nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒03‒14
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Expected Monetary Policy and the Dynamics of Bank Lending Rates By Claudia Kwapil; Johann Scharler
  2. On the role of money growth targeting under inflation targeting regime By Dai, Meixing
  3. The monetary policy rules in EU-15: before and after the euro By Borek Vasicek
  4. Inflation Targets in a Monetary Union with Endogenous Entry By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  5. Out of reach? Convergence to an inflation target in the Central Bank of Iceland’s macroeconomic model By Baldursson, Fridrik M.; Hall, Axel
  6. Money, Infation and Interest Rate: Does the Link Change when the Policy Instrument Changes? By Castillo, Paul; Montoro, Carlos; Tuesta, Vicente
  7. Fiscal Policy in a Monetary Union in the Presence of Uncertainty about the Central Bank Preferences By Dai, Meixing; Sidiropoulos, Moise
  8. Do Asymmetric Central Bank Preferences Help Explain Observed Inflation Outcomes? By Matthew Doyle; Barry Falk
  9. On the dynamics of inflation persistence around the world By Antonio E. Noriega; Manuel Ramos Francia
  10. Monetary policy transparency and inflation persistence in a small open economy By Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
  11. Convergence of EMU Equity Portfolios By Giofré, Maela/M.
  12. Reset Price Inflation and the Impact of Monetary Policy Shocks By Mark Bils; Peter J. Klenow; Benjamin A. Malin
  13. Do Latin American Central Bankers Behave Non-Linearly?: The experiences of Brazil, Chile, Colombia and Mexico By Luiz de Mello; Diego Moccero; Matteo Mogliani
  14. Transparency under Flexible Inflation Targeting: Experiences and Challenges By Svensson, Lars E O
  15. Money, Credit and Default By Sandra Lizarazo; Jose Maria Da-Rocha
  16. Public debt and currency crisis: how central bank opacity can make things bad? By Dai, Meixing
  17. An Affine Model of the Term Structure of Interest Rates in Mexico. By Josué Fernando Cortés Espada; Manuel Ramos Francia
  18. Deforestation and Seigniorage in Developing Countries:Better Environment or Lower Inflation? By Jean-Louis COMBES; Pascale COMBES MOTEL; Alexandru MINEA; P. VILLIEU
  19. Bayesian Analysis of DSGE Models with Regime Switching By Eo, Yunjong
  20. A Note on the Dynamics of Persistence in US Inflation By Noriega Antonio E.; Ramos Francia Manuel
  21. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Wang, Wen-Yao; Hernandez-Verme, Paula
  22. Quantifying the Effect of Financial Conditions in the Euro Area, Japan, United Kingdom and United States By Stéphanie Guichard; David Haugh; David Turner
  23. Global Slack and Domestic Inflation Rates: A Structural Investigation for G-7 Countries By Fabio Milani
  24. The Value of Fiat Money with an Outside Bank: An Experimental Game By Juergen Huber; Martin Shubik; Shyam Sunder
  25. Real exchange rates and real interest rate differentials: a present value interpretation By Mathias Hoffmann; Ronald MacDonald
  26. Two speed Europe and business cycle synchronization in the European Union: The effect of the common currency By Gogas, Periklis; Kothroulas, George
  27. "The Activities of a Japanese Bank in the Interwar Financial Centers: A Case of the Yokohama Specie Bank" By Makoto Kasuya
  28. One Money, One Market: A Revised Benchmark By Theo Eicher; Christian Henn
  29. The Spanish economy in EMU: The first ten years By Ángel Estrada; Juan Francisco Jimeno; José Luis Malo de Molina
  30. Do Both U.S. and Foreign Macro Surprises Matter for the Intraday Exchange Rate? Evidence from Japan By Rasmus Fatum; Michael Hutchison; Thomas Wu
  31. The impact of a common currency on East Asian production networks and China's exports behvior By Rahman, Mizanur

  1. By: Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division, Otto-Wagner-Platz 3,POB 61, A-1011 Vienna, Austria); Johann Scharler (Department of Economics, University of Linz, Altenbergerstrasse 69, A-4040 Linz, Austria,)
    Abstract: In this paper we explore empirically to what extent expected monetary policy matters for the dynamics of bank lending rates in the U.S., the U.K. and Germany. We find that banks have increasingly behaved in a forward-looking fashion by taking expected changes in monetary policy rates into account when setting lending rates. We document that along with the shifts in monetary policy regimes towards inflation targeting, expected monetary policy has become more important as a determinant of bank lending rates. Overall, our results provide support for the hypothesis that monetary policy has become more effective by successfully influencing private sector expectations.
    Keywords: Monetary Policy, Expectations, Interest Rate Pass-Trough
    JEL: E52 E58
    Date: 2009–01–30
  2. By: Dai, Meixing
    Abstract: The mainstream inflation-targeting literature makes the strong assumption that the central bank can exactly target the interest rate which affects investment and consumption decisions and hence the money supply plays no role in the monetary policy strategy. This assumption is equivalent to admitting the perfect credibility of inflation target announced by the central bank, the perfect functioning of money and financial markets and that the central bank is willing to inject as much liquidity as the economic agents demand. Neither of these assumptions corresponds to the reality. In effect, the inflation expectations can not be easily anchored by the cheap talk of central bankers. On the other hand, the central bank may have many difficulties to target, in a context of financial instability, the interest rates which affect the real and financial decisions of private agents. We suggest that under inflation-targeting regime, money and credit markets vehicle the inflation expectations that can be anchored with a well-specified feedback money growth rule. The latter, in contrast to the Friedman’s k percent money growth rule, can help managing the inflation expectations in a manner to guarantee the dynamic stability of the economy. Furthermore, the model can be easily used to discuss the implications of the zero interest rate policy and the quantitative easing policy.
    Keywords: Interest rate rule; imperfect money and credit markets; inflation targeting; monetary targeting; inflation expectations; Friedman’s k percent money growth rule; feedback money growth rule; macroeconomic stability; zero interest rate policy; quantitative easing policy.
    JEL: E43 E51 E58 E52 E44
    Date: 2009–02–20
  3. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The objective of this paper is to identify empirically the logic behind short-term interest rates setting of: 1) the monetary authorities of the 15 EU countries before the launch of the European Monetary Union (EMU) and 2) the European Central Bank (ECB) and the central banks of the non-EMU participants since 1999. We find that the Taylor rule, based on the response to inflation and to the output gap, is a reasonable description of the interest rate setting for only a few economies. In addition, the foreign interest rate and the long-term interest rate are often crucial to explain short-term interest rate developments. On the contrary, the impact of other variables often proposed in the literature (exchange rates, monetary growth and asset prices) is negligible. The application of singleequation analysis to Euro area aggregate data to identify the ECB.
    Keywords: monetary policy, Taylor rule, European Monetary Union, panel data
    JEL: E52 E58
    Date: 2008–12
  4. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Jean-Christophe Poutineau (CREM (UMR 6211) Universite de Rennes 1 and Ecole Normale Superieure de Cachan, France.)
    Abstract: This paper shows that in a monetary union the interest rate rule of the Central Bank should react to the in°ation rate of the Harmonized Index of Consumption Price (HICP) rather than to the inflation rate of the Welfare-Based Consumption Price (WBCP). In a two{country general equilibrium model of the EMU with endogenous entry, we compare both monetary policy regimes and find that targeting the HICP inflation rate reduces the volatility of the Producer Price Index (PPI) in°ation rate and the volatility of the nominal .
    Keywords: monetary union, interest rate rule, harmonized index of consumption price
    JEL: E51 E58 F36 F41
    Date: 2009
  5. By: Baldursson, Fridrik M.; Hall, Axel
    Abstract: Inflation scenarios in forecasts of the Central Bank of Iceland (CBI) appear to converge to the inflation target (2.5%) in 8-9 quarters. We ask whether this is a coincidence or an inherent property of the CBI’s model, QMM. We formulate a sub-model, containing equations for inflation, inflation expectations, wages, exchange rate and the policy interest rate. We find that rapid convergence toward the inflation target is a property of the QMM when a Taylor-rule is included in the model. Underlying is an inflation expectations equation which assumes a high degree of credibility of the CBI. This equation, however, lacks empirical underpinnings. When we replace the QMM expectations equation with an estimated equation, a more realistic picture emerges where the Central Bank has to raise the policy rate considerably higher than in QMM scenarios and it takes much longer to reach the inflation target.
    Keywords: Inflation targeting; inflation forecasts; inflation expectations; macroeconomic models; credibility
    JEL: E27 E58 E52 E44
    Date: 2008–09
  6. By: Castillo, Paul (Banco Central de Reserva del Perú); Montoro, Carlos (Banco Central de Reserva del Perú); Tuesta, Vicente (Deutsche Bank)
    Abstract: The goal of this paper is to explain a recent regularity observed in economies in which central banks have moved from using a money aggregate as the instrument for the conduction of monetary policy towards a short-term interest rate (for example Peru in 2002). In particular, in those economies we observe that, after the change in the policy instrument, there is a decrease in the macroeconomic volatility accompanied by a reduction in the average level of both inflation and interest rates vis-à-vis an increase in the average level of money aggregates (an increase in the money demand). In order to explain the previous stylized fact, a second order solution of a general equilibrium model for a small open economy is evaluated. By analyzing the second order solution we relax the assumption of certainty equivalence which permits consider the role of uncertainty (risk) in the equilibrium solution of the economy. The previous solution takes into account the reduction of macroeconomic uncertainty (risk) as a consequence of changing the instrument (from money aggregates to interest rate rules), helping to explain the stylized fact. Our findings show that the use of the interest rate as the instrument for the conduction of monetary policy induces a reduction of macroeconomic risks. In turn, the previous reduction has driven a decrease in the average level of interest rates and inflation which is consistent with the increase in the demand for money observed in Peru in the 2000s. Hence, the recent increase in the growth rate of money aggregates should not be linked, whatsoever, to higher inflation rates.
    Keywords: Small Open Economy Model, Incomplete Markets, Second Order Solution
    JEL: E52 E42 E12 C63
    Date: 2009–01
  7. By: Dai, Meixing; Sidiropoulos, Moise
    Abstract: In this paper, we examine the link between political transparency of a common central bank (CCB) and decentralized supply-side fiscal policies in a monetary union. We find that the opacity of a conservative CCB has a restrictive effect on national fiscal policies since each government internalizes the influence of its actions on the common monetary policy and thus reinforces the disciplinary effect of institutional constraints such as the Stability and Growth Pact on national fiscal authorities. However, more opacity could imply higher inflation and unemployment when the union is large enough and induce higher inflation and output-gap variability. An enlargement of the union incites national governments to increase tax rate, and weakens the disciplinary effects of opacity on member countries if fiscal policymaking is relatively decentralized and the CCB quite conservative. It induces an increase in the level of inflation and unemployment, and could increase inflation and output-gap variability.
    Keywords: central bank transparency; supply-side fiscal policy; monetary union.
    JEL: E58 E52 E50 E63
    Date: 2008–06
  8. By: Matthew Doyle (Department of Economics, University of Waterloo); Barry Falk (Department of Economics, James Madison University)
    Abstract: When the central banker’s loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment does not help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.
    Keywords: Inflation, Monetary Policy, Asymmetric Loss Function.
    JEL: E50 E61
    Date: 2009–02
  9. By: Antonio E. Noriega; Manuel Ramos Francia
    Abstract: We study the dynamics of inflation persistence in 45 countries for the period 1960-2008. We use a nonparametric unit root test robust to nonlinearities, error distributions, structural breaks and outliers, many of them typical features of inflation data, and a test for multiple changes in persistence, which decomposes the sample information between adjacent I(0) and I(1) periods. We find that (1) With very few exceptions, inflation around the world rejects a unit root, (2) for several countries there is evidence of significant changes in persistence, (3) bursts and drops in the level of inflation and in inflation persistence tend to coincide, (4) these drops occurred during “the Great Moderation” and during the adoption of inflation targeting. We conclude that inflation is characterized by either a stationary behaviour throughout the sample, or by switches of the type I(0)-I(1)-I(0). For all countries in our sample, any indication of nonstationarity seems to be temporary.
    Keywords: Inflation, Multiple persistence change, Stationarity, Unit root tests, Unknown direction of change, Monetary policy
    JEL: C12 C22 E31 E52 E58
    Date: 2009–02
  10. By: Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
    Abstract: Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficient large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing the transparency.
    Keywords: Central bank’s transparency; open economy; inflation persistence; real exchange rate persistence.
    JEL: E58 E52 F41
    Date: 2008–12
  11. By: Giofré, Maela/M.
    Abstract: This paper demonstrates that, after integration, equity portfolios of countries that joined the European Monetary Union have converged at faster rate than those of NON EMU countries. This outcome canbe interpreted as a combination of the convergence of inflation rates and the convergence of investment barriers. On the one hand, the common monetary policy might have driven a stronger comovement in inflation rates, leading to increasingly similar hedging strategies among member countries. On the other hand, exposure to the common currency might have homogenized bilateral investment barriers, thus inducing increasingly similar portfolio allocations among member countries. We find that the comovement of inflation rates has not significantly increased after EMU inception, pointing toward an exclusive role for convergence in investment barriers.
    Keywords: financial integration; EMU; inflation hedging; investment barriers
    JEL: G11 F30 G15 F21 F36
    Date: 2008–12
  12. By: Mark Bils; Peter J. Klenow; Benjamin A. Malin
    Abstract: A standard state-dependent pricing model generates little monetary non-neutrality. Two ways of generating more meaningful real effects are time-dependent pricing and strategic complementarities. These mechanisms have telltale implications for the persistence and volatility of "reset price inflation." Reset price inflation is the rate of change of all desired prices (including for goods that have not changed price in the current period). Using the micro data underpinning the CPI, we construct an empirical measure of reset price inflation. We find that time-dependent models imply unrealistically high persistence and stability of reset price inflation. This discrepancy is exacerbated by adding strategic complementarities, even under state-dependent pricing. A state-dependent model with no strategic complementarities aligns most closely with the data.
    JEL: E31 E32 E52
    Date: 2009–03
  13. By: Luiz de Mello; Diego Moccero; Matteo Mogliani
    Abstract: This papers estimates unrestricted monetary reaction functions for four Latin American countries (Brazil, Chile, Colombia and Mexico) and tests for the presence of non-linear effects in central bank behaviour. The analysis covers the post-1999 inflation-targeting period. We deal with the presence of unit roots in the data by estimating the policy rules in a co-integration setting. We test for linear and non-linear co-integration among the variables of interest. The results suggest that a non-linear specification is not rejected by the data for Brazil, Colombia and Mexico, but it is for Chile. Estimation of smooth-transition models by NLLS and EN-NLLS suggests that the central bank’s response to the inflation gap (i.e. deviations of expected inflation from the target) is invariant across policy regimes in Colombia. It becomes stronger in Mexico as expected inflation deviates from the target. Policy responses appear to weaken in Brazil as the inflation gap widens, a finding that most probably reflects a history of adverse supply shocks and upward adjustments in targets in the early years of inflation targeting. Non-linearity is also found in the central bank’s response to the exchange rate in Brazil and Colombia.<P>Les banques centrales d’Amérique latine se comportent-elles d’une manière non-linéaire? : Les expériences du Brésil, du Chili, de la Colombie et du Mexique<BR>Ce document estime des fonctions de réaction monétaires non-contraintes pour quatre pays d’Amérique latine (Brésil, Chili, Colombie et Mexique) et teste l’existence d’effets non-linéaires dans le comportement des banques centrales. L’analyse couvre la période post-1999 où la politique monétaire se caractérise par le ciblage d’inflation. Nous traitons la question de la présence de racines unitaires dans les données en estimant les règles de politique monétaire dans un cadre de cointégration. Nous testons l’existence d’une cointégration linéaire et non-linéaire de nos variables d’intérêt. Les résultats suggèrent que la spécification non-linéaire ne peut être rejetée pour les données brésiliennes, colombiennes et mexicaines ; elle l’est en revanche dans le cas du Chili. L’estimation de modèles de transition douce par des NLLS et EN-NLLS suggère que la réponse de la banque centrale à la différence entre l’inflation espérée et la cible d’inflation ne change pas selon le régime de politique monétaire au Chili. Elle se durcit au Mexique lorsque l’inflation espérée s’éloigne de la cible. Les réponses semblent s'assouplir au Brésil lorsque la différence entre l’inflation espérée et la cible d’inflation s’accroît ; ce résultat est certainement dû à des chocs d’offre négatifs et à des ajustements à la hausse des cibles dans les premières années de politique monétaire à cible d’inflation. Nous trouvons aussi un effet non-linéaire de la réponse de la Banque centrale au taux de change au Brésil et en Colombie.
    Keywords: cible d'inflation, co-intégration multiple, inflation targeting, reaction function, fonction de réaction, non-linear co-integration, smooth-transition model, modèle de transition douce
    JEL: C22 E52 O54
    Date: 2009–03–06
  14. By: Svensson, Lars E O
    Abstract: I report some personal views and reflections on transparency experiences and transparency challenges following my first year and a half as Deputy Governor at Sveriges Riksbank regarding (1) flexible inflation targeting, (2) the role of transparency in inflation targeting and committee decisions on instrument-rate paths, (3) the management of interest-rate expectations, and (4) the publishing of attributed minutes. I also mention some future developments and improvements in transparency and flexible inflation targeting that I believe would be desirable.
    Keywords: Inflation targeting; interest rate path; transparency
    JEL: E42 E43 E52 E58
    Date: 2009–03
  15. By: Sandra Lizarazo (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Jose Maria Da-Rocha (Facultade de Ciencias Económicas e Empresariais, Universidade de Vigo)
    Abstract: This paper develops a quantitative model of unsecured debt, default, and money demand for heterogenous agents economies. The paper generates a theory of money demand for the case in which money is a dominate asset that is not needed to carry-out transactions. In this environment holding money helps the agents to smooth their consumption during those periods in which they are excluded from credit markets following a default in their debts. In the model the welfare of the individuals is affected by the inflation rate: high inflation rates preclude individuals of using money as an asset that helps them smooth their consumption profile but low inflation rates tend to make softer the punishment for default making it diffcult to sustain high levels of debt at equilibrium. This two opposite effects imply that in equilibrium the inflation rate that maximizes individuals welfare is positive but not too high.
    Keywords: Default, Inflation, Money, Endogenous Borrowing Constraint
    JEL: F34 F36 F42
    Date: 2009
  16. By: Dai, Meixing
    Abstract: This paper examines how the transparency in monetary policy decision can impact the likelihood of currency crisis in a simple open economy model with public debt. In the presence of opacity, it is found that if the debt is high, the government will devaluate and vice versa, and the self-fulfilling multiple equilibria solution disappears. Furthermore, the opacity reduces the threshold of public debt above which the government is considered as totally lacking the credibility in its pre-commitment to maintain fixed the exchange rate.
    Keywords: central bank transparency; public debt; currency crisis; speculative attack.
    JEL: F37 O23 E58 E52 F31
    Date: 2008–12
  17. By: Josué Fernando Cortés Espada; Manuel Ramos Francia
    Abstract: We develop and estimate an affine model that characterizes the dynamics of the term structure of interest rates in Mexico. Moreover, we provide empirical evidence on the relationship between the term structure factors and macroeconomic variables. First, we show that the model fits the data remarkably well. Second, we show that the first factor captures movements in the level of the yield curve, while the second factor captures movements in the slope of the curve. Third, the variance decomposition results show that the level factor accounts for a substantial part of the variance at the long end of the yield curve at all horizons. At short horizons, the slope factor accounts for much of the variance at the short end of the yield curve. Finally, we show that movements in the level of the yield curve are associated with movements in long-term inflation expectations, while movements in the slope of the curve are associated with movements in the short-term nominal interest rate.
    Keywords: No-Arbitrage, Latent Factors, Term-Structure
    JEL: C13 E43 G12
    Date: 2008–07
  18. By: Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Pascale COMBES MOTEL (Centre d'Etudes et de Recherches sur le Développement International); Alexandru MINEA; P. VILLIEU
    Abstract: The forest covers an important share of land area in many developing countries and represents an important source of revenue for governments. The other major contribution to government revenues comes from printing money, namely the seigniorage. Using a simple theoretical model, we show that tighter monetary policies exert a positive effect on deforestation rates. Consequently, there exists a substitution effect between deforestation rates and seigniorage. Empirical evidence for a panel of countries seems to support our theoretical conclusion. This finding sheds some new light on policies that limit seigniorage revenues, as for example IMF's low-inflation recommendations.
    Keywords: deforestation, developing countries, inflation, panel data analysis, seigniorage
    Date: 2009
  19. By: Eo, Yunjong
    Abstract: I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatility), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes’ rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidities. In addition, a model with regime switching policy that conforms to the long-run Taylor principle given in Davig and Leeper (2007) is preferred to a determinacy-indeterminacy model motivated by Lubik and Schorfheide (2004). These empirical results indicate that, even though a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s, the economy can be explained by determinacy over the entire postwar period, implying no role for sunspot shocks in explaining the changes in volatility.
    Keywords: New Keynesian DSGE; Markov-switching; Monetary Policy; Indeterminacy; Long-run Taylor Principle; Bayesian Analysis;
    JEL: C51 C32 E32 C52 E52 C11
    Date: 2008–08
  20. By: Noriega Antonio E.; Ramos Francia Manuel
    Abstract: Empirical research on the degree and stability of inflation persistence in the US has produced mixed results: some suggest high and unchanged persistence during the last few decades, while others argue in favor of a decline in persistence since the early 1980s. We show that post-WWII US inflation (monthly and quarterly) became highly persistent during the´Great Inflation´ period, and then switched back to a low persistence process during 1984, and has remained stationary until the present day.
    Keywords: Inflation, Multiple change in persistence, Stationarity, Great inflation.
    JEL: C12 C22 E31 E52
    Date: 2008–08
  21. By: Wang, Wen-Yao; Hernandez-Verme, Paula
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes.
    Keywords: Sudden stops; Exchange rate regimes; Multiple reserve requirements
    JEL: E31 E44 F41
    Date: 2009–03–05
  22. By: Stéphanie Guichard; David Haugh; David Turner
    Abstract: This paper constructs a broad measure of financial conditions for the United States, Japan, the Euro Area and the United Kingdom, by extending monetary condition indices which are traditionally used to gauge the impact of monetary policy on the economy. In addition to changes in the exchange rate and short and long interest rates, the change in credit availability, corporate bond spreads and household wealth are taken into account to gauge the evolution of financial conditions. Since the onset of the financial crisis, financial conditions have tightened by an unprecedented degree in the four countries/regions and this is evaluated to exert a major drag on activity.<P>Quantifier l’impact des conditions financières dans la Zone Euro, le Japon, le Royaume-Uni et les États-Unis<BR>Ce document propose une mesure des conditions financières au sens large pour les États-Unis, le Japon, la Zone Euro et le Royaume-Uni, en étendant les indices des conditions monétaires traditionnellement employés pour mesurer l’impact de la politique monétaire sur l’économie. En plus des variations du taux de change et des taux d’intérêt à court et long terme, l’évolution de la disponibilité du crédit, des primes de risques sur les obligations des sociétés et de la richesse des ménages sont prises en considération pour apprécier l’évolution des conditions financières. Depuis le début de la crise financière, le resserrement des conditions financières a attient un degré sans précédent dans les quatre pays/régions et ceci devrait peser fortement sur l’activité.
    Keywords: wealth effects, effet de richesse, financial conditions index, interest rate spreads, credit crunch, credit channel, macro-financial linkages, indice des conditions financières, écarts de taux d’intérêt, contraction du crédit, canal du crédit, relations macro-financières, monetary conditions index, indice des conditions monétaires
    JEL: E32 E44 E47 E51
    Date: 2009–03–09
  23. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of ``global", rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.
    Keywords: Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation
    JEL: E31 E50 E52 E58 F41
    Date: 2009–02
  24. By: Juergen Huber; Martin Shubik; Shyam Sunder
    Date: 2009–02–27
  25. By: Mathias Hoffmann; Ronald MacDonald
    Abstract: Although the real exchange rate - real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral U.S. real exchange rate data spanning the period 1978 to 2007. Instead of testing one particular model, we build on Campbell and Shiller (1987) to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.
    Keywords: Real Exchange Rates, Real Interest Rates, Present Value Model.
    JEL: E43 F31 F41
    Date: 2009–02
  26. By: Gogas, Periklis; Kothroulas, George
    Abstract: The purpose of this paper is to examine the effectiveness of the policies and procedures towards economic convergence between the countries that participated in the European Exchange Mechanism I and which are now members states of the Eurozone. The question is whether the introduction of the common currency has led to more synchronisation of the business cycles of member states or it has acted as the monetary ground for the creation of a multi-speed Europe that includes economies that bear little resemblance in terms of their basic economic features and figures and especially with respect to the fluctuations in their Gross Domestic Product. The empirical analysis is done through the use of linear regressions, the estimation of the correlation coefficient, and also a proposed sign concordance index (SCI). The results provide evidence that the synchronisation of the cycles seem to become weaker since the adoption of the new currency. Especially for G6, the group of the smaller regional economies, the results are consistent throughout all three methodologies used and for both groups of countries’ cycles used as a comparison base, the broad EU15 and the narrow G3.
    Keywords: Business Cycle; Synchronization; Eurozone.
    JEL: E32 E42 E52
    Date: 2009–02
  27. By: Makoto Kasuya (Faculty of Economics, University of Tokyo)
    Abstract: This paper aims to analyze the role of a branch of a Japanese bank in the internationals financial centers and its change during the Interwar period. Branches of international exchange banks generally buy bills for goods exported from where they exist, to collect bills for goods imported to where they exist, and to transfer funds with other branches. In addition to these "ordinary" businesses branches in the international financial centers raise funds by selling bills there or by borrowing money from other banks, to makes investments for securing reserves, and to advise letters of credit issued by large banks there. This paper sheds light on these activities of the Yokohama Specie Bank, which was the largest international exchange bank in Japan before the Second World War and shows that branches in London and New York facilitated the flow of funds within the bank. The Interwar period saw significant change in international money flow as New York grew to an international financial center, which was as important as London and also saw the Great Depression and international conflicts after that. This paper analyzes how businesses of the two branches changed in order to cope with turbulence in the financial markets.
    Date: 2009–01
  28. By: Theo Eicher; Christian Henn
    Abstract: The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose’s (2000) initial estimates suggested a tripling of trade and created a literature in search of “more reasonable” CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30–90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose’s original benchmark, extend the dataset, and address Baldwin’s (2006) critiques of gravity implementation in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.
    Date: 2009–03
  29. By: Ángel Estrada (Banco de España); Juan Francisco Jimeno (Banco de España); José Luis Malo de Molina (Banco de España)
    Abstract: This paper has been prepared to mark the tenth anniversary of Economic and Monetary Union (EMU). It seeks to give an overview of the Spanish economy’s experience in this new institutional setting. It should be viewed as the result of a joint effort by a sizeable group of researchers from the Banco de España Directorate General Economics, Statistics and Research to rationalise the implications of a structural change on this scale. To do this, the paper firstly defines the starting conditions of the Spanish economy, at the time when there was only a commitment to join the Monetary Union as a founding member; in this connection, it sets out the advantages of belonging to the euro area versus the possibility of having remained outside it. Next, it describes the main transformations made in converting this commitment into reality. Further, it reviews developments in the economic variables that best document the main events of the past decade, focusing both on the factors underpinning the expansion and the headway in convergence, and on the imbalances that triggered the start of the adjustment, and assesses the scope of these imbalances. Finally, it describes the basic features of the process of adjustment towards a new path of sustained economic growth, emphasising the difficulties added by the superimposition of the international financial crisis.
    Keywords: Spanish economy, EMU, international financial crisis
    JEL: E58 E66 F33
    Date: 2009–02
  30. By: Rasmus Fatum (University of Alberta); Michael Hutchison (University of California, Santa Cruz); Thomas Wu (University of California, Santa Cruz)
    Abstract: We investigate the effects of both U.S. and Japanese news surprises, measured as the difference between macroeconomic announcements and preceding survey expectations, on the intraday JPY/USD exchange rate. No previous study has considered the intraday JPY/USD exchange rate responses to a broad set of comparable news surprises from both the U.S. and Japan. We show that news surprises from Japan are as influential as those from the U.S. in moving 5-minute JPY/USD exchange rate returns and, therefore, focusing on U.S. news while disregarding foreign news misses half the story. Our results also show that distinguishing between positive and negative news surprises and the state of the Japanese business cycle is important in understanding the link between exchange rates and news.
    Keywords: Foreign Exchange Rates; Intraday Data; Macroeconomic News Effects
    JEL: F31 G15 C22
    Date: 2008–11
  31. By: Rahman, Mizanur
    Abstract: Vertical fragmentation of product value chain across borders is the driving force of growing economic interdependency in East Asia. A common currency, not flexible exchange rates between national currencies, would reduce flexibility in relative prices within East Asia. Its impact would be far greater for exports that have stronger production network linkage. In order to test the hypothesis, the paper estimates the effect of a common currency on China’s processing and ordinary exports separately. The distinction is necessary because the processing exports, unlike the ordinary exports, are produced along the regional production networks, with final stages of assembly and exporting being increasingly concentrated in China. The short-run dynamics indicate that the effect on China’s processing exports is more than double the corresponding effect on China’s ordinary exports. The long-run effect on the processing exports of intra-regional RER flexibility, which is otherwise the lack of a regional currency, is almost nine times as large as the long-run effect of a unilateral RMB appreciation. By contrast, the corresponding long-run effect is statistically insignificant for the case of ordinary exports that are produced primarily by using local inputs. The long-run coefficient of this intra-regional RER flexibility implies that the actual volume of processing exports is 20 percent below the potential. The magnitudes of these effects are consistent with the hypothesis that a common currency would further integrate East Asian production networks and promote regional economic integration.
    Keywords: Production networks; fragmentation of value chain; optimum currency area; common currency; exchange rate flexibility; China
    JEL: F15 F42 F32 F14 F33 C33
    Date: 2008–03–17

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