nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒10‒28
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Information, Liquidity and Asset Prices By Benjamin Lester; Andrew Postlewaite; Randall Wright
  2. Monetary Transmission Mechanism in a Small Open Economy: A Bayesian Structural VAR Approach By Rokon Bhuiyan
  3. How does monetary policy respond to exchange rate movements? New international evidence By Hilde C. Bjørnland; Jørn I. Halvorsen
  4. Exchange rate pass-through in new Member States and candidate countries of the EU By Ramón María-Dolores
  5. Monetary Unions and External Shocks By Etienne Farvaque; Norimichi Matsueda
  6. Empirical assessment of bifurcation regions within new Keynesian models By Barnett, William A.; Duzhak, Evgeniya A.
  7. Analysing CPI inflation by the fractionally integrated ARFIMA-STVGARCH model By Mustapha Belkhouja; Imene Mootamri; Mohamed Boutahar
  8. The single monetary policy and domestic macro-fundamentals: Evidence from Spain By Arghyrou, Michael G; Gadea, Maria Dolores
  9. Monetary policy and commodity price shocks By Silke Tober; Tobias Zimmermann
  10. Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed By Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
  11. The Impact of Monetary Policy on Unemployment Hysteresis By Engelbert Stockhammer; Simon Sturn
  12. Inflation Expectation Formation of German Consumers: Rational or Adaptive? By Henry Sabrowski
  13. A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? By Menzie D. Chinn; Shang-Jin Wei
  14. Inflation Targeting and Communication: It Pays Off to Read Inflation Reports By Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir

  1. By: Benjamin Lester (Department of Economics, University of Western Ontario); Andrew Postlewaite (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Pennsylvania)
    Abstract: We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason assets are more or less likely to be accepted is modeled using informational frictions, or recognizability. While everyone understands e.g. what currency is and what it is worth, some might be less sure about other claims. In our model, agents who do not recognize assets do not accept them in trade. Recognizability is endogenized by letting agents invest in information, potentially generating multiple equilibria with different liquidity. We discuss implications for asset pricing and for monetary policy. In particular, we show explicitly that what may look like a cash-in-advance constraint is not invariant to policy interventions or other changes in the economic environment
    Keywords: Money, Asset Pricing, Liquidity
    JEL: G12 E4
    Date: 2008–10–15
  2. By: Rokon Bhuiyan (Queen's University)
    Abstract: This paper develops an open-economy Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight target rate as the policy instrument. I allow the policy variable and the financial variables of the model to interact simultaneously with each other and with a number of other home and foreign variables. When I estimate this over-identified VAR model, I find that the policy shock transmits to real output through both the interest rate and exchange rate channels, and the shock does not induce a departure from uncovered interest rate parity. I also find that the impulse response of the monetary aggregate, M1, does not exactly follow the impulse response of the target rate. Finally, I find that Canadian variables significantly responds to the US federal funds rate shock, and external shocks are an important source of Canadian output fluctuations.
    Keywords: Monetary policy, structural VAR, block exogeneity, impulse response
    JEL: C32 E52 F37
    Date: 2008–10
  3. By: Hilde C. Bjørnland (Department of Economics, Norwegian School of Management (BI); Jørn I. Halvorsen (Norwegian School of Economics and Business Administration)
    Abstract: This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature.
    Keywords: Exchange rate, monetary policy, SVAR, Bayesian estimation, sign restrictions
    JEL: C32 E52 F31 F41
    Date: 2008–10–22
  4. By: Ramón María-Dolores (Banco de España)
    Abstract: This paper studies the pass-through of exchange rate changes into the prices of imports that originated inside the euro area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I use data on import unit values for nine different product categories and bilateral imports from the euro area for each country and I estimate industry-specific rates of pass-through across and within countries using two different methodological approaches. The first one is based on Campa and González-Mínguez (2006) which estimates the short- and long-run pass through elasticities, where long-run elasticities are defined as the sum of the pass-through coefficients for the contemporaneous exchange rate and its first four lags. The second one is employed by de Bandt, Banerjee and Kozluk (2007) which suggests a long-run Engle and Granger (1987) cointegrating relationship and the possibility of structural breaks to restore the long-run in the estimation. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except Slovenia and Cyprus in the latter. The exchange rate pass-through ranged from 0.090 to 2.916 in the short-run and from 0.102 to 2.242 in the long-run. With reference to the results by industry the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain and a large dependence of their economies on imported inputs.
    Keywords: exchange rates, pass-through, monetary union, panel cointegration
    JEL: F31 F36 F42 C23
    Date: 2008–10
  5. By: Etienne Farvaque (University of Lille 1); Norimichi Matsueda (Kwansei Gakuin University)
    Abstract: According to Bordo and James [2008, “A long term perspective on the Euro, ” NBER Working Paper, No. 13815], history shows that multinational monetary unions have dissolved mainly under the consequences of external shocks. This paper provides a theoretical model demonstrating their point.
    Keywords: Monetary Union, Optimum Currency Areas, External Shocks.
    JEL: E58 E61 F33
    Date: 2008–10
  6. By: Barnett, William A.; Duzhak, Evgeniya A.
    Abstract: As is well known in systems theory, the parameter space of most dynamic models is stratified into subsets, each of which supports a different kind of dynamic solution. Since we do not know the parameters with certainty, knowledge of the location of the bifurcation boundaries is of fundamental importance. Without knowledge of the location of such boundaries, there is no way to know whether the confidence region about the parameters’ point estimates might be crossed by one or more such boundaries. If there are intersections between bifurcation boundaries and a confidence region, the resulting stratification of the confidence region damages inference robustness about dynamics, when such dynamical inferences are produced by the usual simulations at the point estimates only. Recently, interest in policy in some circles has moved to New Keynesian models, which have become common in monetary policy formulations. As a result, we explore bifurcations within the class of New Keynesian models. We study different specifications of monetary policy rules within the New Keynesian functional structure. In initial research in this area, Barnett and Duzhak (2008) found a New Keynesian Hopf bifurcation boundary, with the setting of the policy parameters influencing the existence and location of the bifurcation boundary. Hopf bifurcation is the most commonly encountered type of bifurcation boundary found among economic models, since the existence of a Hopf bifurcation boundary is accompanied by regular oscillations within a neighborhood of the bifurcation boundary. Now, following a more extensive and systematic search of the parameter space, we also find the existence of Period Doubling (flip) bifurcation boundaries in the class of models. Central results in this research are our theorems on the existence and location of Hopf bifurcation boundaries in each of the considered cases. We also solve numerically for the location and properties of the Period Doubling bifurcation boundaries and their dependence upon policy-rule parameter settings.
    Keywords: Bifurcation; dynamic general equilibrium; Hopf bifurcation; flip bifurcation; period doubling bifurcation; robustness; New Keynesian macroeconometrics; Taylor rule; inflation targeting.
    JEL: C10 E32 C52 C30 E37 E60
    Date: 2008–10–23
  7. By: Mustapha Belkhouja (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Imene Mootamri (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Mohamed Boutahar (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: The aim of this paper is to study the dynamic evolution of inflation rate. The model is constructed by extending the ARFIMA-GARCH to ARFIMA with a time varying GARCH model where the transition from one regime to another is evolving smoothly over time. We show by Monte Carlo experiments that the constancy parameter tests perform well. We apply then this new model on eight countries from Europe, Japan and Canada and find that this model is appropriate for six among these countries.
    Keywords: ARFIMA model, Generalised autoregressive conditional heteroscedasticity model, Inflation rate, Long memory process, Nonlinear time series, Time-varying parameter mode
    Date: 2008–10–20
  8. By: Arghyrou, Michael G (Cardiff Business School); Gadea, Maria Dolores
    Abstract: We model pre-euro Spanish monetary policy and use our findings to assess the compatibility of the interest rates set by the ECB since 1999 with Spanish macrofundamentals. We find that in the 1990s Spain implemented successfully a monetary strategy tailored to its own domestic fundamentals; and by abolishing it to join the euro she has paid a cost in the form of a sub-optimal monetary policy. Spain.s experience suggests a cautious approach with regards to the timing of further EMU enlargement.
    Keywords: Spain; ECB; monetary policy; domestic fundamentals; compatibility
    JEL: C51 C52 E43 E58 F37
    Date: 2008–10
  9. By: Silke Tober (IMK at the Hans Boeckler Foundation); Tobias Zimmermann (Rhine-Westphalia Insitut for Economic Research (RWI))
    Abstract: This paper analyses the effects of commodity price shocks in a new Keynesian model. The focus is on the central bank's choice of inflation target and the degree of real wage rigidity. It turns out that using core inflation rather than headline inflation is the superior strategy. Targeting expected headline inflation, as practiced by most central banks, is a viable practical alternative to the core inflation target. Simulations illustrate these points. The introduction of real wage rigidity into the model does not change these conclusions. Real wage rigidity does, however, imply second-round effects, making the monetary policy response, the inflation peak and the output drop more pronounced. Although in practice many of the assumptions of the model, such as full information, do not hold, lessons can be drawn for monetary policy. In case of a commodity supply shock, central banks would do well to focus on some measure of core inflation rather than headline inflation so as to reduce the volatility of both inflation and output. A communication strategy that places greater emphasis on underlying and expected inflation could serve to anchor inflation expectations.
    Date: 2008
  10. By: Asaf Bernstein; Eric Hughson; Marc D. Weidenmier
    Abstract: We use the founding of the Federal Reserve as a historical experiment to provide some insight into whether a lender of last resort can stabilize financial markets. Following the Panic of 1907, Congress passed two measures that established a lender of last resort in the United States: (1) the Aldrich-Vreeland Act of 1908 which authorized certain banks to issue emergency currency during a financial crisis and (2) the Federal Reserve Act of 1913 which established a central bank. We employ a new identification strategy to isolate the effects of the introduction of a lender of last resort from other macroeconomic shocks. We compare the standard deviation of stock returns and short-term interest rates over time across the months of September and October, the two months of the year when financial markets were most vulnerable to a crash because of financial stringency from the harvest season, with the rest of the year during the period 1870-1925. Stock volatility in the post-1907 period (June 1908-1925) was more than 40 percent lower in the months of September and October compared to the period (1870- May 1908). We also find that the volatility of the call loan rate declined nearly 70 percent in September and October following the monetary regime change.
    JEL: E4 G1 N11 N12
    Date: 2008–10
  11. By: Engelbert Stockhammer (Vienna University of Economics and Business Administration); Simon Sturn (IMK at the Hans Boeckler Foundation)
    Abstract: This paper investigates the hypothesis that the extent to which hysteresis occurs in the aftermath of recessions depends on monetary policy reactions. The degree of hysteresis is explained econometrically by the extent of monetary easing during a recession and by standard variables for labour market institutions in a pooled cross-country analysis using quarterly data. The sample includes 40 recessions in 19 OECD countries for which the required data is available. The time period lasts from 1980 to 2007. The paper builds on Ball (1999) and extends the sample of countries, the time period under investigation and the set of control variables.
    Keywords: monetary policy, NAIRU, structual unemployment, hysteresis, endogenous NAIRU
    JEL: E24 E39 E50
    Date: 2008
  12. By: Henry Sabrowski (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: This paper analyzes the in ation expectation formation empirically for German consumers. The expectation formation process is analyzed for a representative consumer and for dierent demographic groups. The results indicate that German consumers are a relatively homogeneous group. There are nevertheless quantitative dierences among the groups: Inflation expectations and perceived inflation tend to fall with rising income and unemployed individuals are outliers. Rational inflation expectation is not present for any group. Consumer and expert expectations have short and long run relationships. Evidence for a positive constant gain in the adaptive learning algorithm is given for almost all groups.
    Keywords: Inflation expectations; conversion method; survey data; rationality tests
    JEL: C42 D83 D84 E31
    Date: 2008–10–21
  13. By: Menzie D. Chinn; Shang-Jin Wei
    Abstract: The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation.
    JEL: F3
    Date: 2008–10
  14. By: Katerina Smídková; Viktor Kotlán; David Navrátil; Ales Bulir
    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: Inflation targeting , Central banks , Economic forecasting , Monetary policy , Transparency , Emerging markets , Chile , Czech Republic , Hungary , Poland , Thailand , Sweden ,
    Date: 2008–10–02

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