nep-mon New Economics Papers
on Monetary Economics
Issue of 2009‒12‒05
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis By Filippo COSSETTI; Francesco GUIDI
  2. Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool By Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
  3. Price stability and inflation persistence during the international gold standard: The Scandinavian case By ola Grytten; Arngrim Hunnes
  4. Optimal Monetary Policy during Endogenous Housing-Market Boom-Bust Cycles By Hajime Tomura
  5. Unconventional monetary policies: an appraisal By Claudio Borio; Piti Disyatat
  6. An Optimum-Currency-Area Odyssey By Harris Dellas; George S.Tavlas
  7. Lending Relationships and Monetary Policy By Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez
  8. Testing the Monetary Policy Rule in the US: a Reconsideration of the Fed’s Behaviour By Minford, Patrick; Ou, Zhirong
  9. International spillover effects and monetary policy activism By Lipinska, Anna; Spange, Morten; Tanaka, Misa
  10. Money supply and Greek history monetary statistics: definition, construction, sources and data By Sophia Lazaretou
  11. Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008 By Schularick, Moritz; Taylor, Alan M.
  12. Limitations on the Effectiveness of Forward Guidance at the Zero Lower Bound By Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
  13. Ten propositions about liquidity crises By Claudio Borio
  14. Can the Fiscal Theory of the price Level explain UK inflation in the 1970s? By Fan, Jingwen; Minford, Patrick
  15. Benchmark bonds interactions under regime shifts By Dimitris A. Georgoutsos; Petros M. Migiakis
  16. Robust Optimization of Currency Portfolios By Raquel J. Fonseca; Steve Zymler; Wolfram Wiesemann; Berc Rustem
  17. Fractional Integration and Cointegration: Testing the Term Structure of Interest Rates By Marco R Barassi; Dayong Zhang
  18. A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico By José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia
  19. Bagehot for beginners: The making of lending of last resort operations in the mid-19th century By Vincent Bignon; Marc Flandreau; Stefano Ugolini
  20. Interpreting a crisis: trade and money debates in England during the parliament of 1621 By Carlos Eduardo Suprinyak

  1. By: Filippo COSSETTI (Universita' Politecnica delle Marche, Dipartimento di Economia); Francesco GUIDI (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: This paper aims to explore the effects of the ECB monetary policy on the Euro area yield curve. Using cointegration techniques, this paper investigates the long-run relationships among the EONIA and Euro area money market interest rates. Results show that presence of cointegration was rejected for maturities longer than six years, implying that European Central Bank monetary policy actions do not exert significant impact on the entire spectrum of the yield curve. In addition, we also consider the transmission of EONIA interest rate volatility to the money market interest rates using EGARCH models. We find that EONIA volatility is transmitted to short and medium-period interest rates, whereas longer-term rates are not affected.
    Keywords: EGARCH models, Monetary policy, cointegration, term structure of interest rates
    JEL: E42 E43 E58
    Date: 2009–11
  2. By: Gabriel Pérez Quirós; Hugo Rodríguez Mendizábal
    Abstract: This paper analyzes the role of standing facilities in the determination of the demand for reserves in the overnight money market. In particular, we study how the asymmetric nature of the deposit and lending facilities could be used as a powerful policy tool for the simultaneous control of prices and quantities in the market for daily funds.
    Keywords: Monetary policy implementation; standing facilities; overnight interest rates; fine-tuning operations.
    JEL: E52 E58 E43
    Date: 2009–11–29
  3. By: ola Grytten (Norwegian School of Economics and Business Administration (NHH)); Arngrim Hunnes (University of Agder (UiA))
    Abstract: In the 1870s the three Scandinavian countries Denmark, Norway and Sweden formed the Scandinavian Currency Union. Both the adoption of gold and the monetary union were supposed to lead to price stability in and between these countries. By drawing on new indices of consumer prices the present paper offers an examination of inflation dynamics, defined as price stability and inflation persistence, in the periphery of Scandinavia during the heyday of the international gold standard.
    Keywords: Currency union, Gold Standard, Inflation persistence, Price stability, Scandinavia
    JEL: E31 E42 N13
    Date: 2009–11–11
  4. By: Hajime Tomura
    Abstract: This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. The model shows that boom-bust cycles in house prices emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. These boom-bust cycles replicate the stylized features of housing-market boom-bust cycles in industrialized countries. In an environment where mortgage borrowers are occasionally over-optimistic, the central bank should be less responsive to inflation, more responsive to output, and slower to adjust the nominal policy interest rate. This optimal monetary policy rule dampens endogenous boom-bust cycles in house prices, but prolongs inflation target horizons due to weak policy reactions to inflation fluctuations after fundamental shocks.
    Keywords: Credit and credit aggregates; Financial stability; Inflation targets
    JEL: E44 E52
    Date: 2009
  5. By: Claudio Borio; Piti Disyatat
    Abstract: The recent global financial crisis has led central banks to rely heavily on "unconventional" monetary policies. This alternative approach to policy has generated much discussion and a heated and at times confusing debate. The debate has been complicated by the use of different definitions and conflicting views of the mechanisms at work. This paper sets out a framework for classifying and thinking about such policies, highlighting how they can be viewed within the overall context of monetary policy implementation. The framework clarifies the differences among the various forms of unconventional monetary policy, provides a systematic characterisation of the wide range of central bank responses to the crisis, helps to underscore the channels of transmission, and identifies some of the main policy challenges. In the process, the paper also addresses a number of contentious analytical issues, notably the role of bank reserves and their inflationary consequences.
    Keywords: unconventional monetary policy, balance sheet policy, credit policy, quantitative easing, credit easing, monetary policy implementation, transmission mechanism, interest rates
    Date: 2009–11
  6. By: Harris Dellas (University of Bern); George S.Tavlas (Bank of Greece)
    Abstract: The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime
    Keywords: Optimum-currency-areas; Exchange-rate regimes; New Keynesian models
    JEL: F33 F41
    Date: 2009–09
  7. By: Yunus Aksoy; Henrique S. Basso; Javier Coto-Martinez (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Financial intermediation and bank spreads are important elements in the analysis of business cycle transmission and monetary policy. We present a simple framework that introduces lending relationships, a relevant feature of financial intermediation that has been so far neglected in the monetary economics literature, into a dynamic stochastic general equilibrium model with staggered prices and cost channels. Our main findings are: (i) banking spreads move countercyclically generating amplified output responses, (ii) spread movements are important for monetary policy making even when a standard Taylor rule is employed (iii) modifying the policy rule to include a banking spread adjustment improves stabilization of shocks and increases welfare when compared to rules that only respond to output gap and inflation, and finally (iv) the presence of strong lending relationships in the banking sector can lead to indeterminacy of equilibrium forcing the central bank to react to spread movements.
    Date: 2009–10
  8. By: Minford, Patrick; Ou, Zhirong
    Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.
    Keywords: bootstrap simulation; indirect inference; Monetary policy; New Keynesian model; Taylor-type rules; the 'target rule'; VAR; Wald statistic
    JEL: E12 E17 E42 E52 E58
    Date: 2009–11
  9. By: Lipinska, Anna (Bank of England); Spange, Morten (Danmarks Nationalbank); Tanaka, Misa (Bank of England)
    Abstract: This paper examines how the preferences of a large economy’s central bank affect the trade-off between output and inflation volatility faced by the central bank of a small open economy by analysing the impact of a global cost-push shock. We demonstrate that under the assumption of producer currency pricing, the trade-off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilisation relative to inflation stabilisation; but the opposite is true in the case of local currency pricing.
    Keywords: Open economy; policy trade-offs; producer versus local currency pricing
    JEL: E58 F41 F42
    Date: 2009–11–27
  10. By: Sophia Lazaretou (Bank of Greece)
    Abstract: This paper attempts to provide, for the first time, a survey of the construction of estimates of the quantity of money in Greece since the inception of the National Bank of Greece in 1842 until the eve of WWII. Specifically, we describe in detail the methods of construction and the sources of data used in building these aggregates. We discuss the data collection procedure and publication practices. The end product is presented in a data appendix.
    Keywords: money; monetary aggregates; data; sources
    JEL: E51 N24
    Date: 2009–10
  11. By: Schularick, Moritz; Taylor, Alan M.
    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
    Keywords: banking; central banking; financial stability; liquidity; monetary policy
    JEL: E44 E51 E58 G20 N10 N20
    Date: 2009–11
  12. By: Levin, Andrew; López-Salido, J David; Nelson, Edward; Yun, Tack
    Abstract: The recent literature on monetary policy in the presence of a zero lower bound on interest rates has shown that forward guidance regarding the path of interest rates can be very effective in preserving macroeconomic stability in the face of a contractionary demand shock; moreover, that literature apparently leaves little scope for any further improvements in stabilization performance via nontraditional monetary policies. In this paper, we characterize optimal policy under commitment in a prototypical New Keynesian model and examine whether those conclusions are sensitive to the specification of the shock process and to the interest elasticity of aggregate demand. Although forward guidance is effective in offsetting natural rate shocks of moderate size and persistence, we find that the macroeconomic outcomes are much less appealing for larger and more persistent shocks, especially when the interest elasticity parameter is set to values widely used in the literature. Thus, while forward guidance could be sufficient for mitigating the effects of a 'Great Moderation'-style shock, a combination of forward guidance and other monetary policy measures - such as large-scale asset purchases - might well be called for in responding to a 'Great Recession'-style shock.
    Keywords: Forward Guidance; Optimal Policy under Commitment; Zero Lower Bound
    JEL: E32 E43 E52
    Date: 2009–11
  13. By: Claudio Borio
    Abstract: What are liquidity crises? And what can be done to address them? This short paper brings together some personal reflections on this issue, largely based on previous work. In the process, it questions a number of commonly held beliefs that have become part of the conventional wisdom. The paper is organised around ten propositions that cover the following issues: the distinction between idiosyncratic and systematic elements of liquidity crises; the growing reliance on funding liquidity in a market-based financial system; the role of payment and settlement systems; the need to improve liquidity buffers; the desirability of putting in place (variable) speed limits in the financial system; the proper role of (retail) deposit insurance schemes; the double-edged sword nature of liquidity provision by central banks; the often misunderstood role of "monetary base" injections in addressing liquidity disruptions; the need to develop principles for the provision of central bank liquidity; and the need to reconsider the preventive role of monetary (interest rate) policy.
    Keywords: market and funding liquidity, liquidity crises, deposit insurance, central bank operations, monetary base
    Date: 2009–11
  14. By: Fan, Jingwen (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: We investigate whether the Fiscal Theory of the Price Level can deliver a reasonable explanation for UK inflation in the 1970s, a period in which the government greatly increased public spending without raising taxes and monetary policy was accommodative. The model is tested using the method of indirect inference, under which the model's simulated behaviour is compared with the inflation time-series process. We find that the two are consistent.
    Keywords: UK Inflation; Fiscal Theory of the Price Level; Bootstrap simulation; Indirect inference; Wald statistic
    JEL: E31 E37 E62 E65
    Date: 2009–11
  15. By: Dimitris A. Georgoutsos (Athens University of Economics & Business); Petros M. Migiakis (Bank of Greece)
    Abstract: In the present paper we examine interactions among five benchmark ten year government bonds, namely those of the US, Germany, France, Italy and the Netherlands. Our aim is to illustrate empirically a network of interactions existing among the major bond markets of Europe and the US market taking into account shifts in the underlying stochastic processes. For this purpose, and in contrast to the rest of the relevant empirical literature, after specifying the long-run equilibrium relations we estimate the linkages between the bond markets as subject to hidden Markov chains, by applying the Markov Switching Vector Error Correction framework (MS-VECM). This formulation is found to efficiently reflect the shifts brought about by significant economic events, such as the European monetary unification. As a result we illustrate different short-run relations referring to the periods before and after monetary union. Overall, our empirical results indicate that stronger interactions between the markets of the system exist in the period after the EMU. Also, by means of a variance decomposition analysis we assess leader-follower relations which indicate that the benchmark status of bonds has changed since the introduction of the common monetary policy framework in Europe.
    Keywords: Financial integration; bond markets; benchmarks; Markov Switching
    JEL: F21 F37 G12 G15
    Date: 2009–09
  16. By: Raquel J. Fonseca; Steve Zymler; Wolfram Wiesemann; Berc Rustem
    Abstract: We study a currency investment strategy, where we maximize the return on a portfolio of foreign currencies relative to any appreciation of the corresponding foreign exchange rates. Given the uncertainty in the estimation of the future currency values, we employ robust optimization techniques to maximize the return on the portfolio for the worst-case foreign exchange rate scenario. Currency portfolios differ from stock only portfolios in that a triangular relationship exists among foreign exchange rates to avoid arbitrage. Although the inclusion of such a constraint in the model would lead to a nonconvex problem, we show that by choosing appropriate uncertainty sets for the exchange and the cross exchange rates, we obtain a convex model that can be solved efficiently. Alongside robust optimization, an additional guarantee is explored by investing in currency options to cover the eventuality that foreign exchange rates materialize outside the specified uncertainty sets. We present numerical results that show the relationship between the size of the uncertainty sets and the distribution of the investment among currencies and options, and the overall performance of the model in a series of backtesting experiments.
    Keywords: robust optimization, portfolio optimization, currency hedging, second-order cone programming
    Date: 2009–08–26
  17. By: Marco R Barassi; Dayong Zhang
    Abstract: The expectation hypothesis suggests there exists long run equilibrium of interest rate term structure. Two theoretical approaches proposed by Campbell and Shiller (1987) and Hall el al. (1992) suggest that the term spread of long-term and short-term interest rates should be a stationary I(0) process. However, an empirically non stationary term spread or rejection of cointegration between long and short interest rates, in the traditional sense need not to be considered against the simple theoretical model. It is likely that the dichotomy between I(1) or I(0) and/or integer values of cointegration are environments which are too restrictive to model the term structure. In this paper, we evaluate and apply some recent techniques on testing fractional integration and propose the use of a residual based approach which uses the Exact Local Whittle Estimator. The method is then used to investigate the term structure in the UK and the US.
    Keywords: Term Structure, Long Memory, Fractional Integration, Fractional Cointegration, Local Whittle Estimation
    JEL: C22 E43
    Date: 2009–11
  18. By: José Julián Sidaoui; Carlos Capistrán; Daniel Chiquiar; Manuel Ramos Francia
    Abstract: This note studies the causal relationship that may exist between the producer price index (PPI) and the consumer price index (CPI). In contrast with previous international studies, the results suggest that, in the case of Mexico, information on the PPI seems to be useful to improve forecasts of CPI inflation. In particular, CPI inflation responds significantly to disequilibrium errors with respect to the long-run relationship between consumer and producer prices. These results are based on in-sample and out-of-sample tests of Granger causality, in the context of an error correction model.
    Keywords: Cointegration, forecast evaluation, Granger causality, vector error correction.
    JEL: C32 C53 E31 E37
    Date: 2009–11
  19. By: Vincent Bignon (Graduate Institute, Geneva); Marc Flandreau (Graduate Institute, Geneva and CEPR, London); Stefano Ugolini (Graduate Institute, Geneva)
    Abstract: According to a Keynesian view, short term output fluctuations are normally demand side led. Since prices reflect demand, they should mirror output fluctuations. Thus, prices and output are expected to move in the same direction in the short run. The present paper investigates the historical co-movements of output and prices for a small open raw material based economy, in this case Norway 1830-2006. We find little evidence of a positive relationship. On the contrary, we rather find negative correlations between the two variables, indicating that supply side shocks through the foreign sector were more important for historical business cycles in Norway than assumed hitherto.
    Keywords: Lending of last resort, Bagehot, Bank of England, financial crises, history of monetary policy
    JEL: E58 N13
    Date: 2009–10–05
  20. By: Carlos Eduardo Suprinyak (Cedeplar-UFMG)
    Abstract: The parliament of 1621 witnessed extensive debating of economic issues by those engaged in finding solutions for the exacting crisis which then affected England. These proceedings offer the background against which some of the most relevant economic literature of the period was produced. As debates progressed, two contrasting perspectives gradually emerged. One of them argued that monetary imbalances were responsible for bullion outflows and sluggish economic activity, while the other believed that monetary flows were ultimately caused by an unfavorable balance of trade. These were exactly the same issues at stake in the controversy between Malynes and Misselden in the early 1620’s, to which Mun would provide a solution with his strict adherence to the balance of trade. Thus, through an analysis of economic debates in the 1621 parliament, this paper seeks to offer an essential element for understanding early XVII century British economic reasoning.
    Keywords: pre-classical economics; mercantilism; XVII century; Stuart England; Thomas Mun
    JEL: B11
    Date: 2009–11

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