nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒07‒17
twenty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Impact of the European Monetary Union on Ination Persistence in the Euro Area By Barbara Meller; Dieter Nautz
  2. Monetary Policy and Inflationary Shocks Under Imperfect Credibility. By Matthieu Darracq Pariès; Stéphane Moyen
  3. Estimating Central Bank Preferences under Commitment and Discretion. By Gregory E. Givens
  4. Monetary rules and the spillover of regional fiscal policies in a federation. By Cooper, R.; Kempf, H.; Peled, D.
  5. International Monies, Special Drawing Rights, and Supernational Money By Pietro Alessandrini; Michele Fratianni
  6. The role of banks in monetary policy transmission: Empirical evidence from Russia By Juurikkala, Tuuli; Solanko, Laura; Karas, Alexei
  7. Monetary Transmission in three Central European Economies: Evidence from Time-Varying Coefficient Vector Autoregressions By Zsolt Darvas
  9. Does money matter in inflation forecasting? By Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall
  10. Welfare-based optimal monetary policy with unemployment and sticky prices: a linear-quadratic framework By Federico Ravenna; Carl E. Walsh
  11. Regional currencies and regional monetary zones in Latin America : what prospects ? By Jean-François Ponsot; Claude Gnos
  12. A study of U.S. monetary policy implementation: demand for reserves on a period average basis By Ruth Judson; Elizabeth Klee
  13. The Evolution of Paper Money By Levintal, Oren; Zeira, Joseph
  14. Determination of Inflation in an Open Economy Phillips Curve Framework-- The Case of Developed and Developing Asian Countries By Pami Dua; Upasna Gaur
  15. Inflation and Growth: New Evidence From a Dynamic Panel Threshold Analysis By Stephanie Kremer; Alexander Bick; Dieter Nautz
  16. Asset price misalignments and the role of money and credit. By Dieter Gerdesmeier; Barbara Roffia; Hans-Eggert Reimers
  17. How could the Bank of the South promote sustainable development and regional monetary integration in Latin America ? By Jean-François Ponsot
  18. Exchange rates dependence: what drives it? By Sigridur Benediktsdottir; Chiara Scotti
  19. Using Seasonal Models to Forecast Short-Run Inflation in Mexico. By Carlos Capistrán; Christian Constandse; Manuel Ramos Francia
  20. Whither the liquidity effect: the impact of Federal Reserve Open Market Operations in recent years By Ruth Judson; Elizabeth Klee

  1. By: Barbara Meller; Dieter Nautz
    Abstract: This paper uses the European Monetary Union (EMU) as a natural experiment to investigate whether more effective monetary policy reduces the persistence of inflation. Taking into account the fractional integration of inflation, we confirm that inflation dynamics differed considerably across Euro area countries before the start of EMU. Since 1999, however, results obtained from panel estimation indicate that the degree of long run inflation persistence has converged. In line with theoretical predictions, we find that the persistence of inflation has significantly decreased in the Euro area probably as a result of the more effective monetary policy of the ECB.
    Keywords: Monetary Policy Effectiveness and Inflation Persistence, Panel Test for Fractional Integration, Change in Inflation Persistence
    JEL: C22 C23 E31
    Date: 2009–07
  2. By: Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Stéphane Moyen (Deutsche Bundesbank, Taunusanlage 5, D-60329 Frankfurt am Main, Germany.)
    Abstract: This paper quantifies the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where price and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4.
    Keywords: Monetary policy; Imperfect credibility; Signal extraction.
    Date: 2009–06
  3. By: Gregory E. Givens
    Abstract: This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.
    Keywords: Optimal Monetary Policy, Commitment, Discretion, Policy Preferences
    JEL: E52 E58 E61 C32 C61
    Date: 2009–06
  4. By: Cooper, R.; Kempf, H.; Peled, D.
    Abstract: This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modelled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.
    Keywords: Monetary Union ; Inflation tax ; Seigniorage ; monetary rules ; public debt.
    JEL: E31 E42 E58 E62
    Date: 2009
  5. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche - Dept of Economics, MoFiR)
    Abstract: The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role the dollar as the dominant international money and national money cannot be easily reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and inflation and maintaining the international public good of a stable money. To strengthen the IMS, China has advocated the revitalization of the Special Drawing Rights (SDRs). But SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration to countries' financing needs; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a full-fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and coordination of monetary policies objectives and at expense of the maintenance of the international public good. We also discuss structural changes that would make SDRs converge to SBMs.
    Keywords: Special Drawing Right, international monetary system, international money, supernational bank money
    JEL: E42 E52 F33 F36
    Date: 2009–07
  6. By: Juurikkala, Tuuli (BOFIT); Solanko, Laura (BOFIT); Karas, Alexei (BOFIT)
    Abstract: This paper focuses on the role of the banking sector in monetary policy transmission in an emerging economy with a rapidly developing financial system. Specifically, we exam whether the central bank's monetary policy stance affects banks' lending behaviour. Based on a comprehensive quarterly dataset on all Russian banks from 1Q1999 to 1Q2007, we find evidence for the existence of a bank lending channel in Russia. Contrary to several studies on developed economies, the level of a bank's capitalization matters for the transmission process. Better capitalized banks are less likely to adjust their lending practices following a change in the monetary policy stance.
    Keywords: monetary policy transmission; bank lending; Russia
    JEL: C23 E44 E52 G21
    Date: 2009–07–06
  7. By: Zsolt Darvas (Bruegel, Institute of Economics of the Hungarian Academy of Sciences and Corvinus University of Budapest)
    Abstract: This paper studies the transmission of monetary policy to macroeconomic variables in three new EU Member States in comparison with that in the euro area with structural time-varying coefficient vector autoregressions. In line with the Lucas Critique reduced-form models like standard VARs are not invariant to changes in policy regimes. The countries we study have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that in the euro area the impact on output of a monetary shock have decreased in time while in the new member states of the EU both decreases and increases can be observed. At the last observation of our sample, the second quarter of 2008, monetary policy was the most powerful in Poland and comparable in strength to that in the euro area, the least powerful responses were observed in Hungary while the Czech Republic lied in between. We explain these results by the credibility of monetary policy, openness and the share of foreign currency loans.
    Keywords: monetary transmission, time-varying coefficient vector autoregressions, Kalman-filter
    JEL: C32 E50
    Date: 2009–07–02
  8. By: Heng Chen; Dietrich K. Fausten; Wing-Keung Wong
    Abstract: One possible consequence of the establishment of the Euro is a challenge to the hegemony of the US dollar as the predominant international currency. No other currency has been able to rival the international role of the national currency of the US since World War II. The fact that the unipolar international monetary system can be unstable in the presence of large shocks opens a window of opportunity for the Euro to promote systemic stability. The present study pursues this conjecture by, first, exploring with cointegration and ECM techniques the interdependence between the dynamics of the Dollar/Euro exchange rate and economic fundamentals in the context of a monetary exchange rate model. Identification of the key determinants of the value of the Euro informs our analysis of the policy stance of the European Central Bank regarding the long-run global role of the Euro. Secondly, we explore whether the opportunity for a prominent systemic role of the Euro has been realized by examining the impact of the Euro on the global financial market.
    Keywords: Euro, Exchange rate, Monetary model, Cointegration
    JEL: F15 G14 P34
    Date: 2009–06
  9. By: Jane M. Binner; Peter Tino; Jonathan Tepper; Richard G. Anderson; Barry Jones; Graham Kendall
    Abstract: This paper provides the most fully comprehensive evidence to date on whether or not monetary aggregates are valuable for forecasting US inflation in the early to mid 2000s. We explore a wide range of different definitions of money, including different methods of aggregation and different collections of included monetary assets. In our forecasting experiment we use two non-linear techniques, namely, recurrent neural networks and kernel recursive least squares regression - techniques that are new to macroeconomics. Recurrent neural networks operate with potentially unbounded input memory, while the kernel regression technique is a finite memory predictor. The two methodologies compete to find the best fitting US inflation forecasting models and are then compared to forecasts from a naive random walk model. The best models were non-linear autoregressive models based on kernel methods. Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.
    Keywords: Forecasting ; Inflation (Finance) ; Monetary theory
    Date: 2009
  10. By: Federico Ravenna; Carl E. Walsh
    Abstract: In this paper, we derive a linear-quadratic model for monetary policy analysis that is consistent with sticky prices and search and matching frictions in the labor market. We show that the second-order approximation to the welfare of the representative agent depends on inflation and "gaps" that involve current and lagged unemployment. Our approximation makes explicit how the costs of fluctuations are generated by the presence of search frictions. These costs are distinct from the costs associated with relative price dispersion and fluctuations in consumption that appear in standard new Keynesian models. We use the model to analyze optimal monetary policy under commitment and discretion and to show that the structural characteristics of the labor market have important implications for optimal policy.
    Keywords: Monetary policy ; Econometric models
    Date: 2009
  11. By: Jean-François Ponsot (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II); Claude Gnos (LEG - Laboratoire d'Economie et de Gestion - CNRS : UMR5118 - Université de Bourgogne)
    Abstract: This paper aims at drawing lessons from Keynes's plan presented at the Bretton Woods conference, in order to help improving current regional monetary agreements in Latin America. Some promoters of the Bank of the South and the New Financial Architecture in Latin America are proposing to implement a regional clearing system designed to allow a multilateral offsetting of the liabilities and assets generated in the reciprocal transactions of member countries in words that the British economist certainly would not have denied. This system would be very different from current regional payments aggreements that maintain an implicit reference to the US dollar as reserve or payment currency.
    Keywords: regional monetary zone ; monetary agreements ; Latin America
    Date: 2009–02–27
  12. By: Ruth Judson; Elizabeth Klee
    Abstract: This paper provides new estimates of banks' demand for excess reserve balances on a period average basis. Consistent with theoretical work, we find that the demand for excess depends critically on uncertainty of flows in and out of reserve accounts. We also document the variability of demand for excess reserve balances by institution size, evaluate different models for forecasting demand for excess on a period average basis, and report the forecasting performance of each of these models. Finally, we present analysis of the period of financial turmoil seen over the year since August, 2007.
    Date: 2009
  13. By: Levintal, Oren; Zeira, Joseph
    Abstract: This paper tells the story of how paper money evolved as a result of lending by banks. While lending commodity money requires holding large reserves of commodity money to ensure liquidity, issuing convertible paper money reduces these costs significantly. The paper also examines the possibility of issuing inconvertible notes and shows that while they further reduce the cost of borrowing they also have adverse effects on the stability of the banking system. As a result, governments often intervened, either outlawing the issuance of such notes, or monopolizing them for themselves by issuing fiat money. The paper examines the process of creation of paper money, but also sheds light on more general issues, like the relation between money and financial intermediation.
    Keywords: Banks; Convertibility; Fiat Money; Financial Intermediation; Liquidity; Paper Money
    JEL: E4 E5 N1 N2
    Date: 2009–07
  14. By: Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India); Upasna Gaur (Global Research Group, ICICI Bank Mumbai)
    Abstract: This paper investigates the determination of inflation in the framework of an open economy forward-looking as well as conventional backward-looking Phillips curve for eight Asian countries - Japan, Hong Kong, Korea, Singapore, Philippines, Thailand, China Mainland and India. Using quarterly data from the 1990s to 2005 and applying the instrumental variables estimation technique, we find that the output gap is significant in explaining the inflation rate in almost all the countries. Furthermore, at least one measure of international competitiveness has a statistically significant influence on inflation in all the countries. The differences in the developed and developing world are highlighted by the significance of agriculture related supply shocks in determining inflation in the case of developing countries. For all countries, the forward-looking Phillips curve provides a better fit compared to the backward looking variant.
    Date: 2009–04
  15. By: Stephanie Kremer; Alexander Bick; Dieter Nautz
    Abstract: We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
    Keywords: Inflation Thresholds, Inflation and Growth, Dynamic Panel Threshold Model
    JEL: E31 C23 O40
    Date: 2009–07
  16. By: Dieter Gerdesmeier (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Barbara Roffia (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Hans-Eggert Reimers (Hochschule Wismar, Postfach 1210, D-23952 Wismar, Germany.)
    Abstract: This paper contributes to the literature on the properties of money and credit indicators for detecting asset price misalignments. After a review of the evidence in the literature on this issue, the paper discusses the approaches that can be considered to detect asset price busts. Considering a sample of 17 OECD industrialised countries and the euro area over the period 1969 Q1 – 2008 Q3, we construct an asset price composite indicator which incorporates developments in both the stock price and house price markets and propose a criterion to identify the periods characterised by asset price busts, which has been applied in the currency crisis literature. The empirical analysis is based on a pooled probit-type approach with several macroeconomic monetary, financial and real variables. According to statistical tests, credit aggregates (either in terms of annual changes or growth gap), changes in nominal long-term interest rates and investment-to-GDP ratio combined with either house prices or stock prices dynamics turn out to be the best indicators which help to forecast asset price busts up to 8 quarters ahead. JEL Classification: E37, E44, E51.
    Keywords: Asset prices, house prices, stock prices, financial crisis, asset price busts, probit models, monetary aggregates, credit aggregates.
    Date: 2009–07
  17. By: Jean-François Ponsot (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Section 1 will present, as a starting point, the regional payments and unit of accounts agreements in Latin America: the Reciprocal Payments and Credits Agreement of the Latin American Integration Association or ALADI, the ‘Peso Andino” set up by the Latin American Reserve Fund (FLAR) and the Payment System on Local Currency agreement (SML) recently launched by Brazil and Argentina. Section 2 will examine the objections arisen against Keynes's plan. It will also emphasise their relevance to the Sucre plan or to any similar plan. Section 3 will focus on the exchange scheme drafted by Keynes and on how to supplement it in order to get over the objections under examination.
    Keywords: sustainable development ; regional monetary integration ; Latin America
    Date: 2009–06–10
  18. By: Sigridur Benediktsdottir; Chiara Scotti
    Abstract: Exchange rate movements are difficult to predict but there appear to be discernible patterns in how currencies jointly appreciate or depreciate against the dollar. In this paper, we study the dependence structure of a number of exchange rate pairs against the dollar. We employ a conditional copula approach to recover the joint distributions for pairs of exchange rates and study both the correlation and the upper and lower tail dependence of these distributions. We analyze changes in dependence measures over time, and we investigate whether these measures are affected by the business cycle or interest rate differentials. Our results show that dependencies are indeed time-varying. We find that foreign and U.S. recessions affect the joint dependence structure and that currencies with higher interest rate differentials tend to move less closely together, not only on average (correlation), but also when extreme events occur (tails).
    Date: 2009
  19. By: Carlos Capistrán; Christian Constandse; Manuel Ramos Francia
    Abstract: Since the adoption of inflation targeting, the seasonal appears to be the component that explains the major part of inflation's total variation in Mexico. In this context, we study the performance of seasonal time series models to forecast short-run inflation. Using multi-horizon evaluation techniques, we examine the real-time forecasting performance of four well-known seasonal models using data on 16 indices of the Mexican Consumer Price Index (CPI), including headline and core inflation. These models consider both, deterministic and stochastic seasonality. After selecting the best forecasting model for each index, we apply and compare two methods that aggregate hierarchical time series, the bottom-up method and an optimal combination approach. The best forecasts are able to compete with those taken from surveys of experts.
    Keywords: Aggregated forecasts, bottom-up forecasting, forecast combination, hierarchical time series, inflation targeting, multi-horizon evaluation, seasonal unit roots.
    JEL: C22 C52 C53 E37
    Date: 2009–07
  20. By: Ruth Judson; Elizabeth Klee
    Abstract: Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine the data over the recent period of increased Federal Reserve transparency and find that the liquidity effect stabilized across days of the maintenance period. Rather, the liquidity effect may be a function of the uncertainty about banks' end-of-day balances. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting.
    Date: 2009
  21. By: Tuck Cheong Tang; Dietrich Fausten
    Abstract: This study uses two alternative specifications to test the interdependence between the current and capital accounts of the balance of payments. The empirical specifications, derived from the balance of payments constraint and from national income accounting relationships, respectively, yield consistent support for the interdependence hypothesis. The balance of payments specification returns positive findings for nine of the ten sample countries. These are corroborated by the general equilibrium specification in three instances. Neglect of the comprehensive lag structure of the underlying model may account for the relatively weak support from the general equilibrium specification of the interdependence hypothesis.
    Keywords: Current account; Capital account; Developing countries; G-5; Interdependence
    JEL: F32
    Date: 2009–06

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