nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒09‒05
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Expectational stability under non-zero trend inflation By Kobayashi, Teruyoshi; Muto, Ichiro
  2. Market Forecasts in Brazil: performance and determinants By Fabia A. de Carvalho; André Minella
  3. Is there a Case for Price-level Targeting? By Boris Cournède; Diego Moccero
  4. Expectations, Monetary Policy, and Labor Markets: Lessons from the Great Depression By Christopher P. Reicher
  5. Analysis of the Dynamics of Mexican Inflation Using Wavelets. By Carla Ysusi
  6. Macroeconomic Impact of the Financial Crisis on Armenia By King Banaian
  7. Credit Rationing and Exchange-Rate Stabilization: Examining the Relation between Financial Frictions, Exchange-Rate Volatility, Lending Rates, and Capital Inflows By Gabriel Martinez
  8. Statistical Analysis of Mexican Inflation at Subindex and Item Level. By Carla Ysusi
  9. Long-Run Impacts of Inflation Tax in the Presence of Multiple Capital Goods By Fujisaki , Seiya; Mino, Kazuo
  10. Shocking aspects of monetary integration (SVAR approach) By Mirdala, Rajmund
  11. Wage, inflation and employment dynamics with labour market matching By Kai Christoffel; James Costain; Gregory de Walque; Keith Kuester; Tobias Linzert; Stephen Millard; Olivier Pierrard
  12. A Financial Conditions Index for the United States By Kimberly Beaton; René Lalonde; Corinne Luu
  13. Inflation dynamics with labour market matching: assessing alternative specifications By Christoffel, Kai; Costain, James; de Walque, Gregory; Kuester, Keith; Linzert, Tobias; Millard, Stephen; Pierrard, Olivier

  1. By: Kobayashi, Teruyoshi; Muto, Ichiro
    Abstract: This study examines the expectational stability of the rational expectation equilibria(REE) under Taylor rules when trend inflation is non-zero. We find that whether or not a higher (lower) trend inflation makes the REE more (less) unstable depends largely on the data (such as contemporaneous data, forecasts and lagged data) used in the conduct of monetary policy.
    Keywords: adaptive learning; E-stability; Taylor rule; trend inflation
    JEL: D84 E31 E52
    Date: 2009–09–03
  2. By: Fabia A. de Carvalho; André Minella
    Abstract: This paper assesses a wide set of aspects of market forecasts in Brazil: rationality, predictive power, joint performance, epidemiology and determinants. Using the survey conducted by the Central Bank of Brazil (CBB) among professional forecasters during the inflation targeting period, the main results are as follows: i) credibility in Brazilian monetary policy has increased over time, since inflation targets are important to explain inflation expectations, and private agents perceive the CBB as following a Taylor-type rule that is consistent with the inflation targeting framework; ii) market inflation forecasts had similar or better forecast performance than ARMA-, VAR- and BVAR-based forecasts with standard information sets; iii) the joint performance of market forecasts has improved over the past years; iv) in the decomposition of forecast errors for inflation, interest rate and exchange rate, the common forecast error component prevails over the idiosyncratic component across survey respondents; v) top-five forecasters published by the CBB are influential in other respondents’ forecasts; vi) inflation forecasts are unbiased but not fully efficient; and vii) inflation forecast uncertainty is positively related to increasing inflation and to country-risk premium.
    Date: 2009–04
  3. By: Boris Cournède; Diego Moccero
    Abstract: There is a case, but there are also counter-arguments. With sufficient forward-looking behaviour among firms and households, price-level targeting can act as a powerful built-in stabiliser through automatic shifts in inflation expectations. This stabilisation mechanism reduces the need for large shifts in policy rates, alleviating the risk of hitting the zero lower bound of nominal interest rates and falling into a liquidity trap. Furthermore, credible price-level targeting can support capital accumulation by protecting the long-run purchasing power of money and reducing the inflation risk premium embedded in actual long-term real interest rates. However, price-level targeting can imply welfare-reducing policy-induced output volatility in situations where the degree of forward-looking behaviour is very low. The self-regulating capacity of price-level targeting can be undermined if central banks are not fully credible. Besides, aggressive inflation targeting can replicate some of (but not all) the benefits of price-level targeting. On balance, the case for adopting price-level targeting is not clear-cut, all the more so since transition costs are likely to be significant.<P>Y a-t-il beaucoup à dire en faveur du ciblage du niveau des prix ?<BR>Oui, mais il y a aussi de sérieux contre-arguments. Si une part suffisante des entreprises et des ménages présente un comportement tourné vers l’avenir, le ciblage du niveau des prix peut fonctionner comme un puissant outil de stabilisation autonome grâce aux ajustements automatiques des anticipations des inflations. Ce mécanisme limite le besoin d’opérer de larges mouvements des taux directeurs, ce qui réduit le risque de heurter la borne zéro sur les taux d’intérêt et de tomber dans une trappe à liquidités. Qui plus est, grâce à la manière dont elle protège le pouvoir d’achat de la monnaie, une politique crédible de ciblage du niveau des prix peut encourager l’accumulation de capital en réduisant la prime contre le risque d’inflation qui est incorporée aux taux d’intérêts réels effectifs. Néanmoins, le ciblage du niveau des prix peut entraîner une volatilité de l’activité préjudiciable au bien-être social si la part des ménages et des entreprises qui sont tournés vers l’avenir est très faible. La capacité de stabilisation automatique d’un régime de ciblage du niveau des prix peut aussi être moindrie si la banque centrale manque de crédibilité. Par ailleurs, une stratégie de ciblage agressif du taux d’inflation peut reproduire une partie (mais non pas l’ensemble) des avantages du ciblage du niveau des prix. Tout bien pesé, les arguments en faveur du ciblage du niveau des prix ne justifient pas de manière nette un changement de stratégie monétaire, d’autant plus que les coûts de transition risquent d’être élevés.
    Keywords: monetary policy, politique monétaire, central bank, banque centrale, inflation targeting, ciblage d’inflation, zero lower bound, borne zéro des taux d’intérêt, monetary systems, régimes monétaires, price level targeting, ciblage du niveau des prix, price stability, stabilité des prix, trappe à liquidités, liquidity trap
    JEL: E42 E52
    Date: 2009–08–24
  4. By: Christopher P. Reicher
    Abstract: This paper estimates a series of shocks to hit the US economy during the Great Depression, using a New Keynesian model with unemployment and bargaining frictions. Shocks to long-run inflation expectations appear to account for much of the cyclical behavior of employment, while an increase in labor’s bargaining power also played an important role in deepening and lengthening the Depression. Government spending played very little role during the Hoover Administration and New Deal, until the rise in military spending effectively brought an end to the Depression in 1941. With the economy at or near the zero interest rate bound, interest rates and monetary aggregates provided a misleading indicator as to the true stance of inflation expectations; in fact, conditions were deflationary all throughout the 1930s in spite of high money growth and low interest rates. The experience of the 1930s offers lessons to modern policymakers who find themselves in a similar situation
    Keywords: Great Depression, expectations, deflation, zero bound, liquidity trap
    JEL: E24 E31 E52 E65
    Date: 2009–08
  5. By: Carla Ysusi
    Abstract: This paper studies the dynamics of Mexican inflation by using a wavelet multiresolution analysis on 16 indexes of the Mexican Consumer Price Index. This enables us to estimate the long-term trend, seasonality, and local shocks of the inflation series, even when the series are non-stationary. The energy distribution between the high frequency, seasonal, and trend components, as well as its evolution through time, are compared. In particular, headline and core inflations show a more stable behavior in all the scales since 2001. Also, an increase in the proportion of variance explained by short-term variations is detected in the inflation series. In relative terms, the short run is becoming as important for headline inflation as the medium and long run, and more important for non-core inflation. These results are in line with previous studies documenting the reduction in the Mexican inflation persistence.
    Keywords: Inflation dynamics, wavelets, multiresolution analysis, energy decomposition.
    JEL: C19 C49 E31
    Date: 2009–09
  6. By: King Banaian (Department of Economics, St. Cloud State University)
    Abstract: As a small, open economy with a small export sector, Armenia has experienced a large amount of stress from the financial crisis. The government exited a peg-like exchange rate regime after a drain of foreign reserves. The loss of reserves was put to loss of revenues from mining exports, but can also be put to the effects of global financial crisis on remittance inflows. Worldwide, the World Bank expects remittances to fall from US$305 billion in 2008 to $290 billion in 2009. In this paper I explore the effect of global crisis on the loss of reserves supporting the monetary system. Bank balance sheets expanded rapidly and, though small relative to GDP, accepted many assets tied to real estate. Banks’ asset-liability mismatches have their root cause in changes to the flow of hard currency brought on by the crisis.
    Keywords: Armenia; financial crisis; monetary policy; exchange rates
    JEL: E58 O53
    Date: 2009–07–01
  7. By: Gabriel Martinez (Department of Economics, Ave Maria University)
    Abstract: This paper develops and tests a model of the relation between the volatility of the exchange rate, default rates, the level of interest rates on loans, and the availability of credit, laying emphasis on frictions in the financial market, specifically foreclosure costs to collecting bad debts. On the assumption that foreign sources of funds are crucial for domestic finance, the paper tests the hypothesis of a high positive relation between the volatility of the exchange rate and the lending rate, and between the volatility of the exchange rate and capital inflows, on a sample of 54 countries over 1980-2000. The paper finds that exchange-rate and macroeconomic volatility are strong predictors of capital inflows (but not of lending rates) and that there may be an important role for financial frictions in the transmission process. Moreover, the paper finds that episodes of disinflation that rely on a reduction of the rate of depreciation tend to be accompanied by lower exchange rate volatility (in addition to simply lower rates of devaluation). Both effects, but principally the latter through financial frictions, suggest a solution to the lack of connection between the theory and the stylized facts of exchange rate-based stabilizations: ERBS programs may lead to initial booms through should cause a significant rise in the availability of credit, even if the cost of credit does not fall by much.
    Keywords: interest rates, exchange rate volatility, financial frictions, creditor rights, exchange rate based stabilization
    JEL: E43 E44 E50 F41 G14 E31 E63
    Date: 2009–08
  8. By: Carla Ysusi
    Abstract: In this paper, we conducted a detailed statistical analysis of the behavior of the Mexican CPI price variations from May 2003 to August 2006. Different methodologies allowed identification of posible classification problems of the subindexes and inflationary pressures on specific items during the sample period. Regarding classification problems, education was included in non-core inflation during the sample period; however in our study, it showed similarities in distribution and moments to the subindexes of core inflation. Note that education was reclassified into core inflation from January 2008. Regarding inflationary pressures, the highest means and variances were seen in fruits and vegetables at the subindex level, and in products related to agriculture, processed food, energy, and metals at the ítem level. However further analysis of incidences showed that a considerable part of headline inflation during the studied period was explained by a few individual items.
    Keywords: Mexican CPI, Sample distributions and descriptive measures, Dendrograms, Principal component analysis.
    JEL: C19 E31
    Date: 2009–09
  9. 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 production technology uses two types of capital stocks under a constant-returns-to-scale technology. We find hat unless investment expenditure for each type of capital is subject to the same degree of cash-in-advance constraint, a change in the money growth rate affects the steady-state level of factor intensity. It is shown that if the balanced-growth path is uniquely given, we still have a negative long-run relationship between money growth and the growth rate of real income. However, due to the endogenous determination of the factor intensity, the negative relation between the velocity of money and the rate of inflation may not be established.
    Keywords: maintenance expenditures; endogenous Growth; cash-in-advance constraint; inflation tax
    JEL: O42 E31 E52
    Date: 2009–06
  10. By: Mirdala, Rajmund
    Abstract: One of the most challenging areas relating to the European Monetary Union (EMU) enlargement is the question of new member countries’ vulnerability to exogenous shocks related to euro adoption. Even if well prepared, and also considering the business cycles of the EMU candidate countries became more correlated as the result of persisting convergence toward the old EU member countries, their real output will be still vulnerable to the exogenous structural disturbances. The responsiveness of the new EMU member countries’ real output to the exogenous shocks may of course differ in intensity and durability. If we also assume a possibly low shocks correlation in these countries, the overall short-term wealth effect of the EMU membership may be rather low or even negative at all. In the paper we analyze the impact of three common exogenous structural shocks on the real output development in the new EMU member countries (Cyprus, Malta, the Slovak Republic and Slovenia) in the period 1999-2008 using SVAR (structural vector autoregression) approach. In order to meet this objective we decompose the variability of the real GDP in these countries to permanent and temporary shocks (we assume three types of shocks - nominal (liquidity), demand and supply shocks). Impulse-response functions will be also computed so that we can estimate the behaviour of the real output after structural one standard deviation innovations. The relevant outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU member countries - EU-12 group). This approach helps us to understand the common as well as differing features of the real output determination in the new EMU member countries and old EU member countries.
    Keywords: exogenous shocks; real output; structural vector autoregression; variance decomposition; impulseresponse function
    JEL: C32 E52
    Date: 2009–06
  11. By: Kai Christoffel (European Central Bank); James Costain (Banco de España); Gregory de Walque (Banque Nationale de Belgique); Keith Kuester (Federal Reserve Bank of Philadelphia); Tobias Linzert (European Central Bank); Stephen Millard (Bank of England); Olivier Pierrard (Banque Centrale du Luxembourg)
    Abstract: In a search and matching environment, this paper assesses a range of modeling setups against macro evidence for the monetary transmission mechanism in the euro area. In particular, we assess right-to-manage vs. efficient bargaining, flexible vs. sticky wages, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. Models with wage stickiness and right-to-manage bargaining or with firm-specific labour imply a sufficient degree of real rigidity, and so can reproduce inflation dynamics well. However, they imply too small a response on the employment margin. The other model variants fit employment dynamics better, but then imply too little real rigidity and, so, too volatile inflation, owing to strong responses of marginal wages and hours per employee. Further sources of real rigidities - possibly from outside of the labour market - seem to be needed to simultaneously explain the responses of wages, inflation and employment.
    Keywords: Inflation Dynamics, Labour Market, Business Cycle, Real Rigidities
    JEL: E31 E32 E24 J64
    Date: 2009–08
  12. By: Kimberly Beaton; René Lalonde; Corinne Luu
    Abstract: The financial crisis of 2007-09 has highlighted the importance of developments in financial conditions for real economic activity. The authors estimate the effect of current and past shocks to financial variables on U.S. GDP growth by constructing two growthbased financial conditions indexes (FCIs) that measure the contribution to quarterly (annualized) GDP growth from financial conditions. One FCI is constructed using a structural vector-error correction model and the other is constructed using a large-scale macroeconomic model. The authors' results suggest that financial factors subtracted around 5 percentage points from quarterly annualized real GDP growth in the United States in 2008Q4 and 2009Q1 and should subtract another 5 percentage points from growth in 2009Q2. Moreover, to assess the effect of financial shocks in terms of policy interest rate equivalent units, the authors convert the effect of financial developments on growth into the number of basis points by which the federal funds rate has been tightened. The authors show that the tightening of financial conditions since mid-2007 is equivalent to about 300 basis points of tightening in terms of the federal funds rate. Thus, the aggressive monetary easing undertaken by the Federal Reserve over the financial crisis has not been sufficient to offset the tightening of financial conditions. Finally, in a key contribution to the literature, the authors assess the relationship between financial shocks and real activity in the context of the zero lower bound. They find that the effect of the tightening of financial conditions on GDP growth in the current crisis may have been amplified by as much as 40 per cent due to the fact that policy interest rates reached the zero lower bound.
    Keywords: Business fluctuations and cycles; Monetary conditions index; Monetary and financial indicators; Recent economic and financial developments
    JEL: E32 E44 E47 E51
    Date: 2009
  13. By: Christoffel, Kai (European Central Bank); Costain, James (Banco de Espana); de Walque, Gregory (National Bank of Belgium); Kuester, Keith (Federal Reserve Bank of Philadelphia); Linzert, Tobias (European Central Bank); Millard, Stephen (Bank of England); Pierrard, Olivier (Banque Centrale du Luxembourg)
    Abstract: This paper reviews recent approaches to modelling the labour market, and assesses their implications for inflation dynamics through both their effect on marginal cost and on price-setting behaviour. In a search and matching environment, we consider the following modelling set-ups: right-to-manage bargaining versus efficient bargaining, wage stickiness in new and existing matches, interactions at the firm level between price and wage-setting, alternative forms of hiring frictions, search on-the-job and endogenous job separation. We find that most specifications imply too little real rigidity relative to the data and, so, too volatile inflation. Models with wage stickiness and right-to-manage bargaining, or with firm-specific labour emerge as the most promising candidates.
    Keywords: Inflation dynamics; labour market; business cycle; real rigidities
    JEL: E24 E31 E32 J64
    Date: 2009–08–24

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