nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒07‒28
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Design of a ‘Two-Pillar’ Monetary Policy Strategy By Dai, Meixing
  2. "Financial crisis, monetary policy reform and the monetary transmission mechanism in Turkey" By James Butkiewicz
  3. Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia By Jean-Pierre Allegret; Kosta Josifidis; Emilija Beker Pucar
  4. The sensitivity of South African inflation expectations to surprises By Monique Reid
  5. Monetary Policy Committees: meetings and outcomes. By Jan Marc Berk; Beata K. Bierut
  6. Policy Responses to Exchange-Rate Movements By Laurence M. Ball
  7. Insulation Impossible: Fiscal Spillovers in a Monetary Union By Russell Cooper; Hubert Kempf; Dan Peled
  8. The impact of monetary policy on the yield curve in the Brazilian economy By Aranha, Marcel Z.; Moura, Marcelo L.
  9. Housing Finance and Monetary Policy. By Alessandro Calza; Tommaso Monacelli; Livio Stracca
  10. Macroeconomic Fluctuations and Deposit Dollarization in Sub-Saharan Africa: Evidence from Panel Data By Yinusa, D. Olalekan
  11. Convergenta Nominala By Iancu, Aurel
  12. Monetary Policy Activism and Price Responsiveness to Aggregate Shocks under Rational Inattention By Paciello, Luigi
  13. The Bank Lending Channel of Monetary Transmission in Brazil: A VECM Approach By Luiz de Mello; Mauro Pisu
  14. Prospect Theory and Inflation Perceptions - An Empirical Assessment By Lena Vogel; Jan-Oliver Menz; Ulrich Fritsche
  15. Oil and the Euro Area Economy By G. PEERSMAN; I. VAN ROBAYS
  16. Empirical estimates of changing inflation dynamics By Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
  17. On Money as an Institution By Nikolay Nenovsky
  18. Is a common currency area feasible for East Asia? A multivariate structural VAR approach By Hsiufen Hsu
  19. Zero Nominal Interest Rates, Unemployment, Excess Reserves and Deflation in a Liquidity Trap By Ryu-ichiro Murota; Yoshiyasu Ono
  20. The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short-Term Funds By Nuno Cassola; Ali Hortacsu; Jakub Kastl
  21. Choosing and assessing exchange rate regimes: A survey of the literature By Cruz Rodriguez, Alexis
  22. An investigation of customer order flow in the foreign exchange market By Mario Cerrato; Nicholas Sarantis; Alex Saunders
  23. Forecasting Inflation Using Dynamic Model Averaging By Gary Koop; Dimitris Korobilis
  24. Do Prices in the EMU Converge (Non-linearly)? By Ulrich Fritsche; Sarah Lein; Sebastian Weber
  25. Lucas, Keynes, and the Crisis By David Laidler
  26. Some Benefits of Reducing Inflation in South Africa By Rangan Gupta; Josine Uwilingiye
  27. Impact of Global Financial Crisis on Reserve Bank of India (RBI) as a National Regulator By Usha Thorat
  28. The Determinants of International Reserves in the Emerging Countries: a Non-Linear Approach By Delatte, Anne-Laure; Fouquau, Julien

  1. By: Dai, Meixing
    Abstract: In this paper, it is argued that money supply in a narrow sense and repo interest rate are two independent monetary policy instruments when the effect of interest rate policy cannot be efficiently transmitted to the economy through the monetary and financial markets. In this case, the control of money supply is necessary to reduce the discrepancy between the repo interest rate and the interest rates at which private agents lend and borrow. Using a simple macro-economic model, this study shows how a twopillar monetary policy strategy as practiced by the European central bank (ECB) can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. This strategy can be interpreted as a combination of inflation targeting and monetary targeting. Well conceived monetary targeting with a commitment to a long-run money growth rate corresponding to inflation target could reinforce the credibility of central bank announcements and the role of inflation target as strong and credible nominal anchor for private inflation expectations. However, an inflation-targeting regime associated with Friedman’s money supply rule can generate dynamic instability in output, inflation and money demand. Three feedback monetary targeting rules, of which the design depends on economic structure and central bank preferences, are discussed relative to their capability of warranting macroeconomic stability.
    Keywords: Two-pillar monetary policy strategy, inflation targeting, monetary targeting, macroeconomic stability, Friedman’s k-percent rule
    JEL: E44 E52 E58
    Date: 2009
  2. By: James Butkiewicz (Department of Economics,University of Delaware)
    Abstract: Turkey experienced a financial crisis in 2000-2001 which led to significant financial reforms. The reforms resulted in a switch to a floating exchange rate, granted greater central bank independence and pursuit of a more credible monetary policy. Investigation of the channels of monetary policy in both periods finds that monetary policy’s output effects have been strengthened considerable by the reforms. In the pre-crisis period monetary policy was highly inflationary, while in the post-crisis period, monetary policy targets low inflation and has become a tool for output stabilization. These results support the importance of central bank independence and a credible policy.
    Keywords: monetary transmission mechanism, central bank independence, inflation targeting.
    JEL: E42
    Date: 2009
  3. By: Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Kosta Josifidis (Faculty of Economics Subotica - Novi Sad University); Emilija Beker Pucar (Faculty of Economics Subotica - Novi Sad University)
    Abstract: The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
    Keywords: Exchange rate targeting; Inflation targeting; Intermediate exchange rate regimes; Monetary transmission channels
    Date: 2009
  4. By: Monique Reid (Department of Economics, University of Stellenbosch)
    Abstract: Price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged inflation expectations to be relatively insensitive to macroeconomic surprises, and offers support for the inflation targeting framework as a means to help anchor inflation expectations.
    Keywords: South Africa, Inflation targeting, Macroeconomic surprises, Sensitivity of inflation expectations
    JEL: E31 E52 E58
    Date: 2009
  5. By: Jan Marc Berk (De Nederlandsche Bank, Statistics & Information Division, PO Box 98, 1000AB Amsterdam, the Netherlands.); Beata K. Bierut (De Nederlandsche Bank, Economics & Research Division, PO Box 98, 1000AB Amsterdam, the Netherlands)
    Abstract: Monetary Policy Committees differ in the way the interest rate proposal is prepared and presented in the policy meeting. In this paper we show analytically how different arrangements could affect the voting behaviour of individual MPC members and therefore policy outcomes. We then apply our results to the Bank of England and the Federal Reserve. A general finding is that when MPC members are not too diverse in terms of expertise and experience, policy discussions should not be based on pre-repared policy options. Instead, interest rate proposals should arise endogenously as a majority of views expressed by the members, as is the case at the Bank of England and appears to be the case in the FOMC under Chairman Bernanke. JEL Classification: E58, D71, D78.
    Keywords: monetary policy committee, voting, Bank of England, Federal Open Market Committee.
    Date: 2009–07
  6. By: Laurence M. Ball
    Abstract: This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
    JEL: E52 F41
    Date: 2009–07
  7. By: Russell Cooper; Hubert Kempf; Dan Peled
    Abstract: This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
    JEL: E61 E63 F15 H77
    Date: 2009–07
  8. By: Aranha, Marcel Z.; Moura, Marcelo L.
    Date: 2009–10
  9. By: Alessandro Calza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tommaso Monacelli (IGIER, Università Bocconi, Via Sarfatti, 25 Milano, Italy.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We study how the structure of housing finance affects the transmission of monetary policy shocks. We document three main facts: first, the features of residential mortgage markets differ markedly across industrialized countries; second, and according to a wide range of indicators, the transmission of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. We build a two-sector DSGE model with price stickiness and collateral constraints and analyze how the response of consumption and residential investment to monetary policy shocks is affected by alternative values of two institutional features: (i) down-payment rate; (ii) interest rate mortgage structure (variable vs. fixed rate). In line with our empirical evidence, the sensitivity of both variables to monetary policy shocks increases with lower values of the down-payment rate and is larger under a variable- rate mortgage structure. JEL Classification: E21, E44, E52.
    Keywords: Housing finance, mortgage markets, collateral constraint, monetary policy.
    Date: 2009–07
  10. By: Yinusa, D. Olalekan
    Abstract: The role played by macroeconomic fluctuations in stimulating deposit dollarization in developing countries have been a subject of intense debate in the last few decades especially in Latin America and transition economies of Eastern Europe with little attention on African economies. Apart from this, most of the studies on African economies are country case studies with little scope for generalisation. This article examines the effect of macroeconomic fluctuations on deposit dollarization in 18 selected Sub-Saharan Africa for the period 1980 to 2004. Using the standard money demand model accounting for dollarization in small open economies, the article finds that inflation, expectations about exchange rate changes coupled with interaction between capital account restrictions and domestic inflation plays dominant roles in explaining deposit dollarization in Sub-Sahara Africa. Given the consequences of deposit dollarization on the vulnerability of the domestic banking system, lack of independent monetary policy and optimal exchange rate choices, the article concludes that macroeconomic instability must be adequately brought under control in other to reduce deposit dollarization in these economies.
    Keywords: Macroeconomic Fluctuations; Demand for Money; Deposit Dollarization; Panel Data and Sub-Saharan Africa
    JEL: E31 C21
    Date: 2009
  11. By: Iancu, Aurel (Academia Romana, Institutul National de Cercetari Economice)
    Abstract: After presenting the institutional construction during the pre-accession and post-accession to the Economic and Monetary Union (EMU), the exchange rate mechanisms (ERM) in several countries and the convergence criteria, we go on with a brief analysis of the way the CEE countries cope with the convergence criteria in accordance with the Maastricht Treaty. Then, the study deals with a topic often discussed in the scientific literature and included on the agenda of decision-makers at various levels, in order to clarify the following major issues: a shorter transition to the euro, the exchange rate equilibrium versus the inflation rate diminution and the Balassa-Samuelson effect, the exchange rates and the exchange rate deviation index, evidences concerning the real exchange rate equilibrium and the appreciation of the exchange rate in the CEE countries. * Study within the CEEX Programme – Project No. 220/2006 “Economic Convergence and Role of Knowledge in Relation to the EU Integration”.
    Keywords: Convergence criteria, exchange rate, exchange rate mechanisms, Euro Area, Balassa-Samuelson effect, tradable goods, non-tradable goods, exchange rate deviation index, purchasing power parity.
    JEL: F31 O43 O47
    Date: 2009–07
  12. By: Paciello, Luigi
    Abstract: This paper presents a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. The model of this paper builds on recent work by Mackowiak and Wiederholt (2009), who show that models of endogenous attention allocation deliver prices to be more responsive to more volatile shocks as, everything else being equal, firms pay relatively more attention to more volatile shocks. In fact, according to the U.S. data, aggregate technology shocks are more volatile than monetary policy shocks inducing in this paper, firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by showing that the ability of the model of this paper to account for observed price dynamics crucially depends on monetary policy. In particular, this paper shows how interest rate feedback rules affect the incentives faced by firms in allocating attention. A policy rate responding more actively to expected inflation and output fluctuations induces firms to pay relatively more attention to more volatile shocks. This new mechanism of transmission of monetary policy helps rationalizing the observed behavior of prices in response to technology and monetary policy shocks, and implies novel predictions about the impact of changes in Taylor rules coefficients on economic fluctuations.
    Keywords: Rational inattention; monetary policy; technology shocks; prices
    JEL: E5 E3
    Date: 2009–07–18
  13. By: Luiz de Mello; Mauro Pisu
    Abstract: This paper tests for the existence of a bank lending channel in the transmission of monetary policy in Brazil using monthly aggregate data for the period 1995:12 through 2008:6. The test is carried out in a VECM setting that allows for multiple cointegrating relationships among the variables of interest. We find evidence of two cointegrating vectors, which we identify as bank loan demand and supply functions by testing for a number of exclusion and exogeneity restrictions on the cointegrating relationships. Loan supply is negatively related to the interbank deposit certificate rate in the long term, which confirms the existence of a lending channel for monetary transmission. The VECM’s short-term dynamics show that loan demand is equilibrium-correcting. But short-term disequilibria in the supply of loans are corrected through changes in the interbank deposit certificate rate, suggesting that monetary policy plays a role in restoring equilibrium in the credit market by affecting the borrowing rate faced by banks to raise non-deposit funds. This Working Paper relates to the 2009 OECD Economic Survey of Brazil (<P>Le crédit bancaire comme canal de transmission de la politique monétaire au Brésil : Un modèle à correction d’erreur<BR>Ce document teste l’hypothèse de l’existence du crédit bancaire comme canal de transmission de la politique monétaire au Brésil à l’aide de données mensuelles agrégées pour la période allant de décembre 1995 à juin 2008. Le test est effectué dans le cadre d’un modèle à correction d’erreur (VECM) qui permet plusieurs vecteurs de cointégration parmi les variables d’intérêt. L’analyse empirique révèle l’existence de deux vecteurs de cointégration, que nous identifions comme la demande et l’offre de crédit bancaire sur la base d’un certain nombre de restrictions d’exclusion et d’exogénéité imposées sur les vecteurs de cointégration. L’offre des prêts bancaires est inversement liée au taux de long terme des certificats de dépôt interbancaire, ce qui confirme l’existence du crédit bancaire comme canal de transmission de la politique monétaire. La dynamique de court terme du VECM montre que la demande des prêts s’ajuste à l’équilibre de long terme. Mais à court terme, les déséquilibres dans l'offre des prêts sont corrigés par des changements dans le taux des certificats de dépôt interbancaire, ce qui suggère que la politique monétaire joue un rôle dans le rétablissement de l’équilibre sur le marché du crédit en affectant le taux d’emprunt des banques. Ce Document de travail se rapporte à l’Étude économique de l’OCDE du Brésil, 2009 (ésil).
    Keywords: monetary transmission mechanism, mécanisme de transmission monétaire, vector error-correction model, modèle à correction d’erreur, bank lending channel, canal du crédit bancaire
    JEL: E10 E44 E52
    Date: 2009–07–10
  14. By: Lena Vogel (Department for Economics and Politics, University of Hamburg); Jan-Oliver Menz (Department for Economics and Politics, University of Hamburg); Ulrich Fritsche (Department for Economics and Politics, University of Hamburg)
    Abstract: Building on the hypotheses of loss aversion with respect to price increases and availability of frequently bought goods, Brachinger (2006,2008) constructs an alternative index of perceived inflation (IPI), which can reproduce the jump in the measure for perceived inflation after the Euro introduction in Germany that was not observable in standard HICP inflation. We test the hypotheses of Prospect Theory with regard to households’ inflation perceptions underlying Brachinger’s IPI in a panel estimation for 12 European countries. There is evidence that perceptions react more strongly to ‘losses’ in inflation than to ‘gains’ before the Euro cash changeover, but not afterwards. Moreover, we find empirical support for the availability hypothesis, stating that frequently bought goods have a stronger influence on inflation perceptions than the overall price index.
    Keywords: Inflation Perceptions, Prospect Theory, Dynamic Panel
    JEL: D81 D82 E52 C33
    Abstract: We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policyreaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct passthrough of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. Third, there are also substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
    Date: 2009–04
  16. By: Jeff Fuhrer; Giovanni Olivei; Geoffrey M. B. Tootell
    Abstract: This paper provides an array of empirical evidence bearing on potentially important changes in the dynamics of U.S. inflation. We examine the overall performance of Phillips curves relative to some well-known benchmarks, the efficiency with which the Federal Reserve's Greenbook forecasts of inflation use real activity information, and shifts in the key determinants of the reduced-form "triangle model" of inflation. We develop a structural model-based interpretation of observed reduced-form shifts and conduct a reduced-form assessment of the relationship between core and headline measures of inflation, centering on the persistent "pass-through" of relative price changes into core and headline inflation measures, and a parallel exercise that examines the pass-through of key relative price changes into wage and compensation measures.
    Keywords: Inflation (Finance)
    Date: 2009
  17. By: Nikolay Nenovsky
    Abstract: In this paper I am going to explore some of the major theoretical concepts and ideas in Luca Fantacci’s work devoted to the history of money. As a historical check on Fantacci’s theory I will present various moments in Russian monetary history interpreted in the light of the ideas of the La moneta: storia di un’instituzione mancata. I will compare Fantacci’s theory of division between the unit of account and the medium of exchange with those of Walther Eucken and the Austrian School as well as of some other contemporary authors. A new institutional reading of the evolution of money “money as an institutional compound” is proposed.
    Keywords: institution, money, monetary history
    JEL: B52 E42 N10
    Date: 2009–07
  18. By: Hsiufen Hsu (Osaka School of International Public Policy (OSIPP),Osaka University)
    Abstract: In this paper the feasibility of forming a common currency area in East Asia is investigated. A three-variable SVAR model is employed to identify three types of shocks, i.e. global, regional, and domestic shocks. The empirical results do not provide strong support for forming a common currency area in this region because the symmetric "prevalent shock" cannot be defined. However, it is found that since the late 1990s the importance of asymmetric domestic shocks has declined while that of symmetric global and regional shocks has increased. Furthermore, East Asia is as symmetric as the Euro Area in terms of the correlation of global and regional shocks. The findings suggest that most East Asian economies have become symmetric in terms of economic shocks, and imply that a common currency area may become viable through deepening regional integration.
    Keywords: Common currency area, Monetary integration, OCA, SVAR, East Asia
    JEL: F3 F4
    Date: 2009–07
  19. By: Ryu-ichiro Murota; Yoshiyasu Ono
    Abstract: We present a dynamic and monetary model that consistently explains such various phenomena as unemployment, deflation, zero nominal interest rates and excess reserves held by commercial banks. These phenomena are commonly observed during the Great Depression in the United States, the recent long-run stagnation in Japan, and the worldwide financial crisis triggered by the US subprime loan problem of 2008. We show that an excessive liquidity preference leads to a liquidity trap and thereby generates the phenomena.
    Date: 2009–07
  20. By: Nuno Cassola; Ali Hortacsu; Jakub Kastl
    Abstract: In this paper we study European banks’ demand for short-term funds (liquidity) during the summer 2007 subprime market crisis. We use bidding data from the European Central Bank’s auctions for one-week loans, their main channel of monetary policy implementation. Through a model of bidding, we show that banks’ behavior reflects their cost of obtaining short-term funds elsewhere (i.e., in the interbank market) as well as a strategic response to other bidders. We find considerable heterogeneity across banks in their willingness to pay for short-term funds supplied in these auctions. Accounting for the strategic component is important: while a naive interpretation of the raw bidding data may suggest that virtually all banks suffered a dramatic increase in the cost of obtaining funds in the interbank market, we find that for about one third of the banks, the change in bidding behavior was simply a strategic response. Using a complementary data set, we also find that banks’ pre-turmoil liquidity costs, as estimated by our model, are predictive of their post-turmoil liquidity costs, and that there is considerable heterogeneity in these costs with respect to the country-of-origin. Finally, among the publicly traded banks, the willingness to pay for short-term funds in the second half of 2007 are predictive of stock prices in late 2008.
    JEL: D44 D53 E5
    Date: 2009–07
  21. By: Cruz Rodriguez, Alexis
    Abstract: This paper explore more than 30 years of ideas on the issues surrounding the selection and assessment of exchange rate regimes. It will attempt to provide a comprehensive overview on the theoretical and empirical analysis of the selection and assessment of exchange rate regimes, exposing and interpreting those areas which, from our point of view, are representative of the most influential contributions in this context. The literature can be divided into two main groups: classical and modern. The first group refers to earlier studies examining the differences between floating and fixed exchange rate regimes based on the nature of the shocks and on the OCA theory. The second group is focused on the trade-off between credibility and flexibility, the economic performance and currency crisis, among others. In addition, this paper reviews why many countries follow de facto regimes different from their de jure regimes, that is, declaring different regimes to the actual regimes in place. Finally, this paper reviews the more recent empirical criteria that have been used to evaluate the choice of an optimal exchange regime.
    Keywords: Exchange rate; currency crisis; optimal currency area
    JEL: F02 F33 F31 F36
    Date: 2009–07–15
  22. By: Mario Cerrato; Nicholas Sarantis; Alex Saunders
    Abstract: This paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs. We make three contributions. First, we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables. Second, we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature. Finally we address the question of whether the out-of-sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets.
    Keywords: Customer order flow; exchange rates; microstructure; forecasting
    JEL: F31 F41 G10
    Date: 2009–07
  23. By: Gary Koop (Department of Economics, University of Strathclyde and RCEA); Dimitris Korobilis (Department of Economics, University of Strathclyde and RCEA)
    Abstract: There is a large literature on forecasting inflation using the generalized Phillips curve (i.e. using forecasting models where inflation depends on past inflation, the unemployment rate and other predictors). The present paper extends this literature through the use of econometric methods which incorporate dynamic model averaging. These not only allow for coefficients to change over time (i.e. the marginal effect of a predictor for inflation can change), but also allows for the entire forecasting model to change over time (i.e. different sets of predictors can be relevant at different points in time). In an empirical exercise involving quarterly US inflation, we fi…nd that dynamic model averaging leads to substantial forecasting improvements over simple benchmark approaches (e.g. random walk or recursive OLS forecasts) and more sophisticated approaches such as those using time varying coefficient models.
    Keywords: Option Pricing; Modular Neural Networks; Non-parametric Methods
    JEL: E31 E37 C11 C53
    Date: 2009–01
  24. By: Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Sarah Lein (Swiss National Bank (SNB)); Sebastian Weber (German Institute for Economic Research (DIW) Berlin)
    Abstract: This paper examines the current state of price convergence amongst the eleven initial EMU member states. Special attention is given to possible changes in the convergence process during the euro cash changeover. We apply the sigma-convergence approach using both panel estimates of changes in the deterministic time trend of a coefficient of variation and stochastic kernel-density estimates. We find that convergence took place before 2000, slowed down substantially between 2000 and 2003, and resurfaced after 2003. This points to a non-linear convergence path. We show that stronger convergence is associated with periods of positive and less-dispersed output gaps across member states. There are no big differences between the results for tradables and non-tradables, indicating that Balassa-Samuelson effects are relatively weak.
    Keywords: Prices, European Monetary Union, Sigma-convergence, Kernel-density Estimation, Balassa-Samuelson Effect
    JEL: C14 C33 E31 F15
    Date: 2009–07
  25. By: David Laidler (University of Western Ontario)
    Abstract: This paper examines Robert E. Lucas's views on the relationship of macroeconomics to real world economic phenomena, and on Keynes's place in its history, suggesting that these stem from a particular and debatable understanding of how the subdiscipline has evolved. It considers some implications for today's awkward economic facts of aspects of Keynes' General Theory, not so much its speculations about the role of psychology and social conventions in the economic decisions of individual agents recently highlighted by Akerlof and Shiller (2009) however, as its insights into the influence of the monetary system on the coordination of these decisions, along lines later extended by Clower (1965) and Leijonhufvud (1968). It concludes that the questions about co-ordination that Keynes addressed, not to mention some of his answers, are well worth revisiting.
    Keywords: Crisis; Co-ordination; Clearing Markets; Auctioneer; Money; Financial Markets; Animal Spirits; Psychology; Keynes; Lucas
    JEL: B22 B31 E12 E13 E32
    Date: 2009
  26. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: This paper evaluates the welfare gain from reducing inflation permanently from two percent to price stability and compares it with the output cost associated with this transition. The paper emphasizes the distortions caused by the interaction of inflation and capital income taxation, in calculating the gain from moving to a zero rate of inflation. Though the annual deadweight loss of a two percent inflation rate is 0.20 percent of GDP - a relatively small number when compared to the literature, since the real gain from shifting to price stability grows in perpetuity at the rate of growth of GDP, the present value is a substantial multiple of the annual welfare gain. Calculations reveal a present value gain of 13.33 percent of GDP. Since the corresponding one-off output cost of moving from two percent inflation to price stability is 0.034 percent of GDP, the gain outweighs the cost by an overwhelming margin.
    Keywords: Inflation, Non-Indexed Tax System, Welfare Cost
    JEL: P34 H21 E31
    Date: 2009–07
  27. By: Usha Thorat
    Abstract: The multi-dimensional role of RBI and how it reponded to the financial crisis is depicted in the presentation. [Presentation made at the 56th EXCOM Meeting and FinPower CEO Forum organised by APRACA at Seoul, Korea].
    Keywords: RBI, financial crisis, India, FII, growth, GDP, financial companies, NBFCs, monetary authority, forex, employment intesive sectors
    Date: 2009
  28. By: Delatte, Anne-Laure; Fouquau, Julien
    Abstract: In this paper we adopt a non linear approach to examine the dynamics of the international reserves holdings by the emerging economies. To do so, we estimate the demand for international reserves with a panel smooth transition model, that loosens two restricting hypotheses, homogeneity and time-stability. We find evidence for the presence of a non linear behavior in the demand for international reserves, a result that is new to the literature. The coefficients are found to change smoothly, as a function of two threshold variables- out of seven candidates tested in total. Our specification accounts for the acceleration of foreign exchange reserves accumulation that the linear specifications fail to explain.
    Keywords: International Reserves; Precautionary Demand; Mercantilist; Global Imbalances; Panel Smooth Threshold Regression Models.
    JEL: E58 C23 F41 F31
    Date: 2009–06

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