nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒04‒13
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Channels in Brazil through the Lens of a Semi-Structural Model By André Minella; Nelson F. Souza-Sobrinho
  2. The role for search frictions for output and inflation dynamics: A Bayesian assessment By Martin Menner
  3. Term of Trade Shocks in a Monetary Union: an Application to West-Africa By Loic Batte; Agnes Benassy-Quere; Benjamin Carton; Gilles Dufrenot
  4. The Nature of Persistence in Euro Area Inflation: A Reconsideration By Mohitosh Kejriwal
  5. Sticky Prices Versus Monetary Frictions: An Estimation of Policy Trade-offs By S. Boragan Aruoba; Frank Schorfheide
  6. Money Holdings, Inflation, and Welfare in a Competitive Market By Scott J. Dressler
  7. Learning under Fear of Floating By Bigio, Saki
  8. The Great Inflation Drift By Marvin Goodfriend; Robert G. King
  9. Inflation Targeting and Exchange Rate Dynamics: Evidence From Turkey By K. Azim Ozdemir; Serkan Yigit
  10. Foreign Exchange Market Pressure and Monetary Policy: An Empirical Study Based on China’s Data By Liu, L.; Ni, Y.J
  11. Extraction of financial market expectations about inflation and interest rates from a liquid market By Ricardo Gimeno; José Manuel Marqués
  12. Inflation Responses to Recent Shocks: Do G7 Countries Behave Differently? By Lukas Vogel; Elena Rusticelli; Pete Richardson; Stéphanie Guichard; Christian Gianella
  13. The international cycle and Colombian monetary policy By Lavan Mahadeva; Javier Gómez Pineda
  14. Bretton Woods II and the Emerging Economies: Lazarus, Phoenix, or Humpty Dumpty? By Arslan Razmi
  15. Is the European Monetary Union an Endogenous Currency Area? The Example of the Labor Markets By Herbert Buscher; Hubert Gabrisch
  16. Capital Account Liberalization and Currency Crisis - The Case of Central Eastern European Countries By Malgorzata Sulimierska
  17. The Theoretical Link Between Capital Account Liberalization and Currency Crisis Episodes By Malgorzata Sulimierska
  18. Sovereign Risk and Dollarization: The Case of Ecuador By Jules Pierre; Rupert Rhodd

  1. By: André Minella; Nelson F. Souza-Sobrinho
    Abstract: We develop and estimate a medium-size, semi-structural model for Brazil's economy during the inflation targeting period. The model captures key features of the economy, and allows us to investigate the transmission mechanisms of monetary policy. We decompose the monetary channels into household interest rate, firm interest rate, and exchange rate channels. We find that the household interest rate channel plays the most important role in explaining output dynamics after a monetary policy shock. In the case of inflation, however, both the household interest rate and the exchange rate channels are the main transmission mechanisms. Furthermore, using a proxy for an expectation channel, we also find that this channel is key in the transmission of monetary policy to inflation.
    Date: 2009–04
  2. By: Martin Menner (Universidad de Alicante)
    Abstract: A search-theoretic monetary DSGE model with capital and in¬ventory investment is estimated, and its implications on output and inflation dynamics are contrasted with those of standard flexible price monetary models: a cash-in-advance and a portfolio adjustment cost model. Model estimation and comparison is conducted in a Bayesian way in order to account for possible model misspecification. The search model can track inflation and output data better. It dominates the other models in the ability to predict the autocorrela¬tions of inflation, the contemporaneous correlation between output growth and inflation, and in the persistent (dis-)inflation process after a (technol¬ogy) monetary shock. It generates a hump-shaped but delayed output response to a monetary shock that matches the data better than the other models.
    Keywords: Inflation and Output Dynamics, Business Cycle, Search-Theory of Money, Bayesian Estimation, Model Comparison.
    Date: 2009–03
  3. By: Loic Batte; Agnes Benassy-Quere; Benjamin Carton; Gilles Dufrenot
    Abstract: We propose a two-country DSGE model of the Dutch disease in a monetary union, calibrated on Nigeria and WAEMU. Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy, and a fixed exchange rate regime. We find that, in the face of oil shocks, the most stabilizing regime for Nigeria is a fixed money supply whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil stabilization fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil and agricultural price shocks.
    Keywords: Dutch disease; DSGE; monetary union; optimal monetary policy
    JEL: E52 F41 Q33
    Date: 2009–04
  4. By: Mohitosh Kejriwal
    Abstract: Recent empirical studies find little evidence of a change in euro area inflation persistence over the post-1970 period. Their methodology is primarily based on standard unit root and structural break tests on the persistence parameter in an autoregressive specification for the inflation process. These procedures are, however, not designed to detect a change in persistence when a sub-sample of the data has a unit root, i.e., when the process shifts from stationarity to non-stationarity or vice-versa. In this paper, we use four classes of tests for a change in persistence that allow for such shifts to argue that euro area inflation shifted from a unit root process to a stationary one at some point in the sample. Statistical methods to select the break date identify the change in the second quarter of 1993, around the time of the Maastricht Treaty which established the groundwork for the European Monetary Union, with an explicit mandate for price stability as the primary objective of monetary policy. Bootstrap estimates of the persistence parameter, half-life estimates and confidence intervals for the largest autoregressive root all suggest a marked decline in persistence after the break. We also illustrate that the hypothesis of stationarity with a mean shift but a stable persistence parameter is not compatible with the data. The evidence presented is therefore consistent with the view that the degree of inflation persistence varies with the transparency and credibility of the monetary regime.
    Keywords: persistence, price stability, unit root, monetary policy
    JEL: C22 E3 E5
    Date: 2009–03
  5. By: S. Boragan Aruoba; Frank Schorfheide
    Abstract: We develop a two-sector monetary model with a centralized and decentralized market. Activities in the centralized market resemble those in a standard New Keynesian economy with price rigidities. In the decentralized market agents engage in bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion against the distortion caused by taxing money and hence transactions in the decentralized market. Target rates of -1% or less maximize the social welfare function we consider, which contrasts with results derived from a cashless New Keynesian model.
    JEL: C5 E4 E5
    Date: 2009–04
  6. By: Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: This paper examines an environment where money is essential and agents exchange in perfectly-competitive, Walrasian markets. Agents consume and produce a homogeneous good, but hold money to purchase consumption in the event of a relatively low productivity shock. A Walrasian market delivers a non-degenerate distribution of money holdings across agents and avoids some of the computational difficulties associated with the market and pricing assumptions of bilateral matching and bargaining common to search-theoretic environments. The model is calibrated to long-run US velocity, and the welfare costs of inflation are assessed for variable buyer-seller ratios and persistent states of buying and selling.
    Keywords: Monetary Policy, Inflation, Welfare, Walrasian Markets
    JEL: E40 E50
    Date: 2009–03
  7. By: Bigio, Saki (Department of Economics, New York University)
    Abstract: Cross-country evidence suggests that during recent years a large fraction of developing countries seem to began to overcome fear of oating, i.e., a lower relative volatility of exchange rates to monetary policy instruments. To explain this trend, we build a model that describes the behavior of Central Banks in developing countries under uncertainty and fear of misspecication about the eects of exchange rate depreciations. The Central Bank is uncertain about two sub-models which dier in that exchange rate depreciations can cause output either to expand (textbook eect) or contract (balance sheet eect). Optimal policy within the second sub-model is consistent with fear of floating. A feature of fear of oating is that, by preventing sizeable exchange rate swings, Central Banks could loose valuable information useful to distinguish among models. We describe how the Central Bank's the evolution of the prior depends on the optimal policy and viceversa. We conclude that the trend towards less fear of floating may not be explained by Bayesian or robust policies because it would have been too quick to explain the data. However, if there was a parameter change affecting many countries during the early 2000's, the model generates the observed pattern.
    Keywords: Balance Sheet Effect, Fear of Floating, Model Uncertainty, Learning, Monetary Policy, Policy Experimentation, Robustness
    JEL: C11 E44 E58 F31 F33
    Date: 2009–04
  8. By: Marvin Goodfriend; Robert G. King
    Abstract: A standard statistical perspective on the U.S. Great Inflation is that it involves an increase in the stochastic trend rate of inflation, defined as the long-term forecast of inflation at each point in time. That perspective receives support from two sources: the behavior of long-term interest rates which are generally supposed to contain private sector forecasts, and statistical studies of U.S. inflation dynamics. We show that a textbook macroeconomic model delivers such a stochastic inflation trend, when there are shifts in the growth rate of capacity output, under two behavioral hypotheses about the central bank: (i) that it seeks to maintain output at capacity; and (ii) that it seeks to maintain continuity of the short-term interest rate. The theory then identifies major upswings in trend inflation with unexpectedly slow growth of capacity output. We interpret the rise of inflation in the U.S. from the perspective of this simple macroeconomic framework.
    JEL: E3 E43 E52 E58
    Date: 2009–04
  9. By: K. Azim Ozdemir; Serkan Yigit
    Date: 2009
  10. By: Liu, L.; Ni, Y.J
    Abstract: The reform of exchange rate system in 2005 has settled down the floating exchange rate system with management in China. Until August this year, RMB/USD has appreciated about 16.65%. This paper measures the exchange market pressure (EMP) on RMB/USD, and use VAR model to analyze the relationship between EMP and domestic monetary policy . And from the results we find that the increase of China’s domestic interest rate of is the main cause of RMB pressure of appreciation, but the foreign interest rate has little effects on the pressure and it can affect the growth rate of China’s domestic credit. So,we deem that the theory of "ternary paradox" may not applicable to China, at least in the period of our investigation.
    Keywords: EMP Monetary Policy Foreign Exchange Intervention VAR Model
    JEL: C32 E50 C22 F31
    Date: 2009–01–10
  11. By: Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España)
    Abstract: In this paper we propose an affine model that uses as observed factors the Nelson and Siegel (NS) components summarising the term structure of interest rates. By doing so, we are able to reformulate the Diebold and Li (2006) approach to forecast the yield curve in a way that allows us to incorporate a non-arbitrage opportunities condition and risk aversion into the model. These conditions seem to improve the forecasting ability of the term structure components and provide us with an estimation of the risk premia. Our approach is somewhat equivalent to the recent contribution of Christiensen, Diebold and Rudebusch (2008). However, not only does it seem to be more intuitive and far easier to estimate, it also improves that model in terms of fitting and forecasting properties. Moreover, with this framework it is possible to incorporate directly the inflation rate as an additional factor without reducing the forecasting ability of the model. The augmented model produces an estimation of market expectations about inflation free of liquidity, counterparty and term premia. We provide a comparison of the properties of this indicator with others usually employed to proxy the inflation expectations, such as the break-even rate, inflation swaps and professional surveys.
    Keywords: Interest Rate Forecast, Inflation Expectations, Affine Model, Diebold and Li
    JEL: G12 E43 E44 C53
    Date: 2009–04
  12. By: Lukas Vogel; Elena Rusticelli; Pete Richardson; Stéphanie Guichard; Christian Gianella
    Abstract: This paper uses a variety of empirical methods to examine the apparent differences in monetary policy stances as between the United States and other G7 economies, notably those in the euro area, during the period of sharp increases in oil and other commodity prices in the first half of 2008. In particular it asks the question whether observed differences in policy stances could be attributed to differences in economic structures and the vulnerability of different regions to inflationary shocks coming from import prices as opposed to differences in monetary policy objectives. The main conclusion is that although there are a number of differences in the estimated impact and dynamics of commodities, import prices and exchange rates on domestic inflation, which may have contributed to differences in policy stances during the boom in commodity prices, they cannot explain them all.<P>Réponse de l’inflation aux chocs récents : Les pays du G7 diffèrent-ils les uns des autres ?<BR>Ce papier utilise plusieurs méthodes empiriques distinctes pour examiner les différences apparentes dans l’orientation des politiques monétaires aux États-Unis et d'autres économies du G7, notamment de la zone euro, pendant la période de fortes hausses des cours du pétrole et des matières premières au premier semestre de 2008. En particulier il pose la question de l’origine des différences observées dans l’orientation des politiques : peuvent-elles être attribuées aux différences de structures économiques et à la vulnérabilité de différentes régions aux chocs inflationnistes venant des prix à l'importation ou aux différences dans les objectifs de politique monétaire. La conclusion principale est que bien qu'il y ait un certain nombre de différences dans l'impact estimé des prix à l'importation des produits de base et des taux de change sur l'inflation domestique et dans leurs dynamiques, lesquels ont pu contribuer aux différences d’orientation des politiques monétaires durant la phase de boom des cours des matières premières, ces différences ne peuvent pas tout expliquer.
    Keywords: Phillips curve, courbe de Phillips, inflation, DSGE model, modèle DSGE, coût de transition, commodity prices, prix des matières premières, import prices, prix des importations, error-correction model, modèles à correction d’erreurs
    JEL: E31 E52 J30
    Date: 2009–04–01
  13. By: Lavan Mahadeva; Javier Gómez Pineda
    Abstract: The objective of this paper is to analyze how international cycles affect the real GDP cycle and so monetary policy decisions in Colombia. We estimate that cycles in world GDP, export prices and capital inflows are strongly associated with the Colombian business cycle both on impact and even during the first year. We find evidence that, because of inefficiencies in the domestic financial sector, external gains are channelled into nontradable spending through credit expansions. This creates large appreciations during booms. The reverse happens during world slowdowns. These swings in the Exchange rate restrict the scope for a countercyclical monetary policy.
    Date: 2009–04–05
  14. By: Arslan Razmi (University of Massachusetts Amherst)
    Abstract: Several studies have commented on the emergence of a new interna- tional monetary system in the post-Asian crisis years. The current inter- national financial crisis has, however, put the so-called Bretton Woods II under considerable strain. This paper analyzes the sustainability of the pre-Lehman Brothers international monetary system from an emerging country perspective. A simple framework in which agents have a choice between financial and real assets is constructed in order to explore possi- ble consequences of some of the shocks that emerging economies are cur- rently experiencing. Stock and flow implications are analyzed. Assuming that recent events would have reinforced monetary authorities' desire to maintain an adequate cushion of reserves while preventing exchange rate volatility, we find that the response to most shocks would involve running continuous current account surpluses, that is, a continuation of a crucial aspect of Bretton Woods II. Given political and economic constraints, is such a continuation feasible? A preliminary exploration raises serious doubts and skims alternatives. JEL Categories: F02, F32, F36,
    Date: 2009–03
  15. By: Herbert Buscher; Hubert Gabrisch
    Abstract: Our study tries to find out whether wage dynamics between Euro member countries became more synchronized through the adoption of the common currency. We calculate bivarate correlation coefficients of wage and wage cost dynamics and run a model of endogenously induced changes of coefficients, which are explained by other variables being also endogenous: trade intensity, sectoral specialization, financial integration. We used a panel data structure to allow for cross-section weights for country-pair observations. We use instrumental variable regressions in order to disentangle exogenous from endogenous influences. We applied these techniques to real and nominal wage dynamics and to dynamics of unit labor costs. We found evidence for persistent asymmetries in nominal wage formation despite a single currency and monetary policy, responsible for diverging unit labor costs and for emerging trade imbalances among the EMU member countries.
    Date: 2009–04
  16. By: Malgorzata Sulimierska (Economics Department, University of Sussex)
    Abstract: The dissertation investigates if Central and Eastern European countries with unregulated capital flows are more vulnerable to currency crises. In order to answer this question properly the paper considers two lines of analysis: single-country and multi-country. Single -country studies look into three cases: Russia, Poland and Latvia. The multi-country analysis is the simple adaptation of Glick, Guo and Hutchison's probit panel model (2004). The results suggest that countries with liberalized capital accounts experience a lower likelihood of currency crises. Moreover, the information from case studies pointed that the speed and sequence of the CAL process needs to be adequate for the country development.This paper, co-winner of the best student paper award, was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, May 22, 2008.
    Date: 2008–10–07
  17. By: Malgorzata Sulimierska (Economics Department, University of Sussex)
    Abstract: The paper investigates theoretical background if countries with unregulated capital flows are more vulnerable to currency crises. In order to solve this question properly the paper considers sequence, precondition of the Capital Account Liberalization process and different generation of currency crisis models. Furthermore, theoretical studies pointed that the speed and sequence of the CAL process needs to be adequate for the country financial development and financial liberalization. This paper was presented May 22, 2008, at the 18th International Conference of the International Trade and Finance Association meeting at Universidade Nova de Lisboa in Lisbon, Portugal.
    Date: 2008–08–06
  18. By: Jules Pierre (Florida Atlantic University); Rupert Rhodd (Florida Atlantic University)
    Abstract: Through policy decision of governments and through other unofficial means, many countries have moved away from their local currency to seek protection against inflation provided by a hard currency, the dollar. Among the promises of dollarization is the reduction of sovereign risk associated with developing country debts and subsequently an increase in the rate of economic growth as the cost of financing economic growth declines. This however may not occur as the loss of the policy tool could lead to inflexibility as the economy is not able to respond to shocks, resulting in an increase in sovereign risk. This paper explores the effect of dollarization on sovereign risk in Ecuador and concludes that dollarization does not decrease sovereign risk.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, May 22, 2008, in Lisbon, Portugal.JEL Classification Codes: E44; F31; G19; O54 Keywords: Sovereign Risk; Dollarization; Ecuador
    Date: 2008–08–09

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