nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒06‒21
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Systems in Developing Countries: An Unorthodox View By Cordeiro, Jose Luis
  2. Monetary Transmission and the Yield Curve in a Small Open Economy By Mariano Kulish; Daniel Rees
  3. The Rise and Fall of the Dollar, or When did the Dollar Replace Sterling as the Leading Reserve Currency? By Eichengreen, Barry; Flandreau, Marc
  4. Globalization Effect on Inflation and Domestic Monetary Policy By Adamcik, Santiago
  5. Accumulating Foreign Reserves Under Floating Exchange Rates By Fernando M. Gonçalves
  6. The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the ‘Fear of Floating’ By Carlos Eduardo Schönerward da Silva; Matias Vernengo
  7. Divisia Second Moments: An Application of Stochastic Index Number Theory By Barnett, William A.; Jones, Barry E.; Nesmith, Travis D.
  8. Decade of dissent: explaining the dissent voting behavior of Bank of England MPC members By Harris, Mark; Spencer, Christopher
  9. Inflation, Nominal Portfolios, and Wealth Redistribution in Canada By Césaire Meh; Yaz Terajima
  10. Incorporating judgement with DSGE models By Jaromír Beneš; Andrew Binning; Kirdan Lees
  11. International Price Stability, Full Employment and Global Balances: The Case for a Commodity Reserve Currency By Leanne Ussher
  12. Optimal Fiscal and Monetary Policy Without Commitment By Stefan Niemann; Paul Pichler; Gerhard Sorger
  13. Exchange Rate Regimes and Capital Mobility: How Much of the Swoboda Thesis Survives? By Eichengreen, Barry
  14. The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe By Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
  15. Central Bank Independence and Transparency: Evolution and Effectiveness By Christopher W. Crowe; Ellen E. Meade
  16. Fiscal and Monetary Anchors for Price Stability: Evidence from Sub-Saharan Africa By Alfredo Baldini; Marcos Poplawski Ribeiro
  17. Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities By Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma
  18. Reserve Requirements, the Maturity Structure of Debt, and Bank Runs By Eza Al-Zein
  19. Aid volatility, monetary policy rules and the capital account in African economies By Christopher Adam; Stephen O'Connell; Edward Buffie
  20. The forint interest rate swap market and the main drivers of swap spreads By Csaba Csávás; Lóránt Varga; Csaba Balogh

  1. By: Cordeiro, Jose Luis
    Abstract: This paper analyzes some recent theoretical and practical evidence in terms of economic results of different exchange rate systems. It begins with a historical review and a summary of fixed versus flexible exchange rate systems. Then it compares the experiences of recent currency unions, mostly unilateral, and their relative economic performance during the past currency crises in Latin America, East Asia and Eastern Europe. A set of issues is discussed in order to weigh the overall costs and benefits for several economies. These issues include exchange rates, GDP performance, inflation rates and foreign reserves. The case of Argentina is also considered separately, comparing mostly seigniorage costs and interest-rate savings. The benefits and costs of the producers (central banks/governments) and the consumers (citizens) of money are discussed separately. Free banking is also considered in a fast-changing world where there will probably be fewer but better currencies. Not just the euro is a reality now, but maybe the "amero" and the "worldo" or the "mondo" very soon.
    Keywords: Exchange rates, Monetary policy, Monetary union, Dollarization, Euroization, Developing countries, Foreign exchange, Finance, International finance, Money
    JEL: E42 E52 F02 F30
    Date: 2008–05
  2. By: Mariano Kulish (Reserve Bank of Australia); Daniel Rees (Reserve Bank of Australia)
    Abstract: Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be highly correlated with those of the United States. This observation has recently lent support to the view that the long end of the yield curve is determined abroad. We set up and estimate a micro-founded two-block small open economy model to study the co-movement of long-term nominal interest rates of different currencies. The expectations hypothesis together with uncovered interest rate parity, which both hold in our model, can account for much of the co-movement of interest rates observed in the data.
    Keywords: term structure of interest rates; yield curve; small open economy; DSGE model; transmission mechanism
    JEL: E43 E52 E58 F41
    Date: 2008–06
  3. By: Eichengreen, Barry; Flandreau, Marc
    Abstract: We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.
    Keywords: international currency; international reserves; reserve currency
    JEL: F31 F33
    Date: 2008–06
  4. By: Adamcik, Santiago
    Abstract: This paper discusses that many of the exaggerated claims that globalization has been an important element in the reduction of the inflation in the recent years do not come true. The globalization has, however, the potential to contribute to the stabilization of economies and this has been crucial element in promoting the growth of economies. The paper, therefore, analyzes four issues on the impact of the globalization upon the mechanisms of monetary transmission and arrives at the following findings. ( 1 ) The globalization did not reduce the sensibility of inflation to the domestic production gaps and in consequence to the effectiveness of the monetary policy,. ( 2 ) The gaps in the product of external economies do not play a more important role than in other times,.( 3 ) The domestic monetary policy maintains still the control on the domestic interest rates and that way pursuing the stabilization of inflation and the product,.( 4 ) The globalization affects, by means of different forms, the mechanisms of monetary transmission
    Keywords: Globalizacion; Inflacion; Politica Monetaria
    JEL: E58 E31 E42 G15 E44
    Date: 2008–03–13
  5. By: Fernando M. Gonçalves
    Abstract: Official accumulation of foreign reserves may be perceived as interventions to influence the exchange rate, undermining the credibility of floating exchange rates and inflation targets. This paper develops a theoretical framework to study the interaction between reserve accumulation and monetary policy. The model uncovers a trade-off between the speed of reserve accumulation and anti-inflationary credibility. Under reasonable assumptions, delegation of intervention and monetary policy decisions to separate government agencies allows faster reserve accumulation, while centralization of these decisions results in a more stable economy. The analysis underscores the importance of rather overlooked institutional features of policymaking in open economies.
    Date: 2008–04–24
  6. By: Carlos Eduardo Schönerward da Silva; Matias Vernengo
    Abstract: This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies on earlier time periods, and remains low. Whereas pass-through effects where high and close to 1 in the high-inflation period, they seem to have fallen to around 0.2 after the Real Plan stabilization, a number that is similar to the Import Substitution Industrialization (ISI) period of the 1950s and 1960s. Conventional results suggests that low and stable inflation environments lead to low levels of exchange rate pass-through and thus contribute to weakening the ‘fear of floating’ phenomenon experienced by some developing countries. In spite of lower pass-through effects the Brazilian Central Bank has maintained high interest rates in order to control the exchange rate. This paper suggests that ‘fear of inflation’ provides justification for the central bank’s persistent ‘fear of floating.’
    Keywords: Pass-Through, Inflation, Brazil
    JEL: E58 F41 O54
    Date: 2008–11
  7. By: Barnett, William A.; Jones, Barry E.; Nesmith, Travis D.
    Abstract: W. A. Barnett originated the Divisia monetary aggregates, using Diewert's results on superlative index numbers and Barnett's derivation of the user cost of monetary asset services. The resulting Divisia index can be interpreted as a first moment aggregating over growth rates with expenditure shares serving as probabilities. But Theil showed that there are analogous higher order Divisia moments providing distributional information. In this paper we use the Divisia second moments to investigate distributional information in the monetary aggregate growth rates and to measure aggregation error in the Divisia first moments.
    Keywords: Divisia monetary aggregates; Divisia second moments; monetary aggregation; monetary policy; distribution effects
    JEL: E51 E52 E01 E4 G0 E41 C1
    Date: 2008–06–12
  8. By: Harris, Mark; Spencer, Christopher
    Abstract: We examine the dissent voting record of the Bank of England Monetary Policy Committee (MPC) in its first decade. Probit estimates indicate the impact of career experience on dissent voting is negligible, whereas the impact of forecast inflation is pronounced. In addition to finding a role for dynamics, we also find a role for unobserved heterogeneity in the form of member-specific fixed-effects, suggesting previous literature characterizing voting behavior as largely determined by whether members are appointed from within or outside the ranks of Bank of England staff (internal and external members respectively) is overly simplistic.
    Keywords: Bank of England; Monetary Policy Committee; career background effects; dissent voting; unobserved heterogeneity
    JEL: D7 E5 C35
    Date: 2008–06
  9. By: Césaire Meh; Yaz Terajima
    Abstract: There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. An issue that has generally received relatively less attention in this debate is the redistributional effects of inflation. This omission is likely to be important since the welfare costs of inflation depend not only on aggregate effects but also on redistributional consequences. The goal of this paper is to contribute to this policy debate by assessing the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities.We find that the redistributional effects of inflation are sizeable even for low and moderate inflation episodes. The main winners are young middle-class households with substantial amounts of mortgage debt. Besides young households, inflation also represents a windfall gain for the government because of its long-term debt. Old households, rich households, and the middle-aged middle-class lose from inflation, largely due to their sizeable holdings of bonds and non-indexed defined benefit pension assets.
    Keywords: Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices
    JEL: D31 D58 E31 E50
    Date: 2008
  10. By: Jaromír Beneš; Andrew Binning; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: Central bank policymakers often cast judgement about macroeconomic forecasts in reduced form terms, basing this on off-model information that is not easily mapped to a structural DSGE framework. We show how to compute forecasts conditioned on policymaker judgement that are the most likely conditional forecasts from the perspective of the DSGE model, thereby maximising the influence of the model structure on the forecasts. We suggest using a simple implausibility index to track the magnitude and type of policymaker judgement. This is based on the structural shocks required to return policymaker judgement. We show how to use the methods for practical use in the policy environment and also apply the techniques to condition DSGE model forecasts on: (i) the long history of published forecasts from the Reserve Bank of New Zealand; (ii) constant interest rate forecasts; and (iii) inflation forecasts from a Bayesian VAR currently used in the policy environment at the Reserve Bank of New Zealand.
    Keywords: DSGE models; monetary policy; conditional forecasts
    JEL: C51 C53
    Date: 2008–06
  11. By: Leanne Ussher (Department of Economics and BBA, Queens College of the City University of New York)
    Abstract: Despite globalization, liberalized trade and growing global income, billions of people are underemployed and condemned to life-long poverty. Over two thirds of the world’s poor reside in rural regions. Inequality in living standards between developed and developing regions remains a major challenge. Rising inequality has been tied to a declining terms of trade against commodities and towards manufactured goods. The recent increase in commodity prices has aided growth in developing countries, but it has also triggered renewed concern over inflation and access to key commodities. Standard responses to inflation are tighter monetary policy in the industrialized world, and devalued currencies with price controls in developing countries. Such policies will continue to aggravate global imbalances, and stymie long term investment in commodity production. Nicholas Kaldor in 1964 suggested a bold new international monetary system to equilibrate growth between agriculture and industry, and remove bottlenecks to industrialization. Specifically he proposed the creation of a ‘sound money’ international reserve backed by a basket of stored commodities, tying reserve liquidity to international world trade. His proposed commodity reserve currency would not only balance economic progress between regions, but also mitigate global imbalances. This paper argues that such an ambitious global macro proposal could be usefully studied to provide insights into current policy debates on the Millennium Development Goals, a new international monetary order, new global partnerships in resource security, and ways to stabilizing cost-push inflation.
    Keywords: price stability, commodity reserve currency, commodity prices, international inflation
    Date: 2007–04
  12. By: Stefan Niemann; Paul Pichler; Gerhard Sorger
    Abstract: This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerges as the optimal policy only if markets are perfectly competitive. Second, once nominal rigidities are introduced, the Friedman rule ceases to be optimal, inflation rates are low and stable, and tax rates are relatively volatile. Finally, optimal time-consistent policy under sticky prices does not generate the near-random walk behavior of taxes and real debt that can be observed under optimal policy in the Ramsey problem. A common reason for these results is that the discretionary government, in an effort to asymptotically eliminate its time-consistency problem, accumulates a large net asset position such that it can finance its expenditures via the associated interest earnings.
    Date: 2008–06–16
  13. By: Eichengreen, Barry
    Abstract: Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe’s monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility.
    Keywords: exchange rate regimes; exchange rates
    JEL: F30 F31
    Date: 2008–06
  14. By: Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
    Abstract: This paper assesses São Tomé and Príncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and Príncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.
    Keywords: Working Paper , Exchange rate regimes , São Tomé and Príncipe , Currencies , Monetary systems , Debt management , Fiscal management , Small states ,
    Date: 2008–05–05
  15. By: Christopher W. Crowe; Ellen E. Meade
    Abstract: This paper examines the current level of central bank independence (CBI) and transparency in a broad sample of countries using newly constructed measures, and looks at the evolution in both measures from an earlier time period. Increases in CBI have tended to occur in more democratic countries and in countries with high levels of past inflation. More independent central banks in turn tend to be more transparent, while transparency is also positively correlated with measures of national institutional quality. Exploiting the time dimension of our data to eliminate country fixed effects and using instrumental variable estimation to overcome endogeneity concerns, we present evidence that greater CBI is associated with lower inflation. We also find that enhanced transparency practices are associated with the private sector making greater use of information provided by the central bank.
    Date: 2008–05–08
  16. By: Alfredo Baldini; Marcos Poplawski Ribeiro
    Abstract: The paper presents a model of fiscal dominance with borrowing constraints, and provides evidence for a large number of sub-Saharan African countries on the relative importance of fiscal and monetary determinants of inflation. Based on the dynamic response of inflation to different shocks, including nominal public debt, results show that a number of SSA countries were characterized throughout the period 1980-2005 either by chronic fiscally dominant regimes, with weak or no response of primary surpluses to public debt; or by a consistent adoption of a monetary dominant regime. However, a number of countries were also characterized by lack of a clear monetary and fiscal policy regime. The study also finds that changes in nominal public debt affect price variability via aggregate demand effects, suggesting that fiscal outcomes could be a direct source of inflation variability, as predicted by the fiscal theory of the price level.
    Keywords: Working Paper , Sub-Saharan Africa ,
    Date: 2008–05–13
  17. By: Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma
    Abstract: This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability.
    Keywords: Exchange rate pass-through; smooth transition regression models
    JEL: E31 E52 F41
    Date: 2008–01
  18. By: Eza Al-Zein
    Abstract: The paper looks at the relationship between reserve requirements and the choice of the maturity structure of external debt in a general equilibrium setup, by incorporating the role of international lenders. A date- and maturity-specific reserve requirement is a fraction of the debt to be deposited in a non-interest bearing account at the central bank. At maturity, the central bank returns the reserves. There exist some specific combinations of date- and maturity-specific reserve requirements that reduce the vulnerability to bank runs. In such setup, lenders may still want to provide new short-term lending to the bank after a bank run.
    Keywords: Working Paper , Reserve requirements , External debt , Bank regulations , Financial crisis , Loans , Central banks ,
    Date: 2008–04–29
  19. By: Christopher Adam (University of Oxford); Stephen O'Connell (Swarthmore College); Edward Buffie (Indiana University)
    Abstract: We examine the properties of simple quantity-based monetary policy rules of the kind widely used in low-income African economies. Using a DSGE model and focusing our attention on responses to positive aid shocks, we suggest that policy rules involving substantial reserve accumulation in the face of aid surges serve to ease macroeconomic adjustment to shocks, particularly when a portion of aid is used to support fiscal adjustment. These rules are robust to assumptions about the degree of integration of the domestic public debt market with world capital markets. Although an open capital account facilitates smoother adjustment to temporary aid surges when an aid inflow is fully spent, it exacerbates the adjustment problem when aid is accompanied by fiscal adjustment and hence reinforces the case for a managed float in such circumstances.
    Keywords: Monetary policy, Africa, Aid volatility, foreign capital flows, stochastic simulation models
    Date: 2008–06
  20. By: Csaba Csávás (Magyar Nemzeti Bank); Lóránt Varga (Magyar Nemzeti Bank); Csaba Balogh (Magyar Nemzeti Bank)
    Abstract: In our paper we present the most important characteristics of the forint interest rate swap market, as well as examine the determinants and the information content of the forint interest rate swap spreads. The turnover of the forint interest rate swap market has grown dynamically in recent years, and now it may reach, or even exceed, the turnover of the government bond market. Due to the hedging activity of interest rate swap market makers, there is a close linkage between the forint interest rate swap market and the government bond market. In terms of investors, the interest rate swap and government bond markets are strongly segmented. Consequently, the spillover from one market segment to the other is not perfect. Our analyses suggest that long-term forint interest rate swap spreads are exposed to the common impact of several factors. The strongest effects are attributed to government bond purchases by residents, the Maggie A spread, the slope of the yield curve and the forint/euro forward yield spread. In the developments of swap spreads, the impact of those trading strategies employing interest rate swaps can be detected. These are widespread in the domestic market, as is confirmed by anecdotal information. The results indicate that in certain cases the swap yields, while at other times the government bond yields carry additional information about long-term yield expectations. The values of the 5-year HUF/EUR forward spread 5 years ahead calculated from the swap yields and from the treasury yields differ markedly, and this difference is driven practically by the same factors that influence the interest rate swap spreads.
    Keywords: forint interest rate swap market, government securities market, interest rate swap spread, swap spread model.
    JEL: G12 G14 G15
    Date: 2008

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