nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒09‒19
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Identifying a Forward-Looking Monetary Policy in an Open Economy By Rokon Bhuiyan
  2. Money and monetary policy transmission in the euro area: evidence from FAVAR- and VAR approaches By Blaes, Barno
  3. The (Ir)relevance of Inflation Persistence for Inflation Targeting Policy Design By Sevim Kosem-Alp
  4. Resurrecting the Role of Real Money Balance Effects By José Dorich
  5. Effectiveness and Commitment to Inflation Targeting Policy: Evidences from Indonesia and Thailand By Siregar, Reza.Y.; Goo, Siwei
  6. A Critical Assessment of Existing Estimates of Core Inflation By Bermingham, Colin
  7. The quest for monetary integration – the Hungarian experience By Zoican, Marius Andrei
  8. On the informational role of term structure in the US monetary policy rule By María-Dolores, Ramon; Vázquez, Jesús; Londoño, Juan M.
  9. Evaluating a monetary business cycle model with unemployment for the euro area By Nicolas Groshenny
  10. How different is the exchange rate pass-through in new member states of the EU? Some potential explanatory factors By María-Dolores, Ramon
  11. Industry Effects of Monetary Policy: Evidence from India By Ghosh, Saibal
  12. Bank risk and monetary policy By Yener Altunbas; Leonardo Gambacorta; David Marqués-Ibáñez
  13. More or less aggressive?: robust monetary policy in a New Keynesian model with financial distress By Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
  14. Extending the New Keynesian Monetary Model with Information Revision Processes: Real-time and Revised Data By María-Dolores, Ramon; Vazquez, Jesus; Londoño, Juan M.
  15. Reshaping the international monetary architecture : lessons from Keynes'plan By Piffaretti, Nadia F.
  16. Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model By Christian R. Proano
  17. Performance of Monetary Institutions : Comparative Evidence By Bilin Neyapti
  18. Do we really know that flexible exchange rates facilitate current account adjustment?: some new empirical evidence for CEE countries By Herrmann, Sabine
  19. Transmission of nominal exchange rate changes to export prices and trade flows and implications for exchange rate policy By Hoffmann, Mathias; Holtemöller, Oliver
  20. Overconsumption, Credit Rationing and Bailout Monetary Policy: A Minskyan Perspective By Matthieu Charpe; Peter Flaschel; Christian R. Proano; Willi Semmler

  1. By: Rokon Bhuiyan (QED)
    Abstract: I identify a forward-looking monetary policy function in a structural VAR model by using forecasts of macroeconomic variables, in addition to the realized variables used in a standard VAR. Both impulse responses and variance decompositions of the monetary policy variable of this forecast-augmented VAR model suggest that forecasted variables play a greater role than realized variables in a central bank’s policy decisions. I also find that a contractionary policy shock instantaneously increases the market interest rate as well as the forecast of the market interest rate. The policy shock also appreciates both the British pound and the forecast of the pound on impact. On the other hand, the policy shock lowers expected inflation immediately, but affects realized inflation with a lag. When I estimate the standard VAR model encompassed in the forecast-augmented model, I find that a contractionary policy shock raises the inflation rate and leads to a gradual appreciation of the domestic currency. However, the inclusion of inflation expectations reverses this puzzling response of the inflation rate, and the inclusion of both the market interest rate forecast and the exchange rate forecast removes the delayed overshooting response of the exchange rate. These findings suggest that a standard VAR may incorrectly identify the monetary policy function.
    JEL: C32 E52 F37
    Date: 2009–09
  2. By: Blaes, Barno
    Abstract: This paper investigates the transmission of monetary policy in the euro area based on the factor augmented vector autoregressive approach of Bernanke, Boivin and Eliasz (2005) as well as on a standard VAR model. We focus on the reaction of monetary aggregates to a one-off monetary policy shock. We find that - as theory suggests - money growth is dampened by a restrictive monetary policy stance in the longer term. In the short-run, however, M3 growth may increase due to portfolio shifts caused by the rise in the short-term interest rate. This has consequences for the interpretation of money growth as an input for monetary policy decisions.
    Keywords: Monetary policy transmission,FAVAR,VAR,money stock,euro area.
    JEL: C32 E40 E52
    Date: 2009
  3. By: Sevim Kosem-Alp
    Date: 2009
  4. By: José Dorich
    Abstract: I present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period. Moreover, I show three additional implications of the econometric estimates for monetary policy analysis. First, by including real money balance effects into the standard sticky price model, two stylized facts can be explained: the modestly procyclical real wage response to a monetary policy shock and the supply side effects of monetary policy. Second, the existence of real money balance effects causes higher volatility of output and lower volatility of interest rates under the optimal monetary policy. Third, the reduction in the size of real money balance effects can account for a significant decline in macroeconomic volatility.
    Keywords: Business fluctutations and cycles, Monetary aggregates, Transmission of monetary policy
    JEL: E31 E32 E52
    Date: 2009
  5. By: Siregar, Reza.Y.; Goo, Siwei
    Abstract: The chief objective of our paper is to highlight basic features of the IT policies adopted by Indonesia and Thailand, and to evaluate the commitment of the monetary authorities and the overall performances of the IT regime. The results demonstrate that the IT regime in these two economies has had some success, but not during the immediate aftermath of the Lehman Brothers’ collapse in the last quarter of 2008. Furthermore, the implementations of the IT policy in these two Southeast Asian economies have largely been “flexible” during the stable period, seeking the balance between narrowing output gap, managing exchange rate volatility, and anchoring inflationary pressure. However during the turbulent period, there had been a heightened focus in anchoring inflationary expectation.
    Keywords: Inflationary Expectation; Output Gap; Inflation Targeting; Pass-through; Monetary Policy Rule.
    JEL: E58 E52 F31 F33
    Date: 2009–09–13
  6. By: Bermingham, Colin (Central Bank and Financial Services Authority of Ireland)
    Abstract: Core inflation rates are widely calculated. The perceived benefit of core inflation rates is that they help to inform monetary policy. This is achieved by uncovering the underlying trend in inflation or by helping to forecast inflation. Studies which compare core inflation rates frequently assess candidate core rates on these two criteria. Using U.S. data, the two standard tests of core inflation - the ability to track trend inflation and the ability to forecast inflation -are applied to a more comprehensive set of core inflation rates than has been the case in the literature to date. Furthermore, the tests are applied in a more rigorous fashion. A key difference in this paper is the inclusion of benchmarks to the tests, which is non-standard in the literature. Two problems with core inflation rates emerge. Firstly, it is very difficult to distinguish between different core rates according to these tests, as they tend to perform to a very similar level. Secondly, once the benchmarks are introduced to the tests, the core inflation rates fail to outperform the benchmarks. This failure suggests that core inflation rates are of less practical usefulness than previously thought.
    Date: 2009–08
  7. By: Zoican, Marius Andrei
    Abstract: From 1990 onwards, Eastern European countries have had as a primary economic goal the convergence with the traditionally capitalist states in Western Europe. The usage of various exchange rate regimes to accomplish the convergence of inflation and interest rates, in order to create a fully functional macroeconomic environment has been one of the fundamental characteristics of states in Eastern Europe for the past 20 years. Among these countries, Hungary stands out as having tried a number of exchange rate regimes – from the adjustable peg in 1994‐1995 to free float since 2008. In the first part, this paper analyses the macroeconomic performance of Hungary during the past 15 years as a function of the exchange rate regime used. I also compare this performance, where applicable, with two similar countries which have used the most extreme form of exchange rate regime: Estonia (with a currency board) and Romania, who never officialy pegged its currency and used a managed float even since 1992. The second part of this paper analyzes the overall Hungarian performance from the perspective of the Optimal Currency Area theory, therefore trying to establish if, after 20 years of capitalism, and a large variety of monetary policies, Hungary is indeed prepared to join the European Monetary Union.
    Keywords: exchange rate regimes; free float; Eastern Europe; Optimal Currency Area Theory
    JEL: F15 E42 F41 F31
    Date: 2009–04–05
  8. By: María-Dolores, Ramon; Vázquez, Jesús; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: The term spread may play a major role in a monetary policy rule whenever data revisions of output and inflation are not well behaved. In this paper we use a structural approach based on the indirect inference principle to estimate a standard version of the New Keynesian Monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread becomes a significant determinant of the U.S. estimated monetary policy rule when revised and real-time data of output and inflation are both considered.
    Keywords: NKM model, term structure, Indirect Inference, real-time and revised data, monetary policy rule
    JEL: D12 R23
    Date: 2009–06
  9. By: Nicolas Groshenny (Reserve Bank of New Zealand)
    Abstract: This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price markup shocks emerge as the main source of business-cycle fluctuations in the euro area. Key for the propagation of these disturbances are a high degree of inflation ndexation and a persistent response of monetary policy to deviations of inflation from the target.
    JEL: E32 C51 C52
    Date: 2009–09
  10. By: María-Dolores, Ramon (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: This paper uses data on import unit values for nine different product categories and bilateral imports to study the pass-through of exchange rate changes into the prices of imports that originated inside the Euro Area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I estimate industry-specific rates of pass-through across and within countries using the methodological approach proposed by de Bandt, Banerjee and Kozluk (2008). I did not find evidence in favour of the hypothesis of Local Currency Pricing (zero pass-through) and the hypothesis of Producer Currency Pricing (complete pass-through) could be accepted in some countries for different industries. My results also show that there is a clear positive relationship between exchange rate pass-through and average inflation in these countries. I do find a slightly positive pattern for the relationship between exchange rate pass-through and openness. With reference to the relationship between exchange rate pass-through and the type of exchange rate regime I observe that a less volatile exchange rate implies a less degree of exchange rate pass-through. In industries I obtain a less degree of exchange rate pass-through in differentiated manufactured products. By including possible statistical break-dates in the estimation process I observe that some NMSs have decreased the exchange rate pass-through in recent years. Some of the breaks are close to the dates of some major institutional changes in these countries (changes in monetary policy and exchange rate regimes and the starting up of the EU membership).
    Keywords: exchange rates, monetary union, pass-through, panel cointegration
    JEL: D12 R23
    Date: 2009–06
  11. By: Ghosh, Saibal
    Abstract: The study exploits 2-digit level industry data for the period 1981-2004 to ascertain the interlinkage between a monetary policy shock and industry value added. Accordingly, we first estimate a Vector Auto Regression (VAR) model to ascertain the magnitude of a monetary policy shock on industrial output. Subsequently, we try to explain the observed heterogeneity in terms of industry characteristics. The findings indicate that (a) industries exhibit differential response to a monetary tightening and (b) both interest rate and financial accelerator variables tend to be important in explaining the differential response.
    Keywords: industry; monetary policy; interest rate channel; financial accelerator; vector auto regression; cross section regression
    JEL: E52 L60
    Date: 2009–01
  12. By: Yener Altunbas (University of Wales); Leonardo Gambacorta (Bank for International Settlements); David Marqués-Ibáñez (European Central Bank)
    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 bankÂ’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.
    Keywords: Bank, Risk, Bank Lending Channel, Monetary Policy
    JEL: E44 E52
    Date: 2009–05
  13. By: Gerke, Rafael; Hammermann, Felix; Lewis, Vivien
    Abstract: This paper investigates the optimal monetary policy response to a shock to collateral when policymakers act under discretion and face model uncertainty. The analysis is based on a New Keynesian model where banks supply loans to transaction constrained consumers. Our results confirm the literature on model uncertainty with respect to a cost-push shock. Insuring against model misspecification leads to a more aggressive policy response. The same is true for a shock to collateral. A preference for robustness leads to a more aggressive policy. Increasing the weight attached to interest rate smoothing raises the degree of aggressiveness. Our results indicate that a preference for robustness crucially depends on the way different types of disturbances affect the economy: in the case of a shock to collateral the policymaker does not need to be as much worried about model misspecification as in the case of a conventional cost-push shock.
    Keywords: Optimal monetary policy,discretion,model uncertainty,banking,collateral
    JEL: E44 E58 E32
    Date: 2009
  14. By: María-Dolores, Ramon; Vazquez, Jesus; Londoño, Juan M. (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: This paper proposes an extended version of the New Keynesian Monetary (NKM) model which contemplates revision processes of output and inflation data in order to assess the influence of data revisions on the estimated monetary policy rule parameters. In line with the evidence provided by Aruoba (2008), by using the indirect inference principle, we observe that real-time data are not rational forecasts of revised data. This result along with the differences observed when estimating a model restricted to white noise revision processes provide evidence that policymakers decisions could be determined by the availability of data at the time of policy implementation.
    Keywords: NKM model, Monetary Policy Rule, Indirect Inference, Real-time Data, Rational Forecast Errors
    JEL: D12 R23
    Date: 2009–06
  15. By: Piffaretti, Nadia F.
    Abstract: As the global economy undergoes profound changes, it is becoming apparent that the so-called"Revived Bretton Woods System"has increased the overall vulnerability of the global financial architecture. Therefore, it is worth revisiting the origins of the Bretton Woods conference, and pointing out the relevance for today’s framework of Keynes’ original 1942 plan for an International Clearing Union. This note explores the main characteristics of Keynes'original plan, by revisiting his original writings between 1940 and 1944, and outlining its relevance to the current debate on the international financial architecture. The note suggests that reforms of the international financial architecture should include anchoring the international monetary system on sounder institutional ground.
    Keywords: Currencies and Exchange Rates,Debt Markets,Banks&Banking Reform,Emerging Markets,Access to Finance
    Date: 2009–08–01
  16. By: Christian R. Proano (IMK at the Hans Boeckler Foundation)
    Abstract: In this paper the role of behavioral forecasting rules of chartist and fun-damentalist type for the dynamic macroeconomic stability of a two-country system is investigated both analytically and numerically. The main result of the paper is that for large trend-chasing parameters in the chartist rule used in the FX market, not only this market but the entire macroeconomic system is destabilized. This takes place despite of the presence of monetary policy rules in both countries which satisfy the Taylor Principle.
    Keywords: (D)AS-AD, monetary policy, behavioral heterogenous expectations, FX market dynamics.
    JEL: E12 E31 E32 F41
    Date: 2009
  17. By: Bilin Neyapti
    Date: 2009
  18. By: Herrmann, Sabine
    Abstract: This paper examines the relationship between the exchange rate regime and the pace of current account adjustment. The panel data set we refer to includes 11 catching-up countries from central, eastern and south-eastern Europe between 1994 and 2007. The exchange rate regime is measured by a continuous z-score measure of exchange rate volatility proposed by Gosh, Gulde and Wolf (2003). Based on a basic autoregression estimation, the results indicate that a more flexible exchange rate regime significantly enhances the rate of current account adjustment.
    Keywords: Current account adjustment,exchange rate regime,Central and Eastern Europe
    JEL: F32 F31 O52
    Date: 2009
  19. By: Hoffmann, Mathias; Holtemöller, Oliver
    Abstract: We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and for which fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, United Kingdom) using a heterogeneous dynamic panel approach.
    Keywords: Elasticity of substitution between home and foreign goods,exchange rate pass-through,exchange rate regime choice,expenditure switching effect,heterogeneous dynamic panel,New Open Economy Macroeconomics
    JEL: F41 F31 F14
    Date: 2009
  20. By: Matthieu Charpe (International Labor Organization Geneve, Switzerland); Peter Flaschel (Bielefeld University, Germany); Christian R. Proano (IMK at the Hans Boeckler Foundation); Willi Semmler (New School Univeristy New York, USA)
    Abstract: We consider a Keynes-Goodwin model of effective demand and the distributive cycle where workers purchase goods and houses with marginal propensity significantly larger than one. They therefore need credit, supplied from asset holders, and have to pay interest on their outstanding debt. In this initial situation, the steady state is attracting, while a marginal propensity closer to one makes it repelling. The stable excessive overconsumption case can easily turn from a stable boom to explosiveness and from there through induced processes of credit rationing into a devastating bust. In such a situation the Central Bank may prevent the worst by acting as creditor of last resort, purchasing loans where otherwise debt default (and bankruptcy regarding house ownership) would occur. This bail-out policy can stabilize the economy and also reduces the loss of homes of worker families.
    Keywords: mortgage loans, booms, debt default, busts, creditor of last resort.
    JEL: E24 E31 E32
    Date: 2009

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