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on Monetary Economics |
| By: | Pierre-Richard Agénor; Karim El Aynaoui |
| Abstract: | This paper analyzes the implications of excess bank liquidity for the effectiveness of monetary policy in a simple model with credit market imperfections. Lending rates are set as a premium over the cost of borrowing from the central bank, with the premium itself depending on firms’ net worth. The demand for excess reserves is determined by precautionary factors and opportunity cost variables. The basic framework is used to examine the impact of a change in the refinance rate and the required reserve ratio. The analysis is then extended to account for the impact of excess liquidity on bank pricing rules and macroeconomic equilibrium. Symmetric and asymmetric rules are shown to provide new explanations of the “price puzzle” or “stagflationary” effect associated with contractionary monetary policy. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:105&r=mon |
| By: | Etienne Farvaque (Equippe - Universités de Lille, Faculté des Sciences Economiques et Sociales, Université de Lille 1, France); Norimichi Matsueda (School of Economics, Kwansei Gakuin University, Japan); Pierre-Guillaume Méon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles, Brussels.) |
| Abstract: | This paper relates the volatility of interest rates to the collective nature of monetary policymaking in monetary unions. Several decision rules are modelled, including hegemonic and democratic procedures, and also committees headed by a chairman. A ranking of decision rules in terms of the volatility of policy rates is obtained, showing that the presence of a chairman has a cooling effect. However, members of a monetary union are better off under symmetric rules (voting, averaging, bargaining), unless they themselves chair the union. The results are robust to the inclusion of heterogeneities among members of the monetary union. |
| Keywords: | Monetary Policy Committees, Decision Procedures, Interest-rate, Monetary Union |
| JEL: | D70 E43 E58 F33 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:sol:wpaper:08-026&r=mon |
| By: | Melecky, Ales; Melecky, Martin |
| Abstract: | This paper attempts to estimate possible losses in macroeconomic stabilization due to a move from inflation to exchange rate targeting on an example of the Czech Republic. The authors use an estimated New Keynesian policy model, general inflation and exchange rate targeting rules, and representative central bank loss functions to carry out such estimations. The authors find that for the Czech Republic moving from the historically applied inflation targeting to optimized exchange rate targeting should not involve any significant losses in macroeconomic stabilization. However, the Czech National Bank could improve its stabilization outcomes while remaining an inflation targeter. This requires the Czech National Bank to respond stronger to increasing expected future inflation and be less concerned about an opening output gap when adjusting its policy rate. Moving then from such optimized inflation targeting to optimized exchange rate targeting can result in significant losses in economic stabilization in the magnitude of 0.4 to 2 percentage points of GDP growth. |
| JEL: | E32 E58 E52 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10844&r=mon |
| By: | Pablo Druck; Mario Dehesa |
| Abstract: | The paper analyzes the challenges for the Eastern Caribbean Central Bank (ECCB) to be an effective lender of last resort (LOLR) as part of a modern banking crisis resolution framework. The main results from the theoretical model of the ECCB's institutional arrangement are that the majority of currency union members may veto emergency lending in the case of a member-specific shock, as such lending may endanger the stability of the currency board (by lowering the central bank's international reserves, thus raising devaluation risk). However, in the presence of contagion across countries, all currency union members have a vested interest in liquidity supply from the central bank. A key policy recommendation is that currency union members need a stronger fiscal position to continue to access international financial markets and sustain the exchange rate peg. |
| Date: | 2008–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/214&r=mon |
| By: | Emre Ozsoz (Fordham University, Department of Economics); Erick W. Rengifo (Fordham University, Department of Economics); Dominick Salvatore (Fordham University, Department of Economics) |
| Abstract: | In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results. |
| Keywords: | Central Bank Intervention, Foreign Exchange Rates, Dollarization, Ordered Probit |
| JEL: | F31 E58 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-16&r=mon |
| By: | Bedri Kamil Onur Tas; Selahattin Togay |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:tob:wpaper:0813&r=mon |
| By: | Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank?s policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement over standard models, is considered just a starting point for their revision. |
| Keywords: | Asset pricing ; Risk ; Taylor's rule |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:412&r=mon |
| By: | Giuseppe Marotta |
| Abstract: | We search for breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the euro. One break is detected in six national retail rates among EMU countries; two breaks are found in other six cases, and in the UK as well. The last break occurs much earlier for France while several quarters later for other countries, suggesting a loose link if ever with the event. Pass-throughs decrease (except for France), becoming even more incomplete (except for Netherlands); though the adjustment to equilibrium is faster, cross-country heterogeneity remains fairly large. With the new harmonized interest rates database, available since 2003, pass-throughs are much closer to one, especially for larger loans. |
| Keywords: | Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:depeco:549&r=mon |
| By: | Césaire Meh; Kevin Moran |
| Abstract: | Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking sector, which we interpret as episodes of distress in financial markets. We show that, following adverse shocks, economies whose banking sectors remain well-capitalized experience smaller reductions in bank lending and less pronounced downturns. Bank capital thus increases an economy's ability to absorb shocks and, in doing so, affects the conduct of monetary policy. The model is also used to shed light on the ongoing debate over bank capital regulation. |
| Keywords: | Transmission of monetary policy; Financial institutions; Financial system regulation and policies; Economic models |
| JEL: | E44 E52 G21 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-36&r=mon |
| By: | David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg) |
| Abstract: | We analyse the impact of news on five financial markets in the Czech Republic, Hungary and Poland using a newly-constructed data set in a GARCH framework. Macroeconomic shocks (on GDP, inflation rate, current account and trade balance) are constructed as deviations from expected values. EMU-related political and fiscal news is captured as news dummies. Macroeconomic shocks significantly affect short-term interest rates and - to a lesser extent - other financial variables. Political and fiscal news has an impact on long-term bond yields and exchange rates. News displayed prominently in our media sources has a larger impact on financial markets than other news, in addition the sources of news themselves matter. We also discover asymmetric effects of news within markets. Finally, using a pooled GARCH model we find that macroeconomic shocks have the strongest impact on financial markets in Hungary, while political news has the largest influence in Poland. |
| Keywords: | Financial markets, Czech Republic, Hungary, Poland, political news, macroeconomic shocks, European Monetary Union |
| JEL: | G12 G15 F30 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200815&r=mon |
| By: | Davide Debortoli; Ricardo Nunes |
| Abstract: | Central banks, whether independent or not, may occasionally be subject to external pressures to change policy objectives. We analyze the optimal response of central banks to such pressures and the resulting macroeconomic consequences. We consider several alternative scenarios regarding policy objectives, the degree of commitment and the timing of external pressures. The possibility to adopt " more liberal" objectives in the future increases current inflation through an accommodation effect. Simultaneously, the central bank tries to anchor inflation by promising to be even " more conservative" in the future. The immediate effect is an output contraction, the opposite of what the pressures to adopt " more liberal" objectives may be aiming. We also discuss the opposite case, where objectives may become " more conservative" in the future, which may be the relevant case for countries considering the adoption of inflation targeting. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:944&r=mon |
| By: | Louis Be Duc (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Frank Mayerlen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Sola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This occasional paper describes the monetary presentation of the euro area balance of payments and its use. The monetary presentation is a tool for assessing the impact of balance of payments transactions involving non-bank residents on monetary developments. The paper explains in detail the principle underlying this approach, i.e. the link between the external counterpart of money, as reflected in the balance sheet of the banking sector, and the balance of payments. From a statistical perspective, it is shown that the monetary presentation of the balance of payments, which is based on international statistical standards, may be applied in any country or currency union. With regard to euro area statistics, the paper elaborates on the practical implementation of the monetary presentation, while also describing a few approximations and remaining statistical challenges. Finally, the paper assesses how the monetary presentation of the balance of payments has been used for analysing monetary developments in the euro area, and highlights the significant impact of balance of payments transactions on monetary dynamics in certain periods. JEL Classification: E51, F40 |
| Keywords: | Monetary analysis, capital flows, balance of payments |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080096&r=mon |
| By: | Francesco, Guidi |
| Abstract: | What is the effect of either European Central Bank and Federal Reserve monetary policies on the Italian Index Mibtel? This paper aims to evaluate the impact of monetary policy announcements of the most important Central Banks on the volatility of returns which have been considered at both sectorial and sub-sectorial levels during the period 1999-2008. Using EGARCH models, this work shows that expansive monetary policies may influence stock market indexes much more than restrictive monetary policies. The difference among the two central bank monetary policies is that the ECB influences indexes much more than Fed monetary policy. |
| Keywords: | Monetary Policies; Stock Returns; Volatility; EGARCH; European Central Bank; Federal Reserve USA. |
| JEL: | E58 G10 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10759&r=mon |
| By: | Neil R. Ericsson; Steven B. Kamin |
| Abstract: | This paper assesses the empirical merits of PcGets and Autometrics--two recent algorithms for computer-automated model selection--using them to improve upon Kamin and Ericsson's (1993) model of Argentine broad money demand. The selected model is an economically sensible and statistically satisfactory error correction model, in which cointegration between money, inflation, the interest rate, and exchange rate depreciation depends on the inclusion of a "ratchet" variable that captures irreversible effects of inflation. Short-run dynamics differ markedly from the long run. Algorithmically based model selection complements opportunities for the researcher to contribute value added in the empirical analysis. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:943&r=mon |
| By: | Sahminan Sahminan |
| Abstract: | In this paper we investigate the effectiveness of Bank Indonesia's and Bank of Thailand's monetary policy communication. We focus on two channels of communication: monetary policy statements, and inter-meeting statements. Although the structure of Bank Indonesia's and Bank of Thailand's monetary policy statements have some differences, most of the statements contain policy inclination. In addition, during inter-meeting periods, members of their board of governors often convey statements that contain policy inclination. Our empirical results show that to some extent Bank Indonesia's and Bank of Thailand's monetary policy statements and inter-meeting statements move short-term interest rates effectively. We find that there is asymmetry in the effects of the statements, that is, the statements with loose policy inclination tend to be more effective relative to the statements with tight policy inclination. |
| Keywords: | communication, effectiveness, monetary policy, Bank Indonesia, Bank of Thailand |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:262&r=mon |
| By: | Rocco Huang |
| Abstract: | This study shows that during Paul Volcker’s drastic monetary tightening in the early 1980s, local banks operating in only one county reduced loan supply much more sharply than local subsidiaries of multi-county bank holding companies in similar markets, after controlling for bank (and holding company) size, liquidity, capital conditions, and, most important, local credit demand. The study allows cleaner identification by examining 18 U.S. “county-banking states” where a bank’s local lending volume at the county level was observable because no one was allowed to branch across county borders. The local nature of lending allows us to approximate and control for the exogenous component of local loan demand using the prediction that counties with a higher share of manufacturing employment exhibit weaker loan demand during tightening (which is consistent with the interest rate channel and the balance-sheet channel of monetary policy transmission).The study sheds light on the working of the bank lending channel of monetary policy transmission. |
| Keywords: | Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-20&r=mon |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Kamila Koprnická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Abstract: | In this paper, we examine the determinants of inflation differentials in a panel of the new European Union member states vis-à-vis the euro area in 1997-2007. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-à-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members, as compared to the euro area. |
| Keywords: | inflation differentials, price convergence, exchange rate, New EU members, panel data |
| JEL: | E31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_24&r=mon |