nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒04‒29
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Exchange Rates and the Money Demand Process during the Persistently High Inflation Period in the Turkish Economy: Causes and Dynamics By Savaþ Bilal
  2. Too Many Cooks? Committees in Monetary Policy By Helge Berger; Volker Nitsch
  3. Modeling the monetary policy reaction function of the colombian central bank By Jesús Otero; Manuel Ramírez Gómez
  4. The Term Structure of Inflation Expectations By Chernov, Mikhail; Mueller, Philippe
  5. How should central banks define price stability? By Mark A. Wynne
  6. Optimal monetary policy under sudden stops By Vasco Cúrdia
  7. Economies of scale in banking, indeterminacy, and monetary policy By Dressler, Scott
  8. The Monetary Policy Decision-Making Process and the Term Structure of Interest Rates By Dillén, Hans
  9. A Portfolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment By Stephen G Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
  10. Money and competing assets under private information By Guillaume Rocheteau
  11. Can the Facts of UK Inflation Persistence be Explained by Nominal Rigidity? By Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti; Srinivasan, Naveen
  12. Ensuring Financial Stability: Financial Structure and the Impact of Monetary Policy on Asset Prices By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  13. On the Explosive Nature of Hyper-Inflation Data By Nielsen, Bent
  14. Inflation-Targeting in Sub-Saharan Africa: Why Now? Why at All? By Terry McKinley
  15. Monetary policy and bank distress: an integrated micro-macro approach By De Graeve, Ferre; Kick, Thomas
  16. Technical Appendix to "Fiscal and Monetary Policy under Sectorial Heterogeneity" By Berriel, Tiago; Sinigaglia, Daniel
  17. Globalization and monetary policy: an introduction By Enrique Martinez-Garcia
  18. Vehicle currency By Michael B. Devereux; Shouyong Shi
  19. Monetary Policy Effects in Developing Countries with Minimum Wages By Kodama, Masahiro
  20. Monetary and Fiscal Policy Efficiency and Coordination in an Open-Economy General Equilibrium Model with Three Production Sectors. By Gilbert Koenig; Irem Zeyneloglu
  21. Oil Price Shocks, Rigidities and the Conduct of Monetary Policy: Some Lessons from a New Keynesian Perspective By Romain Duval; Lukas Vogel
  22. Optimal fiscal and monetary policy: equivalence results By Isabel Correia; Juan Pablo Nicolini; Pedro Teles
  23. Israel 1983: A Bout of Unpleasant Monetarist Arithmetic By Sargent, Thomas J; Zeira, Joseph
  24. Coin sizes and payments in commodity money systems By Angela Redish; Warren E. Weber
  25. Forecasting Inflation in China By Mehrotra , Aaron; Sánchez-Fung, José R.
  26. Labour Market Asymmetries in a Monetary Union By Andersen, Torben M; Seneca, Martin
  27. "The International Monetary (Non-)Order and the 'Global Capital Flows Paradox'" By Joerg Bibow
  28. Central bank institutional structure and effective central banking: cross-country empirical evidence By Iftekhar Hasan; Loretta J. Mester
  29. Level, Slope, Curvature: Characterising the Yield Curve in a Cointegrated VAR Model By Giese, Julia V.
  30. Multivariate Feller conditions in term structure models: Why do(n't) we care? By Peter Spreij; Enno Veerman; Peter Vlaar

  1. By: Savaþ Bilal (Aksaray University)
    Abstract: The money demand process in Turkey during the period 1987:1-2002:3 can be explained better in the sense of Cagan (1956) rather than in the sense of Sargent et al.(1973).Cagan assumes the exogeneity of money. Sargent et al. suggest the endogeneity of money. Implicitly, the money supply process with regard to Turkish inflation is unpredictable with respect to the past history of prices, i.e. either inflation or currency depreciation. Therefore, the Turkish monetary regime may be described as a random walk monetary standard with short-term (myopic) discretionary policies used by the authorities. Moreover, the unpredictable money growth implies that the Central Bank’s passive monetary policy implementations help maintain the persistently high inflationary process in Turkey.
    Keywords: Demand for Money, High Inflation, Granger Causality, Exogeneity of Money, Endogeneity of Money, Exchange Rate-Based Pricing
    JEL: E31 E41 E65
    Date: 2008
  2. By: Helge Berger (Freie Universität Berlin, Economics Department, Berlin, Germany); Volker Nitsch (ETH Zurich, KOF Swiss Economic Institute, Zurich, Switzerland)
    Abstract: How many people should decide about monetary policy? In this paper, we take an empirical perspective on this issue, analyzing the relationship between the number of monetary policy decision-makers and monetary policy outcomes. Using a new data set that characterizes Monetary Policy Committees (MPCs) in more than 30 countries from 1960 through 2000, we find a U-shaped relation between the membership size of MPCs and inflation; our results suggest that the lowest level of inflation is reached at MPCs with about seven to ten members. Similar results are obtained for other measures, such as inflation variability and output growth. We also find that MPC size influences the success of monetary targeting regimes. In contrast, there is no evidence that either turnover rates of MPC members or the membership composition of MPCs affect economic outcomes.
    Keywords: central bank design, monetary policy committee, central bank board, central bank council, governance, inflation
    JEL: E52 E58 E61
    Date: 2008–04
  3. By: Jesús Otero; Manuel Ramírez Gómez
    Abstract: This paper proposes a simple Ordered Probit model to analyse the monetary policy reaction function of the Colombian Central Bank. There is evidence that the reaction function is asymmetric, in the sense that the Bank increases the Bank rate when the gap between observed inflation and the inflation target (lagged once) is positive, but it does not reduce the Bank rate when the gap is negative. This behaviour suggests that the Bank is more interested in fulfilling the announced inflation target rather than in reducing inflation excessively. The forecasting performance of the model, both within and beyond the estimation period, appears to be particularly good.
    Date: 2008–04–14
  4. By: Chernov, Mikhail; Mueller, Philippe
    Abstract: We use evidence from the term structure of inflation expectations implicit in the nominal yields and survey forecasts of inflation to address the question of whether or not monetary policy is effective. We construct a model that accommodates forecasts over multiple horizons from multiple surveys and Treasury yields by allowing for differences between risk-neutral, subjective, and objective probability measures. We extract private sector expectations of inflation from this model and establish that they are driven by inflation, real activity and one latent factor, which is correlated with survey forecasts. We show that the interest rate responds to this "survey" factor. The inflation premium and out-of-sample estimates of the inflation long-run mean and persistence suggest that monetary policy became effective over time. As an implication, our model outperforms a standard macro-finance model in inflation and yield forecasting.
    Keywords: inflation; macro-finance term structure model; monetary policy; survey forecasts
    JEL: C50 E52 G12
    Date: 2008–04
  5. By: Mark A. Wynne
    Abstract: It is now generally accepted that the primary objective of central banks should be the maintenance of price stability. This paper considers the question of how central banks should define price stability. I address three specific questions. First, should central banks target broad or narrow measures of inflation? Second, should central banks target headline or core measure of inflation? And third, should central banks define price stability as prevailing at some positive measured rate of inflation?
    Keywords: Inflation (Finance) ; Financial stability ; Price indexes ; Monetary policy
    Date: 2008
  6. By: Vasco Cúrdia
    Abstract: Emerging market economies often face sudden stops in capital inflows or reduced access to the international capital market. This paper analyzes what monetary policy should accomplish in such an event. Optimal monetary policy induces higher interest rates and exchange rate depreciation. The interest rate hike discourages borrowing and consumption, mitigating the impact of the increased cost of borrowing. The exchange rate depreciation provides a boost to export revenues, reducing the need for, but not averting, a domestic recession. The paper shows that the arrival of the sudden stop further aggravates the time inconsistency problem. Optimal policy is fairly well approximated by a flexible targeting rule, which stabilizes a basket composed of domestic price inflation, exchange rate and output. We show that from a welfare perspective, the success of a fixed exchange rate regime depends on the economic environment. For the benchmark parameterization, the peg performs the worst of the simple rules considered. For alternative parameterizations that feature low nominal rigidities or high elasticity of foreign demand, the fixed exchange rate regime performs relatively better.
    Keywords: Monetary policy ; International finance ; Macroeconomics ; Foreign exchange rates ; Inflation targeting
    Date: 2008
  7. By: Dressler, Scott
    Abstract: This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Consumption in the model can be purchased with currency and deposits, and ES in intermediation implies that deposit costs are decreasing in aggregate deposits. The results suggest that indeterminacy does not depend on a large degree of ES nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any degree of ES, while policies targeting nominal rates eliminates indeterminacy for all degrees of ES.
    Keywords: Financial Intermediation; Economies of Scale; Equilibrium Indeterminacy; Monetary Policy
    JEL: E52 E44 C62
    Date: 2008–03
  8. By: Dillén, Hans (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper presents a theoretical model of the term structure of interest rates based on the monetary policy decision-making process at modern central banks. Evaluations of explicit expressions for the spot and forward rate curve render several important results: (i) Spot and forward rates are explicit functions of the number of policy meetings during the time to maturity rather than the time to maturity itself. Consequently, the forward rate curve is step-shaped. (ii) In addition, there are calendar time effects, i.e. the position within the policy cycle is also of importance, especially for short term interest rates. (iii) The forward rate curve exhibits hump-shaped responses to economic shocks and a modified version of the Nelson-Siegel model can be obtained as a special case.
    Keywords: The term structure of interest rates; interest rate stepping; policy gap; calendar time effects; hump-shaped responses
    JEL: E43 E52 G12
    Date: 2008–04–01
  9. By: Stephen G Hall; George Hondroyiannis; P.A.V.B. Swamy; George S. Tavlas
    Abstract: As part of its monetary policy strategy, the European Central Bank has formulated a reference value for M3 growth. A pre-requisite for the use of a reference value for M3 growth is the existence of a stable demand function for that aggregate. However, a large empirical literature has emerged showing that, beginning in 2001, essentially all euro area M3 demand functions have exhibited instability. This paper argues that a proper understanding of the determination of money requires a portfolio analysis where the demand for broad money is seen as just one element in the wealth portfolio. Under this framework, wealth is the variable that constitutes the total budget constraint on the holdings of assets, including money, and changes in equity prices are a key transmission channel of monetary policy. Understanding money behaviour thus requires good data on euro area wealth which at present do not exist. Our basic premise is that there is a stable demand-for-money function but that the models that have been used until now to estimate euro area money-demand are not well-specified because they do not include a measure of wealth. Using two empirical methodologies - - a co-integrated vector equilibrium correction (VEC) approach and a time-varying coefficient (TVC) approach - - we find that a demand-for-money function that includes wealth is stable. The upshot of our findings is that M3 behaviour continues to provide useful information about medium-term developments on inflation.
    Keywords: Money demand; VEC, time varying coefficient estimation; Euro area
    JEL: C20 E41
    Date: 2008–04
  10. By: Guillaume Rocheteau
    Abstract: I study random-matching economies where at money coexists with real assets, and no restrictions are imposed on payment arrangements. I emphasize informational asymmetries about asset fundamentals to explain the partial illiquidity of real assets and the usefulness of at money. The liquidity of the real asset, as measured by its transaction velocity, is shown to depend on the discrepancy of its dividend across states as well as policy. I analyze how monetary policy affects payment arrangements, asset prices, and welfare.
    Keywords: Money ; Monetary policy
    Date: 2008
  11. By: Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Nowell, Eric; Sofat, Prakriti (Cardiff Business School); Srinivasan, Naveen
    Abstract: It has been widely argued that inflation persistence since WWII has been widespread and durable and that it can only be accounted for by models with a high degree of nominal rigidity. We examine UK post-war data where after confirming previous studies, findings of varying persistence due to changing monetary regimes, we find that models with little nominal rigidity are best equipped to explain it.
    Keywords: inflation persistence; New Keynesian; New Classical; nominal rigidity; monetary regime shifts
    JEL: E31 E37
    Date: 2008–04
  12. By: Assenmacher-Wesche, Katrin; Gerlach, Stefan
    Abstract: This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited.
    Keywords: asset prices; monetary policy; panel VAR
    JEL: C23 E52
    Date: 2008–04
  13. By: Nielsen, Bent
    Abstract: Empirical analyses of Cagan’s money demand schedule for hyper-inflation have largely ignored the explosive nature of hyper-inflationary data. It is argued that this contributes to an (i) inability to model the data to the end of the hyper-inflation, and to (ii) discrepancies between “estimated” and “actual” inflation tax. A simple solution to these issues is found by replacing the conventional measure of inflation by the cost of holding money.
    Keywords: Cost of holding money, co-explosiveness, co-integration, explosive processes, hyper-inflation
    JEL: C32 E41
    Date: 2008
  14. By: Terry McKinley (International Poverty Centre)
    Keywords: Sub-Saharan Africa, Inflation
    Date: 2008–04
  15. By: De Graeve, Ferre; Kick, Thomas
    Abstract: Evidence on the interdependency between monetary policy and the state of the banking system is scarce. We suggest an integrated micro-macro approach with two core virtues. First, we measure the probability of bank distress directly at the bank level. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between bank distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a relationship between monetary policy and bank distress. A monetary contraction increases the mean probability of distress. This effect disappears when neglecting micro effects, underlining the crucial importance of the former. Distress responses are economically most significant for weak distress events and at times when capitalization is low.
    Keywords: Stress testing, bank distress, monetary policy
    JEL: E42 E52 E58 G21 G28
    Date: 2008
  16. By: Berriel, Tiago; Sinigaglia, Daniel
    Abstract: This is the complete technical appendix to "Fiscal and Monetary Policy under Sectorial Heterogeneity".
    JEL: E62 E52
    Date: 2008–04–24
  17. By: Enrique Martinez-Garcia
    Abstract: Greater openness has become an almost universal feature of modern, developed economies. This paper develops a workhorse international model, and explores the role of standard monetary policy rules applied to an open economy. For this purpose, I build a two-country DSGE model with monopolistic competition, sticky prices, and pricing-to-market. I also derive the steady state and a log-linear approximation of the equilibrium conditions. The paper provides a lengthy explanation of the steps required to derive this benchmark model, and a discussion of: (a) how to account for certain well-known anomalies in the international literature, and (b) how to start "thinking" about monetary policy in this environment.
    Keywords: Monetary policy ; Equilibrium (Economics) ; Globalization ; Macroeconomics ; International finance ; Mathematical models
    Date: 2008
  18. By: Michael B. Devereux; Shouyong Shi
    Abstract: While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. The dollar acts as a "vehicle currency" in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Indirect trade is desirable when there are transactions costs of exchange. This paper constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency, and show how this depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency's government. We find that there can be very large welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetry weighted towards the residentsof the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle country.
    Keywords: International trade ; Dollar, American ; Equilibrium (Economics) - Mathematical models ; Monetary policy
    Date: 2008
  19. By: Kodama, Masahiro
    Abstract: Using a Dynamic General Equilibrium (DGE) model, this study examines the effects of monetary policy in economies where minimum wages are bound. The findings show that the monetary-policy effect on a binding-minimum-wage economy is relatively small and quite persistent. This result suggests that these two characteristics of monetary policy in the minimum-wage model are rather different from those in the union-negotiation model which is often assumed to account for industrial economies.
    Keywords: Monetary policy, Sticky wage, Business cycles, Developing countries, Minimum wages
    JEL: E32 E52 J3 O11
    Date: 2008–03
  20. By: Gilbert Koenig; Irem Zeyneloglu
    Abstract: The paper analyzes monetary and fiscal policy efficiency and coordination in a stochastic new open economy macroeconomics (NOEM) model with three production sectors. Some or all of these sectors can be affected by unanticipated productivity shocks which can trigger monetary and fiscal policy reactions. The uncertainty over the shocks can be symmetric or asymmetric across the two countries. The paper first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative effects of unanticipated productivity shocks. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on monetary policy efficiency. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible-price equilibrium. However, their efficiency is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks. In case of high asymmetry, monetary cooperation can be counter-productive either for the home or for the foreign country.
    Keywords: Stabilization, international policy cooperation, monetary policy, fiscal policy.
    JEL: E63 F41 F42
    Date: 2008
  21. By: Romain Duval; Lukas Vogel
    Abstract: The strong and sustained rise in oil prices observed in recent years poses a challenge to monetary policy and its ability to simultaneously achieve low inflation and stable output. Against this background, the paper studies monetary policy in a small open economy New Keynesian DSGE model including oil as a production input and a component of final demand. It investigates the performance of alternative price level definitions, notably headline and core CPI, in standard interest rate rules with respect to output and inflation stabilisation. The analysis puts special emphasis on the impact of price and real wage rigidity and their interaction on the policy trade-off induced by the oil price shock. While the degree of price rigidity alone is found to have little impact on the shock transmission and generates only small differences between alternative monetary strategies, the simulations suggest a more important role for real wage stickiness. Real wage stickiness triggers second round effects and complicates stabilisation whatever the policy rule. A focus on core inflation tends to limit the contraction of output in this context. The results also point to some interaction between nominal price and real wage rigidities. In the presence of real wage rigidity, greater price flexibility is found to be destabilising, as it amplifies the initial inflation effect of shocks, thereby triggering a stronger monetary policy response and a larger output effect. <P>Chocs pétroliers, rigidités et conduite de la politique monétaire : quelques leçons tirées d’une perspective néo-keynésienne <BR>La hausse forte et persistante des prix pétroliers au cours des années passées constitue un défi pour la politique monétaire et sa capacité à stabiliser simultanément l’inflation et la production. Dans ce contexte, ce document étudie le comportement de la politique monétaire dans un modèle DSGE néo-keynésien d’une petite économie ouverte, incluant le pétrole à la fois comme bien de consommation final et comme facteur de production. L’analyse met l’accent sur la performance de définitions alternatives de l’indice des prix, notamment des indices de prix courant et sous-jacent, dans des règles de politique monétaire courantes, en matière de stabilisation du niveau de production et de l’inflation. En particulier, l’analyse met en évidence l’impact des rigidités de prix et de salaire réel, ainsi que de leur interaction, sur l’arbitrage engendré par le choc pétrolier. Tandis que le degré de rigidité des prix seul a peu d’effet sur la transmission des chocs et n’engendre que des écarts mineurs entre différentes stratégies de politique monétaire, les simulations suggèrent un impact plus important de la rigidité des salaires réels. La rigidité des salaires réels entraîne des effets de second tour et complique la stabilisation quelle que soit la règle de politique monétaire. Cibler l’inflation sous-jacente tend à limiter la contraction du niveau de production dans ce contexte. En outre, les résultats suggèrent une interaction entre rigidité des prix nominaux et rigidité des salaires réels. Pour un degré de rigidité donné des salaires réels, une forte flexibilité des prix apparait déstabilisatrice car elle amplifie l’effet initial du choc sur l’inflation, ce qui amplifie la réaction de politique monétaire et, ce faisant, entraîne une variation plus forte du niveau de production.
    Keywords: monetary policy, politique monétaire
    JEL: E30 F41 Q43
    Date: 2008–04–08
  22. By: Isabel Correia; Juan Pablo Nicolini; Pedro Teles
    Abstract: In this article, we analyze the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price-setting restrictions imposed on the firms. We show that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness. In this sense, environments with different price-setting restrictions are equivalent.
    Date: 2008
  23. By: Sargent, Thomas J; Zeira, Joseph
    Abstract: From 1970 to 1985, Israel experienced high inflation. It rose in three jumps to new plateaus and eventually exceeded 400% per annum. This paper claims that anticipated monetary and fiscal effects of a massive government bailout of owners of fallen bank shares caused the last big jump in inflation that occurred in October 1983. Bank shares had just collapsed after a scandal in which it was revealed that banks had long manipulated their share prices. The government promised to reimburse innocent owners for the diminished value of their bank shares, but only after four or five years. The public believed that promise and public debt therefore implicitly increased by a large amount. That implied future monetary expansions. Because that was foreseen, inflation immediately rose as predicted by the unpleasant monetarist arithmetic of Sargent and Wallace (1981).
    Keywords: Inflation; Inflation Tax; Public Debt; Rational Expectations
    JEL: E31 E50 H60
    Date: 2008–04
  24. By: Angela Redish; Warren E. Weber
    Abstract: Commodity money standards in medieval and early modern Europe were characterized by recurring complaints of small change shortages and by numerous debasements of the coinage. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that changes in the size of the small coin affect ex ante welfare. Further, the optimal ratio of coin sizes is shown to depend upon the trading opportunities in a country and a country’s wealth. Thus, coinage debasements can be interpreted as optimal responses to changes in fundamentals. Further, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.
    Date: 2008
  25. By: Mehrotra , Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT)
    Abstract: This paper forecasts inflation in China over a 12-month horizon. The analysis runs 15 alternative models and finds that only those considering many predictors via a principal component display a better relative forecasting performance than the univariate benchmark.
    Keywords: inflation forecasting; data-rich environment; principal components; China
    JEL: C53 E31
    Date: 2008–04–21
  26. By: Andersen, Torben M; Seneca, Martin
    Abstract: This paper takes a first step in analysing how a monetary union performs in the presence of labour market asymmetries. Differences in wage flexibility, market power and country sizes are allowed for in a setting with both country-specific and aggregate shocks. The implications of asymmetries for both the overall performance of the monetary union and the country-specific situation are analysed. It is shown that asymmetries are not only critical for country-specific performance but also for the overall performance of the monetary union. A striking finding is that aggregate output volatility is not strictly increasing in nominal rigidities but hump-shaped. Moreover, a disproportionate share of the consequences of wage inflexibility may fall on small countries. In the case of country-specific shocks, a country unambiguously benefits in terms of macroeconomic stability by becoming more flexible, while this is not necessarily the case for aggregate shocks. There may thus be a tension between the degree of flexibility considered optimal at the country level and at the aggregate level within the monetary union.
    Keywords: business cycles; monetary policy; monetary union; nominal wage rigidity; shocks; staggered contracts; wage formation
    JEL: E30 E52 F41
    Date: 2008–04
  27. By: Joerg Bibow
    Abstract: This paper sets out to investigate the forces behind the so-called "global capital flows paradox" and related "dollar glut" observed in the era of advancing financial globalization. The supposed paradox is that the developing world has increasingly come to pursue policies that resulted in current account surpluses and thus net capital exports—destined primarily for the capital-rich United States. The hypothesis put forward here is that systemic deficiencies in the international monetary and financial order have been the root cause behind today’s situation. Furthermore, it is argued that the United States’ position as issuer of the world's premiere reserve currency and supremacy in global finance explain the related conundrum of a positive investment income balance despite a negative international investment position. The assessment is carried out in light of John Maynard Keynes’s views on a sound international monetary and financial order.
    Date: 2008–04
  28. By: Iftekhar Hasan; Loretta J. Mester
    Abstract: Over the last decade, the legal and institutional frameworks governing central banks and financial market regulatory authorities throughout the world have undergone significant changes. This has created new interest in better understanding the roles played by organizational structures, accountability, and transparency, in increasing the efficiency and effectiveness of central banks in achieving their objectives and ultimately yielding better economic outcomes. Although much has been written pointing out the potential role institutional form can play in central bank performance, little empirical work has been done to investigate the hypothesis that institution form is related to performance. This paper attempts to help fill this void.
    Keywords: Banks and banking, Central
    Date: 2008
  29. By: Giese, Julia V.
    Abstract: Empirical evidence on the expectations hypothesis of the term structure is in-conclusive and its validity widely debated. Using a cointegrated VAR model of US treasury yields, this paper extends a common approach to test the theory. If, as we find, spreads between two yields are non-stationary, the expectations hypothesis fails. However, we present evidence that differences between two spreads are stationary. This suggests that the curvature of the yield curve may be a more meaningful indicator of expected future interest rates than the slope. Furthermore, we characterise level and slope by deriving the common trends inherent in the cointegrated VAR, and establish feedback patterns between them and the macroeconomy.
    Keywords: Yield Curve, Term Structure of Interest Rates, Expectations Hypothesis, Cointegration, Common Trends
    JEL: C32 E43 E44
    Date: 2008
  30. By: Peter Spreij; Enno Veerman; Peter Vlaar
    Abstract: In this paper, the relevance of the Feller conditions in discrete time macro-finance term structure models is investigated. The Feller conditions are usually imposed on a continuous time multivariate square root process to ensure that the roots have nonnegative arguments. For a discrete time approximate model, the Feller conditions do not give this guarantee. Moreover, in a macro-finance context the restrictions imposed might be economically unappealing. At the same time, it has also been observed that even without the Feller conditions imposed, for a practically relevant term structure model, negative arguments rarely occur. Using models estimated on German data, we compare the yields implied by (approximate) analytic exponentially affine expressions to those obtained through Monte Carlo simulations of very high numbers of sample paths. It turns out that the differences are rarely statistically significant, whether the Feller conditions are imposed or not. Moreover, economically the differences are negligible, as they arealways below one basis point.
    Keywords: macro-finance models; affine term structure model; expected inflation; ex-antereal short rate; Monte Carlo simulations
    Date: 2008–04

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