nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒03‒20
23 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Comparing Monetary Policy Rules in a Small Open Economy Framework: An Empirical Analysis Using Bayesian Techniques By Eschenhof, Sabine
  2. Estimating a Monetary Policy Rule for India By Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
  3. Optimal Monetary Policy under Sectoral Heterogeneity in Inflation Persistence (Sektorel Enflasyon Ataleti Farkliligi Altinda Optimal Para Politikasi) By Sevim Kosem Alp
  4. Regime-dependent effects of monetary policy shocks. Evidence from threshold vector autoregressions By Martin Mandler
  5. Monetary Policy with Heterogeneous Households and Financial Frictions By Jae Won Lee
  6. Endogenous Price Flexibility and Optimal Monetary Policy By Ozge Senay; Alan Sutherland
  7. Real Interest Rates, Bubbles and Monetary Policy in the GCC countries By E. M. Bentour; W. A. Razzak
  8. Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa By Patrick Minford; Ruthira Naraidoo
  9. Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy By Ozge Senay; Alan Sutherland
  10. Should the central bank be concerned about housing prices? By Karsten Jeske; Zheng Liu
  11. The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money By Moritz Ritter
  12. Standard Taylor rules revisited - A cross country study for European countries By Eschenhof, Sabine
  13. Standard Taylor rules revisited - A cross country study for European countries By Eschenhof, Sabine
  14. Time-varying dynamics of the real exchange rate. A structural VAR analysis By Mumtaz, Haroon; Sunder-Plassmann, Laura
  15. New Monetarist Economics: Models By Williamson, Stephen D.; Wright, Randall
  16. Managing beliefs about monetary policy under discretion By Elmar Mertens
  17. Announced Regime Switch: Optimal Policy for Transition Period By Frantisek Brazdik
  18. Sticky Information vs Sticky Prices: An Empirical comparison within a D S G E framework for the Euro Area By Haider, Adnan; Ramzi, Drissi
  19. Is Euro Area Money Demand (Still) Stable?: Cointegrated VAR versus Single Equation Techniques By Ansgar Belke; Robert Czudaj
  20. Currency crises: The case of Hungary (2008-2009) By Dimitrios Dapontas
  21. The Tax-Foundation Theory of Fiat Money By Dror Goldberg
  22. Uncertainty and Currency Crises: Evidence from Survey Data By Prati, Alessandro; Sbracia, Massimo
  23. Legal Tender By Dror Goldberg

  1. By: Eschenhof, Sabine
    Abstract: This paper examines the role of exchange rate changes in the monetary policy for the Euro Area. Moreover, it compares different Taylor-type policy rules with respect to the numerical results as well as the impulse responses to exogenous shocks and the fit of the different data model specifications when using the underlying data. Overall, a monetary policy rule which includes the expected inflation rate as well as the output gap performs best and supports a possible role of exchange rate changes in the Euro Area's monetary policy.
    Keywords: Bayesian Estimation, Small Open Economy, Monetary Policy, Taylor Rule
    Date: 2009–12
  2. By: Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
    Abstract: We investigate whether the seemingly discretionary and flexible approach of India’s central bank, the Reserve Bank of India (RBI), can in practice be described by a Taylor-type rule. We estimate an exchange rate-augmented Taylor rule for India over the period 1980Q1 to 2008Q4, allowing for potential structural shifts between the pre- and post-liberalization periods in order to capture the potential impact of macroeconomic and institutional changes on the RBI's monetary policy rule. Overall, we find that the output gap seems to matter more to the RBI than inflation, there is greater sensitivity to Consumer Price (CPI) inflation that Wholesale Price (WPI) inflation, and exchange rate changes do not play an important role in constraining monetary policy. Moreover, the post-1998 conduct of monetary policy seems to have changed in the direction of less inertia.
    Keywords: Reserve Bank of India; Monetary Policy; Taylor Rule; Indian Economy
    JEL: E43 E58 E52
    Date: 2010–03–03
  3. By: Sevim Kosem Alp
    Date: 2010
  4. By: Martin Mandler (University of Giessen, Department of Economics and Business, Licher Straße 66, D-35394 Gießen)
    Abstract: This paper studies regime dependence in the effects of monetary policy shocks for the U.S. using a threshold vector autoregressive model. In a high inflation regime the standard results from the literature obtain. In a low inflation regime output shows no significant response to monetary policy while the inflation response is negative. The paper endogenously determines two distinct regimes, while the literature thus far only considers alternative subsamples.
    Keywords: monetary policy shocks, threshold vector autoregression
    JEL: E52 E58 C32
    Date: 2010
  5. By: Jae Won Lee (Rutgers University, Department of Economics)
    Abstract: This paper presents and estimates a sticky-price model with heterogenous households and financial frictions. Frictions in state-contingent asset markets lead to imperfect risk-sharing among households with idiosyncratic labor incomes. I study the impacts of the introduced financial frictions on optimal monetary policy by documenting implications for the central bank's objective function, the equation that characterizes inflation-output gap trade-offs, targeting rules, interest rate rules, and welfare of the economy. Employing the estimated model, the paper argues that the central bank should place a stronger emphasis on stabilizing inflation than it has, and failing to do so can generate nontrivial welfare costs.
    Keywords: monetary policy, financial frictions, heterogeneous households, New Keynesian, nominal rigidities
    JEL: E
    Date: 2010–02–12
  6. By: Ozge Senay; Alan Sutherland
    Abstract: Much of the literature on optimal monetary policy uses models in which the degree of nominal price flexibility is exogenous. There are, however, good reasons to suppose that the degree of price flexibility adjusts endogenously to changes in monetary conditions. This paper extends the standard New Keynesian model to incorporate an endogenous degree of price flexibility. The model shows that endo?genising the degree of price flexibility tends to shift optimal monetary policy towards complete inflation stabilisation, even when shocks take the form of cost-push distur?bances. This contrasts with the standard result obtained in models with exogenous price flexibility, which show that optimal monetary policy should allow some degree of inflation volatility in order to stabilise the welfare-relevant output gap.
    Keywords: Welfare, Endogenous Price Flexibility, Optimal Monetary Policy.
    JEL: E31 E52
    Date: 2010–02
  7. By: E. M. Bentour; W. A. Razzak
    Abstract: The Gulf Cooperation Council countries (GCC) include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Their monetary policy objective is to stabilize the foreign price, i.e., exchange rate instead of the domestic price level, where the nominal interest rate is equalized with the US federal fund rate, but the inflation rates are independent. High oil prices and the depreciating US dollar caused inflation to rise and real interest rates to be persistently negative in the UAE and Qatar. Asset prices bubbles formed then burst creating large loses. They could have moderated the effect of, or avoided, the bubble had they floated the currency and stabilized domestic prices.
    Keywords: Inflation, real interest rate, bubbles.
    JEL: E31 E37 E58
    Date: 2010–01–03
  8. By: Patrick Minford; Ruthira Naraidoo (Department of Economics, University of Pretoria; Department of Economics, University of Pretoria)
    Abstract: This paper estimates the optimal monetary authorities’ response to deviations of inflation and output from their target values for South Africa over the inflation targeting era. This is achieved using an empirical framework that allows the central bank’s policy preferences to be zone-like as well as asymmetric. The main findings are that the monetary authorities react in a passive manner when inflation is within the target band and become increasingly aggressive when it deviates from the target band and that they react with the same level of aggressiveness regardless whether inflation overshoots or undershoots the inflation target band, that is, the monetary authorities’ response towards inflation is zone symmetric. The second major finding shows that the monetary authorities’ response to output fluctuations is asymmetric such that they react more aggressively to negative deviations of output from the potential, therefore weighing more business cycle recessions versus expansions.
    Keywords: monetary policy preferences, target zones, asymmetries
    JEL: C51 C52 E52 E58
    Date: 2010–03
  9. By: Ozge Senay; Alan Sutherland
    Abstract: The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign pro?ducers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.
    Keywords: Monetary Policy, Foreign Monetary Shocks, Expenditure Switching, Exchange Rates, Local Currency Pricing, Reference Currency.
    JEL: E52 F41 F42
    Date: 2010–02
  10. By: Karsten Jeske; Zheng Liu
    Abstract: Housing is an important component of the consumption basket. Since both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. Since production of housing services uses the stocks of housing intensively, large fluctuations in the price of housing stocks lead to large adjustments in reset rental prices. This weak strategic complementarity in rental price setting calls for a small optimal weight on rental price inflation.
    Keywords: Housing - Prices ; Monetary policy ; Inflation targeting
    Date: 2010
  11. By: Moritz Ritter (Department of Economics, Temple University)
    Abstract: This paper incorporates a distortionary tax into a microfoundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy alter the agents’ surplus shares; monetary, but not fiscal, policy affects the agents’ bargaining position, leaving a special role for monetary policy. If the buyers surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy includes a money growth rate above that prescribed by the Friedman rule, even in the presence of fiscal policy instruments.
    Keywords: Money, Search, Friedman Rule, Sales Tax
    JEL: E62 E63 H21
    Date: 2010–03
  12. By: Eschenhof, Sabine
    Abstract: In this paper we want to estimate basic Taylor rules with a cross country study approach for European countries before the reorganization of the system of central banks. We compare basic and extended Taylor rules to give a hint if the exchange rate plays a significant role in the decision making of monetary policy. Fixed Effects, GMM and SGMM estimators are used to check for robustness. The obtained results adumbrate that there may be an influence of exchange rate changes on the monetary policy decision making process but the results are not fully robust and deliver only a weak tendency.
    Keywords: Cross Country Study, Taylor Rules, Exchange Rate, FE Estimation, SGMM Estimation
    Date: 2009–12
  13. By: Eschenhof, Sabine
    Abstract: In this paper we want to estimate basic Taylor rules with a cross country study approach for European countries before the reorganization of the system of central banks. We compare basic and extended Taylor rules to give a hint if the exchange rate plays a significant role in the decision making of monetary policy. Fixed Effects, GMM and SGMM estimators are used to check for robustness. The obtained results adumbrate that there may be an influence of exchange rate changes on the monetary policy decision making process but the results are not fully robust and deliver only a weak tendency.
    Keywords: Cross Country Study, Taylor Rules, Exchange Rate, FE Estimation, SGMM Estimation
    Date: 2009–12
  14. By: Mumtaz, Haroon (Bank of England); Sunder-Plassmann, Laura (University of Minnesota)
    Abstract: The aim of this paper is to explore the evolution of real exchange rate dynamics over time. We use a time-varying structural vector autoregression to investigate the role of demand, supply and nominal shocks and consider their impact on, and contribution to fluctuations in, the real exchange rate, output growth and inflation in four major economies over the past four decades. Our analysis therefore extends recent empirical research on evolving macroeconomic dynamics which has primarily focused on inflation and output and the time-varying impact of monetary policy on these variables. In addition we generalise recent VAR studies on exchange rate dynamics where the analysis is limited to a time-invariant setting. Our main results are as follows. The transmission of demand, supply and nominal shocks to the real exchange rate, output and inflation has changed substantially over time. Demand shocks have a larger impact on the real exchange rate after the mid-1980s for the United Kingdom, euro area and Japan and after the mid-1990s for Canada. Nominal shocks had a larger impact on output and inflation during the 1970s relative to the recent past. The forecast error variance of the real exchange rate is explained mainly by demand shocks with a smaller role for nominal shocks.
    Keywords: Real exchange rate; time-varying VAR; sign restrictions; Bayesian estimation
    JEL: C32 E42 F31 F33
    Date: 2010–03–10
  15. By: Williamson, Stephen D.; Wright, Randall
    Abstract: he purpose of this paper is to discuss some of the models used in New Monetarist Economics, which is our label for a body of recent work on money, banking, payments systems, asset markets, and related topics. A key principle in New Monetarism is that solid microfoundations are critical for understanding monetary issues. We survey recent papers on monetary theory, showing how they build on common foundations. We then lay out a tractable benchmark version of the model that allows us to address a variety of issues. We use it to analyze some classic economic topics, like the welfare effects of inflation, the relationship between money and capital accumulation, and the Phillips curve. We also extend the benchmark model in new ways, and show how it can be used to generate new insights in the study of payments, banking, and asset markets.
    Keywords: monetarism; monetary theory; monetary policy; banking; financial intermediation
    JEL: E5 E4 E3
    Date: 2010–02–28
  16. By: Elmar Mertens
    Abstract: In models of monetary policy, discretionary policymaking often lacks the ability to manage public beliefs, which explains the theoretical appeal of policy rules and commitment strategies. But as shown in this paper, when a policymaker possesses private information, belief management becomes an integral part of optimal discretion policies and improves their performance. ; Solving for optimal policy in a simple New Keynesian model, this paper shows how discretionary losses are reduced when the policymaker has private information. Furthermore, disinflations are pursued more vigorously, when the hidden information problem is larger, even when inflation is partly backward-looking.
    Date: 2010
  17. By: Frantisek Brazdik
    Abstract: The novelty of this work is the presentation of the theoretical framework that allows to model annonced change of the monetary regime. I analyze behavior of small open economy that announced to adopt a monetary policy regime with focus on offsetting nominal exchange rate changes in given number of periods. First, I analyze effects for macroeconomic stability of choice of the monetary regime for transition period. For this analysis, I consider representative types of monetary regimes in the annoncement-change period. I also try to rank the examined regimes in terms of loss functions. Moreover, I try to analyze the evolution of business cycles synchronization over the transition.
    Keywords: New Keynesian Models, Small Open Economy, Monetary regime change.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2009–12
  18. By: Haider, Adnan; Ramzi, Drissi
    Abstract: In this paper we estimate four competing closed economy DSGE models: a standard Calvo (1983) type pricing model; Hernandez’s (2004) state-dependent pricing model; Mankiw and Reis (2002) standard sticky information model; and a mixed version of sticky price-information model. Each model incorporates various other standard New-Keynesian features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilization. Using Bayesian Simulation techniques, we estimate each DSGE model for the Euro Area. While estimation, we also studies the welfare properties of various monetary policies. In particular, the Ramsey allocation has been computed, giving a natural benchmark for welfare comparisons. Our interesting results show that despite the apparent similarities of all models, their responses to shocks and fit to data are quite different and there is no agreement on their relative performance. As a result, Monetary Authorities cannot afford to rely on a single reference model of the economy but need a large number of alternative modeling tools available when they take their decision of optimal monetary policy.
    Keywords: new Keynesian economics; DSGE models; nominal rigidities; monetary policy; Bayesian Approach
    JEL: E32 E31 E37
    Date: 2010–03–03
  19. By: Ansgar Belke; Robert Czudaj
    Abstract: In this paper we present an empirically stable euro area money demand model. Using a sample period until 2009:2 shows that the current financial and economic crisis that started in 2007 does not appear to have any noticeable impact on the stability of the euro area money demand function. We also compare single equation methods like the ARDL approach, FM-OLS, CCR and DOLS with the commonly used cointegrated Johansen VAR framework and show that the former are under certain circumstances more appropriate than the latter. What is more, they deliver results that are more in line with the economic theory. Hence, FMOLS, CCR and DOLS are useful in estimating standard money demand as well, although they have only been rarely applied for this purpose in previous studies.
    Keywords: ARDL model, cointegration, euro area, financial crisis, money demand
    JEL: C12 C22 C32 E41 E43 E58
    Date: 2010
  20. By: Dimitrios Dapontas
    Abstract: This work is explaining the currency crisis in Hungary lasted from October 2008 to March 2009.The Forward spread of the country’s currency (Forint) is selected as a dependent variable along with a set of independent macroeconomic and social variables.
    Keywords: currency crisis, developing economies, structural reforms.
    Date: 2010
  21. By: Dror Goldberg (Department of Economics, Bar Ilan University)
    Abstract: A government can promote the use of an object as the general medium of exchange by accepting it in tax payments. I prove this old claim in a dynamic model and compare the mechanism to convertibility. The government can often keep its favourite money in circulation even while increasing its quantity and thus causing it to decrease in value. This opens the door for an inflationary policy. Most successful fiat moneys have been acceptable for tax payments, typically due to legal tender laws. Numerous historical failures of fiat moneys are consistent with the theory.
    Date: 2009–04
  22. By: Prati, Alessandro; Sbracia, Massimo
    Abstract: This paper studies empirically how uncertainty affects speculation in the foreign exchange markets. We use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals. We find that uncertainty has a non-monotone effect on exchange rate pressures: namely, uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad. We prove that this prediction arises from a broad class of currency crisis theories, ranging from first-generation to global-game models. We also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias.
    Keywords: First-generation models, Global games, Information, Speculation
    JEL: D84 D82 F31
    Date: 2010–03
  23. By: Dror Goldberg (Department of Economics, Bar Ilan University)
    Abstract: The legal foundation of the monetary system is the law of legal tender. The “legal tender” concept is used in models to describe almost anything except for what it really means in actual laws. Such errors prevent an accurate evaluation of the importance of this legal status. This note explains in simple terms what “legal tender” really means.
    Keywords: Legal tender; Contract law; Taxes
    JEL: E42 K12
    Date: 2009–04

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