nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒01‒16
43 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Optimal Structure of Monetary Policy Committees By Keiichi Morimoto
  2. The Role of Monetary Aggregates in the Policy Analysis of the Swiss National Bank By Gebhard Kirchgässner; Jürgen Wolters
  3. Real time underlying inflation gauges for monetary policymakers By Marlene Amstad; Simon Potter
  4. Emerging Economy Responses to the Global Financial Crisis of 2007-09: An Empirical Analysis of the Liquidity Easing Measures By Etienne B. Yehoue
  5. Inflation Targeting Twenty Years on: Where, When, Why, With what Effects, What lies ahead? By Klaus Schmidt-Hebbel.
  6. The Camp View of Inflation Forecasts By Felix Geiger; Oliver Sauter; Kai D. Schmid
  7. Countercyclical Macro Prudential Policies in a Supporting Role to Monetary Policy By Papa M'B. P. N'Diaye
  8. Systemic Liquidity Management in the U.A.E.: Issues and Options By Alexandre Chailloux; Dalia Hakura
  9. Inflation Targeting Pillars: Transparency and Accountability By Charles Freedman; Douglas Laxton
  10. The Demand for Excess Reserves in the Euro Area and the Impact of the Current Credit Crisis By Fátima Teresa Sol Murta; Ana Margarida Garcia
  11. The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market By Morten L. Bech; Elizabeth Klee
  12. The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil By Samuel Cheun; Isabel von Köppen-Mertes; Benedict Weller
  13. The search for co-integration between money, prices and income: low frequency evidence from the Turkish economy By Levent, Korap
  14. Macroeconomic Dynamics in Macedonia and Slovakia: Structural Estimation and Comparison By Melecky, Martin
  15. When Eastern Labour Markets Enter Western Europe. CEECs Labour Market Institutions upon Euro Zone Accession By Joanna Tyrowicz
  16. Anchors Away: How Fiscal Policy Can Undermine “Good” Monetary Policy By Eric M. Leeper
  17. Excess Comovements between the Euro/US dollar and British pound/US dollar exchange rates By Michael Kühl
  18. U.S. Monetary Policy and Stock Prices: Should the Fed Attempt to Control Stock Prices? By John, Tatom
  19. From Lombard Street to Avenida Paulista: Foreign Exchange Liquidity Easing in Brazil in Response to the Global Shock of 2008-09 By W. Christopher Walker; Yosuke Yasui; Mark R. Stone
  20. Asymmetric Response to Monetary Policy Surprises at the Long-End of the Yield Curve By Selva Demiralp; Kamil Yilmaz
  21. Quasi-Fiscal Policies of Independent Central Banks and Inflation By Seok Gil Park
  22. Inflation Volatility: An Asian Perspective By Rizvi, Syed Kumail Abbas; Naqvi, Bushra
  23. New estimates of overseas U.S. currency holdings, the Underground economy and the "Tax Gap" By Feige, Edgar L.
  24. Monetary policy and potential output uncertainty: a quantitative assessment. By Simona Delle Chiaie
  25. Forecast disagreement among FOMC members By Chanont Banternghansa; Michael W. McCracken
  26. Getting Talk Back on Target: The Exchange Rate and the Inflation Rate By David Laidler
  27. Monetary policy and the housing bubble By Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
  28. Regional and Sectoral Effects of a Common Monetary Policy: Evidence from Euro Referenda in Denmark and Sweden By Gabriel Ahlfeldt; Wolfgang Maennig; Tobias Osterheider
  29. The new macroeconometric model of the Polish economy By Katarzyna Budnik; Michal Greszta; Michal Hulej; Marcin Kolasa; Karol Murawski; Michal Rot; Bartosz Rybaczyk; Magdalena Tarnicka
  30. Macroeconomic Implications for Hong Kong SAR of Accommodative U.S. Monetary Policy By Papa M'B. P. N'Diaye
  31. Measuring consumer uncertainty about future inflation By Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
  32. Inflation Targeting Framework: Is the story different for Asian Economies? By Naqvi, Bushra; Rizvi, Syed Kumail Abbas
  33. Macro-finance models of interest rates and the economy By Glenn D. Rudebusch
  34. Inflation persistence By Jeffrey C. Fuhrer
  35. Improving Surveillance Across the CEMAC Region By Misa Takebe; Robert C. York; Noriaki Kinoshita; Plamen Iossifov; Zaijin Zhan
  36. Closed-form estimates of the New Keynesian Phillips Curve with time-varying trend inflation By Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
  37. The implications of inflation in an estimated new-Keynesian model By Pablo A. Guerron-Quintana
  38. Transitional Price Rises with the Adoption of the Euro: Aggregate and Disaggregate Sector Evidence By Marco G Ercolani
  39. Welfare costs of inflation when interest-bearing deposits are disregarded: A calculation of the bias By Cysne, Rubens Penha; Turchick, David
  40. On the social cost of transparency in monetary economies By David Andolfatto
  41. Inflation dynamics and the New Keynesian Phillips curve in EU-4 By Borek Vasicek
  42. Direct tests of the expectations theory of the term structure: Survey expectations, the term premium and coefficient biases By Smant, David / D.J.C.
  43. Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone By Przystupa, Jan

  1. 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 theoretical 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. It also explains why the committees have replaced the single policy makers in the actual central banks.
    Keywords: monetary policy, committee, delegation, imperfect information, higher order expectations
    JEL: D71 D84 E58
    Date: 2009–10
  2. 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: 2009–12
  3. By: Marlene Amstad; Simon Potter
    Abstract: Central banks analyze a wide range of data to obtain better measures of underlying inflationary pressures. Factor models have widely been used to formalize this procedure. Using a dynamic factor model this paper develops a measure of underlying inflation (UIG) at time horizons of relevance for monetary policymakers for both CPI and PCE. The UIG uses a broad data set allowing for high-frequency updates on underlying inflation. The paper complements the existing literature on U.S. "core" measures by illustrating how UIG is used and interpreted in real time since late 2005.
    Keywords: Inflation (Finance) ; Economic indicators ; Economic forecasting ; Monetary policy ; Banks and banking, Central
    Date: 2009
  4. By: Etienne B. Yehoue
    Abstract: This paper draws on a unique data set on the nontraditional systemic liquidity easing measures recently undertaken by many emerging market economies. It offers an empirical analysis of the key determinants affecting the decision to undertake these measures over the period September 2008-March 2009. The paper finds that economy size, access to international credit markets, CDS spreads, currency depreciation, and current account balances are among the key factors influencing the adoption of these measures. It provides a rationale for the differences in central bank policy responses, which reflect differences in economic structures rather than conflicting views on fundamental principles. The paper also provides a preliminary assessment of the effectiveness of these measures and points out that despite their positive impacts, they have not fully shielded the real economy from the recent financial meltdown.
    Keywords: Capital markets , Central bank policy , Cross country analysis , Currency swaps , Emerging markets , Financial crisis , Foreign exchange reserves , Global Financial Crisis 2008-2009 , Interest rate policy , Monetary measures , Monetary policy ,
    Date: 2009–12–02
  5. By: Klaus Schmidt-Hebbel. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: This paper looks back at 20 years of inflation targeting (IT) in the world, reviewing previous findings and reporting new cross-country and panel-data evidence on the determinants or IT regime choice and the results of IT adoption. After describing the where and when of IT adoption, the paper assesses the determinants of why countries choose this monetary regime against alternative candidates. Which have been the main results under IT? Next the paper focuses on several dimensions of monetary policy performance under IT. One is target achievement; beyond measuring cross-country differences in target deviations, the paper assesses empirically what lies behind those deviations. Two, it reviews monetary policy efficiency more broadly, comparing output and inflation volatility under IT to volatility observed in non-IT experiences. Three, it surveys descriptive evidence on monetary policy transparency attained under IT in comparison to other monetary regimes. A discussion of the very important challenges posed by the recent boom-and-bust cycle to IT close the paper.
    Keywords: Inflation targeting, inflation, monetary regimes
    JEL: E31 E52 C53
    Date: 2009
  6. By: Felix Geiger; Oliver Sauter; Kai D. Schmid
    Abstract: Analyzing sample moments of survey forecasts, we derive disagreement and un- certainty measures for the short- and medium term inflation outlook. The latter provide insights into the development of inflation forecast uncertainty in the context of a changing macroeconomic environment since the beginning of 2008. Motivated by the debate on the role of monetary aggregates and cyclical variables describing a Phillips-curve logic, we develop a macroeconomic indicator spread which is assumed to drive forecasters’ judgments. Empirical evidence suggests procyclical dynamics between disagreement among forecasters, individual forecast uncertainty and the macro-spread. We call this approach the camp view of inflation forecasts and show that camps form up whenever the spread widens.
    Keywords: monetary policy, survey forecasts, inflation uncertainty, heterogenous beliefs and expectations, monetary aggregates
    JEL: E47 E51 E52 E58 E66
    Date: 2009–12
  7. By: Papa M'B. P. N'Diaye
    Abstract: This paper explores how prudential regulations can support monetary policy in reducing output fluctuations while maintaining financial stability. It uses a new framework that blends a standard model for monetary policy analysis with a contingent claims model of financial sector vulnerabilities. The results suggest that binding countercyclical prudential regulations can help reduce output fluctuations and lessen the risk of financial instability. More specifically, countercyclical rules such as countercyclical capital adequacy rules, can allow monetary authorities to achieve the same output and inflation objectives but with smaller adjustments in interest rates. The countercyclical rules can help stem swings in asset prices, lean against a financial accelerator process, and thereby help to lower risks of macroeconomic and financial instability. In economies with fixed exchange rates, where countercyclical monetary policy is not possible, prudential regulations can provide a useful mechanism for mitigating a run-up in asset prices and for promoting output stability.
    Keywords: Asset prices , Capital , Economic models , Financial stability , Inflation , Market interest rates , Monetary policy ,
    Date: 2009–11–19
  8. By: Alexandre Chailloux; Dalia Hakura
    Abstract: The paper analyzes the U.A.E.'s liquidity management framework in the context of the 2008 global financial crisis and the measures taken by the Central Bank of the U.A.E. to ease liquidity pressures in the second half of 2008. Drawing also on an empirical analysis of data for 15 U.A.E. banks through end-2008, the paper emphasizes the importance of making available to banks additional instruments to manage their liquidity as well as to strengthen the monitoring of a more comprehensive set of liquidity risk indicators. As regards the former, the paper discusses the merits and scope for the U.A.E. to introduce a domestic bond market.
    Keywords: Banking sector , Central bank policy , Exchange rate regimes , Financial crisis , Financial instruments , Global Financial Crisis 2008-2009 , Liquidity management , Monetary measures , Monetary policy , Monetary unions , United Arab Emirates ,
    Date: 2009–12–01
  9. By: Charles Freedman; Douglas Laxton
    Abstract: This is the fourth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation- Targeting Regimes: Saying What You Do and Doing What You Say." It examines a number of issues related to transparency and accountability in an inflation-targeting regime. It first looks at the factors behind the move to increased transparency in recent years and the important role of a communications strategy in transparency. It then turns to the role of the forecast in communications, how risks surrounding the forecast are communicated, and whether there should be limits on what is made public. It concludes with a short discussion of accountability.
    Keywords: Central bank policy , Central banks , Inflation , Inflation targeting , Monetary policy , Transparency ,
    Date: 2009–12–02
  10. By: Fátima Teresa Sol Murta (Faculdade de Economia/GEMF, Universidade de Coimbra); Ana Margarida Garcia (Faculdade de Economia, Universidade de Coimbra)
    Abstract: One of the risks that banks need to manage, in their financial intermediation activities, is liquidity risk. Thus, banks hold reserves for precautionary reasons, in order to keep enough cash to meet their obligations. In this work, we analyze the demand for excess reserves by Euro Area banks, since the change in the framework of the single monetary policy in March 2004. Our main conclusions are that there is a positive relationship between the demand for reserves and its financing cost and also that the environment of uncertainty present in the credit crisis is not significant in the demand for excess reserves: the ECB achieved control over the money market tensions.
    Keywords: banks; excess reserves; liquidity risk
    JEL: G21 E52 E58
    Date: 2010–01
  11. By: Morten L. Bech; Elizabeth Klee
    Abstract: To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, following the policy change, the effective federal funds rate remained below not only the target but also the rate paid on reserve balances. We develop a model to explain this phenomenon and use data from the federal funds market to evaluate it empirically. In turn, we show how successful the Federal Reserve may be in raising the federal funds rate even in an environment with substantial reserve balances.
    Keywords: Federal funds market (United States) ; Federal funds rate ; Bank reserves
    Date: 2009
  12. By: Samuel Cheun (Federal Reserve Bank of New York, United States of America.); Isabel von Köppen-Mertes (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Benedict Weller (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: In response to the turmoil in global financial markets which began in the second half of 2007, central banks have changed the way in which they implement monetary policy. This has drawn particular attention to the type of collateral used for backing central banks’ temporary open market operations and the range of counterparties which can participate in these operations. This paper provides an overview of the features of the different operational and collateral frameworks of three central banks that have been significantly affected by the crisis: the Eurosystem, the Federal Reserve System and the Bank of England. The paper describes the factors that shaped the three frameworks prior to the turmoil. It then describes the actions the three central banks took in response to the turmoil and analyses to what extent these actions were dependent on the initial design of the operational and collateral framework. JEL Classification: E52, E58, G01, G20.
    Keywords: Collateral Framework, Central Bank Repo Auctions, Collateral, Open Market Operations, Financial Market Turmoil 2007-2009.
    Date: 2009–12
  13. By: Levent, Korap
    Abstract: In this paper, we aim to test the empirical validity of the QTM relationship for the Turkish economy. Using some contemporaneous time series estimation techniques, our estimation results reveal that stationarity characteristics of the velocities of currency in circulation and the broad money aggregate in the economy cannot be rejected through a quantity theoretical co-integrating long-term variable space. We find that there exists an about one-to-one proportionality between money and prices and money and real income, and that the exogeneity of money cannot be rejected for the currency in circulation in the economy. But, the exception here comes from the broad monetary aggregate used in the QTM equation such that money seems to be endogenous as for the long-term variable space.
    Keywords: Money ; Prices ; Income ; Quantity Theory of Money ; Co-integration ; Long-span Data ; Turkish Data ;
    JEL: C32 E51 E52 E61
    Date: 2009
  14. By: Melecky, Martin
    Abstract: This paper estimates the structural model of Linde et al. (2008) using data for Macedonia and Slovakia. A comparison of the estimated model parameters suggest that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions present Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia’s macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia’s variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets.
    Keywords: Structural Open-Economy Model; Bayesian Estimation; Eastern European Transition Economies.
    JEL: E32 E50 F41
    Date: 2010–01
  15. By: Joanna Tyrowicz (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics)
    Abstract: This paper reviews the literature on the labour market institutions in European Union Member States in the context of monetary integration. Traditionally, labour markets are a key concept in the optimal currency area theory, playing the role of the only accommodation mechanism of asymmetric shocks after the monetary unification. There are several theoretical frameworks linking the institutional design of the labour market to the potential effectiveness of monetary policy in the context of currency areas. Many empirical studies addressed these issues too, yielding important policy implications for labour market reforms in the process of monetary unification. However, there seem to be "white spots” in this patchwork, which may actually be particularly useful from the perspective of CEECs upon the accession to the euro zone. We suggest these research directions encompassing labour supply and theoretical frameworks of labour market flexibility benchmarking in the context of monetary integration.
    Keywords: labour market institutions, monetary integration, labour market reform, CEECs, EMU
    Date: 2009–07
  16. By: Eric M. Leeper (Indiana University)
    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 ex- penditures. 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 “good” monetary policy behavior 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 con- frontingmonetary policy are exacerbated when policy institutions leave fiscal objectives and targets unspecified and, therefore, fiscal expectations unanchored.
    Date: 2009–11
  17. By: Michael Kühl
    Abstract: The aim of this paper is to discuss excess comovements for the Euro/US dollar and British pound/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by fundamentals. The results of the empirical analysis give evidence that excess comovements indeed exist. A long-run analysis on correlations can verify that the correlations dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply are linked. We found that money supply and prices play major roles. From the investigation of our exchange rate pair it becomes obvious that non-fundamental factors in exchange rates have an important meaning for modelling foreign exchange rates.
    Keywords: Foreign Exchange Market, DCC-GARCH, Excess Comovements
    JEL: E44 F31 G15
    Date: 2009–11–18
  18. By: John, Tatom
    Abstract: This article rejects the linkages in proposals that the Federal Reserve Bank (Fed) target equity prices. The real federal funds rate (RFF) and stock prices (SP) are uncorrelated; causality tests show a positive effect of SP on RFF and a negative effect of SP on RFF. These results occur as part of the dynamics of a negative cointegrated relationship between SP and RFF. A theoretically expected inverse relation between SP and inflation accounts for the results. The negative effect of SP on FF is also confirmed in a Taylor Rule estimate. Higher stock prices anticipate lower, not higher, inflation.
    Keywords: Monetary Policy; Bubbles; Asset Prices; Inflation.
    JEL: E32 G12 E58 E52
    Date: 2009–12–01
  19. By: W. Christopher Walker; Yosuke Yasui; Mark R. Stone
    Abstract: The provision of foreign exchange liquidity by emerging market central banks during the global shock of 2008-09 departs from the domestic liquidity lender of last resort role described by Bagehot in his classic "Lombard Street." This paper documents and analyzes the foreign exchange liquidity providing measures of the Banco Central do Brasil (BCB) in response to varied market stresses. These measures appear to have reduced the relative onshore cost of dollar liquidity on impact and seemed to stabilize market expectations of exchange rate volatility. The results suggest that foreign exchange liquidity easing operations may become a standard central bank tool.
    Keywords: Brazil , Capital markets , Central bank policy , Currency swaps , Domestic liquidity , Emerging markets , Exchange rate policy , Financial crisis , Foreign exchange operations , Global Financial Crisis 2008-2009 , Liquidity management ,
    Date: 2009–11–24
  20. By: Selva Demiralp (Koc University); Kamil Yilmaz (Koc University)
    Abstract: This paper provides a dynamic analysis of the responsiveness of asset markets to monetary policy path revisions. In an era of increased transparency and gradualism in policy making, one might expect an increased response to path revisions in asset markets as the policy actions become more predictable over longer horizons. Using federal funds futures contracts to extract near-term path revisions, we find that the responsiveness of Treasury securities to path revisions is significantly asymmetric, increasing during cycles of tightenings and declining during easings. This is consistent with the earlier literature that documents asymmetric effects of monetary policy on output.Length: 34 pages
    Keywords: Asymmetric monetary policy; yield curve; federal funds futures
    JEL: E44 E52
    Date: 2009–12
  21. By: Seok Gil Park (Indiana University)
    Abstract: Recently, central banks expanded their balance sheets by unconventional actions, including credit easing operations. Although such quasi-?scal operations are signi?cant in size and assumed to be crucial for the economy?s recovery, little theory is available to explain the possible macroeconomic consequences of these operations. The main contribution of this paper is to show that quasi-?scal shocks may a¤ect in?ation in plausible cases by utilizing a simple DSGE model that embraces the budgetary inde- pendence of the central banks. In the active quasi-?scal policy regime, the shocks in the central bank?s earnings alter the private agent?s portfolio between consumption and the nominal money balance, thus a¤ecting in?ation. Conventional macroeconomic models have implicitly assumed policy regimes in which the aforementioned mechanism does not restrict equilibria; however, this paper shows that such assumptions generally are not guaranteed to hold. The extensions of the basic model show that quasi-?scal shocks may produce undesirable e¤ects, such as in?ation following de?ationary mone- tary policy during the implementation of exit strategy.
    Date: 2009–10
  22. By: Rizvi, Syed Kumail Abbas; Naqvi, Bushra
    Abstract: The primary purpose of this study is to model and analyze inflation volatility in ten selected Asian economies. We used quarterly data of inflation from 1987Q1 to 2008Q4 to model inflation volatility as time varying process through different symmetric and asymmetric GARCH specifications. We also proposed to model inflation volatility on the basis of cyclic component of inflation obtained from HP filter, instead of actual inflation when the latter does not fulfill the criterion of stationarity. Through news impact curves we tried to highlight the behavior of inflation volatility in response to lagged inflation shocks, under different GARCH specifications for selected economies. Bivariate granger causality test is also applied to analyze the direction of causality between inflation and different volatility estimates. We get few important results. At first, leverage parameter shows expected sign and is significant for almost all countries suggesting strong asymmetry in inflation volatility. The hyperbolic sign integral shape of news impact curves based on GJR-GARCH is not only consistent with the results of our previous study based on Pakistani data (Rizvi and Naqvi, 2008) but also highlight the importance of inflation stabilization programs particularly because of the subsequent evidences obtained in favor of bidirectional causality running between inflation and inflation volatility. We also found that cyclic component of inflation could be a suitable proxy of inflation for volatility estimation.
    Keywords: Inflation Volatility, Uncertainty, GJR-GARCH, EGARCH, Asymmetry, Asia, Asian
    JEL: E31 C22 E37
    Date: 2009–08–01
  23. By: Feige, Edgar L.
    Abstract: This paper examines the ‘currency enigma” which arises because despite financial innovation that has created important new substitutes for cash usage, U.S. per capita currency holdings now amount to $2700. American households and businesses admit to holding only 15 percent of the stock of currency outside of the banking system. Some fraction of unaccounted for currency is held overseas (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions involving incomes that are not reported to the IRS (the underground economy hypothesis). We first revisit the longstanding controversy concerning the fraction of U.S. currency held abroad and find that newly revised estimates of U.S. overseas currency stocks estimates the fraction overseas at 37 percent, rather than the widely cited figure of 65 percent. A more refined proxy places the fraction abroad closer to 30 percent. New estimates of overseas holdings permit calculation of domestic currency holdings, as well as narrow and broad measures of domestic monetary aggregates. These are tested to determine their ability to predict fluctuations in real output and prices. The domestic currency figures are then used to estimate the current amount of “unreported income” which approaches $2 trillion, implying a “tax gap” in 2008 of between $446- $490 billion.
    Keywords: Underground economy; unreported income; unobserved economy; tax gap; cash; overseas currency; monetary aggregates; output; inflation.
    JEL: O17 E52 E26 H26 E41
    Date: 2009–09
  24. By: Simona Delle Chiaie (Oesterreichische National Bank, Economic Studies Division, Otto-Wagner Platz 3, 1090 Wien, Austria.)
    Abstract: I estimate a dynamic stochastic general equilibrium model where the policymaker and the private sector have imperfect knowledge about potential output. The estimation of the structural parameters and of the monetary authorities’objectives is key to assess the quantitative relevance of the imperfect information problem and to evaluate the robustness of previous exercises based on calibration. The estimated model also allows me to revisit the Orphanides (2001, 2003) findings that the central bank can make large and persistent mistakes to estimate potential output in response to productivity and cost shocks. I find that when real unit labor cost is used as a monetary policy indicator, the potential output uncertainty has quantitatively negligible consequences on policy behaviour and inflation dynamics. JEL Classification: E4, E5.
    Keywords: Monetary policy, potential output uncertainty, indicator variables, real unit labor cost.
    Date: 2009–12
  25. By: Chanont Banternghansa; Michael W. McCracken
    Abstract: This paper presents empirical evidence on the disagreement among Federal Open Market Committee (FOMC) forecasts. In contrast to earlier studies that analyze the range of FOMC forecasts available in the Monetary Policy Report to the Congress, we analyze the forecasts made by each individual member of the FOMC from 1992 to 1998. This newly available dataset, while rich in detail, is short in duration. Even so, we are able to identify a handful of patterns in the forecasts related to i) forecast horizon; ii) whether the individual is a Federal Reserve Bank president, governor, and/or Vice Chairman; and iii) whether individual is a voting member of the FOMC. Additional comparisons are made between forecasts made by the FOMC and the Survey of Professional Forecasters.
    Keywords: Federal Open Market Committee ; Monetary policy ; Economic forecasting
    Date: 2009
  26. By: David Laidler (C.D. Howe Institute)
    Abstract: Recent efforts by the Bank of Canada to “talk down” the dollar in its public statements have led to public perceptions that the Bank is considering action to weaken it.In permitting this response to gather momentum, the Bank has stepped onto a slippery slope, because if talk seems to be failing, people might reasonably expect direct intervention in the exchange market to follow.
    Keywords: Bank of Canada, inflation rate, exchange rate
    JEL: E58 E31 F31 E4
    Date: 2009–12
  27. By: Jane Dokko; Brian Doyle; Michael T. Kiley; Jinill Kim; Shane Sherlund; Jae Sim; Skander Van den Heuvel
    Abstract: We examine the role of monetary policy in the housing bubble. Our review examines the setting of monetary policy in the middle of this decade, the impetus from monetary policy to the housing market, and other factors that may have contributed to the run-up, and subsequent collapse, in house prices.
    Date: 2009
  28. By: Gabriel Ahlfeldt (Chair for Economic Policy, University of Hamburg); Wolfgang Maennig (Chair for Economic Policy, University of Hamburg); Tobias Osterheider
    Abstract: This article provides empirical evidence for the (anticipated) net costs and benefits of a common monetary policy that varies across regions depending on the industry mix. The paper is the first to approach the issue of the regional and sectoral effects of a common monetary policy by using empirical spatial models to analyze referenda. Here, the referenda examined are the 2000 and 2003 referenda held in Denmark and Sweden regarding participation in the EMU. We find that voters in regions with a high proportion of interest-sensitive sectors and low international integration tend to oppose participation in a currency union. The opposite is true for non-interest-sensitive sectors with relatively high integration. These findings are in line with the hypothesis of rational voters maximizing utility. Furthermore, perceived net costs are found to increase with distance from the European core and with the age of voters, indicating that a national currency represents an experience good. These results are robust to spatial dependencies and are not driven by broader forms of Euro-skepticism.
    Keywords: EMU, Euro, Regional & Sectoral Effects of Monetary Policy, Public Referenda, Denmark, Sweden
    JEL: E52 P16 R12
    Date: 2009
  29. By: Katarzyna Budnik (National Bank of Poland, Economic Institute); Michal Greszta (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics); Michal Hulej (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Karol Murawski (National Bank of Poland, Economic Institute); Michal Rot (National Bank of Poland, Economic Institute); Bartosz Rybaczyk (National Bank of Poland, Economic Institute); Magdalena Tarnicka (National Bank of Poland, Economic Institute)
    Abstract: This paper presents the structural macroeconometric model of the Polish economy, NECMOD, which was developed foremost to facilitate implementation of the monetary policy in Poland through a regular delivery of inflation and GDP projections. The model encompasses all major channels of the monetary policy transmission mechanism and is able to deliver a comprehensive account of factors underlying the main economic developments. With its complex labour market structure, explicit incorporation of inflation expectations, distortionary fiscal policy and heterogeneity of the capital stock, NECMOD is able to describe propagation of a range of macroeconomic shocks. As a forecasting and simulation tool, the model is specifically designed to reflect the dynamic nature of a converging economy.
    Date: 2009
  30. By: Papa M'B. P. N'Diaye
    Abstract: This paper discusses the potential macroeconomic implications for Hong Kong SAR of accommodative monetary policy in the United States. It shows, through model simulations, that a resumption of the credit channel in Hong Kong SAR has the potential to create inflation in both goods and asset markets. Expansionary financial conditions will likely have a greater impact in fueling asset price inflation, manifested in the model through a strong increase in equity prices. Higher asset prices could, in turn, through a financial accelerator mechanism, lead to further credit expansion and an upward cycle of asset prices and credit. This cycle, if unchecked, can potentially feed into volatility in consumption, output and employment and complicate macroeconomic management. The simulation results suggest there is a role for countercyclical prudential regulations to mitigate the amplitude of the cycle and lessen the financial and macroeconomic volatility associated with an unwinding of the credit-asset price cycle.
    Keywords: Asset prices , Business cycles , Credit expansion , Economic models , Exchange systems , Fiscal policy , Hong Kong Special Administrative Region of China , Monetary policy , Monetary transmission mechanism , United States ,
    Date: 2009–11–19
  31. By: Wandi Bruine de Bruin; Charles F. Manski; Giorgio Topa; Wilbert van der Klaauw
    Abstract: Survey measures of consumer inflation expectations have an important shortcoming in that, while providing useful summary measures of the distribution of point forecasts across individuals, they contain no direct information about an individual's uncertainty about future inflation. The latter is important not only for forecasting inflation and other macroeconomic outcomes, but also for assessing a central bank's credibility and effectiveness of communication. This paper explores the feasibility of eliciting individual consumers' subjective probability distributions of future inflation outcomes. ; In November 2007, we began administering web-based surveys to participants in RAND's American Life Panel. In addition to their point predictions, respondents were asked for their subjective assessments of the percentage chance that inflation will fall in each of several predetermined intervals. We find that our measures of individual forecast densities and uncertainty are internally consistent and reliable. Those who are more uncertain about year-ahead price inflation are also generally more uncertain about longer term price inflation and future wage changes. We find also that participants expressing higher uncertainty in their density forecasts make larger revisions to their point forecasts over time. Measures of central tendency derived from individual density forecasts are highly correlated with point forecasts, but they usually differ, often substantially, at the individual level. ; Finally, we relate our direct measure of aggregate consumer uncertainty to a more conventional approach that uses disagreement among individual forecasters, as seen in the dispersion of their point forecasts, as a proxy for forecast uncertainty. Although the two measures are positively correlated, our results suggest that disagreement and uncertainty are distinct concepts, both relevant to the analysis of inflation expectations.
    Keywords: Consumer surveys ; Inflation (Finance) ; Economic forecasting
    Date: 2009
  32. By: Naqvi, Bushra; Rizvi, Syed Kumail Abbas
    Abstract: This paper aims to measure and compare the economic performance of four Asian economies who adopted Inflation Targeting (Indonesia, Philippines, South Korea and Thailand) against their six neighboring Asian non-targeting economies (China, Hong Kong, India, Malaysia, Singapore and Pakistan). Using the methodology of Ball and Sheridan, firstly, behavior of inflation, output growth and short term interest rate has been measured for both groups (Targeters vs. Non-Targeters) in pre and post IT adoption period in order to see whether performance has improved in targeting countries after the adoption of IT. Secondly, we try to find out whether Inflation Targeting has played any significant role in the changed behavior of these variables. Thirdly, we measure the effect of output gap and supply shock on inflation and see whether economic structure of these countries has changed between pre and post targeting period; and then we measure the role of IT in the structural change of these economies if there is any. The results force us to believe that economic performance has improved in all Asian economies in post targeting period. However, IT does not seem to play any significant role in this improvement of targeting countries. In addition to this, we find strong evidence that all variables showed strong reversion to mean suggesting that improved performance of variables today is in fact the outcome of poor economic performance in the past.
    Keywords: Inflation Targeting; Asian countries; Output gap; Targeters vs Non Targeters; Economic Performance
    JEL: E30 E31 E58 E52
    Date: 2009–06–01
  33. By: Glenn D. Rudebusch
    Abstract: During the past decade, much new research has combined elements of finance, monetary economics, and macroeconomics in order to study the relationship between the term structure of interest rates and the economy. In this survey, I describe three different strands of such interdisciplinary macro-finance term structure research. The first adds macroeconomic variables and structure to a canonical arbitrage-free finance representation of the yield curve. The second examines bond pricing and bond risk premiums in a canonical macroeconomic dynamic stochastic general equilibrium model. The third developsa new class of arbitrage-free term structure models that are empirically tractable and well suited to macro-finance investigations.
    Keywords: Interest rates ; Macroeconomics - Econometric models
    Date: 2010
  34. By: Jeffrey C. Fuhrer
    Abstract: This paper examines the concept of inflation persistence in macroeconomic theory. It begins with a definition of persistence, emphasizing the difference between reduced-form and structural persistence. It then examines a number of empirical measures of reduced-form persistence, considering the possibility that persistence may have changed over time. The paper then examines the theoretical sources of persistence, distinguishing “intrinsic” from “inherited” persistence, and deriving a number of analytical results on persistence. It summarizes the implications for persistence from the literatures on “sticky-information” models, learning models, and so-called “trend inflation models,” providing some new results throughout.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  35. By: Misa Takebe; Robert C. York; Noriaki Kinoshita; Plamen Iossifov; Zaijin Zhan
    Abstract: In this paper, we consider the design of the surveillance, and, in particular, the fiscal criteria in the Central African Economic and Monetary Community (CEMAC) with the view to ensuring they are consistent with internal and external sustainability. This consistency is important within a monetary union because fiscal policy is the primary instrument through which national governments can influence macroeconomic performance. We comment on how surveillance might be improved by broadening the region's current criteria through alternative fiscal indicators, some focus on the scope and nature of external shocks, and attention to the consistency of policies in assuring the viability of the union and its fixed exchange rate regime.
    Keywords: Budget deficits , Business cycles , Central African Economic and Monetary Community , External shocks , Fiscal policy , Monetary policy , Monetary unions , Multilateral surveillance , Nonoil sector ,
    Date: 2009–11–25
  36. By: Michelle L. Barnes; Fabià Gumbau-Brisa; Denny Lie; Giovanni P. Olivei
    Abstract: We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In a Monte Carlo exercise, we show that estimating the CF version of the NKPC gives estimates that are much more efficient than the estimates obtained from the DE specification. We then compare DE and CF estimates of the NKPC with time-varying trend inflation on actual data. The data and estimation methodology are the same as in Cogley and Sbordone (2008). We show that DE and CF estimates differ substantially and have very different implications for inflation dynamics. As in Cogley and Sbordone, it is possible to estimate DE specifications of the NKPC where lagged inflation plays no role once trend inflation is taken into account. The CF estimates of the NKPC, however, typically imply as large a role for lagged inflation as for expected future inflation. These estimates thus suggest that trend inflation is not in itself sufficient to explain the persistent dynamics of inflation.
    Keywords: Inflation (Finance) ; Phillips curve
    Date: 2009
  37. By: Pablo A. Guerron-Quintana
    Abstract: This paper studies the steady state and dynamic consequences of inflation in an estimated dynamic stochastic general equilibrium model of the U.S. economy. It is found that 10 percentage points of inflation entails a steady state welfare cost as high as 13 percent of annual consumption. This large cost is mainly driven by staggered price contracts and price indexation. The transition from high to low inflation inflicts a welfare loss equivalent to 0.53 percent. The role of nominal/real frictions as well as that of parameter uncertainty is also addressed.
    Keywords: Inflation (Finance) ; Econometric models ; Keynesian economics
    Date: 2010
  38. By: Marco G Ercolani
    Abstract: This paper presents a time-series regression analysis of price in ation at the time of the euro currency changeover in January 2002. Cross-equation tests on twelve euro countries and three non-euro EU countries are used to identify signicant changes in in ation around that time. For a small number of prod- uct and service categories (mainly small-scale service industries), higher than expected in ation immediately after the euro currency changeover suggest the possible existence of menu costs, sellers' rounding up of prices or buyers' tem- porary rational inattention. However, the lack of evidence for reduced in ation immediately prior to the euro changeover suggests menu costs are not impor- tant.
    Keywords: Euro changeover, inflation, menu costs, price rounding, rational inattention
    JEL: D12 D40 D84 E31 E52 E63 L89
    Date: 2009–12
  39. By: Cysne, Rubens Penha; Turchick, David
    Abstract: Most estimates of the welfare costs of in ation are devised considering only noninterest-bearing assets, ignoring that since the 80 s technological innovations and new regu-lations have increased the liquidity of interest-bearing deposits. We investigate theresulting bias. Su¢ cient and necessary conditions on its sign are presented, alongwith closed-form expressions for its magnitude. Two examples dealing with bidimen-sional bilogarithmic money demands show that disregarding interest-bearing moniesmay lead to a non-negligible overestimation of the welfare costs of in ation. An intu-itive explanation is that such assets may partially make up for the decreased demandof noninterest-bearing assets due to higher in ation.
    Date: 2010–01–07
  40. By: David Andolfatto
    Abstract: I study a class of models commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to exogenous news events, but whose expected long-run return is independent of this information. I show that there are circumstances in which the nondisclosure of news by an asset manager is welfare-improving. When nondisclosure is infeasible, the framework admits a role for government debt. The theory is used to interpret the nondisclosure practices of reputable financial agencies and suggests caveats for legislation designed to promote financial market transparency.
    Keywords: Transparency ; Monetary policy
    Date: 2010
  41. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states: the Czech Republic, Hungary, Poland and Slovakia. To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds a forward- looking component, the backward-looking component is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
    Keywords: Inflation dynamics, New Keynesian Phillips curve, CEEC, GMM estimation
    JEL: C32 E31
    Date: 2009–12
  42. By: Smant, David / D.J.C.
    Abstract: Many studies have reported on various empirical tests of the expectations theory of the term structure of interest rates (ET). Although a common perception seems to be that the ET is rejected by the empirical tests, the overall evidence is actually mixed between frequent support and occasional rejection of the ET and requires careful interpretation. The discussion and empirical results presented in this paper show that after taking into account the weaknesses of the perfect-foresight-with-error expectations hypothesis and taking into account the coefficient bias caused by term premium and forecast errors, the expectations theory fits the term structure data very well.
    Keywords: Expectations theory; term structure of interest rates; survey expectations; term premium
    JEL: E43 G10
    Date: 2010–01–06
  43. By: Przystupa, Jan
    Abstract: Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40)
    Keywords: equilibrium exchange rate; NATREX
    JEL: E52 F31
    Date: 2009–10–04

This nep-mon issue is ©2010 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.