nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒03‒07
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. A Note on Regime Switching, Monetary Policy, and Multiple Equilibria By Jess Benhabib
  2. Taylor Rules and the Euro By Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
  3. Fixed and variable-rate mortgages, business cycles and monetary policy By Margarita Rubio
  4. A Macroeconomic Model of the Term Structure of Interest Rates in Mexico. By Josué Fernando Cortés Espada; Manuel Ramos Francia
  5. Optimal Policy under Commitment and Price Level Stationarity By Gino Cateau
  6. QMM. A Quarterly Macroeconomic Model of the Icelandic Economy By Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir
  7. Fiat money and the value of binding portfolio constraints By Páscoa, Mário R.; Petrassi, Myrian; Torres-Martínez, Juan Pablo
  8. International Evidence on Stochastic and Deterministic Monetary Neutrality. By Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
  9. An Empirical Analysis of the Mexican Term Structure of Interest Rates. By Josué Fernando Cortés Espada; Alberto Torres García; Manuel Ramos Francia
  10. Expectations, learning and policy rule By Michele Berardi
  11. Sticky information vs. Backward-looking indexation: Inflation inertia in the U.S. By Carrillo Julio A.
  12. Can Open Capital Markets Help Avoid Currency Crises? By Gus Garita; Chen Zhou
  13. What Institutional Structure for the Lender of Last Resort? By Itai Agur
  14. Cigarette Money and Black Market Prices around the 1948 German Miracle By Vincent Bignon

  1. By: Jess Benhabib
    Abstract: When monetary policy is subject to regime switches conditions for determinacy become more complex. Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009a) have studied such conditons. Using some new results from stochastic processes, we characterize the moments of the stationary distribution of inflation under regime switiching to obtain conditions for indeterminacy that can be easily checked and interpreted in terms of expected values of Taylor coefficients. In the last section, we outline methods to compute the moments of stationary distributions in regime switching models of higher dimensions.
    JEL: E31 E43 E52
    Date: 2009–03
  2. By: Tanya Molodtsova; Alex Nikolsko-Rzhevskyy; David H. Papell
    Abstract: This paper uses real-time data to show that inflation and either the output gap or unemployment, the variables which normally enter central banks’ Taylor rules for interest-rate-setting, can provide evidence of out-of-sample predictability and forecasting ability for the United States Dollar/Euro exchange rate from the inception of the Euro in 1999 to the end of 2007. We also present less formal evidence that, with real-time data, the Taylor rule provides a better description of ECB than of Fed policy during this period. The strongest evidence is found for specifications that neither incorporate interest rate smoothing nor include the real exchange rate in the forecasting regression, and the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the U.S. and the Euro Area. The evidence is stronger with inflation forecasts than with inflation rates and with real-time data than with revised data. Bad news about inflation and good news about real economic activity both lead to out-of-sample predictability and forecasting ability through forecasted exchange rate appreciation.
    Date: 2009–02
  3. By: Margarita Rubio (Banco de España)
    Abstract: The aim of this paper is twofold. First, I study how the proportion of fixed and variable-rate mortgages in an economy can affect the way shocks are propagated. Second, I analyze optimal implementable simple monetary policy rules and the welfare implications of this proportion. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given proportion of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. The model predicts that in an economy with mostly variable-rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed-rate economy. Aggregate effects are also larger for the variable-rate economy. For plausible parametrizations, differences are muted by wealth effects on labor supply and by the presence of savers. More persistent shocks, such as inflation target and technology shocks, cause larger aggregate differences. From a normative perspective I find that, in the presence of collateral constraints, the optimal Taylor rule is less aggressive against inflation than in the standard sticky-price model. Furthermore, for given monetary policy, a high proportion of fixed-rate mortgages is welfare enhancing.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, housing market, collateral constraint
    JEL: E32 E44 E52
    Date: 2009–02
  4. By: Josué Fernando Cortés Espada; Manuel Ramos Francia
    Abstract: This paper investigates how different macroeconomic shocks affect the term-structure of interest rates in Mexico. In particular, we develop a model that combines a no-arbitrage specification of the term structure with a macroeconomic model of a small open economy. We find that shocks that are perceived to have a persistent effect on inflation affect the level of the yield curve. The effect on medium and long-term yields results from the increase in expected future short rates and in risk premia. With respect to demand shocks, our results show that a positive shock leads to an upward flattening shift in the yield curve. The flattening of the curve is explained by both the monetary policy response and the time-varying term premia.
    Keywords: Term-Structure, No-Arbitrage, Macroeconomic Shocks.
    JEL: C13 E43 G12
    Date: 2008–07
  5. By: Gino Cateau
    Abstract: This paper proposes a simple analytical method to determine the stationarity of an unnormalized variable from the solution to a normalized model i.e. a model whose variables must be expressed in relative terms or must be differenced for a solution to exist. The paper then applies the method to answer a question of interest to policy-makers: does optimal policy under commitment lead to stationarity in the price level? Unlike Gaspar, Smets, and Vestin (2007), the paper finds that optimal policy under commitment does not lead to price level stationarity in the Smets and Wouters (2003) model.
    Keywords: Monetary policy framework
    JEL: E52 E58
    Date: 2009
  6. By: Ásgeir Daníelsson; Magnús F. Gudmundsson; Svava J. Haraldsdóttir; Thorvardur T. Ólafsson; Ásgerdur Ó. Pétursdóttir; Thórarinn G. Pétursson; Rósa Sveinsdóttir
    Abstract: This paper documents and describes Version 2.0 of the Quarterly Macroeconomic Model of the Central Bank of Iceland (QMM). QMM and the underlying quarterly database have been under construction since 2001 at the Research and Forecasting Division of the Economics Department at the Bank and was first implemented in the forecasting round for the Monetary Bulletin 2006.1 in March 2006. QMM is used by the Bank for forecasting and various policy simulations and therefore plays a key role as an organisational framework for viewing the medium-term future when formulating monetary policy at the Bank. This paper is mainly focused on the short and medium-term properties of QMM. Steady state properties of the model are documented in a paper by Daníelsson (2009).
    Date: 2009–02
  7. By: Páscoa, Mário R.; Petrassi, Myrian; Torres-Martínez, Juan Pablo
    Abstract: We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.
    Keywords: Binding credit constraints; Fundamental value of money; Asset pricing bubbles.
    JEL: C61 E44
    Date: 2009–03
  8. By: Antonio E. Noriega; Luis M. Soria; Ramón Velázquez
    Abstract: We analyze the issue of the impact of multiple breaks on monetary neutrality results, using a long annual international data set. We empirically verify whether neutrality propositions remain addressable (and if so, whether they hold or not), when unit root tests are carried out allowing for multiple structural breaks in the long-run trend function of the variables. It is found that conclusions on neutrality are sensitive to the number and location of breaks. In order to interpret the evidence for structural breaks, we introduce a notion of deterministic monetary neutrality, which naturally arises in the absence of permanent stochastic shocks to the variables.
    Keywords: Deterministic and Stochastic Neutrality and Superneutrality of Money, Unit Roots, Structural Breaks, Resampling Methods
    JEL: C15 C32 E51 E52
    Date: 2008–04
  9. By: Josué Fernando Cortés Espada; Alberto Torres García; Manuel Ramos Francia
    Abstract: We study the dynamics of the term-structure of interest rates in Mexico. Specifically, we investigate time variation in bond risk premia and the common factors that have influenced the behavior of the yield curve. We find that term-premia in government bonds appear to be time-varying. We then estimate a principal components model. We find that over 95% of the total variation in the yield curve can be explained by two factors. The first factor captures movements in the level of the yield curve, while the second one captures movements in the slope. Moreover, we find that the level factor is positively correlated with measures of long-term inflation expectations and that the slope factor is negatively correlated with the overnight interest rate.
    Keywords: Term-Structure, Time-Varying Risk Premia, Principal Components
    JEL: C13 E43 G12
    Date: 2008–07
  10. By: Michele Berardi
    Abstract: The optimal discretionary policy rule in the New Keynesian forwardlooking model under the hypothesis of rational expectations responds only to fundamental shocks. This leads to indeterminacy of equilibria and E-unstability of the MSV REE. The outcome can be improved by responding to private expectations. This requires the Central Bank to be able to observe those expectations, or to precisely estimate them. It has also been shown in the literature that when the private sector doesn’t have RE and instead is trying to learn the structure of the economy from data, the policymaker should implement a more aggressive policy. In light of these considerations, we ask how a policymaker that responds only to fundamental shocks should change its response when private expectations depart from rationality. In addition, we show that a policy rule that adeguately takes into account the learning process of agents while responding only to fundamentals can obtain the same results as an expectations based policy rule.
    Date: 2009
  11. By: Carrillo Julio A. (METEOR)
    Abstract: This paper compares two approaches towards the empirical inertia of inflation and output. Two variants that produce persistence are added to a baseline DSGE model of sticky prices: 1) sticky information applied to firms, workers, and households; and 2) a backward-looking inflation indexation along with habit formation. The rival models are then estimated using U.S. data in order to determine their plausibility. It is shown that the sticky information model is better at predicting inflation, wage inflation, and the degree of price stickiness. Output dynamics, however, are better explained by habit persistence.
    Keywords: macroeconomics ;
    Date: 2009
  12. By: Gus Garita; Chen Zhou
    Abstract: By proposing a measure for cross-market rebalancing effects, we provide new insights into the different sources of currency crises. We address three interrelated questions: (i) How can we best capture contagion; (ii) Is the contagion of currency crisis a regional or global phenomenon?; and (iii) By controlling for “cross-market rebalancing” do other mechanisms like "financial openness" increase the probability of a currency crisis? We introduce the concept of conditional probability of joint failure (CPJF) to measure the linkages of currency crisis intra- and inter-regionally. From estimating this measure, we test for contagion and conclude that contagion only exists regionally. Furthermore, we construct a “cross-market rebalancing” variable based on the regional CPJF. By employing a probit model to compare our new variable with a regular contagion variable often used in literature, we conclude that our new variable captures contagion better; moreover, it also captures cross-market rebalancing effects. When we properly account for these effects, then financial openness helps to diminish the probability of a currency crisis even after controlling for the onset of a banking crisis. We also show that monetary policy geared towards price stability reduces the probability of a currency crisis.
    Keywords: Crisis; Contagion; Cross-Market Rebalancing; Exchange Market Pressure; Extreme Value Theory; Financial Integration.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  13. By: Itai Agur
    Abstract: This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization. 
    Keywords: Lender of Last Resort; Bailout; Delegation; Contagion; Centralization
    JEL: D82 G21
    Date: 2009–02
  14. By: Vincent Bignon
    Abstract: This paper is an empirical study of the distribution of black prices among 120 Bavarian locations at two dates, the beginning of July, 1947 and the end of June, 1948. It shows huge differences in the liquidity of those goods either when measured with the coefficient of variation or the number of locations in which those goods were traded. The main finding is that liquidity of cigarette was very high either when measured by the coefficient of variation and or the number of counties that traded them. This made them special, even when compared with a pure fiat object such as the US dollar. Consistently with the insights of the modern theory of money, the high liquidity of cigarettes is indicative of its use as money.
    Date: 2009

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