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on Monetary Economics |
| By: | Jürgen von Hagen |
| Abstract: | In response to the financial and economic crisis, central banks, unlike in the 1930s, have created enormous amounts of money. There are fears that this will lead to inflation, but it is base money (the central bank's liabilities) that has expanded; total monetary aggregates have not. By contrast, in the 1930s, base money remained stable and monetary aggregates dropped. The reason for this is that in a crisis the relationship between the base money and monetary aggregates is altered. The money multiplier drops. It is therefore necessary to create more base money so that monetary aggregates remain stable. This is what central banks have done in the current crisisand rightly so. They have learned the lessons of the Great Depression. This framework helps understand differences across countries. The crisis affected the euro area money and credit supply process much less than the US and the UK. Therefore, the European Central Bank was right to respond to the crisis with a less expansionary monetary policy than the Bank of England and the Federal Reserve. However, stabilising the money supply may not have been enough to stabilise the supply of credit. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:335&r=mon |
| By: | Martina Cecioni (Bank of Italy, Economics, Research and International Relations) |
| Abstract: | For historical and geographical reasons, the member countries of the European Monetary Union (EMU) display different degrees of external trade openness. The paper lays out a model for a currency area composed of two regions. One region is more open to trade with a third country outside the area than the other. Using the utility-based loss function for the currency area, the optimal monetary policy is compared to the one for a homogeneous area. In the model with heterogeneity, the relative competitiveness across regions influences the extent to which shocks are transmitted to the area-wide inflation and output gap. Under a plausible calibration for the EMU, the optimal policy plan exhibits a stronger tendency towards currency area exchange rate stabilization than the one in the homogeneity case. Moreover, it is welfare-improving to forgo some area-wide inflation stabilization to dampen inflation differentials. |
| Keywords: | Monetary union, optimal monetary policy, loss function |
| JEL: | E52 F41 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_738_10&r=mon |
| By: | Romain Baeriswyl; Camille Cornand |
| Abstract: | This paper analyzes the conduct of the optimal monetary policy with imperfect information on the shocks hitting the economy where firms’ prices are strategic complements. Monetary policy entails a dual stabilizing role, as a policy response that influences directly the economy and as a vehicle for information that shapes firms’ beliefs. In the case where more information is welfare detrimental, the central bank faces a dilemma, for its monetary instrument aimed at stabilizing the economy may harmfully shape firms’ beliefs. Recognizing the signaling role of its instrument, the central bank finds it optimal to distort its policy response in order to mitigate the detrimental information that it may convey. |
| Keywords: | differential information, monetary policy, transparency. |
| JEL: | E52 E58 D82 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-04&r=mon |
| By: | Michael D. Bordo; John Landon-Lane |
| Abstract: | In this paper we provide some evidence on when central banks have shifted from expansionary to contractionary monetary policy after a recession has ended—the exit strategy. We examine the relationship between the timing of changes in several instruments of monetary policy and the timing of changes of selected real macro aggregates and price level (inflation) variables across U.S. business cycles from 1920-2007. We find, based on historical narratives, descriptive evidence and econometric analysis, that in the 1920s and the 1950s the Fed would generally tighten when the price level turned up. By contrast, since 1960 the Fed has generally tightened when unemployment peaked and this tightening often occurred after inflation began to rise. The Fed is often too late to prevent inflation. |
| JEL: | N12 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15731&r=mon |
| By: | Sousa, Pedro (Universidade Portucalense) |
| Abstract: | Since January 1999, according to the law, the common monetary policy for all the Economic and Monetary Union (EMU) Member States should be decided by simple majority in the Governing Council (GC) of the European Central Bank (ECB), regarding the Euro area aggregate conditions. Notwithstanding, no formal vote has been taken until today and a consensus solution has been the officially announced practical rule, hiding different points of view fuelled by national divergences that might exist within Euro area. Assuming that EMU national central bankers take into account national perspectives from their home countries when they vote interest rate decisions in the GC, we try to find whether there have been favourable conditions for the emergence of voting coalitions among them. In order to accomplish that purpose, for every month since January 1999 until August 2003, we applied cluster analysis techniques to national stances before GC meetings, which we describe using three variables. We found high stability in the identified cluster structure, particularly since August 2001, favouring the emergence of alliances between national interests. In spite of that, it is likely that the strong strategic position enjoyed by the Executive Board of the ECB has been sufficient to a priori defeat any coalitions of opposing proposals on the monetary policy for the Euro-area, situation that will change with EMU enlargement. |
| Keywords: | Monetary Policy; European Central Bank; Desired Interest Rate; Cluster Analysis |
| JEL: | C80 E40 E52 |
| Date: | 2009–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:ris:cigewp:2009_009&r=mon |
| By: | Yu-Fu Chen; Michael Funke; Nicole Glanemann |
| Abstract: | Hong Kong’s currency is pegged to the US dollar in a currency board arrangement. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate regimes, to explain the notable achievement of speculative peace and credibility since May 2005. |
| Keywords: | Currency Board Arrangement, Target Zone Model, Credibility, Hong Kong |
| JEL: | C61 E42 F31 F32 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:dun:dpaper:228&r=mon |
| By: | Jesús Vázquez (Universidad del País Vasco); Ramón María-Dolores (Universidad de Murcia); Juan M. Londoño (Tilburg University) |
| Abstract: | This paper uses a structural approach based on the indirect inference principle to estimate a standard version of the new Keynesian monetary (NKM) model augmented with term structure using both revised and real-time data. The estimation results show that the term spread and policy inertia are both important determinants of the U.S. estimated monetary policy rule whereas the persistence of shocks plays a small but significant role when revised and real-time data of output and inflation are both considered. More importantly, the relative importance of term spread and persistent shocks in the policy rule and the shock transmission mechanism drastically change when it is taken into account that real-time data are not well behaved. |
| Keywords: | NKM model, term structure, monetary policy rule, indirect inference, real-time |
| JEL: | C32 E30 E52 |
| Date: | 2010–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:ehu:dfaeii:201001&r=mon |
| By: | Kudoh, Noritaka; Nguyen, Hong Thang |
| Abstract: | We explore the implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. To ensure uniqueness of the steady-state equilibrium, monetary policy cannot be either too "active" or too "passive". The effects of fiscal policy depend crucially on whether monetary policy is active or passive, and are independent of the "tightness" of monetary policy. |
| Keywords: | monetary policy rules, fiscal policy, overlapping generations, |
| JEL: | E52 E62 H62 H63 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hok:dpaper:220&r=mon |
| By: | Ila Patnaik; Ajay Shah |
| Abstract: | Capital account openness and exchange rate flexibility in 11 Asian countries are examined. Asia has made slow progress on de jure capital account openness, but has made much more progress on de facto capital account openness. While there is a slow pace of increase in exchange rate flexibility, most Asian countries continue to have largely inflexible exchange rates. This combination { of moving forward with de facto capital account integration without bringing in exchange rate flexibility { has lead to procyclicality of monetary policy when capital flows are procyclical. The paper emphasizes the case for a consistent monetary policy framework. [NIPFP WP No. 2010-64]. |
| Keywords: | Korea, capital, account, monetary policy, Asian countries, Asia, China, defacto, exchange rate flexibility, de jure, India, industrial countries, Chinn-Ito measure, |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2402&r=mon |
| By: | Lopez, Claude; Papell, David |
| Abstract: | We propose a new procedure to increase the power of panel unit root tests when used to study group-wise convergence. When testing for stationarity of the differential between a group of series and their cross-sectional means, although each differential has non-zero mean, the group of differentials has a cross-sectional average of zero for each time period by construction. We incorporate this constraint for estimation and generating finite sample critical values. Applying this new procedure to Euro Area inflation, we find strong evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. |
| Keywords: | group wise convergence; inflation; euro |
| JEL: | C32 E31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20585&r=mon |
| By: | Di Bartolomeo Giovanni; Giuli Francesco |
| Abstract: | Despite the recent increasing number of studies on monetary policy uncertainty, its role on the strategic interactions between fiscal and monetary policies has not been fully explored. Our paper aims to fill this gap by tackling this issue by evaluating the consequences produced by multiplicative uncertainty in such a context. |
| Keywords: | Monetary-fiscal policy interactions, paramenter uncertainty, symbiosis, monetary policy attenuation |
| JEL: | E61 E63 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0061&r=mon |
| By: | Zagaglia, Paolo |
| Abstract: | I address the role of information heterogeneity in the Euro interbank market for unsecured term lending. I use high-frequency quotes of bid and ask prices to estimate probabilities of informed trading for contract maturities from one month to one year. The dataset spans from November 2000 to March 2008, and includes the relevant events that characterize the developments of the Euro area money market. I obtain four main results. First, I show that the loose supply of liquidity of the ECB has not dampened the distortions arising from asymmetric information in the unsecured money market. I also find that the probability of trading with a better informed bank is higher on days when open market operations take place, and at the end of the maintenance period. This effect has strengthened during the turmoil. The results indicate that information is segmented, in the sense that heterogenous knowledge among banks is maturity-specific. Finally, the paper presents some evidence suggesting that the risk of trading with a counterparty that enjoys an enhanced information set is priced. |
| Keywords: | Market microstructure; PIN model; money markets; term structure |
| JEL: | G14 E52 |
| Date: | 2010–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20415&r=mon |
| By: | Lorenzo Cappiello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (Bank of Albania, Sheshi “Skënderbej”, No.1 Tirana, Albania.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Protopapa (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Applying the identification strategy employed by Driscoll (2004) for the United States, this paper provides empirical evidence for the existence of a bank lending channel of monetary policy transmission in the euro area. In addition, and in contrast to recent findings for the US, we find that in the euro area changes in the supply of credit, both in terms of volumes and in terms of credit standards applied on loans to enterprises, have significant effects on real economic activity. This highlights the importance of the monitoring of credit developments in the toolkit of monetary policy and underpins the reasoning behind giving monetary and credit analysis a prominent role in the monetary policy strategy of the ECB. It also points to the potential negative repercussions on real economic growth of bank balance sheet impairments arising in the context of the financial crisis erupting in mid-2007 which led to the need for banks to delever their balance sheets and possibly to reduce their loan supply. JEL Classification: C23, E51, E52, G21. |
| Keywords: | bank credit, bank lending channel, euro area, panel data. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101150&r=mon |
| By: | Pacheco, Luis (Universidade Portucalense) |
| Abstract: | Forecasts are an inherent part of economic science and the quest for perfect foresight occupies economists and researchers in multiple fields. The release of economic forecasts (and its revisions) is a popular and often publicized event, with a multitude of institutions and think-tanks devoted almost exclusively to that task. The European Central Bank (ECB) also publishes its forecasts for the euro area, however ECB’s forecast accuracy is not a deeply researched theme. The ECB forecasts’ accuracy is the main point developed in this paper, which tries to contribute to understand the nature of the errors committed by the ECB forecasts and its main differences compared to other projections. What we try to infer is whether the ECB is accurate in its projections, making less errors than the others, maybe due to some informational advantage. We conclude that the ECB seems to consistently underestimate the HICP inflation rate and overestimate GDP growth. Comparing it with the others, the ECB shows a superior performance, committing almost always fewer errors. So, this signals a possible informational advantage from the ECB. Since the forecasting errors could jeopardize ECB’s credibility public criticism could be avoided if the ECB simply let forecasts for the others. Naturally, this change should be weighted against the benefits of publishing forecasts. |
| Keywords: | European Central Bank; Staff projections; Monetary Policy; Forecasting; Central Bank Communication |
| JEL: | E52 E58 |
| Date: | 2010–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:ris:cigewp:2010_011&r=mon |
| By: | Andreas Beyer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Katarina Juselius (Department of Economics, University of Copenhagen, Studiestræde 6, 1455 Copenhagen K, Denmark.) |
| Abstract: | Beyer, Doornik and Hendry (2000, 2001) show analytically that three out of four aggregation methods yield problematic results when exchange rate shifts induce relative-price changes between individual countries and found the least problematic method to be the variable weight method of growth rates. This papers shows, however, that the latter is sensitive to the choice of base year when based on real GDP weights whereas not on nominal GDP weights. A comparison of aggregates calculated with different methods shows that the differences are tiny in absolute value but highly persistent. To investigate the impact on the cointegration properties in empirical modelling, the monetary model in Coenen &Vega (2001) based on fixed weights was re-estimated using flexible real and nominal GDP weights. In general, the results remained reasonably robust to the choice of aggregation method. JEL Classification: C32, C42, E41. |
| Keywords: | Aggregation, Flexible weights, Eurowide money demand, Cointegration. |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101149&r=mon |
| By: | Jürgen von Hagen |
| Abstract: | Senior Non-Resident Fellow Jürgen von Hagen offers his recommendations for the proper monetary policy to lead the eurozone out of the crisis. He argues that the tentative recovery in the euro area indicates that both monetary and fiscal policy can be normalised soon. However, because delaying fiscal consolidation would result in greater debt burdens whereas monetary policy can be quickly adjusted to respond to unforeseen developments, there is less risk involved if a fiscal exit comes first. In any case, the two strategies must be coordinated and the European Central Bank must be very clear on its interest rate policies. This paper was prepared as part of testimony for the European Parliament's Economic and Monetary Affairs Committee. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:379&r=mon |
| By: | Guido Ascari (University of Pavia and Kiel Institute for the World Economy); Tiziano Ropele (Bank of Italy and Kiel Institute for the World Economy JEL classification: E31, E5) |
| Abstract: | When taken to examine disinflation monetary policies, the current workhorse DSGE model of business cycle fluctuations successfully accounts for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains. |
| Keywords: | disinflation, sacrifice ratio, non-linearities |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_736_10&r=mon |
| By: | Jean Pisani-Ferry; Jakob von Weizsäcker |
| Abstract: | Through Bruegel's role on the Monetary Experts Panel for the European Parliament's Committee on Economic and Monetary Affairs, Bruegel scholars contributed to the Committee's Monetary Dialogue with the European Central Bank meeting on 28 September. In this briefing paper for the Panel, Director Jean-Pisani Ferry and Resident Fellow Jakob von Weizsacker point out that, in the wake of the financial crisis, the ECB will take on much more responsibility for macro-prudential supervision of the financial system. With this added responsibility, however, comes serious questions about the mechanisms in place to ensure the ECB's accountability. Previously focused almost solely on price stability, the ECB will now likely be asked to increase its discretionary decision-making, especially in dealing with financial regulation. The accompanying accountability questions, the authors say, need to be addressed proactively. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:342&r=mon |
| By: | Jürgen von Hagen; Jean Pisani-Ferry; Jakob von Weizsäcker |
| Abstract: | This Policy Brief was adapted from a paper written by the three authors and presented by Bruegel Director Jean Pisani-Ferry at the informal ECOFIN Council meetings in Gothenburg, Sweden, on 1 Oct. In the brief, the authors argue that bank recapitalisation and restructuring should be a matter of urgency for EU member states and that governments should not undertake the necessary fiscal and monetary policy exit until problems within the financial sector are addressed. The authors also recommend that European states set debt targets to be reached by the end of 2014 and explain that proper incentives are necessary to ensure that an exit strategy, once implemented, is done so in coordination between various institutional actors. Such a policy framework should be in place by summer 2010, the authors say, in order to avoid a buildup of financial instability during the process. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polbrf:344&r=mon |
| By: | Zsolt Darvas |
| Abstract: | Resident Fellow Zsolt Darvas takes a look at the issue of the Baltic states - Estonia, Latvia and Lithuania - and the challenges facing those three countries in the aftermath of the financial crisis. He argues that because it is in the broader European interest to prevent a collapse in the Baltics, the best option is immediate euro entry at a suitable exchange rate supported by appropriate resolution in order to manage the resulting debt overhang. However, there seems to be no legal basis for this under the current euro accession criteria. Furthermore, the economic foundations of the criteria are fundamentally flawed, as euro-area members continue to violate the criteria while the EU's expansion to 27 members has made the criteria tougher for new member states to meet themselves. Ultimately, the European Council has the ability to reform the criteria without a formal treaty change. The Council should do so, the author argues, and allow for more meaningful benchmarks for all future euro-area applicants. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:bre:polcon:373&r=mon |
| By: | Andrea Gerali (Bank of Italy); Stefano Neri (Bank of Italy); Luca Sessa (Bank of Italy); Federico M. Signoretti (Bank of Italy) |
| Abstract: | This paper studies the role of credit-supply factors in business cycle fluctuations. For this purpose, we introduce an imperfectly competitive banking sector into a DSGE model with financial frictions. Banks issue collateralized loans to both households and firms, obtain funding via deposits and accumulate capital from retained earnings. Margins charged on loans depend on bank capital-to-assets ratios and on the degree of interest rate stickiness. Bank balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the existence of a banking sector partially attenuates the effects of demand shocks, while it helps propagate supply shocks. Second, shocks originating in the banking sector explain the largest share of the fall of output in 2008 in the euro area, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital has a substantial impact on the real economy and particularly on investment. |
| Keywords: | collateral constraints, banks, banking capital, sticky interest rates |
| JEL: | E30 E32 E43 E51 E52 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_740_10&r=mon |
| By: | Paolo Angelini (Bank of Italy); Andrea Nobili (Bank of Italy); Maria Cristina Picillo (Bank of Italy) |
| Abstract: | The outbreak of the financial crisis coincided with a sharp increase of worldwide interbank interest rates. We analyze the micro and macroeconomic determinants of this phenomenon, finding that before August 2007 interbank rates were insensitive to borrower characteristics, whereas afterwards they became reactive to borrowers’ creditworthiness. At the same time, conditions for large borrowers became relatively more favorable, both before and after the failure of Lehman Brothers. This suggests that banks have become more discerning in their lending, a welcome change, but that moral hazard considerations related to the â€too big to fail†argument should remain a main concern for central banks. |
| Keywords: | Interbank markets, Spreads, Financial crisis |
| JEL: | E43 E52 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_731_09&r=mon |