nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒11‒21
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank By Gebhard Kirchgässner; Jürgen Wolters
  2. Conventional and unconventional monetary policy By Vasco Cúrdia; Michael Woodford
  3. The market-perceived monetary policy rule By James D. Hamilton; Seth Pruitt; Scott C. Borger
  4. Did easy money in the dollar bloc fuel the global commodity boom? By Christopher Erceg; Luca Guerrieri; Steven B. Kamin
  5. Some Empirical Evidence on the Demand for Money in the Pacific Island Countries By Kumar, Saten; Singh, Rup
  6. Foreign Demand for Domestic Currency and the Optimal Rate of Inflation By Stephanie Schmitt-Grohé; Martín Uribe
  7. Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle By Eric M. Leeper
  8. Multiple equilibria in two-sector monetary economies: an interplay between preferences and the timing for money By Stefano Bosi; Kazuo Nishimura; Alain Venditti
  9. How Stable Are Monetary Models of the Dollar-Euro Exchange Rate?: A Time-varying Coefficient Approach By Joscha Beckmann; Ansgar Belke; Michael Kühl
  10. A Stable Model for Euro Area Money Demand: Revisiting the Role of Wealth. By Andreas Beyer
  11. What Triggers Prolonged Inflation Regimes? A Historical Analysis. By Isabel Vansteenkiste
  12. Monetary-fiscal policy interactions and fiscal stimulus By Troy Davig; Eric M. Leeper
  13. Expectations, deflation traps and macroeconomic policy By Evans , George W; Honkapohja, Seppo
  14. Endogenous Inflows of Speculative Capital and the Optimal Currency Appreciation Path By Mei Li,; Junfeng Qiu
  15. Credit Spreads and Monetary Policy By Vasco Cúrdia; Michael Woodford
  16. Inflation persistence in New EU Member States: Is it different than in the Euro Area Members? By Maria Popa
  17. Communication in a monetary policy committee: a note By Jan Marc Berk; Beata Bierut
  18. The determinants of international flows of U.S. currency By Rebecca Hellerstein; William Ryan
  19. A Banking Explanation of the US Velocity of Money: 1919-2004 By Benk, Szilárd; Gillman, Max; Kejak, Michal
  20. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008 By Moritz Schularick; Alan M. Taylor
  21. Exchange Rate Pass-Through into Romanian Price Indices: A VAR Approach By Florentina Manea
  22. Interbank lending, credit risk premia and collateral. By Florian Heider; Marie Hoerova
  23. A note on US excess bank reserves and the credit contraction By Khemraj, Tarron
  24. The puzzling peso By Carlos Arteta; Steven B. Kamin; Justin Vitanza
  25. Exchange Rate Mean Reversion within a Target Zone: Evidence from a Country on the Periphery of the ERM By António Portugal Duarte; João Sousa Andrade; Adelaide Duarte
  26. Credit Crunch in a Small Open Economy By Brzoza-Brzezina, Michal; Makarski, Krzysztof
  27. Pass-through of external shocks along the pricing chain: A panel estimation approach for the euro area. By Bettina Landau; Frauke Skudelny
  28. The effects of foreign shocks when interest rates are at zero By Martin Bodenstein; Christopher J. Erceg; Luca Guerrieri

  1. By: Gebhard Kirchgässner; Jürgen Wolters
    Abstract: Using Swiss data from 1983 to 2008, this paper investigates whether growth rates of the different measures of the quantity of money and or excess money can be used to forecast inflation. After a preliminary data analysis, money demand relations are specified, estimated and tested. Then, employing error correction models, measures of excess money are derived. Using recursive estimates, indicator properties of monetary aggregates for inflation are assessed for the period from 2000 onwards, with time horizons of one, two, and three years. In these calculations, M2 and M3 clearly outperform M1, and excess money is generally a better predictor than the quantity of money. Taking into account also the most (available) recent observations that represent the first three quarters of the economic crisis, the money demand function of M3 remains stable while the one for M2 is strongly influenced by these three observations. While in both cases forecasts for 2010 show inflation rates inside the target zone between zero and two percent, and the same holds for forecasts based on M3 for 2011, forecasts based on M2 provide evidence that the upper limit of this zone might be violated in 2011.
    Keywords: Stability of Money Demand, Monetary Aggregates and Inflation
    JEL: E41 E52
    Date: 2009–11
  2. By: Vasco Cúrdia; Michael Woodford
    Abstract: We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy--variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves--alongside the traditional question of the proper operating target for an overnight policy rate. We also study the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions within a single unified framework, and to achieve policy prescriptions that apply equally well regardless of whether financial markets work efficiently or not and regardless of whether the zero bound on nominal interest rates is reached or not.
    Keywords: Banks and banking, Central ; Monetary policy ; Interest rates
    Date: 2009
  3. By: James D. Hamilton; Seth Pruitt; Scott C. Borger
    Abstract: We introduce a novel method for estimating a monetary policy rule using macroeconomic news. Market forecasts of both economic conditions and monetary policy are affected by news, and our estimation links the two effects. This enables us to estimate directly the policy rule agents use to form their expectations, and in so doing flexibly capture the particular dynamics of policy response. We find evidence that between 1994 and 2007 the market-perceived Federal Reserve policy rule changed: the output response vanished, and the inflation response path became more gradual but larger in long-run magnitude. In a standard model we show that output smoothing caused by a larger inflation response magnitude is offset by the more measured pace of response. Our response coefficient estimates are robust to measurement and theoretical issues with both potential output and the inflation target.
    Date: 2009
  4. By: Christopher Erceg; Luca Guerrieri; Steven B. Kamin
    Abstract: Among the various explanations for the runup in oil and commodity prices of recent years, one story focuses on the role of monetary policy in the United States and in developing economies. In this view, developing countries that peg their currencies to the dollar were forced to ease their monetary policies after reductions in U.S. interest rates, leading to economic overheating, excess demand for oil and other commodities, and rising commodity prices. We assess that hypothesis using the Federal Reserve staff’s forward-looking, multicountry, dynamic general equilibrium model, SIGMA. We find that even if many developing country currencies were pegged to the dollar, an easing of U.S. monetary policy would lead to only a transitory runup in oil prices. Instead, strong economic growth in many developing economies, as well as shortfalls in oil production, better explain the sustained runup in oil prices observed until earlier this year. Moreover, a closer look at exchange rates and interest rates around the world suggests that the monetary policies of many developing economies, including in East Asia, are less closely influenced by U.S. policies than is frequently assumed.
    Date: 2009
  5. By: Kumar, Saten; Singh, Rup
    Abstract: This paper explores the stability of the demand for narrow money in the Pacific Island Countries viz, Fiji, Vanuatu, Samoa, Solomons and Papua New Guinea (PNG). The results from the time series approaches of LSE-Hendry’s General to Specific (GETS) and Johansen’s Maximum Likelihood (JML) suggest that real income, nominal rate of interest and real narrow money, are cointegrated. The CUSUM and CUSUMSQ stability test results indicate that the demand for money functions for these countries are stable and therefore the respective monetary authorities may consider targeting money supply in their conduct of monetary policy.
    Keywords: Cointegration; Demand for Money; General to Specific Method and Johansen Maximum Likelihood Method
    JEL: C22 E41
    Date: 2009–07–19
  6. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: More than half of U.S. currency circulates abroad. As a result, much of the seignorage income of the United States is generated outside of its borders. In this paper we characterize the Ramsey-optimal rate of inflation in an economy with a foreign demand for its currency. In the absence of such demand, the model implies that the Friedman rule—deflation at the real rate of interest—maximizes the utility of the representative domestic consumer. We show analytically that once a foreign demand for domestic currency is taken into account, the Friedman rule ceases to be Ramsey optimal. Calibrated versions of the model that match the range of empirical estimates of the size of foreign demand for U.S. currency deliver Ramsey optimal rates of inflation between 2 and 10 percent per annum. The domestically benevolent government finds it optimal to impose an inflation tax as a way to extract resources from the rest of the world in the form of seignorage revenue.
    JEL: E41 E5
    Date: 2009–11
  7. By: Eric M. Leeper
    Abstract: Slow moving demographics are aging populations around the world and pushing many countries into an extended period of heightened fiscal stress. In some countries, taxes alone cannot or likely will not fully fund projected pension and health care expenditures. If economic agents place sufficient probability on the economy hitting its "fiscal limit" at some point in the future--after which further tax revenues are not forthcoming--it may no longer be possible for monetary policy behavior that obeys the Taylor principle to control inflation or anchor inflation expectations. In the period leading up to the fiscal limit, the more aggressively that monetary policy leans against inflationary winds, the more expected inflation becomes unhinged from the inflation target. Problems confronting monetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored. In light of this theory, the paper contrasts monetary-fiscal policy frameworks in the United States and Chile.
    JEL: E31 E52 E62
    Date: 2009–11
  8. By: Stefano Bosi (EQUIPPE - Université de Lille I); Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: In this paper, we study the occurrence of local indeterminacy in two-sector monetary economies. In order to capture the credit market imperfections and the liquidity services of money, we consider a general MIUF model with two alternative timings in monetary payments: the Cash-In-Advance timing, in which the cash available to buy goods is money in the consumers' hands after they leave the bond market but before they enter the goods market, and the Cash-After-the-Market timing, in which agents hold money for transactions after leaving the goods market. We consider three standard specifications of preferences: the additively separable formulation, the Greenwood-Hercovitz-Huffman (GHH) [18] formulation and the King-Plosser-Rebelo (KPR) [21] formulation. First, we show that for all the three types of preferences, local indeterminacy easily arises under the CIA timing with a low enough interest rate elasticity of money demand. Second, we show that with the CAM timing, determinacy always holds under separable preferences, but local indeterminacy can arise in the case of GHH and KPR preferences. We thus prove that compared to aggregate models, two-sector models provide new rooms for local indeterminacy when non-separable standard preferences are considered.
    Keywords: Money-in-the-utility-function, Indeterminacy, Sunspot equilibria
    Date: 2009–11–15
  9. By: Joscha Beckmann; Ansgar Belke; Michael Kühl
    Abstract: This paper examines the significance of different fundamental regimes by applying various monetary models of the exchange rate to one of the politically most important exchange rates, the exchange rate of the US dollar vis-à-vis the euro (the DM). We use monthly data from 1975:01 to 2007:12. Applying a novel time-varying coefficient estimation approach, we come up with interesting properties of our empirical models. First, there is no stable long-run equilibrium relationship among fundamentals and exchange rates since the breakdown of Bretton Woods. Second, there are no recurring regimes, i.e. across different regimes either the coefficient values for the same fundamentals differ or the significance differs. Third, there is no regime in which no fundamentals enter. Fourth, the deviations resulting from the stepwise cointegrating relationship act as a significant error-correction mechanism. In other words, we are able to show that fundamentals play an important role in determining the exchange rate although their impact differs significantly across different sub-periods.
    Keywords: Structural exchange rate models, cointegration, structural breaks, switching regression, time-varying coefficient approach
    JEL: E44 F31 G12
    Date: 2009
  10. By: Andreas Beyer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we present an empirically stable money demand model for Euro area M3. We show that housing wealth is an important explanatory variable of long-run money demand that captures the trending behaviour of M3 velocity, in particular its shift in the first half of this decade. We show that the current financial crisis has no impact on the stability of our money demand model. JEL Classification: C22, C32, E41.
    Keywords: Money Demand, Parameter Constancy, Wealth, Cointegration, Vector Error Correction Model.
    Date: 2009–11
  11. By: Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper empirically assesses which factors trigger prolonged periods of inflation for a sample of 91 countries over the period 1960-2006. The paper employs pooled probit analysis to estimate the contribution of the key factors to inflation starts. The empirical results suggest that for all cases considered a more fixed exchange rate regime and lower real policy rates increase the probability of an inflation start. For developing countries, other relevant factors include food price inflation, the degree of trade openness, the level of past inflation, the ratio of external debt to GDP and the durability of the political regime. For advanced economies, these factors turn out to be statistically insignificant but instead a positive output gap, higher global inflation and a less democratic environment were seen to be detrimental for triggering inflation starts. Finally, oil prices, M2 growth and government spending were never statistically significant. JEL Classification: E31, E58.
    Keywords: Panel Probit, Inflation, emerging markets.
    Date: 2009–11
  12. By: Troy Davig; Eric M. Leeper
    Abstract: Increases in government spending trigger substitution effects both inter- and intra-temporal and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary-fiscal policy combinations.
    Date: 2009
  13. By: Evans , George W (University of Oregon, University of St. Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja, European Economic Review (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks that push interest rates to the zero lower bound, temporary increases in government spending can effectively insulate the economy from deflation traps.
    Keywords: adaptive learning; monetary policy; fiscal policy; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2009–09–22
  14. By: Mei Li, (Department of Economics,University of Guelph); Junfeng Qiu (Central University of Finance and Economics)
    Abstract: This paper examines the optimal appreciation path of an under-valued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides the optimal appreciation path based on three factors: (i) Misalignment costs associated with the gap between the actual exchange rate and the fundamental exchange rate, (ii) short-term adjustment costs due to fast appreciation, and (iii) capital losses due to speculative capital inflows. We examine two cases in which speculators do and do not face liquidity shocks. We show that, in the case without liquidity shocks, the central bank should appreciate quickly to discourage speculative capital, and should appreciate more quickly in initial periods than in later periods. In the case with liquidity shocks, the central bank should pre-commit to a slow appreciation path to discourage speculative capital. The central bank should appreciate slowest when the probability of liquidity shocks takes middle values. If the central bank cannot commit and can only take a discretionary policy, appreciation should be faster.
    Keywords: exchange rate, appreciation, capital flows
    JEL: F31 F32
    Date: 2009
  15. By: Vasco Cúrdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We consider the desirability of modifying a standard Taylor rule for a cen- tral bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor, 2008, and by McCulley and Toloui, 2008) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al., 2007). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in C¶urdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Tay- lor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even sign) of response to credit is less robust to alternative assumptions about the nature and persistence of the disturbances to the economy.
    Date: 2009
  16. By: Maria Popa
    Abstract: Is inflation persistence in the New Member States comparable to that in the Euro Area? We argue that persistence may not be as different between the two groups as one might expect. The paper provides a structural measure for the inflation persistence in the New Member States: New Hybrid Phillips Curve. The data set used includes samples for five new member of the EU. We describe the dynamics of inflation using the New Hybrid Phillips Curve as framework. Structural measures show that backward-looking behavior may be a more important component in explaining inflation persistence in the New Member States than in the Euro Area.
    Keywords: inflation persistence, Hybrid Phillips Curve
    Date: 2009–10
  17. By: Jan Marc Berk; Beata Bierut
    Abstract: This paper models monetary policy decisions as being taken by an interacting group of heterogeneous policy makers, organized in a committee. Disclosing the premises on which an individual view on the interest rate is based is likely to provide value added in terms of the quality of the collective decision over-and-above simultaneous voting on interest rates. However, this is not generally true, as communication also involves a trade-off in the quality of views of committee members, which can lead to a reduction in the quality of collective decisions below the outcome achieved under simple majority voting. Still, communication is a relatively effective way to implement the 'knowledge pooling' argument pro-collective decision-making, compared to expanding the size of the MPC.
    Keywords: committees; deliberations; correlated votes; simple majority voting.
    JEL: E58 D71 D78
    Date: 2009–11
  18. By: Rebecca Hellerstein; William Ryan
    Abstract: This paper examines the determinants of cross-border flows of U.S. dollar banknotes, using a new panel data set of bilateral flows between the United States and 103 countries from 1990 to 2007. We show that a gravity model explains international flows of currency as well as it explains international flows of goods and financial assets. We find important roles for market size and transaction costs, consistent with the traditional gravity framework, as well as roles for financial depth, the behavior of the nominal exchange rate, the size of the informal sector, the amount of remittance credits, the degree of competition with the euro, and the history of macroeconomic instability over the previous generation. We find no role for official trade flows of goods. Our results thus confirm several hypotheses about the determinants of using a secondary currency.
    Keywords: Flow of funds ; Dollar, American ; Currency substitution
    Date: 2009
  19. By: Benk, Szilárd; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper shows that US GDP velocity of M1 money has exhibited long cycles around a 1.25% per year upward trend, during the 1919-2004 period. It explains the velocity cycles through shocks constructed from a DSGE model and annual time series data (Ingram et al., 1994). Model velocity is stable along the balanced growth path, which features endogenous growth and decentralized banking that produces exchange credit. Positive shocks to credit productivity and money supply increase velocity, as money demand falls, while a positive goods productivity shock raises temporary output and velocity. The paper explains such velocity volatility at both business cycle and long run frequencies. With filtered velocity turning negative, starting during the 1930s and the 1987 crashes, and again around 2003, results suggest that the money and credit shocks appear to be more important for velocity during less stable times and the goods productivity shock more important during stable times.
    Keywords: Volatility; business cycle; credit shocks; velocity
    JEL: E13 E32 E44
    Date: 2009–11
  20. By: Moritz Schularick; Alan M. Taylor
    Abstract: The crisis of 2008–09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870– 2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are “credit booms gone wrong” and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  21. By: Florentina Manea
    Abstract: This paper investigates the exchange rate pass-through (ERPT) into import prices, producer prices and several different measures of consumer prices indices for Romanian economy. In order to determine the size, describe the dynamics and identify the asymmetries in ERPT the paper employs an array of econometric methods belonging to the VAR family. The methods range from RVARS (on different price indices and/or on a rolling window), Sign-restriction VARs (also using different consumer inflation measures), MS-VAR, TAR and SETAR, the last three methods being naturally equipped to capture various types of asymmetries. The results point to an almost complete pass-through into import prices and incomplete passthrough into producer and consumer prices. In all cases except import prices the ERPT displays a decline in magnitude over the analysed time interval. The paper also finds important asymmetries with respect to sign and size of the exchange rate, size of inflation and time period.
    Keywords: exchange rate pass-through, MS-VAR, TAR, SETAR
    Date: 2009–11
  22. By: Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marie Hoerova (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We study the functioning of secured and unsecured interbank markets in the presence of credit risk. The model generates empirical predictions that are in line with developments during the 2007-2009 financial crises. Interest rates decouple across secured and unsecured markets following an adverse shock to credit risk. The scarcity of underlying collateral may amplify the volatility of interest rates in secured markets. We use the model to discuss various policy responses to the crisis. JEL Classification: G01, G21, E58.
    Keywords: Financial crisis, Interbank market, Liquidity, Credit risk, Collateral.
    Date: 2009–11
  23. By: Khemraj, Tarron
    Abstract: This paper reports aggregate bank excess liquidity preference curves for the pre-crisis and crisis periods. It is argued that the flat curve reflects a threshold lending rate at which point banks accumulate reserves passively. Moreover, the expansion of reserves – when the lending rate threshold is binding – does not lead to credit expansion. The latter would require policies that directly increase the demand for loans, particularly by the business sector.
    Keywords: bank reserves; minimum loan interest rate; credit crunch
    JEL: E40 E41 G21
    Date: 2009–10
  24. By: Carlos Arteta; Steven B. Kamin; Justin Vitanza
    Abstract: In the past decade, some observers have noted an unusual aspect of the Mexican peso's behavior: During periods when the U.S. dollar has risen (fallen) against other major currencies such as the euro, the peso has risen (fallen) against the dollar. Very few other currencies display this behavior. In this paper, we attempt to explain the unusual pattern of the peso's correlation with the dollar by developing some general empirical models of exchange rate correlations. Based on a study of 29 currencies, we find that most of the cross-country variation in exchange rate correlations with the dollar and the euro can be explained by just a few variables. First, a country's currency is more likely to rise against the dollar as the dollar rises against the euro, the closer it is to the United States and the farther it is from the euro area. In this result, distance likely proxies for the role of economic integration in affecting exchange rate correlations. Second, and perhaps more surprisingly, a country's currency is more likely to exhibit this unusual pattern when its sovereign credit rating is more risky. This may reflect that currencies of riskier countries are less substitutable in investor portfolios than those of better-rated countries. All told, these factors well explain the peso's unusual behavior, as Mexico both is very close to the United States and has a lower credit rating than most industrial economies.
    Date: 2009
  25. By: António Portugal Duarte (Faculdade de Economia/GEMF, Universidade de Coimbra); João Sousa Andrade (Faculdade de Economia/GEMF, Universidade de Coimbra); Adelaide Duarte (Faculdade de Economia/GEMF, Universidade de Coimbra)
    Abstract: The aim of this study is to assess to what extent the Portuguese participation in the European Monetary System (EMS) has been characterized by mean reverting behaviour, as predicted by the exchange rate target zone model developed by Krugman (1991). For this purpose, a new class of mean reversion tests is introduced. The empirical analysis of mean reversion in the Portuguese exchange rate shows that most of the traditional unit root and stationarity tests point to the nonstationarity of the exchange rate within the band. However, using a set of variance-ratio tests, it was possible to detect the presence of a martingale difference sequence. This suggests that the Portuguese foreign exchange market has functioned efficiently, allowing us to conclude that the adoption of an exchange rate target zone regime has contributed decisively to the creation of the macroeconomic stability conditions necessary for the participation of Portugal in the euro area.
    Keywords: difference sequence, mean reversion, stationarity, target zones and unit roots
    JEL: C32 C51 F31 F41 G15
    Date: 2009–11
  26. By: Brzoza-Brzezina, Michal; Makarski, Krzysztof
    Abstract: We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by a little over one percent.
    Keywords: credit crunch; monetary policy; DSGE with banking sector
    JEL: E32 E52 E44
    Date: 2009–11
  27. By: Bettina Landau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Frauke Skudelny (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this paper we analyse in a mark-up framework the pass-through of commodity price and exchange rate shocks to the main components of producer and consumer prices. Thereby we link movements in prices at the different production stages as firms set their prices as a mark-up over production costs. The empirical results reveal significant linkages between different price stages in the euro area. The overall results are roughly in line with the literature and provide insight into the effects at different stages of the production chain. Non-energy commodity prices turn out to be important determinants of euro area prices. JEL Classification: E31, E37.
    Keywords: Pass-through, producer prices, consumer prices, commodity prices, exchange rate.
    Date: 2009–11
  28. By: Martin Bodenstein; Christopher J. Erceg; Luca Guerrieri
    Abstract: In a two-country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound for policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. The duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the liquidity trap, implying more contractionary effects for the home country; conversely, large positive shocks can prompt an early exit, implying effects that are closer to those when the zero bound constraint is not binding.
    Date: 2009

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