nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒07‒03
37 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Impact of U.S. Central Bank Communication on European and Pacific Equity Markets By Bernd Hayo; Ali M. Kutan; Matthias Neuenkirch
  2. Strict and Flexible Inflation Forecast Targets: An Empirical Investigation By Glenn Otto; Graham Voss
  3. One Money and Fifteen Needs Inflation and Output Convergence in the European Monetary Union By Van Poeck A.
  4. Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods By Beyer, Andreas; Gaspar, Vítor; Gerberding, Christina; Issing, Otmar
  5. Credit Cards and Inflation By John Geanakoplos; Pradeep Dubey
  6. Negative Nominal Interest Rates: Three ways to overcome the zero lower bound By Willem H. Buiter
  7. Monetary policy rules in a small open economy: An application to Mexico By Villagómez, F. Alejandro; Orellana Polo, Javier
  8. Credit Spread and Monetary Policy By Yuki Teranishi
  9. Public investment, distortionary taxes and monetary policy transparency By Dai, Meixing; Sidiropoulos, Moïse
  10. Survey measures of expected inflation and the inflation process By Bharat Trehan
  11. Financial Development and Velocity of Money in Bangladesh: A Vector Auto- Regression Analysis By Md. Akhtaruzzaman
  12. Inflationary Equilibrium in a Stochastic Economy with Independent Agents By John Geanakoplos; Ioannis Karatzas; Martin Shubik; William D. Sudderth
  13. Monetary Policy and Housing Sector Dynamics in a Large-Scale Bayesian Vector Autoregressive Model By Rangan Gupta; Marius Jurgilas; Alain Kabundi; Stephen M. Miller
  14. The Rocky Ride of Break-even-inflation rates. By Cette, G.; De Jong, M.
  15. Did the Structure of Trade and Foreign Debt Affect Reserve Currency Composition? Evidence form Interwar Japan By Mariko Hatase; Mari Ohnuki
  16. What Explains Global Exchange Rate Movements During the Financial Crisis? By Marcel Fratzscher
  17. The role of bank lending in combating the economic crisis By Coman, Florin
  18. Endogenous optimal currency areas: The case of the Central African Economic and Monetary Community By Fabrizio Carmignani
  19. Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro. By Marcel Fratzscher; Livio Stracca
  20. Central bank’s role and involvement in bank regulation: Lender of last resort arrangements and the Special Resolution Regime (SRR) By Ojo, Marianne
  21. Inflation and welfare in long-run equilibrium with firm dynamics By Janiak, Alexandre; Monteiro, Paulo Santos
  22. Money and Endogenous Growth in a Cash-in-Advance Model with Social Status By Hung-Ju Chen; Jang-Ting Guo
  23. Global Liquidity and Commodity Prices : A Cointegrated VAR Approach for OECD Countries By Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
  24. Exchange Market Pressure in Central Europe: An Application of the Girton-Roper Model By Stavarek, Daniel; Dohnal, Marek
  25. Foreign Exchange Liberalization: Perceptions, Realities and Way Forward By P Samarasiri
  26. Iran’s Banking and Monetary Problems By Naghshineh-Pour, Amir
  27. Changes in import pricing behaviour: the case of Germany By Stahn, Kerstin
  28. External shocks and international inflation linkages: a Global VAR analysis. By Alessandro Galesi; Marco J. Lombardi
  29. Price adjustments and inflation - evidence from Norwegian consumer price data 1975-2004 By Fredrik Wulfsberg
  30. An Interest Rate Peg Might Be Better than You Think By Andreas Schabert; Markus Hörmann
  31. The Financial Crisis as an Overshooting Phenomenon By Fritz Breuss
  32. Common currency and economic integration in mercosur By HOLLAND, Márcio; LUIZ CARLOS, BRESSER-PEREIRA
  33. Does the Currency Regime Shape Unhedged Currency Exposure? By Ila Patnaik
  34. Regime Switching Interest Rates and Fluctuations in Emerging Markets By Bertrand Gruss; Karel Mertens
  35. The process by which the Dollar will fall: the effect of forward-looking consumers By Kuralbayeva, Karlygash; Vines, David
  36. A brief empirical history of U.S. foreign-exchange intervention: 1973-1995 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  37. Understanding inflation dynamics : Where do we stand ? By Maarten Dossche

  1. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg); Ali M. Kutan (Southern Illinois University Edwardsville and the William Davidson Institute, Michigan); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: We examine the effects of federal funds target rate changes and all types of FOMC communication on European and Pacific equity market returns using a GARCH model. We show that both types of news have a significant statistical and economic impact, but that the effects are not symmetric: target rate changes exert a larger influence, although several communication variables are statistically significant. Third, Pacific markets react more strongly than do European markets to FOMC news, whereas the latter are influenced by a greater variety of communications.
    Keywords: Central Bank Communication, International Equity Markets, Federal Reserve Bank, U.S. Monetary Policy
    JEL: E52 G14 G15
    Date: 2009
  2. By: Glenn Otto (School of Economics, University of New South Wales); Graham Voss (Department of Economics, University of Victoria)
    Abstract: We examine whether models of inflation forecast targeting are consistent with the observed behaviour of the central banks of Australia, Canada, and the United States. The target criteria from these models restrict the conditionally expected paths of variables targeted by the central bank, in particular inflation and the output gap. We estimate various moment conditions, providing a description of monetary policy for each central bank under different maintained hypotheses. We then test whether these estimated conditions satisfy the predictions of models of optimal monetary policy. The overall objective is to examine the extent to which and the manner in which these central banks successfully balance inflation and output objectives over the near term. For all three countries, we obtain reasonable estimates for both the strict and flexible inflation forecast targeting models, though with some qualifications. Most notably, for Australia and the United States there are predictable deviations from forecasted targets, which is not consistent with models of inflation targeting. In contrast, the results for Canada lend considerable support to simple models of flexible inflation forecast targeting.
    Keywords: Monetary policy, inflation, inflation targeting, central banks
    JEL: E31 E58
    Date: 2009–06–16
  3. By: Van Poeck A.
    Abstract: In January 1999 the Economic and Monetary Union was established. The member countries abandoned their national currencies and adopted a common currency, the euro, and a common monetary policy. Adopting a common currency is supposed to bring a number of advantages to the member states of a monetary union, such as deeper product and financial market integration, increased trade and capital flows and ultimately increased growth. But by joining a monetary union, a country forgoes the ability to use domestic monetary policy to respond to country-specific macroeconomic disturbances. Monetary policy in a monetary union is the responsibility of the central monetary authority, in this case the European Central Bank (ECB). This central authority pursues monetary policy taking into account the overall situation in the union. Hence, for an individual country, the more its macroeconomic position is in line with the union’s average, the less the costs for that country of belonging to the union. Put differently, the more similarity between the individual countries belonging to a monetary union, the easier the task of the union’s central bank. One could even argue that the long run success and political viability of a monetary union depends on it. In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. This assumption is confirmed by many researchers (see e.g. Breuss, 2002; Fourçans and Vranceanu, 2002, Sauer and Sturm, 2003, Ulrich, 2003). The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union.
    Date: 2009–02
  4. By: Beyer, Andreas; Gaspar, Vítor; Gerberding, Christina; Issing, Otmar
    Abstract: During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policymakers at the time.
    Keywords: Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules
    JEL: E31 E32 E41 E52 E58
    Date: 2009
  5. By: John Geanakoplos (Cowles Foundation, Yale University); Pradeep Dubey (SUNY, Stonybrook)
    Abstract: The introduction and widespread use of credit cards increases trading efficiency but, by also increasing the velocity of money, it causes inflation, in the absence of monetary intervention. If the monetary authority attempts to restore pre-credit card price levels by reducing the money supply, it might have to sacrifice the efficiency gains. When there is default on credit cards, there is even more inflation, and less efficiency gains. The monetary authority might then have to accept less than pre-credit card efficiency in order to restore pre-credit card price levels, or else it will have to accept inflation if it is unwilling to cut efficiency below pre-credit card levels. This could be a source of stagflation.
    Keywords: Credit cards, Outside money, Inside money, Central bank, Inflation, Stagflation
    JEL: D50 D51 D53 D61 E40 E50 E51 E52 E58
    Date: 2009–06
  6. By: Willem H. Buiter
    Abstract: The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying negative interest on currency by taxing currency; and (3) decoupling the numéraire from the currency/medium of exchange/means of payment and introducing an exchange rate between the numéraire and the currency which can be set to achieve a forward discount (expected depreciation) of the currency vis-a-vis the numéraire when the nominal interest rate in terms of the numéraire is set at a negative level for monetary policy purposes.
    JEL: E31 E4 E41 E42 E43 E44 E5 E52 E58
    Date: 2009–06
  7. By: Villagómez, F. Alejandro (Tecnológico de Monterrey, Campus Ciudad de México); Orellana Polo, Javier (McKinsey)
    Abstract: We estimate a small-scale macro model for the Mexican economy under the New Keynesian (NK) framework and alternative interest rate rules for Mexico. With these results we evaluate the performance of the Bank of Mexico against a set of optimality principles derived in the NK literature. We show that the Bank of Mexico holds a preference for stabilizing not only inflation around target, but also acts to achieve an output gap close to zero. Furthermore, we show the central bank responds non-linearly to real exchange rate depreciations. We also show that, although the central bank has attempted to contain inflation, it has not conclusively satisfied the Taylor principle, so moderate inflation during the period may be partly a consequence of a favorable macroeconomic environment, rather than active policy.
    Keywords: Taylor Rule, New Keynesian, Monetary Policy, Interest Rate Rules, Small Open Economy
    JEL: E52 E58
    Date: 2009–01
  8. By: Yuki Teranishi (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi
    Abstract: Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
    Keywords: Credit spread, optimal monetary policy
    JEL: E44 E52
    Date: 2009–06
  9. By: Dai, Meixing; Sidiropoulos, Moïse
    Abstract: In a two-period model with distortionay tax and public investment, we reexamine the interaction between monetary policy transparency and fiscal bias. We find that the optimal decisions of tax and public investment allow eliminating the effects of fiscal bias and hence neutralizing the impact of monetary policy opacity (lack of political transparency) on the level and variability of inflation and output, independently of institutional quality. Our results are robust under alternative game structures between the private sector, the government and the central bank.
    Keywords: bank transparency; distortionay tax; public investment; fiscal bias
    JEL: E62 E58 E52 E63
    Date: 2009–06
  10. By: Bharat Trehan
    Abstract: This paper uses data from surveys of expected inflation to learn how the expectations formation processes of households and professionals have changed following a change in the inflation process in the early part of this decade. Households do not appear to have recognized the change in the process, and are placing substantially more weight than appears warranted on recent inflation data when forming expectations about inflation over the next year. Professional forecasters do appear to have changed how they predict inflation in recent years, in a way that appears consistent, at first, with the finding that the ‘core’ inflation process has not changed as much as the ‘headline’ inflation process has. But the professionals appear to be placing too much weight on lagged core inflation data, and over recent sample periods professional forecasts of headline CPI inflation are noticeably worse than the alternatives. Some other evidence is consistent with the hypothesis that they are now focusing on the core CPI.
    Keywords: Inflation (Finance)
    Date: 2009
  11. By: Md. Akhtaruzzaman
    Abstract: The study uses co-integration and vector auto-regression (VAR) techniques to identify the determinants of income velocity of money (VM) in Bangladesh, covering both narrow and broad money. The study observes that financial development affects VM negatively. The VAR estimates show that two variables, real GDP growth and financial development, jointly account for around half of the variance of speed of VM for both M1 and M2. The results show that it is important for the monetary authorities to take into account both stages of economic and financial development in forecasting VM for designing effective monetary policy in Bangladesh.[PAU WP no.0806]
    Keywords: velocity of narrow and broad money; safe limit to monetary expansion; financial development; inflation expectation; Cambridge equation of exchange; money multiplier; rate of monetization; co-integration; unit root test; VAR; forecast error variance.
    Date: 2009
  12. By: John Geanakoplos (Cowles Foundation, Yale University); Ioannis Karatzas (Columbia University and INTECH); Martin Shubik (Cowles Foundation, Yale University); William D. Sudderth (University of Minnesota)
    Abstract: We argue that even when macroeconomic variables are constant, underlying microeconomic uncertainty and borrowing constraints generate inflation. We study stochastic economies with fiat money, a central bank, one nondurable commodity, countably many time periods, and a continuum of agents. The aggregate amount of the commodity remains constant, but the endowments of individual agents fluctuate "independently" in a random fashion from period to period. Agents hold money and, prior to bidding in the commodity market each period, can either borrow from or deposit in a central bank at a fixed rate of interest. If the interest rate is strictly positive, then typically there will not exist an equilibrium with a stationary wealth distribution and a fixed price for the commodity. Consequently, we investigate stationary equilibria with inflation, in which aggregate wealth and prices rise deterministically and at the same rate. Such an equilibrium does exist under appropriate bounds on the interest rate set by the central bank and on the amount of borrowing by the agents. If there is no uncertainty, or if the stationary strategies of the agents select actions in the interior of their action sets in equilibrium, then the classical Fisher equation for the rate of inflation continues to hold and the real rate of interest is equal to the common discount rate of the agents. However, with genuine uncertainty in the endowments and with convex marginal utilities, no interior equilibrium can exist. The equilibrium inflation must then be higher than that predicted by the Fisher equation, and the equilibrium real rate of interest underestimates the discount rate of the agents.
    Keywords: Inflation, Economic equilibrium and dynamics, Dynamic programming, Consumption
    JEL: D5 D8 E31 E58
    Date: 2009–06
  13. By: Rangan Gupta (University of Pretoria); Marius Jurgilas (Bank of England); Alain Kabundi (University of Johannesburg); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: Our paper considers this channel whereby monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model that incorporates 143 monthly macroeconomic variables over the period of 1986:01 to 2003:12, including 21 variables relating to the housing sector at the national and four census regions. We find at the national level that housing starts, housing permits, and housing sales fall in response to the tightening of monetary policy. Housing sales reacts more quickly and sharply than starts and permits and exhibits more duration. Housing prices show the weakest response to the monetary policy shock. At the regional level, we conclude that the housing sector in the South drives the national data. The responses in the West differ the most from the other regions, especially for the impulse responses of housing starts and permits.
    Keywords: Monetary policy, Housing sector dynamics, Large-Scale BVAR models
    JEL: C32 R31
    Date: 2009–06
  14. By: Cette, G.; De Jong, M.
    Abstract: The correlation matrix between break-even inflation rate movements and real interest rate movements across several countries shows puzzling features. Correlation is significantly positive for nearly all cross-border pairs whereas it is nil, positive or negative unsystematically within countries. By means of a correlation matrix decomposition, we provide an explanation for this puzzle.
    Keywords: Inflation-linked bonds ; Break-even inflation rates
    JEL: E43 G15
    Date: 2009
  15. By: Mariko Hatase (Director and Senior Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Mari Ohnuki (Associate Director and Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mari.
    Abstract: Historical experience is often invoked in the modern debate on competition among reserve currencies, yet little is known about quantitative aspects or institutional features of reserve management. By drawing on newly obtained data on foreign exchange reserves, especially those broken down by currency, this paper explores the competition between the British pound sterling and the U.S. dollar for the status of leading reserve currency in Japan during the interwar period. We find that competition between these two currencies remained undecided and that their relative status alternated repeatedly. Historical materials and the results of econometric analysis suggest that the key factors explaining a choice of reserve currencies are trade volumes and the currency denomination of external debt. The latter criteria supported maintaining sterlingfs status as a reserve currency for the interwar period, reflecting its considerable share in debt service generated through issues that had been launched when London was the sole international market. The stability of potential reserve currencies is shown to be crucial as well. We also find evidence of institutional factors, which include taxation, foreign exchange controls, and restrictions on financial activities.
    Keywords: Foreign Exchange Reserves, Gold Exchange Standard, Exchange Rate, Trade Strucutre, Debt Structure, Japan
    JEL: F31 F32 F33 F34 N20 N25
    Date: 2009–06
  16. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular. JEL Classification: F31, F4, G1.
    Keywords: Financial crisis, exchange rates, global imbalances, shocks, United States, US dollar, transmission channels.
    Date: 2009–06
  17. By: Coman, Florin (Universitatea Spiru Haret, Facultatea de Finante si Banci)
    Abstract: Taking some measures for diminuation the obligatory minimal reserves of the banking societies and for the decrease of the monetary policy rate of interest, the Romanian National Bank intended to make available certain amounts of money to be used by the banking societies to credit the activity of the trading companies and of the natural persons. A diminuation of the interest for the credits granted by the banking societies is required, along with taking some political and fiscal measures.
    Keywords: Romanian National Bank; banking societies; banking credits; (economic) crisis/ depression; standard of coinage; foreign credits; political and fiscal measures
    JEL: F23
    Date: 2009–06–16
  18. By: Fabrizio Carmignani (School of Economics, The University of Queensland)
    Abstract: The Central African Economic and Monetary Community (CAEMC) has been a monetary union for several decades now. According to the hypothesis of endogenous optimal currency areas (OCA), the degree of business cycles synchronization across its member states should be significantly higher today than 40 years ago. Investigating the empirical validity of this hypothesis is important in the context of the African economic integration process. If currency unions are endogenous, then quick monetary integration is a worthwhile option that can be used to accelerate economic integration. On the contrary, if currency unions were not endogenous, then a speedy monetary unification would not benefit countries collectively and might therefore jeopardize the whole regional integration initiative. This paper assesses the endogeneity of CAEMC as an OCA by examining the cross-country synchronization of business cycles along three statistical dimensions: bilateral correlation of cyclical co-movements, similarity of cycle statistical properties, and concordance of cyclical phases. Its innovative contribution is threefold. First, it provides a direct test of the endogeneity hypothesis on a specific currency union. Most previous studies instead rely on panel estimates of global datasets. Second, it expands the existing literature on the monetary geography of Africa. Indeed, there are several papers that study whether or not specific African regions are OCA. However, these papers generally look at the ex-ante conditions for optimality, leaving the issue of endogeneity of OCA criteria unexplored. The paper fills in this gap. Third, the paper presents a business cycle chronology for the six CAEMC members, thus opening up new opportunities to understand the cyclical characterization of economic systems and policies in the region. The main result of the analysis is that (i) the degree of synchronization of business cycles across CAEMC countries has remained low throughout the period 1960-2007, but (ii) it has somewhat increased over time. This increase is however marginal in both economic and statistical terms, thus implying that CAEMC currency union is not as endogenous as one would expect from previous empirical results obtained from global datasets. The reason why the endogeneity effect is so weak is that its channels of transmission are not work: intra-regional trade is very low and macroeconomic policies across union members do not seem to converge. Furthermore, increasingly different productive structures also reduced the intensity of synchronization. The policy implications of the analysis then concern the design of policy and institutions in the CAEMC and the way forward for monetary unification in Africa.
    Date: 2009
  19. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper there-fore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions. JEL Classification: F31, F33, G14.
    Keywords: Euro, Italy, political economy, exchange rates, asset prices, financial markets, shocks.
    Date: 2009–06
  20. By: Ojo, Marianne
    Abstract: This paper considers developments which have necessitated greater involvement and a greater role for the central bank in financial regulation and supervision. The aftermath of the 2007/08 financial crisis has witnessed the enactment of legislation such as the Banking Act of 2009 which has not only introduced greater statutory powers for the central bank, but also the Special Resolution Regime. As well as a consideration of arguments which are in favour of the central bank’s role as supervisor and lender of last resort, the importance of central bank independence and safeguards which exist to ensure that sufficient accountability is fostered, will be considered. Safeguards and accountability mechanisms which are adequate, such that, whilst ensuring that the regulator is not susceptible to regulatory capture, do not impede the ability of such a regulator to obtain vital and necessary information from systemically important individual financial institutions. In its support of the view that central banks should assume a greater role in supervision, this paper not only seeks to justify why such a degree of involvement is vital to ensuring and maintaining stability in the financial system, but also those factors which are considered to be necessary if such a role is to be effective.
    Keywords: central; bank; lender; last; resort;regulation;monetary;policy
    JEL: K2 E58
    Date: 2009–06
  21. By: Janiak, Alexandre (University of Chile and IZA); Monteiro, Paulo Santos (University of Warwick)
    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 infiation 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
  22. By: Hung-Ju Chen (Department of Economics, National Taiwan University); Jang-Ting Guo (Department of Economics, University of California Riverside)
    Abstract: Motivated by the substantial increase of nominal money supply in the U.S. economy since late 2008, this paper examines the equilibrium growth effect of money/inflation within a standard one-sector AK model of endogenous growth with wealth-enhanced preferences for social status and the most generalized cash-in-advance constraint. We show that the sign for the correlation between money and output growth depends crucially on (i) the liquidity-constrained ratio of consumption to investment, and (ii) how the shadow price of physical capital responds to a change in the monetary growth rate. This money-growth correlation, as well as the growth effect of social status, turns out to be closely related to the local stability properties of the economy's balanced growth path(s).
    Keywords: Money, Endogenous Growth, Cash-in-Advance Constraint, Social Status, In- determinacy
    JEL: E52 O42
    Date: 2009–06
  23. By: Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
    Abstract: This paper examines the interactions between money, consumer prices and commodity prices at a global level from 1970 to 2008. Using aggregated data for major OECD countries and a cointegrating VAR framework, we are able to establish long run and short run relationships among these variables while the process is mainly driven by global liquidity. According to our empirical findings, different price elasticities in commodity and consumer goods markets can explain the recently observed overshooting of commodity over consumer prices. Although the sample period is rather long, recursive tests corroborate that our CVAR fits the data very well.
    Keywords: Commodity prices, cointegration, CVAR analysis, global liquidity, inflation, international spillovers
    JEL: E31 E52 C32 F42
    Date: 2009
  24. By: Stavarek, Daniel; Dohnal, Marek
    Abstract: This paper applies the Girton-Roper model of exchange market pressure (EMP) on four Central European economies (Czech Republic, Hungary, Poland, Slovakia) over the period 1995-2008. The results suggest that there is a strong negative relation between domestic credit and EMP in all countries. We also found evidence of positive effect of domestic income on EMP in most of the countries. The paper reveals that EMP in the Czech Republic and Hungary was mostly absorbed by changes of exchange rate while changes in reserves absorbed EMP in Slovakia. The levels of EMP estimated do not pose a significant threat for fulfilment of the exchange rate stability convergence criterion.
    Keywords: exchange market pressure; Girton-Roper model; euro-candidate countries
    JEL: C32 F31 F36
    Date: 2009–06–15
  25. By: P Samarasiri
    Abstract: The article focuses on understanding of the economics of the exchange control liberalisation in macroeconomic perspectives and, therefore, the article does not attempt to interpret or explore the legal background relating to exchange control and liberalization and details of liberalization measures and their impact. The exchange control is a part of the broad regulatory policy package to intervene in or guide economic activities and markets in terms of the relevant legal provisions that empower the authorities to apply such interventions in the public interest. Accordingly, the exchange control and its liberalisation involve a considerable volume of legal aspects and procedures. However, the exchange control as well as its liberalization should be applied and evaluated carefully with a good understanding of the underlying economics because their purpose is to promote the economic welfare of the general public. [Central Bank Public Seminar]
    Keywords: Foreign Exchange; Globalisation; liberalisation; Exchange Controls; Monetary Law Act; Exchange Control Act; Liberalisation Measures; Current Account Liberalisation; Capital Account Liberalisation; Sectoral imbalance; capital mobility; financial crises; economic impact
    Date: 2009
  26. By: Naghshineh-Pour, Amir
    Abstract: Iran has had many self-imposed economic crises. Many of which relate to the poorly managed banking system as well as flawed monetary and fiscal policy. Inefficiency of the banking-monetary system in Iran is a well known fact. A complete overhaul of the current system should be one of the essential priorities of any economic reformation and development. The banking-monetary system of any country has a key role in its economic efficiency and strength, price stability, production, and economic growth. The main functions of a banking-monetary system are to provide fiscal resources, to prepare ground for optimal allocation of capital in the economy, to distribute the wealth in the best possible way, and to ease economic development. This is particularly important in Iran because capital markets are underdeveloped.
    Keywords: Iran; Banking; Monetary Policy; Fiscal Policy
    JEL: F00 H0
    Date: 2009–06
  27. By: Stahn, Kerstin
    Abstract: Since changes in import prices feed into consumer prices and thus might affect monetary policy decisions, policymakers need to establish whether or not German importers’ long-run pricing behaviour has changed. Of particular interest are any shifts in the importance of cost passthrough and pricing-to-market for import pricing in Germany that may have ocurred since the 1990s. We analyse pricing in single equations for 11 product categories because the factors influencing the pricing behaviour, eg competitive pressure, may well have developed differently on the individual product markets. The Saikkonen (1991) approach is applied to test the import price levels for changes in the impact of their determinants. After aggregating the findings for the individual product categories, we find that, on the whole, pricing-to-market has increased, whereas cost pass-through via foreign costs and exchange rates is lower, but not via commodity prices.
    Keywords: import pricing, cost pass-through, exchange rate pass-through, pricing-to-market, Germany
    JEL: C22 F41
    Date: 2009
  28. By: Alessandro Galesi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Amid the recent commodity price gyrations, policy makers have become increasingly concerned in assessing to what extent oil and food price shocks transmit to the inflationary outlook and the real economy. In this paper, we try to tackle this issue by means of a Global Vector Autoregressive (GVAR) model. We first examine the short-run inflationary effects of oil and food price shocks on a given set of countries. Secondly, we assess the importance of inflation linkages among countries, by dis-entangling the geographical sources of inflationary pressures for each region. Generalized impulse response functions reveal that the direct inflationary effects of oil price shocks affect mostly developed countries while less sizeable effects are observed for emerging economies. Food price increases also have significative inflationary direct effects, but especially for emerging economies. Moreover, significant second-round effects are observed in some countries. Generalized forecast error variance decompositions indicate that considerable linkages through which inflationary pressures spill over exist among regions. In addition, a considerable part of the observed headline inflation rises is attributable to foreign sources for the vast majority of the regions. JEL Classification: C32, E31.
    Keywords: oil shock, commodity prices, inflation, second-round effects, Global VAR.
    Date: 2009–06
  29. By: Fredrik Wulfsberg (Norges Bank (Central Bank of Norway))
    Abstract: I document price adjustments in both high and low inflation years from 14 milllion monthly price observations of 1,133 goods and services. The variation in the frequency of price changes explains all the variation in the inflation rate. On average, prices increase more often when inflation is high, and decrease more often when inflation is low. There is also substantial variation both in the duration and size of price changes within and between items.
    Keywords: Consumer prices, price rigidity
    JEL: E31 D40 C2
    Date: 2009–06–24
  30. By: Andreas Schabert; Markus Hörmann
    Abstract: Active interest rate policy is frequently recommended based on its merits in reducing macroeconomic volatility and being a simple and transparent policy device. In a standard NewKeynesian model,we show that an even simpler policy, namely an interest rate peg, can be welfare enhancing:The minimum state variable solution and an autoregessive solution under a peg can lead to lower welfare losses than the unique solution under an active interest rate rule. Given that a peg is usually blamed to facilitate endogenous fluctuations, we further show that a peg can be implemented in a way that ensures equilibrium determinacy.
    Keywords: Interest rate rules, welfare losses, equilibrium determinacy, fundamental solutions
    JEL: E52 E51 E32
    Date: 2009–06
  31. By: Fritz Breuss (WIFO)
    Abstract: Inspired by Dornbusch's model of exchange rate overshooting we develop a theory of stock market behaviour. The idea is that stock market prices overshoot and undershoot their long-run equilibrium values which are determined by the development in the real economy. The overshooting is fuelled primarily by a loose monetary policy. The simple macro model consists of three markets – the money market, the stock market and the goods market – interacting with different speeds of adjustment. The goods market slowly adjusts relative to the money and the asset market. This model can explain some of the major features of the global financial crisis, having its origin in the loose monetary policy in the USA and spreading its recession-plagued effects all over to the world economy. The model focuses primarily on the monetary interpretation of the present crisis leaving aside the complex interactions of the real estate bubble in the USA, followed by the innovation of new financial instruments which were sold all over the world, hoping to disperse the risks involved with it. Nor does this model deal with the institutional aspects of the financial crisis (the failed behaviour of banks, the banking crises, unregulated financial markets, etc.). These are questions of better international regulation of the financial industry touched upon by the G-20 summit in London.
    Keywords: Financial Crisis, Open Economy Macroeconomics, Stock Markets, Business Cycles
    Date: 2009–04–27
    Abstract: Latin America has a long history of attempts to achieve regional integration, yet success has been modest. This paper contends that this is essentially due not so much to protectionist practices in the various countries, but to the lack of a common currency, or, at least, of a tightly managed exchange rate band. We reviewed the optimum currency area criteria that indicate it is prudent to increase economic integration before attempting to establish exchange rates coordination. Yet, we show that in the Mercosul there are already the minimal requirements to work on this direction. Diminishing exchange rate instability could encourage trade and investment flows across Latin American economies. We also performed a simplified exercise to understand how feasible would be the efforts to achieve exchange rate parity stability in the two larger economies in the region (Brazil and Argentina) and step forward toward adopting a common currency.
    Date: 2009–06–05
  33. By: Ila Patnaik
    Abstract: This paper examines how unhedged currency exposure of firms varies with changes in currency exibility. A sequence of four time-periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less exible. We also find homogeneity of views,where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency exibility encourages firms to hold unhedged exposure in response to implicit government guarantees.[NIPFP WP 2008 - 50]
    Keywords: currency regime; currency exposure of firms; moral hazard; one-way bets on exchange rates.
    Date: 2009
  34. By: Bertrand Gruss; Karel Mertens
    Abstract: We estimate regime switching models for emerging market interest rates and embed the obtained nonlinear dynamics in a small open economy model with a financial friction. We show that the presence of an infrequent regime characterized by high level/high volatility of interest rates and the tightening of financial constraints is key to account for the empirical regularities specific to emerging markets, including the high volatility of consumption relative to output and a strongly countercyclical trade balance-to-output ratio. The model accounts for the dynamics of sudden stops and matches the autocorrelation function of the trade balance-to-output ratio as well as the cross-correlations between the main macroeconomic aggregates and interest rates. Our findings suggest that interest rate shocks and financial frictions are essential for explaining emerging market fluctuations, but mostly because of their effects in crisis episodes.
    Keywords: regime switching model, peso problem, sudden stops, small open economy
    JEL: E32 F32 F41
    Date: 2009
  35. By: Kuralbayeva, Karlygash; Vines, David
    Abstract: This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and Sà 2005), using a model which incorporates forward-looking consumers. It provides additional underpinnings for the idea of a rapid adjustment in the value of the dollar. We analyze what will happen to the dollar value when forward-looking consumers, in anticipation of the reduction in the current account deficit, cut their consumption. We show that the real interest rate must fall as a result, and that this causes the exchange rate to fall more initially. However we also show that the interest rate does not fall greatly initially, and so that these effects are not large. But they add to pressures causing a rapid fall in the dollar.
    Keywords: imperfect substitutability; Net foreign assets; valuation effects
    JEL: F32 F41 G15
    Date: 2009–06
  36. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: This paper assesses U.S. foreign-exchange intervention since the inception of generalized floating. We find that intervention was by and large ineffectual. We first identify which interventions were successful according to three criteria. Then, we test whether the number of observed successes significantly exceeds the amount that would randomly occur given the near-martingale nature of daily exchange-rate changes. Finally, we investigate whether the various characteristics of an intervention - its size, frequency, or coordination - can increase the probability of success. We find that intervention did tend to moderate same-day exchange-rate movements relative to the previous day, but this effect is not robust across subperiods or currencies and it occurs infrequently. Increasing the size of an intervention increases the probability of success, but no other variable consistently makes a difference, including coordinating interventions with other central banks.
    Keywords: Foreign exchange administration
    Date: 2009
  37. By: Maarten Dossche (National Bank of Belgium, Research Department; Ghent University)
    Abstract: I summarize recent progress made in the literature on inflation dynamics. This has been a very productive area of research due to the development of the so-called New Keynesian model and the availability of new macroeconomic and microeconomic evidence. Nevertheless, a number of problems still subsist. In particular the importance of temporary price markdowns to inflation dynamics and the characteristics of the information set price-setters use for their price adjustment decision currently constitute unresolved issues
    Keywords: Inflation dynamics, New Keynesian model, sticky prices
    JEL: E30 E50 E60
    Date: 2009–06

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