nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒02‒05
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The role of central bank transparency for guiding private sector forecasts By Michael Ehrmann; Sylvester Eijffinger; Marcel Fratzscher
  2. Central bank independence and conservatism under uncertainty: Substitutes or complements? By Carsten Hefeker; Blandine Zimmer
  3. Deciding to peg the exchange rate in developing countries: the role of private-sector debt By Harms, Philipp; Hoffmann, Mathias
  4. How Anchored Are Inflation Expectations in EMU Countries? By Carin van der Cruijsen; Carin van der Cruijsen
  5. Rational Partisan Theory, Uncertainty and Spatial Voting: Evidence for the Bank of England’s MPC By Bhattacharjee, A.; Holly, S.
  6. The Taylor Rule and “Opportunistic” Monetary Policy By Helle Bunzel; Walter Enders
  7. Size and composition of the central bank balance sheet: revisiting Japan's experience of the quantitative easing policy By Shigenori Shiratsuka
  8. Audit the Federal Reserve? By Barnett, William A.
  9. A Multimarket Approach for Estimating a New Keynesian Phillips Curve By Juan de Dios Tena; Jorge Dresdner; Iván Araya
  10. An institutional approach to balancing international monetary relations : the case for a US-China settlement facility By Piffaretti, Nadia F.; Rossi, Sergio
  11. The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008 By Canale, Rosaria Rita; Napolitano, Oreste
  12. Credit money and macroeconomic instability in the agent-based model and simulator Eurace By Cincotti, Silvano; Raberto, Marco; Teglio, Andrea
  13. Does the Law of One Price Hold in a High-Inflation Environment? A Tale of Two Cities in Turkey By Sule Akkoyunlu; Boriss Siliverstovs
  14. Alternative Phillips Curves Models with Endogenous Real-Time Expectations By David Kiefer

  1. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sylvester Eijffinger (Tilburg University, Koopmans building, Warandelaan 2, 5037 AB Tilburg, The Netherlands.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: There is a broad consensus in the literature that costs of information processing and acquisition may generate costly disagreements in expectations among economic agents, and that central banks may play a central role in reducing such dispersion in expectations. This paper analyses empirically whether enhanced central bank transparency lowers dispersion among professional forecasters of key economic variables, using a large set of proxies for central bank transparency in 12 advanced economies. It finds evidence for a significant and sizeable effect of central bank transparency on forecast dispersion, be it by means of announcing a quantified inflation objective, other forms of communication, or by publishing central banks’ inflation and output forecasts. However, there also appear to be limits to central bank transparency, with decreasing marginal returns to enhancing (economic) transparency, and given our findings that disagreement among inflation expectations in the general public is not affected by the various central bank transparency measures analyzed in this paper. JEL Classification: E37, E52, C53.
    Keywords: central banking; transparency; disagreement; survey expectations; monetary policy; inflation targeting; central bank communication; forecasting.
    Date: 2010–01
  2. By: Carsten Hefeker; Blandine Zimmer
    Abstract: This paper revisits the trade-off between central bank independence and conservatism using a New Keynesian model with uncertainty about the central banker's output gap target. It is shown that when this uncertainty is high, the trade-off no longer holds. In this case, the optimal combination between independence and conservatism is characterised by complementarity.
    Keywords: central bank independence, conservatism, transparency of monetary policy
    JEL: E52 E58
    Date: 2010
  3. By: Harms, Philipp; Hoffmann, Mathias
    Abstract: We argue that a higher share of the private sector in a country's external debt raises the incentive to stabilize the exchange rate. We present a simple model in which exchange rate volatility does not affect agents' welfare if all the debt is incurred by the government. Once we introduce private banks who borrow in foreign currency and lend to domestic firms, the monetary authority has an incentive to dampen the distributional consequences of exchange rate fluctuations. Our empirical results support the hypothesis that not only the level, but also the composition of foreign debt matters for exchange-rate policy. --
    Keywords: Exchange rate regimes,foreign debt,monetary policy
    JEL: E52 F31 F41
    Date: 2009
  4. By: Carin van der Cruijsen; Carin van der Cruijsen
    Abstract: Anchored inflation expectations help stabilize inflation. Previous results indicate that monetary policy has been effective in breaking the link between actual and expected inflation at the euro area level. In this paper we examine whether this is also true at the national level. We define the ‘disconnect' between inflation and inflation expectations and then proceed to examine the extent to which this disconnect exists for a number of euro area countries. Our findings suggest that country-specific inflation experiences still affect national inflation expectations, and certainly more by comparison to the aggregate euro area level. EMU has therefore not made this link disappear at the national level.
    Keywords: Inflation expectations; monetary policy; EMU. J.E.L. codes : E52; E58.
    Date: 2010–01
  5. By: Bhattacharjee, A.; Holly, S.
    Abstract: The transparency and openness of the monetary policymaking process at the Bank of England has provided very detailed information on both the decisions of individual members of the Monetary Policy Committee and the information on which they are based. In this paper we consider this decision making process in the context of a model in which inflation forecast targeting is used but there is heterogeneity among the members of the committee. We find that rational partisan theory can explain spatial voting behaviour under forecast uncertainty about the output gap. Internally generated forecasts of output and market generated expectations of medium term inflation provide the best description of discrete changes in interest rates, in combination with uncertainty in the macroeconomic environment. There is also a role for developments in asset housing and labour markets. Further, spatial voting patterns clearly differentiates between internal and externally appointed members of the Monetary Policy Committee. The results have important implications for committee design and the conduct of monetary policy.
    Keywords: Monetary policy, interest rates, Monetary Policy Committee, Committee decision making
    JEL: E42 E43 E50 E58
    Date: 2010–01–22
  6. By: Helle Bunzel (Department of Economics, Iowa State University and CREATES); Walter Enders (Department of Economics, Finance & Legal Studies, University of Alabama)
    Abstract: We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic” monetary policy makes significant progress towards explaining Federal Reserve behavior.
    Keywords: Threshold regression, Nonlinear Taylor rule, Opportunistic Monetary Policy
    JEL: C22 E32 E52
    Date: 2009–12–06
  7. By: Shigenori Shiratsuka
    Abstract: This paper re-examines Japan's experience of the quantitative easing policy in light of the policy responses against the current financial and economic crisis. Central banks use various unconventional measures in the range of financial assets being purchased and in the scale of such purchases. As the scope of such unconventional measures expands, it is often emphasized that the U.S. Federal Reserve policy reactions focus more on the asset side of its balance sheet, the so-called credit easing. By contrast, the Bank of Japan's quantitative easing policy from 2001 to 2006 set a target for the current account balances, the liability side of its balance sheet. It is crucial to understand that central banks combine the two elements of their balance sheets, size and composition, to enhance the overall effects of unconventional policy measures, given constraints on policy implementation.
    Keywords: Financial markets ; Monetary policy ; Banks and banking, Central ; Financial crises
    Date: 2010
  8. By: Barnett, William A.
    Abstract: An independent institute for monetary statistics is needed in the United States. Expanded Congressional audit would be a second best alternative, but would not fully address the needs and would carry risks.
    Keywords: Federal Reserve; data institute; audit; GAO; monetary aggregation; index number theory
    JEL: C82 E01 E50 E41
    Date: 2010–02–26
  9. By: Juan de Dios Tena (Departamento de Estadística, Universidad Carlos III, Madrid, España.); Jorge Dresdner (Departamento de Economía, Universidad de Concepción); Iván Araya (Departamento de Economía, Universidad de Concepción)
    Abstract: We propose a new approach for estimating a “hybrid” New Keynesian Phillips Curve (NKPC)that includes demand pressures coming from disequilibrium relations in three differentmarkets: (1) monetary and financial, (2) international, and (3) labour. The results of theapplication of this approach show that all three markets contribute to the evolution of inflation. However, shocks on equilibrium in the labour market and short-run movements in cyclical output are relatively more important than other shocks. Econometric tests indicate that this specification is superior to the traditional NKPC, which includes a single variable to account for demand pressures.
    Keywords: New Keynesian Phillips Curve, Cointegration, Monetary Policy.
    Date: 2009
  10. By: Piffaretti, Nadia F.; Rossi, Sergio
    Abstract: Management of international monetary relations between China and the United States will be one of the crucial parameters for the stability or instability of the global financial system in the next decade. Although most of the literature suggests rebalancing through either adjustment of relative prices or adjustment of behavior in both countries, this paper explores an institutional approach to rebalancing. Applying the lessons from Keynes'1944 plan for a United States-United Kingdom international clearing union, the paper explores the creation of a bilateral United States-China settlement facility as an institutional contribution to the structural rebalancing of global imbalances.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Access to Finance
    Date: 2010–01–01
  11. By: Canale, Rosaria Rita; Napolitano, Oreste
    Abstract: The EMU assigns a very marginal role to economic policy and relies on the leading idea that, if prices are kept constant, there will be an automatic convergence towards long-run equilibrium income. These beliefs represent the theoretical underpinnings of fiscal and monetary policy strategies in Europe. In order to highlight the weakness of these foundations, the paper evaluates empirically the effects of public expenditure and interest rate setting on equilibrium income in Italy from 1998 to 2008. The analysis supports the conclusions that government spending has a positive impact on national income while inflation targeting has a negative impact. Moreover the empirical evidence shows that a high level of debt does not produce negative effects on GDP. Finally, at a time of financial crisis, these results appear to be reinforced for fiscal policy, but weakened for monetary policy. The paper draws the conclusion that the EMU’s rigid rules for both fiscal and monetary policy have recessive attitudes, and limit the use of instruments to deal with high levels of unemployment, definitely undermining the future existence of the single-currency area.
    Keywords: Fiscal policy; Monetary policy; EMU; Italy
    JEL: E62 E12 E52
    Date: 2009–12
  12. By: Cincotti, Silvano; Raberto, Marco; Teglio, Andrea
    Abstract: The paper presented a study on the relationship between credit money and economic instability. The issue is of primary importance because, as it is generally stated, lower variability of output and inflation has numerous economic benefits. We address this problem by means of an agent-based model and simulator, called Eurace, which is characterized by a complete set of interrelated markets and different types of interacting agents, modelled according to a rigorous balance-sheet approach. The dynamics of credit money is endogenous and depends on the supply of credit from the banking system, which is constrained by its equity base, and the demand of credit from firms in order to finance their production activity. Alternative dynamic paths for credit money have been produced by setting different firms' dividend policies. Results show the emergence of endogenous business cycles which are mainly due to the interplay between the real economic activity and its financing through the credit market. In particular, the amplitude of the business cycles strongly raises when the fraction of earnings paid out by firms as dividends is higher, that is when firms are more constrained to borrow credit money to fund their activity. This interesting evidence can be explained by the fact that the level of firms leverage, defined as the debt-equity ratio, can be considered ad a proxy of the likelihood of bankruptcy, an event which causes mass layoffs and supply decrease. --
    Keywords: Macroconomic policy design,agent-based computational economics credit money,economic instability
    JEL: E42 E2 E32
    Date: 2010
  13. By: Sule Akkoyunlu (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This study addresses price convergence in two cities in Turkey (Istanbul and Ankara) using the annual data over the three quarters of the 20th century (1922–1998), characterized by prevailing high inflation rates for most of the period. In contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best, we argue that convergence is much easier detected in growth rates rather than levels of prices. We suggest using the bounds testing procedure of Pesaran et al. (2001) for this purpose. We find a clear-cut evidence on the existence of a common driving force behind inflation dynamics in Istanbul and Ankara—a finding that is intuitively appealing from the point of view of economic theory.
    Keywords: Price convergence, Bounds testing procedure, Turkey
    JEL: C22 C32 C52 E31
    Date: 2010–01
  14. By: David Kiefer
    Abstract: Originally presented as an empirical regularity, a variety of microeconomic derivations of the Phillips tradeoff between inflation and real output have been developed. Since these new Phillips curve models are expressed in terms of unobserved variables and expectations, we develop estimates of these unobservables using a state space characterization of the short-run political-economic equilibrium. This method is appropriate because it yields recursive forecasts based on contemporaneous information, and because we apply it to a real-time data set in order to accurately measure available information. Although none of the new Phillips curve tested are completely adequate, we find that Calvo’s sticky price formulation provides the best fit for US data. It is inadequate because the estimate coefficient for the driving variable (either the output gap or the marginal cost) is essentially zero
    Keywords: new Phillips curve, microfoundations, real-time data
    JEL: E3 E6
    Date: 2010–03

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