nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒09‒11
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Bank of Canada Communication and the Predictability of Canadian Monetary Policy By Bernd Hayo; Matthias Neuenkirch
  2. How did we get to inflation targeting and where do we go now? a perspective from the U.S. experience By Daniel L. Thornton
  3. Money talks By Marie Hoerova; Cyril Monnet; Ted Temzelides
  4. Monetary Policy Transmission and House Prices: European Cross Country Evidence By Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
  5. The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks By Daniel L. Thornton
  6. Intervention index and exchange rate regimes: the cases of selected East-Asian economies By Pontines, Victor; Siregar, Reza
  7. The Struggle Over the Real Wage In the Monetary Production Economy By Hernando Matallana
  8. EMU and European Government Bond Market Integration. By Pilar Abad; Helena Chuliá; Marta Gomez-Puig
  9. Flow-of-funds analysis at the ECB – framework and applications By Louis Bê Duc; Gwenaël Le Breton
  10. "Some Simple Observations on the Reform of the International Monetary System" By Jan Kregel
  11. Sources of exchange rate fluctuations: are they real or nominal? By Luciana Juvenal
  12. Nature of Oil Price Shocks and Monetary Policy By Junhee Lee; Joonhyuk Song
  13. Structural Change and Counterfactual Inflation-Targeting in Hong Kong By Paul D. McNelis
  14. Stationarity without Degeneracy in a Model of Commodity Money By de O. Cavalcanti, Ricardo; Puzzello, Daniela
  15. Macro-Prudential Monitoring Indicators for CEMAC Banking System By Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
  16. European Financial Market Integration: A Closer Look at Government Bonds in Eurozone Countries By Sebastian Weber
  17. Vulnerabilities in Central and Eastern European countries: Dynamics of asymmetric shocks By Aleksandra Zdzienicka-Durand
  18. On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals By Philippe Bacchetta; Eric van Wincoop

  1. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps-University Marburg); Matthias Neuenkirch (Faculty of Business Administration and Economics, Philipps-University Marburg)
    Abstract: We explain changes in the Canadian target rate using macroeconomic variables and Bank of Canada (BOC) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to predict 60 target rate decisions between 1998 and 2006. We find that BOC communication is forward-looking, with a horizon that goes beyond the next meeting. Speeches and testimonies by Governing Council members have a statistically significant impact, whereas the less frequent monetary policy reports are insignificant. These communication variables significantly explain target rate changes but have no additional explanatory power over a standard Taylor rule. Prior to the introduction of Fixed Announcement Dates, BOC communication contained more information on upcoming policy moves. Communications by the U.S. Federal Reserve Bank (Fed)—which are much more frequent—outperform our Canadian communication indicators in predicting Canadian target rate decisions. We conclude that if the BOC is interested in improving the predictability of its monetary policy decisions, it should follow the Fed and use informal types of communication more frequently.newswire reports of Fed communications.
    Keywords: Bank of Canada, Central Bank Communication, Interest Rate Decision, Monetary Policy, Ordered Probit Model, Taylor Rule
    JEL: E43 E52 E58
    Date: 2009
  2. By: Daniel L. Thornton
    Abstract: This paper advances the hypothesis that the transition from there-is-little-central-banks-can-do-to-control-inflation to inflation targeting occurred because central banks, especially the Federal Reserve, demonstrated that central banks can control inflation rather than a consequence of marked improvement in the professions understanding of how monetary policy controls inflation. As consequence, monetary theorists and central bankers have returned to a Phillips curve framework for formulating and evaluating the monetary policy. I suggest that the return to the Phillips curve framework endangers the continued effectiveness, and perhaps even viability, of inflation targeting, recommend three steps that inflation-targeting central banks should take to preserve and strengthen inflation targeting.
    Keywords: Monetary policy ; Phillips curve ; Inflation targeting
    Date: 2009
  3. By: Marie Hoerova; Cyril Monnet; Ted Temzelides
    Abstract: The authors study credible information transmission by a benevolent central bank. They consider two possibilities: direct revelation through an announcement, versus indirect information transmission through monetary policy. These two ways of transmitting information have very different consequences. Since the objectives of the central bank and those of individual investors are not always aligned, private investors might rationally ignore announcements by the central bank. In contrast, information transmission through changes in the interest rate creates a distortion, thus lending an amount of credibility. This induces the private investors to rationally take into account information revealed through monetary policy.
    Keywords: Banks and banking, Central ; Information theory
    Date: 2009
  4. By: Kai Carstensen; Oliver Hülsewig; Timo Wollmershäuser
    Abstract: This paper explores the importance of housing and mortgage market heterogeneity in 13 European countries for the transmission of monetary policy. We use a pooled VAR model which is estimated over the period 1995-2006 to generate impulse responses of key macroeconomic variables to a monetary policy shock. We split our sample of countries into two disjoint groups according to the impact of the monetary policy shock on real house prices. Our results suggest that in countries with a more pronounced reaction of real house prices the propagation of monetary policy shocks to macroeconomic variables is amplified.
    Keywords: Pooled VAR model, house prices, monetary policy transmission, country clusters, sign restrictions
    JEL: C32 C33 E52
    Date: 2009
  5. By: Daniel L. Thornton
    Abstract: It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this "joint-response bias." The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.
    Keywords: Prices ; Monetary policy ; Federal funds rate
    Date: 2009
  6. By: Pontines, Victor; Siregar, Reza
    Abstract: Given the absence of publicly available information on foreign exchange intervention, we propose an index of central bank intervention in the exchange market to classify exchange rate regimes adopted by four East Asian economies. We revisit an old debate on whether these crisis-effected East Asia countries have indeed returned to their pre-1997 rigid exchange rate policies. If, instead, there had been evidences of a policy shift to a more flexible regime, was the move voluntary, or mainly due to high market pressures on the currency? Our findings clearly reject the “hollow middle” hypothesis.
    Keywords: Exchange Market Intervention; Exchange Rate Regimes; East Asian Countries
    JEL: F41 F31
    Date: 2009–01–15
  7. By: Hernando Matallana
    Abstract: Keynes contents in General Theory that the monetary market logic of the aggregate real wage in the monetary production economy conveys: (i) the determination of the average real wage rate, the level of employment, and the possibility of involuntary unemployment through the interaction of the monetary markets and the goods markets; and (ii) the determination of the money wage rate through the bargains of the firms and the workers as a market-theoretical stability condition of the economic system. Accordingly, (iii) the money wage claims of labour (in conformity with changes of the average labour productivity) do not alter the distribution of income between capital and labour; and (iv) the struggle about the money wages by different groups of workers is actually a zerosum game over the distribution of the aggregate real wage between the different fractions of the working class. The paper discusses Keynes’s contention in the context of the monetary-keynesian theory of the endogenous-money monetary production economy.
    Date: 2009–01–08
  8. By: Pilar Abad (Fundamentos del Análisis Económico, Paseo Artilleros, E-28032 Madrid, Spain.); Helena Chuliá (Universitat Oberta de Catalunya, E-08035 Barcelona, Spain.); Marta Gomez-Puig (University of Barcelona, Av. Diagonal 690, E-08034 Barcelona, Spain.)
    Abstract: The main objective of this paper is to study whether the introduction of the euro had an impact on the degree of integration of European Government bond markets. We adopt the CAPM-based model of Bekaert and Harvey (1995) to compare, from the beginning of Monetary Union until June 2008, the differences in the relative importance of two sources of systemic risk (world and Eurozone risk) on Government bond returns, in the two groups of countries (EMU and non-EMU) in EU-15. Our empirical evidence suggests that the impact of the introduction of the euro on the degree of integration of European Government bond markets was important. The markets of the countries that share a monetary policy are less vulnerable to the influence of world risk factors, and more vulnerable to EMU risk factors. However, euro markets are only partially integrated, since they are still segmented and present differences in market liquidity or default risk. For their part, the countries that decided to stay out of the Monetary Union present a higher vulnerability to external risk factors. JEL Classification: E44, F36, G15.
    Keywords: Monetary integration, sovereign securities markets, bond markets integration.
    Date: 2009–08
  9. By: Louis Bê Duc (Banque de France, 39, rue Croix-des-Petits-Champs, F-75049 Paris Cedex 01, France.); Gwenaël Le Breton (European Central Bank, Directorate Economic Developments, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The financial crisis has enhanced the need for close monitoring of financial flows in the economy of the euro area and at the global level focusing, in particular, on the development of financial imbalances and financial intermediation. In this context flow-of-funds analysis appears particularly useful, as flow-of-funds data provide the most comprehensive and consistent set of macro-financial information for all sectors in the economy. This occasional paper presents different uses of flow-of-funds statistics for economic and monetary analysis in the euro area. Flow-of-funds data for the euro area have developed progressively over the past decade. The first data were published in 2001, and fully-fledged quarterly integrated economic and financial accounts by institutional sector have been published since 2007. The paper illustrates how flow-of-funds data enable portfolio shifts between money and other financial assets to be assessed and trends in bank intermediation to be monitored, in particular. Based on data (and first published estimates) on financial wealth over the period 1980-2007, the paper analyses developments in the balance sheet of households and non-financial corporations in euro area countries over the last few decades and looks at financial soundness indicators using flow-of-funds data, namely debt and debt service ratios, and measures of financial wealth. Interactions with housing investment and saving are also analysed. In addition, the paper shows how flow-of-funds data can be used for assessing financial stability. Finally, the paper presents the framework for and use of flow-of-funds projections produced in the context of the Eurosystem staff macroeconomic projection exercises, and reports the outcome of a sensitivity analysis that considers the impact of interest rate changes on the interest payments and receipts of households and non-financial corporations. JEL Classification: E44, E47, E51.
    Keywords: Flow of funds, financial account, saving, sector balance sheet, financial projections.
    Date: 2009–08
  10. By: Jan Kregel
    Abstract: The demand for reform of the financial system has focused on the dollar's loss of international purchasing power (the Triffin dilemma) and its substitution by an international reserve currency that is not a national currency. The problem, however, is not the particular asset that serves as the international currency but rather the operation of the adjustment mechanism for dealing with global imbalances. In a preliminary report issued in May, the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System made clear that the international system suffers from an inherent tendency toward deficient aggregate demand, a reflection of the asymmetry in the international adjustment mechanism. Even the simple creation of a notional currency to be used in a clearing union (proposed by Keynes) cannot do this without some commitment to coordinated symmetric adjustment by both surplus and deficit countries. Thus, the first steps in the reform process must be (1) to offset the balance sheet losses caused by the collapse of asset values and (2) to provide an alternative source of demand to replace the U.S. consumer and an alternative source of finance to offset the deleveraging of financial institutions. This can be done through the coordinated introduction of traditional, countercyclical deficit expenditure policies, on a global scale.
    Date: 2009–08
  11. By: Luciana Juvenal
    Abstract: I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 23% and 38% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
    Keywords: Foreign exchange rates ; Vector autoregression
    Date: 2009
  12. By: Junhee Lee; Joonhyuk Song
    Abstract: We investigate the nature of oil price shocks to the Korean economy in recent years and find that the recent hike in oil price is induced by the increase in oil demand in contrast to the previous years when oil price run-up is mostly from supply disruptions. We also study how monetary responses to oil price shocks affect economic stability and find that an accommodative policy yields more stable outcomes.
    JEL: E32 E52 E58
    Date: 2009–09
  13. By: Paul D. McNelis (Hong Kong Institute for Monetary Research, Fordham University)
    Abstract: This paper evaluates structural change and adjustment in Hong Kong with Bayesian estimation of a small open economy with a fixed exchange rate show little or no change in the structural parameters or volatility estimates of the structural shocks before and after the Asian crisis and the experience of deflation. Terms of trade shocks are the most important sources of volatility for inflation in both periods. A counterfactual simulation shows that the dispersion of consumption and inflation volatility may have slightly decreased with an inflation-targeting regime with no uncertainty, but interest-rate volatility would have increased by factors of 50 to 100 percent.
    Keywords: Bayesian Estimation, Structural Change, Inflation Targeting
    JEL: E62 F41
    Date: 2009–07
  14. By: de O. Cavalcanti, Ricardo; Puzzello, Daniela
    Abstract: We develop a model of macroeconomic heterogeneity inspired by the Kiyotaki-Wright (1989) formulation of commodity money, with the addition of linear utility and idiosyncratic shocks to savings. We consider two environments. In the benchmark case, the consumer in a meeting is chosen randomly. In the auctions case, the individual holding more money can be selected to be the consumer. We show that in both environments socially optimal trading decisions (that are individually acceptable) are stationary and solve a tractable static op- timization problem. Savings decisions in the benchmark case are re- markably invariant to mean-preserving changes in the distribution of shocks. This result is overturned in the auctions case.
    Keywords: Macroeconomics with heterogeneous savings; commodity money with linear adjustments; mechanism design; auctions
    JEL: C00 E00
    Date: 2009–03
  15. By: Kamgna, Severin Yves; Tinang, Nzesseu Jules; Tsombou, Kinfak Christian
    Abstract: The main purpose of this paper is to determine the macro-prudential indicators of financial stability that can be used for supervising the banking system in the CEMAC zone. Going by a set of indicators drawn from similar works on macro-prudential supervision, and, more specifically, aggregate microeconomic variables of the banking sector, macroeconomic variables and combinations of the two, we were able to identify those that are relevant in analysing an imminent deterioration of the banking system in the subregion. At the end of this study, it was realised that claims on the private sector, foreign direct investments and the combination of exports and credits to the private sector, increase the risk of degradation of the banking system, while this risk is reduced by an increase in the exchange rate, increase in the internal resources of the banking system and inflation rate. The regulator should therefore bear this set of indicators in mind in order to facilitate a quick response to offset any potential banking crisis in the CEMAC region.
    Keywords: Banking System; Macro-Prudential Indicators; Weakness; Degradation; Monetary Policy; CEMAC; BEAC; Africa;
    JEL: C13 E58 C12 G28 G21
    Date: 2009–08
  16. By: Sebastian Weber
    Abstract: The European Union made a number of steps not least of them the introduction of a common currency to foster the integration of the European financial markets. A number of papers have tried to gauge the degree of integration for various financial markets looking at the convergence of interest rates. A common finding is that government bond markets are quite well integrated. In this paper stochastic Kernel density estimates are used to take a closer look at the dynamics that drive the process of interest rate convergence. The main finding is that countries with large initial deviations from the mean interest rate do indeed converge. Interestingly the candidates least suspected namely the countries initially with interest rates at the mean level show a pattern of slight divergence.
    Keywords: Financial markets integration, euro area government bonds, stochastic Kernel density estimates
    JEL: C23 E44 G15
    Date: 2009
  17. By: Aleksandra Zdzienicka-Durand (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this work, we use the VAR and space-state methodology to analyze how the recent developments in 20 European countries have modified the dynamics of structural shocks. Our results confirm a visible progress in (predominated output fluctuations) supply shocks convergence between the CEECs and the euro zone, but also corroborate a positive initial impact of EMU creation and EU enlargement supply shocks correlation. In particular, we find that Croatia, Poland, Slovakia and Slovenia are good candidates to the euro adoption under condition of greater fiscal policy alignment.
    Keywords: Structural Shocks; CEECs; VAR model; Kalman filter; Euro Adoption
    Date: 2009
  18. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research, Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, Hong Kong Institute for Monetary Research)
    Abstract: It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample.
    Date: 2009–08

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