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on Monetary Economics |
| By: | Ruthira Naraidoo (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | A simple empirical nonlinear framework is used to analyse monetary policy between 1983 and 2007 in South Africa, focusing on the policy of in?ation targeting introduced in Feb 2000, more precisely when the South African Reserve Bank (SARB) announced that an inflation zone targeting regime of 3-6% would be in place. We find that a model specification embodying a simple inflation learning rule for the future inflation rate seems to provide a better understanding of the decision process made by the SARB in its interest rate setting policy. The main findings are that the adoption of inflation targeting led to significant changes in monetary policy, secondly, post-2000 monetary policy is asymmetric as policy-makers respond more to downward deviation of inflation away from the target, thirdly, post-2000 policy-makers may be attempting to keep inflation within the 4.5%-6.9% range rather than pursuing a target zone of 3-6% as generally pre- announced and fourthly, the response of monetary policy to in?ation is nonlinear as interest rates respond more when inflation is further from the target. |
| Keywords: | Monetary policy, inflation targeting, inflation learning rule, nonlinear smooth transition model |
| JEL: | C51 E52 E58 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200904&r=mon |
| By: | Berlemann, Michael (Helmut Schmidt University, Hamburg); Hielscher, Kai (Helmut Schmidt University, Hamburg) |
| Abstract: | According to the game-theoretic model of monetary policy, inflation is the consequence of time-inconsistent behavior of the monetary authority. The inflation bias can be eased by handing over the responsibility for monetary policy to an independent central bank and appointing a weight-conservative central banker. Countries around the world chose different combinations of central bank independence and conservatism. Most of the existing empirical studies concentrate on measuring legal or factual central bank independence thereby neglecting the degree of conservatism of the monetary authorities. In this paper we show how a joint empirical measure of central bank independence and conservatism can be derived from factual central bank behavior. Based on a panel logit approach we estimate measures of effective monetary policy conservatism for a sample of 11 OECD countries. |
| Keywords: | Central Banking; Conservatism; Central Bank Independence; Inflation |
| JEL: | E31 E58 |
| Date: | 2009–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:vhsuwp:2009_089&r=mon |
| By: | Ana Carolina Saizar; Nigel Andrew Chalk |
| Abstract: | Monetary policy, at least in part, operates through both an interest rate and credit channel. The question arises, therefore, whether monetary policy is a less potent a device in affecting output and inflation in countries that have low levels of credit and where investment and consumption are not financed by borrowing in local currency. This paper employs a Panel Vector Auto Regression approach to examine the empirical evidence in a broad sample of emerging market countries. The data suggests that the effectiveness of changes in policy interest rates in influencing the path of inflation appear to be unrelated to the level of credit and that, instead, the willingness to allow exchange rate flexibility is a far more important determining factor. |
| Keywords: | Monetary policy , Credit , Interest rates , Inflation , Flexible exchange rates , Economic models , |
| Date: | 2008–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/288&r=mon |
| By: | Balogun, Emmanuel Dele |
| Abstract: | This paper examines the determinants of inflation differentials in a panel of West African Monetary Zone (WAMZ) states vis-à-vis its set benchmark for macroeconomic convergence since 2000 to date. Using a stylized 5-country model of WAMZ area, the differences in national inflation is analyzed in light of country specific shocks or differences in the monetary transmission mechanisms. The main results show macroeconomic (price) stabilization around a desired target was not attained. Over the sample period, the un-weighted average regional inflation rates were most often above a single digit target and vary widely among the countries. The major monetary policy instruments determinants of inflationary divergence are the pursuit of distorted interest rates, exchange rates overvaluation and expansionary monetary policies, which penalized credit and accentuated output supply/demand gaps. |
| Keywords: | Inflation differentials; price convergence; exchange rate; WAMZ members; panel data |
| JEL: | E31 E52 |
| Date: | 2009–01–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13045&r=mon |
| By: | Piti Disyatat |
| Abstract: | Despite constituting the very heart of the monetary transmission mechanism, widespread misconceptions still exist regarding how monetary policy is implemented. This paper highlights the key misconceptions in this regard and shows how they have compromised the understanding of important aspects of the monetary transmission mechanism. In particular, the misplaced emphasis on open market operations as the means through which monetary policy is implemented can give rise to inappropriate characterizations of monetary policy, as well as to ill-defined discussions of liquidity effects, the bank lending channel, and sterilized exchange rate intervention. |
| Keywords: | Monetary policy implementation, transmission mechanism, interest rates, money, liquidity effect, bank lending channel, sterilized intervention |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:269&r=mon |
| By: | Secil Topak; Alfredo Cuevas |
| Abstract: | When faced with a relative price shock, monetary authorities often aim to contain its second round effects on inflation while accepting first round effects. We analyze the experience of South Africa and other inflation targeters to explore whether and when this policy prescription implies changing the monetary policy stance. Inflation targeting central banks differ on how aggressively they typically react to relative price shocks, reflecting differences in resilience of underlying inflation to such shocks. An examination of individual policy decisions reveals the importance of the broader economic context in framing the responses to relative price shocks. |
| Keywords: | Monetary policy , South Africa , External shocks , Inflation targeting , Pricing policy , Central banks , Energy prices , Commodity prices , |
| Date: | 2009–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/289&r=mon |
| By: | Cruijsen, C. van der; Eijffinger, S.C.W.; Hoogduin, L.H. (Tilburg University, Center for Economic Research) |
| Abstract: | Should central banks increase their degree of transparency any further? We show that there is likely to be an optimal intermediate degree of central bank transparency. Up to this optimum more transparency is desirable: it improves the quality of private sector inflation forecasts. But beyond the optimum people might: (1) start to attach too much weight to the conditionality of their forecasts, and/or (2) get confused by the large and increasing amount of information they receive. This deteriorates the (perceived) quality of private sector inflation forecasts. Inflation then is set in a more backward looking manner resulting in higher inflation persistence. By using a panel data set on the transparency of 100 central banks we find empirical support for an optimal intermediate degree of transparency at which inflation persistence is minimized. Our results indicate that while there are central banks that would benefit from further transparency increases, some might already have reached the limit. |
| Keywords: | central bank transparency;monetary policy;inflation persistence. |
| JEL: | E31 E52 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200859&r=mon |
| By: | Tang, Hsiao Chink (Asian Development Bank) |
| Abstract: | In the first-half of the global financial turmoil, rising inflation was a major concern for emerging East Asian central banks. Coupled with a slowing US economy, regional central banks faced an inevitable monetary policy choice of either addressing higher inflation or supporting moderate growth. Higher food and fuel prices were the major drivers of headline inflation. Their causes, however, were a confluence of factors--whether cyclical or structural, domestic or global, supply or demand--all reinforcing each other and contributing to widespread price escalations in all classes of commodities. In response, a raft of fiscal and administrative measures of questionable effectiveness was widely implemented. Understandably, different economies faced different balance of risks between price stability and growth, but to attribute the causes of inflation to supply shocks alone was misleading and probably explained why many central banks were reluctant and/or slow to raise interest rates. This was all the more puzzling given that inflation and inflation expectations were on the rise, and central bank credibility was not in abundance. Without much credibility, inflation expectations cannot be well-anchored. To gain credibility, a central bank must "walk-the-talk" and this is only possible if it has the autonomy to do so. |
| Keywords: | Commodity prices; inflation; monetary policy; emerging East Asia |
| JEL: | E31 E52 E58 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0023&r=mon |
| By: | Luis Ignacio Jácome; Inci Ötker; Turgut Kisinbay; Francisco F. Vázquez; Alessandro Giustiniani; David Vávra; Kotaro Ishi; Karl Friedrich Habermeier |
| Abstract: | This paper analyzes the monetary policy response to rising inflation in emerging and developing countries associated with the food and oil price shocks in 2007 and the first half of 2008. It reviews inflation developments in a sample of countries covering all regions and a broad range of monetary and exchange rate policy regimes; discusses the underlying causes of inflation; provides a synthesis of policy responses taken against the background of the conflicting objectives and trade-offs, the uncertainties regarding the nature of the shocks, and the additional challenges brought on by the global financial turmoil; and presents considerations for policy. |
| Keywords: | Monetary policy , Inflation , Emerging markets , Developing countries , Exchange rate regimes , External shocks , Oil prices , Inflation targeting , Central banks , |
| Date: | 2009–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/1&r=mon |
| By: | Sushil Wadhwani |
| Abstract: | We argue that central banks can improve macroeconomic performance by reacting to asset price misalignments over and above their reaction to fixed horizon inflation forecasts. This is because such countercyclical monetary policy tends to offset the impact on output and inflation of such bubbles. In addition, if it were know ex ante that monetary policy would LATW in this way, it might reduce the probability of bubbles arising at all. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp180&r=mon |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg) |
| Abstract: | This paper assesses the impact of monetary policy on house price inflation for the nine census divisions of the US economy using a factor-augmented VAR (FAVAR), estimated a large data set comprising of 126 quarterly series over the period 1976:01 to 2005:02. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the census divisions. In addition, our findings suggests the importance of South Atlantic, East South Central, West South Central, Mountain and the Pacific divisions, in particular, in shaping the dynamics of US house price inflation. |
| Keywords: | Monetary Policy, House Price Inflation, FAVAR |
| JEL: | C32 E52 R2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200903&r=mon |
| By: | Frederic S. Mishkin |
| Abstract: | This short paper argues that the view that monetary policy is ineffective during financial crises is not only wrong, but may promote policy inaction in the face of a severe contractionary shock. To the contrary, monetary policy is more potent during financial crises because aggressive monetary policy easing can make adverse feedback loops less likely. The fact that monetary policy is more potent than during normal times provides a rationale for a risk-management approach to counter the contractionary effects from financial crises, in which monetary policy is far less inertial than would otherwise be typical – not only by moving decisively through conventional or nonconventional means to reduce downside risks from the financial disruption, but also in being prepared to quickly take back some of that insurance in response to a recovery in financial markets or an upward shift in inflation risks. |
| JEL: | E52 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14678&r=mon |
| By: | Essahbi Essaadi (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Zied Ftiti (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | In this paper, we study the inflation dynamics in an industrial inflation-targeting country (New Zealand). Our objective is to check if the inflation targeting policy has a transition period or not. Loosely speaking, we try to give some response to the famous debate: if the inflation targeting is a framework or a simple monetaryrule. For this purpose, we use a frequency approach: Evolutionary Spectral Analysis, as defined by Priestley (1965-1996). Then, we detect endogenously a structuralbreak point in inflation series, by applying a non-parametric test. This is the first time that this method is used in the case of inflation-targeting countries. Our main finding is that the adoption of the inflation-targeting policy in New Zealand was characterized by a transition period before the adoption of this framework. This period was characterized by many radical reforms, which caused a structuralbreak in the New Zealand inflation series. These reforms were made to lead back the inflation close to the initial target. In addition, these reforms increased the transparency and the credibility of the monetary policy. We conclude from our frequency analysis that the inflation series becomes stable in long-term after the adoption of the inflation targeting. This can be a justification of the effectiveness of this policy to ensure the price stability. |
| Keywords: | New Zealand; inflation targeting; spectral analysis and structural change |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00355628_v1&r=mon |
| By: | Söderström, Ulf (Research Department, Central Bank of Sweden) |
| Abstract: | I revisit the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. I first show that the Swedish business cycle since the mid-1990s has been closely correlated with the Euro area economies, suggesting that common shocks have been an important driving force of business cycles in Europe. However, evidence from an estimated model of the Swedish economy instead suggests that country specific shocks have been important for fluctuations in the Swedish economy since 1993, implying that EMU membership could be costly. The model also indicates that the exchange rate has to a large extent acted to destabilize, rather than stabilize, the Swedish economy, pointing to the costs of independent monetary policy with a flexible exchange rate. Finally, counterfactual simulations of the model suggest that Swedish in inflation and GDP growth might have been slightly higher if Sweden had been a member of EMU since the launch in 1999, but also that GDP growth might have been more volatile. The evidence is therefore not conclusive about whether or not participation in the monetary union would be advantageous for Sweden. |
| Keywords: | Monetary union; Open economy; Optimum Currency Area; DSGE model. |
| JEL: | E42 E58 F41 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0227&r=mon |
| By: | Russell Cooper (University of Texas - Department of Economics); Hubert Kempf (Paris School of Economics - Centre d'Economie de la Sorbonne); Dan Peled (University of Haifa - Department of Economics) |
| Abstract: | This paper studies the inflationary implications of interest bearing regional debt in a monetary union. Is this debt simply backed by future taxation with non inflationary consequences ?. Or will the circulation of region debt induce monetization by a central bank ?. We argue here that both outcomes can arise in equilibrium. In the model economy, there are multiple equilibria which reflect the perceptions of agents regarding the manner in which the debt obligations will be met. In one equilibrium, termed Ricardian, the future obligations are met with taxation by a regional government while in the other, termed Monetization, the central bank is induced to print money to finance the region's obligations. The multiplicity of equilibria reflects a commitment problem of the central bank. A key indicator of the selected equilibrium is the distribution of the holdings of the regional debt. We show that regional governments, anticipating central bank financing of their debt obligations, have an incentive to create excessively large deficits. We use the model to assess the impact of policy measures within a monetary union. |
| Keywords: | Monetary union, inflation tax, Seigniorage, public debt. |
| JEL: | E31 E42 E58 E62 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:v08070&r=mon |
| By: | Essahbi Essaadi (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Zied Ftiti (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | In this work, we study the inflation targeting effect on the inflation dynamics in the case of four industrial countries. Our objective is to check whether the inflation targeting policy (ITP) has a significant impact on the change of the inflation path. We use a non-parametric approach that doesn’t require any previous modelling. This is the evolutionary spectral analysis, as defined by Priestley (1965-1996). Then, we use a test that can detect many break points on the time series. This test is inspired by Subba Rao (1981). We use an extension to this test to allow the detection of multiple breaks. We base this on the extension of Ahamada and Boutahar (2002). This is the first time that this method is used in the case of inflation-targeting countries. We find that the inflation-targeting policy had a transition period for countries that had a high and volatile inflation experience before the inflation-targeting adoption. There is the case of New Zealand, Canada and Sweden. In these countries, we identify a structural change in the inflation series resulting to the inflation targeting intervention. However, In the case of other countries like United Kingdom that have a relatively lower inflation rate experience before the ITP adoption, we didn’t find a break point caused by this monetary policy intervention. In this case, the ITP had a role of ensuring this price stability. This result is explained by the fact that the inflation targeting is relevant when the initial inflation to be stabilized is near the target range (Artus, 2004). So, in this paper we justify the intuition of Artus (2004). The second result in our paper consists on the nature of inflation stabilization during the inflation-targeting period. The results proof a long-term stabilization on the inflation dynamic in the period of IT. These results traduce the success of this new framework to anchor the inflation expectation anchoring. So, we can conclude that this policy is preferment to ensure price stability in the case of industrials countries. |
| Keywords: | Inflation Targeting, Spectral Analysis and Structural Change |
| JEL: | C16 E52 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0832&r=mon |
| By: | Selahattin Togay (Gazi University); Nezir Kose (Gazi University) |
| Abstract: | In this study, the endogenous money hypothesis is examined for the Argentinean economy employing exogeneity tests by using monthly data for the time period 1991-2001 within the frame of money and price relationship in a Currency Board-like system. Empirical results support the hypothesis which suggests that money supply is endogenous. |
| Keywords: | Currency Board, Argentina, Money Supply Endogeneity, Exogeneity Test |
| JEL: | C12 C22 E51 E58 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2009/1&r=mon |
| By: | Essahbi Essaadi (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Zied Ftiti (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | In this work, we study the inflation targeting effect on the inflation dynamics in the case of four industrial countries. Our objective is to check whether the inflation targeting policy (ITP) has a significant impact on the change of the inflation path. We use a non-parametric approach that doesn’t require any previous modelling. This is the evolutionary spectral analysis, as defined by Priestley (1965-1996). Then, we use a test that can detect many break points on the timeseries. This test is inspired by Subba Rao (1981). We use an extension to this test to allow the detection of multiple breaks. We base this on the extension ofAhamada and Boutahar (2002). This is the first time that this method is used in the case of inflation-targeting countries. We find that the inflation-targeting policyhad a transition period for countries that had a high and volatile inflation experience before the inflation-targeting adoption. There is the case of New Zealand,Canada and Sweden. In these countries, we identify a structural change in the inflation series resulting to the inflation targeting intervention. However, In thecase of other countries like United Kingdom that have a relatively lower inflation rate experience before the ITP adoption, we didn’t find a break point caused by this monetary policy intervention. In this case, the ITP had a role of ensuring this price stability. This result is explained by the fact that the inflation targetingis relevant when the initial inflation to be stabilized is near the target range (Artus, 2004). So, in this paper we justify the intuition of Artus (2004). The second result in our paper consists on the nature of inflation stabilization during the inflation-targeting period. The results proof a long-term stabilization on the inflation dynamic in the period of IT. These results traduce the success of this new framework to anchor the inflation expectation anchoring. So, we can conclude thatthis policy is preferment to ensure price stability in the case of industrials countries. |
| Keywords: | inflation targeting, spectral analysis and structural change |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00355637_v1&r=mon |
| By: | Guillaume Rocheteau |
| Abstract: | This paper offers a monetary theory of asset liquidity—one that emphasizes the role of assets in payment arrangements—and it explores the implications of the theory for the relationship between assets’ intrinsic characteristics and liquidity, and the effects of monetary policy on asset prices and welfare. The environment is a random-matching economy where fiat money coexists with a real asset, and norestrictions are imposed on payment arrangements. The liquidity of the real asset is endogenized by introducing an informational asymmetry in regard to its fundamental value. |
| Keywords: | Money ; Payment systems ; Liquidity (Economics) |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0901&r=mon |
| By: | Menzie Chinn (University of Wisconsin); Jeffrey Frankel (Harvard University) |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| Keywords: | Foreign exchange market, Euro, Dollar, Reserve currency |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200831&r=mon |
| By: | Bettina Becker; Stephen G. Hall |
| Abstract: | We present a common factor framework of convergence which we implement using principal components analysis. We apply this technique to a dataset of monthly inflation rates of EMU and the Eastern European New Member Countries (NMC) over 1996-2007. In the earlier years, the NMC rates moved independently from an average of the three best performing countries over the past twelve months, while they moved somewhat closer in line with them in the later years. Looking at the sample of the EMU and NMC countries as a whole, there is evidence of a formation of convergence clubs across the two groups. |
| Keywords: | Convergence; inflation rates; European Monetary Union; principal components analysis |
| JEL: | C22 F31 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:09/1&r=mon |
| By: | Khan, Safdar Ullah; Saqib, Omar Farooq |
| Abstract: | This study investigates the effects of political instability on inflation in Pakistan. Applying the Generalized Method of Moments and using data from 1951-2007, we examine this link in two different models. The results of the ‘monetary’ model suggest that the effects of monetary determinants are rather marginal and that they depend upon the political environment of Pakistan. The ‘nonmonetary’ model’s findings explicitly establish a positive association between measures of political instability and inflation. This is further confirmed on analyses based on interactive dummies that reveal political instability significantly leading to high (above average) inflation. |
| Keywords: | political instability; inflation; Pakistan |
| JEL: | E31 E63 |
| Date: | 2008–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13056&r=mon |
| By: | Ana Paula Ribeiro (CEMPRE and Faculdade de Economia, Universidade do Porto) |
| Abstract: | Although central banks often advocate labor market reforms, the latter may lead to higher stabilization costs in the presence of habit persistence in consumption. This is more likely to occur when strong habit persistence is coupled with an inflation-averse central bank. The presence of habit formation is a non-negligible assumption: theoretically, it is now a well-established device used in New-Keynesian models in order to be data-consistent with the response of real spending to several shocks. Moreover, estimates of habit formation are, according to the literature, quite large. To capture the interactions between monetary policy and structural reforms, our model improves on the one presented in Aguiar and Ribeiro (2008) by including a job matching process that introduces additional labor market features through which a labor market reform can operate. Within this framework, we assess, across different policy rules, how labor market institutional changes impinge on the effectiveness of monetary policy. We have concluded that labor market reform reduces central banks' losses, as long as the degree of habit persistence is not too strong; however, alternative reform devices impinge differently on monetary policy effectiveness. Moreover, the inflation targeting rule accommodates positive permanent effects from the reform for a wider range of habit persistence. Even when habit persistence is high, reform may still reduce stabilization costs if the importance of both demand and technology shocks is low relative to cost-push ones. |
| Keywords: | Monetary policy rules, Labor market reform, Labor market search and matching, New-Keynesian models |
| JEL: | E24 E37 E52 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:309&r=mon |
| By: | Edwin Le Heron (Sciences Po, Bordeaux, France) |
| Abstract: | Following the New Classical Macroeconomics and the New Keynesian Macroeconomics, the independence of central banks significantly increased after 1990, which could preclude the coordination between the fiscal and the monetary policies. The purpose of this paper is to consider the stabilizing effects of fiscal policy within the framework of the new monetary policies implemented by independent central banks.Firstly, we build a Post Keynesian stock-flow consistent (SFC) model with a private banks sector introducing more realistic features. New Keynesian Macroeconomics replaces the three equations of the Keynesian synthesis (IS-LM-Phillips Curve) by three new equations of the new consensus: an IS relation, a Taylor Rule and a New Keynesian Phillips Curve (IS-TR-NKPC). Our Post Keynesian SFC model replaces the IS relation. Secondly, we make simulations by imposing supply shocks (cost push) corresponding to an inflationary shock. The consequences are examined for two kinds of policy mix, for two countries: (i) For country (1), monetary policy is determined by a standard Taylor rule that corresponds to a dual mandate: output gap and inflation gap. Fiscal policy has a countercyclical effect. Broadly speaking, country (1) describes the United States. (ii) For country (2), monetary policy is determined by a ‘truncated’ Taylor rule that corresponds to a unique mandate: inflation gap only. Fiscal policy is neutralized, because we assume that the ratio of the current deficit of the Government (GD) on the GDP is constant and equal to zero, as imposed by the Maastricht Treaty. Broadly speaking, country (2) describes the European Union. |
| Keywords: | Monetary policy, fiscal policy, stock- flow consistent model, post-keynesian macroeconomics |
| JEL: | C15 E12 E31 E4 E52 E61 E62 G11 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2009-01&r=mon |
| By: | Kazuko Shirono |
| Abstract: | This paper examines the role of Japan against that of China in the exchange rate regime in East Asia in light of growing interest in forming a currency union in the region. The analysis suggests that currency unions with China tend to generate higher average welfare gains for East Asian countries than currency unions with Japan or the United States. Overall, Japan does not appear to be a dominant player in forming a currency union in East Asia, and this trend is likely to continue if China's relative presence continues to rise in the regional trade. |
| Keywords: | Exchange rate regimes , East Asia , Japan , China, People's Republic of , Currencies , Monetary unions , Trade , Economic cooperation , Economic models , Trade models , Data analysis , |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/3&r=mon |
| By: | John J. Seater (North Carolina State University, USA) |
| Abstract: | A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory. |
| Keywords: | Currency substitution, Dollarization |
| JEL: | E41 E42 E31 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200841&r=mon |
| By: | Craig S. Hakkio |
| Abstract: | This paper examines the dynamics of various measures of national, regional, and global inflation. The paper calculates the first two common factors for four measures of industrial country inflation rates: total CPI, core CPI, cyclical total CPI, and cyclical core CPI. The paper then demonstrates that the first common factor is sometimes helpful in forecasting national inflation rates. It also shows that the second common factor and the first common factor for cyclical inflation is sometimes helpful in forecasting national CPI inflation rates. Finally, the paper suggests that the commonality of industrial inflation rates reflects the commonality of the determinants of inflation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-01&r=mon |
| By: | Dubravko Mihaljek; Marc Klau |
| Abstract: | This paper estimates the Balassa-Samuelson effects for 11 countries in central and eastern Europe on a disaggregated set of quarterly data covering the period from the mid-1990s to the first quarter of 2008. The Balassa-Samuelson effects are clearly present and explain around 24% of inflation differentials vis-à-vis the euro area (about 1.2 percentage points on average); and around 84% of domestic relative price differentials between non-tradables and tradables; or about 16% of total domestic inflation (about 1.1 percentage points on average). The paper presents mixed evidence on whether the Balassa-Samuelson effects have declined since 2001 compared with the second half of the 1990s. |
| Keywords: | Balassa-Samuelson effect, productivity, inflation, transition, convergence, European monetary union, Maastricht criteria |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:270&r=mon |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Alain Kabundi (Department of Economics and Econometrics, University of Johannesburg) |
| Abstract: | This paper assesses the impact of monetary policy on real house price growth in South Africa using a factor-augmented vector autoregression (FAVAR), estimated based on a large data set comprising of 246 quarterly series over the period 1980:01 to 2006:04. The results based on the impulse response functions indicate that, in general, house price inflation responds negatively to monetary policy shock, but the responses are heterogeneous across the middle-, luxury- and affordable-segments of the housing market. The luxury-, large-middle- and medium-middle-segments are found to respond much more than the small-middle- and the affordable-segments of the housing market. More importantly, we find no evidence of the home price puzzle, observed previously by other studies that analyzed house prices using small-scale models. We put this down to the benefit gained from using a large information set. |
| Keywords: | Monetary Policy; Real House Price Growth; FAVAR |
| JEL: | C32 E52 R2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200905&r=mon |
| By: | Cornel Oros (Universit 0064e Poitiers, CRIEF,France) |
| Abstract: | Given a monetary Union which is heterogeneous at the level of labour market flexibility, this paper investigates the effects in terms of macroeconomic stabilization of the different degrees of fiscal coordination between governments. We use a static Keynesian model within a closed monetary Union and we introduce an intermediate level of coordination between the national governments, which is the variable geometry coordination between economic clubs consisting of structurally close countries. The distinction between the wide Unions welfare and each country members individual welfare proves that the effectiveness of a variable geometry fiscal coordination mainly depends on the type of the economic shocks affecting the Union members, the nature of the fiscal spillovers, and the extent of the Unions structural heterogeneity. While this type of game is effective in neutralizing the demand shocks, it doesnt manage to improve the national protection of all the country members against the supply shocks. |
| Keywords: | Economic policy, Macroeconomic stabilization, Fiscal coordination, Economic shocks, Structural heterogeneity |
| JEL: | E52 E58 E61 E62 E63 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200834&r=mon |
| By: | Tobias Adrian; Hyun Song Shin |
| Abstract: | In a market-based financial system, banking and capital market developments are inseparable, and funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Offering a window on liquidity, the balance sheet growth of broker-dealers provides a sense of the availability of credit. Contractions of broker-dealer balance sheets have tended to precede declines in real economic growth, even before the current turmoil. For this reason, balance sheet quantities of market-based financial intermediaries are important macroeconomic state variables for the conduct of monetary policy. |
| Keywords: | Intermediation (Finance) ; Liquidity (Economics) ; Brokers ; Economic indicators ; Financial institutions |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:360&r=mon |
| By: | Jean-Pierre Allegret (University of Lyon, France); Alain Sand-Zantman (University of Lyon, France) |
| Abstract: | This paper assesses the monetary consequences of the Latin-American integration process. Over the period 1991-2007, we analyze a sample of five Latin-American countries focusing on the feasibility of a monetary union between L.A. economies. To this end, we study the issue of business cycle synchronization with the occurrence of common shocks. First, we assess the international disturbances influence on the domestic business cycles. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries responses to shocks. |
| Keywords: | Business cycles, OCA, Bayesian VAR, Latin American countries |
| JEL: | C32 E32 F42 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200832&r=mon |
| By: | Kirsten Bonde Rørdam (Department of Economics, University of Copenhagen); Morten Linnemann Bech (Federal Reserve Bank of New York) |
| Abstract: | This paper presents the first topological analysis of Danish money market flows. We analyze the structure of two networks with different types of transactions. The first network is the money market network, which is driven by banks' behaviour on the interbank market, the second is the network of customer driven transactions, which is driven by banks' customers' transactions demand. We show that the structure of these networks differ. This paper adds to the new and growing literature on network topological analysis of payment systems. |
| Keywords: | network; topology; payment system; money market |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiefr:200901&r=mon |
| By: | Martin Lettau; Jessica A. Wachter |
| Abstract: | This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model. |
| JEL: | G12 G13 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14698&r=mon |