nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒11‒07
fifteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Determinacy in New Keynesian models: a role for money after all? By Minford, Patrick; Srinivasan, Naveen
  2. The European Central Bank, the Federal Reserve and the Bank of England: is the Taylor Rule an useful benchmark for the last decade? By Forte, Antonio
  3. Interest Rate Transmission Mechanism of Monetary Policy in the Selected EMU Candidate Countries By Rajmund Mirdala
  4. Optimal Structure of Monetary Policy Committees By Keiichi Morimoto
  5. Price Volatility, Expectations and Monetary Policy in Nigeria By Ajimuda Olumide
  6. Political institutions and central bank independence revisited By Davide Ferrari; Barbara Pistoresi; Francesco Salsano
  7. Asymmetry of the exchange rate pass-through: An exercise on the Polish data. By Przystupa, Jan; Wróbel, Ewa
  8. The Taylor Principle and (In-) Determinacy in a New Keynesian Model with hiring Frictions and Skill Loss By Ansgar Rannenberg
  9. Perspectives on East-Asian Monetary Integration By Fabio Masini
  10. Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy By Dubecq, S.; Mojon, B.; Ragot, X.
  11. The housing price boom of the late ’90s: did inflation targeting matter? By Frappa, S.; Mésonnier, J-S.
  12. Implementing the New Structural Model of the Czech National Bank By Michal Andrle; Tibor Hledik; Ondra Kamenik; Jan Vlcek
  13. Analyzing Factors Affecting U.S. Food Price Inflation. By Baek, Jungho; Koo, Won
  14. Optimal monetary policy and firm entry By Vivien Lewis
  15. Discrete-Time Interest Rate Modelling By Lane P. Hughston; Andrea Macrina

  1. By: Minford, Patrick (Cardiff Business School); Srinivasan, Naveen
    Abstract: The New-Keynesian Taylor-Rule model of inflation determination with no role for money is incomplete. As Cochrane (2007a) argues, it has no credible mechanism for ruling out bubbles and as a result fails to provide a reason for private agents to pick a unique stable path. We propose a way forward. Our proposal is in effect that the New-Keynesian model should be formulated with a money demand and money supply function. It should also embody a terminal condition for money supply behaviour. If an unstable path occurred the central bank would switch to a money supply Rule explicitly designed to stop it via the terminal condition. This would be therefore a 'threat/trigger strategy' complementing the Taylor Rule - only to be invoked if inflation misbehaved. Thus we answer the criticisms levelled at the Taylor Rule that it has no credible mechanism for ruling out bubbles. However it does imply that money cannot be avoided in the new Keynesian set-up, contrary to Woodford (2008).
    Keywords: New-Keynesian; Taylor Rule; Determinacy
    JEL: E31 E52 E58
    Date: 2009–10
  2. By: Forte, Antonio
    Abstract: The Taylor rule has been used in many studies in order to analyse the monetary policies. In my work I focus on the Euro era and compare the ECB with other two central banks, the Fed and the BoE. A very interesting result comes out from the analysis: it seems that these central banks do not observe the inflation course before deciding about the variation of the interest rates. This result can be linked to two ideas: firstly, the use of stationary time series drops out the significance of the inflation gap as regressor; secondly, a really forward looking central bank focuses on other macroeconomic leading indicators instead of examining the realized or expected inflation gap.
    Keywords: Taylor rule; monetary policy; European Central Bank; Federal Reserve; Bank of England; Euro; Exchange rates.
    JEL: E58 E52
    Date: 2009–11
  3. By: Rajmund Mirdala (Faculty of Economics, Technical University of Košice, Slovakia)
    Abstract: The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech Republic, Slovak Republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech Republic (May 1997), Poland (April 2000), Slovak Republic (October 1998) and fixed exchange rate to euro in Hungary (January 2000) with broad band (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks’ monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that higher sensitivity of domestic variables to interest rates shocks can be interpreted as a convergence of monetary policies in candidate countries towards the ECB’s monetary policy.
    Keywords: Monetary policy, Short-term interest rates, Structural vector autoregression, Variance decomposition, Impulse-response function
    JEL: C32 E52
    Date: 2009–03
  4. By: Keiichi Morimoto (Graduate School of Economics, Osaka University)
    Abstract: This paper explores an optimal personnel organization problem of monetary policy committees. First, I construct an analytically tractable model for monetary policy analysis which starts from decision-making in the monetary policy committee. Using the model, I investigate the relationship between preference heterogeneity among the committee members and the optimal structure of the monetary policy committee. The result shows that it is optimal in general cases to appoint not only inflation-minded (hawkish) persons but also output-minded (dovish) persons. This is a justification for the fact that the actual monetary policy committees (e.g. MPC of Bank of England and FOMC) usually consist of both type members as the empirical researches suggest.
    Keywords: monetary policy, committee, delegation, imperfect information
    JEL: D71 D84 E58
    Date: 2009–10
  5. By: Ajimuda Olumide (Department of Economics and Statistics,University of Benin, Nigeria)
    Abstract: The study has as its objectives, to determine the influence of price volatility and price expectation in the rate of inflation as a measure of the price level. In addition, the study sought to evaluate ipso facto the extent to which monetary policy has influenced inflation by reducing price volatility and expectation towards zero. The study applied the maximum likelihood estimator in addition to the GARCH (p, q model) to estimate the steady state model of inflation. As a measure of volatility, the conditional standard deviation for inflation was obtained from the GARCH model. Inflation expectation was solved using the Gauss-Siedel algorithm for forward-looking expectations with actual inflation series as start values. The VAR model was estimated to determine the impulse response functions and the variance decomposition using Cholesky decomposition so as to determine the response to monetary policy of inflation, its volatility and expectations. The study found that inflation expectation and price volatility not only influence the contemporaneous inflation, it also results in persistence in interest rate differential and monetary growth, thus compromising the objective of monetary policy. The study recommends that explicit anchoring of expectations and volatility ensure that monetary policy is forward-looking and that a symmetric inflation target strengthens intertemporal sustainability in monetary policy management. In addition, the behaviour of inflation ex post and the speed of convergence of inflation expectations should provide the basis for determining the most appropriate pulse of nominal interest rate in the economy which will keep inflation trajectory consistent with the growth of the economy.
    Keywords: Price Volatility, Forward-looking Expectations, Persistence, Speed of Adjustment, Steady-State, Gauss-Siedel, GARCH, Impulse-Response functions
    JEL: C22 C32 D84 E31 E40 E5 E60
    Date: 2009–05
  6. By: Davide Ferrari; Barbara Pistoresi; Francesco Salsano
    Abstract: We build on earlier studies regarding Central Bank independence (CBI) by relating it to political, institutional and economic variables. The data suggest that CBI is positively related to the presence of federalism, the features of the electoral system and parties, the correlation between the shocks to the level of economic activity in the countries included in the sample and, for a sub-sample of economies, the convergence criteria to join the European Monetary Union (EMU).
    Keywords: ICentral Bank independence; institutional systems; variable selection
    JEL: E5
    Date: 2009–07
  7. By: Przystupa, Jan; Wróbel, Ewa
    Abstract: We propose a complex analysis of the exchange rate pass-through in an open economy. We assess the level, linearity and symmetry of exchange rate pass-through to import and consumer prices in Poland and discuss its implications for the monetary policy. We show that the pass-through is incomplete even in the long run. There is pricing to market behavior both in the long and short run. We do not find a strong evidence of non-linearity in import prices reaction to the exchange rate and reject the hypothesis of an asymmetric response to appreciations and depreciations. On the other hand, we find an asymmetry of CPI responses to the output gap, direction and size of the exchange rate changes and to the magnitude of the exchange rate volatility. The asymmetry is mostly visible after exogenous shocks. We reject the hypothesis of an asymmetric reaction of prices in a high and low inflation environment.
    Keywords: Exchange Rate Pass-through; Non-linear Model.
    JEL: E52 C22 F31
    Date: 2009–04–30
  8. By: Ansgar Rannenberg
    Abstract: We introduce duration dependent skill decay among the unemployed into a New-Keynesian model with hiring frictions developed by Blanchard/Gali (2008). If the central bank responds only to (current, lagged or expected future) inflation and quar¬terly skill decay is above a threshold level, determinacy requires a coefficient on infla¬tion smaller than one. The threshold level is plausible with little steady-state hiring and firing ("Continental European Calibration") but implausibly high in the oppo¬site case ("American calibration"). Neither interest rate smoothing nor responding to the output gap helps to restore determinacy if skill decay exceeds the threshold level. However, a modest response to unemployment guarantees determinacy. Moreover, under indeterminacy, both an adverse sunspot shock and an adverse technology shock increase unemployment extremely persistently.
    Keywords: monetary policy rules, Taylor principle, NAIRU, unemployment, hysteresis.
    JEL: E24 E31 E52 J64
    Date: 2009–09
  9. By: Fabio Masini (Department of Public Institutions, Economics and Society, University of Rome)
    Abstract: Increasing trade interdependence among East-Asian countries suggests the urge to design some monetary arrangement to stabilize the macroeconomic framework of an extremely heterogeneously growing area. The paper reviews the literature and analyses several directions of East-Asian integration process, especially in relation to the European model. We argue that a more comprehensive economic and political world-scenario should be considered and a multi-speed policy approach should be implemented in the area. Around the pivotal role of China, a wide agreement should be reached for an Asian single-currency, which might be rapidly issued and provide a reference target for other East-Asian countries.
    Keywords: trade, East-Asian countries, East-Asian integration process, European model, Asian singlecurrency
    JEL: F33 F59
    Date: 2009–05
  10. By: Dubecq, S.; Mojon, B.; Ragot, X.
    Abstract: We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk exposure of intermediaries. Underestimation of regulatory arbitrage may induce households to infer that higher asset prices are due to a decline of risk. First, this mechanism can explain why the risk premia paid by US financial intermediaries did not increase between 2000 and 2007 in spite of its increasing leverage. Second, we provide a theory of the risk taking channel of monetary policy: in the model, the underestimation of risk is larger the lower the level of the risk free interest rate.
    Keywords: Capital requirements, Imperfect Information, Risk-taking Channel of monetary policy.
    JEL: E5 G12 G18 G32
    Date: 2009
  11. By: Frappa, S.; Mésonnier, J-S.
    Abstract: The recent boom in housing markets of most developed economies has spurred criticism that inflation targeting central banks may have neglected the build-up of financial imbalances. This paper provides a formal empirical test of such claims, using a standard program evaluation methodology to correct for a possible bias due to self-selection into inflation targeting. We consider 17 industrial economies over 1980-2006, among which nine countries have targeted inflation a some dates. We find robust evidence of a significant positive effect of inflation targeting on real housing price growth and on the housing price to rent ratio.
    Keywords: Inflation targeting; Housing prices; Treatment effect; OECD countries.
    JEL: E4 E52 E58
    Date: 2009
  12. By: Michal Andrle; Tibor Hledik; Ondra Kamenik; Jan Vlcek
    Abstract: The purpose of the paper is to introduce the new “g3†structural model of the Czech National Bank and illustrate how it is used for forecasting and policy analysis. As from January 2007 the model was regularly used for shadowing official forecasts, and in July 2008 it became the core model of the CNB. In the paper we highlight the most important and unusual features of the model and discuss tools and procedures that help us in forecasting and assessing the economy with the model. The paper is not meant to provide a full derivation of the model or the complete characteristics of its behavior and should not be regarded as model documentation. Rather, the paper demonstrates how the model is used and how it contributes to policy analysis.
    Keywords: DSGE, filtering, forecasting, general equilibrium, monetary policy.
    JEL: D58 E32 E58 E47 C53
    Date: 2009–10
  13. By: Baek, Jungho; Koo, Won
    Abstract: Since the summer of 2007, U.S. food price has increased dramatically. Given public anxiety over fast-rising food prices in recent years, this paper attempts to analyze the effects of market factors â prices of energy and agricultural commodities and exchange rate â on U.S. food prices using a co-integration analysis. Results show that the agricultural commodity price and exchange rate play key roles in determining the short- and long-run movement of U.S. food prices. It is also found that in recent years, the energy price has been a significant factor affecting U.S. food prices in the long-run, but has little effect in the short-run. This implies the strong long-run linkage between energy and agricultural markets has emerged through production of commodity-based ethanol in the recent years.
    Keywords: Agricultural commodity price, Energy price, Exchange rate, Food price inflation, Time-series analysis, Agribusiness,
    Date: 2009–09
  14. By: Vivien Lewis (National Bank of Belgium, Research Department; Ghent University, Department of Financial Economics)
    Abstract: This paper describes optimal monetary policy in an economy with monopolistic competition, endogenous firm entry, a cash-in-advance constraint and pre-set wages. Firms must make profits in order to cover entry costs; thus a mark-up on goods prices is necessary. Without this mark-up, profits would be zero and no firm would enter the market, resulting in zero production. Therefore, the mark-up should not be removed. In this economy with market entrants, goods are more expensive than in a competitive economy with marginal cost pricing. This leads to a misallocation of resources, because leisure is not sold at a mark-up. Goods and leisure are two sources of utility that households trade off against each other. Thus, they may buy too much leisure instead of consumption goods. The consequence is that labour supply and production are sub-optimally low. Due to the labour requirement at market entry stage, insufficient labour supply also implies too little entry and too few firms in equilibrium. In the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy-maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks. This induces a rise in labour supply, more production of goods and more new firms
    Keywords: entry, optimal policy
    JEL: E52 E63
    Date: 2009–10
  15. By: Lane P. Hughston; Andrea Macrina
    Abstract: This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing kernel be consistent with a pair of axioms, one giving the inter-temporal relations for dividend-paying assets, and the other ensuring the existence of a money-market asset. We show that the existence of a positive-return asset implies the existence of a previsible money-market account. A general expression for the price process of a limited-liability asset is derived. This expression includes two terms, one being the discounted risk-adjusted value of the dividend stream, the other characterising retained earnings. The vanishing of the latter is given by a transversality condition. We show (under the assumed axioms) that, in the case of a limited-liability asset with no permanently-retained earnings, the price process is given by the ratio of a pair of potentials. Explicit examples of discrete-time models are provided.
    Date: 2009–11

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