nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒04‒05
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Robust Monetary Policy under Model Uncertainty and Inflation Persistence. By Li Qin; Moïse SIDIROPOULOS; Eleftherios Spyromitros
  2. Currency Misalignments and Optimal Monetary Policy: A Reexamination By Charles Engel
  3. Interest rate transmission mechanism of the monetary policy in the selected EMU candidate countries (SVAR approach) By Mirdala, Rajmund
  4. Has the monetary transmission process in the euro area changed? Evidence vased on VAR estimates By Axel A Weber; Rafael Gerke; Andreas Worms
  5. Compositional Analysis of Foreign Currency Reserves in the 1999-2007 Period : The Euro vs. The Dollar as Leading Reserve Currency By Aristovnik, Aleksander; Čeč, Tanja
  6. Monetary policy rules with financial instability By Sofia Bauducco; Ales Bulir; Martin Cihak
  7. IS U.S. MONEY CAUSING CHINA'S OUTPUT? By Johansson, Anders C.
  8. China's financial conundrum and global imbalances By Ronald McKinnon; Gunther Schnabl
  9. Linear Contracts, Common Agency and Central Bank Preference Uncertainty By Giuseppe Ciccarone; Enrico Marchetti
  10. Talking about monetary policy: the virtues (and vice?) of central bank communication By Alan Blinder
  11. Credit frictions and optimal monetary policy By Vasco Cúrdia; Michael Woodford
  12. In search of monetary stability: the evolution of monetary policy By Otmar Issing
  13. Does a Monetary Union protect again shocks? An assessment of Latin American integration By Jean-Pierre Allegret; Alain Sand-Zantman
  14. Velocity and Monetary Expansion in a Growing Economy with Interest-Rate Control By Seiya Fujisaki
  15. Assess The Long Run Effects Of Monetary Policy On Bank lending,Foreign Asset and Liability In MENA Countries By Ziaei, Sayyed Mahdi
  16. Sources of the Great Moderation: shocks, frictions, or monetary policy? By Zheng Liu; Daniel F. Waggoner; Tao Zha
  17. Monetary Policy Transmission and House Prices : European Cross Country Evidence By Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
  18. The impact of monetary policy on the yield curve in the Brazilian economy By ARANHA, Marcel Z.; MOURA, Marcelo L.
  19. Surprising Comparative Properties of Monetary Models: Results from a New Data Base By John B. Taylor; Volker Wieland
  20. Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008 By Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
  21. The credit crisis and the dynamics of asset backed commercial paper programs By Nikolaj Schmidt
  22. Monetary Time Series of Southeastern Europe from the 1870s to 1914 By Members of the SEEMHN data collection task force with a foreword by Michael Bordo and an introduction by Matthias Morys;
  23. "What Role for Central Banks in View of the Current Crisis?" By Philip Arestis; Elias Karakitsos
  24. Expectations, learning and policy rule By Michele Berardi
  25. Currency crashes in industrial countries: much ado about nothing? By Joseph E. Gagnon
  26. CONDI: a cost-of-nominal-distortions index By Stefano Eusepi; Bart Hobijn; Andrea Tambalotti
  27. Endogenous Money, Output and Prices in India By Das, Rituparna
  28. Are Macroeconomic Variables Useful for Forecasting the Distribution of U.S. Inflation? By Manzan, Sebastiano; Zerom, Dawit
  29. Time of Troubles: The Yen and Japan's Economy, 1985-2008 By Maurice Obstfeld
  30. Accounting for housing in a CPI By W. Erwin Diewert; Alice O. Nakamura

  1. By: Li Qin; Moïse SIDIROPOULOS; Eleftherios Spyromitros
    Abstract: This paper examines the relationship between the preference for ro- bustness of central bank (when it fears that its model is misspecified), the inflation persistence and the output cost of disinflation. Using a simple monetary game model in which higher preference for robustness of central bank is positively associated with the inflation persistence and thus nega- tively with the speed of disinflation, this paper shows that the output cost of disinflation is higher when the less the central bank believes that its reference model is robust.
    Keywords: Model uncertainty, Robust control, Minmax policies, Inflation persistence, Sacrifice ratio.
    JEL: E50 E52 E58
    Date: 2009
  2. By: Charles Engel
    Abstract: This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade-offs facing policymakers that are incorporated in "targeting rules". The model is a modified version of Clarida, Gali, and Gertler's (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, our model also gives a rationale for targeting CPI, rather than PPI, inflation.
    JEL: E52 F41
    Date: 2009–04
  3. By: Mirdala, Rajmund
    Abstract: The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech republic, Slovak republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech republic (May 1997), Poland (April 2000), Slovak republic (October 1998) and fixed exchange rate to euro with broad band in Hungary (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks’ monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that the higher sensitivity of the selected macroeconomic indicators of the EMÚ candidate countries to the national monetary policy shocks would indicate the higher exposure of the selected countries to the ECB monetary policy impulses after the euro adoption in the future.
    Keywords: monetary policy; short-term interest rates; structural vector autoregression; variance decomposition; impulse-response function
    JEL: C32 E52
    Date: 2009–02
  4. By: Axel A Weber; Rafael Gerke; Andreas Worms
    Abstract: Empirical evidence on whether the euro area monetary transmission process has changed is, at best, mixed. We argue that this inconclusiveness is likely to be due to the fact that existing empirical studies concentrate on the effects of a particular development on a specific transmission channel. Another problem of this literature is that specific changes could have off-setting effects regarding the overall effectiveness of monetary policy, leaving open the question whether the ability of monetary policy to control inflation has been altered. In order to shed light on this issue, we investigate whether there has been a significant change in the overall transmission of monetary policy to inflation and output by estimating a standard VAR for the euro area and by searching for a possible break date. We find a significant break point around 1996 and some evidence for a second one around 1999. We compare impulse responses to a monetary policy shock for these episodes and find that the well-known "stylised facts" of monetary policy transmission remain valid. Therefore, we argue that the general guiding principles of the Eurosystem monetary policy remain adequate. Moreover, it seems that monetary transmission after 1998 is not very different from before 1996, but probably very different in the interim period. This implies that evidence for the euro area could be biased by an "atypical" interim period 1996-1999. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Marvin Goodfriend and Armínio Fraga Neto.
    Keywords: Monetary policy transmission, Eurosystem, euro area, globalisation, financial development, VAR
    Date: 2009–03
  5. By: Aristovnik, Aleksander; Čeč, Tanja
    Abstract: Using a critical analysis of the acquired data, this article mainly aims to present the currency composition of the foreign currency reserves of central banks in selected countries in the 1999-2007 period and, on this basis, to establish whether the euro stands any real chances of dethroning the US dollar as the global currency. Among other things, the empirical results, for the most part overlapping with the theoretical and empirical expectations, confirm the hypothesis that in the near future the euro may be regarded as a global reserve currency on a par with the US dollar or it may even become the leading reserve currency. Finally, the empirical analysis also shows that the proportion of the euro in foreign currency reserves differs by the groups of countries concerned; however, in the period under scrutiny it was mainly increasing.
    Keywords: international monetary system; international currency; foreign currency reserves; dollar; euro
    JEL: F02 F31 G20
    Date: 2009–03–26
  6. By: Sofia Bauducco; Ales Bulir; Martin Cihak
    Abstract: To provide a rigorous analysis of monetary policy in the face of financial instability, we extend the standard dynamic stochastic general equilibrium model to include a financial system. Our simulations suggest that if financial instability affects output and inflation with a lag, and if the central bank has privileged information about credit risk, monetary policy responding instantly to increased credit risk can trade off more output and inflation instability today for a faster return to the trend than a policy that follows the simple Taylor rule. This augmented rule leads in some parameterizations to improved outcomes in terms of long-term welfare, however, the welfare impacts of such a rule appear to be negligible.
    Keywords: DSGE models, financial instability, monetary policy rule.
    JEL: E52 E58 G21
    Date: 2008–12
  7. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that U.S. money supply Granger causes China’s real output, but that an alternative monetary instrument, the Federal Fund Rate, does not. Furthermore, there is a significant cointegrating relationship between U.S. money and China’s output, which means that there is a long-run relationship between them. Impulse response functions and variance decompositions also support the results, showing that shocks in the U.S. money supply have an effect on China’s real output. The results have important implications for policy makers in China that focus on maintaining a high and stable economic growth. They also have implications for U.S. policy makers. A number of countries around the world still fix their currencies against the U.S. dollar, which means that U.S. monetary policy has effects not only domestically but also in these countries.
    Keywords: China; United States; Monetary policy; Output; Causality; VECM
    JEL: C32 E40 E51 E52 E58
    Date: 2009–03–15
  8. By: Ronald McKinnon; Gunther Schnabl
    Abstract: China's financial conundrum arises from two sources: (1) its large trade (saving) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead foreign currency claims (largely dollars) build up within domestic financial institutions. And (2), economists - both American and Chinese - mistakenly attribute the surpluses to an undervalued renminbi. To placate the United States, the result is a gradual appreciation of the renminbi against the dollar of 6 percent or more per year. This predictable appreciation since 2004, and the fall in US interest rates since mid 2007, not only attracts hot money inflows but inhibits private capital outflows from financing (compensating?) China's huge trade surplus. This one-way bet in the foreign exchange markets can no longer be offset by relatively low interest rates in China compared to the United States, as had been the case in 2005-06. Thus, the People's Bank of China (PBC) now must intervene heavily to prevent the renminbi from ratcheting upwards - and so becomes the country's sole international financial intermediary. Despite massive efforts by the PBC to sterilise the monetary consequences of the reserve buildup, inflation in China is increasing, with excess liquidity that spills over into the world economy. China has been transformed from a deflationary force on American and European price levels into an inflationary one. Because of the currency mismatch, floating the RMB is neither feasible nor desirable - and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal yuan/dollar rate similar to that which existed between 1995 and 2004. But for any newly reset yuan/dollar rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Currency stabilisation would allow the PBC to regain monetary control and quash inflation. Only then can the Chinese government take decisive steps to reduce the trade (saving) surplus by tax cuts, increased social expenditures, and higher dividend payouts. But as long as the economy remains overheated, the government hesitates to take these trade-surplus-reducing measures because of their near-term inflationary consequences. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Michael Mussa.
    Keywords: Global Imbalances, Chinese Exchange Rate Regime
    Date: 2009–03
  9. By: Giuseppe Ciccarone; Enrico Marchetti
    Abstract: The aim of this paper is to bring together two recent developments in the ”contracting” approach to the time-inconsistency problem of monetary policy: linear contracts under common agency and central bank preference uncertainty under single agency. We show that under common agency and imperfect ”political” transparencey, the full transparency finding that the interest group contract dominates the government’s one is confirmed, but equilibrium expected inflation is lower, as the new source of uncertainty makes the two principals more cautious in their instrument setting. This reduces the average inflation bias. We then extend the analysis to the case of uncertainty on the central bank output target and show that the expected values of inflation and output are the same as those obtained under perfect ”economic” transparency, whereas the actual values are different only for the presence of an additive term depending on opacity. Finally, we demonstrate that when the principals are uncertain about the weight attached by the central banker to the incentive scheme the equilibrium inflation surprise may be negative and output may be lower than the natural rate.
    Keywords: Central bank transparency, Inflation, uncertainty.
    JEL: E58
    Date: 2008–12
  10. By: Alan Blinder
    Abstract: Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes "optimal" communication strategy - either in quantity or nature. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Benjamin M Friedman and YV Reddy.
    Keywords: Central Bank Communication, Monetary Policy Transparency
    Date: 2009–03
  11. By: Vasco Cúrdia; Michael Woodford
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion - a linear relation that should be maintained between the inflation rate and changes in the output gap - that characterises optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule", in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Olivier Blanchard and Charles Goodhart.
    Keywords: Financial Frictions, Interest Rate Spreads
    Date: 2009–03
  12. By: Otmar Issing
    Abstract: The mid-1980s began a period that might, in retrospect, be seen as the golden age of monetary policy. Worldwide inflation rates, which had come down from the high levels reached in the 1970s, were at the lowest level seen in a long time. In the real economy, low and stable inflation went along with growth - at first, reasonable, and later, remarkable - and with reduced volatility. The term Goldilocks is sometimes used to describe this solid, sustainable situation - meaning that, like the porridge in the fairy tale, it was neither too hot nor too cold but just right. A number of fortunate circumstances contributed to the Goldilocks economy. Deregulation and globalisation, with their impact on competition and pricing power in goods and labour markets, are sometimes seen as major factors supporting the achievement and maintenance of low inflation (Rogoff (2003)). With the weakening of deregulation and globalisation, will we see the end of the golden age, which then will turn out to have been only a short episode? On the one hand, an end to the golden age would be no surprise for those who have stressed from the outset that its highly positive macroeconomic outcomes were the result, if not of luck, then of benign circumstances whose combination could not be expected to last forever (Sims and Zha (2006)). And do not recent developments already confirm this sceptical assessment of the role of central banks and monetary policy during this period? Isn't inflation rising? Doesn't the ongoing turbulence in financial markets indicate that central banks did not - or, rather, could not - prevent such developments? On the other hand, have we not seen the emergence of a policy regime that should be robust enough to continue the period of monetary stability? And would not a regime of monetary stability contribute to the stability of the real economy? We might only ex post be able to give a definite answer to these questions. For the time being, we can just study the emergence of the current policy regime and its elements via the practice of central banking and the results of research. I would like to start with a personal note. It would be, to say the least, overambitious to survey in just a few pages roughly three decades of research on monetary policy. The same is true for the analysis of monetary policymaking during this period. What I have tried to do is simply provide the reflections of someone who, coming from academia, played a special role in two central banks - the Bundesbank (from 1990 to 1998) and the European Central Bank (from 1998 to 2006) - under extremely difficult circumstances, namely the aftermath of German reunification in 1990 and the launch of the European Union two years later. It was a challenge and a privilege to build the bridge between monetary policy research and monetary policymaking in those two central banks. What were the most relevant aspects of theory to be considered when deciding on monetary policy? How did it work in practice? I will start with some results of monetary policy and the advances in research that, to a large degree, were triggered by those results. The later sections analyse the principles guiding the conduct of monetary policy by the Bundesbank and the ECB and some specific aspects of monetary policy. One of the main lessons I got during my 16 years of central banking practice is that it is critical to raise questions and not ignore important insights - even if the dominant approaches in research seem to suggest otherwise. It should therefore not come as a surprise that the paper ends with open questions. This is part of a series of BIS Working Papers (273 to 278) collecting papers presented at the BIS's Seventh Annual Conference on "Whither monetary policy? Monetary policy challenges in the decade ahead" in Luzern, Switzerland, on 26-27 June 2008. The event brought together senior representatives of central banks and academic institutions to exchange views on this topic. BIS Paper 45 contains the opening address of William R White (BIS), the contributions of the policy panel on "Beyond price stability - the challenges ahead" and speeches by Edmund Phelps (Columbia University) and Martin Wolf (Financial Times). The participants in the policy panel discussion chaired by Malcolm D Knight (BIS) were Martin Feldstein (Harvard University), Stanley Fischer (Bank of Israel), Mark Carney (Bank of Canada) and Jean-Pierre Landau (Banque de France). This Working Paper includes comments by Allan H Meltzer.
    Keywords: Cross-Shareholding; European Monetary Union, Monetary Policy Strategy
    Date: 2009–03
  13. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Alain Sand-Zantman (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries -Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we tryto determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries' responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process.
    Keywords: bayesian VAR ; business cycles ; Latin American countries ; optimum currency area
    Date: 2009
  14. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: We analyze the income velocity of money in an endogenous growth model with an interest-rate control rule and a cash-in-advance (CIA) constraint. We show that the long-term relationship between the income velocity of money and the nominal growth rate of money supply depends not only on the form of the CIA constraint but also on the central bankfs stance of interest-rate control rule.
    Keywords: velocity, an interest-rate control, endogenous growth, cash-in-advance constraint
    JEL: O42 E52
    Date: 2009–03
  15. By: Ziaei, Sayyed Mahdi
    Abstract: In this empirical study, we perform cointegrated relation to analyze the effects of monetary policy on bank credit to private sector, foreign assets and foreign debts in ten MENA countries include: Algeria, Bahrain, Egypt, Kuwait, Lebanon, Morocco, Oman, Qatar, Tunis and Turkey. There are two co-integration techniques, the Johanson co-integration and dynamic ordinary least square (DOLS) are used to examine long run relationship between the variables. The empirical evidences with aggregate data of ten MENA countries show that bank credit to private sector and foreign asset increasing with a monetary expansion. However, the positions of banks’ foreign debts aren’t similar for different countries. Hence, the aggregate data show that bank lending channel is likely to be an effective monetary transmission mechanism in MENA countries.
    Keywords: Bank Lending; Monetary Transmission; Capital Flows
    JEL: E51 F32 E52
    Date: 2009–03–29
  16. By: Zheng Liu; Daniel F. Waggoner; Tao Zha
    Abstract: We study the sources of the Great Moderation by estimating a variety of medium-scale dynamic stochastic general equilibrium (DSGE) models that incorporate regime switches in shock variances and the inflation target. The best-fit model—the one with two regimes in shock variances—gives quantitatively different dynamics compared with the benchmark constant-parameter model. Our estimates show that three kinds of shocks accounted for most of the Great Moderation and business-cycle fluctuations: capital depreciation shocks, neutral technology shocks, and wage markup shocks. In contrast to the existing literature, we find that changes in the inflation target or shocks in the investment-specific technology played little role in macroeconomic volatility. Moreover, our estimates indicate considerably fewer nominal rigidities than the literature suggests. incompl s
    Keywords: regime-switching DSGE, shock variances, inflation target, nominal rigidities, intertemporal capital accumulation shocks, model comparison CL HG2567 A4A5
    Date: 2009
  17. By: Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: This paper explores the importance of housing and mortgage market heterogeneity in 13 European countries for the transmission of monetary policy. We use a pooled VAR model which is estimated over the period 1995-2006 to generate impulse responses of key macroeconomic variables to a monetary policy shock. We split our sample of countries into two disjoint groups according to the impact of the monetary policy shock on real house prices. Our results suggest that in countries with a more pronounced reaction of real house prices the propagation of monetary policy shocks to macroeconomic variables is amplified.
    Keywords: Pooled VAR model, house prices, monetary policy transmission, country clusters, sign restrictions
    JEL: C32 C33 E52
    Date: 2009
  18. By: ARANHA, Marcel Z.; MOURA, Marcelo L.
    Date: 2008–10
  19. By: John B. Taylor; Volker Wieland
    Abstract: In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.
    JEL: C52 E30 E52
    Date: 2009–04
  20. By: Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor
    Abstract: In this paper we connect the events of the last twelve months, "The Panic of 2008" as it has been called, to the demand for international reserves. In previous work, we have shown that international reserve demand can be rationalized by a central bank's desire to backstop the broad money supply to avert the possibility of an internal/external double drain (a bank run combined with capital flight). Thus, simply looking at trade or short-term debt as motivations for reserve holdings is insufficient; one must also consider the size of the banking system (M2). Here, we show that a country's reserve holdings just before the current crisis, relative to their predicted holdings based on these financial motives, can significantly predict exchange rate movements of both emerging and advanced countries in 2008. Countries with large war chests did not depreciate -- and some appreciated. Meanwhile, those who held insufficient reserves based on our metric were likely to depreciate. Current account balances and short-term debt levels are not statistically significant predictors of depreciation once reserve levels are taken into account. Our model's typically high predicted reserve levels provide important context for the unprecedented U.S. dollar swap lines recently provided to many countries by the Federal Reserve.
    JEL: E42 E44 E58 F21 F31 F33 F36 F41 F42 O24
    Date: 2009–03
  21. By: Nikolaj Schmidt
    Abstract: Motivated by the credit crisis 2007-08, this paper presents a theory of ¶capital market banks¶; banks that use derivative programs to exploit ine¢ ciencies in the capital markets. I model banks. use of asset backed commercial paper (ABCP) programs as a local game, and analyse how these programs affect financial stability. In a financial market where banks are subject to costly capital requirements and investors are heterogeneous, the ABCP program arises endogenously in response to inefficient risk sharing. The sustainability of the ABCP program depends crucially on the sponsoring bank's capital. Small shocks to the bank's capital can lead to a failure of the ABCP program. This amplifies the shock and pushes the the bank into bankruptcy. I link the dynamics of the ABCP market to the interbank market, and argue that an unravelling of the ABCP market can cause a seizure of the interbank market. The model indicates, that traditional monetary policy is unable to alleviate seizures of the interbank market, but that targeted liquidity measures, such as the ¶Term Securities Lending Facility¶, the ¶Term Auction Facility¶, the ¶Troubled Asset Relief Program¶, the ¶Money Market ABCP Program¶ and the launch of a ¶super fund¶, could end the unravelling of the ABCP market and ease the pressures in the interbank market.
    Date: 2009–01
  22. By: Members of the SEEMHN data collection task force with a foreword by Michael Bordo and an introduction by Matthias Morys;
    Abstract: TThe South-Eastern European Monetary History Network (SEEMHN) is a community of financial historians, economists and statisticians, established in April 2006 at the initiation of the Bulgarian National Bank and the Bank of Greece. Its objective is to spread knowledge on the economic history of the region in the context of European experience with a specific focus on financial, monetary and banking history. The SEEMHN Data Collection Task Force aims at establishing a historical database with 19th and 20th century financial and monetary data for the countries in the region. A set of data has already been published as an annex to the 2007 conference proceedings, released by the OeNB (2008, Workshops, no 13). The second stage of the SEEMHN Data Collection Task force includes reports from all participating central banks. For each country, historical aggregates are preceded by a description of the country’s monetary events and explanatory remarks. The data set refers to banknotes in circulation, reserves, discount rates and exchange rates. The frequency is monthly and the time span covers the period from 1870 and beyond to 1914. A foreword on the paramount importance of historical data series is supplemented by Prof. Michael Bordo (Rutgers University). An introduction on crosscountry historical comparison is written by Dr. Matthias Morys (University of York). Here we present data displays for each country written by Kliti Ceca, Kelmend Rexha and Elsida Orhan for Albania (Banka e Shqiperise); Thomas Scheiber for Austria-Hungary (Oesterreichische Nationalbank); Kalina Dimitrova (Balgarska Narodna Banka) and Martin ivanov (Bulgarian Academy of Science) for Bulgaria; Sopfia Lazaretou for Greece (Bank of Greece); George Virgil Stoenescu, Elisabeta Blejan, Brindusa Costache and Adriana Iarovici Aloman for Romania (Banca Nationala a Romaniei); Milan Sojic, Ljiljana Durdevic, Sanja Borkovic and Olivera Jovanovic for Serbia (Narodna Banka Srbije). We strongly believe that by making the historical time series available to a wider audience for the first time ever, research interests in monetary and financial economics in this part of Europe will be further stimulated.
    Date: 2009–02
  23. By: Philip Arestis; Elias Karakitsos
    Abstract: Central banks have an aversion to bailing out speculators when asset bubbles burst, but ultimately, as custodians of the financial system, they have to do exactly that. Their actions are justified by the goal of protecting the economy from the bursting of bubbles; while their intention may be different, the result is the same: speculators, careless investors, and banks are bailed out. The authors of this new Policy Note say that a far better approach is for central banks to widen their scope and target the net wealth of the personal sector. Using interest rates in both the upswing and the downswing of a (business) cycle would avoid moral hazard. A net wealth target would not impede the free functioning of the financial system, as it deals with the economic consequences of the rise and fall of asset prices rather than with asset prices (equities or houses) per se. It would also help to control liquidity and avoid future crises. The current crisis has its roots in the excessive liquidity that, beginning in the mid 1990s, financed a series of asset bubbles. This liquidity was the outcome of “bad” financial engineering that spilled over to other banks and to the personal sector through securitization, in conjunction with overly accommodating monetary policy. Hence, targeting net wealth would also help control liquidity, the authors say, without interfering with the financial engineering of banks.
    Date: 2009–03
  24. By: Michele Berardi
    Abstract: In his monograph The conquest of American inflation (1999) Sargent suggests that the sharp reduction in US inflation that took place under Volker may vindicate the type of econometric policy evaluation famously criticized by Lucas (1976). At the core of this vindication strory are the escape dynamics, recurrent sliding away from the path leading to the time-consistent sub-optimal equilibrium level of inflation. We try to understand here under which conditions this phenomenon arises. In particular, we note that economists, and consequently policymakers, knew long before the Lucas critique that in order to do policy analysis structural models were required. We thus endow our policymaker with a correctly specified model, one that takes explicitly into account the role of expectations. Using such a model, together with a policy that takes expectations as given, the escape dynamics do not appear. But they reappear when long run considerations of policy effects enter into the picture. We thus conclude that what really matters is the way in which the policymaker designs its policy, rather than the econometric specification of the model he uses.
    Date: 2009
  25. By: Joseph E. Gagnon
    Abstract: Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.
    Keywords: Foreign exchange rates; Exchange rate, depreciation, inflation, unemployment, current account CL HG136 A54
    Date: 2009
  26. By: Stefano Eusepi; Bart Hobijn; Andrea Tambalotti
    Abstract: We construct a price index with weights for the prices of different PCE (personal consumption expenditures) goods chosen to minimize the welfare costs of nominal distortions. In this cost-of-nominal-distortions index (CONDI), the weights are computed in a multi-sector New Keynesian model with time-dependent price setting. The model is calibrated using U.S. data on the dispersion of price stickiness and labor shares across sectors. We find that the CONDI weights depend mostly on price stickiness and are less affected by the dispersion in labor shares. Moreover, CONDI stabilization closely approximates the optimal monetary policy and leads to negligible welfare losses. Finally, CONDI is better approximated by targeting core inflation rather than headline inflation--and is even better approximated with an adjusted core index that covers total expenditures excluding autos, clothing, energy, and food at home, but including food away from home.
    Keywords: Personal Consumption Expenditures Price Index ; Prices; core inflation, nominal rigidities, optimal monetary policy, price indexes
    Date: 2009
  27. By: Das, Rituparna
    Abstract: This paper proposes to quantify the macroeconometric relationships among the variables broad money, lending by banks, price, and output in India using simultaneous equations system keeping in view the issue of endogeneity.
    Keywords: Money; Output; Price; WPI; IIP; Credit; Commercial Bank; Endogeneity
    JEL: C32
    Date: 2009–03–24
  28. By: Manzan, Sebastiano; Zerom, Dawit
    Abstract: Much of the US inflation forecasting literature deals with examining the ability of macroeconomic indicators to predict the mean of future inflation, and the overwhelming evidence suggests that the macroeconomic indicators provide little or no predictability. In this paper, we expand the scope of inflation predictability and explore whether macroeconomic indicators are useful in predicting the distribution of future inflation. To incorporate macroeconomic indicators into the prediction of the conditional distribution of future inflation, we introduce a semi-parametric approach using conditional quantiles. The approach offers more flexibility in capturing the possible role of macroeconomic indicators in predicting the different parts of the future inflation distribution. Using monthly data on US inflation, we find that unemployment rate, housing starts, and the term spread provide significant out-of-sample predictability for the distribution of core inflation. Importantly, this result is obtained for a forecast evaluation period that we intentionally chose to be after 1984, when current research shows that macroeconomic indicators do not add much to the predictability of the future mean inflation. This paper discusses various findings using forecast intervals and forecast densities, and highlights the unique insights that the distribution approach offers, which otherwise would be ignored if we relied only on mean forecasts.
    Keywords: Conditional quantiles; Distribution; Inflation; Predictability; Phillips curve; Combining
    JEL: C53 E31 E52 C22
    Date: 2009–01–30
  29. By: Maurice Obstfeld
    Abstract: This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct periods of endaka fukyo, or recession induced by a strong yen, occurred in the late 1980s and the early 1990s at critical phases of the monetary policy cycle. My approach emphasizes the interaction of short-term developments driven by monetary factors (as they affect international real interest rate differentials) and the long-term determinants of the real exchange rate's equilibrium path. Chief among those long-run determinants are relative sectoral productivity levels and the terms of trade, including the price of oil. Since the mid-1990s, the yen's real exchange rate has generally followed a depreciating trend and Japan's comprehensive terms of trade have deteriorated.
    JEL: F14 F41 F42 F51 N15
    Date: 2009–03
  30. By: W. Erwin Diewert; Alice O. Nakamura
    Abstract: In this paper, we take stock of how statistical agencies in different nations are currently accounting for housing in their consumer price indexes (CPIs). The rental equivalence and user cost approaches have been favourites of economists. Both can be derived from the fundamental equation of capital theory. Concerns about these approaches are taken up. We go on to argue that an opportunity cost approach is the correct theoretical framework for accounting for owner-occupied housing (OOH) in a CPI. This approach, first mentioned in a 2006 OECD paper by Diewert, is developed more fully here. We explore the relationship of this new approach to the usual rental equivalency and user cost approaches. The new approach leads to an owner-occupied housing opportunity cost (OOHOC) index that is a weighted average of the rental and the financial opportunity costs. ; We call attention to the need for more direct measures of inflation for owner-occupied housing services. In a 2007 paper, Mishkin argues that central banks with supervisory authority can reduce the likelihood of bubbles forming through prudential supervision of the financial system. However, the official mandates of central banks typically focus on managing measured inflation. Barack Obama has pledged to give the Federal Reserve greater oversight of a broader array of financial institutions. We believe that an important addition to this pledge should be to give the BLS, BEA, and Census Bureau the funds and the mandate to aggressively develop improved measures of inflation for owner-occupied housing services. Central banks and national governments have many policy instruments at their disposal that they could use, in the future, to control inflation in housing markets. What they lack are appropriate measures of inflation in the market for owner-occupied housing services. The proposed new opportunity cost measure for accounting for OOH in a CPI will not be simple or cheap to implement. However, the current financial crisis makes it clear that the costs of not having an adequate measure for inflation in the cost of owner-occupied housing services can be far greater.
    Keywords: Durable goods, Consumer ; Consumer price indexes ; Cost of living adjustments ; Housing; Durable goods, Consumer Price Index, Cost of Living Index, Owner Occupied Housing, depreciation, hedonic regression models, rental equivalence approach, acquisitions approach, user cost approach, payments, approach, maintenance and repair, renovations expenditures
    Date: 2009

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