|
on Monetary Economics |
| By: | Charles Goodhart; Dimitrios Tsomocos; Pojanart Sunirand |
| Abstract: | The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank automatically satisfies the increased demand for money. Thus, it prevents sharp losses in asset values and enhanced asset volatility. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp617&r=mon |
| By: | Mark M. Spiegel |
| Abstract: | The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences. |
| Keywords: | Monetary policy ; Inflation (Finance) ; Globalization |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-10&r=mon |
| By: | Soner Baþkaya; Hakan Kara; Defne Mutluer |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0801&r=mon |
| By: | Mark M. Spiegel |
| Abstract: | A number of studies have recently noted that monetary integration in the European Monetary Union (EMU) has been accompanied by increased financial integration. This paper examines the channels through which monetary union increased financial integration, using international panel data on bilateral international commercial bank claims from 1998-2006. I decompose the relative increase in bilateral commercial bank claims among union members following monetary integration into three possible channels: A "borrower effect," as a country's EMU membership may leave its borrowers more creditworthy in the eyes of foreign lenders; a "creditor effect," as membership in a monetary union may increase the attractiveness of a nation's commercial banks as intermediaries, perhaps through increased scale economies enjoyed by commercial banks themselves or through an improved regulatory environment after the advent of monetary union; and a "pairwise effect," as joint membership in a monetary union increases the quality of intermediation between borrowers and creditors when both are in the same union. This pairwise effect could be attributed to mitigated currency risk stemming from monetary integration, but may also indicate that monetary union integration increases borrowing capacity. I decompose the data into a series of difference-in-differences specifications to isolate these three channels and find that the pairwise effect is the primary source of increased financial integration. This result is robust to a number of sensitivity exercises used to address concerns frequently associated with difference-in-differences specifications, such as serial correlation and issues associated with the timing of the intervention. |
| Keywords: | Banks and banking - Europe ; Euro ; European Monetary System (Organization) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-11&r=mon |
| By: | Christopher J. Neely; David E. Rapach |
| Abstract: | Common shocks, similarities in central bank reaction functions, and international trade potentially produce common components in international inflation rates. This paper characterizes such links in international inflation rates with a dynamic latent factor model that decomposes inflation for 65 countries into world, regional, and idiosyncratic components. The world component accounts for 34% of inflation variability on average across countries, although the importance of this global factor differs substantially across countries. Variables that reflect policy as well as economic and financial development strongly explain the cross-section variation in the relative importance of global influences. A parsimonious model of time variation in the factor loadings shows that most countries became more sensitive to international inflation influences over 1951 2006. In addition, European-specific influences became more important over time for countries participating in European economic and monetary integration. |
| Keywords: | Inflation (Finance) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-025&r=mon |
| By: | Long, Dara; Samreth, Sovannroeun |
| Abstract: | In this paper, we re-examine the validity of both short and long run monetary models of exchange rate for the case of the Philippines by using new approach called Autoregressive Distributed Lag (ARDL) to cointegration. From our analysis, some findings are obtained. First, there are robust short and long run relationships between variables in the monetary exchange rate model. Second, the stability of the estimated parameters is confirmed by CUSUM and CUMSUQ stability tests. Third, the Purchasing Power Parity (PPP) condition is not hold for the Philippines. Last, all the monetary restrictions are rejected. Therefore, this result seems to suggest that the estimation result of the monetary model of exchange rate, in which monetary restrictions are assumed to be satisfied beforehand, might suffer from a number of deficiency; it is not appropriate to estimate the exchange rate model before the monetary restrictions are confirmed as also mentioned in Haynes and Stone (1981). |
| Keywords: | Exchange rate model; ARDL approach to cointegration |
| JEL: | F31 F33 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9822&r=mon |
| By: | Zbigniew Polanski (Narodowy Bank Polski and Warsaw School of Economics, ul. Swietokrzyska 11/21, 00-919 Warsaw, Poland.); Adalbert Winkler (Frankfurt School of Finance and Management, Sonnemannstrasse 9-11, 60314 Frankfurt am Main, Germany.) |
| Abstract: | This paper reviews selected aspects of economic relations between the EU and Russia, focusing on the impact that the last two waves of EU enlargement have had on Russia, as well as the role of the euro in Russia. The analysis suggests that if EU enlargement has had any diversion effects on trade between the EU and Russia at all, they have been minimal, while robust growth in both the EU and Russia, as well as high oil and gas prices, has boosted trade. Likewise, FDI to and from Russia has increased, with the direct impact of enlargement again difficult to disentangle from other factors. Use of the euro by Russian residents and authorities in international transactions has increased, albeit at an uneven pace. While, in general, the US dollar remains the major foreign currency used by Russian residents, the euro has gained importance as an anchor and reserve currency in Russian exchange rate policies. This has happened in the context of an overall monetary policy strategy aiming at a gradual shift from an exchange rate-oriented monetary policy to inflation targeting. JEL Classification: F14, F15, F21, F36. |
| Keywords: | Economic integration, trade diversion, foreign direct investment, international currencies. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080093&r=mon |
| By: | Marzo, Massimiliano (Universita di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless variant of their model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed. |
| Keywords: | Monetary Policy; Fiscal Policy; Government Bonds; Determinacy |
| JEL: | C68 E52 |
| Date: | 2008–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2008_0007&r=mon |
| By: | Alexander Meyer-Gohde |
| Abstract: | The uniqueness of bounded local equilibria under interest rate rules is analyzed in a model with sticky information `a la Mankiw and Reis (2002). The main results are tighter bounds on monetary policy than in sticky-price models, irrelevance of the degree of output-gap targeting for determinacy, independence of determinacy regions from parameters outside the interest-rate rule, and equivalence between real determinacy in models satisfying the natural rate hypothesis and nominal determinacy in the associated full-information, flex-price equivalent. The analysis follows from boundedness considerations on the nonautonomous recursion that describe the MA(¥) representation of variables’ reaction to endogenous fluctuations. |
| Keywords: | Nonautonomous difference equations; Indeterminacy; Taylor rule; Sticky information; Sticky prices |
| JEL: | C62 E31 E52 E58 E61 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-054&r=mon |
| By: | Andrea Vaona (Facoltà di Economia, Università di Lugano, Svizzera); Guido Ascari (Dipartimento di Economia e Metodi Quantitativi, Facoltà di Economia, Università di Pavia, Italia) |
| Abstract: | Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial disaggregation (NUTS3). Our results show that economically backward regions display greater inflation persistence. Moreover, we show that higher persistence is linked to a lower degree of competitiveness in the retail sector. |
| Keywords: | inflation persistence, retail sector, regions. |
| JEL: | E0 E30 R0 R10 |
| Date: | 2007–07–28 |
| URL: | http://d.repec.org/n?u=RePEc:lug:wpaper:0807&r=mon |
| By: | Co-Pierre Georg (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät); Markus Pasche (Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultät) |
| Abstract: | In New Keynesian as well as in Post Keynesian macroeconomic models, money supply is assumed to be endogenous. The reasons for the endogeneity and the role of the financial sector in the supply process, however, are seen very different. In this paper we explicitly derive the behaviour of the banking sector regarding the supply of loans and the demand for reserves from portfolio and liquidity considerations. As a result, the money multiplier as well as the money base are endogenously determined. Although the microeconomics of the bank behaviour is quite simple, credit and money as well as bonds demand depend on policy variables in a non-linear and non-monotonous way. |
| Keywords: | endogenous money, loans market, bonds market, central banking |
| JEL: | E51 E44 B22 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2008-065&r=mon |
| By: | Yue, Eddie; He, Dong |
| Abstract: | This article outlines our thoughts on the following three issues. First, will the renminbi become an international currency in the foreseeable future? Second, what does the international use of the renminbi mean for Hong Kong? Third, should the Hong Kong dollar exchange rate be repegged to the renminbi? We argue that the renminbi is likely to become a major international currency in the future, but the process will most likely be a gradual one, reflecting the particular approach that the authorities in the Mainland have taken to capital account liberalization. We also argue that Hong Kong is well positioned to benefit from the process of the renminbi becoming an international currency. At the same time, we continue to believe in the appropriateness of the link of the Hong Kong dollar exchange rate to the U.S. dollar. |
| JEL: | E58 F36 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9953&r=mon |
| By: | Jun, Jongbyung (Suffolk University, Department of Economics) |
| Abstract: | The noise-trading or coordination channel hypothesis implies that sterilized intervention in the foreign exchange market is effective if certain conditions are satisfied, but ineffective otherwise. The hypothesis is tested with a three-regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend-chasing behaviors of noise traders, such strategic intervention is effective in moving the exchange rate in the desired direction. |
| Keywords: | Central bank intervention; Threshold model; Coordination channel |
| JEL: | C22 E58 F31 |
| Date: | 2008–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:suf:wpaper:2008-1&r=mon |
| By: | Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ebrahim Rahbari (London Business School, Economics Department, Regent’s Park, London, NW1 4SA, United Kingdom.) |
| Abstract: | We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and "transaction demands" caused by sudden stops in capital inflows. In this model, the transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 24 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt to reserve ratios, introducing transactions demand has a relatively modest effect. We also find that euro and dollar bonds act as "safe haven currencies" during sudden stops. Dollars are better hedges for global sudden stops and for regional sudden stops in Asia and Latin America, while the euro is a better hedge for sudden stops in Emerging Europe. We reproduce qualitatively the recent decline in the share of the dollar in emerging market reserves and find that the denomination of foreign currency debt has very little importance for optimal reserve portfolios. JEL Classification: F31, F32, F33, G11. |
| Keywords: | Foreign exchange reserves, currency composition, sudden stops. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080916&r=mon |
| By: | Marzo, Massimiliano (Universita di Bologna;); Romagnoli , Silvia (Universita di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds. |
| Keywords: | Bond Pricing; Fiscal Policy; Mathematical Methods |
| JEL: | D90 G12 |
| Date: | 2008–07–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2008_0006&r=mon |
| By: | Sophie Guilloux; Enisse Kharroubi |
| Abstract: | The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports. This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process. |
| Keywords: | Globalization ; Inflation (Finance) ; Time-series analysis ; International trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:18&r=mon |