nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒05‒02
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. On the role of money growth targeting under inflation targeting regime. By Meixing DAI
  2. Monetary Targeting in Pakistan: A Skeptical Note By Saqib, Omar F; Omer, Muhamad
  3. Household’s Preferences and Monetary Policy Inertia By Alessandro Flamini; Andrea Fracasso
  4. Is Nigeria Ready for Inflation Targeting? By Aliyu, Shehu Usman Rano; Englama, Abwaku
  5. The Implementation of SNB Monetary Policy By Thomas Jordan; Angelo Ranaldo; Paul Soderlind
  6. Central Bank Preferences, Distribution Forecasts and Economic Stability in a Small Open-economy By Alessandro Flamini
  7. The role of house prices in the monetary policy transmission mechanism in small open economies By Hilde C. Bjørnland; Dag Henning Jacobsen
  8. Developing a Structured Forecasting and Policy Analysis System to Support Inflation-Forecast Targeting (IFT) By Douglas Laxton; David Rose; Alasdair Scott
  9. Inflation Differentials in the Euro Area and Their Determinants - An Empirical View By Václav Zdárek; Juan Ignacio Aldasoro
  10. Locked-in and Sticky Textbooks: Mainstream Teaching of the Money Supply Process By Boermans, Martijn Adriaan; Moore, Basil J
  11. The Bank Lending Channel: a FAVAR Analysis By Chetan Dave; Scott J. Dressler; Lei Zhang
  12. Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia By Daniel Leigh; Enrique Flores; Benedict J. Clements
  13. Fiscal and Monetary Policy During Downturns: Evidence from the G7 By Daniel Leigh; Sven Jari Stehn
  14. Variety of economic judgment and monetary policy-making by committee By Sheila Dow; Matthias Klaes; Alberto Montagnoli
  15. Assessing Inflationary Pressures in Colombia By Hernando Vargas; Andrés González; Eliana González; Jose Vicente Romero
  16. Monetary Policy Challenges for Emerging Market Economies By Hammond, Gill; Kanbur, Ravi; Prasad, Eswar
  17. The Role of Media for Inflation Forecast Disagreement of Households and Professionals By Thomas Maag; Michael J. Lamla
  18. Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis By Erlend Nier
  19. Common determinants of currency crises: role of external balance sheet variables By Licchetta, Mirko
  20. Commodity Price Volatility, Cyclical Fluctuations, and Convergence: What is Ahead for Inflation in Emerging Europe? By Edda Zoli
  21. Behavioral and Permanent Zloty/Euro Equilibrium By Joanna Beza-Bojanowska
  22. Forces Driving Inflation in the New EU10 Members By Emil Stavrev
  24. One or Two Monies? By Janet Hua, Jiang; Mei, Dong
  25. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules By Ulrich Gunter; Harald Fadinger; Stefan Berger
  26. Auctions for Injecting Bank Capital By Lawrence M. Ausubel; Peter Cramton
  27. Capital Inflows: Macroeconomic Implications and Policy Responses By M. Ayhan Kose; Selim Elekdag; Roberto Cardarelli

  1. By: Meixing DAI
    Abstract: The mainstream inflation-targeting literature makes the strong assumption that the central bank can exactly target the interest rate which affects investment and consumption decisions and hence the money supply plays no role in the monetary policy strategy. This assumption is equivalent to admitting the perfect credibility of inflation target announced by the central bank, the perfect functioning of money and financial markets and that the central bank is willing to inject as much liquidity as the economic agents demand. Neither of these assumptions corresponds to the reality. In effect, the inflation expectations can not be easily anchored by the cheap talk of central bankers. On the other hand, the central bank may have many difficulties to target, in a context of financial instability, the interest rates which affect the real and financial decisions of private agents. We suggest that under inflation-targeting regime, money and credit markets vehicle the inflation expectations that can be anchored with a well-specified feedback money growth rule. The latter, in contrast to the Friedman’s k percent money growth rule, can help managing the inflation expectations in a manner to guarantee the dynamic stability of the economy. Furthermore, the model can be easily used to discuss the implications of the zero interest rate policy and the quantitative easing policy.
    Keywords: Interest rate rule, imperfect money and credit markets, inflation targeting, monetary targeting, inflation expectations, Friedman’s k percent money growth rule, feedback money growth rule, macroeconomic stability, zero interest rate policy, quantitative easing policy.
    JEL: E43 E44 E51 E52 E58
    Date: 2009
  2. By: Saqib, Omar F; Omer, Muhamad
    Abstract: The objective of this study is to evaluate monetary targeting strategy in Pakistan by testing the Quantity Theory of Money and the income velocity of money stated by Monetarists and the endogenous money hypothesis postulated by the Post Keynesians. Our tests on the Pakistani data covering about thirty years reveal that the quantity theory is an inadequate explanation of inflation, income velocity of money is unstable, and money is endogenous. These results suggest rethinking on monetary targeting strategy in Pakistan.
    Keywords: Monetary Targeting; QTM; Income Velocity of Money; Endogenous Money
    JEL: E58 E52 E5
    Date: 2008–06–05
  3. By: Alessandro Flamini (Department of Economics, The University of Sheffield); Andrea Fracasso
    Abstract: The estimation of monetary policy rules suggests that the interest rates set by central banks move with a certain inertia. Although a number of hypotheses have been suggested to explain this phenomenon, its ultimate origin is unclear, thus delineating this issue as a modern "puzzle" in monetary economics. We show that household's preferences can play an important role in determining optimal interest rate inertia. Importantly, this can occur even when the central bank has negligible preferences for smoothing the interest rate.
    Keywords: Optimal monetary policy; interest rate smoothing; household's preferences
    JEL: E52 E58
    Date: 2009–02
  4. By: Aliyu, Shehu Usman Rano; Englama, Abwaku
    Abstract: This paper evaluates whether Nigeria is ready to adopt inflation targeting (IT), a monetary policy framework that several emerging markets have adopted over the last one decade. The paper reviewed literature on selected conditions for successful implementation of IT and then focused on whether one specific precondition of an empirically stable monetary transmission mechanism is tenable. Vector autoregressive (VAR) model was applied using select monetary policy and other macroeconomic variables to explore the various channels using the Granger causality tests, impulse responses, and variance decompositions. Results showed that inflation in Nigeria is impassive to monetary transmission variables in the model. Specifically, weak link between prices and credit and interest rate channels were established. However, evidence of strong inverse link between exchange rate and prices was found in the model. This suggests exchange rate pass-through on the level of prices in the economy. The paper, therefore, recommends the pursuance of IT lite in Nigeria.
    Keywords: Inflation targeting; vector autoregressive model; Granger causality test; monetary transmission mechanism; exchange rate pass-through.
    JEL: E31 E37
    Date: 2009–01–03
  5. By: Thomas Jordan; Angelo Ranaldo; Paul Soderlind
    Abstract: We use a regime switching approach to model the implementation of the SNB monetary policy. The regime switching technique is crucial to assess the flexibility inherent in the SNB's monetary policy concept. The empirical findings support the idea that repo operations are instrumental in smoothing the implementation of monetary policy in normal times while changes in the official operational target accompanied by the accommodating use of repo operations produce the aimed effects in distressed periods. A significant contribution also came from some new measures designed to improve liquidity in the Swiss franc money market during the financial crisis in 2007- 8.
    Keywords: implementation of monetary policy, Libor, repo, Swiss franc money market, regime switching model
    JEL: E5 G15
    Date: 2009–04
  6. By: Alessandro Flamini (Department of Economics, The University of Sheffield)
    Abstract: This paper relates the central bank's preferences on the inflation index and on the degree of smoothness of the interest rate to the quality of its forecasts and the expected perturbing impact of several shocks. The framework is a Markov jump-linear-quadratic system for optimal policy with model uncertainty in a timeless perspective. Comparing CPI and domestic inflation targeting, the latter implies considerably less variability in the distribution forecast of the economic dynamics. Furthermore, domestic inflation targeting stands out for much less sensitiveness to interest rate smoothing, and for resulting in more expected economic stability. Importantly, domestic inflation targeting allows significantly improving the prediction accuracy of the interest rate behaviour.
    Keywords: Inflation targeting; additive and multiplicative uncertainty; Markov jump linear quadratic systems; small open-economy; optimal monetary policy; central bank preferences
    JEL: E52 E58 F41
    Date: 2009–03
  7. By: Hilde C. Bjørnland (Norwegian School of Management and Norges Bank (Central Bank of Norway)); Dag Henning Jacobsen (Norges Bank (Central Bank of Norway))
    Abstract: We analyse the role of house prices in the monetary policy transmission mechanism in Norway, Sweden and the UK using structural VARs. A solution is proposed to the endogeneity problem of identifying shocks to interest rates and house prices by using a combination of short-run and long-run (neutrality) restrictions. By allowing the interest rate and house prices to react simultaneously to news, we find the role of house prices in the monetary transmission mechanism to increase considerably. In particular, house prices react immediately and strongly to a monetary policy shock. Furthermore, the fall in house prices seem to enhance the negative response in output and consumer price inflation that has traditionally been found in the conventional literature. Moreover, we find that the interest rate respond systematically to a change in house prices.
    Keywords: VAR, monetary policy, house prices, identification
    JEL: C32 E52 F31 F41
    Date: 2009–04–27
  8. By: Douglas Laxton; David Rose; Alasdair Scott
    Abstract: This paper presents a basic plan for developing a Forecast and Policy Analysis System designed to support an inflation-forecast targeting regime at a central bank. It includes discussion of the development of data management and reporting processes; the creation of a forecast team and the development of human capital; the implementation of a simple model, plus possible extensions; and the management of regular economic projections. We emphasize that it is better to implement simple models earlier and use them well, rather than wait in an attempt to develop an all-encompassing model.
    Keywords: Inflation , Forecasting models , Data analysis , Databases , Monetary policy , Central banks , Human capital ,
    Date: 2009–03–24
  9. By: Václav Zdárek; Juan Ignacio Aldasoro
    Abstract: In this paper, we present evidence on the statistical features of observed dispersion in HICP inflation rates in the Euro area. Our descriptive exercise shows that there is still a remarkable dispersion of HICP inflation rates across the member countries. We find that most of dispersion originates in the non-traded categories of the HICP. This suggests that the main source of dispersion in countries’ headline inflation rates is in those components of the HICP where non-traded goods (services, (public) goods with regulated and administered prices) are more intensely represented. We then examine the determinants of inflation differentials in a panel of the states of the Euro area in 1999–2007 using alternative classifications of this group and three different datasets. The evidence presented shows that output gaps and a proxy for price level convergence were statistically significant. On the other hand, some determinants that were found significant in previous studies (for example Honohan and Lane 2003, 2004; ECB, 2003) has no impact on inflation in our expanded time span (e.g. exchange rate movements) The dispersion of HICP inflation is expected to increase in the coming years as the new EU member states will join the Euro area. There are some risks for these countries connected with the common monetary policy, which is adjusted more to the conditions of stabilized advanced economies forming the core of the Euro area. This creates potential problems for the EU common monetary policy (ECB), in particular negative (positive) interest rates, their repercussions on investment processes, consumption and the possibility of creating asset bubbles.
    Keywords: inflation differentials, price convergence, exchange rate, panel data
    JEL: C23 E31 F15 F41
    Date: 2009–03
  10. By: Boermans, Martijn Adriaan; Moore, Basil J
    Abstract: Current macro-economic textbooks provide a fatally misleading description of the money supply process in modern economies. Over the past 20 years Post Keynesian authors have established conclusively that despite strictly-enforced cash reserve requirements, changes in the supply of bank deposits are not determined exogenously by central bank open market operations, but are endogenously determined by changes in bank borrowers’ demand for credit. Nevertheless the vast majority of undergraduate macroeconomic textbooks continue to teach the high-powered-base “money-multiplier” paradigm that the supply of money is exogenously determined by the central bank. Few texts recognize that interest rate targeting renders the high-powered base endogenous. This paper summarizes the extent mainstream macroeconomic textbooks are “locked in” and “sticky,” and fail both in the teaching of monetary policy and in proper scientific discourse.
    Keywords: macroeconomic textbooks; money supply; endogenous money paradigm; EMP; Post Keynesian economics; paradigm shift
    JEL: E12 E51 A20 I21 E58 E52 E41 A14 B5
    Date: 2008–11
  11. By: Chetan Dave (School of Economic, Political and Policy Sciences at the University of Texas at Dallas); Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Lei Zhang (School of Economic, Political and Policy Sciences at the University of Texas at Dallas)
    Abstract: We examine the role of commercial banks in monetary transmission in a factor-augmented vector autoregression (FAVAR). A FAVAR exploits a large number of macroeconomic indicators to identify monetary policy shocks, and we add commonly used lending aggregates and lending data at the bank level. While our results suggest that the bank lending channel (BLC) is stronger than previously thought, this feature is not robust. In addition, our results indicate a diffuse response to monetary innovations when individual banks are grouped according to asset sizes and loan components. This suggests that other bank characteristics could improve the identification of the BLC.
    Keywords: Bank Lending Channel, FAVAR, Monetary Policy
    JEL: E51 E52 C32
    Date: 2009–04
  12. By: Daniel Leigh; Enrique Flores; Benedict J. Clements
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.
    Keywords: Monetary policy , Fiscal policy , External shocks , Colombia , Inflation targeting , Flexible exchange rates , Economic models ,
    Date: 2009–03–19
  13. By: Daniel Leigh; Sven Jari Stehn
    Abstract: This paper analyzes how fiscal and monetary policy typically respond during downturns in G7 countries. It evaluates whether discretionary fiscal responses to downturns are timely and temporary, and compares the response of fiscal policy to that of monetary policy. The results suggest that while responding more weakly and less quickly than monetary policy, discretionary fiscal policy is more timely than conventional wisdom would suggest, particularly in “Anglo-Saxon†countries, but the response differs substantially across fiscal instruments. Both fiscal and monetary policy are found to be subject to an easing bias, with more easing during downturns than tightening during upturns; and liable to easing in response to erroneously perceived downturns, many of which are subsequently revised to expansions.
    Keywords: Fiscal policy , Group of seven , Monetary policy , Government expenditures , Revenues , Economic stabilization , Economic models , Cross country analysis ,
    Date: 2009–03–19
  14. By: Sheila Dow (University of Stirling); Matthias Klaes (Keele University); Alberto Montagnoli (University of Stirling)
    Abstract: With the increasing attention to how monetary policy is communicated has come a focus on the scope for diverse messages to arise from the committee making the decisions. While the existing literature sees the source of such diversity in relation to a 'correct' decision based on one 'true' model, we explore the implications of diversity as being instead the norm within a pluralist approach to knowledge. By considering judgment as the core of decision-making and uncertainty as conditioning judgment, we develop a theory of decision-making by committee under uncertainty. our case study is the Monetary Policy Committee of the Bank of England. We conclude with a hypothesis about the tendency to policy inaction in different circumstances, notably where there are confident but conflicting judgments within the committee, on the one hand, and where there is agreement that a high level of uncertainty clouds judgment, on the other. This contrasts with the conventional association of diversity of MPC opinion with uncertainty (both as cause and effect).
    Keywords: uncertainty, judgement, ambiguity, central bank communication, monetary policy
    JEL: B41 B50 E58
    Date: 2008–12
  15. By: Hernando Vargas; Andrés González; Eliana González; Jose Vicente Romero
    Abstract: The assessment of inflationary pressures in Colombia has faced two important challenges in the present decade. The …rst one occurred in 2006 and consisted of detecting an overheating economy in the midst of fast growing investment and increasing measured productivity. The second challenge took place in 2007-2008, when the economy was hit by a number of "supply" shocks and core inflation indicators sent diverging signals about the transmission of those shocks to macroeconomic in‡ation. An evaluation of the …rst episode shows that traditional indicators of productivity and unit labor costs were not su¢ cient to identify "supply" and "demand" movements. Thus, policymakers had to rely on a wider array of variables to gauge the state of the economy. Regarding the second episode, an evaluation of core in‡ation indicators according to stan- dard criteria suggests that no particular measure seems to be clearly superior to the others. Hence, the assessment of inflationary pressures should not rely only on one or few core in‡ation indicators, since some signals could be picked by some measures and not by others. Moreover, this result suggests that the analysis of core in‡ation measures must be complemented with a careful examination of the persistence of the shocks and a close monitoring of their impact on inflation expectations. It is found that the latter are formed on the basis of past inflaation, but that the inflation target also plays a role. In addition, in‡ation expectations partially move with "supply" shocks, an outcome that re‡ects a degree of credibility of monetary policy.
    Date: 2009–04–21
  16. By: Hammond, Gill; Kanbur, Ravi; Prasad, Eswar
    Abstract: This paper introduces a significant new collection of papers on monetary policy in emerging market economies, written by leading analysts and policy makers. Does existing economic theory provide lessons that are pertinent for designing effective monetary policy frameworks in emerging markets? What can be learned from cross-country studies and from experiences of individual countries that have adopted different approaches? While country-specific circumstances and initial conditions matter a great deal in formulating suitable frameworks, are there clear general principles that can serve as a guide in this process? These are among the issues addressed in the dialogue between academics and policy makers represented in this volume. In this paper, we provide an overview of the main issues, linking them to broader debates in the academic literature as well as an assessment of how individual countries have chosen to respond to specific policy challenges and what the consequences have been. We discuss many controversies where there are still sharp differences in views between and amongst theorists and practitioners. We also delineate a few key analytical issues where there is still a yawning gap between theory and practice. In the process, we set out a broad agenda for further research in this area.
    Keywords: Emerging Markets, Monetary Policy, Economies, International Development, International Relations/Trade, Political Economy, Public Economics,
    Date: 2009–02
  17. By: Thomas Maag (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper investigates the effects of media coverage and macroeconomic con- ditions on inflation forecast disagreement of German households and professional forecasters. We adopt a Bayesian learning model in which media coverage of infla- tion affects forecast disagreement by influencing information sets as well as predictor choice. Our empirical results show that disagreement of households depends on the content of news stories (tone) but is unaffected by reporting intensity (volume) and by the heterogeneity of story content (information entropy). Disagreement of pro- fessionals does not depend on media coverage. With respect to the influence of macroeconomic variables we provide evidence that disagreement of households and professionals primarily depends on the current rate of inflation.
    Keywords: forecast disagreement, inflation expectations, media coverage, Bayesian learning
    JEL: E31 E37 D83
    Date: 2009–04
  18. By: Erlend Nier
    Abstract: This paper sets out general principles for the design of financial stability frameworks, starting from an analysis of the objectives and tools of financial regulation. The paper then offers a comprehensive analysis of the costs and benefits of the two main models that have emerged for modern financial systems: the integrated model, with a single supervisor outside of the central bank, and the twin-peaks model, with a systemic risk regulator (central bank) on the one hand and a conduct of business regulator on the other. The paper concludes that the twin-peaks model may become more attractive when regulatory structures are geared more explicitly towards the mitigation of systemic risk-including through the introduction of new macroprudential tools that could be used alongside monetary policy to contain macro-systemic risks; through enhanced regulation and special resolution regimes for systemically important institutions; and a more holistic approach to the oversight of clearing and settlement systems. Since the optimal solution may well be path-dependent and specific to the development of financial markets in any given country, a number of hybrid models are also discussed.
    Keywords: Central banks , Financial crisis , Monetary policy , Financial stability , Financial systems , Financial sector , Bank supervision , Bank regulations , Bank resolution , Credit risk , Risk management ,
    Date: 2009–04–10
  19. By: Licchetta, Mirko (Bank of England)
    Abstract: This paper investigates the role of external balance sheet variables as determinants of currency crises in emerging market (EME) and advanced economies. A random effect probit model is used in a panel of 40 countries with monthly data over the January 1980-December 2004 period. The main results of the paper are as follows. First, size and, particularly, the composition of a country's external balance sheet are found to play an important role in the onset of crises. Second, EMEs seem to be more sensitive to external balance sheet variables than developed countries, and so too do economies with fixed or quasi-fixed exchange rate regimes. Third, further support is provided to standard theoretical explanations of currency crises. The likelihood of a crisis is found to increase with: the extent to which the real exchange rate rises above its trend; faster growth in broad money (relative to the level of international reserves); larger current account and budget balance deficits; lower GDP growth; and, if a neighbouring country already has a crisis. Economic fundamentals are also found to be a more important explanation of the onset of currency crises during the 1980s than during the 1990s, suggesting that more recent crises are less 'fundamentally' driven.
    Keywords: Currency crises; early warnings system; emerging markets
    JEL: F31 F33 F37
    Date: 2009–04–27
  20. By: Edda Zoli
    Abstract: This paper assesses the role of international commodity prices, cyclical fluctuations, and convergence in driving inflation in 18 European emerging economies. Country specific VARs and panel estimates indicate that international commodity price shocks have a significant impact on domestic inflation, but the inflation response is asymmetric for positive and negative shocks. Cyclical fluctuations explain a relative small share of inflation variability, and the inflation response is asymmetric during upturns and downturns. Price convergence is estimated to add nearly 3 percentage points to headline inflation, for the average country whose price level is about 50 percent relative to the EU-15 average.
    Keywords: Commodity prices , Emerging markets , Commodity price fluctuations , Inflation , Economic models , Time series , Cross country analysis ,
    Date: 2009–03–17
  21. By: Joanna Beza-Bojanowska (National Bank of Poland)
    Abstract: Poland is expected to enter the Exchange Rate Mechanism II (ERM II). The European Central Bank recommends that the ERM II central rate should reflect the best possible assessment of the equilibrium exchange rate. Since the equilibrium rate is changing in time, it is important to identify the pushing and pulling forces of the exchange rate. This knowledge will let the authorities to defend only the exchange rate that is in equilibrium and to assess outcomes of their actions. We use the VEC approach of Johansen to estimate the behavioral equilibrium exchange rate and to identify the pushing forces of the Polish zloty/euro rate. We apply the Gonzalo-Granger decomposition to calculate the permanent equilibrium exchange rate and to identify the pulling forces of the zloty exchange rate. We demonstrate that this approach may be useful for Polish authorities while entering the ERM II as well as within that mechanism.
    Keywords: equilibrium exchange rate, cointegration analysis, Gonzalo- Granger decomposition, ERM II
    JEL: C32 C51 F31
    Date: 2009–02–25
  22. By: Emil Stavrev
    Abstract: The paper analyzes the forces driving inflation in the new EU10 member countries. A significant part of headline inflation in these countries is due to common factors, such as price level convergence and EU integration. However, idiosyncratic factors have also played a role in the inflation process. These factors are related to the country-specific financial conditions, pass-through from foreign prices, and demand-supply situation in each country, although administered price adjustments and increases of indirect taxes associated with EU accession are also likely to have played a role.
    Keywords: Inflation , European Union , Economic integration , Economic models , Cross country analysis ,
    Date: 2009–03–19
  23. By: Andrés González Gómez; Lavan Mahadeva; Diego Rodríguez; Luis Eduardo Rojas
    Abstract: If theory-consistent models can ever hope to forecast well and to be useful for policy, they have to relate to data which though rich in information is uncertain, unbalanced and sometimes forecasts from external sources about the future path of other variables. One example from many is financial market data, which can help but only after smoothing out irrelevant short-term volatility. In this paper we propose combining different types of useful but awkward data set with a linearised forward-looking DSGE model through a Kalman Filter fixed-interval smoother to improve the utility of these models as policy tools. We apply this scheme to a model for Colombia.
    Date: 2009–04–21
  24. By: Janet Hua, Jiang; Mei, Dong
    Abstract: We investigate whether money constitutes a perfect substitute for the missing record-keeping technology in a quasi-linear environment, where private information and limited commitment are present. We adopt the mechanism design approach and solve a social planners problem subject to the resource constraint, the incentive constraints imposed by the existing frictions, and the available memory technologies. The result is that when money is divisible, concealable and in variable supply, a single money may or may not be su¢ cient to replace the record-keeping technology. We further show that two monies serve as a perfect substitute for the record-keeping technology so that there is no need for a third money.
    Keywords: Record-keeping; Money; Private Information; Limited Commit- ment; Mechanism Design
    JEL: F30 D82 E40
    Date: 2008–09–21
  25. By: Ulrich Gunter; Harald Fadinger; Stefan Berger
    Abstract: The present article extends a variant of the Obstfeld/Rogoff (2001) two-country DSGE model by introducing Calvo (1983) pricing. It is possible to collapse the model into a canonical log-linear representation consisting of two dynamic IS and two New Keynesian Phillips curves. Re°ecting the di®ering statutes of the ECB and the Fed, two diverging interest-rate rules are introduced. For a sensible calibration of the model we can derive a locally unique rational expectations equilibrium. Furthermore, we ¯nd that aggregate productivity shocks, which are assumed to be positively correlated across countries, have a negative impact on domestic and foreign output, a phenomenon already described for the closed economy by Gal¶³ (2002). Cost-push as well as contractionary monetary policy shocks, which are assumed to be country-speci¯c, also have a negative impact on domestic and foreign output since the economies are interdependent due to terms-of-trade externalities. Contrary to Corsetti/Pesenti (2001), expansionary monetary policy shocks always have a "prosper thyself" and "beggar thy neighbor" e®ect since they in°uence the terms of trade bene¯cially for the respective country's resident households. Finally, if the ECB implemented the interest-rate rule proposed in the present article, it would encounter lower °uctuations in European producer price in°ation compared to an interest-rate rule as proposed for the Fed. This is consistent with the ECB's paramount objective of price stability. However, this advantage only holds at the expense of relatively high °uctuations in the European output gap.
    JEL: E12 E52 E58 F41 F42 F47
    Date: 2009–04
  26. By: Lawrence M. Ausubel (Economics Department, University of Maryland); Peter Cramton (Economics Department, University of Maryland)
    Abstract: Public discussion has turned, in the past few days, toward using some of the $700 billion in rescue funds for the injection of government money into banks in return for ownership stakes. The purpose of this short note, an addendum to “A Troubled Asset Reverse Auction,” is to describe an auction mechanism suitable for injections of capital into banks. The auctions would price the equity purchases through a competitive process.
    Keywords: Auctions, financial auctions, financial crisis
    JEL: D44 G21
    Date: 2009
  27. By: M. Ayhan Kose; Selim Elekdag; Roberto Cardarelli
    Abstract: This paper examines the macroeconomic implications of, and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.
    Keywords: Capital inflows , Emerging markets , Current account deficits , Exchange rate policy , Fiscal policy , Capital controls , Cross country analysis ,
    Date: 2009–03–17

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