nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒06‒17
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Testing for the stability of money demand in italy: has the euro influenced the monetary transmission mechanism? By Salvatore Capasso; Oreste Napolitano
  3. The day-to-day interbank market, volatility, and central bank intervention in a developing economy By Sánchez-Fung, José R.
  4. Independent Central Banks: Some theoretical and empirical problems? By Peter Howells
  5. Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy By Bianca De Paoli
  7. Non-constant Hazard Function and Inflation Dynamics By Fang Yao
  8. Linear and nonlinear monetary approaches to the exchange rate of the Philippines peso-Japanese yen By Liew, Venus Khim-Sen
  9. Should Central Banks Target Happiness? Evidence from Latin America By Pavel Luengas; Inder J. Ruprah
  10. Precautionary Demand for Money in a Monetary Business Cycle Model By Telyukova, Irina A.; Visschers, Ludo
  11. The re-establishment of the Ethiopia’s monetary and banking systems By Arnaldo MAURI
  12. Country Size, Currency Unions, and International Asset Returns. By Tarek A. Hassan
  13. The Romanian's loan agreement with IMF and EC By Mihai, Ilie
  14. Strengthening the Governance of the International Monetary Fund: How a Dual Board Structure Could Raise the Effectiveness and Legitimacy of a Key Global Institution By Thimann, Christian; Just, Christian; Ritter, Raymond

  1. By: Salvatore Capasso; Oreste Napolitano (Department of Economic Studies, Parthenope University of Naples)
    Keywords: Money demand, ARDL model, Kalman filter
    Date: 2008–02
  2. By: Jan Libich; Petr Stehlik
    Abstract: The paper examines whether central banks should be committed to achieving price stability (a low-inflation target), and how strong (explicit) their long-term monetary commitment should be. For that purpose we propose a game theoretic framework that enables us to model various degrees of commitment, as well as its endogenous deter- mination. Our main policy contribution consists in showing that the socially optimal degree of long-term monetary commitment depends on: (i) the potential short-term cost in terms of reduced stabilization flexibility, (ii) the potential benefi?t in terms of better anchored expectations, (iii) the structure of the economy, (iv) agents' expectations for- mation, and (v) the degrees of the central bank's conservatism (strictness) and ambition. The latter point implies substitutability between explicit inflation targeting and central bank goal-independence, and offers a possible explanation for the fact that countries with originally low degrees of central bank goal-independence have tended to commit more explicitly to price stability (legislate a unitary or hierarchical mandate rather than a dual mandate).
    JEL: E52 C72 E61
    Date: 2009–01
  3. By: Sánchez-Fung, José R.
    Abstract: This paper investigates banking system instability vis-à-vis the day-to-day interbank market and monetary policy effectiveness in the Dominican Republic. The analysis reveals a negative relationship among excess banking system reserves and the interbank interest rate, and shows that in crisis ‘news’ affect the interbank rate’s volatility asymmetrically and non-linearly. The paper also finds that the 2002-2003 banking crisis and the subsequent central bank intervention as a lender of last resort weakened monetary policy’s transmission mechanism. These events undermined the ensuing stabilization effort, stressing the pervasive short-run trade-off between preserving macroeconomic stability and safeguarding financial stability, and the pitfalls of monetary policymaking in a highly volatility setting.
    Keywords: interbank market; financial stability; monetary policy; IMF stabilisation programme; Dominican Republic.
    JEL: E43 E58 G21
    Date: 2008
  4. By: Peter Howells (UWE, Bristol)
    Abstract: In little more than twenty years, it has become widely accepted that the optimal design of monetary policy should include provision for a central bank that is independent of government influence. This is a remarkably short period of time for any idea in economics to become so widely-accepted. But there are problems. In this paper we show that there are many confusions and even some contradictions associated with central bank independence. To begin with, it is not entirely clear what it is exactly that central banks need to be independent of. Furthermore, there is confusion over the mechanisms whereby independence is supposed to deliver its benefits. The literature which is commonly said to provide the rationale for independence is often misunderstood and the evidence that independence does in fact enhance policy outcomes is extremely weak.
    Keywords: independent central banks
    JEL: E52 E58
    Date: 2009–06
  5. By: Bianca De Paoli
    Abstract: Can the structure of asset markets change the way monetary policy should be conducted?Following a linear-quadratic approach, the present paper addresses this question in a NewKeynesian small open economy framework. Our results reveal that the configuration of assetmarkets significantly affects optimal monetary policy and the performance of standard policyrules. In particular, when comparing complete and incomplete markets, the ranking of policyrules is entirely reversed, and so are the policy prescriptions regarding the optimal level ofexchange rate volatility.
    Keywords: Welfare, Optimal Monetary Policy, Asset Markets, Small Open Economy
    JEL: F41 G15 E52 E61
    Date: 2009–04
  6. By: Richard Dennis
    Abstract: Model uncertainty has the potential to change importantly how monetary policy should be conducted, making it an issue that central banks cannot ignore. In this paper, I use a standard new Keynesian business cycle model to analyze the behavior of a central bank that conducts policy with discretion while fearing that its model is misspeci?fied. My main results are as follows. First, policy performance can be improved if the discretionary central bank implements a robust policy. This important result is obtained because the central bank's desire for robustness directs it to assertively stabilize inflation, thereby mit- igating the stabilization bias associated with discretionary policymaking. In effect, a fear of model uncertainty can act similarly to a commitment mechanism. Second, exploiting the connection between robust control and uncertainty aversion, I show that the central bank's fear of model misspeci?cation leads it to forecast future outcomes under the be- lief that inflation (in particular) will be persistent and have large unconditional variance, raising the probability of extreme outcomes. Private agents, however, anticipating the policy response, make decisions under the belief that in?ation will be more closely sta- bilized, that is, more tightly distributed, than under rational expectations. Third, as a technical contribution, I show how to solve an important class of linear-quadratic robust Markov-perfect Stackelberg problems.
    JEL: E52 E62 C61
    Date: 2008–08
  7. By: Fang Yao
    Abstract: This paper explores implications of nominal rigidity characterized by a non-constant hazard function for aggregate dynamics. I derive the NKPC under an arbitrary hazard function and parameterize it with the Weibull duration model. The resulting Phillips curve involves lagged inflation and lagged expectations. It nests the Calvo NKPC as a limiting case in the sense that the effects of both terms are canceled out under the constant-hazard assumption. Furthermore, I find lagged inflation always has negative coefficients, thereby making it impossible to interpret inflation persistence as intrinsic. The numerical evaluation shows that the increasing hazard function leads to hump-shaped impulse responses of ination to monetary shocks, and output leads inflation.
    Keywords: Hazard function, Weibull distribution, New Keynesian Phillips Curve
    JEL: E12 E31
    Date: 2009–05
  8. By: Liew, Venus Khim-Sen
    Abstract: This study provides evidence of nonlinear long-run relationship between peso-yen exchange rate and its monetary determinants implied by the reduced-form flexible-price monetary model for the Philippines, using Breitung’s (2001) nonlinear cointegration testing procedures. The existence of such relationship is probably resulted from the strong and consistent bilateral trade relationship between the Philippines and Japan. Results from various monetary restrictions tests suggest that other forms of the related monetary model are not suitable in the determination of the peso-yen exchange rate.
    Keywords: Exchange Rate; Monetary Model; Nonlinear; Cointegration; the Philippines
    JEL: C32 F31
    Date: 2009
  9. By: Pavel Luengas (Office of Evaluation and Oversight at the Interamerican Development Bank.); Inder J. Ruprah (Office of Evaluation and Oversight at the Interamerican Development Bank.)
    Abstract: It has become common wisdom amongst monetary policy professionals that central banks in Latin America should adopt inflation targeting. Pure inflation targeting implicitly assumes a social loss welfare function dependent on only inflation. In this paper using subjective well-being survey data for Latin America we present evidence that both inflation and unemployment reduce wellbeing; where the cost of inflation in terms of unemployment, hence the relative size of the weights in a social well-being function, is about one to eight, almost double of that found for OECD countries. The weighted misery index differs in level (is higher) and change (an increase rather than a fall) from the commonly used unitary weighted index and from that of the pure inflation targeters for the period 1997 to 2006. In addition, the trade-off—and therefore the misery index—differs across subgroups, for example the young (aged 18-24 years) and left-leaning citizens are more concerned with unemployment than inflation. Thus advocates and practioners of inflation only targeting are, and increasingly so, divorced from the wellbeing of LAC citizens who are increasingly left leaning and with the youth, who given the population pyramid, are also increasing as a proportion of the population. The evidence presented in this paper, combined with the low frequency of happiness data, may not be sufficiently convincing for central banks to adopt happiness-targeting rule. However, happiness data would be useful to inform policy makers regarding the optimal disinflation policy or at least allow consciousness of the potential discontent of different sub-groups of the population of different disinflation strategies.
    Keywords: Happiness, Life Satisfaction, Inflation, Unemployment, and Misery Index
    JEL: I31 D60 D31 O54 C30
    Date: 2009–01
  10. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: Precautionary Demand for Money; Business Cycles
    JEL: E32 E40 E41
    Date: 2009–06–08
  11. By: Arnaldo MAURI
    Abstract: The study is concerned with a crucial period of the banking history of Ethiopia, almost untouched so far by the specializing literature, in which the banking industry was affected by important changes. The paper describes and analyses the reconstruction process of the banking system and the reorganization of the monetary setting in Ethiopia started in 1941, when the Italian colonial rule came to an end and the country regained independence, during World War II. The terminal date of the study is the beginning of 1964, when a one-tier banking system, based on a state-owned financial institution, the State Bank of Ethiopia, gave way to a two-tiers banking system. The monetary banking reform in Ethiopia after liberation in 1941 was an event logical, inevitable and predictable. Different paths, however could had be followed at that moment. The choice in money matter was to establish a national monetary unit, the Ethiopian dollar, instead of keeping the country inside the East African shilling area. On the other hand, as far as concerns banking, it was opted for establishing a state-owned financial institution enjoying a monopolistic position in the credit market rather than for setting up a system of private banks, possibly expatriate.
    Keywords: Ethiopia, African Banking, Banking History, Monetary Reform
    JEL: E42 G21 N27
    Date: 2008–05–16
  12. By: Tarek A. Hassan (Harvard University, Department of Economics; Postal Address: Littauer Center G4, 1875 Cambridge Street, Cambridge MA 02138, USA,)
    Abstract: The fact that economies differ in size has important implications for international asset returns. I solve for the spread on international bonds and stocks in an endowment economy with complete asset markets and non-traded goods. The model predicts that larger countries have lower real interest rates because their bonds provide insurance against shocks that affect a larger fraction of the world economy. Larger countries' bonds must therefore pay lower excess returns in equilibrium and uncovered interest parity fails. By a similar logic, stocks in the non-traded sector of larger countries also tend to pay lower excess returns. If asset markets are segmented, the introduction of a currency union lowers real interest rates and expected returns on stocks in the non-traded sector of participating countries. I test the predictions of the model for a panel of OECD countries and show that they are strongly supported by the data: Investors earn lower excess returns on bonds and stocks in the non-traded sector of larger countries. Similarly, excess returns on EMU member countries'bonds and stocks in the non-traded sector fell after European monetary integration.
    Keywords: International return differentials, country size, currency unions, uncovered interest parity, market segmentation.
    JEL: F3 G0
    Date: 2009–05–14
  13. By: Mihai, Ilie (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: As it is very known, in the 2009 spring, Romania took the decision to take a loan, an important amount, from the international financial bodies, in order to support the currency and the local economy, overall. Further negotiations, which began unwieldy, rising controversies even between political parties which constitute the governance coalition (PDL and PSD), Romania is almost ready to sign the loan agreement, at the end of May current year, waiting that the first trenches to be available for being drawn.
    Keywords: loan agreement; IMF / International Monetary Fund; Romanian external debt; Exchange rate; Wages; Loans in foreign currency.
    JEL: E52 G28
    Date: 2009–05–28
  14. By: Thimann, Christian; Just, Christian; Ritter, Raymond
    Abstract: After having been at the helm of the international monetary system for decades, the International Monetary Fund was sidelined in policy debates in the past few years. One reason for the IMF not having taken a more central role in addressing key global policy issues in recent years relates to its internal governance. This paper focuses specifically on the structure and functioning of the Executive Board. The paper argues that Executive Board, although uniquely placed to provide authoritative guidance to IMF member countries, exert peer pressure and give economic policy advice, is overwhelmed by its tasks and responsibilities and too large to be an effective forum for true international economic dialogue. The paper makes the point that the highly diverse tasks of the IMF require different governance structures in order to be implemented effectively. We believe that the optimal number of governing bodies for the ongoing IMF work is not one, but that it is two, duly distinguishing between multilateral matters from country-related matters. Specifically, we propose to split the tasks that are predominantly systemic in nature from those that are predominantly country-focused and technical and believe that this can be done. Two different Boards would be dealing with these issues: a Systemic Issues Board and a Country Issues Board. The paper also discusses how such a dual board structure could be implemented in practice.
    Keywords: IMF; Governance
    JEL: F02 F33
    Date: 2009–04

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