nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒10‒31
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters. By Magnus Andersson; Boris Hofmann
  2. Money Talks. By Marie Hoerova; Cyril Monnet; Ted Temzelides
  3. Inflation and monetary regimes By Gerald P. Dwyer; Mark Fisher
  4. Evaluating inflation determinants with a money supply rule in four Central and Eastern European EU member states By Mehrotra, Aaron; Slacik, Tomas
  5. Monetary policy implementation frameworks: a comparative analysis By Antoine Martin; Cyril Monnet
  6. Prices and quantities in the monetary policy transmission mechanism By Tobias Adrian; Hyun Song Shin
  7. Testing the structural interpretation of the price puzzle with a cost channel model By Castelnuovo, Efrem
  8. Financial intermediaries and monetary economics By Tobias Adrian; Hyun Song Shin
  9. Taylor-type rules and permanent shifts in productivity growth By William T. Gavin; Benjamin D. Keen; Michael R. Pakko
  10. The effects of monetary policy on unemployment dynamics under model uncertainty: Evidence from the US and the euro area. By Carlo Altavilla; Matteo Ciccarelli
  11. Monetary and Exchange Rate Policies for the Perfect Storm: The Case of The Bahamas, Barbados, Guyana, Haiti, Jamaica, Suriname, and Trinidad & Tobago By Andre Minella; Alessandro Rebucci; Nelson Souza-Sobrino
  12. Monetary and fiscal policy aspects of indirect tax changes in a monetary union. By Anna Lipińska; Leopold von Thadden
  13. State-dependent pricing, local-currency pricing, and exchange rate pass-through By Anthony Landry
  14. China and the Reserve Currency Question By RYAN, JOHN
  15. Revised System for the Classification of Exchange Rate Arrangements By Harald Anderson; Romain Veyrune; Annamaria Kokenyne; Karl Friedrich Habermeier
  16. How robust are popular models of nominal frictions? By Benjamin D. Keen; Evan F. Koenig
  17. The Sub-Prime Crisis and UK Monetary Policy By Martin, Christopher; Milas, C.
  18. Inflation Expectations: Does the Market Beat Professional Forecasts? By Makram El-Shagi
  19. Monetary tightening cycles and the predictability of economic activity By Arturo Estrella; Tobias Adrian
  20. The local effects of monetary policy By Neville Francis; Michael T. Owyang; Tatevik Sekhposyan
  21. The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis By Heiko Hesse; Nathaniel Frank
  22. Reverse Shooting of Exchange Rates By Peijie Wang
  23. Optimal Monetary Policy When Asset Markets are Incomplete By R. Anton BRAUN; NAKAJIMA Tomoyuki
  24. The Dual Stickiness Model and Inflation Dynamics in Spain By Torres Torres, Diego José
  25. Household inflation experiences in the U.S.: a comprehensive approach By Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
  26. Credit crises, money, and contractions: A historical view By Michael D. Bordo; Joseph G. Haubrich
  27. Unconventional Central Bank Measures for Emerging Economies By Etienne B. Yehoue; Kotaro Ishi; Mark R. Stone
  28. Exchange Rates and Stock Prices in the Long Run and Short Run By Morley, Bruce
  29. Scale Economies and Heterogeneity in Business Money Demand: The Italian Experience By Ganugi, P; Grossi, L; Ianulardo, Giancarlo
  30. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  31. Peso Acceptance Patterns in El Paso By Fullerton, Thomas M., Jr.; Molina, Angel L., Jr.; Pisani, Michael J.

  1. By: Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Boris Hofmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper conducts a comparative analysis of the performances of the forward guidance strategies adopted by the Reserve Bank of New Zealand, the Norges Bank and the Riksbank, with the aim to gauge whether forward guidance via publication of an own interest rate path enhances a central bank’s ability to steer market expectations. Two main results emerge. First, we find evidence that all three central banks have been highly predictable in their monetary policy decisions and that long-term inflation expectations have been well anchored in the three economies, irrespective of whether forward guidance involved publication of an own interest rate path or not. Second, for New Zealand, we find weak evidence that a publication of a path could potentially enhance a central bank’s leverage on the medium term structure of interest rates. JEL Classification: E40, E43, E52.
    Keywords: Monetary policy, transparency, central bank communication, forward guidance, term structure of interest rates.
    Date: 2009–10
  2. By: Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Cyril Monnet (Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall, Philadelphia, PA 19106-1574, USA.); Ted Temzelides (Rice University, Department of Economics, P.O. Box 1892, Houston, TX 77251-1892, USA.)
    Abstract: We study credible information transmission by a benevolent Central Bank. We 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. JEL Classification: D80, E40, E52.
    Keywords: Information, Interest rates, Monetary policy.
    Date: 2009–09
  3. By: Gerald P. Dwyer; Mark Fisher
    Abstract: Correlations of inflation with the growth rate of money increase when data are averaged over longer time periods. Correlations of inflation with the growth of money also are higher when high-inflation as well as low-inflation countries are included in the analysis. We show that serial correlation in the underlying inflation rate ties these two observations together and explains them. We present evidence that averaging increases the correlation of inflation and money growth more when the underlying inflation rate has higher serial correlation.
    Date: 2009
  4. By: Mehrotra, Aaron (BOFIT); Slacik, Tomas (BOFIT)
    Abstract: We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.
    Keywords: determinants of inflation; McCallum rule; Phillips curve; Bayesian model averaging; Central and Eastern Europe
    JEL: C11 C22 E31 E52 O52
    Date: 2009–10–21
  5. By: Antoine Martin; Cyril Monnet
    Abstract: The authors compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, while the second framework relies only on open market operations. They show that the Friedman rule cannot be implemented when the central bank uses standing facilities, while it can be implemented with open market operations. For a given rate of inflation, the authors show that standing facilities unambiguously achieve higher welfare than just conducting open market operations. They conclude that elements of both frameworks should be combined. Also, their results suggest that any monetary policy implementation framework should remunerate both required and excess reserves.
    Keywords: Monetary policy ; Open market operations ; Banks and banking, Central
    Date: 2009
  6. By: Tobias Adrian; Hyun Song Shin
    Abstract: Central banks have a variety of tools for implementing monetary policy, but the tool that has received the most attention in the literature has been the overnight interest rate. The financial crisis that erupted in the summer of 2007 has refocused attention on other channels of monetary policy, notably the transmission of policy through the supply of credit and overall conditions in the capital markets. In 2008, the Federal Reserve put into place various lender-of-last-resort programs under section 13(3) of the Federal Reserve Act in order to cushion the strains on financial intermediaries' balance sheets and thereby target the unusually wide spreads in a variety of credit markets. While classic monetary policy targets a price (for example, the federal funds rate), the liquidity facilities affect balance-sheet quantities. The financial crisis forcefully demonstrated that the collapse of the financial sector's balance-sheet capacity can have powerful adverse effects on the real economy. We reexamine the distinctions between prices and quantities in monetary policy transmission.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Credit ; Liquidity (Economics)
    Date: 2009
  7. By: Castelnuovo, Efrem (University of Padua)
    Abstract: We estimate a new-Keynesian DSGE model with the cost channel to assess its ability to replicate the price puzzle ie the inflationary impact of a monetary policy shock typically arising in VAR analysis. In order to correctly identify the monetary policy shock, we distinguish between a standard policy rate shifter and a shock to trend inflation ie the time-varying inflation target set by the Fed. While offering some statistical support to the cost channel, our estimated model clearly implies a negative inflation reaction to a tightening of monetary policy. We offer a discussion of the possible sources of mismatch between the VAR evidence and our own.
    Keywords: cost channel; inflation dynamics; price puzzle; trend inflation
    JEL: E30 E52
    Date: 2009–09–07
  8. By: Tobias Adrian; Hyun Song Shin
    Abstract: We reconsider the role of financial intermediaries in monetary economics. We explore the hypothesis that financial intermediaries drive the business cycle by way of their role in determining the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and hence of the "risk-taking channel" of monetary policy. We document evidence that the balance sheets of financial intermediaries reflect the transmission of monetary policy through capital market conditions. We find short-term interest rates to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and we suggest the importance of tracking balance sheet quantities for the conduct of monetary policy.
    Keywords: Interest rates ; Capital market ; Intermediation (Finance) ; Monetary policy ; Risk ; Business cycles
    Date: 2009
  9. By: William T. Gavin; Benjamin D. Keen; Michael R. Pakko
    Abstract: This paper examines the impact of a permanent shock to the productivity growth rate in a New Keynesian model when the central bank does not immediately adjust its policy rule to that shock. Our results show that inflation and productivity growth are negatively correlated at business cycle frequencies when the central bank follows a Taylor-type policy rule that targets the output gap. We then demonstrate that inflation is more stable after a permanent productivity shock when monetary policy targets the output growth rate (not the output gap) or the price-level path (not the inflation rate). As for the welfare implications, both the output growth and price-level path rules generate much less volatility in output and inflation after a productivity shock than occurs with the Taylor rule.
    Keywords: Taylor's rule ; Productivity ; Inflation (Finance)
    Date: 2009
  10. By: Carlo Altavilla (University of Naples Parthenope, Via Medina, 40 - 80133 Naples, Italy.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper explores the role that the imperfect knowledge of the structure of the economy plays in the uncertainty surrounding the effects of rule-based monetary policy on unemployment dynamics in the euro area and the US. We employ a Bayesian model averaging procedure on a wide range of models which differ in several dimensions to account for the uncertainty that the policymaker faces when setting the monetary policy and evaluating its effect on real economy. We find evidence of a high degree of dispersion across models in both policy rule parameters and impulse response functions. Moreover, monetary policy shocks have very similar recessionary effects on the two economies with a different role played by the participation rate in the transmission mechanism. Finally, we show that a policy maker who does not take model uncertainty into account and selects the results on the basis of a single model may come to misleading conclusions not only about the transmission mechanism, but also about the differences between the euro area and the US, which are on average essentially small. JEL Classification: C11, E24, E52, E58.
    Keywords: Monetary policy, Model uncertainty, Bayesian model averaging, Unemployment gap, Taylor rule.
    Date: 2009–09
  11. By: Andre Minella; Alessandro Rebucci; Nelson Souza-Sobrino
    Abstract: This study provides a set of tools to analyze the monetary and exchange rate policy issues in the seven countries of the Inter-American Development Bank’s Caribbean region (The Bahamas, Barbados, Jamaica, Haiti, Guyana, Suriname, and Trinidad and Tobago). It then applies some of them to the analysis of the impact of the global turmoil on these economies in the last quarter of 2008. The paper also discusses, in light of both recent theoretical developments and key aspects of these economies, the monetary and exchange policy responses to the initial phase of the global turmoil.
    Keywords: Caribbean countries, Global crisis, Monetary policy
    JEL: F33 E52
    Date: 2009–10
  12. By: Anna Lipińska (Bank of England, Monetary Analysis,Monetary Assessment and Strategy Division, Threadneedle Street, London EC2R 8AH, United Kingdom.); Leopold von Thadden (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In recent years a number of European countries have shifted their tax structure more strongly towards indirect taxes, motivated, inter alia, by the intention to foster competitiveness. Against this background, this paper develops a tractable two-country model of a monetary union, characterised by national fiscal and supranational monetary policy, with price-setting firms and endogenously determined terms of trade. The paper discusses a number of monetary and fiscal policy questions which emerge if one of the countries shifts its tax structure more strongly towards indirect taxes. Qualitatively, it is shown that the long-run effects of such a unilateral policy shift on output and consumption within and between the two countries depend sensitively on whether indirect tax revenues are used to lower direct taxes or to finance additional government expenditures. Moreover, short-run dynamics are shown to depend significantly on the speed at which fiscal adjustments take place, on the choice of the inflation index stabilised by the central bank, and on whether the tax shift is anticipated or not. Quantitatively, the calibrated model version indicates that only if the additional indirect tax revenues are used to finance a cut in direct taxes there is some, though limited scope for non-negligible spillovers between countries. JEL Classification: E61, E63, F42.
    Keywords: Fiscal regimes, Monetary policy, Currency union.
    Date: 2009–10
  13. By: Anthony Landry
    Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey, King, and Wolman (1999) in which firms price-discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.
    Keywords: Pricing ; Foreign exchange rates ; Equilibrium (Economics) - Mathematical models ; Monetary policy ; Price discrimination
    Date: 2009
  14. By: RYAN, JOHN
    Abstract: China’s concern about its U.S. Dollar reserves is being amplified by the low returns of some of China’ investments in the U.S. which leads to a broader concern about how the current reserve system basically entails China lending to the U.S. at very low interest rates. A two-currency reserve system would potentially be even more unstable than the existing one, because of speculation moves in and out of the U.S. Dollar and the Euro depending on their return, increasing volatility. U.S. Policymakers have started to realize that large external deficits, the dominance of the dollar, and the large capital inflows that necessarily accompany deficits and currency dominance are no longer in the U.S. national interest. The U.S. has to consider initiatives put forward over the past year by China and others to begin a serious discussion of reforming the international monetary system. This chapter will examine four scenarios regarding the global currency regime of the future and the Chinese influence in this most important policy arena. It will focus on the U.S. Dollar decline as the Reserve Currency, on the Euro gaining strength slowly in a turbulent world, on the potential of the Renminbi to become a Reserve Currency, and on the future of the Super-Sovereign Reserve Currency, the IMF’s Special Drawing Rights (SDRs). Before that it will examine the role of the Renminbi in the Asian Financial Crisis in 1997 and its role in the global financial markets at that time and lessons learnt from the crisis. The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries.
    JEL: E42 E58 F02 E44 A10 E40 F31 E41
    Date: 2009–10–26
  15. By: Harald Anderson; Romain Veyrune; Annamaria Kokenyne; Karl Friedrich Habermeier
    Abstract: Since 1998, the staff of the International Monetary Fund has published a classification of countries' de facto exchange rate arrangements. Experience in operating this classification system has highlighted a need for changes. The present paper provides information on revisions to the system in early 2009. The changes are expected to allow for greater consistency and objectivity of classifications across countries, expedite the classification process, conserve resources, and improve transparency.
    Keywords: Cross country analysis , Currency boards , Currency pegs , Data collection , Data quality assessment framework , Exchange rate developments , Exchange rates , Floating exchange rates , Foreign exchange , Fund role , Publications , Transparency ,
    Date: 2009–09–29
  16. By: Benjamin D. Keen; Evan F. Koenig
    Abstract: This paper analyzes three popular models of nominal price and wage frictions to determine which best fits post-war U.S. data. We construct a dynamic stochastic general equilibrium (DSGE) model and use maximum likelihood to estimate each model's parameters. Because previous research finds that the conduct of monetary policy and the behavior of inflation changed in the early 1980s, we examine two distinct sample periods. Using a Bayesian, pseudo-odds measure as a means for comparison, a sticky price and wage model with dynamic indexation best fits the data in the early-sample period, whereas either a sticky price and wage model with static indexation or a sticky information model best fits the data in the late-sample period. Our results suggest that price- and wage-setting behavior may be sensitive to changes in the monetary policy regime. If true, the evaluation of alternative monetary policy rules may be even more complicated than previously believed.
    Keywords: Econometric models - Evaluation ; Business cycles - Econometric models ; Monetary policy ; Price levels ; Wages
    Date: 2009
  17. By: Martin, Christopher; Milas, C.
    Abstract: The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis
    Keywords: optimal monetary policy; sub-prime crisis
    Date: 2009
  18. By: Makram El-Shagi
    Abstract: The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period of 1988 to 2007. To capture expected inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
    Keywords: Inflation Expectations,Rational Expectations,Inflation Forecasting
    JEL: E31 E37
    Date: 2009–10
  19. By: Arturo Estrella; Tobias Adrian
    Abstract: Eleven of fourteen monetary tightening cycles since 1955 were followed by increases in unemployment; three were not. The term spread at the end of these cycles discriminates almost perfectly between subsequent outcomes, but levels of nominal or real interest rates, as well as other interest rate spreads, generally do not.
    Keywords: Monetary policy ; Business cycles ; Unemployment ; Interest rates
    Date: 2009
  20. By: Neville Francis; Michael T. Owyang; Tatevik Sekhposyan
    Abstract: Previous studies have documented disparities in the regional responses to monetary policy shocks; this variation has been found to depend, in part, on differences in the industrial composition of the regional economies. However, because of computational issues, the literature has often neglected the richest level of disaggregation: the city. In this paper, we estimate the city-level responses to monetary policy shocks in a Bayesian VAR. The Bayesian VAR allows us to model the entire panel of metropolitan areas through the imposition of a shrinkage prior. We then seek the origin of the city-level asymmetric responses.
    Keywords: Vector autoregression ; Econometric models
    Date: 2009
  21. By: Heiko Hesse; Nathaniel Frank
    Abstract: This paper provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. Extraordinary liquidity provisions, such as the Term Auction Facility by the Federal Reserve, are analyzed. First a decomposition of the Libor-OIS spread indicates that credit premia increased in importance as the crisis deepened. Second, using Markov switching models, central bank operations are then graphically associated with reductions in term funding stress. Finally, bivariate VAR and GARCH models are adopted to econometrically quantified these impacts. While helpful in compressing Libor spreads, the economic magnitudes of central interventions have overall not been very large.
    Keywords: Bank credit , Banking sector , Central bank policy , Central banks , Credit risk , Economic models , Financial crisis , Liquidity management , Loans , Monetary policy , Risk management ,
    Date: 2009–09–25
  22. By: Peijie Wang (University of Hull, IESEG School of Management)
    Abstract: Reverse shooting of the exchange rate has been put forward in this paper by scrutinizing the adjustment and evolution of the exchange rate towards its new long-run equilibrium level following a change in money supply. Joint and sequential effects of covered interest rate parity and the sticky price on the rise, from the short-term through the long-run horizon, result in a feature of reverse shooting of the exchange rate. Regardless of what the immediate response of the exchange rate to the change in money supply can be argued for, reverse shooting homogenizes the evolution path of exchange rate adjustment and movement from different views.
    Keywords: exchange rate, reverse shooting
    JEL: F31 F37
    Date: 2009–04
  23. By: R. Anton BRAUN; NAKAJIMA Tomoyuki
    Abstract: his paper considers the properties of an optimal monetary policy when households are subject to counter-cyclical uninsured income shocks. We develop a tractable incomplete-markets model with Calvo price setting. In our model the welfare cost of business cycles is large when the variance of income shocks is counter-cyclical. Nevertheless, the optimal monetary policy is very similar to the optimal policy that emerges in the representative agent framework and calls for nearly complete stabilization of the price-level.
    Date: 2009–10
  24. By: Torres Torres, Diego José
    Abstract: We estimate a model that integrates sticky prices and sticky information using Spanish data following Dupor et. al (2008). The model yields three empircal facts: a-) the frequency of price changes (around one year), b-) the firm's report that sticky information is no too important for nominal rigidities and c-) the inflation's persistence, the latter with more microfoundations than the Hybrid Model. We found that both types of stickiness are present in Spain, but the most important is the stickiness in prices.
    Keywords: Sticky Prices; Sticky Information; Spain; Inflation Dynamics
    JEL: E31
    Date: 2009–09–21
  25. By: Bart Hobijn; Kristin Mayer; Carter Stennis; Giorgio Topa
    Abstract: We present new measures of household-specific inflation experiences based on comprehensive information from the Consumer Expenditure Survey (CEX). We match households in the Interview and the Diary Surveys from the CEX to produce both complete and detailed pictures of household expenditures. The resulting household inflation measures are based on a more accurate and detailed description of household expenditures than those previously available. We find that our household-based inflation measures track aggregate measures such as the CPI-U quite well and that the addition of Diary Survey data induces small but significant differences in the measurement of household inflation. The distribution of inflation experiences across households exhibits a large amount of dispersion over the entire sample period. In addition, we uncover a significantly negative relationship between mean inflation and inflation inequality across households.
    Keywords: Inflation (Finance) ; Households - Economic aspects
    Date: 2009
  26. By: Michael D. Bordo; Joseph G. Haubrich
    Abstract: The relatively infrequent nature of major credit distress events makes a historical approach particularly useful. Using a combination of historical narrative and econometric techniques, we identify major periods of credit distress from 1875 to 2007, examine the extent to which credit distress arises as part of the transmission> of monetary policy, and document the subsequent effect on output. Using turning points defined by the Harding-Pagan algorithm, we identify and compare the timing, duration, amplitude, and comovement of cycles in money, credit, and output. Regressions show that financial distress events exacerbate business cycle downturns both in the nineteenth and twentieth centuries and that a confluence of such events makes recessions even worse.
    Keywords: Monetary policy ; Credit ; Business cycles
    Date: 2009
  27. By: Etienne B. Yehoue; Kotaro Ishi; Mark R. Stone
    Abstract: Unconventional central bank measures are playing a key policy role for many advanced economies in the 2007-09 global crisis. Are they playing a similar role for emerging economies? Emerging economies have widely used unconventional foreign exchange and domestic short-term liquidity easing measures. Their use of credit easing and quantitative easing measures has been much more limited. Thus, unconventional measures are much less important for emerging economies compared to advanced economies in achieving broader macroeconomic objectives. The difference can be attributed to the relatively limited financial stress in emerging economies, their external vulnerabilities and their limited scope for quasifiscal activities.
    Date: 2009–10–16
  28. By: Morley, Bruce
    Abstract: Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results.
    Keywords: Exchange Rates; Stock Prices; Forecast; Cointegration
    Date: 2009
  29. By: Ganugi, P; Grossi, L; Ianulardo, Giancarlo
    Abstract: This paper investigates the demand for money by firms and the existence of economies of scales in order to evaluate the efficiency in the cash management of the Italian manufacturing industry. We estimate a money demand for cash elaborated by Fujiki and Mulligan (1996). Estimates differ from the previous literature firstly, because we use a choice dynamic model to overcome endogeneity problems in cash holdings; secondly, because we use an iterative procedure based on backward exclusion of firms from model estimation with which we point out the high heterogeneity of Italian companies in money demand. Our estimates show that the Italian Manufacturing industry, considered as whole, does not enjoy scale economies in money demand. Our iterative procedure points out that the cause of this result is to be ascribed to small firms which are characterized by thin cash money holdings and a consequently very modest opportunity cost. Once small size firms are removed from our data set our estimates reveal that money demand of medium and large size firms is different for high scale economies. This result, together with the fact that small firms’ cash balances are thin, implies the efficiency of Italian manufacturing industry.
    Date: 2009
  30. By: Alexander Mihailov; Fabio Rumler; Johann Scharler
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Galí and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2009–10
  31. By: Fullerton, Thomas M., Jr.; Molina, Angel L., Jr.; Pisani, Michael J.
    Abstract: This paper examines the acceptance of peso payments, or currency substitution reverse dollarization, by U.S retail firms near the international border with Mexico. Survey data are drawn from a stratified random sample of 586 retailers located in El Paso, Texas, situated across the border from Ciudad Juarez, Chihuahua, Mexico. Approximately 13 percent of the participant firms accept Mexican pesos in exchange for goods and services. Empirical results indicate that factors such as a firm’s percentage of Spanish speaking employees and distance to the nearest international bridge significantly influence the decision to accept or reject Mexican pesos.
    Keywords: Currency Substitution; Mexican Peso; Border Economics; Probit Models
    JEL: R11 M21
    Date: 2009–04–17

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