nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒05‒10
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia By Herman kamil
  2. Challenges to Monetary Policy in the Czech Republic—An Integrated Monetary and Fiscal Analysis By Céline Allard; Sònia Muñoz
  3. The Effects of Joining a Monetary Union on Output and Inflation Variability in Accession Countries By Holtemöller, Oliver
  4. Sacrifice ratio dispersion within the Euro Zone:<br />What can be learned about implementing a Single Monetary Policy? By Marilyne Huchet-Bourdon; Jean-Jacques Durand; Julien Licheron
  5. Striving to Be "Clearly Open" and "Crystal Clear": Monetary Policy Communication of the CNB By Katerina Smídková; Ales Bulir
  6. Taylor-type rules versus optimal policy in a Markov-switching economy By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  7. Essential Interest-Bearing Money (2008) By Andolfatto, David
  8. Issues on the choice of Exchange Rate Regimes and Currency Boards – An Analytical Survey By Moheeput, Ashwin
  9. Optimal operational monetary policy rules in an endogenous growth model: a calibrated analysis By Arato, Hiroki
  10. Reforming the IMF: Lessons from Modern Central Banking By Philipp Maier; Eirc Santor
  11. The Monetary Model Strikes Back: Evidence from the World By Valerie Cerra; Sweta Chaman Saxena
  12. Intelligible Factors for the Yield Curve By Lengwiler, Yvan; Lenz, Carlos
  13. Calculating Welfare Costs of Inflation in a Search Model with Preference Heterogeneity: A Calibration Exercise By Pedro de Araujo

  1. By: Herman kamil
    Abstract: Policymakers in many emerging markets are attempting to resist currency appreciation while simultaneously meeting targets for inflation. Using the recent experience of Colombia between 2004 and 2007, this paper examines the effectiveness of the Central Bank's intervention in stemming domestic currency appreciation under an inflation targeting regime. The results indicate that exchange rate intervention was effective during 2004-2006, when foreign currency purchases were undertaken during a period of monetary easing. During 2007, on the other hand, intervention was ineffective in reversing or slowing down domestic currency appreciation, as large-scale intervention became incompatible with meeting the inflation target in an overheating economy. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention.
    Date: 2008–04–09
  2. By: Céline Allard; Sònia Muñoz
    Abstract: This paper uses the Global Integrated Monetary and Fiscal Model (GIMF), a New Keynesian open-economy general equilibrium model suitable for an integrated evaluation of monetary and fiscal policies, to analyze monetary policy challenges facing the Czech Republic. In the context of the recent rising inflation pressures, we analyze how the authorities' fiscal reform package and the planned reduction in the inflation target in 2010 would weigh on the conduct of monetary policy.
    Keywords: Monetary policy , Czech Republic , Inflation targeting , Fiscal policy ,
    Date: 2008–03–25
  3. By: Holtemöller, Oliver
    Abstract: New EU member countries are supposed to adopt the Euro as soon as economic convergence is achieved. This paper analyzes the effects of joining a monetary union on output and inflation variability in small acceding countries. An asymmetric macroeconomic two-country model is specified and combined with two different monetary policy regimes: (i) national monetary policy, (ii) monetary union. The performance of the two regimes is analyzed in terms of inflation and output variability for a broad range of structural parameter specifications.
    Keywords: European monetary union; open economy macroeconomic models; optimal monetary policy
    JEL: F42 E52 F41
    Date: 2007–12–14
  4. By: Marilyne Huchet-Bourdon (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Jean-Jacques Durand (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen); Julien Licheron (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université Rennes I - Université de Caen)
    Abstract: This article focuses on the comparison of sacrifice ratios as an indicator for structural dispersion within the euro area over the period 1972-2003. Estimates of the sacrifice ratio, defined as the cumulative output cost arising from permanent inflation reduction, are obtained using structural VAR models. Results from sub-period analysis as well as ten-year-period rolling estimates lead to two main conclusions. Firstly empirical evidence displays a recent increase in the average sacrifice ratio, which can be linked to the simultaneous decrease in the average inflation rate: this negative relationship between the initial level of inflation and the cost of disinflation can be seen as a justification for the choice of an inflation objective close to 2% for the European Central Bank (ECB) rather than a target of perfect price stability, potentially very damaging. Secondly, we can't provide evidence of any reduction in European sacrifice ratio dispersion, which would suggest that the nominal convergence triggered by the Maastricht Treaty didn't involve a true reduction of structural differences. It is likely to be a problem in the stance of a single monetary policy, since structural differences imply asymmetric responses of real national economies to the same monetary impulse.
    Keywords: Sacrifice ratio; monetary policy; convergence; Economic and Monetary Union (EMU)
    Date: 2008–09–30
  5. By: Katerina Smídková; Ales Bulir
    Abstract: The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. Using a simple forward-looking policy rule, we find that its main communication tools-inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board-provided a clear message in about three out of every four observations in our 2001- 2005 sample.
    Date: 2008–04–04
  6. By: Fernando Alexandre (NIPE and University of Minho); Pedro Bação (GEMF and Faculdade de Economia, Universidade de Coimbra); Vasco Gabriel (Department of Economics, University of Surrey, UK and NIPE-UM)
    Abstract: We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.
    Keywords: Asset Prices, Monetary Policy, Markov Switching
    JEL: E52 E58
    Date: 2008
  7. By: Andolfatto, David
    Abstract: I consider a model of intertemporal trade where agents lack commitment, agent types are private information, there is an absence of recordkeeping, and societal penalties are infeasible. Despite these frictions, I demonstrate that policy can be designed to implement the first-best allocation as a (stationary) competitive monetary equilibrium. The optimal policy requires a strictly positive interest rate with the aggregate interest expenditure financed in part by an inflation tax and in part by an incentive-compatible lump-sum fee. An illiquid bond is essential only in the event that paying interest on money is prohibitively costly.
    JEL: E4
    Date: 2008–05–03
  8. By: Moheeput, Ashwin (Department of Economics, University of Warwick)
    Abstract: Currency boards have often been at the heart of monetary reforms proposed by the International Monetary Fund (IMF) : they have been instrumental either as a short term crisis management strategy that successfully restores financial order for many countries seeking stabilization in the aftermath of prolonged economic crisis or as a way of importing monetary credibility as part of a medium / long term strategy for conducting monetary policy. As backbone of a credible exchange-rate based stabilisation programme, they have also been the linchpin of several heterodox or orthodox programmes aimed at mitigating hyperinflation. This paper attempts to synthetize our thinking about currency boards by reviewing their strengths and weaknesses and endeavours to seek real world examples to rationalise their applicability as opposed to alternative exchange rate regimes. Architects of international financial stability at the IMF or at central banks often ponder about the prerequisites for such programme to work well. These are also reviewed using appropriate economic theory where necessary. Finally, this paper sheds light on the best exchange rate regime that may be adopted in the intermediate term by those countries wishing to adopt a currency board, not as a quick fix solution to end an economic chaos but rather, as integral part of a long term monetary strategy.
    Keywords: Currency Boards ; IMF ; Crisis Management ; Monetary Credibility ; Heterodox / Orthodox Programs ; Hyperinflation ; Exchange Rate Regimes
    Date: 2008
  9. By: Arato, Hiroki
    Abstract: We construct an endogenous growth model with new Keynesian-type sticky prices and wages. In this model, monetary policy affects long-run output growth. We characterize the optimal operational monetary policy rule in this economy. We find that even though stabilization of output growth increases long-run output growth, the optimal monetary policy rule is the rule that makes interest rate respond to price and wage actively and output growth mutely, similar as in exogenous growth models. We also find that the optimal monetary policy rule virtually maximizes mean growth. These results suggest that although long-run growth is important for welfare, new Keynesian's claim that monetary policy should stabilize nominal variables is highly robust.
    Keywords: Monetary policy; Sticky price and wage; Business cycle fluctuations; Productivity growth
    JEL: E32 O41 E52
    Date: 2008–05
  10. By: Philipp Maier; Eirc Santor
    Abstract: The authors examine the institutional and governance framework of modern central banks to determine whether there are lessons that can be applied to the International Monetary Fund's (IMF's) institutional framework. Such a comparison is appealing for two reasons. First, both central banks and the IMF carry out tasks that can be described as "delegated responsibilities." Second, while monetary policy has yielded mixed results in many countries for decades, it has recently enjoyed considerable success in reducing inflation. Substantial changes to the institutional frameworks of central banks have, at least partly, contributed to this success. This raises a simple question: can the lessons learned from modern central banking help to strengthen the governance of the IMF? The authors argue they can. Governance reform would enhance the IMF's decision-making process and make the Fund more transparent and accountable, thus improving the effectiveness of its main instruments -- surveillance and lending. The reforms proposed by the authors in this paper should not be viewed as immediately achievable goals; rather, they constitute a set of guiding principles for long-term governance reform.
    Keywords: International topics
    JEL: F3
    Date: 2008
  11. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentalsbased models very successful in beating a random walk in out-of-sample prediction.
    Keywords: Exchange rates , Forecasting models ,
    Date: 2008–03–28
  12. By: Lengwiler, Yvan (Universitaet Basel); Lenz, Carlos (Swiss National Bank)
    Abstract: We construct a factor model of the yield curve and specify time series processes for these factors, so that the innovations are mutually orthogonal. At the same time, the factors are constructed in such a way that they assume clear, intuitive interpretations. The resulting "intelligible factors" should prove useful for investment professionals to discuss expectations about yield curves and the implied dynamics. Moreover, they allow us to distinguish announced changes of the monetary policy stance versus monetary policy surprises, which are ctually rare. We identify two such events, namely September 11, 2001, and the Fed reaction to the recent subprime crisis.
    Keywords: yield curve; factor models; structural vector autoregression; monetary policy
    JEL: E43
    Date: 2008–04–30
  13. By: Pedro de Araujo (Indiana University Bloomington)
    Abstract: Using U.S. cross-sectional data, this paper calculates the welfare cost of a 10% inflation for different individuals and finds that the difference in cost between the poorest 10%, measured by their expenditure share on cash goods, and the richest 10% is in the order of 176%. That is, a poor person is on average willing to forgive 176% more of their total consumption in order to have inflation reduced from 10% to 0. In absolute terms this represents a cost of 2.687% of consumption for the poorest and 0.974% for the richest. I accomplish this by introducing preference heterogeneity in a monetary search model first developed by Lagos and Wright (2005), and calibrate the model to match the expenditure share on cash goods and total expenditures for each individual type using data from the Consumer Expenditure Survey (CEX) for the second quarter of 1996. I also show that this welfare difference increases to 210% (10.522% for the poorest 10% and 3.401% for the richest 10%) whenever frictions in the use of money are imposed (holdup problem). The ability to explicitly model these frictions is the advantage of using this model. Hence, inflation in this framework, as other studies have shown, acts as a regressive consumption tax; and this regressiveness is augmented with the holdup problem.
    Keywords: Inflation, welfare, search, holdup
    JEL: C63 C78 E41
    Date: 2008–04

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