nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒01‒17
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Optimal Operational Monetary Policy Rules in an Endogenous Growth Model: a calibrated analysis By Hiroki Arato
  2. Deep Habits and the Dynamic Effects of Monetary Policy Shocks By Morten O. Ravn; Stephanie Schmitt-Grohe; Martín Uribe; Lenno Uuskula
  3. Financial Structure and the Impact of Monetary Policy on Asset Prices By Assenmacher-Wesche, Katrin; Gerlach, Stefan
  4. Tax, Credit Constraints, and the Big Costs of Small Inflation By Andrew Coleman
  5. Term structure and the estimated monetary policy rule in the eurozone By Ramón María-Dolores; Jesús Vázquez
  6. Bank Lending Channel of Monetary Policy: Evidence for Colombia, Using a Firms´ Panel By José E. Gómez González; Paola Morales Acevedo
  7. Budgetary Policies in a DSGE Model with Finite Horizons By Annicchiarico, Barbara; Giammarioli, Nicola; Piergallini, Alessandro
  8. Narrow money and transaction technology: new disaggregated evidence By Columba, Francesco
  9. Independence and Accountability of Monetary and Fiscal Policy Committees By Alexander Mihailov; Katrin Ullrich
  10. Intergenerational Transmission of Inflation Aversion: Theory and Evidence By Etienne Farvaque; Alexander Mihailov
  11. Tradeoff between Inflation Stabilization and Growth Maximization By Hiroki Arato
  12. Portuguese banks in the euro area market for daily funds By Luísa Farinha; Vítor Gaspar
  13. Quest for the best: How to measure central bank independence and show its relation with inflation? By Aleksandra Maslowska
  14. Classifying Monetary Economics: Fields and Methods from Past to Future By Philip Arestis; Alexander Mihailov
  15. Technological change and the demand for currency: An analysis with household data By Francesco Lippi; Alessandro Secchi
  16. The Islamic Inter bank Money Market and a Dual Banking System ; The Malaysian Experience. By Bacha, Obiyathulla/I
  17. Sterling in crisis: 1964–1967 By Michael D. Bordo; Ronald MacDonald; Michael J. Oliver
  18. Price-Setting Behaviour in Switzerland Evidence from CPI Micro Data By Kaufmann, Daniel
  19. Asymmetric information in the interbank foreign exchange market By Geir H. Bjønnes; Carol L. Osler; Dagfinn Rime
  20. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong By John B. Taylor

  1. By: Hiroki Arato (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)
    Abstract: This paper constructs an endogenous growth New Keynesian model and considers growth and welfare effect of Taylor-type (operational) monetary policy rules. The Ramsey equilibrium and optimal operational monetary policy rule is also computed. In the calibrated model, the Ramseyoptimal volatility of inflation rate is smaller than that in standard exogenous growth New Keynesian model with physical capital accumulation. Optimal operational monetary policy rule makes nominal interest rate respond strongly to inflation and mutely to real activity, as in standard New Keynesian model. Growth-maximizing operational monetary policy is not identical to optimal operational monetary policy. Welfare cost of responding to real activity is two or three times larger than that of exogenous growth New Keynesian model.
    Keywords: Monetary policy, Sticky price, Endogenous growth
    JEL: E31 E52 O41
    Date: 2009–01
  2. By: Morten O. Ravn; Stephanie Schmitt-Grohe; Martín Uribe; Lenno Uuskula
    Abstract: This paper introduces deep habits into a sticky-price sticky-wage economy and asks whether the countercyclical markup movements induced by deep habits is helpful for accounting for the dynamic effects of monetary policy shocks. We find that this is the case: When allowing for deep habits, the model can account very precisely for the persistent impact of monetary policy shocks on aggregate consumption and for the impact on inflation that other models have hard a time explaining. In particular, the model can account both for the price puzzle and for inflation persistence. We also show that the deep habits mechanism and nominal rigidities are complementary: The deep habits model can account for the dynamic effects of monetary policy shock at low to moderate levels of nominal rigidities. We show that the results are stable over time and are not caused by monetary policy changes.
    Keywords: deep habits, monetary policy, price puzzle, inflation persistence, countercyclical markups
    JEL: E21 E31 E32 E52
    Date: 2008
  3. By: Assenmacher-Wesche, Katrin (Swiss National Bank); Gerlach, Stefan (Goethe University, Frankfurt)
    Abstract: We study the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006, using single-country VARs and panel VARs in which we distinguish between groups of countries depending on their financial systems. The effect of monetary policy on property prices is only about three times as large as its impact on GDP. Using monetary policy to guard against financial instability by offsetting asset-price movements thus has sizable effects on economic activity. While the financial structure influences the impact of policy on asset prices, its importance appears limited.
    Keywords: asset prices; monetary policy; panel VAR
    JEL: C23 E52
    Date: 2008–09–10
  4. By: Andrew Coleman (Motu Economic and Public Policy Research)
    Abstract: This paper develops an overlapping generations model incorporating credit constraints, owner-occupier and rental sectors, and detailed tax regulations to examine how the interaction of inflation and the tax system affect the housing market. It shows that even modest rates of inflation can have very large effects on the home-ownership rates of young households, particularly at low real interest rates. This occurs even if there is a large supply response in the quantity of housing. The model suggests that the welfare costs of inflation could be ameliorated by exempting the inflation component of interest payments from income tax.
    Keywords: Inflation, credit constraints, capital income taxes, housing markets, home-ownership rates, monetary policy
    JEL: E40 E58
    Date: 2008–12
  5. By: Ramón María-Dolores (Universidad de Murcia); Jesús Vázquez (Euskal Herriko Unibertsitatea)
    Abstract: In this paper we estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure in order to analyze two issues. First, we analyze the effect of introducing an explicit term structure channel in the NKM model on the estimated parameter values of the model, with special emphasis on the interest rate smoothing parameter using data for the Eurozone. Second, we study the ability of the model to reproduce some stylized facts such as highly persistent dynamics, the weak comovement between economic activity and inflation, and the positive, strong comovement between interest rates observed in actual Eurozone data. The estimation procedure implemented is a classical structural method based on the indirect inference principle.
    Keywords: NKM model, term structure, policy rule, indirect inference
    JEL: C32 E30 E52
    Date: 2008–12
  6. By: José E. Gómez González; Paola Morales Acevedo
    Abstract: In this paper we find empirical evidence of bank lending channel for Colombia, using a balanced panel data of about four thousand non-financial firms. We find that increases in the interest rate, proxiing for the monetary policy instrument, lead to a reduction in the proportion of bank loans, out of total debt, of the .rms. This bank lending channel amplifies the effect of the traditional interest rate channel, which leads to a reduction in total debt and spending when monetary policy tightens. Our result agrees with, and complements, those obtained by Gómez González and Grosz (2007), who provide evidence of the existence of a bank lending channel in Colombia using bank-specific financial variables.
    Date: 2009–01–07
  7. By: Annicchiarico, Barbara; Giammarioli, Nicola; Piergallini, Alessandro
    Abstract: This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.
    Keywords: Fiscal Policy; Monetary Policy; Nominal Rigidities; Capital Accumulation; Finite Lifetime; Simulations.
    JEL: E52 D58 E63
    Date: 2009–01
  8. By: Columba, Francesco
    Abstract: This paper analyses the effect of transaction technology innovation on narrow money using Italian data disaggregated at provincial level. In particular, this study assesses the impact of the diffusion of ATMs (automated teller machines) and of POS (points of sale), on the demand for currency and on the demand for M1 using a unique data set. We find that transaction technology innovation has a negative effect on the demand for currency in circulation, while its effect on M1 is positive; additionally, heterogeneity in the use of cash within Italy is detected.
    Keywords: Currency; Demand for money; Financial innovation; Monetary aggregates
    JEL: E51 E41
    Date: 2009–01–08
  9. By: Alexander Mihailov (School of Economics, University of Reading); Katrin Ullrich (Centre for European Economic Research, Mannheim)
    Abstract: The democratic accountability of policymaking institutions which are autonomous within delegated mandates has not received as much attention as their independence. We analyze in a theoretical model the effects of accountability inthe form of possible overriding of economic policy decisions by the government under different degrees of independence of expert committees conducting monetary and fiscal policy. The equilibrium outcomes of such alternative institution-design frameworks are compared according to key macroeconomic performance criteria. Our results stress the trade-off between anchoring inflation expectations on target and output stabilization that is not solved with accountability.
    Keywords: independence, accountability, monetary policy, fiscal policy, expert committees, institution design
    JEL: E52 E58 E61 E63
    Date: 2008
  10. By: Etienne Farvaque (Equippe - Universités de Lille, and DULBEA - Université Libre de Bruxelles.); Alexander Mihailov (School of Economics, University of Reading)
    Abstract: We study the evolution of inflation aversion preferences across generations. In the theoretical part of the paper, we analyze the dynamics of such preferences in an overlapping-generations model with heterogenous mature agents characterized by different degrees of inflation aversion. We show how the stability of a society’s degree of inflation aversion depends on the strength and speed of changes in the structure of the population. The empirical part then proposes two applications in support of the theoretical results. We first link demographic structures to inflation aversion, and then proceed by looking at the relations between income (in)equality and measures of inflation aversion.
    Keywords: Intergenerational transmission, evolving preferences, inflation aversion, central bank independence, demographic change, income inequality
    JEL: E24 E31 E58 J10
    Date: 2008
  11. By: Hiroki Arato (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)
    Abstract: This paper analyzes monetary policy implication in an endogenous growth model in which the average growth rate is inefficiently low and in which the capital accumulation technology is concave. This paper does two exercises. First, we derive the utility-based welfare criterion of the model. The welfare measure suggests that even if the natural rate of growth moves parallel to its efficient rate, the increase of inflation volatility may improve welfare through the increase of average growth. Second, we test this hypothesis numerically and show that in our calibrated model the tradeoff between inflation stabilization and average growth maximization exists. In addition, the tradeoff is resolved by highly growth-stimulating (investment stabilization) policy. The reason is the existence of concavity in the capital accumulation technology, through which investment stabilization rises average growth.
    Keywords: Endogenous Growth; Monetary Stabilization Policy
    JEL: E3
    Date: 2009–01
  12. By: Luísa Farinha (Banco de Portugal, 148, Rua do Comercio, P-1101 Lisbon Codex, Portugal.); Vítor Gaspar (Bureau of European Policy Advisers, European Commission, Rue de la Loi 100, B-1049 Brussels, Belgium.)
    Abstract: In this paper, we use the Furfine (1999) statistical procedure to identify Money market operations from Payments Systems data. Given the availability of an alternative data set, recording money market operations we could confirm the accuracy of the method. We examine evidence on integration of the Money market in the euro area. We ask, “how do Portuguese banks participate in the market for daily funds?” and look for a possible hierarchical structure in the market. We find strong evidence of integration and mixed evidence on hierarchical structure. JEL Classification: E52, E58.
    Keywords: Money market, Furfine procedure, financial integration, hierarchical structure, Portuguese banks.
    Date: 2008–12
  13. By: Aleksandra Maslowska (Department of Economics, University of Turku)
    Abstract: We use several numerical tests in order to receive answers to our three questions. First, this paper aims to indicate, which measure of central bank independence explains economic changes the most accurately, and hence gives the most exact guidance onto institutional design of monetary authorities. Second, our aim is to prove that differences in legal proxies matter as much as institutional development of countries. Finally, we show that results are vulnerable to data modification. This experiment is performed by an empirical verification of the quality of CBI indices, comparing several widely used measures for around 100 countries, using a panel data approach. After a brief description of imprecision in CBI measures methodology and their definitions, a comparison using OLS method is made. Additional tests of TSLS, PCA and stepwise selection are used, as well. In the final conclusion we are able to point the ``winner'' of this experiment but also we indicate that a minor modification of data can change the result.
    Keywords: institution, central bank independence, panel data
    JEL: E42 E50
    Date: 2008–09
  14. By: Philip Arestis (Department of Land Economy, University of Cambridge); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: We propose a simple, yet sufficiently encompassing classification scheme of monetary economics. It comprises three fundamental fields and six recent areas that expand within and across these fields. The elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature, neither is this an attempt to produce a relatively complete systematization. Our intention in taking stock is not finality or exhaustiveness. We rather suggest a viewpoint and a possible ordering of the accumulating knowledge. Our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large.
    Keywords: monetary economics, monetary theory, monetary policy, public finance, classification, methodology
    JEL: E40 E50 E60
    Date: 2008
  15. By: Francesco Lippi (University of Sassari, EIEF and CEPR); Alessandro Secchi (Bank of Italy, Economics and International Relations)
    Abstract: Advances in transaction technology allow agents to economize on the cost of cash management. We argue that accounting for the impact of new transaction technologies on currency holding behaviour is important to obtain theoretically consistent estimates of the demand for money. We modify a standard inventory model to study the effect of withdrawal technology on the demand for currency. An empirical specification for households’ demand schedule is suggested, in which both the level of currency holdings and the interest rate elasticity of demand depend on the withdrawal technology available to agents (e.g. ATM card ownership or a high/low density of bank branches, ATMs). The theoretical implications are tested using a unique panel of Italian household data (on currency holdings, deposit interest rates, consumption, development of banking services, etc.) for the period 1989-2004.
    Keywords: money demand, inventory models, technological change
    JEL: E5
    Date: 2008–12
  16. By: Bacha, Obiyathulla/I
    Abstract: This paper examines the operation of an Islamic Interbank Money market (IIMM), within a dual banking system. The paper argues that even though an Islamic Money market operates in an interest free environment and trades shariah compliant instruments, many of the risks associated with conventional money markets, including interest rate risk is relevant to an Islamic Money Market operating within a dual banking system. The empirical evidence based on Malaysian data, points to Islamic money market profit rates/yields that are highly correlated and move in sync with conventional money market rates. Given the dynamics of fund flows and cross linkages, an IIMM operating within a dual banking system cannot sterilize itself from interest rate risk. In fact, the paper argues that such an IIMM may actually enhance interest rate risk transmission to the Islamic banking sector, by providing additional channels of transmission. Ironical as it may be, the operations of an IIMM in a dual banking system may serve to bring the Islamic banking sector into closer orbit with the conventional sector.
    Keywords: Islamic Interbank Money Market; Dual Banking; Malaysia
    JEL: D53 D02 E44
    Date: 2008
  17. By: Michael D. Bordo; Ronald MacDonald; Michael J. Oliver
    Abstract: We provide the first econometric study of foreign exchange market intervention for the UK during the sterling crises from 1964–1967. We use daily data on spot and forward dollar/sterling exchange rates and reserve movements which allows a more precise description of the loss of credibility during four currency crises. Reserve losses are consistent with exchange rate crises. External assistance given to sterling throughout this period shored up the reserves and allowed the sterling peg to be maintained.
    JEL: N1 N14 N2
    Date: 2009–01
  18. By: Kaufmann, Daniel (Swiss National Bank)
    Abstract: This paper investigates price-setting behaviour of firms based on the individual price quotes underlying the Swiss consumer price index. The data set covers the years from 1993 to 2005. Six main findings emerge from the analysis. (i) Prices are sticky; the median duration amounts to 4.6 quarters. (ii) Price-setting behaviour is heterogeneous across sectors and outlet characteristics. (iii) Price changes are sizeable; the median absolute size amounts to 9.4%. (iv) There is no indication of general downward price stickiness; even in the case of positive inflation, 41.3% of all price adjustments are decreases and the distributions of price changes do not show substantial asymmetries. (v) Firms respond to expected cost shocks at the date of their occurrence; VAT rate changes do not lead to more price adjustments before they take effect. (vi) There is some evidence that firms adjust their behaviour according to the state of the economy; in particular, firms facing higher rates of inflation adjust prices more frequently.
    Keywords: Price-setting; frequency of price changes; nominal price rigidity; time-dependent pricing; statedependent pricing
    JEL: D40 E31
    Date: 2008–08–04
  19. By: Geir H. Bjønnes (Norwegian School of Management (BI),); Carol L. Osler (Brandeis International Business School); Dagfinn Rime (Norges Bank (Central Bank of Norway)and Norwegian University of Science and Technology (NTNU))
    Abstract: This paper provides evidence of private information in the interdealer foreign exchange market. In so doing it provides support for the hypothesis that information is an important reason for the strong positive correlation between order flow and returns. It also provides evidence that information influences order-book structure. Our data comprise the complete record of interdealer trades at a good-sized Scandinavian bank during four weeks in 1998 and 1999, including bank identities. Our results indicate that larger banks have more information than smaller banks, that the relation between order flow and returns is stronger for larger banks than smaller banks, and that larger banks exploit their information advantage in limit-order placement.
    Keywords: Foreign exchange, microstructure, asymmetric information, liquidity premium
    JEL: G15 F31 F33
    Date: 2009–01–08
  20. By: John B. Taylor
    Abstract: This paper is an empirical investigation of the role of government actions and interventions in the financial crisis that flared up in August 2007. It integrates and summarizes several ongoing empirical research projects with the aim of learning from past policy. The evidence is presented in a series of charts which are backed up by statistical analysis in these research projects.
    JEL: E0
    Date: 2009–01

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