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on Monetary Economics |
| By: | Jean Boivin; Marc P. Giannoni; Benoît Mojon |
| Abstract: | This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically. |
| JEL: | C3 D2 E31 E4 E5 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14190&r=mon |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Laurent Pauwels (Research Department, Hong Kong Monetary Authority) |
| Abstract: | In this paper, we model the policy stance of the People¡¦s Bank of China (PBoC) as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBoC. In a second step, we estimate how much of the variation in the PBoC's implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets figured significantly in PBoC's policy changes, but not output gaps. |
| Keywords: | Monetary policy, People's Bank of China, qualitative response models, large factor models |
| JEL: | E52 E58 C25 C32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0806&r=mon |
| By: | Di Bartolomeo Giovanni; Acocella Nicola; Patrizio Tirelli |
| Abstract: | In New Keynesian models nominal rigidities determine socially inefficient outcomes. Our paper reverses this view: properly designed monetary policies may take advantage of predetermined nominal wages to discipline monopolistic wage setters. This, in turn, requires accepting a non-zero inflation rate. Discretionary monetary policy is effective when wage setters are non atomistic. Inflation targeting has real effects irrespective of the degree of labor market centralization. |
| Keywords: | Inflation bias, discretionary monetary policy, non-zero inflation targeting, unemployment, strategic wage setter, labor unions |
| JEL: | E52 E58 J51 E24 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0043&r=mon |
| By: | Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O |
| 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. |
| Keywords: | Instrument rules; Open-economy DSGE models; Optimal monetary policy; Optimal policy projections |
| JEL: | E52 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6907&r=mon |
| By: | Wolf Schäfer |
| Abstract: | This paper deals with the present undervaluation policy in China in the light of the German experiences with the undervaluation of the Deutschmark under Bretton Woods conditions. In Germany, there was a 20 years lasting academic and public debate on the needs for appreciation because of the high costs of having an undervalued currency. These costs referred, i. a., to inflation import, overheating the economy, and distortion of the internal production structure of the country – this seeming to be a similar situation in present China. From the German experience it is argued that flexible nominal exchange rates for large economies like China could better reduce the costs of the adjustment needs of real exchange rates than adjustments via internal inflation. Furthermore, if China as a new Global Player fulfills some necessary conditions for sound economic performance the RMB could possibly change the international monetary order towards a 3-polar monetary system. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:phu:wpaper:013&r=mon |
| By: | Jan Libich; Petr Stehlik |
| Abstract: | The paper analyzes the interactions between monetary and fiscal policies. Its emphasis is on a monetary union; one in which (some of) the governments are excessively ambitious. In contrast to conventional games, our novel game theoretic framework allows for stochastic timing of policy actions. The fact that moves occur with some ex-ante probability distribution (rather than certainty every period) enables us to model various degrees of fiscal rigidity and indiscipline that are heterogeneous across the member countries. We examine a number of specifications in discrete and continuous time, such as the widely-used Calvo (1983) timing, as well as a fully general probability distribution of the timing of policy actions. We derive the necessary and sufficient degree of monetary commitment that eliminates socially inferior (subgame perfect Nash) equilibria. This degree is shown to be increasing in (i) the degree of fiscal rigidity of each member country, (ii) their relative economic size, (iii) the structure of the economy (that determines eg inflation and output variability costs), and (iv) the degree of the central banker's impatience. Interestingly, such a strong monetary commitment - interpretable as a sufficiently explicit numerical inflation target - does not only ensure high credibility of the central bank, but it also indirectly "disciplines" the fiscal policymaker(s). As such, it leads to an improvement in monetary-fiscal policy cooperation and outcomes of both policies. We conclude by calibrating the model with European Monetary Union data. This exercise aims at providing some quantitative predictions regarding the required explicitness of the European Central Bank's commitment to an inflation target. |
| JEL: | E42 E61 C70 C72 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-22&r=mon |
| By: | Fregert, Klas; Jonung, Lars |
| Abstract: | Inflation targeting was adopted by several countries, including Sweden, in the 1990s. We evaluate the Swedish inflation targeting regime since 1995 using a novel approach based on a unique data set on the characteristics of collective wage agreements between 1908 and 2008. First, we establish that the length of wage contracts decreases in response to an increase in “macroeconomic uncertainty” across policy regimes. Second, using contract length as the assessment criteria for regime performance, we find that the inflation targeting regime of 1995–2008 stands out as an exceptionally stable policy regime as judged by the willingness of wage contract-makers to repeatedly commit to three-year non-indexed wage agreements. In addition, inflation targeting gained instant credibility in the sense that the labor market organizations entered long-term wage agreements at the same time as this new regime was announced. Inflation targeting has thus reduced macroeconomic uncertainty compared to previous regimes adopted in Sweden during the 20th century. Our approach to evaluate inflation targeting is different from the traditional one commonly based on cross-section samples comparing inflation outcomes. Instead we focus on the actual decisions of private-sector wage setters under different monetary regimes. Judging from their behavior across a century of observations, inflation targeting in Sweden is a success – at least so far. |
| Keywords: | Inflation targeting, policy regime, contract length, wage indexation, Lucas critique, Sweden, credibility |
| JEL: | E30 E42 E65 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7335&r=mon |
| By: | Jan Babecky; Fabrizio Coricelli; Roman Horvath |
| Abstract: | The paper provides an empirical analysis of inflation persistence in an inflation targeting country, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence. |
| Keywords: | Inflation dynamics, persistence, inflation targeting. |
| JEL: | D40 E31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp353&r=mon |
| By: | KAMGNA, Severin Yves; Ndambendia, Houdou |
| Abstract: | The excess of banks liquidity in the CEMAC zone, following the banking restructuring, brought the monetary authorities to undertake a certain number of reforms. The object of this article is, besides the determination of the explanatory factors of the excess of banks liquidity, to appreciate the efficiency of the transmission mechanisms of the monetary policy. It is evident from results of the evaluation that this phenomenon depends strongly on the economic and financial structures of every CEMAC’s country. To the level of the zone, only the credit to the private sector could reduce the liquidity in excess. In the same way, this situation reduces the efficiency of the monetary channel. This inefficiency of the monetary channel explains itself by the weak adjustment of the rate of the inter-bank market following an expansive monetary policy. These results confirms the necessity for the monetary authorities to implement actions aiming to increase the offer of credit to the private sector. |
| Keywords: | surliquidité; politique monétaire; réserves bancaires; liquidité bancaire; stérilisation. |
| JEL: | E58 E52 E50 |
| Date: | 2008–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9599&r=mon |
| By: | Modena, Matteo |
| Abstract: | The expectations hypothesis implies that rational investors can predict future changes in interest rates by simply observing the yield spread. According to Mishkin (1990) the expectations theory can also be reformulated in terms of the ability of the spread to predict future inflation. Unfortunately, although appealing, the theory has found little empirical support. Time-varying term premia and changing risk perception have been advocated to rationalize the aforementioned weak empirical evidence. In this work we suggest that the time-varying nature of term premia makes single-equation models inappropriate to analyse the informative content of the term structure. In particular, when the deviations between the expected and the actual spread are large, which occurs in times of soaring term premia volatility, linear models fail to support the expectations theory. Within a threshold model for term premia, we provide evidence that the yield spread contains valuable information to predict future interest rates changes once the risk-averse attitude of economic agents is appropriately considered. Empirical results show that the predictive ability of the yield spread is contingent on the level of uncertainty as captured by the size of monetary policy surprise. |
| Keywords: | Expectations Hypothesis; Term Premia; Threshold Models |
| JEL: | E43 G12 C30 |
| Date: | 2008–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9611&r=mon |
| By: | Menzie D. Chinn; Michael J. Moore |
| Abstract: | We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications. |
| JEL: | D82 F31 F41 F47 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14175&r=mon |
| By: | Sylvain Martel |
| Abstract: | The author constructs a measure of core inflation using a structural vector autoregression containing oil-price growth, output growth, and inflation. This "macro-founded" measure of inflation forecasts total inflation at least as well as other, atheoretical measures. |
| Keywords: | Inflation and prices |
| JEL: | E31 C53 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:08-10&r=mon |
| By: | Stehn, Sven Jari; Vines, David |
| Abstract: | We analyse optimal discretionary games between a benevolent central bank and a myopic government in a New Keynesian model. First, when lump-sum taxes are available and public debt is absent, we show that a Nash game results in too much government spending and excessively high interest rates, while fiscal leadership reinstates the cooperative outcome under discretion. Second, we show that this familiar result breaks down when lump-sum taxes are unavailable. With government debt, the Nash equilibrium still entails too much public spending but leads to lower interest rates than the cooperative policy, because debt has to be adjusted back to its pre-shock level to ensure time consistency. A setup of fiscal leadership does not avoid this socially costly outcome. Imposing a debt penalty onto the myopic government under either Nash or fiscal leadership raises welfare substantially, while appointing a conservative central bank is less effective. |
| Keywords: | Non-cooperative games; Optimal Fiscal Policy; Optimal Monetary Policy; Policy Myopia; Stabilisation Bias |
| JEL: | E52 E60 E61 E63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6913&r=mon |
| By: | Anufriev, M. (Universiteit van Amsterdam); Assenza, T. (Universiteit van Amsterdam); Hommes, C.H. (Universiteit van Amsterdam); Massaro, D. (Universiteit van Amsterdam) |
| Abstract: | Recent macroeconomic literature stressed the importance of expectations heterogeneity in the formulation of monetary policy. We use a stylized macro model of Howitt (1992) to investigate the dynamical consequences of alternative interest rate rules when agents have heterogeneous expectations and update their beliefs over time along the lines of Brock and Hommes (1997). We find that the outcome of different monetary policies in terms of stability crucially depends on the ecology of forecasting rules and on the intensity of choice among different predictors. We also show that, when agents have heterogeneous expectations, an interest rate rule that obeys the Taylor principle does not always lead the system to converge to the rational expectations equilibrium but multiple equilibria may persist. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ams:ndfwpp:08-08&r=mon |
| By: | Niola Amendola (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | According to Engineer and Shi (1998, 2001) and Berentsen and Rocheteau (2003), the double coincidence of wants problem seems to be not essential to rationalize the use of money in a search theoretic framework. This paper analyzes an endogenous price search model of money where there is universal double coincidence of wants. The existence of a monetary equilibrium depends, essentially, on the asymmetry in the role played by economic agents in the exchange and production processes. In particular, entrepreneurs are assumed to produce a fixed amount of a divisible consumption good by means of labour services provided by workers. Entrepreneurs can offer a co-operative (barter) contract or a monetary contract to workers. Under the co-operative contract real wages are determined in the labour exchange sector, while in the monetary regime real wages are determined in the commodity exchange sector. The monetary contract is proved to be an equilibrium strategy provided that: (i) the workers' labour disutility is sufficiently high and/or (ii) the entrepreneurs' bargaining power in the commodity market is sufficiently large relative to their bargaining power in the labour market. The rationale for money comes from the fact that entrepreneurs use it as an instrument to maximize their output share. |
| Keywords: | Money, Search, Double Coincidence, Bargaining |
| JEL: | D E |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:126&r=mon |
| By: | Tatiana Damjanovic; Charles Nolan |
| Abstract: | What is the seigniorage-maximizing level of inflation? Four models formulae for the seigniorage maximizing inflation rate (SMIR) are compared. Two sticky-price models arrive at very different quantitative recommendations although both predict somewhat lower SMIRs than Cagan’s formula and a variant of a .ex-price model due to Kimbrough (2006). The models differ markedly in how inflation distorts the labour market: The Calvo model implies that inflation and output are negatively related and that output is falling in price stickiness whilst the Rotemberg cost-of-price-adjustment model implies exactly the opposite. Interestingly, if our version of the Calvo model is to be believed, the level of inflation experienced recently in advanced economies such as the USA and the UK may be quite close to the SMIR. |
| Keywords: | Price stickiness; Revenue maximizing inflation; Inflation tax; Seigniorage; price dispersion. |
| JEL: | E4 E52 E61 E63 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0807&r=mon |
| By: | Eugenio Gaiotti (Bank of Italy, Economic Outlook and Monetary Policy Department) |
| Abstract: | The flattening of the Phillips curve observed in the industrial countries has been attributed to globalisation, while the traditional explanation centres on monetary policy credibility. The empirical literature is not conclusive, since macroeconomic data are affected by substantial identification problems. This paper argues that recourse to micro data is needed to identify structural changes in the slope of the Phillips curve. Taking advantage of a unique dataset including about 2,000 Italian firms, the paper tests whether a change in the link between capacity utilisation and prices is confirmed at company level, after controlling for inflation expectations, and whether it is concentrated among those firms that are more exposed to globalisation on either the product or the labour market. The answer is negative in all cases. The results do not support the view that the flattening of the Phillips curve is due to globalisation. |
| Keywords: | Phillips curve, globalisation, inflation, monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_676_08&r=mon |
| By: | Peter Bernholz (Univeristy of Basel) |
| Abstract: | A difference is made between open and hidden or veiled government bankruptcies. The latter are happening if budget deficits are covered by substantial money creation leading to inflation. In this case non-indexed government debt loses its value and is inflated away. This path is not open, if the debt is not denominated in the national but in a stable foreign currency or in units of gold or silver. This is usually the case for debt owed to foreigners. But sometimes both kinds of government bankruptcies are occurring together. In the present paper several general qualitative hypotheses are tested for the Balkan countries and the Ottoman Empire. |
| Keywords: | Government bankruptcies; Foreign debt; Fixed exchange rates |
| JEL: | F34 G33 N23 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:74&r=mon |
| By: | Nikola A Tarashev |
| Abstract: | Confronted with a speculative attack on its currency peg, an authority weighs the short-term benefit of giving in and fine tuning the economy against the long-term benefit of credibility-enhancing resistance. In turn, speculators with heterogeneous beliefs face strategic uncertainty that peaks at the time of the attack, when the fate of the peg is unclear, and then declines, as the economy settles in a stable currency regime. In this environment, a less conservative authority - i.e. one that stabilises less the exchange rate once a peg is abandoned - may be more likely to withstand an attack on the peg. This result, which strengthens as speculators' risk aversion declines, casts doubt on the conventional wisdom that greater conservatism enhances welfare. |
| Keywords: | Global games of regime change, Strategic uncertainty, Coordination, Currency crises |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:254&r=mon |
| By: | Dhasmana, Anubha; Drummond, Paulo |
| Abstract: | This paper looks at the question of adequacy of reserves in sub-Saharan African countries in light of the shocks faced by these countries. Literature on optimal reserves so far has not paid attention to the particular shocks facing low-income countries. We use a two-good endowment economy model facing terms of trade and aid shocks to derive the optimal level of reserves by comparing the cost of holding reserves with their benefits as an insurance against a shock. We find that the optimal level of reserves depends upon the size of these shocks, their probability, and the output cost associated with them. |
| JEL: | F0 |
| Date: | 2008–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9729&r=mon |