nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒10‒17
sixteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Memories of high inflation. By Michael Ehrmann; Panagiota Tzamourani
  2. Money in a DSGE framework with an application to the Euro Zone By Benchimol, Jonathan; Fourçans, André
  3. Does inflation targeting lead to excessive exchange rate volatility? By Thórarinn G. Pétursson
  4. Did the crisis affect inflation expectations? By Gabriele Galati; Steven Poelhekke; Chen Zhou
  5. The Announcement of Monetary Policy Intentions By Giuseppe Ferrero; Alessandro Secchi
  6. Inflation Target Shocks and Monetary Policy Inertia in the Euro Area By Fève,P.; Materon,J.; Sahuc, J-G.
  7. Currency Runs, International Reserves Management and Optimal Monetary Policy Rules By Mika Kato; Christian R. Proano; Willi Semmler
  8. Why Do Politicians Implement Central Bank Independence Reforms? By Daunfeldt, Sven-Olov; Hellström, Jörgen; Landström, Mats
  9. How Endogenous Is Money? Evidence from a New Microeconomic Estimate By Cuberes, David; Dougan, William
  10. Risk Premium Shocks and the Zero Bound on Nominal Interest Rates By Robert Amano; Malik Shukayev
  11. Adjustment in EMU: Is Convergence Assured? By Sebastian Dullien; Ulrich Fritsche; Ingrid Groessl; Michael Paetz
  12. Exchange Rate Regimes and Reserve Policy on the Periphery: The Italian Lira 1883-1911 By Filippo Cesarano; Giulio Cifarelli; Gianni Toniolo
  13. Monetary policy as a source of uncertainty By André P. Calmon; Thomas Vallée; João B. R. Do Val
  14. Estimation of quasi-rational DSGE monetary models By Luca Fanelli
  15. The Macroeconomic Performance of the Inflation Targeting Policy : An Approach Based on the Evolutionary Co-spectral Analysis By Zied Ftiti
  16. The impact of oil price changes on Spanish and euro area consumer price inflation By Luis J. Álvarez; Samuel Hurtado; Isabel Sánchez; Carlos Thomas

  1. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Panagiota Tzamourani (Bank of Greece, 21, E. Venizelos Avenue, GR-10250 Athens, Greece.)
    Abstract: Inflation has been well contained over the last decades in most industrialized countries. This implies, however, that memories of high inflation are likely to fade, because over time larger parts of the population have never experienced high inflation, whereas those who have might forget. This paper tests whether memories of high inflation affect agents’ preferences about the importance attached to price stability, using a large database covering over 52,000 survey responses from 23 countries over the years 1981-2000. It finds that memories of hyperinflation are there to last, whereas those of less drastic inflation experiences tend to erode after around 10 to 15 years. The recent decline in the importance attached to price stability does therefore most likely reflect mitigated inflation concerns in an environment of low and stable inflation, but also the consequences of fading memories of high inflation. The longer central banks have successfully delivered price stability, the more important it is for them to engage in a proactive communication, especially with the younger generations, about the merits of low and stable inflation. JEL Classification: D10, E31, E52.
    Keywords: Inflation aversion, inflation memories, hyperinflation, World Values Survey, inflation targeting.
    Date: 2009–09
  2. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In the current New Keynesian literature, the role of monetary aggregates is generally neglected. Yet it’s hard to imagine money completely “passive” to the rest of the system. By entering real money balances in a non-separable utility function, we introduce an explicit role for money via preference redefinition in a simple New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. It involves new inflation and output gap specifications where money plays a significant role. We use the General Method of Moments (GMM) to calibrate our DSGE model of the Euro area and we show that the European Central Bank –ECB) should react more strongly to economic shocks as far as the role of money is found significant.
    Keywords: ECB; Inflation; Monetary Policy; Money
    JEL: E31 E51 E58
    Date: 2009–09
  3. By: Thórarinn G. Pétursson
    Abstract: This paper analysis whether the adoption of inflation targeting affects excessive exchange rate volatility, i.e. the share of exchange rate fluctuations not related to economic fundamentals. Using a signal-extraction approach to estimate this excessive volatility in multivariate exchange rates in a sample of forty-four countries, the empirical results show no systematic relationship between inflation targeting and excessive exchange rate volatility. Joint analysis of the effects of inflation targeting and EMU membership shows, however, that a membership in the monetary union significantly reduces this excessive volatility. Together, the results suggest that floating exchange rates not only serve as a shock absorber but are also an independent source of shocks, and that these excessive fluctuations in exchange rates can be reduced by joining a monetary union. At the same time the results suggest that adopting inflation targeting does not by itself contribute to excessive exchange rate volatility.
    Date: 2009–10
  4. By: Gabriele Galati; Steven Poelhekke; Chen Zhou
    Abstract: We investigate whether the anchoring properties of long-run inflation expectations in the United States, the euro area and the United Kingdom have changed around the economic crisis that erupted in mid-2007. We document that in these three economies, expectations measures extracted from inflation-indexed bonds and inflation swaps became much more volatile in 2007. Moreover, their sensitivity to news about inflation and other domestic macroeconomic variables – a measure of anchoring – increased first during the oil price rally in 2006–07, and then during the heightened turmoil triggered by the collapse of Lehman Brothers. Liquidity premia and technical factors have significantly influenced the behaviour of inflation-indexed markets since the outburst of the crisis. We show, however, that these factors did not contaminate the relationship between macroeconomic news and financial market-based inflation expectations at the daily frequency. By testing for structural breaks we conclude that in the United States, the euro area and the United Kingdom, long-run inflation expectations have become less firmly anchored during the crisis.
    Keywords: monetary policy; inflation and inflation compensation; anchors for expectations; crisis; liquidity.
    JEL: E31 E44 E52 E58
    Date: 2009–09
  5. By: Giuseppe Ferrero (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: Whether a central bank should share with the public its views about the future evolution of short term interest rates is an unresolved issue. Disclosing this information might allow a more precise control of market expectations and a more effective achievement of the ultimate goals of the monetary authority. Yet, if the public do not understand the conditional nature of this forecast, it could also undermine the credibility of the central bank. We provide new evidence on the effects of this announcement on private expectations about future short term interest rates. The communication of policy intentions tends to be associated with a greater predictability of monetary policy decisions. Moreover, focussing on New Zealand, where the central bank releases interest rate projections, we find that market expectations react significantly and persistently to the unexpected part of such forecasts. Finally it emerges that the predicted component of the changes in these projections is large, suggesting that market operators understand their conditionality.
    Keywords: monetary policy, communication, interest rates
    JEL: E58 E52 E43
    Date: 2009–09
  6. By: Fève,P.; Materon,J.; Sahuc, J-G.
    Abstract: The Euro area as a whole has experienced a marked downward trend in inflation over the past decades and, concomitantly, a protracted period of depressed activity. Can permanent and gradual shifts in monetary policy be held responsible for these dynamics? To answer this question, we embed serially correlated changes in the inflation target into a DSGE model with real and nominal frictions. The formal Bayesian estimation of the model suggests that gradual changes in the inflation target have played a major role in the Euro area business cycle. Following an inflation target shock, the real interest rate increases sharply and persistently, leading to a protracted decline in economic activity. Counter--factual exercises show that, had monetary policy implemented its new inflation objective at a faster rate, the Euro zone would have experienced more sustained growth than it actually did.
    Keywords: Inflation target shocks , Gradualism , DSGE models , Bayesian econometrics.
    JEL: E31 E32 E52
    Date: 2009
  7. By: Mika Kato (Howard University, Washington, D.C., USA); Christian R. Proano (IMK at the Hans Boeckler Foundation); Willi Semmler (New School Univeristy New York, USA)
    Abstract: This paper studies the design of optimal monetary policy rules for emerging economies confronted to sharp capital outflows and speculative attacks. We extend Taylor type monetary policy rules by allowing the central bank to give some weight to the level of precautionary foreign reserve balances as one of its targets. We show that a currency crisis scenario can easily occur when the weight is zero, and that it can be avoided when the weight is positive. The impacts of the central bank's monetary control on the output level, the inflation rate, the exchange rate, and the foreign reserve level are investigated as well. By applying both the Hamiltonian as well as the Hamilton-Jacobi-Bellman (HJB) equation (the latter leading to a dynamic programming formulation of the problem), we can explore safe domains of attractions in a variety of complicated model variants. Given the uncertainties the central banks faces, we also show of how central banks can enlarge safe domains of attraction.
    Keywords: Currency Crises, Capital Outflows, Monetary Policy Rules
    JEL: E5 F3
    Date: 2009
  8. By: Daunfeldt, Sven-Olov (The Ratio Institute); Hellström, Jörgen (Department of Economics, Umeå University); Landström, Mats (Department of Economics, University of Gävle)
    Abstract: This paper is a first empirical attempt to investigate why politicians around the world have chosen to give up power to independent central banks, thereby reducing their ability to fine-tune the economy. A new data-set covering 132 countries, of which 89 countries had implemented such reforms, was collected. Politicians in non-OECD countries were more likely to delegate power to independent central banks if their country has been characterized by a high variability in historical inflation and if they faced a high probability of being replaced. No such effects were found for OECD-countries.
    Keywords: inflation; institutional reforms; monetary policy; time-inconsistency
    JEL: E52 E58 P48
    Date: 2009–10–07
  9. By: Cuberes, David; Dougan, William
    Abstract: This paper uses microeconomic data on firms’ money demand and investment in physical capital for the period 1983-2006 to estimate the extent to which variation in the U.S. money supply is an endogenous response to variation in firms’ demand for liquidity. We estimate a simple model in which each firm’s desired money balances in any period depend on that firm’s current transactions, current investment, and its planned future investment, as well as aggregate variables such as interest rates and common policy forecasts. Calculations based on our estimates suggest that only a very small fraction of the variability in the aggregate stock of money represents an endogenous response to autonomous changes in firms’ investment plans.
    Keywords: Money demand; money supply; endogenous money; monetary neutrality
    JEL: E51 E41
    Date: 2009–10
  10. By: Robert Amano; Malik Shukayev
    Abstract: There appears to be a disconnect between the importance of the zero bound on nominal interest rates in the real-world and predictions from quantitative DSGE models. Recent economic events have reinforced the relevance of the zero bound for monetary policy whereas quantitative models suggest that the zero bound does not constrain (optimal) monetary policy. This paper attempts to shed some light on this disconnect by studying a broader range of shocks within a standard DSGE model. Without denying the possibility of other factors, we find that risk premium shocks are key to building quantitative models where the zero bound is relevant for monetary policy design. The risk premium mechanism operates by increasing the spread between the rates of return on private capital and risk-free government bonds. Other common shocks, such as aggregate productivity, investment-specific productivity, government spending and money demand shocks, are unable to push nominal bond rates close to zero as the same risk premium spread mechanism is not at play.
    Keywords: Monetary policy framework
    JEL: E32 E52
    Date: 2009
  11. By: Sebastian Dullien (HTW Berlin, University of Applied Sciences, Germany); Ulrich Fritsche (University Hamburg, Germany); Ingrid Groessl (University Hamburg, Germany); Michael Paetz (University Hamburg, Germany)
    Abstract: Using a modified version of the model presented by Belke and Gros (2007), we analyze the stability of adjustment in a currency union. Using econometric estimates for parameter values we check the stability conditions for the 11 original EMU countries and Greece. We found significant instability in the model for a large number of countries. We then simulate the adjustment process for some empirically observed parameter values and find that even for countries with relatively smooth adjustment, the adjustment to a price shock in EMU might take several decades. Keywords: EMU, convergence, stability.
    Keywords: EMU, convergence, stability, inflation
    JEL: E32 E61 C32
    Date: 2009
  12. By: Filippo Cesarano (Banca D'Italia); Giulio Cifarelli (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Gianni Toniolo
    Abstract: The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I — the gold standard (1883-1893), floating rates (1894-1902), and “gold shadowing” (1903-1911) — produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy’s performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy’s variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamenals and consistent policies.
    Keywords: Exchange rate; gold standard; reserve policy; cointegration
    JEL: F31 F33 N13 N23
    Date: 2009
  13. By: André P. Calmon (FAPESP - Department of Telematics of the School of Electrical and Computer Engineering - University of Campinas,); Thomas Vallée (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272); João B. R. Do Val (FAPESP - Department of Telematics of the School of Electrical and Computer Engineering - University of Campinas,)
    Abstract: This paper proposes a model in which control variations induce an increase in the uncertainty of the system. The aim of our paper is to provide a stochastic theoretical model that can be used to explain under which uncertainty conditions monetary policy rules should be less or more aggressive, or, simply, applied or not.
    Date: 2009
  14. By: Luca Fanelli (Alma Mater Studiorum Università di Bologna)
    Abstract: This paper proposes the estimation of small-scale dynamic stochastic general equilibrium (DSGE) monetary models under the quasi-rational expectations (QRE) hypothesis. The QRE-DSGE model is based on the idea that the determinate reduced form solution associated with the structural model, if it exists, must have the same lag structure as the ‘best fitting’ vector autoregressive (VAR) model for the observed time series. After discussing solution properties and the local identifiability of the model, a likelihood-based iterative algorithm for estimating the structural parameters and testing the data adequacy of the system is proposed. A Monte Carlo experiment shows that, even controlling for the omitted dynamics bias, the over-rejection of the nonlinear cross-equation restrictions when asymptotic critical values are used and variables are highly persistent is a relevant issue in finite samples. An application based on euro area data illustrates the advantages of using error-correcting formulations of the QRE-DSGE model when the inflation rate and the short-term interest rate are approximated as difference stationary processes. A parametric bootstrap version of the likelihood-ratio test for the implied cross-equation restrictions does not reject the estimated QRE-DSGE model.
    Keywords: Dynamic stochastic general equilibrium model, Maximum Likelihood estimation, Quasi-Rational Expectations, VAR. Modelli DSGE, Stima di massima verosimiglianza, Aspettative Quasi-Razionali, Modelli VAR.
    Date: 2009
  15. By: Zied Ftiti (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper proposes a new methodology to check the economic performance of a monetary policy and in particular the inflation targeting policy (ITP). The main idea of this work is to consider the ITP as economically efficient when it generates a stable monetary environment. The latter is considered as stable when a long-run equilibrium exists to which the paths of economic variables (inflation rate, interest rate and GDP growth) converge. The convergence of the variables' paths implies that these variables are more predictable and implies a lower degree of uncertainty in the economic environment. To measure the degree of convergence between economic variables, we propose, in this paper, a dynamic time-varying variable presented in the frequency approach named cohesion. This variable is estimated from the evolutionary co-spectral theory as defined by Priestley and Tong (1973) and Priestley (1988-1996). We apply this theory to the measure of cohesion presented by Croux et al (2001) to obtain a dynamic time-varying measure. In the last step of the study, we apply the Bai and Perron test (1998-2003b) to determine the change in the cohesion path. The results show that the implementation of the ITP generates a high degree of convergence between economic series that implies less uncertainty into the monetary environment. We conclude that the inflation targeting generates a stable monetary environment. This result allows us to conclude that the ITP is relevant in the case of industrialized countries.
    Keywords: Inflation Targeting ; Co-Spectral Analysis ; Cohesion, Stability Environment ; Economic Performance and Structural Change
    Date: 2009
  16. By: Luis J. Álvarez (Banco de España); Samuel Hurtado (Banco de España); Isabel Sánchez (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This paper assesses the impact of oil price changes on Spanish and euro area consumer price inflation. We find, consistently with recent international evidence, that the inflationary effect of oil price changes is limited, even though crude oil price fluctuations are a major driver of inflation variability. The impact on Spanish inflation is found to be somewhat higher than in the euro area. Direct effects are increasing over time, reflecting the higher spending of households on refined oil products, whereas indirect ones, defined in broad terms, are losing importance.
    Keywords: oil prices, consumer price infl ation, Spanish and Euro area infl ation, DSGE models
    JEL: E20 E31 E37
    Date: 2009–10

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