nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒01‒24
nine papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. A Small Open Economy DSGE Model for Pakistan By Haider, Adnan; Khan, Safdar Ullah
  2. The Impact of Foreign Macroeconomic News on Financial Markets in the Czech Republic, Hungary, and Poland By David Büttner; Bernd Hayo; Matthias Neuenkirch
  3. Fiat Money and the Value of Binding Portfolio Constraints By Mário R. Páscoa; Myrian Petrassi; Juan Pablo Torres-Martínez
  4. The New Arthurian Economics By Shipman, Arthur F.
  5. Determinants of West African Monetary Zone (WAMZ)countries global export trade: do foreign reserves and independent exchange rates matter? By Balogun, Emmanuel Dele
  6. Business surveys and inflation forecasting in China By Kaaresvirta, Juuso; Mehrotra, Aaron
  7. Dynamics of the price distribution in a general model of state-dependent pricing By James Costain; Antón Nákov
  8. Exchange rate pass-through in the global economy – the role of emerging market economies By Bussière, Matthieu; Peltonen, Tuomas
  9. Capital Market Regimes and Bank Structure in Europe By Ronald E. Shrieves; Drew Dahl; Michael F. Spivey

  1. By: Haider, Adnan; Khan, Safdar Ullah
    Abstract: This paper estimates a small open economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan using Bayesian simulation approach. Model setup is based on new Keynesian framework, characterized by nominal rigidity in prices with habit formation in household’s consumption. The core objective is to study whether an estimated small open economy DSGE model provides a realistic behavior about the structure Pakistan economy with fully articulated description of the monetary policy transmission mechanism vis-à-vis domestic firm’s price setting behavior. To do so, we analyze the impulse responses of key macro variables; domestic inflation, imported inflation, output, consumption, interest rate, exchange rate, term of trade to different structural/exogenous shocks. From several interesting results, few are; (a) high inflation in Pakistan do not hit domestic consumption significantly; (b) Central bank of Pakistan responds to high inflation by increasing the policy rate by 100 to 200 bps; (c) exchange rate appreciates in both the cases of high domestic and imported inflation; (d) tight monetary policy stance helps to curb domestic inflation as well as imported inflation but appreciates exchange rate significantly (f) pass through of exchange rate to domestic inflation is very low; finally parameter value of domestic price stickiness shows that around 24 percent domestic firms do not re-optimize their prices which implies averaged price contract is about two quarters.
    Keywords: New-Keynesian economics; open economy DSGE models; nominal rigidities; monetary policy transmission mechanism; Bayesian Approach
    JEL: F37 E32 E52 F47 E47
    Date: 2008–11–06
  2. By: David Büttner (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: In this paper, we study the effects of euro area and US macroeconomic news on financial markets in the Czech Republic, Hungary, and Poland (CEEC-3) from 1999 to 2006. Using a GARCH model, we examine the impact on daily returns of three-month interest rates, stock market indices, exchange rates versus the euro, and the US dollar. First, foreign macroeconomic news has a significant impact on CEEC-3 financial markets. Second, neither US nor European news has a stronger effect over the whole observation period. Third, the process of European integration is accompanied by an increasing importance of euro area news relative to US news. Fourth, there are country-specific differences: the Czech markets become more affected by foreign news after the Copenhagen Summit than the other countries. Finally, testing the persistence of news over a business week confirms our main results.
    Keywords: Financial Markets, Czech Republic, Hungary, Poland, Macroeconomic News, European Monetary Union
    JEL: G12 G15 F30
    Date: 2009
  3. By: Mário R. Páscoa; Myrian Petrassi; Juan Pablo Torres-Martínez
    Abstract: It is well known that, under uniform impatience, positive net supply assets are free of bubbles for non-arbitrage kernel deflators that yield finite present values of wealth. However, this does not mean that prices cannot be above the series of deflated dividends for the deflators given by the agents' marginal rates of substitution, which also yield finite present values of wealth. In particular, binding no-short-sales constraints lead to positive prices of fiat money. These monetary equilibria are Pareto improvements but they are still inefficient.
    Date: 2009–01
  4. By: Shipman, Arthur F.
    Abstract: The popular understanding of monetary policy is reviewed. A flaw is uncovered: Changes in the components of "money" have been ignored. Policy has therefore allowed the development of a monetary imbalance. This imbalance may be described as the excessive reliance on credit. The flaw has reduced the effectiveness of monetary policy. It is responsible for our failure to bring inflation to a halt. It is responsible for massive debt accumulation. It is responsible for our economic problems today. A solution is proposed.
    Keywords: monetary imbalance; monetary policy; new economic theory; credit-money; credit in circulation; debt accumulation; cause of hard times
    JEL: E0 E31 E51
    Date: 2009–01–16
  5. By: Balogun, Emmanuel Dele
    Abstract: This study examines the effect of independent exchange rate pursuits and reserve holdings, relative to other determinants, on global export performance of WAMZ countries. The regression results show that exports originating from the Zone to the rest of the world are influenced positively by domestic output, export prices and exchange rate devaluations, but negatively by import price and economic performance of the major global trading partner, proxied by the US GDP. This result is not universal as the Gambia, Ghana and Guinea total exports functions show that exchange rate policy penalized exports contrary to the Nigerian case in which the coefficient estimate is significant and positive. The study infers that these results are consistent with theoretical expectation given the ironical divergence in export basket. Although they are all primary commodity exporters, Nigeria’s exports is mainly crude oil, and a priori expectation is that rapid economic growth or booms in the US should lead to increased demand for energy (healthy competitions). In conclusion, the study infers that since independent flexible exchange rate policy pursuits and reserve holdings makes no difference to the Zonal export performance ex ante, but have great potential for global exports collectively, they could explore an OCA to enhance both intra- and global inter-regional export trade
    Keywords: Exchange rate policy; export trade; panel data regression model; WAMZ
    JEL: F10 C23 F14 F1
    Date: 2009–01–21
  6. By: Kaaresvirta, Juuso (BOFIT); Mehrotra, Aaron (BOFIT)
    Abstract: We use business survey data collected by the People’s Bank of China for inflation forecasting. Some survey indicators lead to enhanced forecasting performance relative to the univariate benchmark model, especially for a period of moderate inflation. However, the estimated models do not do a good job of tracking the recent pickup in Chinese inflation, due to increases in food prices.
    Keywords: inflation forecasting; business surveys; China
    JEL: C53 E31
    Date: 2009–01–13
  7. By: James Costain (Banco de España); Antón Nákov (Banco de España)
    Abstract: This paper analyzes the effects of monetary shocks in a DSGE model that allows for a general form of smoothly state-dependent pricing by firms. As in Dotsey, King, and Wolman (1999) and Caballero and Engel (2007), our setup is based on one fundamental property: firms are more likely to adjust their prices when doing so is more valuable. The exogenous timing (Calvo 1983) and fixed menu cost (Golosov and Lucas 2007) models are nested as limiting cases of our setup. Our model is calibrated to match the steady-state distribution of price adjustments in microdata; realism calls for firm-specific shocks. Computing a dynamic general equilibrium requires us to calculate how the distribution of prices and productivities evolves over time. We solve the model using the method of Reiter (2008), which is well-suited to this type of problem because it combines a fully nonlinear treatment of firm-level state variables with a linearization of the aggregate dynamics. We compute impulse responses to iid and autocorrelated money growth shocks, and decompose the inflation impact into 'intensive margin', 'extensive margin' and 'selection' components. Under our most successful calibration, increased money growth causes a persistent rise in inflation and output. The real effects are substantially larger if money growth is autocorrelated. In contrast, if we instead impose a fixed menu cost specification, money growth shocks cause a sharp spike in inflation (via the selection component) so that the real effects are small and short-lived, especially if money growth is iid. An increase in aggregate productivity raises consumption but causes labor to fall. Also, impulse responses differ depending on the distribution at the time the shock occurs. In particular, increased money growth has different effects starting from the steady state distribution than it does if all firms have recently received an economy-wide productivity shock.
    Keywords: price stickiness, state-dependent pricing, stochastic menu costs, generalized (S,s), heterogeneous agents, distributional dynamics
    JEL: E31 E52 D81
    Date: 2009–01
  8. By: Bussière, Matthieu (BOFIT); Peltonen, Tuomas (BOFIT)
    Abstract: This paper estimates export and import price equations for 41 countries –including 28 emerging market economies. Further, it relates the estimated elasticities to structural factors and tests for statistical breaks in the relation between trade prices and exchange rates. Results indicate that (i) the elasticity of trade prices in emerging markets is sizeable, but not significantly higher than in advanced economies; (ii) such elasticity is primarily influenced by macroeconomic factors such as the exchange rate regime and the inflationary environment, although microeconomic factors such as product differentiation also play a role; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) pass-through to import prices has declined in some advanced economies, noticeably the United States; this is consistent with a rise in pricing-to-market in several EMEs and especially with a change in the geographical composition of U.S. imports.
    Keywords: emerging market economies; exchange rate pass-through; pricing-to-market; local and producer currency pricing; exchange rate regime
    JEL: F10 F30 F41
    Date: 2009–01–13
  9. By: Ronald E. Shrieves (University of Tennessee); Drew Dahl (Department of Economics and Finance, Utah State University); Michael F. Spivey (Clemson University)
    Abstract: We hypothesize that features of European capital markets used to distinguish market reliance and investor protection have predictably influenced emerging national differences in bank capitalization, growth, and choice of income-producing activities. We characterize countries' capital regimes as more or less "equity-friendly" or "debt-friendly" based upon their reliance on equity and credit markets and the extent to which their legal frameworks protect shareholders and creditors. Using bank-level data from 13 European countries, 1998 to 2004, we find evidence of positive associations between “equity-friendly” market features and, respectively, bank capitalization, bank asset growth and the relative emphasis on bank lending to its customers. Support is also provided for hypotheses that “credit-friendly” capital regimes convey advantages reflected in higher rates of growth in assets and greater emphasis on lending to customers. Our results suggests that integration of European banking markets is mitigated by other, relatively static, features of the equity and debt markets on which banks rely.
    Keywords: international banking, market integration, shareholder protection
    JEL: F33 F36 G21 G28 G32 G38
    Date: 2009–01–14

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