nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒02‒13
ten papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Policy Rules, Regime Switches, and Trend Inflation: An Empirical Investigation for the U.S. By Efrem Castelnuovo; Luciano Greco; Davide Raggi
  2. An Overhaul of Fed Doctrine: Nominal Income and the Great Moderation By Hendrickson, Joshua
  3. Exchange Market Pressure and Monetary Policy By Sayera Younus
  4. Money and Sustainability By Othman, Jamal
  5. Regional Inflation Persistence: Evidence from Italy By Guido Ascari; Andrea Vaona
  6. US Rates and Emerging Markets Spreads By Eduardo Levy-Yeyati; Tomás Williams
  7. An exact pricing formula for European call options on zero-coupon bonds in the run-up to a currency union By Gerrit Reher; Bernd Wilfling
  8. Coordination Behavior and Optimal Committee Size By Keiichi Morimoto
  9. Financial Integration and Foreign Banks in Latin America: How Do They Impact the Transmission of External Financial Shocks? By Arturo Galindo; Alejandro Izquierdo; Liliana Rojas-Suarez
  10. What Drives Exchange Rates? New Evidence from a Panel of U.S. Dollar Bilateral Exchange Rates By Jean-Philippe Cayen; Donald Coletti; Rene Lalonde; Philipp Maier

  1. By: Efrem Castelnuovo (University of Padua); Luciano Greco (University of Padua); Davide Raggi (University of Bologna)
    Abstract: This paper estimates Taylor rules featuring instabilities in policy parameters, switches in policy shocks' volatility, and time-varying trend inflation using post-WWII U.S. data. The model embedding the stochastic target performs better in terms of data-fit and identification of the changes in the FOMC's chairmanships. Policy breaks are found not to be synchronized with variations in policy shocks' volatilities. Finally, we detect a negative correlation between systematic monetary policy aggressiveness and inflation gap persistence.
    JEL: E52 E61 E62
    Date: 2010–01
  2. By: Hendrickson, Joshua
    Abstract: The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that the increased stability has been associated with monetary policy that responded much more strongly to rising inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve's response to movements in nominal income rather than inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.
    Keywords: monetary policy rules; real-time data; Greenbook forecasts; nominal income target; Great Moderation
    JEL: E51 E30 E58
    Date: 2010–01–31
  3. By: Sayera Younus
    Abstract: The objective of this study is to examine empirically the impact of monetary policy on exchange market pressure (EMP) in Bangladesh. [Bangladesh Bank WP NO. 0603].
    Keywords: pressure, bangladesh, bank, monetary policy, exchange, foreign exchange, currency, market pressure, empirically, Variance, Domestic Credit Growth,
    Date: 2010
  4. By: Othman, Jamal
    Abstract: This paper overviews the political-economics of FIAT and asset-based money. The paper further highlights the presumably syariah standpoint of the impartiality character of money as the fundamental factor that differentiates money from her conventional counterpart. The paper argues that while it is ideal for asset-based money to make a comeback in the interest of holistic wellbeing (maslahah) of humankind, it necessarily be complemented by an appropriate financial and regulatory system to safeguard its impartiality, i.e., viz, non-tradable, non-interest bearing, and non-debt financing to avoid the recurring pitfalls which are immanent in conventional financial system. It is hoped this rather concise paper will offer a thought provoking discourse on how syariah principles may present the world a useful ideological construct for a new monetary and financial architecture in light of the global financial crises.
    Keywords: Financial crises; Neutrality of money; FIAT money; Asset based money; Islamic perspectives of money; Financial regulatory system; Money and sustainability
    JEL: E42 Q56 E4
    Date: 2009–08–27
  5. By: Guido Ascari (Università di Pavia); Andrea Vaona (Department of Economics (University of Verona))
    Abstract: Regional patterns of inflation persistence have received attention only at a very coarse level of territorial disaggregation, that of EMU member states. However economic disparities within EMU member states are an equally important policy issue. This paper considers a country with a large regional divide, i.e., Italy, at a fine level of territorial disaggregation (NUTS3). Our results show that economically backward regions display greater inflation persistence. Moreover, we show that higher persistence is linked to a lower degree of competitiveness in the retail sector. Finally, the inflation persistence at the national level does not present any geographical aggregation bias, because it equals the mean of inflation persistence of provincial data.
    Keywords: inflation persistence, retail sector, regions
    JEL: E0 E30 R0 R10
    Date: 2010–02
  6. By: Eduardo Levy-Yeyati; Tomás Williams
    Abstract: While many studies document the influence of global liquidity and risk aversion on emerging markets spreads, less is known about their link with the US yield curve –a point that becomes more relevant at today´s historically low US rates. In this note, we examine the channels through which emerging markets spreads could be affected by changes in the US Treasury curve, and their economic importance in light of realistic scenarios, accounting for the differential response from investment and non investment grade economies, and during periods of financial distress. We find that a UST curve steepening (e.g., due to an oversupply of Treasuries) represents a more important risk factor for emerging market spreads than a monetary policy tightening.
    Date: 2010
  7. By: Gerrit Reher; Bernd Wilfling
    Abstract: In this paper we analyze the dynamics of zero-coupon bond options in a situation in which two open economies plan to enter a currency union in the future. More precisely, we make use of recent theoretical work on the continuous-time dynamics of interest-rate differentials between the economies involved and derive a closed-form pricing formula for a European call option on zero-coupon bonds. In a Monte-Carlo simulation study we show that significant option-pricing errors can occur when the key features of interest-rate dynamics during the run-up to the currency union are ignored.
    Keywords: Interest-rate dynamics; valuation of interest-rate options; currency union
    JEL: G12 G13 G15 E42 F37
    Date: 2010–01
  8. By: Keiichi Morimoto (Graduate School of Economics, Osaka University)
    Abstract: How many members should committees consist of? This paper addresses this question in view of imperfect information and coordination behavior among the members, which is a new approach alternative to introducing information acquisition cost. First, using a simple model, I show that the existence of the coordination motive dismisses Condorcetfs (1785) suggestion and the finite optimal size of the committee is determined. Second, I provide an application of the mechanism to monetary policy committees in a basic New Keynesian model. This example will inspire other applications to policy issues in the dynamic stochastic general equilibrium framework.
    Keywords: committee, Condorcet jury theorem, coordination, higher order beliefs monetary policy
    JEL: D71 D84 E58
    Date: 2010–01
  9. By: Arturo Galindo; Alejandro Izquierdo; Liliana Rojas-Suarez
    Abstract: This paper explores the impact of international financial integration on credit markets in Latin America, using a cross-country dataset covering 17 countries between 1996 and 2008. It is found that financial integration amplifies the impact of international financial shocks on aggregate credit and interest rate fluctuations. Nonetheless, the net impact of integration on deepening credit markets dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset that covers more than 500 banks for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. It is found that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. This does not hold for all foreign banks. Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates.
    Keywords: Foreign Banks, Credit, Interest Rates, Financial Shocks
    JEL: F36 G0 G21
    Date: 2010–02
  10. By: Jean-Philippe Cayen; Donald Coletti; Rene Lalonde; Philipp Maier
    Abstract: We use a novel approach to identify economic developments that drive exchange rates in the long run. Using a panel of six quarterly U.S. bilateral real exchange rates – Australia, Canada, the euro, Japan, New Zealand and the United Kingdom – over the 1980-2007 period, a dynamic factor model points to two common factors. The first factor is driven by U.S. shocks, and cointegration analysis points to a long-run statistical relationship with the U.S. debt-to-GDP ratio, relative to all other countries in our sample. The second common factor is driven by commodity prices. Incorporating these relationships directly into a state-space model, we find highly significant coefficients. Then, we decompose the historical variation of each exchange rate into U.S. shocks, commodities, and a domestic component. We find a strong role for economic fundamentals: Changes in the two common factors, which are driven by the (relative) U.S. debt-to-GDP ratio and commodity prices, can explain between 36 and 96 per cent of individual countries' exchange rates in our panel.
    Keywords: Exchange rates; Econometric and statistical methods
    JEL: J31
    Date: 2010

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