nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒02‒27
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Great Inflation and Central Bank Independence in Japan By Takatoshi Ito
  2. Monetary Policy, Global Liquidity and Commodity Price Dynamics By Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
  3. Liquidity, Financial Intermediation, and Monetary Policy in a New Monetarist Model By Williamson, Stephen
  4. The Euro Cash Changeover, Inflation Perceptions and the Media By Michael J. Lamla; Sarah M. Lein
  5. Audit the Federal Reserve? By William Barnett; ;
  7. Money and Credit With Limited Commitment and Theft By Williamson, Stephen; Sanches, Daniel
  8. Central bank dollar swap lines and overseas dollar funding costs By Linda S. Goldberg; Craig Kennedy; Jason Miu
  9. (How) Do the ECB and the Fed React to Financial Market Uncertainty?: The Taylor Rule in Times of Crisis By Ansgar Belke; Jens Klose
  10. The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market By Morten L. Bech; Elizabeth Klee
  11. Banking competition, collateral constraints and optimal monetary policy By Javier Andrés; Óscar Arce; Carlos Thomas
  12. Real-Time Data Revisions and the PCE Measure of Inflation By Tierney, Heather L.R.
  13. The Political Economy of the Yield Curve By Di Maggio, Marco
  14. Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes By Frankel, Jeffrey; Xie, Daniel
  15. Monetary Policy and Identification in SVAR Models: A Data Oriented Perspective By Fragetta, Matteo
  16. Global Liquidity, World Savings Glut and Global Policy Coordination By Ansgar Belke; Daniel Gros
  17. Evolving macroeconomic perceptions and the term structure of interest rates By Athanasios Orphanides; Min Wei
  18. "The Global Crisis and the Future of the Dollar: Toward Bretton Woods III?" By Joerg Bibow
  19. Money Supply Function for Bangladesh: An Empirical Analysis By Muhammad Mahboob Ali; Victoria Wise
  20. What Explains Real and Nominal Exchange Rate Fluctuations? Evidence from SVAR Analysis for India By Inoue, Takeshi; Hamori, Shigeyuki
  21. West African Monetary Integration and Interstates Risk-Sharing By Sampawende Jules TAPSOBA
  22. Official Central Bank Interventions in the Foreign Exchange Markets: A DCC Approach with Exogenous Variables By Nikolaos Antonakakis
  23. On the Links Between Unemployment Rate, Monetary Creation and the Value-added Sharing By Bernard Philippe; Stéphane Mussard
  24. Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation? By Duo Qin; Xinhua He

  1. By: Takatoshi Ito
    Abstract: Japan suffered a very high inflation rate in 1973-74. The CPI inflation rate rose to near 30% in 1974, the highest rate in the postwar Japanese history after the chaotic hyperinflation following the end of the Second World War. Traditionally, the oil crisis is blamed for the 1973-74 high inflation. However, due to monetary policy decisions in 1972-73, the inflation rate had already exceeded 10% before the onset of the oil crisis in October 1973. These decisions include the interest rate cut of June 1972 and the interest rate hike of April 1973, which in retrospect proved too small. Concern about the rapid yen appreciation produced political pressure on the Bank of Japan to continue easing. The Bank of Japan came out of the Great Inflation of 1973 with a stronger voice. The Bank successfully argued that its recommendation to tighten monetary policy should not be overruled or the high inflation would be repeated. By this logic, the Bank of Japan obtained /de facto/ independence after 1975. When faced with the next economic recovery in 1979, again accompanied by oil price increases, the Bank of Japan was able to tighten monetary policy and to contain the inflation rate under 10 percent. The interest rate in the 1972-75 period was well below, by as much as 25 percentage points in 1973, the interest rate suggested by a modified monthly Taylor rule regression.
    JEL: E31 E58 N15
    Date: 2010–02
  2. By: Ansgar Belke; Ingo G. Bordon; Torben W. Hendricks
    Abstract: This paper examines the interactions between money, interest rates, goods and commodity prices at a global level. For this purpose, we aggregate data for major OECD countries and follow the Johansen/Juselius cointegrated VAR approach. Our empirical model supports the view that, when controlling for interest rate changes and thus different monetary policy stances, money (defined as a global liquidity aggregate) is still a key factor to determine the long-run homogeneity of commodity prices and goods prices movements. The cointegrated VAR model fits with the data for the analysed period from the 1970s until 2008 very well. Our empirical results appear to be overall robust since they pass inter alia a series of recursive tests and are stable for varying compositions of the commodity indices. The empirical evidence is in line with theoretical considerations. The inclusion of commodity prices helps to identify a significant monetary transmission process from global liquidity to other macro variables such as goods prices. We find further support of the conjecture that monetary aggregates convey useful information about variables such as commodity prices which matter for aggregate demand and thus inflation. Given this clear empirical pattern it appears justified to argue that global liquidity merits attention in the same way as the worldwide level of interest rates received in the recent debate about the world savings and liquidity glut as one of the main drivers of the current financial crisis, if not possibly more.
    Keywords: Commodity prices, cointegration, CVAR analysis, global liquidity, inflation, international spillovers
    JEL: E31 E52 C32 F42
    Date: 2010
  3. By: Williamson, Stephen
    Abstract: A model of monetary exchange with private financial intermediation is constructed. Claims on financial intermedaries of two types are traded in transactions: circulating notes and deposits. There can be a role for the government in supplying liqudity, and level changes in the money supply accomplished through open market operations can be nonneutral. A Friedman rule is suboptimal, due to costs of maintaining the stock of currency. The model is used to address some issues related to current monetary policy in the United States.
    Keywords: Monetary policy; financial intermediation; financial crisis
    JEL: E5 E4
    Date: 2009–12
  4. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sarah M. Lein (Swiss National Bank, Zurich)
    Abstract: In the aftermath of the euro cash changeover consumers’ inflation perceptions rose substantially in the euro area countries while actual inflation figures remained almost unchanged. During that period media reporting on the potentially large inflationary effect of the euro introduction intensified. In this paper we argue that the information set of the public has been distorted through the significant slant in the media. Employing an unique dataset for Germany, we provide evidence that media reporting has a statistically significant and economically meaningful impact on inflation perceptions and contributed to their sharp rise in the aftermath of the euro cash changeover.
    Keywords: Monetary policy, inflation perceptions, media coverage, media bias
    JEL: E52 D83
    Date: 2010–02
  5. By: William Barnett (Department of Economics, The University of Kansas); ;
    Abstract: An independent institute for monetary statistics is needed in the United States, says William Barnett in paper to appear in the journal, Central Banking. Expanded Congressional audit would be a second best alternative, but would not fully address the needs and would carry risks.
    Keywords: Central banking, Federal Reserve, data institute, monetary aggregation, monetary policy, audit, GAO.
    JEL: C82 E01 E41 E50
    Date: 2010–01
  6. By: Andrés Alvarez
    Abstract: This paper presents Léon Walras and Augustin Cournot views on monetary regulation. Important differences can be found in their views about the convenience of the issuing of paper money and fiat money in general. Whereas Walras is against bank notes, even if coming from a central bank, Cournot has a moderate position. He accepts the need for bank notes even without a strict adjustment to metal reserves. It can be ascertained that Cournot believes discretionary monetary regulation is convenient and acceptable, while Walras believes the only acceptable monetary system is one based exclusively on the stability of the value of money under a monetary rule following the strict equivalence between metallic reserves and a pure medium of exchange form of money. This paper shows Cournot’s ability to understand more clearly than Walras the evolution of the monetary system of his days. Whereas Walras is trying to guarantee the coherence of his pure theory with his applied theory, and he is then unable to accept the evolution toward a monetary system based on fiat money and he proposes very rigid and complex system of quasi-bimetallic circulation where banks are simple mediators between entrepreneurs and savings.
    Date: 2010–02–11
  7. By: Williamson, Stephen; Sanches, Daniel
    Abstract: We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.
    Keywords: Money; Credit; Limited Commitment; Monetary Policy
    JEL: E5 E4
    Date: 2009
  8. By: Linda S. Goldberg; Craig Kennedy; Jason Miu
    Abstract: Following a scarcity of dollar funding available internationally to financial institutions, in December 2007 the Federal Reserve began to establish or expand Temporary Reciprocal Currency Arrangements with fourteen other central banks. These central banks had the capacity to use the swap facilities to provide dollar liquidity to institutions in their jurisdictions. This paper presents the developments in the dollar swap facilities through the end of 2009. The facilities were a response to dollar funding shortages outside the United States and were effective at making dollars more broadly available to financial institutions overseas during a period of market dysfunction. Formal research, as well as more descriptive accounts, suggests that the dollar swap lines among central banks were effective at reducing the dollar funding pressures abroad and the stresses in money markets. While these findings are compelling, it is still difficult to draw definitive lessons on particular facilities given the numerous changes over time in market conditions and policy responses.
    Keywords: Banks and banking, Central ; Swaps (Finance) ; Foreign exchange ; Dollar, American ; Liquidity (Economics) ; Currency convertibility ; Federal Reserve System
    Date: 2010
  9. By: Ansgar Belke; Jens Klose
    Abstract: We assess differences that emerge in Taylor rule estimations for the Fed and the ECB before and after the start of the subprime crisis. For this purpose, we apply an explicit estimate of the equilibrium real interest rate and of potential output in order to account for variations within these variables over time. We argue that measures of money and credit growth, interest rate spreads and asset price inflation should be added to the classical Taylor rule because these variables are proxies of a change in the equilibrium interest rate and are, thus, also ikely to have played a major role in setting policy rates during the crisis. Our empirical results gained from a state-space model and GMM estimations reveal that, as far as the Fed is concerned, the impact of consumer price inflation, and money and credit growth turns negative during the crisis while the sign of the asset price inflation coefficient turns positive. Thus we are able to establish significant differences in the parameters of the reaction functions of the Fed before and after the start of the subprime crisis. In case of the ECB, there is no evidence of a change in signs. Instead, the positive reaction to credit growth, consumer and house price inflation becomes even stronger than before. Moreover we find evidence of a less inertial policy of both the Fed and the ECB during the crisis.
    Keywords: Subprime crisis, Federal Reserve, European Central Bank, equilibrium real interest rate, Taylor rule
    JEL: E43 E52 E58
    Date: 2010
  10. 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.
    Date: 2010
  11. By: Javier Andrés (Universidad de Valencia); Óscar Arce (CNMV); Carlos Thomas (Banco de España)
    Abstract: We analyze optimal monetary policy in a model with two distinct financial frictions. First, borrowing is subject to collateral constraints. Second, credit flows are intermediated by monopolistically competitive banks, thus giving rise to endogenous lending spreads. We show that, up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: inflation, output gap, the consumption gap between constrained and unconstrained agents, and the distribution of the collateralizable asset between both groups. Following both financial and non-financial shocks, the optimal monetary policy commitment implies a short-run trade-off between stabilization goals. Such policy tradeoffs become amplified as banking competition increases, due to the fall in lending spreads and the resulting increase in financial leveraging.
    Keywords: banking competition, lending spreads, collateral constraints, monetary policy, linear-quadratic method
    JEL: E32 E52 G10 G21
    Date: 2010–02
  12. By: Tierney, Heather L.R.
    Abstract: This paper tracks data revisions in the Personal Consumption Expenditure using the exclusions-from-core inflation persistence model. Keeping the number of observations the same, the regression parameters of earlier vintages of real-time data, beginning with vintage 1996:Q1, are tested for coincidence against the regression parameters of the last vintage of real-time data used in this paper, which is vintage 2008:Q2 in a parametric and two nonparametric frameworks. The effects of data revisions are not detectable in the vast majority of cases in the parametric model, but the flexibility of the two nonparametric models is able to utilize the data revisions.
    Keywords: Real-Time Data; Inflation Persistence; Nonparametrics; Monetary Policy; In-Sample Forecasting
    JEL: C53 C14 E52
    Date: 2010–02–01
  13. By: Di Maggio, Marco
    Abstract: This paper proposes a novel method to recover the market's beliefs about the Fed's monetary policy by using the responses of interest rates to economic news. We investigate the differential impact of news over time showing that the impact of this information is time varying, and that the importance of the housing and labor markets has sharply increased after the crisis. We follow a difference-in-difference estimation procedure to test for the presence of political constraints in the U.S., employing as control group the response of the European swap rates to macroeconomic announcements. We provide strong evidence that after the crisis of 2007, the Federal Reserve has been subject to the political pressure exerted by the Congress.
    Keywords: Fed; Financial Crisis; Political Pressure; Yield Curve; Political Constraints
    JEL: E43 G14 E58 G18
    Date: 2010–01–31
  14. By: Frankel, Jeffrey (Harvard University); Xie, Daniel (Peterson Institute for International Economics, Washington, DC)
    Abstract: A new technique for estimating countries' de facto exchange rate regimes synthesizes two approaches. One approach estimates the implicit de facto basket weights in an OLS regression of the local currency value rate against major currency values. Here the hypothesis is a basket peg with little flexibility. The second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up. Here the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly substantial degree of exchange rate flexibility around that anchor. It is important to have available a technique that can cover both dimensions: inferring anchor weights and the flexibility parameter. We test the synthesis technique on a variety of fixers, floaters, and basket peggers. We find that real world data demand a statistical technique that allows parameters and regimes to shift frequently. Accordingly we here take the next step in estimation of de facto exchange rate regimes: endogenous estimation of parameter breakpoints, following Bai and Perron.
    JEL: F31 F41
    Date: 2010–02
  15. By: Fragetta, Matteo
    Abstract: There is an ongoing debate on how to identify monetary policy shocks in SVAR models. Graphical modelling exploits statistical properties of data for identification and offers a data based tool to shed light on the issue. The information set of the monetary authorities, which is essential for the identification of the monetary shock seems to depend on availability of data in terms of higher frequency with respect to the policy instrument.
    Keywords: Monetary Policy; SVAR; Graphical Modelling;
    JEL: C32 E50
    Date: 2010–01
  16. By: Ansgar Belke; Daniel Gros
    Abstract: The global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both originate in the combination of economic policies adopted by the two key economies, the US and China. Global financial markets served as a transmission belt, both during the boom as during the bust. In the US, the interaction among the Fed's monetary stance, global real interest rates, distorted incentives in credit markets, and financial innovation created the mix of conditions which first drove growth, but then made the US the epicenter of the global financial crisis. Exchange rate and other economic policies followed by emerging markets such as China and the oil-exporting countries contributed to the US ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble during the upswing. But we find that the key drivers of asset prices are global liquidity conditions. Central banks flooded the markets with ample liquidity. Mopping up this excess liquidity will be one major task for central banks worldwide, which needs to be done in a coordinated fashion. Moreover, our analysis has shown that liquidity will first show up in asset price inflation and only later in consumer goods inflation. This renders it difficult for central bank to exit from their current very expansive monetary policy stance if they continue to focus only on price stability.
    Keywords: Asset prices, China, current account adjustment, global liquidity, oil prices,<br /> savings glut, monetary policy, policy coordination
    JEL: E21 E43 E52 F32 F42 Q43
    Date: 2010
  17. By: Athanasios Orphanides; Min Wei
    Abstract: We explore the role of evolving beliefs regarding the structure of the macroeconomy in improving our understanding of the term structure of interest rates within the context of a simple macro-finance model. Using quarterly vintages of real-time data and survey forecasts for the United States over the past 40 years, we show that a recursively estimated VAR on real GDP growth, inflation and the nominal short-term interest generates predictions that are more consistent with survey forecasts than a benchmark fixed-coefficient counterpart. We then estimate a simple term structure model under the assumption that the investors' risk attitude is driven by near-term expectations of the three state variables. When we allow for evolving beliefs about the macroeconomy, the resulting term structure model provides a better fit to the cross section of yields than the benchmark model, especially at longer maturities, and exhibits better performance in out-of-sample predictions of future yield movements.
    Date: 2010
  18. By: Joerg Bibow
    Abstract: This paper investigates the United States dollar's role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007-09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the "Bretton Woods II" regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent U.S. current account deficits may turn into a "Bretton Woods III" regime that sees U.S. fiscal policy and public debt as "minding the store" in maintaining U.S. and global growth.
    Keywords: Reserve Currency; Global Monetary Order; Global Financial Crisis
    JEL: E12 E61 E62 F02 F33
    Date: 2010–02
  19. By: Muhammad Mahboob Ali (Atish Dipankar University of Science and Technology; Bangladesh); Victoria Wise (University of Houston-Downtown, USA)
    Abstract: The study had empirically tested the money supply function for Bangladesh using annual time series data. Authors observed that high-powered money played a very significant role in the money supply process of Bangladesh, particularly with respect to the narrow money supply M1, thus providing some support for the monetarist model. However, beyond the monetarist view, additional variables in the light of the Keynesian and structuralist analysis, such as bank rate, external resources, and financial liberalization need to be taken into account in understanding the money supply process of the country. Other aforesaid variables were also found to exert some influence on the broad money supply in Bangladesh. However, given the poor performance of the narrow money model and the existence of multicollinearity problem in both models, the estimated results, even for the broad money model, needed to be interpreted with caution.
    Date: 2010–02
  20. By: Inoue, Takeshi; Hamori, Shigeyuki
    Abstract: This study empirically analyzes the sources of the exchange rate fluctuations in India by employing the structural VAR model. The VAR system consists of three variables, i.e., the nominal exchange rate, the real exchange rate, and the relative output of India and a foreign country. Consistent with most previous studies, the empirical evidence demonstrates that real shocks are the main drives of the fluctuations in real and nominal exchange rates, indicating that the central bank cannot maintain the real exchange rate at its desired level over time.
    Keywords: Exchange Rate, India, RBI, SVAR, India, Foreign Exchange
    JEL: E31 F31
    Date: 2009–10
  21. By: Sampawende Jules TAPSOBA (Ministère de l'Economie et des Finances [France])
    Abstract: There are continuing efforts at the monetary integration and unionization in West Africa. Several academics argue that a monetary union among West African states would be costly because of the magnitude of asymmetric shocks. A common monetary policy is inappropriate and ineffective to respond to divergent shocks. Therefore, the stability of such a union is critically dependent on risk-sharing mechanisms for achieving income insurance and consumption smoothing. A monetary union is still optimal if output stabilization mechanisms such as risk-sharing institutions, are in place to cope with asymmetric shocks. This article estimates risk-sharing channels among West African states from 1970 to 2004. It uses the definition of national accounts to measure the fraction of asymmetric output shocks smoothed via net factors income, net transfers and net saving. We find that compared to the OECD (Organization for Economic Cooperation and Development) estimates, the degree of risk-sharing among West African countries is quite low. We also obtain that net saving is the significant and stable risk-sharing channel. A further analysis shows that only the contribution of public saving is significant.
    Keywords: Asymmetric shocks, Interstates Risk-sharing, West Africa
    Date: 2010
  22. By: Nikolaos Antonakakis (Department of Economics, University of Strathclyde)
    Abstract: This paper assesses the impact of official central bank interventions (CBIs) on exchange rate returns, their volatility and bilateral correlations. By exploiting the recent publication of intervention data by the Bank of England, this study is able to investigate interventions by a total number of four central banks, while the previous studies have been limited to three (the Federal Reserve, Bundesbank and Bank of Japan). The results of the existing literature are reappraised and refined. In particular, unilateral CBI is found to be more successful than coordinated CBI. The likely implications of these ndings are then discussed.
    Keywords: Central bank interventions; Foreign exchange; Multivariate GARCH; Conditional correlations
    JEL: C32 E58 F31 G15
    Date: 2010–02
  23. By: Bernard Philippe; Stéphane Mussard
    Abstract: In this paper, we investigate the analytical links between the rate of unemployment, monetary creation and how individuals share the value added in an economy with three types of agents : capital owners, managers and employees. This relationship relies on the fact that the rate of unemployment depends on many macroeconomic characteristics such as : creation of money, external balance of goods and services and mark-up pricing. The latter being decomposed into the expected margin rate and the growth rate of the unitary wage cost that characterize the primary value-added sharing.
    Keywords: Mark-up pricing, Unemployment rate, Value added
    JEL: E25 E24 C39
    Date: 2010–02–11
  24. By: Duo Qin (Queen Mary, University of London); Xinhua He (Chinese Academy of Social Sciences)
    Abstract: This study provides quarterly time-series estimates of the misalignment in the REER of the Renminbi (RMB). The estimation is based on a commonly used economic approach, but with a wider and more up-to-date coverage of data and a more extensive use of econometric modelling techniques. Our estimates corroborate and explain most of the previous estimates. More importantly, our estimates demonstrate that there is no significant undervaluation in the REER of the RMB though downward misalignment exists in the trilateral rates between the RMB, US$ and euro. The finding refutes the claim that RMB appreciation is the primary and necessary solution to the current global trade imbalance.
    Keywords: Real exchange rate misalignment
    JEL: F31 F41
    Date: 2010–02

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.