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on Monetary Economics |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper attempts at characterising South Korean monetary policy in the period of explicit inflation targeting started in 1999. We explain Korean interest rates in relation to an estimated macro-model, assuming that monetary policy is set optimally. This allows us to obtain the central bank’s parameters in the policy objective function. During the IT regime, the data support that the Bank of Korea pursued optimal policy geared towards achieving price stability, with the degree of interest rate smoothing being estimated to be considerable. In addition, the central bank loss function is estimated to include negligible weights on output and exchange rate variability. JEL Classification: E52, E58, E61. |
| Keywords: | inflation targeting, optimal monetary policy, small open economies, South Korea. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091004&r=mon |
| By: | Andreas Beyer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Vitor Gaspar (Banco de Portugal, Special Adviser, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal.); Christina Gerberding (Deutsche Bundesbank, Monetary Policy and Analysis Division, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt am Main, Germany.); Otmar Issing (Centre for Financial Studies, Goethe University Frankfurt, Mertonstrasse 17-25, D-60325 Frankfurt am Main, Germany.) |
| 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 policy-makers at the time. JEL Classification: E31, E32, E41, E52, E58. |
| Keywords: | Inflation, Price Stability, Monetary Policy, Monetary Targeting, Policy Rules. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091020&r=mon |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Christophe Kamps (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Nadine Leiner-Killinger (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | To the best of our knowledge, our paper is the first systematic study of the predictive power of monetary aggregates for future inflation for the cross section of New EU Member States. This paper provides stylized facts on monetary versus non-monetary (economic and fiscal) determinants of inflation in these countries as well as formal econometric evidence on the forecast performance of a large set of monetary and non-monetary indicators. The forecast evaluation results suggest that, as has been found for other countries before, it is difficult to find models that significantly outperform a simple benchmark, especially at short forecast horizons. Nevertheless, monetary indicators are found to contain useful information for predicting inflation at longer (3-year) horizons. JEL Classification: C53, E31, E37, E51, E52, E62, P24 |
| Keywords: | Inflation forecasting, leading indicators, monetary policy, information content of money, fiscal policy, New EU Member States |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091015&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091065&r=mon |
| By: | Inoue, Takeshi; Hamori, Shigeyuki |
| Abstract: | This paper empirically analyzes India’s monetary policy reaction function by applying the Taylor (1993) rule and its open-economy version which employs dynamic OLS. The analysis uses monthly data from the period of April 1998 to December 2007. When the simple Taylor rule was estimated for India, the output gap coefficient was statistically significant, and its sign condition was found to be consistent with theoretical rationale; however, the same was not true of the inflation coefficient. When the Taylor rule with exchange rate was estimated, the coefficients of output gap and exchange rate had statistical significance with the expected signs, whereas the results of inflation remained the same as before. Therefore, the inflation rate has not played a role in the conduct of India’s monetary policy, and it is inappropriate for India to adopt an inflation-target type policy framework. |
| Keywords: | DOLS, India, Monetary policy, Reaction function, Taylor rule |
| JEL: | E52 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper200&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091070&r=mon |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Following Fuhrer and Moore (1995), several authors have proposed alternative mechanisms to ‘hardwire’ inflation persistence into macroeconomic models, thus making it structural in the sense of Lucas (1976). Drawing on the experience of the European Monetary Union, of inflation-targeting countries, and of the new Swiss monetary policy regime, I show that, in the Phillips curve models proposed by Fuhrer and Moore (1995), Gali and Gertler (1999), Blanchard and Gali (2007), and Sheedy (2007), the parameters encoding the ‘intrinsic’ component of inflation persistence are not invariant across monetary policy regimes, and under the more recent, stable regimes they are often estimated to be (close to) zero. In line with Cogley and Sbordone (2008), I explore the possibility that the intrinsic component of persistence many researchers have estimated in U.S. post-WWII inflation may result from failure to control for shifts in trend inflation. Evidence from the Euro area, Switzerland, and five inflation-targeting countries is compatible with such hypothesis. JEL Classification: E30, E32. |
| Keywords: | New Keynesian models, inflation persistence, Bayesian estimation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091038&r=mon |
| By: | Kai Christoffel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Keith Kuester (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behaviour and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy. JEL Classification: E32, E52, J64, C11. |
| Keywords: | Labor Market, wage rigidity, bargaining, Bayesian estimation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091035&r=mon |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Liquidity provision through its repo auctions has been one of the main instruments of the European Central Bank (ECB) to address the recent tensions in financial markets since summer 2007. In this paper, we analyse banks’ bidding behaviour in the ECB’s main refinancing operations (MROs) during the ongoing turmoil in money and financial markets. We employ a unique data set comprising repo auctions from March 2004 to October 2008 with bidding data from 877 counterparties. We find that increased bid rates during the turmoil can be explained by, inter alia, the increased individual refinancing motive, the increased attractiveness of the ECB’s tender operations due to its collateral framework and banks’ bidding more aggressively, i.e. at higher rates to avoid being rationed at the marginal rate in times of increased liquidity uncertainty. JEL Classification: E52, D44, C33, C34. |
| Keywords: | Central Bank Auctions, Financial Market Turmoil, Panel Sample Selection Model, Bidding Behavior, Monetary Policy Instruments. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091052&r=mon |
| By: | Oliver Landmann (Department of International Economic Policy, University of Freiburg) |
| Abstract: | On the eve of the financial and economic crisis of 2008/09, the European Economic and Monetary Union (EMU) could look back to a decade of remarkable macroeconomic stability. Somewhat surprisingly, though, inflation differentials across member states have been substantial and persistent, causing large cumulative changes in relative price levels. This paper presents a stylized theoretical model of a monetary union which demonstrates how persistent inflation differentials can arise from inflation inertia in conjunction with the loss of monetary control on the national level. The interaction of inflation and output dynamics which is at the core of the model generates a pattern of ‘rotating slumps’ (a term coined by Blanchard 2007b). A number of implications are derived from the model which shed light on the observed behavior of cyclical conditions and inflation rates in the euro area. The paper concludes that the monetary-fiscal framework of EMU does not pay adequate attention to the need of dealing with internal macroeconomic tensions within the euro zone. |
| Keywords: | EMU |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:fre:wpaper:9&r=mon |
| By: | Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences, Bruegel-Brussels, 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 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0913&r=mon |
| By: | Sandra Eickmeier (Deutsche Bundesbank, Economic Research Center, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main, Germany.); Katharina Moll (Goethe-Universität Frankfurt am Main, D-60054 Frankfurt am Main, Germany.) |
| Abstract: | We examine the global dimension of inflation in 24 OECD countries between 1980 and 2007 in a traditional Phillips curve framework. We decompose output gaps and changes in unit labor costs into common (or global) and idiosyncratic components using a factor analysis and introduce these components separately in the regression. Unlike previous studies, we allow global forces to affect inflation through (the common part of) domestic demand and supply conditions. Our most important result is that the common component of changes in unit labor costs has a notable impact of inflation. We also find evidence that movements in import price inflation affect CPI inflation while the impact of movements in the common component of the output gap is unclear. A counterfactual experiment illustrates that the common component of unit labor cost changes and non-commodity import price inflation have held down overall inflation in many countries in recent years whereas commodity import price inflation has only raised the short-run volatility of inflation. In analogy to the Phillips curves, we estimate monetary policy rules with common and idiosyncratic components of inflation and the output gap included separately. Central banks have indeed reacted to the global components. JEL Classification: E31, F41, C33, C50. |
| Keywords: | Inflation, globalization, Phillips curves, factor models, monetary policy rules. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091011&r=mon |
| By: | Sophocles N. Brissimis (Bank of Greece and University of Piraeus); Manthos D. Delis (University of Ioannina) |
| Abstract: | The heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. |
| Keywords: | Monetary policy; Bank heterogeneity; Risk-taking; Bank performance |
| JEL: | E44 E52 G21 C14 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:101&r=mon |
| By: | Grace H.Y. Lee; M. Azali |
| Keywords: | Optimum Currency Area; Monetary Union; Vector autoregression; Exchange rate; East Asia Abstract: This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an OCA. The preliminary findings of this study suggest that there exists scope among some small sub-regions for potential monetary integration. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2009-19&r=mon |
| By: | Luca Benati (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Over the last two centuries, the cross-spectral coherence between either narrow or broad money growth and inflation at the frequency ω=0 has exhibited little variation–being, most of the time, close to one–in the U.S., the U.K., and several other countries, thus implying that the fraction of inflation’s long-run variation explained by long-run money growth has been very high and relatively stable. The cross-spectral gain at ω=0, on the other hand, has exhibited significant changes, being for long periods of time smaller than one. The unitary gain associated with the quantity theory of money appeared in correspondence with the inflationary outbursts associated with World War I and the Great Inflation–but not World War II–whereas following the disinflation of the early 1980s the gain dropped below one for all the countries and all the monetary aggregates I consider, with one single exception. I propose an interpretation for this pattern of variation based on the combination of systematic velocity shocks and infrequent inflationary outbursts. Based on estimated DSGE models, I show that velocity shocks cause, ceteris paribus, comparatively much larger decreases in the gain between money growth and inflation at ω=0 than in the coherence, thus implying that monetary regimes characterised by low and stable inflation exhibit a low gain, but a still comparatively high coherence. Infrequent inflationary outbursts, on the other hand, boost both the gain and coherence towards one, thus temporarily revealing the one-for-one correlation between money growth and inflation associated with the quantity theory of money, which would otherwise remain hidden in the data. JEL Classification: E30, E32. |
| Keywords: | Quantity theory of money, inflation, frequency domain, cross-spectral analysis, band-pass filtering, DSGE models, Bayesian estimation, trend inflation. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091027&r=mon |
| By: | Fiorella De Fiore (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Oreste Tristani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We consider a simple extension of the basic new-Keynesian setup in which we relax the assumption of frictionless financial markets. In our economy, asymmetric information and default risk lead banks to optimally charge a lending rate above the risk-free rate. Our contribution is threefold. First, we derive analytically the loglinearised equations which characterise aggregate dynamics in our model and show that they nest those of the new- Keynesian model. A key difference is that marginal costs increase not only with the output gap, but also with the credit spread and the nominal interest rate. Second, we find that financial market imperfections imply that exogenous disturbances, including technology shocks, generate a trade-off between output and inflation stabilisation. Third, we show that, in our model, an aggressive easing of policy is optimal in response to adverse financial market shocks. JEL Classification: E52, E44. |
| Keywords: | optimal monetary policy, financial markets, asymmetric information. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091043&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091069&r=mon |
| By: | Campbell Leith (Department of Economics, Adam Smith Building, University of Glasgow, Glasgow G12 8RT, Scotland, UK.); Ioana Moldovan (Department of Economics, Adam Smith Building, University of Glasgow, Glasgow G12 8RT, Scotland, UK.); Raffaele Rossi (Department of Economics, Adam Smith Building, University of Glasgow, Glasgow G12 8RT, Scotland, UK.) |
| Abstract: | While consumption habits have been utilised as a means of generating a hump shaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly, external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules. JEL Classification: E30, E57, E61. |
| Keywords: | consumption habits, nominal inertia, optimal monetary policy. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091076&r=mon |
| By: | Grace H.Y. Lee; M. Azali |
| Abstract: | This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). We extend the existing literature by improving the methodology of assessing the symmetry shocks in evaluating the suitability of a common currency area in the East Asian economies employing the Bayesian State-Space Based approach. We consider a model of an economy in which the output is influenced by global, regional and country-specific shocks. The importance of a common regional shock would provide a case for a regional common currency. This model allows us to examine regional and country-specific cycles simultaneously with the world business cycle. The importance of the shocks decomposition is that studying a subset of countries can lead one to believe that observed co-movement is particular to that subset of countries when it in fact is common to a much larger group of countries. In addition, the understanding of the sources of international economic fluctuations is important for making policy decisions. Our findings also indicate that regional factors play a minor role in explaining output variation in both East Asian and the European economies. This implies that while East Asia does not satisfy the OCA criteria (based on the insignificant share of regional common factor), neither does Europe. |
| Keywords: | Optimum Currency Area; Business Cycle Synchronisation, Monetary Integration; East Asia |
| JEL: | E3 F1 F4 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2009-18&r=mon |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Jens Tapking (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Unsecured interbank money market rates such as the Euribor increased strongly with the start of the financial market turbulences in August 2007. There is clear evidence that these rates reached levels that cannot be explained alone by higher credit risk. This article presents this evidence and provides a theoretical explanation which refers to the funding liquidity risk of lenders in unsecured term money markets. JEL Classification: G01, G10, G21. |
| Keywords: | Liquidity premium, interbank money markets, unsecured lending, 2007/2008 financial market turmoil. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091025&r=mon |
| By: | Max Gillman (Cardiff Business School Cardiff University, Research Associate, Institute of Economics Hungarian Academy of Sciences); Mark N. Harris (Monash University Australia) |
| Abstract: | The paper examines the effect of inflation on growth in transition countries. It presents panel data evidence for 13 transition countries over the 1990-2003 period; it uses a fixed effects panel approach to account for possible bias from correlations among the unobserved effects and the observed country heterogeniety. The results find a strong, robust, negative effect on growth of inflation or its standard deviation, and one that appears to decline in magnitude as the inflation rate increases, as seen for OECD countries. And the results include a role for a normalized money demand in affecting growth, as well as for a convergence variable, a trade variable and a government share variable. And robustness of the baseline single equation model is examined by expanding this into a three equation simultaneous system of output growth, inflation and money demand that allows for possible simultaneity bias in the baseline model. |
| Keywords: | growth, transition, panel data, inflation, money demand, endogeneity |
| JEL: | C23 E44 O16 O42 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0912&r=mon |
| By: | Faia, Ester (University of Frankfurt); Lechthaler, Wolfgang (Kiel Institute for the World Economy); Merkl, Christian (Kiel Institute for the World Economy) |
| Abstract: | We study the design of optimal monetary policy in a New Keynesian model with labor turnover costs in which wages are set according to a right to manage bargaining where the firms' counterpart is given by currently employed workers. Our model captures well the salient features of European labor market, as it leads to sclerotic dynamics of worker flows. The coexistence of those types of labor market frictions alongside with sticky prices gives rise to a non-trivial trade-off for the monetary authority. In this framework, firms and current employees extract rents and the policy maker finds it optimal to use state contingent inflation taxes/subsidies to smooth those rents. Hence, in the optimal Ramsey plan, inflation deviates from zero and the optimal volatility of inflation is an increasing function of firing costs. The optimal rule should react to employment alongside inflation. |
| Keywords: | optimal monetary policy, hiring and firing costs, labor market frictions, policy trade-off |
| JEL: | E52 E24 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4322&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091068&r=mon |
| By: | Gabriel Fagan (Directorate General Research, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Julián Messina (Universitat de Girona, Plaça Sant Domènec, 3, IT-17071 Girona, Italy; IZA and FEDEA.) |
| Abstract: | This paper examines the impact of downward wage rigidity (nominal and real) on optimal steady-state inflation. For this purpose, we extend the workhorse model of Erceg, Henderson and Levin (2000) by introducing asymmetric menu costs for wage setting. We estimate the key parameters by simulated method of moments, matching key features of the cross-sectional distribution of individual wage changes observed in the data. We look at five countries(the US, Germany, Portugal, Belgium and Finland). The calibrated heterogeneous agent models are then solved for different steady state rates of inflation to derive welfare implications. We find that, across the European countries considered, the optimal steady-state rate of inflation varies between zero and 2%. For the US, the results depend on the dataset used, with estimates of optimal inflation varying between 2% and 5%. JEL Classification: E31, E52, J4. |
| Keywords: | Downward wage rigidity, DSGE models, optimal inflation. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091048&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091060&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091064&r=mon |
| By: | KOBAYASHI Keiichiro |
| Abstract: | We propose a new model for policy analysis of banking crises (or systemic bank runs) based on the monetary framework developed by Lagos and Wright (2005). If banks cannot enforce loan repayment and have to secure loans by collateral, a banking crisis due to coordination failure among depositors can occur in response to a sunspot shock, and the banks become insolvent as a result of the bank runs. The model is tractable and easily embedded into a standard business cycle model. The model naturally makes a distinction between money and goods, while most of the existing banking models do not. This distinction enables us to clarify further the workings of banking crises and crisis management policies. In particular, we may be able to use this framework to compare the efficacy of fiscal stimulus, monetary easing, and bank reforms as recovery efforts from the current global financial crisis. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:09036&r=mon |
| By: | Grace H.Y. Lee; M. Azali |
| Abstract: | The Asian financial crisis in mid-1997 has increased interest in policies to achieve greater regional exchange rate stability in East Asia. It has renewed calls for greater monetary and exchange rate cooperation. A country’s suitability to join a monetary union depends, inter alia, on the trade intensity and the business cycle synchronization with other potential members of the monetary union. However, these two Optimum Currency Area criteria are endogenous. Theoretically, the effect of increased trade integration (after the elimination of exchange fluctuations among the countries in the region) on the business cycle synchronization is ambiguous. Reduction in trade barriers can potentially increase industrial specialization by country and therefore resulting in more asymmetry business cycles from industry-specific shocks. On the other hand, increased trade integration may result in more highly correlated business cycles due to common demand shocks or intra-industry trade. If the second hypothesis is empirically verified, policy makers have little to worry about the region being unsynchronized in their business cycles as the business cycles will become more synchronized after the monetary union is formed. This paper assesses the dynamic relationships between trade, finance, specialization and business cycle synchronization for East Asian economies using a Generalized Method of Moments (GMM) approach. The dynamic panel approach improves on previous efforts to examine the business cycle correlation –trade link using panel procedures, which control for the potential endogeneity of all explanatory variables. Based on the findings on how trade, finance and sectoral specialization have effects on the size of common shocks among countries, potential policies that can help East Asian countries move close toward a regional currency arrangement can be suggested. The empirical results of this study suggest that there exists scope for East Asia to form a monetary union. |
| Keywords: | Optimum Currency Area; Monetary Union; Trade Integration; Business Cycle Synchronisation |
| JEL: | E3 F1 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2009-15&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091062&r=mon |
| By: | Wolfgang Lemke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Thomas Werner (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and bond yields as well as risk premia are affine functions of the state variables: the dividend yield, two factors driving the one-period real interest rate and the rate of inflation. The model provides for each month the `term structure of equity premia', i.e. expected excess stock returns over various investment horizons. Model-implied equity premia decrease during the `dot-com' boom period, show an upward correction thereafter, and reach highest levels during the financial turmoil that started with the 2007 subprime crisis. Equity premia for longer-term investment horizons are less volatile than their short-term counterparts. JEL Classification: E43, G12. |
| Keywords: | Equity premium, affine term structure models, asset pricing. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091045&r=mon |
| By: | Felix Geiger |
| Abstract: | I estimate a Gaussian two-factor affine term structure model of bond yields for three countries, the United States, the United Kingdom and Germany. I find a considerable time-varying component of excess returns in the data. They are positively correlated with the slope of the term structure and negatively with the short-term policy rate. In addition, the panel clearly indicates to co-movements in the same directions on an international level. When testing the estimated model for the expectations puzzle of the the term structure, at least at one end of the yield curve, this puzzle can be resolved when applying risk-adjusted yield changes. |
| Keywords: | Term Structure of Interest Rates, Term Premia, Kalman Filter, Maximum Likelihood |
| JEL: | G12 G15 E43 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:hoh:hohdip:316&r=mon |
| By: | Max Gillman (Cardiff Business School Cardiff University, Research Associate, Institute of Economics Hungarian Academy of Sciences); Michal Kejak (The Center for Economic Research and Graduate Education of Charles University (CERGE EI)) |
| Abstract: | Output growth, investment and the real interest rate in long run evidence tend to be negatively affected by inflation. Theoretically, inflation acts as a human capital tax that decreases output growth and the real interest rate, but increases the investment rate, opposite of evidence. The paper resolves this puzzle by requiring exchange for investment as well as consumption. Inflation then decreases the investment rate, and still decreases both output growth and real interest up to some moderately high rate of inflation, above which increasingly low investment finally causes capital to fall relative to labor, and the real interest rate to rise. |
| Keywords: | inflation, investment, growth, Tobin |
| JEL: | C23 E44 O16 O42 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0911&r=mon |
| By: | Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a new concept - the global roles of currencies. The concept combines the domestic and international (cross-border) use of currencies and therefore captures the overall importance of different currencies in a globalised economy. The measure of a currency’s global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well-known ranking for the leading currencies – in particular the US dollar and the euro – but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalisation, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross-border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration. JEL Classification: F31, F33, F37, G15, E58. |
| Keywords: | International currencies, international finance, global capital markets. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091031&r=mon |
| By: | Dimitrios Sideris (Bank of Greece and Panteion University) |
| Abstract: | The present paper has two aims. The first aim is to test whether six new member states of the European Union (the six Central and Eastern European Countries) form an optimum currency area (OCA) with the eurozone, in an attempt to assess their readiness for euro adoption. The second aim is to examine whether the introduction of the euro in 1999 and the decision of the countries to seek to join the euro area created any forces fostering their convergence, evidence which would be in line with the theory on the endogeneity of the OCA criteria. Our findings indicate that the introduction of the euro did promote integration of the six new member states and that, at present, they are quite well aligned with the eurozone. |
| Keywords: | EU enlargement; OCA; real exchange rates; cointegration; GPPP. |
| JEL: | C32 F33 F36 F42 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:99&r=mon |
| By: | Matthew Sherman |
| Abstract: | This paper looks at the trends in activity at the Federal Reserve’s newly-created special lending facilities, hoping to provide a better understanding of their operation and significance within financial markets. These facilities were created in response to the financial crisis and have expanded the Fed's balance sheet by over $1 trillion in terms of total assets. This sum is larger than the total price tag of the recent federal stimulus as well as the bank bailout authorized by the TARP. Yet both of these government responses have received enormously more public scrutiny than any of the actions taken by the Federal Reserve. |
| Keywords: | Federal Reserve, special lending facilities |
| JEL: | G G2 G21 G24 G28 H H2 H25 E E5 E58 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:epo:papers:2009-24&r=mon |
| By: | Qazi Muhammad Adnan Hye (AERCK, University of Karachi, Pakistan); Asghar Ali (AERCK, University of Karachi, Pakistan) |
| Abstract: | This pioneer research for Pakistan uses monthly time series data for the period of 1997-1 to 2008-4 to determine the causal relationship between the money supply, food prices and manufactured product prices in developing country like Pakistan. Empirical analysis is performed by using the ARDL and Toda Yamamoto causality test. The results show that the bidirectional causality between the food prices and money supply and unidirectional causality from money supply to manufactured product prices. On the other hand there is no causal relationship between the food prices and manufactured product prices. The important finding of this study is that food prices response faster then the manufactured product prices to a change in money supply in the Pakistan. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:aiu:abewps:78&r=mon |
| By: | Domenico Giannone (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michele Lenza (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lucrezia Reichlin (London Business School, Regent's Park, London NW1 4SA, United Kingdom.) |
| Abstract: | This paper shows that the EMU has not affected historical characteristics of member countries’ business cycles and their cross-correlations. Member countries which had similar levels of GDP per-capita in the seventies have also experienced similar business cycles since then and no significant change associated with the EMU can be detected. For the other countries, volatility has been historically higher and this has not changed in the last ten years. We also find that the aggregate euro area per-capita GDP growth since 1999 has been lower than what could have been predicted on the basis of historical experience and US observed developments. The gap between US and euro area GDP per capita level has been 30% on average since 1970 and there is no sign of catching up or of further widening. JEL Classification: E32, E33, C5, F2, F43. |
| Keywords: | Euro area, International Business Cycle, European Monetary Union, European integration. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091010&r=mon |
| By: | Kleopatra Nikolaou (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We discuss the notion of liquidity and liquidity risk within the financial system. We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal and turbulent times. We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets. The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buffer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk. JEL Classification: G10, G20. |
| Keywords: | liquidity, risk, central bank, LLR. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091008&r=mon |