nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒04‒21
seventeen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Sweden's Monetary Internationalization under the Silver and Gold Standards, 1834–1913 By Anders Ögren
  2. Central Bank Design with Heterogeneous Agents By Aleksander Berentsen; Carlo Strub
  3. Globalization, Macroeconomic Performance, and Monetary Policy By Frederic S. Mishkin
  4. Monetary Politics in a Monetary Union: A Note on Common Agency with Rational Expectations By Michele Ruta
  5. A Black Swan in the Money Market By John B. Taylor; John C. Williams
  6. Play Money? Contemporary Perspectives on Monetary Sovereignty By Christoph Herrmann
  7. Demand for money in Iran: An ARDL approach By Sharifi-Renani, Hosein
  8. Term Structure and the Estimated Monetary Policy Rule in the Eurozone. By Ramón María-Dolores; Jesús Vázquez
  9. Monetary policy and Swedish unemployment fluctuations By Alexius, Annika; Holmlund, Bertil
  10. Remittances, Inflation and Exchange Rate Regimes in Small Open Economies By Christopher P. Ball; Martha Cruz-Zuniga; Claude Lopez; Javier Reyes
  11. Impact of bank competition on the interest rate pass-through in the euro area By M. van Leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel
  12. "Term Structure of Interest Rates under Recursive Preferences in Continuous Time" By Hisashi Nakamura; Keita Nakayama; Akihiko Takahashi
  13. Optimal Monetary Policy and the Sources of Local-Currency Price Stability By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  14. The Comovement between Monetary and Fiscal Policy Instruments: Post-War Period in US. By Jesús Vázquez
  15. Will the Renminbi Become a World Currency? By Wendy Dobson; Paul R. Masson
  16. The Degree of Legal Independence of the Mediterranean Central Banks: International Comparison and Macroeconomic Implications By Enrico Gisolo
  17. Balance Sheet Effects in Currency Crises: Evidence from Brazil By Marcio M. Janot; Marcio G. P. Garcia; Walter Novaes

  1. By: Anders Ögren
    Abstract: The central bank’s possibility to sustain the specie standard was largely affected by both the financial development and its internationalization. The increased foreign debt denominated in foreign currencies forced the central bank to engage in more disciplinary monetary policy. The developed banking system worked in two ways: 1) increased public wealth in the banking system allowed a more relaxed discipline but 2) the commercial banks’ supply of liquidity through note issuance allowed the central bank to strengthen monetary discipline. The international economy developed as a credit economy and this international credit economy led to more flexible monetary policy. This affected the working of the adjustment mechanism where domestic prices simultaneously followed changes in the domestic money supply and in international prices. Thus the international integration made both prices and money supply grow in harmony over the borders.
    Keywords: Balance of Payments; Central Bank Reserves; Foreign Debt; Gold Standard; Monetary Base; Monetary Discipline; Monetary Policy; Money Supply; Silver Standard
    JEL: E42 E50 F33 N13 N23
    Date: 2008
  2. By: Aleksander Berentsen; Carlo Strub
    Abstract: We study alternative institutional arrangements for the determination of monetary policy in a general equilibrium model with heterogeneous agents, where monetary policy has redistributive effects. Inflation is determined by a policy board using either simple-majority voting, supermajority voting, or bargaining. We compare the equilibrium inflation rates to the first-best allocation.
    Keywords: Policy board, monetary policy, search
    JEL: E4 E5 D7
    Date: 2008–04
  3. By: Frederic S. Mishkin
    Abstract: The paper argues that many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up. Globalization does, however, have the potential to be stabilizing for individual economies and has been a key factor in promoting economic growth. The paper then examines four questions about the impact of globalization on the monetary transmission mechanism and arrives at the following answers: (1) Has globalization led to a decline in the sensitivity of inflation to domestic output gaps and thus to domestic monetary policy? No. (2) Are foreign output gaps playing a more prominent role in the domestic inflation process, so that domestic monetary policy has more difficulty stabilizing inflation? No. (3) Can domestic monetary policy still control domestic interest rates and so stabilize both inflation and output? Yes. (4) Are there other ways, besides possible influences on inflation and interest rates, in which globalization may have affected the transmission mechanism of monetary policy? Yes.
    JEL: E52 F41
    Date: 2008–04
  4. By: Michele Ruta
    Abstract: Is the politicisation of monetary policy in a currency union desirable? This paper shows that in a setting where political influence by national governments is modeled as a common agency game with rational expectations, the answer to this question crucially depends on whether the common central bank can commit to follow its policy.
    Keywords: Common Agency, Political Pressures, European Monetary Union
    JEL: F33 E58 D78
    Date: 2007–09–28
  5. By: John B. Taylor; John C. Williams
    Abstract: At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions -- including the introduction of a new term auction facility (TAF) --- to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.
    JEL: E43 E44 E52
    Date: 2008–04
  6. By: Christoph Herrmann
    Abstract: Money has always been a difficult and complex concept and the views about what money actually is could hardly be more diverse. This is all the more true in the times of completely manipulated irredeemable paper currencies, the functioning of which is based almost completely on the extent to which people believe in its trustworthiness. The final abolition of Gold as a universal standard of currencies in the early 1970s at first glance seems to have strengthened the grip of governments on money. Nevertheless, it is often argued that "national currencies" are under threat. According to this view, "monetary sovereignty" is waning, as is sovereignty as a whole. The present paper takes a different view. It argues that "monetary sovereignty" understood as a legal concept remains intact and is not even significantly limited by obligations under public international law. This leaves governments significant leeway in taking decisions regarding the setup of their monetary regime ("sovereignty games") and empirical evidence shows the large number of different options that are actually chosen.
    Keywords: Sovereignty, Monetary Sovereignty, International Monetary Relations, Monetary Policy, Money
    Date: 2007–11–09
  7. By: Sharifi-Renani, Hosein
    Abstract: The objective of this study is to estimate the demand for money in Iran using the autoregressive distributed lag (ARDL) approach to cointegration analysis. The empirical results show that there is a unique cointegrated and stable long-run relationship among M1 monetary aggregate, income, inflation and exchange rate. We find that the income elasticity and exchange rate coefficient are positive while the inflation elasticity is negative. This indicates that depreciation of domestic currency increases the demand for money, supporting the wealth effect argument and people prefer to substitute physical assets for money balances that are supporting our theoretical expectation. Our results also after incorporating the CUSUM and CUSUMSQ tests reveal that the M1 money demand function is stable between 1985 and 2006.
    Keywords: Money demand; ARDL; Stability; Iran
    JEL: E44 E4 E41
    Date: 2007–10–10
  8. By: Ramón María-Dolores (Bank of Spain, Universidad de Murcia); Jesús Vázquez (The University of the Basque Country)
    Abstract: In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a classical structural method based on the indirect inference principle.
    Keywords: NKM model, term structure, policy rule, indirect inference
    JEL: C32 E30 E52
    Date: 2008–04–08
  9. By: Alexius, Annika (Department of Economics, Stockholm University); Holmlund, Bertil (Department of Economics, Uppsala University)
    Abstract: A widely spread belief among economists is that monetary policy has relatively short-lived effects on real variables such as unemployment. Previous studies indicate that monetary policy affects the output gap only at business cycle frequencies, but the effects on unemployment may well be more persistent in countries with highly regulated labor markets. We study the Swedish experience of unemployment and monetary policy. Using a structural VAR we find that around 30 percent of the fluctuations in unemployment are caused by shocks to monetary policy. The effects are also quite persistent. In the preferred model, almost 30 percent of the maximum effect of a shock still remains after ten years.
    Keywords: Unemployment; monetary policy; structural VARs
    JEL: E24 J60
    Date: 2008–02–28
  10. By: Christopher P. Ball; Martha Cruz-Zuniga; Claude Lopez; Javier Reyes
    Abstract: Remittances are private monetary transfers yet the rapidly growing literature on the subject seems to forget their monetary nature and thus ignore the role that exchange rate regimes play in determining the effect remittances have on a recipient economy. This paper uses a theoretical model and panel vector autoregression techniques to explore the role exchange rate regimes play in understanding the effect of remittances. The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should be inflationary and generate an increase in the domestic money supply under a fixed regime but deflationary and generate no change in the money supply under a flexible regime. These differences are borne out in the data. This adds to our understanding of the true effect of remittances on economies and suggests results existent in the literature that do not control for regimes may be biased.
    Date: 2008
  11. 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 loan market 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: 2008–03
  12. By: Hisashi Nakamura (Faculty of Economics, University of Tokyo); Keita Nakayama (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. Under mean-reverting expectation on real output growth and inflation, this paper finds that, if interest rates tend to be high during economic booms, then a real yield curve slopes up when, and only when, late resolution is preferred strongly enough. Also, even when the real yield curve slopes down, the nominal yield curve may slope up when expected inflation is negatively correlated with the real output growth.
    Date: 2008–01
  13. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: We analyze the policy trade-offs generated by local currency price stability of imports in economies where upstream producers strategically interact with downstream firms selling the final goods to consumers. We study the effects of staggered price setting at the downstream level on the optimal price (and markup) chosen by upstream producers and show that downstream price movements affect the desired markup of upstream producers, magnifying their price response to shocks. We revisit the international dimensions of optimal monetary policy, unveiling an argument in favour of consumer price stability as the main prescription for monetary policy. Since stable consumer prices feed back into a low volatility of markups among upstream producers, this contains inefficient deviations from the law of one price at the border. However, efficient stabilization of different CPI components will not generally result into perfect stabilization of headline inflation. National policies optimally respond to the same shocks in a similar way, thus containing volatility of the terms of trade, but not necessarily of the real exchange rate. The latter will be more volatile, among other things, the larger the home bias in expenditure and the content of local inputs in consumer goods.
    Keywords: optimal monetary policy, price discrimination, price dispersion, exchange rate pass through, real exchange rates
    JEL: F31 F33 F41
    Date: 2007–11–09
  14. By: Jesús Vázquez (The University of the Basque Country)
    Abstract: This paper empirically studies the dynamic relationship between monetary and fiscal policies by analyzing the comovements between the Fed funds rate and the primary deficit/output ratio. Simple economic thinking establishes that a negative correlation between Fed rate and deficit arises whenever the two policy authorities share a common stabilization objective. However, when budget balancing concerns lead to a drastic deficit reduction the Fed may reduce the Fed rate in order to smooth the impact of fiscal policy, which results in a positive correlation between these two policy instruments. The empirical results show (i) a significant negative comovement between Fed rate and deficit and (ii) that deficit and output gap Granger-cause the Fed funds rate during the post-Volcker era, but the opposite is not true.
    Keywords: Fed rate, deficit, comovement, switching regimes
    JEL: C32 E52 E62
    Date: 2008–04–08
  15. By: Wendy Dobson (Rotman School of Management); Paul R. Masson (Rotman School of Management)
    Abstract: China has emerged as a major power in the world economy, so it seems natural to consider whether its currency will also have a major role. However, at present it is not used internationally. We look at the factors that contribute to the international use of currencies, and focus on the aspects of China’s financial system that would have to change before the renminbi emerged as an important regional or world currency. Even with important reforms, two important questions would remain: whether the authorities would want to encourage its international use, and whether an economy with substantial party control could gain international acceptance for its currency.
    Date: 2007–12
  16. By: Enrico Gisolo
    Abstract: The aim of the present paper is to assess the degree of central bank legal independence enjoyed by the central banks of the south shore of the Mediterranean Sea, which belong to the Euro-Mediterranean Partnership and to shed some light on the macroeconomic outcomes of different degrees of independence. To this end a methodology used by the International Monetary Fund, here slightly modified to better suit the characteristics of the central banks in the area, is introduced and applied. The main findings of the present work are as follows: i) as regards legal independence, the Mediterranean countries show a diverse picture, sometimes far from the common wisdom; ii) legal independence does not always appear in line with the de facto situation; iii) Cyprus and Malta (that recently joined the European Union), as well as Turkey, that has been recognized a candidate country status, do not always show the best degrees of legal/actual independence and iv) many central banks of the area have recently amended their Statutes with a view to achieving more independence, as the issue has a key role in the modernization of the economies and a priority status in the implementation of a comprehensive and effective set of political and economic reforms.
    Keywords: central bank independence; independence assessment; macroeconomic performance
    Date: 2007–11–19
  17. By: Marcio M. Janot (Central Bank of Brasil); Marcio G. P. Garcia (Department of Economics, PUC-Rio); Walter Novaes (Department of Economics, PUC-Rio)
    Abstract: In third generation currency crises models, balance sheet losses from currency depreciations propagate the crises into the real sector of the economy. To test these models, we built a firmlevel database that allowed us to measure currency mismatches around the 2002 Brazilian currency crisis. We found that between 2001 and 2003, firms with large currency mismatches just before the crisis reduced their investment rates 8.1 percentage points more than other publicly held firms. We also showed that the currency depreciation increased exporters revenue, but those with currency mismatches reduced investments 12.5 percentage points more than other exporters. These estimated reductions in investment are economically very significant, underscoring the importance of negative balance sheet effects in currency crises. Jel Codes:F32; F34; G31; G32
    Keywords: Investment; Balance sheets; Currency crises; Hedge; Financial constraints.
    Date: 2008–04

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