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on Monetary Economics |
| By: | WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); ChunShen Lee (Department of Economics, Feng Chia University) |
| Abstract: | Recent studies evaluate the effectiveness of inflation targeting through the average treatment effect and generally conclude the window-dressing view of the monetary policy for industrial countries. This paper argues that the evidence of irrelevance emerges because of a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time. Targeters achieve lower inflation immediately following the adoption of the policy as well as temporarily slower output growth and higher inflation and output growth variability. But these short-run effects will eventually disappear in the long run. This paper finds substantial empirical evidence for the existence of such intertemporal tradeoffs for eight industrial inflation-targeting countries. That is, targeting inflation significantly reduces inflation at the costs of a lower output growth and higher inflation and growth variability in the short-run, but no substantial effects in the medium to the long-run. |
| Keywords: | inflation targeting, time-varying treatment effects, short-run costs, long-run irrelevance |
| JEL: | C23 E52 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0920&r=mon |
| By: | WenShwo Fang (Department of Economics, Feng Chia University); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Chih-Chuan Yeh (Department of Finance, The Overseas Chinese Institute of Technology) |
| Abstract: | Using quantile regressions and cross-sectional data from 152 countries, we examine the relationship between inflation and its variability. We consider two measures of inflation – the mean and median – and three different measures of inflation variability – the standard deviation, relative variation, and median deviation. All results from the mean and standard deviation, the mean and relative variation, or the median and the median deviation support both the hypothesis that higher inflation creates more inflation variability and that inflation variability raises inflation across quantiles. Moreover, higher quantiles in both cases lead to larger marginal effects of inflation (inflation variability) on inflation variability (inflation). We particularly consider whether thresholds for inflation rate or inflation variability exist before finding such positive correlations. We find evidence of thresholds for inflation rates below 3 percent, but mixed results for thresholds for inflation variability. Finally, a series of robustness checks, including a set of additional explanatory variables as well as controlling for potential endogeneity with instrumental variables, leaves our findings generally unchanged. |
| Keywords: | inflation, inflation variability, inflation targeting, threshold effects, quantile regression |
| JEL: | C21 E31 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0921&r=mon |
| By: | Gino Cateau; Oleksiy Kryvtsov; Malik Shukayev; Alexander Ueberfeldt |
| Abstract: | Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when imperfect credibility is short-lived. The gain becomes smaller with persisting imperfect credibility, turning to a loss if it lasts more than 13 years. |
| Keywords: | Monetary policy framework; Monetary policy implementation |
| JEL: | E31 E52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-17&r=mon |
| By: | Zagaglia, Paolo (Dept. of Economics, Stockholm University) |
| Abstract: | This paper studies the forecasting performance of the general equilibrium model of bond yields of Marzo, Söderström and Zagaglia (2008), where long-term interest rates are an integral part of the monetary transmission mechanism. The model is estimated with Bayesian methods on Euro area data. I investigate the out-of-sample predictive performance across different model specifications, including that of De Graeve, Emiris and Wouters (2009). The accuracy of point forecasts is evaluated through both univariate and multivariate accuracy measures. I show that taking into account the impact of the term structure of interest rates on the macroeconomy generates superior out-of-sample forecasts for both real variables, such as output, and inflation, and for bond yields. |
| Keywords: | Monetary policy; yield curve; general equilibrium; bayesian estimation |
| JEL: | E43 E44 E52 |
| Date: | 2009–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2009_0014&r=mon |
| By: | Antonio Ribba |
| Abstract: | Following the lead of Fama [American Economic Review 65 (1975) 269-282] and of other influential papers, such as Mishkin [Journal of Monetary Economics 30 (1992) 195-215], it has become standard to interpret the Fisher effect as the ability of short-term interest rate to predict future inflation. However, in this paper we demonstrate that by restricting to zero the instantaneous response of expected inflation to an interest rate shock, one can identify a disturbance that economic agents, according to the Fisherian framework, should evaluate as transitory. An important implication of this result is that short-term nominal interest rates cannot be interpreted as predictors, at least not long-run predictors, of inflation. We illustrate this result with an empirical application to US postwar data. |
| Keywords: | Fisher Effect; Identification; Structural Cointegrated VARs |
| JEL: | E40 C32 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:033&r=mon |
| By: | Yao, Fang |
| Abstract: | This paper explores what can be lost when assuming price adjustment is a time - independent (memoryless) process.I derive a generalized NKPC in an optinizing model with the non- constant hazard function and trend inflation. Memory emerges in the resulting Phillips curve through the presence of lagged inflation and lagged expectations. It nests the Calvo NKPC as a limitting case in the sense that the effect of both terms are canceled out by one another under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic to the model. The numerical evaluation shows that introducing trend inflation strengthens the effects of the increasing hazard function on the inflation dynamics . The model can jointly account for persistent dynamics of inflation and output, hump-shaped impulse responses of inflation to monetary shocks, and the fact that high trend inflation leads to more persistence in inflation but not for real variables. |
| Keywords: | Intrinsic inflation persistance, Hazard function, New Keynesian Phillips Curve |
| JEL: | E12 E31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7577&r=mon |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper classifies the monetary standards in Sweden from the Middle Ages to the present, and gives an overview of the various currencies that were in use. During most of Sweden’s history, a commodity standard was in place, while the fiat standard is a rather late innovation. The classification into monetary standards is also related to the issue of debasement under the commodity standard and the mechanisms behind the rise of multiple currencies. |
| Keywords: | monetary history; monetary standard; Sweden |
| JEL: | E42 N13 N14 N23 N24 |
| Date: | 2009–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0006&r=mon |
| By: | Habib Ahmed (Institute of Middle Eastern and Islamic Studies, Durham University); C. Paul Hallwood (Department of Economics, University of Connecticut); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms’ decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for ‘fear of floating’. |
| Keywords: | exchange rates, open economy macroeconomics, monetary policy, exchange rate overshooting |
| JEL: | F31 F32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0918&r=mon |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper deals with foreign exchange rates in Sweden 1658-1803. Foreign currencies played a crucial role in Sweden. Most of the domestic currency units were, in fact, originally imported. In the 18th century, the exchange rates most quoted in Sweden were the ones on Amsterdam, Hamburg, London, Paris, Copenhagen, Gdansk and Swedish Pomerania. The primary data are bills of various durations. To estimate spot rates, an assumption must be made of an interest rate on these bills. In the period 1662-1669 the estimated median shadow interest rate on bills of exchange was as high as 12.5 percent, while it most likely decreased substantially in the 18th century. |
| Keywords: | monetary history; foreign exchange; reichstaler; guilder; pound; taler; zloty; florin; Sweden |
| JEL: | E42 N13 N23 |
| Date: | 2009–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0008&r=mon |
| By: | Ansgar Rannenberg |
| Abstract: | This paper examines the rise in European unemployment since the 1970s by introducing endogenous growth into an otherwise standard New Keynesian model with capital accumulation and unemployment. We subject the model to an uncorrelated cost push shock, in order to mimic a scenario akin to the one faced by central banks at the end of the 1970s. Monetary policy implements a disin?ation by following an interest feedback rule calibrated to an estimate of a Bundesbank reaction function. 40 quarters after the shock has vanished, unemployment is still about 1.8 percentage points above its steady state. Our model also broadly reproduces cross country differences in unemployment by drawing on cross country di¤erences in the size of cost push shock and the associated disinflation, the monetary policy reaction function and the wage setting structure. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0903&r=mon |
| By: | Edvinsson, Rodney (Dept. of Economic History, Stockholm University) |
| Abstract: | This paper deals with the exchange rates between the domestic currencies of Sweden-Finland in 1534-1803. In 1534, the first silver daler coins were minted in Sweden, which existed alongside the main silver coins at a fluctuating exchange rate. In 1624, a copper standard was introduced. However, the silver standard continued to exist alongside the copper standard. A distinctive feature of the multi-currency standard in Sweden-Finland during the 17th and 18th centuries, was that there was not only a fluctuating market exchange rate between the copper and silver currencies, but also between various silver currencies. At least five or six currency units were used, three based on silver, one or two based on copper and one based on gold. In 1776 a mono-currency, silver standard was reintroduced, with the riksdaler as the main unit. However, montery stability was not long-lasting. In 1789-1803 two different currencies existed, one fiat currency based on riksdaler riksgälds notes and one based on the riksdaler banco that continued to be convertible into silver coins by the Riksbank. In 1803 the relation 1 riksdaler banco = 1.5 riksdaler riksgälds was fixed, which basically ended the period of multiple currencies. |
| Keywords: | monetary history; bimetallism; debasement; copper standard; Sweden |
| JEL: | E42 N13 N23 |
| Date: | 2009–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:suekhi:0007&r=mon |
| By: | Ivan Petrella (University of Cambridge); Emiliano Santoro (Department of Economics, University of Copenhagen) |
| Abstract: | This paper deals with the implications of factor demand linkages for monetary policy design. We develop a dynamic general equilibrium model with two sectors that produce durable and non-durable goods, respectively. Part of the output produced in each sector is used as an intermediate input of production in both sectors, according to an input-output matrix calibrated on the US economy. As shown in a number of recent contributions, this roundabout technology allows us to reconcile standard two-sector New Keynesian models with the empirical evidence showing co-movement between durable and non-durable spending in response to a monetary policy shock. A main result of our monetary policy analysis is that strategic complementarities generated by factor demand linkages amplify social welfare loss. As the degree of interconnection between sectors increases, the cost of misperceiving the correct production technology of each sector can rise substantially. In addition, the transmission of different sources of exogenous perturbation is altered, compared to what is commonly observed in standard two-sector models without factor demand linkages. In this respect, the role of the relative price of non-durable goods is crucial, as this does not only influence the user cost of durables through the conventional demand channel, but also affects in opposite directions the real marginal cost of production in either sector through the intermediate input channel. |
| Keywords: | input-output interactions, durable goods, optimal monetary policy |
| JEL: | E23 E32 E52 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:09-04&r=mon |
| By: | Kohlscheen, E (Economics Department, University of Warwick.) |
| Abstract: | In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:905&r=mon |
| By: | Renee A. Fry; Vance L. Martin; Nicholas Voukelatos |
| Abstract: | A 7 variate SVAR model is used to identify the presence and causes of overvaluation in real house prices in Australia from 2002 to 2008. An important feature of the model is the development of a housing sector where long-run restrictions are derived from economic theory to identify housing demand and supply shocks. The empirical results show that real house prices were overvalued during the period, reaching a peak of nearly 20% by the end of 2003. Important factors driving the observed overvaluation are housing demand shocks prior to 2006, and macroeconomic shocks in the goods market post 2006. Wealth effects from portfolio shocks in equity markets are also found to be an important driver. The results also suggest that monetary policy is not an important contributing factor in the overvaluation of house prices. |
| JEL: | E21 E44 C32 R21 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-10&r=mon |