nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒05‒16
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Bank Lending Channel during the Quantitative Monetary Easing Policy Period By Hitoshi Inoue
  2. Implementing inflation targeting in Brazil: an institutional analysis By Strachman, Eduardo
  3. The Role of Labor Markets for Euro Area Monetary Policy By Kai Christoffel; Keith Kuester; Tobias Linzert
  4. Currency crises: The case of Iceland By Panagiotis Liargovas; Dimitrios Dapontas
  5. The Name of the Rose: Classifying 1930s Exchange-Rate Regimes By Scott Andrew Urban
  6. Decentralized Exchange and Factor Payments: A Multiple-Matching Approach By Derek Laing; Victor E. Li; Ping Wang
  7. Another look at global disinflation By Toshitaka Sekine
  8. The Money Supply in Macroeconomics By Peter Howells
  9. A further look at the 2004 reform of the operational framework of the ECB By M. Marzo; P. Zagaglia
  10. Models of currency crises with self-fulfilling features: A comment. By Meixing Dai
  11. Macroeconomic Volatilities and the Labor Market: First Results from the Euro Experiment By Christian Merkl; Tom Schmitz
  12. Unstable Banking By Andrei Shleifer; Robert W. Vishny
  13. A Test for the Presence of Central Bank Intervention in the Foreign Exchange Market With an Application to the Bank of Canada By Douglas James Hodgson

  1. By: Hitoshi Inoue (Osaka School of International Public Policy (OSIPP),Osaka University)
    Abstract: This paper investigates an existence of the bank lending channel during the quantitative monetary easing policy (QMEP) period, using panel data of Japanese banks' balance sheets. We find that growth rates of lending of smaller banks and healthier banks responded well to the QMEP. We also find that the growth rate of lending of an average bank responded to the QMEP significantly. These results imply that the bank lending channel existed during the QMEP period.
    Keywords: Monetary policy, Bank of Japan, base money, system GMM
    JEL: E52 E58 G21
    Date: 2009–04
  2. By: Strachman, Eduardo
    Abstract: The paper shows the advantages and handicaps of implementing an inflation target (IT) regime, from a Post-Keynesian and, thus, an institutional stance. It is Post-Keynesian as long as it does not perceive any benefit in the mainstream split between monetary and fiscal policies. And it is institutional insofar as it assumes that there are several ways of implementing a policy, such that the chosen one is determined by historical factors, as it is illustrated by the Brazilian case. One could even support IT policies if their targets were seen just as “focusing devices” guiding economic policy, notwithstanding other targets, as, in the short run, output growth and employment and, in the long run, technology and human development. Nevertheless, an IT is not necessary, although it can be admitted, mainly if the target is hidden from the public, in order to increase the flexibility of the Central Bank.
    Keywords: Brazil; Inflation; Inflation Targeting; Monetary Policy; Economic Policy; Central Bank
    JEL: E58 E42 E31 N16 E52
    Date: 2009
  3. By: Kai Christoffel; Keith Kuester; Tobias Linzert
    Abstract: In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy
    Keywords: Labor Market, wage rigidity, bargaining, Bayesian estimation
    JEL: E32 E52 J64 C11
    Date: 2009–04
  4. By: Panagiotis Liargovas; Dimitrios Dapontas
    Abstract: This paper tries to explain the recent currency crisis in Iceland and draw some policy lessons. It shows that the recent currency crisis in Iceland is mainly due to a loose monetary policy preceding the crisis. Structural reforms which could have prevented the occurrence of the crisis were missing.
    Date: 2009
  5. By: Scott Andrew Urban (St Antony’s College, Oxford University, Oxford OX2 6JF)
    Abstract: There is an implicit consensus that 1930s exchange-rate regimes can be characterised as some variant of ‘floating’. This paper applies an adaptation of modern methodologies of exchange-rate regime classification to a panel of 47 countries in weekly observations between January 1919 and August 1939. On the basis of modern benchmarks, the 1930s world monetary system would not be considered ‘floating’ or even ‘managed floating’. One implication is that today’s fiat-based, managed-floating international financial architecture is unprecedented.
    Keywords: Fixed Exchange Rate, International Reserves, Intervention
    JEL: F31 F33 N10
    Date: 2009–04–01
  6. By: Derek Laing (Department of Economics, Syracuse University); Victor E. Li (Department of Economics and Statistics, Villanova School of Business, Villanova University); Ping Wang (Department of Economics, Washington University in St. Louis)
    Abstract: The emergence of fiat money is studied in an environment in which exchange is organized around trading posts where many producers and shoppers are matched in a dynamic monopolistically competitive framework. Each household consumes a bundle of commodities and has a preference for consumption variety. Within this multiple matching structure we determine the endogenous organization of exchange between firms and shoppers and the means of factor payment (remuneration) as well as the price at which these trades occur. Although each household contacts many sellers, the specialization of tastes implies that the variety of the consumption basket under barter mediated exchange is sparser than that obtained under monetary exchange. We verify that the endogenous linkage of factor payments with the medium of exchange can lead to a monetary equilibrium outcome where only fiat money trades for goods, an ex-ante feature of cash-in-advance models. We also examine the long-run effects of money growth on the equilibrium pattern of exchange. A primary finding, consistent with documented hyperinflationary episodes, is that a sufficiently rapid expansion of money supply and inflation leads to the gradual emergence of barter. Under these circumstances sellers will accept both goods and cash payments whereas workers receive part of their remuneration in goods.
    Keywords: Variety Preference, Search, Trading Post, Monetary vs. Barter Equilibrium
    JEL: D83 D9 E0 E4
    Date: 2009–04
  7. By: Toshitaka Sekine
    Abstract: This paper highlights relative price adjustments taking place in the global economy as important sources of the lower levels of inflation rates observed in the recent decades. Using a markup model, it shows substantial effects from declines in wage costs and import prices relative to consumer prices. Out of the 5 percentage point decline in the inflation rates in eight OECD countries from 1970-1989 to 1990-2006, global shocks to two relative prices account for more than 1.5 percentage points, while a monetary policy shock accounts for another 1 percentage point.
    Keywords: markup model, open-economy New Keynesian Phillips curve, dynamic factor model, global disinflation
    Date: 2009–05
  8. By: Peter Howells (UWE, Bristol)
    Abstract: The notion that the quantity of money in an economy might be endogenously determined has a long history. Even so, it has never been part of mainstream economic thinking which has remained dominated by the view that the policymaker somehow controls the stock of money and that interest rates are market-determined. However, the need to design and operate a monetary policy that works for modern economies as they are currently constructed, has led to the emergence of the so-called ‘new consensus macroeconomics’ in which it is recognised that the policymaker sets a short-term interest rate and the quantities of money and credit are demand-determined. This paper looks at the way in which this ‘new consensus’ is (at last) forcing a recognition, in the teaching of money, that the money supply is endogenously determined. It also shows how we can take this further by adding a banking sector to a model of the real economy in which the money supply is endogenously determined. The paper ends by showing how some of the issues currently emerging in the new consensus are very closely related to earlier debates amongst post Keynesian economists.
    Keywords: Money supply; macroeconomics
    JEL: E50
    Date: 2009–04
  9. By: M. Marzo; P. Zagaglia
    Date: 2009–03
  10. By: Meixing Dai
    Abstract: Much attention has been paid to models of currency crisis with self-fulfilling features and the concept of multiple equilibria developed in the 1990s. They aim at explaining currency crisis without apparent fundamental disequilibrium. They are also useful to render account for currency crisis unpredictability. This paper re-examines an illustrative model of Obstfeld (1996), in which high unemployment may cause an exchange-rate crisis with selffulfilling features. By completing the algebraic demonstration, this paper shows that there are less equilibria than conjectured.
    Keywords: Self-fulfilling currency crisis, Fixed exchange rate, Multiple equilibria.
    JEL: F33 E58
    Date: 2009
  11. By: Christian Merkl; Tom Schmitz
    Abstract: This paper analyzes the effects of different labor market institutions on inflation and output volatility. The eurozone offers an unprecedented experiment for this exercise: since 1999, no national monetary policies have been implemented that could account for volatility differences across member states, but labor market characteristics have remained very diverse. We use a New Keynesian model with unemployment to predict the effects of different labor market institutions on macroeconomic volatilities. In our subsequent empirical estimations, we find that higher labor turnover costs have a statistically significant negative effect on output volatility, while replacement rates have a positive effect, both of which are in line with theory. Real wage rigidities do not seem to play much of a role. This result is in line with our employed labor market model, but stands in stark contrast to the search and matching model. While labor market institutions have a large effect on output volatility, they do not seem to have much of an effect on inflation volatility. Our estimations indicate that the latter is driven instead to a certain extent by differences in government spending volatility
    Keywords: Labor market institutions, macroeconomic volatility, monetary policy, firing costs, unemployment benefits, replacement rate
    JEL: E24 E32 J64
    Date: 2009–04
  12. By: Andrei Shleifer; Robert W. Vishny
    Abstract: We propose a theory of financial intermediaries operating in markets influenced by investor sentiment. In our model, banks make loans, securitize these loans, trade in them, or hold cash. They can also borrow money, using their security holdings as collateral. We embed such banks in a stylized financial market, in which securitized loans may be mispriced, and investigate how banks allocate limited capital among the various activities, as well as how they choose their capital structure. Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors. The theory explains the cyclical behavior of credit and investment, but also accounts for the fundamental instability of banks operating in financial markets, especially when banks use leverage.
    JEL: E32 G21 G33
    Date: 2009–05
  13. By: Douglas James Hodgson
    Abstract: We propose a general non-linear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from target levels. We consider the instrumental variables estimation of possibly non-linear response functions and tests of intervention when the functional form may be non-linear, asymmetric, and may contain unknown shape parameters. The methodology applies techniques developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous equations model. We report the results of an empirical analysis of activity of the Bank of Canada, for the period from 1953-2006, with regard to the Canada-U.S. exchange rate, with changes in foreign reserves proxying for intervention activity. <P>Nous proposons un cadre de référence général pour les équations non-linéaires simultanées s’appliquant à l’analyse économétrique de modèles d’intervention des banques centrales dans les marchés des devises étrangères, en réponse aux écarts des taux de change par rapport aux niveaux cibles. Nous prenons en considération l’estimation des variables instrumentales liées aux fonctions de réponses possiblement non-linéaires et aux tests en matière d’interventions lorsque la forme fonctionnelle peut être non linéaire, asymétrique et lorsqu’elle peut contenir des paramètres de forme inconnue. La méthodologie applique, à un modèle à équations simultanées non linéaires, des techniques élaborées pour effectuer des tests en présence de paramètres de nuisance non identifiés sous une hypothèse nulle. Nous présentons les résultats d’une analyse empirique des activités de la Banque du Canada, durant la période de 1953-2006, relativement au taux de change Canada-É.-U., les variations des réserves étrangères permettant les activités d’intervention.
    Keywords: unidentified nuisance parameter, nonlinear simultaneous equations, foreign exchange reserves, policy reaction functions, paramètre de nuisance non identifié, équations simultanées non linéaires, réserves de change, fonctions de réaction de la politique
    Date: 2009–04–01

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