nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒06‒27
fifteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Globalization Effect on both Inflation and Domestic Monetary Policy By Adamcik, Santiago
  2. Monetary policy, asset prices and model uncertainty. By Meixing DAI; Eleftherios SPYROMITROS
  3. Globalisation, domestic inflation and the global output gaps: evidence from the Euro era By Alessandro Calza
  4. On the Welfare Cost of Inflation and the Recent Behavior of Money Demand By Peter N. Ireland
  5. Implementing monetary policy in the 2000s: operating procedures in Asia and beyond By Corrinne Ho
  6. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model By Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson
  7. Inflation dynamics in a small open-economy model under inflation targeting: some evidence from Chile By Marco Del Negro; Frank Schorfheide
  8. Exchange Rate Regimes and Capital Mobility: How Much of the Swoboda Thesis Survives? By Barry Eichengreen
  9. Monetary and Fiscal Policy Interaction: What is the Role of the Transaction Cost of the Tax System in Stabilisation Policies? By Panagiotis Chronis; Aspassia Strantzalou
  10. Interest Rate Forecasts: A Pathology By Wen Bin Lim; Charles Goodhart
  11. Banking Globalization, Monetary Transmission, and the Lending Channel By Nicola Cetorelli; Linda S. Goldberg
  12. Inflation Risk Premia and Survey Evidence on Macroeconomic Uncertainty By Paul Söderlind
  13. Long memory modelling of inflation with stochastic variance and structural breaks By Charles S. Bos; Siem Jan Koopman; Marius Ooms
  14. An arbitrage-free generalized Nelson-Siegel term structure model By Jens H. E. Christensen; Francis X. Diebold; Glenn D. Rudebusch
  15. Short-run Exchange-Rate Dynamics: Theory and Evidence By John A Carlson; Christian M. Dahl; Carol L. Osler

  1. 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 ) Globalization did not reduce the sensibility of inflation to the domestic production gaps and in consequence to the effectiveness of the monetary policy,. ( 2 ) Gaps in the product of external economies do not play a more important role than in other times,.( 3 ) Domestic monetary policy maintains still the control on the domestic interest rates and that way pursuing the stabilization of inflation and the product,.( 4 ) Globalization affects, by means of different forms, the mechanisms of monetary transmission
    Keywords: Globalizacion; Inflacion; Politica Monetaria
    JEL: E58 E31 E42 G15 E44
    Date: 2008–02–09
  2. By: Meixing DAI; Eleftherios SPYROMITROS
    Abstract: Using a macroeconomic model with asset prices, we analyze how optimal monetary policy, and macroeconomic dynamics and performance are affected by the central bank’s desire to be robust against model misspecifications. Considering the worst-case model, we show that an increase in the central bank’s preference for robustness requires a more aggressive reaction of the optimal nominal interest rate with respect to expected inflation and inflation shocks. According to the value of structural parameters, the economic equilibrium can be stable or saddle-point stable. In both cases, the speed of dynamic convergence is smaller under robust control compared to a benchmark case without it. Finally, an increase in the preference for robustness reinforces the reaction of current and expected future inflation, asset prices and output-gap to inflation shocks. However, the preference for robustness has no effect on the reaction of asset prices to the shocks affecting goods demand and financial markets.
    Keywords: Monetary policy, asset prices, model uncertainty, macro-financial stability.
    JEL: E44 E52 E58
    Date: 2008
  3. By: Alessandro Calza
    Abstract: This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the "global output gap hypothesis") holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area.
    Keywords: Globalization ; Inflation (Finance) ; Monetary policy - Europe ; International trade - Europe
    Date: 2008
  4. By: Peter N. Ireland
    Abstract: Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.
    JEL: E31 E41 E52
    Date: 2008–06
  5. By: Corrinne Ho
    Abstract: Just as monetary policy at the strategic level has undergone significant changes over the years, so has its day-to-day implementation. This paper documents the key features of 17 central banks' monetary operating frameworks as of early 2007 and discusses their major developments over the preceding decade. It finds that while some common themes and practices can be identified, there is no unique "best" way to implement monetary policy. Moreover, central banks everywhere - even in industrial economies - have continued to refine their operating frameworks and procedures and to innovate where necessary, responding to changing needs in changing times.
    Keywords: monetary policy implementation, operating procedures, policy rate, operating target, reserve requirements, standing facilities, discretionary operations, Asia-Pacific
    Date: 2008–06
  6. By: Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson
    Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.
    JEL: E52 E58 F41
    Date: 2008–06
  7. By: Marco Del Negro; Frank Schorfheide
    Abstract: This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Galí and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence of model misspecification.
    Keywords: Stochastic analysis ; Time-series analysis ; Econometric models ; Banks and banking, Central ; Monetary policy
    Date: 2008
  8. By: Barry Eichengreen
    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.
    JEL: F31
    Date: 2008–06
  9. By: Panagiotis Chronis (Bank of Greece); Aspassia Strantzalou (Ministry of Employment and Social Protection, Greece)
    Abstract: In the theory of monetary and fiscal policy interaction, the assumption of Ricardian households isolates the determinants of fiscal policy instrument from the price stabilization policies carried out by the central bank. One of the main implications of the above mentioned Ricardian assumption is that the fiscal policy does not have any distortionary effect for the economy, i.e. it does not affect the behaviour of the households, supporting that way the fiscal policy’s neutrality. The argument for this view comes if one assumes that fiscal policy has a distortionary effect on the behaviour of the agents. We relax the above non distortionary assumption by assuming that the imposition of the taxes is consistent with a transaction cost of the tax system that underlies the state - tax payer interaction. In this way we develop a channel through which the stability of prices carried out by the independent central bank is, within optimality, also a function of the fiscal policy determinants (the transaction cost, the tax rates and the debt level). The analysis is carried out in a framework of a monetary union, with two different countries. Within this framework, the effectiveness of a numerical fiscal rule is also examined.
    Keywords: Monetary and fiscal policy interactions; Transaction cost of the tax system; Probability of re-election; Stability and growth pact
    JEL: E52 E58 E62 E63 H60
    Date: 2008–05
  10. By: Wen Bin Lim; Charles Goodhart
    Abstract: This is the first of three prospective papers examining how well forecasters can predict the future time path of short-term interest rates. Most prior work has been done using US data; in this exercise we use forecasts made for New Zealand (NZ) by the Reserve Bank of New Zealand (RBNZ), and those derived from money market yield curves in the UK. In this first exercise we broadly replicate recent US findings for NZ and UK, to show that such forecasts in NZ and UK have been excellent for the immediate forthcoming quarter, reasonable for the next quarter and useless thereafter. Moreover, when ex post errors are assessed depending on whether interest rates have been upwards, or downwards, trending, they are shown to have been biased and, apparently, inefficient. In the second paper we shall examine whether (NZ and UK) forecasts for inflation exhibit the same syndromes, and whether errors in inflation forecasts can help to explain errors in interest rate forecasts. In the third paper we shall set out an hypothesis to explain those findings, and examine whether the apparent ex post forecast inefficiencies may still be consistent with ex ante forecastefficiency. Even if the forecasts may be ex ante efficient, their negligible ex post forecasting ability suggests that, beyond a six months’ horizon from the forecast date, they would be better replaced by a simple ‘no-change thereafter’ assumption.
    Date: 2008–06
  11. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: The globalization of banking in the United States is influencing the monetary transmission mechanism both domestically and in foreign markets. Using quarterly information from all U.S. banks filing call reports between 1980 and 2005, we find evidence for the lending channel for monetary policy in large banks, but only those banks that are domestically-oriented and without international operations. We show that the large globally-oriented banks rely on internal capital markets with their foreign affiliates to help smooth domestic liquidity shocks. We also show that the existence of such internal capital markets contributes to an international propagation of domestic liquidity shocks to lending by affiliated banks abroad. While these results imply a substantially more active lending channel than documented in the seminal work of Kashyap and Stein (2000), the lending channel within the United States is declining in strength as banking becomes more globalized.
    JEL: E5 F3 G20 G3
    Date: 2008–06
  12. By: Paul Söderlind
    Abstract: Nominal and real U.S. interest rates (1997-2007) are combined with inflation expectations from the Survey of Professional Forecasters to calculate time series of "inflation risk premia." It is shown that survey data on inflation and output growth uncertainty, as well as a proxy for liquidity premia can explain a large amount of the variation in these risk premia.
    Keywords: break-even inflation; liquidity premium, Survey of Professional Forecasters
    JEL: E27 E47
    Date: 2008–06
  13. By: Charles S. Bos; Siem Jan Koopman; Marius Ooms (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: We investigate changes in the time series characteristics of postwar U.S. inflation. In a model-based analysis the conditional mean of inflation is specified by a long memory autoregressive fractionally integrated moving average process and the conditional variance is modelled by a stochastic volatility process. We develop a Monte Carlo maximum likelihood method to obtain efficient estimates of the parameters using a monthly dataset of core inflation for which we consider different subsamples of varying size. Based on the new modelling framework and the associated estimation technique, we find remarkable changes in the variance, in the order of integration, in the short memory characteristics and in the volatility of volatility.
    Keywords: Time varying parameters, Importance sampling, Monte Carlo simulation, Stochastic Volatility, Fractional Integration
    JEL: C15 C32 C51 E23 E31
    Date: 2007–12–21
  14. By: Jens H. E. Christensen; Francis X. Diebold; Glenn D. Rudebusch
    Abstract: The Svensson generalization of the popular Nelson-Siegel term structure model is widely used by practitioners and central banks. Unfortunately, like the original Nelson-Siegel specification, this generalization, in its dynamic form, does not enforce arbitrage-free consistency over time. Indeed, we show that the factor loadings of the Svensson generalization cannot be obtained in a standard finance arbitrage-free affine term structure representation. Therefore, we introduce a closely related generalized Nelson-Siegel model on which the no-arbitrage condition can be imposed. We estimate this new arbitrage-free generalized Nelson-Siegel model and demonstrate its tractability and good in-sample fit.
    Keywords: Interest rates ; Econometric models
    Date: 2008
  15. By: John A Carlson; Christian M. Dahl; Carol L. Osler (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information is valuable to us as scientists since, like evidence of macroeconomic regularities, it can provide critical guidance for designing exchange-rate models. This paper presents an optimizing model of short-run exchange-rate dynamics consistent with both the micro evidence and the macro evidence, the first such model of which we are aware. With respect to microeconomics, the model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives faced by the major participants, and it fits key stylized facts concerning returns and order flow. With respect to macroeconomics, the model is consistent with most of the major puzzles that have emerged under floating rates.
    Keywords: Exchange-rate dynamics, currency market microstructure
    JEL: F31 G12 G15
    Date: 2008–01–07

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