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on Monetary Economics |
| By: | Andreas Beyer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Vitor Gaspar (Banco de Portugal, Special Adviser, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal.); Christina Gerberding (Deutsche Bundesbank, Monetary Policy and Analysis Division, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt am Main, Germany.); Otmar Issing (Centre for Financial Studies, Goethe University Frankfurt, Mertonstrasse 17-25, D-60325 Frankfurt am Main, Germany.) |
| Abstract: | During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time. JEL Classification: E31, E32, E41, E52, E58. |
| Keywords: | Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901020&r=mon |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christophe Kamps (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | To the best of our knowledge, our paper is the first systematic study of the predictive power of monetary aggregates for future inflation for the cross section of New EU Member States. This paper provides stylized facts on monetary versus non-monetary (economic and fiscal) determinants of inflation in these countries as well as formal econometric evidence on the forecast performance of a large set of monetary and non-monetary indicators. The forecast evaluation results suggest that, as has been found for other countries before, it is difficult to find models that significantly outperform a simple benchmark, especially at short forecast horizons. Nevertheless, monetary indicators are found to contain useful information for predicting inflation at longer (3-year) horizons. JEL Classification: C53, E31, E37, E51, E52, E62, P24 |
| Keywords: | Inflation forecasting, leading indicators, monetary policy, information content of money, fiscal policy, New EU Member States |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901015&r=mon |
| By: | Bianchi, Francesco (Princeton University); Mumtaz, Haroon (Bank of England); Surico, Paolo (Bank of England) |
| Abstract: | This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis. |
| Keywords: | Term structure; time-varying VAR; Bayesian estimation |
| JEL: | E50 E58 |
| Date: | 2009–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0363&r=mon |
| By: | Kozo Ueda (Institute for Monetary and Economic Studies, Deputy Director and Economist, Bank of Japan (Email: kouzou.ueda @boj.or.jp)) |
| Abstract: | In this paper, we investigate the determinants of households' inflation expectations in Japan and the United States. We estimate a vector autoregression model in which the four endogenous variables are inflation expectations, inflation, the short-term nominal interest rate and the output gap, with energy prices and (fresh) food prices being exogenous. Short-term nonrecursive restrictions are imposed taking account of simultaneous codependence between realized inflation and expected inflation. We find, first, that responding not only to changes in energy prices and food prices but also to monetary policy shocks, inflation expectations adjust more quickly than does realized inflation. This explains why Japanese and US data indicate that inflation expectations lead realized inflation. Second, the effects of changes in energy prices and food prices on inflation and inflation expectations are large in the short run in Japan, while in the United States, they are not only large but also long lasting. Third, shocks to expectations occasionally fluctuate greatly, and can have self-fulfilling effects on realized inflation. The self-fulfilling property is more apparent in the United States than in Japan. |
| Keywords: | expected inflation, structured vector autoregression, monetary policy |
| JEL: | C32 E31 E52 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-08&r=mon |
| By: | Helge Berger; Thomas Harjes |
| Abstract: | Global excess liquidity is sometimes believed to limit sovereign monetary policy even in large economies, including the euro area. There is much discussion about what constitutes global excess liquidity and our approach adjusts liquidity for longer-term interest rate and output effects. We find that especially excess liquidity in the U.S. leads developments in euro area liquidity. U.S. excess liquidity also enters consistently positive as a determinant of euro area inflation. There is some evidence that this result may be related to a weakening of the effectiveness of monetary policy in the euro area during times of excessive U.S. liquidity. |
| Keywords: | Excess liquidity , Europe , Euro Area , United States , Japan , Monetary policy , Interest rates , Inflation , |
| Date: | 2009–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/17&r=mon |
| By: | Nicoletta Batini; Paul Levine; Joseph Pearlman |
| Abstract: | We develop a optimal rules-based interpretation of the 'three pillars macroeconomic policy framework': a combination of a freely floating exchange rate, an explicit target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies. The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions It is calibrated using Chile and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules alongside a 'Structural Surplus Fiscal Rule' as followed recently in Chile. A comparison with a fixed exchange rate regime is made. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy. |
| Keywords: | Emerging markets , External shocks , Monetary policy , Interest rate policy , Fiscal policy , Economic models , |
| Date: | 2009–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/22&r=mon |
| By: | Sandra Eickmeier (Deutsche Bundesbank, Economic Research Center, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Katharina Moll (Goethe-Universität Frankfurt am Main, D-60054 Frankfurt am Main, Germany.) |
| Abstract: | We examine the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a traditional Phillips curve framework. We decompose output gaps and changes in unit labor costs into common (or global) and idiosyncratic components using a factor analysis and introduce these components separately in the regression. Unlike previous studies, we allow global forces to affect inflation through (the common part of) domestic demand and supply conditions. Our most important result is that the common component of changes in unit labor costs has a notable impact of inflation. We also find evidence that movements in import price inflation affect CPI inflation while the impact of movements in the common component of the output gap is unclear. A counterfactual experiment illustrates that the common component of unit labor cost changes and non-commodity import price inflation have held down overall inflation in many countries in recent years whereas commodity import price inflation has only raised the short-run volatility of inflation. In analogy to the Phillips curves, we estimate monetary policy rules with common and idiosyncratic components of inflation and the output gap included separately. Central banks have indeed reacted to the global components. JEL Classification: E31, F41, C33, C50. |
| Keywords: | Inflation, globalization, Phillips curves, factor models, monetary policy rules. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901011&r=mon |
| By: | Ippei Fujiwara (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara @boj.or.jp)); Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp)) |
| Abstract: | This paper investigates the implications for monetary policy of financial markets that are internationally integrated but have intrinsic frictions. When there is no other distortion than financial market imperfections in the form of staggered international loan contracts, financial stability, which here constitutes eliminating the inefficient fluctuations of loan premiums, is the optimal monetary policy in open economies, regardless of whether policy coordination is possible. Yet, the optimality of inward-looking monetary policy requires an extra condition, in addition to those included in previous studies on the optimal monetary policy in open economies. To make allocations between cooperative and noncooperative monetary policy coincide, the exchange rate risk must be perfectly covered by the banks. Otherwise, each central bank has an additional incentive to control the nominal exchange rate to favor firms in her own country by reducing the exchange rate risk. |
| Keywords: | optimal monetary policy, policy coordination, global banking, international staggered loan contracts |
| JEL: | E50 F41 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-09&r=mon |
| By: | Alexander L. Wolman |
| Abstract: | The relative prices of different categories of consumption goods have been trending over time. Assuming they are exogenous with respect to monetary policy, these trends imply that monetary policy cannot stabilize the prices of all consumption categories. If prices are sticky, monetary policy then must trade off relative price distortions within different categories of consumption. Optimally, more weight should be placed on stabilizing goods and services prices that are less flexible. Calibrating a simple stickyprice model to U.S. data, we find that slight deflation is optimal, even absent transactions frictions leading to a demand for money. Optimality of deflation derives from the fact that relative prices have been trending up for services, whose nominal prices seem to be less flexible. |
| Keywords: | Inflation (Finance) ; Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:09-02&r=mon |
| By: | Mangal Goswami; Andreas Jobst; Xin Long |
| Abstract: | Policy-makers have attributed the scale of the credit crisis and its profound impact on money markets (as well as financial sector stability) to the fast rise of securitization and the way it has arguably complicated both the conduct of monetary policy and the effect of interest rate transmission to the real economy. In our study, we examine whether financial innovation, specifically through securitization, has altered the nature of some macro-financial linkages, often with considerable policy implications. We find that securitization activity in the United States (mature market) and South Africa (emerging market) has indeed dampened the interest rate elasticity of real output via the balance sheet channel (while decreasing the interest rate pass-through from policy rates to market rates). That being said, current reservations about securitization do not invalidate the fact that securitization activity helps cushion the immediate impact of interest rate shocks to loan origination, which might be particularly effective in EM countries where poorly developed capital markets provide few alternatives to bank lending. |
| Keywords: | Monetary policy , United States , South Africa , Securities markets , Money markets , Capital markets , Market interest rates , Emerging markets , Economic models , Cross country analysis , |
| Date: | 2009–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/26&r=mon |
| By: | Lodewyk Erasmus; Jules Leichter; Jeta Menkulasi |
| Abstract: | Liberia's experience with a dual currency regime, with the U.S. dollar enjoying legal tender status, dates to its founding as a sovereign country in 1847. Following the end of the most recent episode of civil war in late-2003, the new government has expressed interest in strengthening the role of the Liberian dollar. Liberia, however, is heavily dollarized, with the U.S. dollar estimated to account for about 90 percent of money supply. Cross-country experience suggests that dollarization does not preclude monetary policy from achieving its primary objective of price stability, and that successful and lasting dedollarization may be difficult to achieve. |
| Keywords: | Dollarization , Liberia , Dual exchange rates , U.S. dollar , Liberian dollar , Money supply , Monetary policy , Price stabilization , Cross country analysis , |
| Date: | 2009–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/37&r=mon |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Over the last two centuries, the cross-spectral coherence between either narrow or broad money growth and inflation at the frequency ω=0 has exhibited little variation–being, most of the time, close to one–in the U.S., the U.K., and several other countries, thus implying that the fraction of inflation’s long-run variation explained by long-run money growth has been very high and relatively stable. The cross-spectral gain at ω=0, on the other hand, has exhibited significant changes, being for long periods of time smaller than one. The unitary gain associated with the quantity theory of money appeared in correspondence with the inflationary outbursts associated with World War I and the Great Inflation–but not World War II–whereas following the disinflation of the early 1980s the gain dropped below one for all the countries and all the monetary aggregates I consider, with one single exception. I propose an interpretation for this pattern of variation based on the combination of systematic velocity shocks and infrequent inflationary outbursts. Based on estimated DSGE models, I show that velocity shocks cause, ceteris paribus, comparatively much larger decreases in the gain between money growth and inflation at ω=0 than in the coherence, thus implying that monetary regimes characterised by low and stable inflation exhibit a low gain, but a still comparatively high coherence. Infrequent inflationary outbursts, on the other hand, boost both the gain and coherence towards one, thus temporarily revealing the one-for-one correlation between money growth and inflation associated with the quantity theory of money, which would otherwise remain hidden in the data. JEL Classification: E30, E32. |
| Keywords: | Quantity theory of money, inflation, frequency domain, cross-spectral analysis, band-pass filtering, DSGE models, Bayesian estimation, trend inflation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901027&r=mon |
| By: | Fan, Longzhen (School of Management, Fudan University); Johansson, Anders C. (China Economic Research Center) |
| Abstract: | Recent research shows that bond yields are influenced by monetary policy decisions. To learn how this works in an interest rate market that differs significantly from that of the U.S. and Europe, we model Chinese bond yields using the one-year deposit rate as a state variable. We also add the difference between the one-year interest rate and the one-year deposit rate as a factor. The model is developed in an affine framework and closed-form solutions are obtained. It is tested empirically and the results show that the new model characterizes the changing shape of the yield curve well. Incorporating the benchmark rate into the model thus helps us to match Chinese bond yields. |
| Keywords: | China; deposit rate; bond yields; jump process; affine model |
| JEL: | E43 E44 E52 E58 |
| Date: | 2009–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2009-003&r=mon |
| By: | Mumtaz, Haroon (Bank of England); Zabczyk, Pawel (Bank of England); Ellis, Colin (Daiwa Securities SMBC Europe Ltd) |
| Abstract: | This paper uses a factor-augmented vector autoregression technique to examine the role that macroeconomic and sector-specific factors play in UK price fluctuations at the aggregate and disaggregated levels. Macroeconomic factors are less important for disaggregated prices than aggregate ones. There also appears to be significant aggregation bias - the persistence of aggregate inflation series is much higher than the underlying persistence across the range of disaggregated price series. Our results suggest that monetary policy affects relative prices in the short to medium term, and that the degree of competition within industries plays a role in determining pricing behaviour. |
| Keywords: | Inflation persistence; disaggregation; principal components |
| JEL: | C30 D40 E31 E52 |
| Date: | 2009–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0364&r=mon |
| By: | Dean Baker; Matthew Sherman |
| Abstract: | This study produces calculations of the amount of money being dispersed by the government to the 16 primary dealers and investment banks who qualify to borrow through the special lending facilities created in the last year by the Federal Reserve Board under the assumption that each borrows in proportion to its assets. The study then uses Fed data on the interest rate charged for loans from these lending facilities to calculate the potential subsidy in this lending. The report calls attention to the fact that few details have been given about the specific loan amounts, recipients, or collateral posted. |
| JEL: | G G2 G24 G28 H H2 H25 E E5 E58 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2009-10&r=mon |
| By: | Herman Kamil; Benedict J. Clements |
| Abstract: | This paper assesses the effects of capital controls imposed in Colombia in 2007 on capital flows and exchange rate dynamics. The results suggest that the controls were successful in reducing external borrowing, but had no statistically significant impact on the volume of non- FDI flows as a whole. We find no evidence that restrictions to capital mobility moderated the appreciation of Colombia's currency, or increased the degree of independence of monetary policy. We also find that controls have significantly increased the volatility of the exchange rate. Additional research is needed to assess the effects of capital controls on financial stability. |
| Keywords: | Capital controls , Colombia , Capital flows , Exchange rate appreciation , Exchange rate developments , Emerging markets , Economic models , |
| Date: | 2009–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/30&r=mon |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jens Tapking (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Unsecured interbank money market rates such as the Euribor increased strongly with the start of the financial market turbulences in August 2007. There is clear evidence that these rates reached levels that cannot be explained alone by higher credit risk. This article presents this evidence and provides a theoretical explanation which refers to the funding liquidity risk of lenders in unsecured term money markets. JEL Classification: G01, G10, G21. |
| Keywords: | Liquidity premium, interbank money markets, unsecured lending, 2007/2008 financial market turmoil. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901025&r=mon |
| By: | Rasmus Fatum (University of Alberta (4-30H Business Building, University of Alberta, Edmonton AB, T6G 2R6 Canada. Telephone: 1-780-492- 3951, fax: 1-780-492-3325, email: rasmus.fatum@ualberta.ca)) |
| Abstract: | This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective. By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on through which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works. The results suggest that Japanese intervention is effective during the first 5 years of the sample and ineffective during the last 3 months of the sample, thereby providing an ex-post rationale for why Japan intervened as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio-balance channel. The results do not rule out that effective intervention also works through signaling. |
| Keywords: | Exchange Rates, Foreign Exchange Market Intervention, Channels of Transmission |
| JEL: | E52 F31 G14 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:09-e-12&r=mon |
| By: | Nada Oulidi; Alain Ize |
| Abstract: | Determinants of central banks' profitability are studied using a statistical analysis of their balance sheets, country characteristics, and the macroeconomic and institutional environments in which they operate. Central banks at both tails of the distribution of profits generally operate in poorer countries with more troubled macroeconomic and institutional environments. For these central banks, profitability is strongly influenced by fiscal dominance and, to a lesser extent, by how actively central banks used their balance sheet for monetary policy purposes. |
| Keywords: | Central banks , Profits , Fiscal analysis , Cross country analysis , Fiscal management , Economic models , Bank soundness , |
| Date: | 2009–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/13&r=mon |
| By: | Mark Weisbrot; David Rosnick |
| Abstract: | This paper looks briefly at the recent inflation experiences of ten Latin American countries: Brazil, Mexico, Venezuela, Colombia, Chile, Peru, Ecuador, Guatemala, the Dominican Republic, and Bolivia. The authors construct a core inflation index (excluding food and energy), and look at three-month changes in both headline and core inflation. The paper focuses on the increase in inflation from April 2007 to July 2008, driven by a surge in food and energy prices worldwide. These prices have since dropped considerably. The authors conclude that macroeconomic policy that does not take into account the temporary nature of these price shocks may result in an unnecessary slowing of growth, with reduced output and employment. |
| Keywords: | Latin America, Inflation |
| JEL: | E E3 E5 E6 O O54 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2009-05&r=mon |
| By: | Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a new concept - the global roles of currencies. The concept combines the domestic and international (cross-border) use of currencies and therefore captures the overall importance of different currencies in a globalised economy. The measure of a currency’s global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well-known ranking for the leading currencies – in particular the US dollar and the euro – but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalisation, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross-border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration. JEL Classification: F31, F33, F37, G15, E58. |
| Keywords: | International currencies, international finance, global capital markets. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901031&r=mon |