nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒05‒24
nine papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case By U. Michael Bergman; Shakill Hassan
  2. "Creating Maryland’s Paper Money Economy, 1720-1739: The Role of Power, Print, and Markets" By Farley Grubb
  3. Central bank reaction to public deficit and sound public finance: the case of the European Monetary Union By Canale, R.R.
  4. Improving Forecasts of Inflation using the Term Structure of Interest Rates By Alonso Gomez; John M Maheu; Alex Maynard
  5. Changes in the transmission mechanism of monetary policy in New Zealand By Özer Karagedikli; Rishab Sethi; Christie Smith; Aaron Drew
  6. Risk and uncertainty in central bank signals By Sheila Dow; Matthias Klaes; Alberto Montagnoli
  7. Representations of knowledge in monetary policy processes: a discursive perspective By Dana Gabor
  8. Heterogeneous Expectations, Adaptive Learning,and Forward-Looking Monetary Policy By Martin Fukac
  9. Bank runs, liquidity and credit risk By Topi, Jukka

  1. By: U. Michael Bergman (Department of Economics, University of Copenhagen); Shakill Hassan (University of South Africa)
    Abstract: This paper revisits the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction - even with foreign-currency debt in firms' balance sheets. The effect of lower interest rates on output can help restore the value of the currency due to increased money demand.
    Keywords: currency crises; foreign–currency debt; balance sheets; interest parity; monetary policy
    JEL: E51 F30 O11
    Date: 2008–05
  2. By: Farley Grubb (Department of Economics,University of Delaware)
    Abstract: The British North American colonies were the first western economies to rely on legislature-issued fiat paper money as their principal internal medium of exchange. This system arose piecemeal across the colonies making the paper money creation story for each colony unique. It was true monetary experimentation on a grand scale. The creation story for Maryland, perhaps the most unique among the colonies, is analyzed to evaluate how market forces, media influences, and the power of various constituents combined to shape its particular paper money system.
    Keywords: Colonial Maryland; Commodity Money; Dual Currency; Economic History; Export Controls; Monetary Policy; Paper Money; Tax Policy; Tobacco Trade.
    JEL: E42 E51 H20 N11 N21 N41
  3. By: Canale, R.R.
    Abstract: The paper aims to shed light on the relation between monetary and fiscal policy in EMU, focusing on the interest rates and deficit dynamics. We present a theoretical model in which monetary and fiscal policy independently interact in a closed economic system through their own instrument, namely, the rate of interest for the central bank and deficit spending for governments. We demonstrate that the possibility of the two policy authorities producing not conflicting results depends on the idea each has of the workings of the economic system and on the influence each variable has on inflation and equilibrium income. Furthermore the inflationary opinion of the ECB about deficit spending leads to the result that public finance becomes surely unsound, unless governments stop using expansionary instruments. We provocatively conclude that the limits set by the Maastricht Treaty are a necessary solution to avoid unsound public finance.
    Keywords: Monetary policy; Fiscal Policy; Policy coordination; EMU
    JEL: E62 E58 E52 E63 E61
    Date: 2008–05–10
  4. By: Alonso Gomez; John M Maheu; Alex Maynard
    Abstract: Many pricing models imply that nominal interest rates contain information on inflation expectations. This has lead to a large empirical literature that investigates the use of interest rates as predictors of future inflation. Most of these focus on the Fisher hypothesis in which the interest rate maturity matches the inflation horizon. In general forecast improvements have been modest and often fail to improve on autoregressive benchmarks. Rather than use only monthly interest rates that match the maturity of inflation, this paper advocates using the whole term structure of daily interest rates and their lagged values to forecast monthly inflation. Principle component methods are employed to combine information from interest rates across both the term structure and time series dimensions. We find robust forecasting improvements in general as compared to both an augmented Fisher equation and autoregressive benchmarks.
    Keywords: inflation, inflation forecast, Fisher equation, term structure, principal components
    JEL: E31 E37 C53 C32
    Date: 2008–05–16
  5. By: Özer Karagedikli; Rishab Sethi; Christie Smith; Aaron Drew (Reserve Bank of New Zealand)
    Abstract: Over the last few years, monetary policy in New Zealand has focused on reducing strong demand and inationary pressures. It has been commented that this task has been frustrated by a weakening of the monetary policy transmission mechanism in New Zealand. In this paper we draw upon a range of empirical models to assess whether monetary policy has lost its potency over the recent cycle, and to identify changes in the mechanism more broadly. Our main conclusion is that the overall impact of monetary policy has not obviously weakened, and in some respects has strengthened, over the past decade.
    JEL: C32 E32 E58
    Date: 2008–02
  6. By: Sheila Dow (SCEME, University of Stirling); Matthias Klaes (Keele University); Alberto Montagnoli (Department of Economics, University of Stirling)
    Abstract: This paper considers the signalling aspect of monetary policy. We introduce a heuristic framework for the study of signal uncertainty, and use this to analyses the signal uncertainty implicit in the communications of the Bank of England’s Monetary Policy Committee (MPC). Our findings suggest that frequencies of key terms expressing signal uncertainty in MPC minutes may either reflect the degree of confidence implicit in MPC deliberations, or offer evidence for the presence of an irreducible kind of signal uncertainty that shows up as white noise, casting doubt on the soundness of the various qualitative uncertainty indices found in the literature.
    Keywords: MPC, signal uncertainty, central bank uncertainty, word frequencies, uncertainty index, seasonality
    JEL: E52 E58 E12 D81
    Date: 2008–05
  7. By: Dana Gabor (SCEME, University of Stirling)
    Abstract: Exploring knowledge in monetary policy process stands to benefit by departing from conceptualizing knowledge as an objective depiction of reality, a neutral language of science underpinning technocratic policy-making. This paper proposes a postpositivist perspective, approaching knowledge production as a process of struggle over truth claims which structures policy action by establishing boundaries for policy choices. To contextualize the mechanisms of knowledge generation, it explores the adoption by the National Bank of Romania of a new policy framework, Inflation Targeting, in August 2005. This allows a mapping of the knowledge agenda, the knowing subjects allowed to participate in policy talk and avenues for contesting truth claims.
    Keywords: discourse analysis, MPC, monetary policy
    JEL: B41 Z1
    Date: 2007–11
  8. By: Martin Fukac (Reserve Bank of New Zealand)
    Abstract: In this paper, I examine the role of monetary policy in a heterogeneous expectations environment. I use a New Keynesian business cycle model as the experiment laboratory. I assume that the central bank and private economic agents (households and producing rms) have imperfect and heterogeneous information about the economy, and as a consequence, they disagree in their views on its future development. I facilitate the heterogeneous environment by assuming that all agents learn adaptively. Measured by the central bank's expected loss, the two major findings are: (i) policy that is efcient under homogeneous expectations is not effccient under heterogeneous expectations; (ii) in the short and medium run, policy that is excessively responsive to ination increases ination and output volatility, but in the long run such policy lowers economic volatility.
    JEL: E4 E52
    Date: 2008–05
  9. By: Topi, Jukka (Bank of Finland Research)
    Abstract: In this paper, I develop a model that addresses the links between banks’ liquidity outlook and their incentives to take credit risk. Assuming that both bank-specific liquidity shocks and credit losses are necessary to provoke bank runs, the model predicts that a bank’s incentives to mitigate its credit risk by screening decrease if the probability of a bank-specific liquidity shock declines. This suggests that the benign liquidity outlook prevailing prior to the subprime crisis may have contributed to the lack of screening by banks that has been an important causal factor in the crisis.
    Keywords: liquidity; credit risk screening; bank runs
    JEL: G12 G21 G28
    Date: 2008–05–14

This nep-mon issue is ©2008 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.