|
on Monetary Economics |
| By: | Graeme Snooks |
| Keywords: | inflation targeting, war on inflation, social consequences, monetary policy, reserve bank, growth-inflation curve |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:auu:wpaper:001&r=mon |
| By: | Ales Bulir; Katerina Smidkova; Viktor Kotlan; David Navratil |
| Abstract: | Inflation-targeting central banks have a respectable track record at explaining their policy actions and corresponding inflation outturns. Using a simple forward-looking policy rule and an assessment of inflation reports, we provide a new methodology for the empirical evaluation of consistency in central bank communication. We find that the three communication tools—inflation targets, inflation forecasts, and verbal assessments of inflation factors contained in quarterly inflation reports—provided a consistent message in five out of six observations in our 2000–05 sample of Chile, the Czech Republic, Hungary, Poland, Thailand, and Sweden. |
| Keywords: | Emerging markets, forecasting, inflation targeting, monetary policy, transparency. |
| JEL: | E31 E43 E47 E58 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/14&r=mon |
| By: | Helge Berger; Emil Stavrev |
| Abstract: | This paper contributes to the debate on the role of money in monetary policy by analyzing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian DSGE models and VARs incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, non-monetary models dominate monetary models in an all-out horserace. |
| Keywords: | Working Paper , Euro Area , Money , Inflation , Forecasting models , Monetary policy , Economic models , |
| Date: | 2008–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/166&r=mon |
| By: | Toshitaka Sekine (Associate Monetary Affairs Department, Bank of Japan (E-mail: toshitaka.sekine @boj.or.jp)); Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp)) |
| Abstract: | We estimate monetary policy activism, defined as responsiveness of the policy interest rate to inflation, among five inflation-targeting countries (the UK, Canada, Sweden, Australia and New Zealand) plus the G3 (the US, Japan and Germany) by applying a time- varying parameter with a stochastic-volatility model. We find that activism of inflation-targeting countries tends to have increased before (not after) the adoption of the inflation-targeting policy framework and that these countries have experienced a decline in activism in recent years, albeit to different degrees. We further explore this result in terms of the constraint of an inflation target range by developing a formal theoretical model in a New Keynesian framework. |
| Keywords: | Inflation-targeting Policy, Monetary Policy Activism, New Keynesian Model, Markov chain Monte Carlo, Time-varying Parameter with Stochastic Volatility Model |
| JEL: | C11 E52 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-13&r=mon |
| By: | Christian Bordes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Laurent Clerc (Direction de la Recherche - Banque De France - Banque de France) |
| Abstract: | This paper focuses on the price stability objective within the framework of the single monetary policy strategy. It starts by reviewing what this objective, which is common to all central banks, means. Second, this paper focuses exclusively on the anchoring of short- to medium-term inflation expectations (Part 2). Several measures show that this anchoring is effective. A 'two-pillar' small structural macro-economic model framework is used to analyze the impact that this anchoring of expectations has on the determination of the short- to medium-term inflation rate. From this point of view, observed inflation in the euro area seems to be in line with the theory and the ECB's action seems to be very effective. Third, we focus on the other aspect of monetary stability: the degree of price-level uncertainty and the anchoring of inflation expectations in the medium to long term. Even though this assessment is more difficult than it is in the short to medium term, since we only have a track record covering 6 years, various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ECB. |
| Keywords: | European Central Bank • Inflation • Monetary policy |
| Date: | 2007–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00308557_v1&r=mon |
| By: | Athanasios Orphanides; John C. Williams |
| Abstract: | This paper examines the robustness characteristics of optimal control policies derived under the assumption of rational expectations to alternative models of expectations formation and uncertainty about the natural rates of interest and unemployment. We assume that agents have imperfect knowledge about the precise structure of the economy and form expectations using a forecasting model that they continuously update based on incoming data. We also allow for central bank uncertainty regarding the natural rates of interest and unemployment. We find that the optimal control policy derived under the assumption of perfect knowledge about the structure of the economy can perform poorly when knowledge is imperfect. These problems are exacerbated by natural rate uncertainty, even when the central bank's estimates of natural rates are efficient. We show that the optimal control approach can be made more robust to the presence of imperfect knowledge by deemphasizing the stabilization of real economic activity and interest rates relative to inflation in the central bank loss function. That is, robustness to the presence of imperfect knowledge about the economy provides an incentive to employ a "conservative" central banker. We then examine two types of simple monetary policy rules from the literature that have been found to be robust to model misspecification in other contexts. We find that these policies are robust to the alternative models of learning that we study and natural rate uncertainty and outperform the optimal control policy and generally perform as well as the robust optimal control policy that places less weight on stabilizing economic activity and interest rates. |
| Keywords: | Rational expectations (Economic theory) ; Monetary policy ; Econometric models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-09&r=mon |
| By: | Yuliya Rychalovska |
| Abstract: | The paper analyzes the stabilization objectives of optimal monetary policy and the trade-offs facing the central bank in a two-sector small open economy model obtained as a limiting case of a two-country DSGE framework. We introduce a more complicated economic structure, namely, multiple domestic sectors combined with a variety of exogenous shocks. In addition, our model includes a more general specication of consumers’ preferences than has been considered in the literature so far. As a result, we are able to uncover additional welfare effects specic to the open multi-sectoral economy and make a methodological contribution by deriving a utility-based welfare measure and the optimal reaction function of the central bank. We show that the optimal targeting rule is represented by a complex expression that prescribes the response to the appropriate measure of domestic inflation, sectoral output gaps, as well as to the relevant relative prices. We demonstrate that our model generates an endogenous conflict between the objectives of domestic inflation and real exchange rate stabilization in addition to the inflation-output gap policy trade-off common in the literature. Furthermore, we experiment with alternative simple rules and analyze their ability to replicate the optimal solution. |
| Keywords: | DSGE models, non-traded goods, optimal monetary policy, welfare. |
| JEL: | E52 E58 E61 F41 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/16&r=mon |
| By: | Riccardo Cristadoro (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.); Fabrizio Venditti (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.); Giuseppe Saporito (Banca d’Italia, Research Department, via Nazionale 91, I – 00184 Rome, Italy.) |
| Abstract: | The ECB objective is set in terms of year on year growth rate of the Euro area HICP. Nonetheless, a good deal of attention is given to national data by market analysts when they try to anticipate monetary policy moves. In this paper we use the Generalized Dynamic Factor model to develop a set of core inflation indicators that, combining national data with area wide information, allow us to answer two related questions. The first is whether country specific data actually bear any relevance for the future path of area wide price growth, over and above that already contained in area wide data. The second is whether in order to track ECB monetary policy decisions it is useful to take into account national information and not only area wide statistics. In both cases our findings point to the conclusion that, once area wide information is properly taken into account, there is little to be gained from considering national idiosyncratic developments. JEL Classification: C25, E37, E52. |
| Keywords: | Forecasting, dynamic factor model, inflation, Taylor rule, monetary policy. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080900&r=mon |
| By: | Kenji Moriyama |
| Abstract: | This paper investigates inflation dynamics in Sudan using three different approaches: the single equation model, the structural vector-auto regression model and a vector error correction model. This is the first study in a low-income and a post-conflict country that uses these three separate techniques to understand inflation dynamics. The use of these approaches is particularly useful to check the robustness of the estimated parameters in the model for a country with limited data coverage and possible structural breaks. The estimated results suggest that money supply growth and nominal exchange rate changes affect inflation with 18-24 months time lag. |
| Keywords: | Sudan , Inflation , Money supply , Real effective exchange rates , Monetary policy , Economic models , |
| Date: | 2008–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/189&r=mon |
| By: | Matteo Ciccarelli; Benoît Mojon |
| Abstract: | This paper shows that inflation in industrialized countries is largely a global phenomenon. First, the inflation rates of 22 OECD countries have a common factor that alone accounts for nearly 70 percent of their variance. This large variance share that is associated with Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, we show that, in conformity to the prediction of New Keynesian open economy models, there is little spillover of inflationay shocks across countries. The comovement of inflation comes largely from common shocks. Global Inflation is a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a robust "error correction mechanism" that brings national inflation rates back to Global Inflation. A simple model that accounts for this feature consistently beats the previous benchmarks used to forecast inflation 4 to 8 quarters ahead across samples and countries. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-08-05&r=mon |
| By: | Helge Berger; Emil Stavrev; Thomas Harjes |
| Abstract: | Monetary aggregates continue to play an important role in the ECB's policy strategy. This paper revisits the case for money, surveying the ongoing theoretical and empirical debate. The key conclusion is that an exclusive focus on non-monetary factors alone may leave the ECB with an incomplete picture of the economy. However, treating monetary factors as a separate matter is a second-best solution. Instead, a general-equilibrium inspired analytical framework that merges the economic and monetary "pillars" of the ECB's policy strategy appears the most promising way forward. The role played by monetary aggregates in such unified framework may be rather limited. However, an integrated framework would facilitate the presentation of policy decisions by providing a clearer narrative of the relative role of money in the interaction with other economic and financial sector variables, including asset prices, and their impact on consumer prices. |
| Keywords: | European Central Bank , Monetary policy , Central bank policy , Economic models , Asset prices , Consumer prices , Financial sector , Money , |
| Date: | 2008–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/171&r=mon |
| By: | Furlani, Luiz Gustavo C.; Portugal, Marcelo Savino; Laurini, Márcio Poletti |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_122&r=mon |
| By: | Brad E. Strum |
| Abstract: | This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy, which is the minimization of a simple loss function, are studied. Consumer utility losses under alternative simple loss functions are compared, including their robustness to model and shock misperceptions, and parameter uncertainty. Targeting inflation in both consumer and intermediate goods performs better than targeting a single price index; price-level targeting of both consumer and intermediate goods prices performs significantly better. Moreover, targeting prices in both sectors yields superior robustness properties. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-33&r=mon |
| By: | Reza Siregar; Siwei Goo |
| Abstract: | The chief objective of our paper is to highlight basic features of the IT policies adopted by Indonesia and Thailand, and to evaluate their overall performances. These economies have seen their inflation rates to decline during the post-IT period, and pass-through rates for both tradable and non-tradable prices in the two emerging markets have also declined. More importantly, no trade-offs between output growth and inflation have been reported. The implementations of the IT policy in these two Southeast Asian economies have however largely been “flexible” rather than “strict”, seeking the balance between minimizing output gap and achieving price stability. |
| JEL: | E52 E58 F31 F33 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-23&r=mon |
| By: | Bystedt, Brianne; Brito, Ricardo D. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_123&r=mon |
| By: | Ulrich H. Klueh; Peter Stella |
| Abstract: | The financial health of central banks and its relation to policy outcomes has recently been recognized as an important policy issue. While case study evidence clearly indicates that weak central bank finances can hamper effective policy implementation, the question of whether central bank financial strength influences policy performance remains controversial. This is due, in part, to a lack of econometric evidence. The paper presents a first step toward filling this gap, by providing a quantitative evaluation of the relationship between measures of central bank financial strength and policy performance, in particular inflation. The paper's major finding is that there indeed is a negative relationship between central bank financial strength and inflation outcomes. This relationship appears to be robust to the choice of alternative country samples, control variables, estimation strategies, and conceptualizations of central bank financial strength. |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/176&r=mon |
| By: | Melecky, Martin; Najdov, Evgenij |
| Abstract: | This paper re-emphasizes the link from structural policies to enhanced macroeconomic stabilization using a small structural model estimated on quarterly data for Macedonia and Slovakia over 1995-2007. The success of macroeconomic stabilization, typically in hands of monetary policy, is not only determined by a suitable choice of the nominal anchor, which shapes the reaction function of monetary policy, but also the constraints within which the monetary policy strives to achieve its objectives. The key attributes of the constraints to macroeconomic stabilization are economic rigidities and structural shocks. By benchmarking the estimated economic rigidities and structural shocks faced by Macedonia to those faced by Slovakia, we find that Macedonia has relatively weaker transmission mechanisms of monetary policy, higher output rigidity, a lower exchange rate pass-through, and faces larger external shocks. For Macedonia, these relatively higher constraints on monetary policy together with the chosen exchange rate anchor result in higher output and inflation volatility relative to Slovakia. Hence, it appears that small open economies with stronger economic rigidities should apply monetary policy regimes that allow for more flexible adjustments in external relative prices to enhance their macroeconomic stability. |
| JEL: | E30 E58 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9786&r=mon |
| By: | Nao Sudo (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)) |
| Abstract: | The co-movement of output across the sector producing non- durables (that is, non-durable goods and services) and the sector producing durables is well-established in the monetary business-cycle literature. However, standard sticky-price models that incorporate sectoral heterogeneity in price stickiness (that is, sticky non-durables prices and flexible durables prices) cannot generate this feature. We argue that an input-output structure provides a solution to this problem. Here we develop a two-sector model with an input-output structure, which is calibrated to the U.S. economy. In the model, each sector's output affects those of the others by acting as an intermediate input This connection between the sectors provides a channel through which sectoral co-movement is induced. |
| Keywords: | Monetary Policy, Input-Output Matrix, Durables, Non-durables |
| JEL: | E5 E6 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-15&r=mon |
| By: | Selwyn Cornish |
| Keywords: | central banking, Reserve Bank of Australia, banking history and policy, Coombs, Theodore, Chifley. |
| JEL: | G21 G28 N27 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:auu:wpaper:003&r=mon |
| By: | Marcel Tirpák; Christoph B. Rosenberg |
| Abstract: | The paper investigates the determinants of foreign currency borrowing by the private sector in the new member states of the European Union. We find that striking differences in patterns of foreign currency borrowing between countries are explained by the loan-to-deposit ratios, openness, and the interest rate differential. Joining the EU appears to have played an important role, by providing direct access to foreign funding, offering hedging opportunities through greater openness, lending credibility to exchange rate regimes, and raising expectations of imminent euro adoption. The empirical evidence suggests that regulatory policies to slow foreign currency borrowing have had only limited success. |
| Keywords: | Europe , European Union , External borrowing , Private sector , Foreign investment , Exchange rate regimes , Euro , |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/173&r=mon |
| By: | Christian Bordes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Samuel Maveyraud (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - CNRS : UMR5113 - Université Montesquieu - Bordeaux IV) |
| Abstract: | This paper o¤ers to investigate both the Friedman's and Mishkin's hypotheses on the consequences of inflation on output growth. To this end, we first base these hypotheses in a unified framework. Second, in an empirical work based on OECD countries, we distinguish between short-medium and long run and between headline and core inflation. We get two main results. First, nominal uncertainty and inflation are positively linked. Second, headline inflation negatively Granger causes out- put gap (US, Japan, France) but has no effect on potential output growth (US excepted) whereas core inflation impacts potential output growth (UK, Germany) but not output gap (US excepted). |
| Keywords: | Inflation, uncertainty, output growth, GARCH, CF filter |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00308571_v1&r=mon |
| By: | Sven Jari Stehn; David Vines |
| 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: | Central banks , Monetary authorities , Intergovernmental fiscal relations , Government expenditures , Fiscal policy , Stabilization measures , |
| Date: | 2008–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/164&r=mon |
| By: | Fernando de Holanda Barbosa; Tito Nícias Teixeira da Silva Filho |
| Abstract: | This paper tests hyperinflation theories using the inflation tax curve. This curve is estimated directly instead of the usual approach which is a by-product of demand for money empirical estimates. The inflation tax functional form encompasses several specifications as particular cases and allows to test whether or not money is inelastic. This strategy is applied to the Brazilian annual data covering almost half a century. The money inelasticity hypothesis is rejected. Thus, both the bubble and the strict hyperinflation hypotheses are rejected. The weak hyperinflation hypothesis is not rejected and the Brazilian economy could have been in the 'wrong' side of the Laffer curve for some time during hyperinflation. This outcome, contrary to conventional wisdom, is predicted by the weak hypothesis. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:166&r=mon |
| By: | Angrist, Joshua (MIT); Kuersteiner, Guido M. (University of California, Davis) |
| Abstract: | Macroeconomists have long been concerned with the causal effects of monetary policy. When the identification of causal effects is based on a selection-on-observables assumption, non-causality amounts to the conditional independence of outcomes and policy changes. This paper develops a semiparametric test for conditional independence in time series models linking a multinomial policy variable with unobserved potential outcomes. Our approach to conditional independence testing is motivated by earlier parametric tests, as in Romer and Romer (1989, 1994, 2004). The procedure developed here is semiparametric in the sense that we model the process determining the distribution of treatment – the policy propensity score – but leave the model for outcomes unspecified. A conceptual innovation is that we adapt the cross-sectional potential outcomes framework to a time series setting. This leads to a generalized definition of Sims (1980) causality. A technical contribution is the development of root-T consistent distribution-free inference methods for full conditional independence testing, appropriate for dependent data and allowing for first-step estimation of the propensity score. |
| Keywords: | monetary policy, propensity score, multinomial treatments, causality |
| JEL: | E52 C22 C31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3606&r=mon |
| By: | Kris James Mitchener (Assistant Department of Economics, Santa Clara University (E-mail:kmitchener@scu.edu)); Mari Ohnuki (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mari.oonuki@boj.or.jp)) |
| Abstract: | Using a newly-constructed panel data set which includes annual estimates of lending rates for 47 Japanese prefectures, we analyze why interest rates converged over the period 1884-1925. We find evidence that technological innovations and institutional changes played an important role in creating a national capital market in Japan. In particular, the diffusion in the use of the telegraph, the growth in commercial branch banking networks, and the development of Bank of Japanfs branches reduced interest-rate differentials. Bank regulation appears to have played little role in impeding financial market integration. |
| Keywords: | Monetary Policy, Input-Output Matrix, Durables, Non-durables |
| JEL: | E5 E6 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-12&r=mon |
| By: | James M. Nason; John H. Rogers |
| Abstract: | Exchange rates have raised the ire of economists for more than twenty years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out-of-sample forecasts. Engel and West (2005) show that these failures can be explained by the standard present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The Engel and West hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard PVM carry over to the DSGE PVM. The DSGE PVM also yields unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one, implying the Canadian dollar–U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-16&r=mon |
| By: | James McAndrews; Asani Sarkar; Zhenyu Wang |
| Abstract: | This paper examines the effects of the Federal Reserve's Term Auction Facility (TAF) on the London Inter-Bank Offered Rate (LIBOR). The particular question investigated is whether the announcements and operations of the TAF are associated with downward shifts of the LIBOR; such an association would provide one indication of the efficacy of the TAF in mitigating liquidity problems in the interbank funding market. The empirical results suggest that the TAF has helped to ease strains in this market. |
| Keywords: | Federal Reserve System ; Interbank market ; Financial markets ; Bank liquidity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:335&r=mon |
| By: | Mathew Bradbury; Matías Vernengo |
| Abstract: | The paper sheds light on the apparent success of dollarization in Ecuador. The experience of Argentina with convertibility is used to anchor the analysis. Two key factors are seen to play the most important role; first, the behavior of the real exchange rate and second, the source of external resources. The papers explains that exogenous determinants of the real exchange rate- productivity growth, the value of the dollar, commodity prices- have tended to behave very differently over the respective life spans of the Argentine and Ecuadorian monetary regimes. Trends in these exogenous variables have favored positive trends in the Ecuadorian current account. However, as the paper shows, the critical element informing the sustainability of the currency remains the source of external funds. Whereas in Argentina the IMF and international capital flows were central in propping up the flawed regime, the fate of Ecuadorian experiment relies heavily on a surprising factor, remittances. Reliance on remittance income is seen as a stop gap that cannot secure sustainability of the monetary system and implies longer run consequences for lost development potential. |
| Keywords: | Dollarization, Balance of Payments, Debt Sustainability |
| JEL: | E52 F24 F31 O54 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2008_12&r=mon |
| By: | Rannenberg, Ansgar |
| Abstract: | Unemployment in the big continental European economies like France and Germany has been substantially increasing since the mid 1970s. So far it has been difficult to empirically explain the increase in unemployment in these countries via changes in supposedly employment unfriendly institutions like the generosity and duration of unemployment benefits. At the same time, there is some evidence produced by Ball (1996, 1999) saying that tight monetary policy during the disinflations of the 1980s caused a subsequent increase in the NAIRU, and that there is a relationship between the increase in the NAIRU and the size of the disinflation during that period across advanced OECD economies. There is also mounting evidence suggesting a role of the slowdown in productivity growth, e.g. Nickell et al. (2005), IMF (2003), Blanchard and Wolfers (2000). This paper introduces endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to a cost push shock lasting for 1 quarter, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disinflation by following a standard interest feedback rule calibrated to an estimate of a Bundesbank reaction function. About 40 quarters after the shock has vanished, unemployment is still about 1.7 percentage points above its steady state, while annual productivity growth has decreased. Over a similar horizon, a higher weight on the output gap increases employment (i.e. reduces the fall in employment below its steady state). Thus the model generates an increase in unemployment following a disinflation without relying on a change to labour market structure. We are also able to coarsely reproduce cross country differences in unemployment. A higher disinflation generated by a larger cost push shock causes a stronger persistent increase in unemployment, the correlation noted by Ball. For a given cost push shock, a policy rule estimated for the Bundesbank produces stronger persistent increase in unemployment than a policy rule estimated for the Federal Reserve. Testable differences in real wage rigidity between continental Europe and the United States, namely, as pointed out by Blanchard and Katz (1999), the presence of the labour share in the wage setting function for Europe with a negative coefficient but it's absence in the U.S. also imply different unemployment outcomes following a cost push shock: If the real wage does not depend on the labour share, the persistent increase in unemployment is about one percentage point smaller than in it's presence. To the extent that the wage setting structure is due to labour market rigidities, "Shocks and Institutions" jointly determine the unemployment outcome, as suggested by Blanchard and Wolfers (2000). The calibration of unobservable model parameters is guided by a comparison of second moments of key variables of the model with western German data. The endogenous growth model matches the moments better than a model without endogenous growth but otherwise identical features. This is particularly true for the persistence in employment as measured by first and higher order autocorrelation coefficients. |
| Keywords: | Monetary Policy; Endogenous Growth; NAIRU; Disinflation; Unemployment Persistence |
| JEL: | N1 J6 J01 |
| Date: | 2008–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9753&r=mon |
| By: | Nicola Cetorelli; Linda S. Goldberg |
| Abstract: | This paper revisits the hypothesis that changes in inventory management were an important contributor to volatility reductions during the Great Moderation. It documents how changes in inventory behavior contributed to the stabilization of the U.S. economy within the durable goods sector, in particular, and develops a model of inventory behavior that is consistent with the key facts about volatility decline in that sector. The model is calibrated to evidence from survey data showing that lead times for materials orders in manufacturing shrank after the early 1980s. Simulations of the model show large reductions in the volatility of output growth and more modest reductions in the volatility of sales growth. In addition, the model addresses concerns raised by a number of researchers who criticize the inventory literature's focus on finished goods inventories, given that stocks of works-in-process and materials are actually larger and more volatile that those of finished goods. The model adapts the stockout-avoidance concept to a production-to-order setting and shows that much of the intuition and results regarding production volatility still apply. |
| Keywords: | Banks and banking, International ; International economic integration ; Monetary policy ; Capital market ; Globalization |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:333&r=mon |
| By: | Hiroshi Fujiki (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp)); Cheng Hsiao (International Department, Bank of Japan (E-mail: yasuo.hirose@boj.or.jp)) |
| Abstract: | We use data from Public Opinion Surveys on Household Financial Assets and Liabilities from 1991 to 2002 to investigate the issues of unobserved heterogeneity among cross-sectional units and stability of Japanese aggregate money demand function. Conditions that permit individual data and aggregate data to be modeled under one consistent format are given. Alternative definitions of money are explored through year-by-year cross-sectional estimates of Fujiki-Mulligan (1996) household money demand model. We find that using M3 appears to be broadly consistent with time series estimates using the aggregates constructed from the micro data. The results appear to support the existence of a stable money demand function for Japan. The estimated income elasticity for M3 is about 0.68 and five year bond interest rate elasticity is about -0.124. |
| Keywords: | Demand for Money, Aggregation, Heterogeneity |
| JEL: | E41 C43 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-17&r=mon |
| By: | Christopher Adam; David Cobham |
| Abstract: | Middle East and North African (MENA) countries have traditionally anchored their currencies largely on the US dollar, but the creation of the euro means that there is now for the first time a real alternative numéraire and anchor available. This paper estimates the effect of a menu of exchange rate regimes on trade within a gravity model, using the Baier & Bergstrand (2006) Taylor expansion technique to allow for multilateral trade resistance. This approach allows simulations of the effects of changes in the exchange rate regime for a particular country or region which explicitly take into account the associated changes in multilateral and world trade resistance. Results are presented for eight different scenarios: pegging to the dollar, dollarising, pegging to the euro and euroising, each of these on an individual country basis and when the MENA countries all implement the change together. We find that in terms of the trade effects for most MENA countries it would be better to anchor on the euro than on the dollar, but for some others (typically small oil exporters with large exports to Asian countries) it would be better to continue to anchor on the dollar. |
| Keywords: | gravity, geography, trade, exchange rate regime, currency union, transactions costs, multilateral trade resistance, MENA, Middle East, North Africa, euro, dollar |
| JEL: | F10 F33 F49 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0803&r=mon |