nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒06‒13
sixteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Effects of Anticipated Future Change in the Monetary Policy Regime By Juraj Antal; Frantisek Brazdik
  2. Some New Insights into Currency Boards: Evidence from Bulgaria By Alexandru Minea; Christophe Rault
  3. Why and How to Assess Inflation Target Fulfilment By Jan Filacek
  4. On the (ir)relevance of direct supply-side effects of monetary policy By Vasco Gabriel; Paul Levine; Christopher Spencer; Bo Yang
  5. Long Memory and Non-Linearities in International Inflation By Giovanni Caggiano; Efrem Castelnuovo
  6. Taylor-type rules versus optimal policy in a Markov-switching economy¤ By Fernando Alexandre; Pedro Bação; Vasco Gabriel
  7. Inflation Persistence in New EU Member States: Is It Different Than in the Euro Area Members? By Michal Franta; Branislav Saxa; Katerina Smidkova
  8. From the Bancor to the Euro. And Further on to the Intor? By Heinz Handler
  9. How forward-looking is the Fed? Direct estimates from a `Calvo-type' rule By Vasco Gabriel; Paul Levine; Christopher Spencer
  10. Transmission of Exchange Rate Shocks into Domestic Inflation: The Case of the Czech Republic By Oxana Babetskaia-Kukharchuk
  11. Cognitive Constraints and Reversibility of International Economic Institutions. The Case of the European Monetary System By Maurizio Mistri
  12. A Statistical Comparison of Alternative Identification Schemes for Monetary Policy Shocks By Markku Lanne; Helmut Luetkepohl
  13. Further Theoretical and Empirical Evidence on Money to Growth Relation By Alexandru Minea; Christophe Rault; Patrick Villieu
  14. Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy By KOBAYASHI Keiichiro; NUTAHARA Kengo
  15. Asymptotic Maturity Behavior of the Term Structure By Klaas Schulze

  1. By: Juraj Antal; Frantisek Brazdik
    Abstract: In this paper, we investigate the effects of an anticipated future change in monetary policy regime in small open economies targeting either inflation or the exchange rate. The announcement of a future change in the monetary policy regime triggers an immediate change in the behavior of households and firms. As a result the economy starts to behave differently even though the current monetary policy rule remains the same for the whole period before the monetary policy regime change. Thus, the behavior of economic agents over the transitory period to the new monetary policy rule depends not only on the current monetary policy rule in this transitory period, but also on the anticipated future monetary policy regime. Given a common future monetary policy regime, the behavior of inflation and exchange rate targeting economies converges after the announcement.
    Keywords: Macroeconomics, new Keynesian DSGE models, small open economy,monetary policy rules, regime change.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2007–12
  2. By: Alexandru Minea; Christophe Rault
    Abstract: The presence of a Currency Board (CB) monetary system in Bulgaria is a key factor in assessing monetary policy transmission, since a CB implies no monetary autonomy. Using the SVAR technique according to the statistical properties of macroeconomic time series, we propose evidence sustaining the endogeneity of main Bulgarian monetary aggregates to shocks on the ECB interest rate. These results shed a new perspective over CB functioning.
    Keywords: Currency Board, monetary policy, SVAR, Bulgaria.
    JEL: E42 E52
    Date: 2008–01–01
  3. By: Jan Filacek
    Abstract: The ex post analysis of inflation target fulfilment plays an important role in an inflation targeting framework. The major benefits of ex post analysis are threefold. First, it might improve the forecast accuracy. Second, it helps central bank staff and board members to understand the capabilities and limitations of the forecasts used in their decision-making. Third, it enhances monetary policy transparency and credibility. The primary aim of this paper is to propose a methodological framework for inflation target fulfilment assessment based on partial simulations, as applied in the Czech National Bank. In order to demonstrate the applicability of this framework we analyse the performance of the Czech National Bank between 2002 and 2006. We show that a large part of the inflation target misses in this period can be assigned to bias in the variables describing external developments.
    Keywords: Central bank, inflation target, monetary policy performance.
    JEL: E47 E58
    Date: 2007–12
  4. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey); Bo Yang (University of Surrey)
    Abstract: The relevance of direct supply-side effects of monetary policy in a New Keynesian DSGE model is studied. We extend a model with several nominal and real frictions by introducing a cost channel of monetary transmission and allowing for non-separability of money and consumption in the utility of the representative household. These fea- tures have important theoretical consequences for the output-inflation trade-off and indeterminacy of interest rate rules. The empirical evidence for these effects are then examined using a Bayesian maximum likelihood framework complemented with GMM single-equation estimation. Both estimation strategies point to weak evidence for the cost channel and non-separable utility.
    Keywords: New Keynesian model, Bayesian maximum likelihood estimation, GMM, non-separable utility, cost channel.
    JEL: E42 E52 C11
    Date: 2008–06
  5. By: Giovanni Caggiano (University of Padua); Efrem Castelnuovo (University of Padua)
    Abstract: This paper investigates inflation dynamics in a panel of 20 OECD economies using an approach based on the sample autocorrelation function (ACF). We find that inflation is characterized by long-lasting fluctuations, which are similar across countries and that eventually revert to a potentially time-varying mean. The cyclical and persistent behavior of inflation does not belong to the class of linear autoregressive processes but rather to a more general class of nonlinear and long memory models. Recent theoretical contributions on heterogeneity in price setting and aggregation offer a rationale to our results. Finally, we draw the monetary policy implications of our findings.
    Keywords: AutoCorrelation Function, long-memory, inflation persistence, inflation targeting, heavy tails.
    JEL: E52 E58 C22
    Date: 2008–05
  6. By: Fernando Alexandre (University of Minho); Pedro Bação (University of Coimbra); Vasco Gabriel (University of Surrey)
    Abstract: We analyse the e®ect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modelled 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 ¯nancial 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: 2008–06
  7. By: Michal Franta; Branislav Saxa; Katerina Smidkova
    Abstract: Is inflation persistence in the new EU Member States (NMS) comparable to that in the euro area countries? We argue that persistence may not be as different between the two country groups as one might expect. We confirm that one should work carefully with the usual estimation methods when analyzing the NMS, given the scope of the convergence process they went through. We show that due to frequent breaks in inflation time series in the NMS, parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. Employing a time-varying mean leads to the reversal of this result and suggests similar or lower inflation persistence for the NMS compared to euro area countries. Structural measures show that backward-looking behavior may be a more important component in explaining inflation dynamics in the NMS than in the euro area countries.
    Keywords: Inflation persistence, new hybrid Phillips curve, new member states, timevarying mean.
    JEL: E31 C22 C11 C32
    Date: 2007–12
  8. By: Heinz Handler (WIFO)
    Abstract: The current paper analyses the similarities between the Bretton Woods system (BWS) and the Eurozone and looks into the future of the world monetary system. The gold standard, the Keynes Plan and the White Plan are identified as the most important sources of ideas that formed the BWS. Although Keynes was not particularly successful in Bretton Woods, his plan played a decisive role later on in the critique of the BWS as well as in the design of the European Monetary System. Either system was based on the concept of fixed exchange rates which were seen as more apt for international economic relations than flexible rates. In the BWS, fixed rates were seen to be achieved by coordinating economic policies of member states and by sporadic realignments of exchange rates. In the Eurozone, only policy coordination is available to fulfil this function. The favourable experience made so far with the euro may be utilised for monetary integration in other parts of the world. The Eurozone is also considered good practice for any reform of the international monetary system. Given the diverging political and economic goals of the major currency blocks, it may be questioned, however, whether the success of the euro also furthers the idea of developing a single world currency.
    Keywords: Gold standard, Bretton Woods system, European monetary integration, future of the international monetary system, Europäisches Wärhungssystem
    Date: 2008–04–24
  9. By: Vasco Gabriel (University of Surrey); Paul Levine (University of Surey); Christopher Spencer (University of Surrey)
    Abstract: We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted in?nite sum of future expected in?ation. Compared to conventional in?ation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters.
    Keywords: Calvo-type interest rules; In?ation Forecast Based rules; GMM; Indeterminacy.
    JEL: C22 E58
    Date: 2008–06
  10. By: Oxana Babetskaia-Kukharchuk
    Abstract: This paper aims at estimating the exchange rate pass-through (ERPT) for the Czech Republic. The existing empirical literature does not come to a consensus about the degree of pass-through to Czech inflation. Since there is no unique approach regarding how to measure ERPT, we use various specifications found in the pass-through literature for the Czech Republic. In addition, we estimate the pass-through along the distribution chain in the spirit of McCarthy (2007). We try to explore the properties of exchange rate shock transmission into Czech consumer prices by comparing impulse responses among 11 specifications estimated on data transformed in monthly differences and in annual rates. Equilibrium pass-through is estimated with the help of the VEC model. In addition, we try to account for possible variation in time. The simplest approach is a re-estimation of VAR models on two sub-periods. Our second strategy is the estimation of the error correction equation with the Kalman filter. Finally, we explore how the pass-through differs between tradable (3 sub-groups) and non-tradable goods. We find that the speed of exchange rate shock transmission to all prices is quite high. However, in absolute terms, ERPT does not exceed 25 – 30%.
    Keywords: Exchange rate pass-through, inflation, Kalman filter, VAR, VECM.
    JEL: E31 E52 E58 F31
    Date: 2007–12
  11. By: Maurizio Mistri (University of Padua)
    Abstract: This paper builds on the case study of the birth and death of the fixed exchange rate system in Western Europe, prior to the launch of the Euro. The analysis of this case aims to highlight how "new" international economic institutions may suffer the processes of "preference reversals" and thereby implode. De facto, the paper focuses on the cognitive factors that are deemed to have played an important role in determining the originating decision-making processes in favour of a system of fixed exchange rates and, then, in determining the abandonment of that system. After briefly explaining events such as the "currency snake" and the "European Monetary System" (EMS), the paper highlights how processes of this nature are conditional on the extent of the limits of rationality of the decision-making agents, with the consequence of producing cognitive imbalances. These imbalances are determined by the "fuzziness" with which agents evaluate not only opposing objectives, in particular those of employment and the balance of payments, but especially objectives achievable in an intertemporal dimension (Walliser, 2008: ch. 4). In fact, we illustrate how the actual inflationary differentials between the countries concerned determine the imbalances in the balances of payments. We also highlight how the policies to bring inflation under control can determine changes in the electorate in the preferences defined in the area of economic policies. The collapse of the monetary snake and the European Monetary System is representative of such a change in preferences. The conceptual framework of analysis used is that of temporary equilibria.
    Date: 2008–05
  12. By: Markku Lanne; Helmut Luetkepohl
    Abstract: Different identification schemes for monetary policy shocks have been proposed in the literature. They typically specify just-identifying restrictions in a standard structural vector autoregressive (SVAR) framework. Thus, in this framework the different schemes cannot be checked against the data with statistical tests. We consider different approaches how to use the data properties to augment the standard SVAR setup for identifying the shocks. Thereby it becomes possible to test models which are just identified in a standard setting. For monthly US data it is found that a model where monetary shocks are induced via the federal funds rate is the only one which cannot be rejected when the data properties are used for identification.
    Keywords: Mixed normal distribution, structural vector autoregressive model, vector autoregressive process
    JEL: C32
    Date: 2008
  13. By: Alexandru Minea; Christophe Rault; Patrick Villieu
    Abstract: This paper proposes a theoretical growth model where seigniorage can be used to finance productive public spending, and show the existence of nonlinear effects between seigniorage and economic growth. Empirical evidence based on panel regression techniques provides some support for these nonlinear effects on a sample of OECD countries over the 1978-2005 period.
    Keywords: economic growth, nonlinear effects of monetary policy
    JEL: E52 E62 H54
    Date: 2008–02–01
  14. By: KOBAYASHI Keiichiro; NUTAHARA Kengo
    Abstract: A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives.
    Date: 2008–06
  15. By: Klaas Schulze
    Abstract: Pricing and hedging of long-term interest rate sensitive products require to extrapolate the term structure beyond observable maturities. For the resulting limiting term structure we show two results by postulating no arbitrage in a bond market with infinitely increasing maturities: long zero-bond yields and long forward rates (i) are monotonically increasing and (ii) equal their minimal future value. Both results constrain the asymptotic maturity behavior of stochastic yield curves. They are fairly general and extend beyond semimartingale modeling. Hence our framework embeds arbitrage-free term structure models and imposes restrictions on their specification.
    Keywords: bond markets, yield curve, long forward rates, no arbitrage, asymptotic maturity
    JEL: G10 G12 E43
    Date: 2008–06
  16. By: Irene Andreou; Gilles Dufrenot; Alain Sand-Zantman; Aleksandra Zdzienicka-Durand
    Abstract: We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more “custom-made” early warning system for each one.
    Keywords: Currency Crisis, Early Warning System, Composite Indicator, Eastern Europe.
    JEL: F31 F47
    Date: 2007–05–01

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.