficient as nationally differentiated policies, even when shocks are strongly asymmetric, provided that the composition of aggregate spending tends to be symmetric at union-wide level. Convergence in consumption (and spending) patterns thus emerges as a possible novel attribute of countries participating in an efficient currency area. |
| Keywords: | Exchange Rate Regime; International Policy Coordination; New Open Macro Macroeconomics; Optimal Monetary Policy; Optimum Currency Area |
| JEL: | E31 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6712&r=mon |
| By: | Dominique Guillaume; David Stasavage |
| Abstract: | This paper analyses the experience with monetary policy in African countries which have participated in rule-based international monetary arrangements (CFA Franc Zone, Eastern African Currency Board and Rand Monetary Area). It argues that African countries have generally lack the political institutions necessary for governments to credibly commit through domestic institutions (exchange rate pegs or independent central banks). For such countries, monetary unions can provide an alternative source of credible commitment to sound macroeconomic policies, but only when exit from a union is made costly by the existence of parallel regional accords, and only when governance structures of monetary unions have been designed so as to maximise chances for the enforcement of monetary rules. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces09908&r=mon |
| By: | Yunus Aksoy; Tomasz Piskorski |
| Abstract: | Recent empirical research has found that the strong short-term relationship between US monetary aggregates and macroeconomic fundamentals, as outlined in the classical study of M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of B. Friedman and Kuttner (1992) information value approach we reevaluate the vanishing relationship between US monetary aggregates and macroeconomic fundamentals. By using the official US data constructed by Porter and Judson (1996) we find that the currency component of M1 corrected for the foreign holdings of dollars contains valuable information on US macroeconomic fundamentals, such as nominal and real income, as well as inflation. This correction for monetary aggregates is required because the rate of foreign holdings in total money creation is large and unstable. The statistical evidence provided in this paper suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. |
| Keywords: | foreign holdings, US monetary aggregates, information value, the Friedman-Schwartz's evidence. |
| JEL: | E3 E4 E5 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0107&r=mon |
| By: | Mumtaz, Haroon; Surico, Paolo |
| Abstract: | Several industrialised countries have had a similar inflation experience in the past 30 years, with inflation high and volatile in the 1970s and the 1980s but low and stable in the most recent period. We explore the dynamics of inflation in these countries via a time-varying factor model. This statistical model is used to describe movements in inflation that are idiosyncratic or country specific and those that are common across countries. In addition, we investigate how comovement has varied across the sample period. Our results indicate that there has been a decline in the level, persistence and volatility of inflation across our sample of industrialised countries. In addition, there has been a change in the degree of comovement, with the level and persistence of national inflation rates moving more closely together since the mid-1980s. |
| Keywords: | factor model; Low inflation; monetary policy; time variation |
| JEL: | E30 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6767&r=mon |
| By: | Stehn, Sven Jari; Vines, David |
| Abstract: | Leith and Wren-Lewis (2007) have shown that government debt is returned to its pre-shock level in a New Keynesian model under optimal discretionary policy. This has two important implications for monetary and fiscal policy. First, in a high-debt economy, it may be optimal for discretionary monetary policy to cut the interest rate in response to a cost-push shock - thereby violating the Taylor principle - although this will not be true if inflation is significantly persistent. Second, the optimal fiscal response to such a shock is more active under discretion than commitment, whatever the degree of inflation persistence. |
| Keywords: | Fiscal Policy; Government Debt; Monetary Policy; Stabilisation Bias |
| JEL: | E52 E60 E61 E63 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6696&r=mon |
| By: | Carlo Altavilla |
| Abstract: | The paper compares the di¤erent timing and magnitude of mon-etary shocks across European countries. The problem the European Central Bank faces in setting a single monetary policy rule is analyzed starting from the di¤erences in the monetary transmission mechanism across EMU members. The econometric methodology applied is the Structural Vector Autoregression with constraints both on contem-poraneous and long term relationships among the variables of the estimated models. The results suggest the presence of asymmetric response to a monetary policy shock. In contrast with some empirical studies, the comparative analysis of the EMU members’ response to a contractionary monetary policy shock does not lead to an unambigu-ous positive relationship between country size and response widht. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0022&r=mon |
| By: | Linda Goldberg; Cédric Tille |
| Abstract: | The U.S. dollar plays a key role in international trade invoicing along two complementary dimensions. First, most U.S. exports and imports are invoiced in dollars; second, trade flows that do not involve the United States are often invoiced in dollars, a fact that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that although exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal monetary policy. |
| Keywords: | Dollar, American ; Monetary policy ; International trade ; International finance ; Foreign exchange |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:316&r=mon |
| By: | Orphanides, Athanasios; Wieland, Volker |
| Abstract: | Monetary policy analysts often rely on rules-of-thumb, such as the Taylor rule, to describe historical monetary policy decisions and to compare current policy to historical norms. Analysis along these lines also permits evaluation of episodes where policy may have deviated from a simple rule and examination of the reasons behind such deviations. One interesting question is whether such rules-of-thumb should draw on policymakers' forecasts of key variables such as inflation and unemployment or on observed outcomes. Importantly, deviations of the policy from the prescriptions of a Taylor rule that relies on outcomes may be due to systematic responses to information captured in policymakers' own projections. We investigate this proposition in the context of FOMC policy decisions over the past 20 years using publicly available FOMC projections from the biannual monetary policy reports to the Congress (Humphrey-Hawkins reports). Our results indicate that FOMC decisions can indeed be predominantly explained in terms of the FOMC's own projections rather than observed outcomes. Thus, a forecast-based rule-of-thumb better characterizes FOMC decision-making. We also confirm that many of the apparent deviations of the federal funds rate from an outcome-based Taylor-style rule may be considered systematic responses to information contained in FOMC projections. |
| Keywords: | FOMC; forecasts; monetary policy; policy rules |
| JEL: | E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6748&r=mon |
| By: | Marie Donnay; Hans Degryse |
| Abstract: | The pass-through from the money market rate to several bank lending rates and the government bond rate is investigated for 12 European countries over the period 1980-2000, by applying a SVAR based on the Cholesky decomposition. Simulations of a one percent point rise in the money market rate, performed for all countries, reveal divergences within and between countries in the dynamics of the lending rate pass-through. Subsequently, this pass-through is introduced in an enlarged SVAR model to account for the intermediation role of banks in the transission process of monetary policy to the real economy, for 7 European countries. The simulation results indicate a significant role for the banking sector. Moreover some asymmetries in the price of credit both within and across countries in Europe exist. The different effects on the real economy (private consumption and investment) depend on the magnitude of the lending rate pass-through. |
| Keywords: | Transmission of monetary policy, EMU, Bank intermediation, Lending rates, Pass-through, SVAR, Impulse response analysis |
| JEL: | E43 E44 E52 G21 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0117&r=mon |
| By: | Ugo Marani (in collaboration with Carlo Altavilla) |
| Abstract: | The aim of the research is the evaluation of the exchange rate of the Euro after the first six months of its existence. The main interpretative hypotheses of the research can be summarised in the following points: (i) the evolution of the Euro external value is strictly connected with the agents’ confidence on real, financial and foreign exchange markets; (ii) the ECB monetary policy strategy influenced negatively (or at least neglected) the agents’ confidence and expectations already affected by the negative cyclical conditions of european economy; (iii) the resulting portfolio reallocation determined a short-term capital outflow in favour of US Dollar denominated assets and, hence, an Euro depreciation. The consistency of the whole framework is checked by variables as the Industrial Sentiment, the Interest-Rate Spread, the Implied Volatility of exchange rates, the Risk Reversal, and by the building of a Structural Autoregressive Model. |
| JEL: | E58 F31 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9923&r=mon |
| By: | Goldberg, Linda S; Tille, Cédric |
| Abstract: | The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy. |
| Keywords: | center-periphery; exchange rate pass-through; invoicing; monetary policy |
| JEL: | F41 F42 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6704&r=mon |
| By: | Yunus Aksoy |
| Abstract: | This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9920&r=mon |
| By: | Obstfeld, Maurice; Shambaugh, Jay C; Taylor, Alan M |
| Abstract: | The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. |
| Keywords: | banking crises; capital flight; central banks; exchange rate regimes; financial development; foreign exchange; global imbalances; Guidotti-Greenspan rule; international liquidity; intervention; lender of last resort; net foreign assets; sterilization; sudden stop |
| JEL: | E44 E58 F21 F31 F36 F41 N10 O24 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6693&r=mon |
| By: | Hans Dewachter; Marco Lyrio |
| Abstract: | This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modeling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard “level” factor is highly correlated to long-run inflation expectations, the “slope”' factor captures temporary business cycle conditions, while the “curvature” factor represents a clear independent monetary policy factor |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0304&r=mon |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents' learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation. |
| Keywords: | determinacy; fluctuations; imperfect knowledge; interest-rate setting; learning; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6640&r=mon |
| By: | OGAWA Eiji; YOSHIMI Taiyo |
| Abstract: | This paper investigates recent diverging trends among East Asian currencies as well as recent movements of the weighted average value of East Asian currencies (Asian Monetary Unit: AMU) and deviations (AMU Deviation Indicators) of the East Asian currencies from the average values. Our empirical analysis shows that linkages with the US dollar have been weakening since 2001 or 2002 for some of the East Asian countries. On the other hand, the monetary authority of China continues stabilizing the exchange rate of the Chinese yuan against the US dollar even though it announced its adoption of a currency basket system. It is found that the weighted average of East Asian currencies has been appreciating against the US dollar in recent years while depreciating against the currency basket of the US dollar and the euro. Also, deviations among the East Asian currencies have been widening in recent years, reflecting the fact that these countriesf monetary authorities are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate systems among these monetary authorities increases volatility and misalignment of intra-regional exchange rates in East Asia. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08010&r=mon |
| By: | Evans, George W; Honkapohja, Seppo |
| Abstract: | We consider "robust stability" of a rational expectations equilibrium, which we define as stability under discounted (constant gain) least-squares learning, for a range of gain parameters. We find that for operational forms of policy rules, i.e. rules that do not depend on contemporaneous values of endogenous aggregate variables, many interest-rate rules do not exhibit robust stability. We consider a variety of interest-rate rules, including instrument rules, optimal reaction functions under discretion or commitment, and rules that approximate optimal policy under commitment. For some reaction functions we allow for an interest-rate stabilization motive in the policy objective. The expectations-based rules proposed in Evans and Honkapohja (2003, 2006) deliver robust learning stability. In contrast, many proposed alternatives become unstable under learning even at small values of the gain parameter. |
| Keywords: | adaptive learning; Commitment; determinacy; interest-rate setting; stability |
| JEL: | D84 E31 E52 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6641&r=mon |
| By: | M. van leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loanmarket competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data; |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:171&r=mon |
| By: | Charles Goodhart |
| Abstract: | The relative liquidity of financial assets is significantly influenced by the Central Bank’s willingness to buy such assets, or to accept them as collateral, in the course of providing additional cash to banks. Those assets which the Central Bank will deal in for such purposes become more liquid, and more marketable, than those that the Central Bank will not. When the banking system as a whole is short of cash, it has no other recourse than to go to the Central Bank for assistance. The Central Bank has to provide this, since otherwise interest rates will rise very sharply, given the banks’ inelastic demand for cash reserves. A Central Bank’s choice, in practice, is the price (interest rate) at which it will supply the requisite cash, not the volume of high-powered cash reserves to supply. Normally a Central Bank will supply just enough cash to hold very short-term (e.g. overnight) rates close to the policy rate, chosen generally on broad macro-economic grounds, e.g. to maintain medium-term price stability. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp179&r=mon |
| By: | Straetmans, Stefan; Versteeg, Roald; Wolff, Christian C |
| Abstract: | One of the reasons for governments to use capital controls is to obtain some degree of monetary independence. This paper investigates the link between capital controls and interest differentials/ forward premia. This to test whether they can indeed give governments the power to drive exchange rates away from parity conditions. Two capital control variables are constructed in addition to the standard IMF capital control dummy. These variables are used to determine the date of capital account liberalization in a panel of Western European as well as emerging countries. Results show that capital controls do not give governments extra monetary freedom. There is even some evidence that capital controls decrease the level of monetary freedom governments enjoy for a number of countries. |
| Keywords: | Capital controls; Exchange Rates; Forward premia; Interest differentials; Monetary freedom |
| JEL: | E42 F21 F31 G15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6727&r=mon |
| By: | Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob de Haan; David-Jan Jansen |
| Abstract: | Over the last two decades, communication has become an increasingly importantaspect of monetary policy. These real-world developments have spawned a huge newscholarly literature on central bank communicationmostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:170&r=mon |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are based on either the generalized shock structure for the DSGE model or the explicit modeling of deviations from cross-equation restrictions. Using post-1982 U.S. data, we first quantify the degree of misspecification in a state-of-the art DSGE model and then document the performance of different interest rate feedback rules. We find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially. |
| Keywords: | Time-series analysis ; Monetary policy ; Stochastic analysis ; Econometric models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:321&r=mon |
| By: | Buiter, Willem H |
| Abstract: | The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council - the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly-based movement towards far-reaching political integration. And there is little evidence of that as yet. |
| Keywords: | convergence; currency union; exchange rate regime; GCC |
| JEL: | E42 E52 E63 F33 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6639&r=mon |
| By: | Eichengreen, Barry |
| Abstract: | The thesis of this paper is that there is no historical precedent for Europe’s monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had “union” as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU. |
| Keywords: | European Monetary Union |
| JEL: | F15 N14 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6642&r=mon |
| By: | Fischer, Andreas M; Ranaldo, Angelo |
| Abstract: | Does global currency volume increase on days when the Federal Open Market Committee (FOMC) meets? To test the hypothesis of excess currency volume on FOMC days, we use a novel data set from the Continuous Linked Settlement (CLS) Bank. The CLS measure captures roughly half of the global trading volume in foreign exchange (FX) markets. We find strong evidence that trading volume increases in the order of 5% across currency areas on FOMC days during 2003 to 2007. This result holds irrespective of the size of price changes in currency markets and FOMC policy shocks. The new evidence of excess FX trading on FOMC days is inconsistent with standard models of the asset market approach with homogenous agents. |
| Keywords: | FOMC; Global linkages; Trading volume |
| JEL: | F31 G12 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6753&r=mon |
| By: | Romain Houssa |
| Abstract: | We analyse the costs of a monetary union in West Africa by means of asymmetric aggregate demand and aggregate supply shocks. Previous studies have estimated the shocks with the VAR model. We discuss the limitations of this approach and apply a new technique based on the dynamic factor model. The results suggest the presence of economic costs for a monetary union in West Africa because aggregate supply shocks are poorly correlated or asymmetric across these countries. Aggregate demand shocks are more correlated between West African countries. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0411&r=mon |
| By: | Wolf, Nikolaus |
| Abstract: | The paper examines the timing of exit from the interwar gold-exchange standard for a panel of European countries, based on monthly data over the period January 1928 - December 1936. I show that the decision of exit from gold can be understood in terms of a trade-off between a quite limited set of factors commonly suggested in the theoretical literature on currency crises. A simple and parsimonious econometric framework that nests various hypotheses allows predicting the very month when a country will exit gold in the 1930s. |
| Keywords: | Europe; Gold-Exchange Standard; Interwar Period |
| JEL: | E42 E44 N14 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6685&r=mon |