nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒03‒13
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia By Kosta Josifidis; Jean-Pierre Allegret; Emilija Beker Pucar
  2. Is There a Case for Formal Inflation Targeting in Sub-Saharan Africa? By James Heintz; Léonce Ndikumana
  3. Measuring Monetary Policy in Open Economies By Diego, Cerdeiro
  4. Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward? By Filardo, Andrew; Genberg, Hans
  5. The Search for Co-Integrat1on Between Money, Pr1ces and Income: Low Frequency Ev1dence From the Turk1sh Economy By Cem Saati006flu; Levent Korap
  6. Long Term Dynamic of Real Exchange Rate, Trade Liberalization and Financial Integration: The Case of South-East Mediterranean Countries By Hadj Amor Thouraya; El Araj Rita
  7. Evaluating the Welfare Cost of Inflation in a Monetary Endogenous Growth General Equilibrium Model: The Case of South Africa By Rangan Gupta; Josine Uwilingiye
  8. Analysis of Shocks Affecting Europe: EMU and some Central and Eastern Acceding Countries By Nabil Ben Arfa
  9. "Regional and Global Short-term Financial Market Integration in Asia: Evidence from the Interbank Markets" By Shin-ichi Fukuda
  10. The Sensitivity of South African Inflation Expectations to Surprises By Monique Reid
  11. The Properties of Survey-Based Inflation Expectations in Sweden By Jonsson, Thomas; Österholm, Pär
  12. Asia confronts the impossible trinity. By Patnaik, Ila; Shah, Ajay
  13. Money in the Soviet Administrative Command Economy: A Quantitative Analysis By Yasushi Nakamura
  14. The Effects of Electronic Money on Money Demand: Time Series Analysis By Yukinobu Kitamura; Mahito Oomori; Kenta Nishida
  15. Modelling of the Inflation-Unemployment Tradeoff from the Perspective of the History of Econometrics By Duo Qin
  16. Financial amplification mechanisms and the Federal Reserve's supply of liquidity during the crisis By Asani Sarkar; Jeffrey Shrader
  17. Forward Exchange Rate Puzzle: Joining the Missing Pieces in the Rand-US Dollar Exchange Market By Lumengo Bonga-Bonga
  18. Term structure forecasting using macro factors and forecast combination By Michiel de Pooter; Francesco Ravazzolo; Dick van Dijk
  19. Money supply and capital accumulation on the transition path revisited By Cysne, Rubens Penha
  20. Liberalization and Regulation of Capital Flows: Lessons for Emerging Market Economies By Mohan, Rakesh; Kapur, Muneesh

  1. By: Kosta Josifidis (University of Novi Sad, Serbia; Faculty of Economics in Subotica, Department of European Economics and Business, Novi Sad); Jean-Pierre Allegret (Universit 0064e Nice Sophia-Antipolis (France)); Emilija Beker Pucar (University of Novi Sad, Serbia; Faculty of Economics in Subotica, Department of European Economics and Business, Novi Sad)
    Abstract: The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.
    Keywords: Exchange rate targeting, Inflation targeting, Intermediate exchange rate regimes, Monetary transmission channels
    JEL: E42 E52 F41
    Date: 2009–03
  2. By: James Heintz; Léonce Ndikumana
    Abstract: <p>This working paper examines the question of whether inflation targeting monetary policy is an appropriate framework for sub-Saharan African countries. The paper presents an overview of inflation targeting, reviews the justification for the regime, and summarizes some major critiques. </p><p>Monetary policy responses to inflation depend on the source of inflationary pressures. Therefore, the determinants of inflation in African countries are<br />investigated, using dynamic panel data, and the implications for inflation targeting are discussed. These issues are examined in greater detail for the two African countries which have formally adopted inflation targeting, South Africa and Ghana. </p><p>The analysis is placed in the context of the global economic crisis. The paper concludes with a discussion of alternative approaches to monetary policies and the institutional constraints that would need to be addressed to allow central banks to play a stronger developmental role in sub-Saharan African countries.</p>
    Keywords: Sub-Saharan Africa, inflation, development, monetary policy, finance
    JEL: E31 E52 O55 O11
    Date: 2010
  3. By: Diego, Cerdeiro
    Abstract: The paper extends Bernanke and Mihov’s (1998) closed-economy strategy for identification of monetary policy shocks to open-economy settings, accounting for the simultaneity between interest-rate and exchange-rate innovations. The methodology allows a separate treatment of two distinct monetary policy shocks, one that operates through open market operations, and another one that takes place through interventions in the foreign exchange market. The results that the identification strategy yields when applied to the data of a small and open economy are free of the empirical anomalies previously found in the literature.
    Keywords: Identification; Structural Vector Autoregressions; Open economy; Monetary policy shock; Foreign Exchange Intervention; Endogenous monetary policy.
    JEL: C32 E58 E52
    Date: 2010
  4. By: Filardo, Andrew (Asian Development Bank Institute); Genberg, Hans (Asian Development Bank Institute)
    Abstract: Monetary policy frameworks in the Asia and Pacific region have performed well in the past decade as judged by inflation outcomes. We argue that this is due to three principal factors: (i) central banks have focused on price stability as the primary objective of monetary policy, (ii) institutional setups have been put in place that are supportive of the central banks' abilities to carry out their objectives, and (iii) economic policies in general have been supportive of the pursuit of price stability, in particular the adoption of prudent fiscal policies that have reduced concerns of fiscal dominance. <p>The financial systems in the region have also held up well in the face of the current crisis, notwithstanding more adverse liquidity conditions in several markets and pressures on certain exchange rates that spilled over from the West. <p>It may nevertheless be useful to ask whether changes in monetary policy frameworks should be contemplated. This paper concludes that: (i) for economies with well developed financial markets, there may be little value in using unconventional monetary policies in the absence of financial crises, because in normal times such policies are not likely to be effective and may further reduce the efficiency of the financial market; (ii) a good case can be made for elevating the role of the misalignment of asset prices (including exchange rates) and financial imbalances in the conduct of monetary policy; and (iii) financial stability should take on greater importance as an objective for public policy. Whether and how much of the financial stability objective should be assigned to the central bank is still an open question.
    Keywords: asian monetary policy frameworks; pacific monetary policy frameworks; future changes; monetary policy strategies; asia monetary policy
    JEL: E52 E58
    Date: 2010–02–15
  5. By: Cem Saati006flu (Istanbul University Faculty and Department of Economics); Levent Korap (Marmara University)
    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 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, Longspan Data, Turkish Economy
    JEL: C32 E51 E52 E61
    Date: 2009–03
  6. By: Hadj Amor Thouraya (University of Nice-Sophia Antipolis, CEMAFI (Centre dEtudes en Macroc006fnomie et Finance Internationale)); El Araj Rita (University of Nice-Sophia Antipolis, CEMAFI (Centre dEtudes en Macroc006fnomie et Finance Internationale))
    Abstract: n 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 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: Equilibrium real exchange rate, Misalignment, Trade liberalization, International financial integration, Cointegration, PSEM
    JEL: F36 F37 F41 G15
    Date: 2009–03
  7. By: Rangan Gupta (Department of Economics, University of Pretoria); Josine Uwilingiye (Department of Economics, University of Pretoria)
    Abstract: This paper uses the general equilibrium monetary endogenous growth model of Dotsey and Ireland (1996), in which inflation distorts a variety of marginal decisions, to evaluate the welfare cost of inflation in South Africa – a country, where, since the February of 2000, the sole objective of the central bank has been to keep the inflation rate within the target band of 3 percent to 6 percent. Although individually none of the distortions is very large, they combine to yield substantial welfare cost estimates ranging between 0.70 percent of GDP to 1.33 percent of GDP for the lower and upper limits of the target band. More importantly, the welfare costs obtained here are at least three times more than those derived previously for the South African economy based on partial equilibrium approaches. These higher estimates, thus, tend to make a case for a possibly lower and narrower target band.
    Keywords: Inflation, Growth, Welfare
    JEL: E31
    Date: 2010–02
  8. By: Nabil Ben Arfa (University of Nice - Sophia Antipolis; Faculty of Law, Political Science, Economic and Management; C.E.M.A.F.I; Macroeconomics and International Finance Center)
    Abstract: This paper deals with the synchronization of business cycles and economic shocks between the euro area and acceding countries. We therefore extract the business cycle component of output by using Hodrick-Prescott filter. Supply and demand shocks are recovered from estimated structural VAR models of output growth and inflation using long run restriction (Blanchard and Quah). We then check the (A) symmetry of these shocks by calculating the correlation between euro area shocks and those of the different acceding countries. We find that several acceding countries have a quite high correlation of demand shocks with the euro area however supply shocks are asymmetric; the correlation between euro area and central and east European countries (CEECs) is negative. We therefore conclude that joining the European Monetary Union is not yet possible: central and east European countries have to make structural changes to join the European Monetary Union.
    Keywords: Central and East European countries, Euro area, SVAR models, Hodrick- Prescott filter, Symmetric-asymmetric shocks
    JEL: E32 F42
    Date: 2009–03
  9. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)
    Abstract: In this paper, we explore how the Asian money markets have been integrated with the London money market since the 1990s. The Asian money markets we explore in the paper are the interbank markets in Tokyo, Singapore, and Hong Kong as well as those in Malaysia and Thailand. After matching the currency denomination, we investigate how each of Asian interbank rates has been synchronized with the London Interbank Offered Rate (LIBOR) since the 1990s. The sample period of our analysis is noteworthy because it includes two crisis periods, that is, 1997-1999 when the Asian financial crisis happened and 2007-2009 when the global financial crisis happened. We find that both Tokyo and Hong Kong markets as well as offshore markets in Singapore and Malaysia were highly synchronized with the London market in non-crisis periods. However, onshore markets in Singapore, Malaysia, and Thailand were less correlated with the London market and their interbank offered rates frequently showed substantial deviations from the covered interest parity. More interestingly, each Asian interbank rate showed substantially different degree of integration with the LIBOR in the two crisis periods. During the global financial crisis in 2007-2009, we find that the SIBOR remained to be highly integrated with the dollar-denominated LIBOR. However, there were remarkable asymmetric responses in the other Asian markets in how to reflect regional risk premium under the global financial crisis. The asymmetric impacts in the dollar-denominated and local currency-denominated markets had a feature of "home bias" reflecting different liquidity premia under the financial crisis.
    Date: 2010–02
  10. By: Monique Reid
    Date: 2009
  11. By: Jonsson, Thomas (National Institute of Economic Research); Österholm, Pär (National Institute of Economic Research)
    Abstract: This paper assesses the properties of survey-based inflation expectations in Sweden. The survey is conducted by Prospera once every quarter and consists of respondents from businesses and labour-market organisa-tions. The paper shows that inflation expectations measured in this sur-vey tend to be biased and inefficient forecasts of future inflation. Results also indicate that long-run inflation expectations are overly adaptive with respect to actual inflation. Finally, evaluations of forecast accuracy show that these inflation expectations are worse predictors of inflation than those of a professional forecasting institution and also typically outper-formed by a simple autoregressive model. Overall, our results indicate that economic agents’ expectations formation process is suboptimal and/or the survey fails to capture the true inflation expectations.
    Keywords: Survey data; Inflation targeting
    JEL: E52
    Date: 2009–12–01
  12. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In this paper, we examine capital account openness and exchange rate exibility in 11 Asian countries. 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 exibility, most Asian countries continue to have largely inexible exchange rates. This combination { of moving forward with de facto capital account integration without bringing in exchange rate exibility { has lead to procyclicality of monetary policy when capital ows are procyclical. The paper emphasises the case for a consistent monetary policy framework.
    Date: 2010–01
  13. By: Yasushi Nakamura
    Abstract: This paper quantitatively examined the relation between money and real economy in the Soviet economy. The institutional and historical analysis of the Soviet monetary management yielded the tasks of quantitative analysis. The quantitative analysis showed that the institutional division of cash and non-cash was effective, demand for cash was not predictable, and there was no significant relation between money and real production. This result suggested that the Soviet monetary management relying on some vague money supply target could not function well and only the control on wage which was supported by the division of cash and non-cash could weakly ceil money supply. A fundamental problem of the Soviet economy seemed that a mechanism to bridge between money and real economy was lacked, while money was used. It is, therefore, difficult to regard the Soviet economic system as an complete economic system equivalent to the market economy.
    Date: 2010–02
  14. By: Yukinobu Kitamura; Mahito Oomori; Kenta Nishida
    JEL: E41 E42
    Date: 2010–02
  15. By: Duo Qin (Queen Mary, University of London)
    Abstract: This paper examines the history of econometrics through a particular case study - modelling the tradeoff between inflation and unemployment. It focuses on the questions of what econometric tools modellers would choose to model the tradeoff, how their choices helped shape the ways that they obtained, interpreted and theorised the empirical evidence and how their different concerns and the different problems that they encountered has fed back into the development of econometrics. The study reveals that much of the interaction between econometrics and economics involved modellers taking certain tradeoffs between theory and data, and their different positions generated disputes, factions as well as confusions. It also reveals that the history of modelling the tradeoff mirrors the evolving process of how the Cowles structural modelling paradigm in econometrics became consolidated, challenged, reformed or abandoned.
    Keywords: Phillips curve, History of econometrics
    JEL: B23
    Date: 2010–02
  16. By: Asani Sarkar; Jeffrey Shrader
    Abstract: The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in light of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between financial constraints and asset prices. By comparison, the Fed's later-stage crisis programs take into account adverse-selection amplifications that operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new empirical evidence that increases in the Federal Reserve's liquidity supply reduce interest rates during periods of high liquidity risk. Our analysis has implications for the impact on market prices of a potential withdrawal of liquidity supply by the Fed.
    Keywords: Assets (Accounting) ; Bank assets ; Interest rates ; Bank liquidity ; Financial crises ; Federal Reserve System
    Date: 2010
  17. By: Lumengo Bonga-Bonga
    Date: 2009
  18. By: Michiel de Pooter (federal Reserve Board); Francesco Ravazzolo (Norges Bank (Central Bank of Norway)); Dick van Dijk (Erasmus University, Rotterdam)
    Abstract: We examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S.interest rates. We start off by analyzing and comparing the forecast performance of several individual term structure models. Our results confirm and extend results found in previous literature that adding macroeconomic information, through factors extracted from a large number of individual series, tends to improve interest rate forecasts. We then show, however, that the predictive power of individual models varies over time significantly. Models with macro factors are the more accurate in and around recession periods. Models without macro factors do particularly well in low-volatility subperiods such as the late 1990s. We demonstrate that this problem of model uncertainty can be mitigated by combining individual model forecasts. Combining forecasts leads to encouraging gains in predictability, especially for longer-dated maturities, and importantly, these gains are consistent over time.
    Keywords: Term structure of interest rates, Nelson-Siegel model, Affine term structure model, macro factors, forecast combination, Model Confidence Set
    JEL: C5 C11 C32 E43 E47
    Date: 2010–03–01
  19. By: Cysne, Rubens Penha
    Abstract: Fischer (1979) and Asako (1983) analyze the sign of the correlation between the growth rate ofmoney and the rate of capital accumulation on the transition path. Both plug a CRRA utility(based on a Cobb-Douglas and a Leontief function, respectively) into Sidrauski's model - yetreturn contrasting results. The present analysis, by using a more general CES utility, presents bothof those settings and conclusions as limiting cases, and generates economic gures more consistentwith reality (for instance, the interest-rate elasticity of the money demands derived from thoseprevious works is necessarily 1 and 0, respectively).R
    Date: 2010–02–22
  20. By: Mohan, Rakesh (Asian Development Bank Institute); Kapur, Muneesh (Asian Development Bank Institute)
    Abstract: Capital flows to emerging market economies (EMEs) have been characterized by high volatility since the 1980s. In recent years (especially since 2003), although gross as well as net capital flows to the EMEs have increased, they could not be absorbed domestically. Overall, savings have flowed uphill from EMEs to advanced economies, challenging the conventional view that capital flows to EMEs are always beneficial through augmentation of their resources leading to greater investment. Full capital account liberalization can impart avoidable volatility and have an adverse impact on growth prospects of EMEs. Available evidence is strongly in favor of a calibrated and well-sequenced approach to opening up the capital account and its active management, along with complementary reforms in other sectors. Greater caution is needed in the liberalization of debt flows. <p>Despite much advice to the contrary, most EMEs manage their capital accounts actively to cushion their economies from undue volatility, including interventions in the foreign exchange markets accompanied by sterilization. Sound macroeconomic and financial policies-accompanied by prudent capital account management, greater exchange rate flexibility, purposive use of prudential regulation, and continued financial market development practiced by most Asian EMEs over the past decade-have cushioned their economies from the current global financial crisis that started in 2007. They have successfully achieved a virtuous circle of continuing growth, low and stable inflation, and financial stability. How these elements can be best combined will depend on the country and on the period: There is no "one size fits all." <p>Such a discretionary approach does put a great premium on the skill of policymakers and can run the risk of markets perceiving central bank actions becoming uncomfortably unpredictable. Such risk is mitigated by a record of successful management.
    Keywords: capital flows emerging markets; liberalization regulation capital flows; emerging markets capital account management; capital flows; emerging market economies
    JEL: E42 E44 E52 E58 F30 F40 G15
    Date: 2010–01–14

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