nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒04‒18
nineteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model By Riccardo DiCecio; Edward Nelson
  2. Leader of the Pack? German Monetary Dominance in Europe Prior to EMU By J. James Reade; Ulrich Volz
  3. Sophisticated Monetary Policies By Andrew Atkeson; V. V. Chari; Patrick Kehoe
  4. Sticky prices versus monetary frictions: an estimation of policy trade-offs By S. Boragan Aruoba; Frank Schorfheide
  5. The great inflation in the United States and the United Kingdom: reconciling policy decisions and data outcomes By Riccardo DiCecio; Edward Nelson
  6. Analysis on ƒÀ and ƒÐ Convergences of East Asian Currencies By Eiji Ogawa; Taiyo Yoshimi
  7. Monetary policy strategy in a global environment By Philippe Moutot; Giovanni Vitale
  8. The Great Inflation in the United States and the United Kingdom: Reconciling Policy Decisions and Data Outcomes By Riccardo DiCecio; Edward Nelson
  9. Defending Against Speculative Attacks By Tijmen Daniëls; Henk Jager; Franc Klaassen
  10. Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work? By Rasmus Fatum
  11. On Determinacy and Learnability in a New Keynesian Model with Unemployment By Mewael F. Tesfaselassie; Eric Schaling
  12. The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa By Balázs Égert
  13. Optimal Monetary Policy with Imperfect Unemployment Insurance By NAKAJIMA Tomoyuki
  14. Design and Evaluation of Core Inflation Measures for Turkey By Oguz Atuk; Mustafa Utku Ozmen
  15. The Inflation-Output Tradeoff: Which Type of Labor Market Rigidity Is to Be Blamed? By Christian Merkl
  16. External Adjustments and Coordinated Exchange Rate Policy in Asia By Eiji Ogawa; Kentaro Iwatsubo
  17. The Dollar in the Turmoil By Agnes Benassy-Quere; Sophie Bereau; Valerie Mignon
  18. Disinflation in a DSGE Perspective: Sacrifice Ratio or Welfare Gain Ratio? By Guido Ascari; Tiziano Ropele
  19. The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation By Fabio Milani

  1. By: Riccardo DiCecio; Edward Nelson
    Abstract: Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom’s monetary policy options using a structural open-economy model. We use the Erceg, Gust, and López-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.
    JEL: E32 E42 E52
    Date: 2009–04
  2. By: J. James Reade; Ulrich Volz
    Abstract: In this paper, the monetary policy independence of European nations in the years before European Monetary Union (EMU) is investigated using cointegration techniques. Daily data is used to assess pairwise relationships between individual EMU nations and ‘lead’ nation Germany, to assess the hypothesis that Germany was the dominant European nation prior to EMU. By and large our econometric investigations support this hypothesis, and lead us to conclude that the only European nation to lose monetary policy independence in the light of monetary union was Germany.
    Keywords: Monetary policy independence, European monetary integration, Cointegrated VAR method
    JEL: E52 E58 F41 F42 C32
    Date: 2009
  3. By: Andrew Atkeson; V. V. Chari; Patrick Kehoe
    Abstract: In standard approaches to monetary policy, interest rate rules often lead to indeterminacy. Sophisticated policies, which depend on the history of private actions and can differ on and off the equilibrium path, can eliminate indeterminacy and uniquely implement any desired competitive equilibrium. Two types of sophisticated policies illustrate our approach. Both use interest rates as the policy instrument along the equilibrium path. But when agents deviate from that path, the regime switches, in one example to money; in the other, to a hybrid rule. Both lead to unique implementation, while pure interest rate rules do not. We argue that adherence to the Taylor principle is neither necessary nor sufficient for unique implementation with pure interest rate rules but is sufficient with hybrid rules. Our results are robust to imperfect information and may provide a rationale for empirical work on monetary policy rules and determinacy.
    JEL: E5 E52 E58 E6 E61
    Date: 2009–04
  4. 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. We find that target rates of -1% or less are desirable, which contrasts with policy recommendations derived from a cashless New Keynesian model.
    Date: 2009
  5. By: Riccardo DiCecio; Edward Nelson
    Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
    Keywords: Inflation (Finance) ; Great Britain
    Date: 2009
  6. By: Eiji Ogawa; Taiyo Yoshimi
    Abstract: This paper investigates recent diverging trends among East Asian currencies as well as recent movements of the weighted average value of East Asian currencies (Asian Monetary Unit: AMU) and deviations (AMU Deviation Indicators) of the East Asian currencies from the average values by ƒÀ and ƒÐ convergence methods. Our empirical analysis shows that linkages with the US dollar have been weakening since 2001 or 2002 for some of the East Asian countries. On the other hand, the monetary authority of China continues stabilizing the exchange rate of the Chinese yuan against the US dollar even though it announced its adoption of a currency basket system. It is found that the weighted average of East Asian currencies has been appreciating against the US dollar while depreciating against the currency basket of the US dollar and the euro until the global financial crisis in 2008. Also, the analytical results on ƒÀ and ƒÐ Convergences show that deviations among the East Asian currencies have been widening@in recent years, reflecting the fact that these countriesf monetary authorities are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate systems among these monetary authorities increases volatility and misalignment of intra-regional exchange rates in East Asia.
    JEL: F31 F33
    Date: 2009–03
  7. By: Philippe Moutot; Giovanni Vitale
    Abstract: Since the mid-1980s the world economy has gone through profound transformations of which the sources and effects are probably not yet completely understood. The process of continuous integration in trade, production and financial markets across countries and economic regions--which is what is generally defined as "globalisation"--affects directly the conduct of monetary policy in a variety of respects. The aim of this paper is to present an overview of the structural implications of globalisation for the domestic economies of developed countries and to deduct from these implications lessons for the conduct of monetary policy, and in particular the assessment of risks to price stability.
    Keywords: Globalization ; Monetary policy ; Inflation (Finance) ; International finance ; International trade
    Date: 2009
  8. By: Riccardo DiCecio; Edward Nelson
    Abstract: We argue that the Great Inflation experienced by both the United Kingdom and the United States in the 1970s has an explanation valid for both countries. The explanation does not appeal to common shocks or to exchange rate linkages, but to the common doctrine underlying the systematic monetary policy choices in each country. The nonmonetary approach to inflation control that was already influential in the United Kingdom came to be adopted by the United States during the 1970s. We document our position by examining official policymaking doctrine in the United Kingdom and the United States in the 1970s, and by considering results from a structural macroeconomic model estimated using U.K. data.
    JEL: E31 E52 E58
    Date: 2009–04
  9. By: Tijmen Daniëls; Henk Jager; Franc Klaassen
    Abstract: While virtually all currency crisismodels recognise that the fate of a currency peg depends on how tenaciously policy makers defend it, they seldom model how this is done. We incorporate themechanics of speculation and the interest rate defence against it in the model ofMorris and Shin (American Economic Review 88, 1998). Our model captures that the interest rate defence reduces speculators’ profits and thus postpones the crisis. It predicts that well before the fall of a currency interest rates are increased to offset the buildup of exchange market pressure, and this then unravels in a sharp depreciation. This pattern is at odds with predictions of standard models, but we show that it fits well with reality.
    Keywords: Exchange Market Pressure, Currency Crisis, Interest Rate Defence, Global Game
    JEL: E58 F31 F33 G15
    Date: 2009–02
  10. By: Rasmus Fatum (University of Alberta)
    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: 2009–01
  11. By: Mewael F. Tesfaselassie; Eric Schaling
    Abstract: We analyze determinacy and stability under learning (E-stability) of rational expectations equilibria in the Blanchard and Galí (2006, 2008) New-Keynesian model of inflation and unemployment, where labor market frictions due to costs of hiring workers play an important role. We derive results for alternative specifications of monetary policy rules and alternative values of hiring costs as a percentage of GDP. Under low hiring costs – a typical part of the U.S. calibration – for policy rules based on current period inflation and unemployment our results are similar to those of Bullard and Mitra (2002). However, we find that the region of indeterminacy and E-instability in the policy space increases with the hiring costs. So, higher hiring costs – consistent with the European 'sclerotic' labor market institutions – seem to play an important part in explaining unemployment instability. Under lagged data based rules the area where monetary policy delivers both determinacy and E-stability shrinks. These rules perform worse according to these two dimensions when hiring costs go up. Finally, under expectations-based rules – unlike Bullard and Mitra (2002) – an additional explosive region is introduced. Here also the scope for determinacy and E-stability oriented monetary policy decreases. Interestingly – under the same rule and European 'sclerotic' labor market institutions – we find that responding too much to expected inflation and too little to expected unemployment may very well be self-defeating. When hiring costs are large, a central bank that follows such a policy rule could very easily end up in the worst-case scenario of both indeterminacy and E-instability
    Keywords: Monetary Policy Rules, Determinacy, Learning, E-Stability
    JEL: E52 E31 D84
    Date: 2009–03
  12. By: Balázs Égert
    Abstract: This paper studies drivers of high-frequency (daily) dynamics of the South African rand vis-à-vis the dollar from January 2001 to July 2007. We find strong nonlinear effects of commodity prices, perceived country and emerging market risk premium and changes in the dollar-euro exchange rate on changes in daily returns of the rand-dollar exchange rate. We also identify a one-sided nonlinear mean reversion to the long-term monetary equilibrium. In addition we establish very short-lived effects on the exchange rate of selected macroeconomic surprises and central bank communication aimed at talking up the rand.<P>L’impact des fondamentaux monétaires et de matières premières, des nouvelles macroéconomiques et de la communication de la Banque centrale sur le taux de change : Le cas de l’Afrique du Sud<BR>Ce document étudie les facteurs qui peuvent expliquer la dynamique journalière du rand sud-africain vis-à-vis du dollar sur la période allant de janvier 2001 à juillet 2007. Nous trouvons que les prix des matières premières, la perception du risque par rapport à l’Afrique du Sud et aux pays émergents et les changements du taux de change dollar-euro influencent forcément les variations des rendements journalières du taux de change du rand par rapport au dollar de manière non linéaire. Nos résultats indiquent aussi que le rand s’ajuste vers son niveau d’équilibre monétaire de manière non linéaire lorsque le taux de change du marché est plus fort que le taux de change d’équilibre. De plus, il se trouve que certaines nouvelles macroéconomiques et la communication de banque centrale visant l’appréciation du rand exercent une influence de très court terme sur le cours du rand par rapport au dollar.
    Keywords: exchange rates, taux de change, South Africa, Afrique du Sud, commodity prices, central bank communication, communication de la Banque centrale, macroeconomic news, nouvelles macroéconomiques, nonlinearity, non-linéarité, monetary model, modèle monétaire, prix des commodités
    JEL: E31 F31 O11 P17
    Date: 2009–04–08
  13. By: NAKAJIMA Tomoyuki
    Abstract: We consider an efficiency-wage model with the Calvo-type sticky prices and analyze the optimal monetary policy when the unemployment insurance is not perfect. With imperfect risk sharing, the strict zero-inflation policy is no longer optimal even when the steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earnings loss due to unemployment varies over business cycles. If the idiosyncratic income loss is acyclical, the optimal policy differs very little from the zero-inflation policy. However, if it varies countercyclically, as evidence suggests, the deviation of the optimal policy from the complete price-level stabilization becomes quantitatively signifficant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.
    Date: 2009–04
  14. By: Oguz Atuk; Mustafa Utku Ozmen
    Date: 2009
  15. By: Christian Merkl
    Abstract: In the standard New Keynesian sticky price model the central bank faces no contradiction between the stabilization of inflation and the stabilization of the welfare relevant output gap after a productivity shock hits the economy. When the standard model is enhanced by real wage rigidities or labor turnover costs, an endogenous short-run inflation-output tradeoff arises. This paper compares the implications of the two labor market rigidities. It argues that economists and policymakers alike should pay more attention to labor turnover costs for the following reasons. First, a model with labor turnover costs generates impulse response functions that are more in line with the empirical evidence than those of a model with real wage rigidities. Second, labor turnover costs are the dominant source for the inflation-output tradeoff when both rigidities are present in the model. And finally, there is stronger empirical evidence for the existence of labor turnover costs than for real wage rigidities
    Keywords: monetary policy, real wage rigidity, labor turnover costs, unemployment, tradeoff
    JEL: E24 E32 E52 J23
    Date: 2009–03
  16. By: Eiji Ogawa; Kentaro Iwatsubo
    Abstract: In this paper, we estimate structural VAR models with contemporaneous restrictions based on neo-classical and Keynesian theories to investigate whether the cause of current account surpluses for East Asian economies is a gsaving gluth or undervalued currencies. Analytical results show that the major determinant of the current account is the real effective exchange rate for all East Asian countries with the exception of China for which the major determinant is domestic GDP. Accordingly, the recently requested revaluation of the Chinese yuan may not be an effective policy for reducing the Chinese current account surplus, and may affect other Asian current accounts. We also investigate whether a Chinese currency revaluation would contribute to the improvement of current account imbalances in East Asia and find that a revaluation would improve the current accounts of Japan, Korea, Indonesia, and Thailand. Since the trade structures of major East Asian countries are substitutes with that of China, a Chinese currency revaluation might not lead to a decrease, rather that an increase, in East Asian current account surpluses. Coordination of currency policy among East Asian countries is, therefore, needed to solve the global current account imbalance.
    Date: 2009–03
  17. By: Agnes Benassy-Quere; Sophie Bereau; Valerie Mignon
    Abstract: We study the impact of the global financial crisis on the equilibrium exchange rate of the US dollar. We first simulate the impact of the crisis on the US net foreign asset position. Then, we calculate the equilibrium value of the dollar according both to a BEER and to a FEER approach. We find the case for a strong, although temporary, depreciation of the dollar even more acute than before the crisis. This suggests that the strength of the dollar in late 2008 and early 2009 may be short-lived.
    Keywords: Equilibrium exchange rate; US dollar; global imbalances; crisis; valuation effects
    JEL: F31 C23
    Date: 2009–04
  18. By: Guido Ascari; Tiziano Ropele
    Abstract: When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains
    Keywords: Disinflation, Sacrifice ratio, Non-linearities
    JEL: E31 E5
    Date: 2009–03
  19. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: Recent research has suggested that globalization may have transformed the U.S. Phillips curve by making inflation a function of global, rather than domestic, economic activity. This paper tests this view by estimating a structural model for the U.S., which incorporates a role of global output on the domestic demand and supply relations and on the formation of expectations. Expectations are modeled as near-rational and economic agents are allowed to learn about the economy's coefficients over time. The estimation reveals small and negative coefficients for the sensitivity of inflation to global output; moreover, the fit of the model improves when global output is excluded from the Phillips curve. Therefore, the evidence does not support altering the traditional closed-economy Phillips curve to include global output. The data suggest, instead, that global output may play an indirect role through the determination of domestic output. But the overall impact of global economic conditions on U.S. inflation remains negligible.
    Keywords: Globalization; Global output; Inflation dynamics; New Keynesian Phillips curve; Global slack hypothesis; Constant-gain learning
    JEL: E31 E50 E52 E58 F41
    Date: 2009–04

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