nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒05‒09
sixteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Transmission in three Central European Economies: Evidence from Time-Varying Coefficient Vector Autoregressions By Zsolt Darvas
  2. Optimal monetary policy in a model of the credit channel. By Fiorella De Fiore; Oreste Tristani
  3. Evaluating inflation forecast models for Poland: Openness matters, money does not (but its cost does) By Mukherjee, Deepraj; Kemme, David
  4. Surprising comparative properties of monetary models: Results from a new data base By Taylor, John B.; Wieland, Volker
  5. Money-Market Segmentation in the Euro Area: What has Changed During the Turmoil? By Zagaglia, Paolo
  6. Global Financial Crisis: Causes, Consequences and India’s Prospects By Rakesh Mohan
  7. Dynamic Monetary-Fiscal Interactions and the Role of Monetary Conservatism By Stefan Niemann
  8. Optimal Monetary Policy with Partially Rational Agents By Orlando Gomes; Vivaldo M. Mendes; Diana A. Mendes
  9. Downward wage rigidity and optimal steady-state inflation By Gabriel Fagan; Julián Messina
  10. Inflation and welfare in long-run equilibrium with firm dynamics By Alexandre Janiak; Paulo Santos Monteiro
  11. The term structure of equity premia in an affine arbitrage-free model of bond and stock market dynamics. By Wolfgang Lemke; Thomas Werner
  12. Invoice currencies, import prices, and inflation By Ono, Masanori
  13. Controlling Money and Politics – An Exercise in Damage Control By Marcin Walecki
  14. Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia By Söderberg, Jonas
  15. Demand for Money in the Asian Countries: A Systems GMM Panel Data Approach and Structural Breaks By Rao, B. Bhaskara; Tamazian, Artur; Singh, Prakash
  16. The forecasting power of international yield curve linkages By Michele Modugno; Kleopatra Nikolaou

  1. By: Zsolt Darvas
    Abstract: This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans. 
    Keywords: monetary transmission; time-varying coefficient vector autoregressions; Kalmanfilter
    JEL: C32 E50
    Date: 2009–04
  2. By: Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44.
    Keywords: optimal monetary policy, financial markets, asymmetric information.
    Date: 2009–04
  3. By: Mukherjee, Deepraj; Kemme, David
    Abstract: Countries in which inflation targeting has been adopted require high quality inflation forecasts. The Polish National Bank adopted a variant of implicit inflation targeting and therefore the ability to forecast inflation is critically important to policy makers. Since the domestic price formation process is still evolving, medium term inflation forecasting is often difficult. Using quarterly data from 1995-2007, we estimate and evaluate three types of models for inflation forecasting: (1) output gap models, (2) models involving money, and (3) models which bring the foreign sector into the price formation process. We find that openness is significant in the price formation process and inflation targeting is associated with lower inflation. Traditional measures of forecast accuracy indicate that the simple price gap version of the P* model and the money demand model perform best of this group for medium term forecasting.
    Keywords: Monetary policy; inflation; forecasting; models.
    JEL: E0 E31 E52 E37
    Date: 2008–07–12
  4. By: Taylor, John B.; Wieland, Volker
    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.
    Keywords: Macroeconomic models; Model comparison; Monetary policy rules; Monetary policy shocks; Optimal policy; Robustness and model uncertainty
    JEL: C52 E30 E52
    Date: 2009–05
  5. By: Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: I study how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in financial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. Quantile measures of comovements in volatility report evidence of an increase in contagion within the longer end of the money market curve.
    Keywords: Money market; high-frequency data; time-series methods
    JEL: C22 E58
    Date: 2009–04–23
  6. By: Rakesh Mohan
    Abstract: Presentation shows the global financial crisis, the difference between US, Europe and India, RBI’s policy response and impact, lessons from the crisis, medium-term issues and challenges. [Speech delivered at London Business School].
    Keywords: monetary policy, advanced economies, federal fund rate, china, commodity, asset prices, financial stability, policy, global financial crisis, US, Europe, India, RBI, sub-prime lending rate
    Date: 2009
  7. By: Stefan Niemann
    Abstract: The present paper reassesses the role of monetary conservatism in a setting with nominal government debt and endogenous fiscal policy. We assume that macroeconomic policies are chosen by monetary and fiscal policy makers who interact repeatedly but cannot commit to future actions. The real level of public liabilities is an endogenous state variable, and policies are chosen in a non-cooperative fashion. We focus on Markovperfect equilibria and investigate the role of fiscal impatience and monetary conservatism as determinants of the economy’s steady state and the associated welfare implications. Fiscal impatience creates a tendency of accumulating debt, and monetary conservatism actually exacerbates such excessive debt accumulation. Increased conservatism implies that any given level of real liabilities can be sustained at a lower rate of inflation. However, since this is internalized by the fiscal authority, the Markov-perfect equilibrium generates a steady state with higher indebtedness. As a result, increased monetary conservatism has adverse welfare implications.
    Date: 2009–04–30
  8. By: Orlando Gomes (Instituto Politécnico de Lisboa - Escola Superior de Comunicação Social and UNIDE-ERC); Vivaldo M. Mendes (ISCTE - Department of Economics and UNIDE-ERC); Diana A. Mendes (ISCTE - Department of Quantitative Methods and UNIDE-StatMath)
    Abstract: We explore the dynamic behavior of a New Keynesian monetary policy problem with expectations formed, partially, under adaptive learning. We consider two alternative cases: on the first setting, the private economy has the ability to predict rationally real economic conditions (the output gap) but it needs to learn about the future values of the nominal variable (the inflation rate); on the second setup, private agents are fully aware of future inflation rates, however they lack the ability to predict instantly the correct values of the output gap (learning is attached to this variable). In both cases, we find a simple condition indicating the required learning quality that is needed to guarantee local stability. To achieve convergence to the steady-state, the economy does not need to attain full learning efficiency; it just has to secure a minimum learning quality in order to attain the desired long run result.
    Date: 2008–07
  9. By: Gabriel Fagan (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Julián Messina (Universitat de Girona, Plaça Sant Domènec, 3, IT-17071 Girona, Italy; IZA and FEDEA.)
    Abstract: This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries (the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%. JEL Classification: E31, E52, J4.
    Keywords: Downward wage rigidity, DSGE models, optimal inflation.
    Date: 2009–04
  10. By: Alexandre Janiak; Paulo Santos Monteiro
    Abstract: We analyze the welfare cost of inflation in a model with cash-in-advance constraints and an endogenous distribution of establishments' productivities. Inflation distorts aggregate productivity through firm entry dynamics. The model is calibrated to the United States economy and the long-run equilibrium properties are compared at low and high inflation. We find that increasing the annual inflation rate by 10 percentage points above the average rate in the U.S. would result in a fall in average productivity of roughly 1.3 percent. This decrease in productivity is not innocuous: it is responsible for about one half of the welfare cost of inflation.
    Date: 2009
  11. By: Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12.
    Keywords: Equity premium, affine term structure models, asset pricing.
    Date: 2009–04
  12. By: Ono, Masanori
    Abstract: This paper uses the structural VAR approach to examine the interactive responses between import prices and domestic prices in Japan before and after the 1990s. First, the estimation reveals that the Japanese domestic prices have become a little more vulnerable to foreign inflationary pressure through a rise in contract import prices. Second, Japan after the 1990s can pass along its domestic inflationary pressure to foreign countries with an increase in the pricing of its domestic products. Third, the results confirm that Japan’s exchange rate pass-through effect on its domestic prices has decreased, as suggested by other literature.
    Keywords: Structural VAR; globalization; Japanese economy
    JEL: C32 E31 F31
    Date: 2009–03
  13. By: Marcin Walecki
    Abstract: In many countries political financial regulations have been introduced.
    Keywords: political, governance,,money, politics, democracies, democracy, financial
    Date: 2009
  14. By: Söderberg, Jonas (Centre for Labour Market Policy Research (CAFO))
    Abstract: This paper evaluates 14 macroeconomic variables’ ability to forecast changes in monthly liquidity on the Scandinavian order-driven stock exchanges. Every macroeconomic variable is evaluated both out-of-sample and in-sample and against three different benchmark models of market variables and asymmetries concerning up and down markets. Policy rate on Copenhagen, broad money growth on Oslo, and short-term interest rate and flows from mutual funds on Stockholm significantly improve the out-of-sample forecasts of liquidity at these exchanges. However, most proposed macroeconomic variables can be rejected as forecasters of liquidity on the Scandinavian stock exchanges. There are many variables that predict in-sample liquidity that do not forecast out-of-sample. This stresses the importance of conducting out-of-sample tests when examining whether macroeconomic variables predict liquidity. In addition, this is the first paper confirming that stock market liquidity can be forecast out-of-sample.
    Keywords: Liquidity; Scandinavian stock markets; Forecasting; Out-of-sample tests.
    JEL: G12 G18
    Date: 2008–12–01
  15. By: Rao, B. Bhaskara; Tamazian, Artur; Singh, Prakash
    Abstract: A systems GMM method is used to estimate the demand for money (M1) for a panel of 11 Asian countries from 1970 to 2007. This method has advantages of which the most important one is its ability to minimise small sample bias with persistence in the variables. This system GMM method of Blundell and Bond (1998) simultaneously estimates specifications with the levels and first differences specifications of the variables. We test for structural stability of the estimated function with a recently developed test, for this approach, by Mancini-Griffoli and Pauwels (2006). Our results show that there is a well defined demand for money for these countries and there are no structural breaks.
    Keywords: Systems GMM; Blundell and Bond; Mancini-Griffoli and Pauwels; Asian Countries and Demand for Money and Structural Sta
    JEL: E41
    Date: 2009–05–05
  16. By: Michele Modugno (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Kleopatra Nikolaou (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates whether information from foreign yield curves helps forecast domestic yield curves out-of-sample. A nested methodology to forecast yield curves in domestic and international settings is applied on three major countries (the US, Germany and the UK). This novel methodology is based on dynamic factor models, the EM algorithm and the Kalman …lter. The domestic model is compared vis-á-vis an international one, where information from foreign yield curves is allowed to enrich the information set of the domestic yield curve. The results have interesting and original implications. They reveal clear international dependency patterns, strong enough to improve forecasts of Germany and to a lesser extent UK. The US yield curve exhibits a more independent behaviour. In this way, the paper also generalizes anecdotal evidence on international interest rate linkages to the whole yield curve. JEL Classification: F31.
    Keywords: Yield curve forecast, Dynamic factor model, EM algorithm, International linkages.
    Date: 2009–04

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