nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒08‒16
sixteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Global slack and domestic inflation rates: a structural investigation for G-7 countries By Fabio Milani
  2. Inflation Targeting and Inflation Convergence within Turkey By Yilmazkuday, Hakan
  3. Habit Formation, Interest-Rate Control and Equilibrium Determinacy By Seiya Fujisaki
  4. Bank risk and monetary policy By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  5. Monetary policy response to oil price shocks By Jean-Marc Natal
  6. Should monetary policy "lean or clean"? By William R. White
  7. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Hernandez-Verme, Paula; Wang, Wen-Yao
  8. A Model of Market Clearing Exchange Rates By Rajas Parchure
  9. Has globalization transformed U.S. macroeconomic dynamics? By Fabio Milani
  10. Financial Frictions and Monetary Transmission By Uluc Aysun; Ryan Brady; Adam Honig
  11. Estimation of a Time Varying Natural Interest Rate for Peru By Humala, Alberto; Rodríguez, Gabriel
  12. The stability of the inflation rate in the Euro area: the role of Globalization and labour market By Forte, Antonio
  13. Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation By Fujisaki, Seiya; Mino, Kazuo
  14. Foreign Exchange Intervention and Exchange Rate Volatility in Peru By Humala, Alberto; Rodríguez, Gabriel
  15. Prominent Numbers, Indices and Ratios in Exchange Rate Determination and Financial Crashes: in Economists’ Models, in the Field and in the Laboratory By Robin Pope; Reinhard Selten; Sebastian Kube; Jürgen von Hagen
  16. Price Inflation and Income Distribution By Jennings, Anne; Lyons, Seán; Tol, Richard S. J.

  1. By: Fabio Milani
    Abstract: Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of "global," rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.
    Keywords: Globalization ; Inflation (Finance) ; Group of Seven countries ; Monetary policy ; Banks and banking, Central ; Phillips curve
    Date: 2009
  2. By: Yilmazkuday, Hakan
    Abstract: Using a disaggregated level CPI data, this paper compares bilateral convergence properties of Turkish regional inflation rates between pre-inflation-targeting and inflation-targeting periods. Rather than using an ad hoc date for the introduction of inflation-targeting regime, structural break dates are estimated for Turkish national inflation rate as well as the standard deviation of Turkish regional inflation rates. The first moment of Turkish national inflation rate has an estimated break at the beginning of explicit inflation-targeting regime in January 2002, and the second moment of Turkish regional inflation rates has an estimated break at the financial crisis in February 2001 after which Turkey adopted a flexible exchange rate. It is found that during the inflation-targeting period, Turkish regional inflation rates have converged to each other in terms of CPI groups with relatively non-tradable components, and they have diverged from each other in terms of CPI groups with relatively tradable components.
    Keywords: Inflation Targeting; Inflation Rate Convergence; Regional Analysis; Turkey
    JEL: E31 E52 E50 R12
    Date: 2009
  3. By: Seiya Fujisaki (Graduate School of Economics, Osaka University)
    Abstract: We examine macroeconomic stability of a monetary economy with habit formation in consumption. We assume that monetary authority controls the rate of nominal interest in response to inflation and output gap. We show that in the presence of habit persistence not only active but also passive monetary policy can generate equilibrium determinacy under empirically plausible values of the elasticity of intertemporal substitution in felicity.
    Keywords: equilibrium determinacy, habit formation, Taylor rule, endogenous labor.
    JEL: E21 E52 O42
    Date: 2009–08
  4. By: Yener Altunbas (University of Wales, Bangor, Gwynedd LL57 2DG, Wales, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We find evidence of a bank lending channel for the euro area operating via bank risk. Financial innovation and the new ways to transfer credit risk have tended to diminish the informational content of standard bank balance-sheet indicators. We show that bank risk conditions, as perceived by financial market investors, need to be considered, together with the other indicators (i.e. size, liquidity and capitalization), traditionally used in the bank lending channel literature to assess a bank’s ability and willingness to supply new loans. Using a large sample of European banks, we find that banks characterized by lower expected default frequency are able to offer a larger amount of credit and to better insulate their loan supply from monetary policy changes. JEL Classification: E44, E55.
    Keywords: bank, risk, bank lending channel, monetary policy.
    Date: 2009–07
  5. By: Jean-Marc Natal
    Abstract: How should monetary authorities react to an oil price shock? This paper argues that a meaningful trade-off between stabilizing inflation and the welfare relevant output gap arises in a distorted economy once one recognizes (1) that oil (energy) cannot be easily substituted by other factors, (2) that monopolistic competition implies that production is suboptimally low in the steady state, and (3) that increases in oil prices also directly affect consumption by raising the price of fuel, heating oil, and other energy sources. While the first two conditions are necessary to introduce a microfounded monetary policy trade-off, the third one makes it quantitatively significant. ; The optimal precommitment monetary policy relies on unobservables and is therefore hard to implement. To address this concern, I derive a simple interest rate feedback rule that mimics the optimal plan for all practical purposes but that depends only on observables, namely core inflation, oil price inflation, and the growth rate of output.
    Keywords: Monetary policy ; Petroleum products - Prices
    Date: 2009
  6. By: William R. White
    Abstract: It has been contended by many in the central banking community that monetary policy would not be effective in "leaning" against the upswing of a credit cycle (the boom) but that lower interest rates would be effective in "cleaning" up (the bust) afterwards. In this paper, these two propositions (can't lean, but can clean) are examined and found seriously deficient. In particular, it is contended in this paper that monetary policies designed solely to deal with short term problems of insufficient demand could make medium term problems worse by encouraging a buildup of debt that cannot be sustained over time. The conclusion reached is that monetary policy should be more focused on "preemptive tightening" to moderate credit bubbles than on "preemptive easing" to deal with the after effects. There is a need for a new macrofinancial stability framework that would use both regulatory and monetary instruments to resist credit bubbles and thus promote sustainable economic growth over time.
    Keywords: Monetary policy ; Financial crises
    Date: 2009
  7. By: Hernandez-Verme, Paula; Wang, Wen-Yao
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.
    Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
    JEL: G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21
    Date: 2009–03–05
  8. By: Rajas Parchure
    Abstract: This paper formulates a model of exchange rate determination that describes the market processes by which the foreign exchange markets are cleared and international receipts of countries are brought into equality with their international payments. The model is capable of being explicitly solved for the actual world economy provided the balance of payments data which are routinely collected by central banks and reported to the IMF are arranged by their countrywise origins and destinations.
    Keywords: foreign exchange markets, data, national currency, currency, exchange rates, homogenous equations, Forward Exchange Rates, markets, foreign exchange rate, world economy, international receipts, payments, balance of payments, central banks, IMF,
    Date: 2009
  9. By: Fabio Milani
    Abstract: This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model--such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to "global" output, and so forth--are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed economy specification still appears to provide a substantially better fit of U.S. data than various open economy specifications with timevarying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization.
    Keywords: Globalization ; Macroeconomics - Econometric models ; Inflation (Finance) ; Monetary policy ; Banks and banking, Central ; Phillips curve
    Date: 2009
  10. By: Uluc Aysun (University of Connecticut); Ryan Brady (Unites States Naval Academy); Adam Honig (Amherst College)
    Abstract: This paper examines the effect of financial frictions on the strength of the credit channel of monetary policy. First, we use a DSGE model characterized by financial frictions as in Bernanke, Gertler, and Gilchrist (1999), and calibrate it using parameter values for countries with different levels of financial frictions. We find that the credit channel is stronger in countries with high levels of financial frictions. The intuition is that in these countries, external finance premiums are more sensitive to firms' financial leverage. By affecting asset prices, therefore, monetary policy has greater impact on external finance premiums and output. Second, we provide empirical evidence for this relationship. We use cross-country data in SVAR models to generate indicators for credit channel strength. We then show that there is a positive relationship between financial frictions, captured by bankruptcy recovery rates, and credit channel strength, confirming the predictions of the model.
    Keywords: credit channel, financial frictions, bankruptcy costs
    JEL: E44 F31 F41
    Date: 2009–08
  11. By: Humala, Alberto (Central Reserve Bank of Peru); Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: Following the approach of Mésonnier and Renne (2007), we estimate a Natural Rate of Interest (NRI) using quarterly Peruvian data for the period 1996:3 - 2008:3. The model has six equations and it is estimated using the Kalman filter with output gap and NRI as unobservable variables. Estimation results indicate a more stable NRI in period 2001:3 - 2008:3 than in period 1996:3 - 2001:2 and also more stable than the observed real interest rate. Real interest rate gap (difference between real and natural rates), which measures monetary policy stance, indicates a restrictive policy for 1996-2001 and for 2003. Results also suggest a real interest rate greater than NRI for 2002 and for 2004-2008.
    Keywords: Interest rate, natural interest rate, Kalman filter, output gap, unobservable components
    JEL: C32 E32 E43 E52
    Date: 2009–03
  12. By: Forte, Antonio
    Abstract: In this paper I present a statistical analysis of some macroeconomic data that can shed more light on the causes of the low inflation rate that we registered in the Euro area during the last years. I focus on both the globalization and the labour market for their importance, as external and internal factor respectively, in influencing the domestic inflation. The main finding of this study, in which I also present an international comparison, is that the firms’ behaviour can help explain the stable trend of the inflation rate in the Euro area. This result can be interpreted as a signal of the redistribution, in favour of the firms, of the positive features of the globalization process
    Keywords: Inflation rate; Euro area; Exchange rate; Labour cost
    JEL: L25 E31 F14
    Date: 2009
  13. By: Fujisaki, Seiya; Mino, Kazuo
    Abstract: This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the rate of capital depreciation is endogenously determined. It is assumed that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance spending. Money is introduced via a cash in advance constraint that may apply to the maintenance expenditure as well as to consumption and investment spending. We find that the long-run effects of inflation tax are more complex than those obtained in the monetary Ak growth model with a fixed capital depreciation rate. In particular, the relation between inflation and growth is highly sensitive to the specifications of the capital depreciation technology as well as to the forms of cash-in-advance constraint.
    Keywords: cash-in-advance constraint; AK growth model; endogenous capital depreciation; maintenance expenditures
    JEL: E22
    Date: 2009–07–13
  14. By: Humala, Alberto (Central Reserve Bank of Peru); Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: Flexible exchange rate experience in Peru has been accompanied by frequent official interventions in the form of foreign exchange purchases or sales. Monetary authority pursues reducing excess volatility in the exchange rate through its direct intervention. However, in recent years, this intervention has concentrated in US dollars purchases, apparently signaling a bias towards defending a given exchange rate level (not necessarily fixed). For the period 1994 - 2007, this document assesses consistency of the empirical evidence with the goal of reducing exchange rate volatility. Thus, it uses univariate and multivariate time series models subject to stochastic shifts to study currency pressures. Results suggest consistency with the reduced-volatility goal. Nonetheless, in line with other studies, factors such as the foreign exchange gap with respect to its trend also induce foreign exchange intervention.
    Keywords: Foreign Exchange Intervention, Exchange Rate Volatility, Markov-Switching Models.
    JEL: C22 C32 E52 F31
    Date: 2009–03
  15. By: Robin Pope; Reinhard Selten; Sebastian Kube; Jürgen von Hagen
    Abstract: The prior paper in this sequel, Pope (2009) introduced the concept of a nominalist heuristic, defined as a focus on prominent numbers, indices or ratios. In this paper the concept is used to show three things in how scientists and practitioners analyse and evaluate to decide (conclude). First, in constructing theories such as purchasing power and interest parity to predict exchange rates and to advocate floating exchange rates, economists unwittingly employ nominalist heuristics. Second, nominalist heuristics have influenced actual exchange rates through the centuries, and this finding is replicated in the laboratory. Third, nominalist heuristics are incompatible with expected utility theory which excludes the evaluation stage, and are also incompatible with prospect theory which assumes that, while the evaluation stage can involve systematic mistakes, the overall decision situation is ultra simple. It is so simple that: a) economists and psychologists can mechanically model and identify what is a mistake, and b) decision makers can maximise. However, contrary to prospect theory, in the typical complex situation, neither a) nor b) holds. Assuming that a) and b) hold has resulted in the 1988 crisis from applying the Black Scholes formulae to forward exchange rates and contributed to sequel financial crises including that of 2007-2009. What is required is a fundamentally different class of models that allow for the progressive anticipated changes in knowledge ahead faced under risk and uncertainty, namely models under the umbrella of SKAT, the Stages of Knowledge Ahead Theory. The paper’s findings support a single world currency rather than variable unpredictable exchange rates subjected to the vagaries of how prominent numbers, ratios and indices influence events via the models of scientists and practitioners.
    Keywords: nominalism, money illusion, heuristic, unpredictability, experiment, SKAT the Stages of Knowledge Ahead Theory, prominent numbers, prominent indices, prominent ratios, transparent policy, nominal equality, historical benchmarks, complexity, decision costs, evaluation, maximisation, Black Scholes, Lehmann Brothers, sub-prime crisis, central bank swaps
    JEL: D80 D81 F31 F33
    Date: 2009–08
  16. By: Jennings, Anne (ESRI); Lyons, Seán (ESRI); Tol, Richard S. J. (ESRI)
    Date: 2009–08

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