|
on Monetary Economics |
| By: | Borek Vasicek |
| Abstract: | This paper has three objectives. First, it aims at revealing the logic of interest rate setting pursued by monetary authorities of 12 new EU members. Using estimation of an augmented Taylor rule, we find that this setting was not always consistent with the official monetary policy. Second, we seek to shed light on the inflation process of these countries. To this end, we carry out an estimation of an open economy Philips curve (PC). Our main finding is that inflation rates were not only driven by backward persistency but also held a forward-looking component. Finally, we assess the viability of existing monetary arrangements for price stability. The analysis of the conditional inflation variance obtained from GARCH estimation of PC is used for this purpose. We conclude that inflation targeting is preferable to an exchange rate peg because it allowed decreasing the inflation rate and anchored its volatility. |
| Keywords: | open emerging economies, CEE countries, monetary policy rules, open economy Phillips curve, conditional inflation variance |
| JEL: | E31 E52 E58 P24 |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-968&r=mon |
| By: | Sokic, Alexandre |
| Abstract: | The paper emerges from the failure of the traditional models of hyperinflation with rational expectations or perfect foresight. Using the insights from two standard optimizing monetary settings the paper shows that the possibility of perfect foresight monetary hyperinflation paths depends robustly on the essentiality of money. We show that the popular semilogarithmic form of the demand for money is not appropriate to analyse monetary hyperinflation with perfect foresight. We propose a simple test of money essentiality for the appropriate specification of the demand for money equation in empirical studies of hyperinflation. |
| Keywords: | monetary hyperinflation; inflation tax; money essentiality |
| JEL: | E31 E41 |
| Date: | 2010–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21503&r=mon |
| By: | Hendrickson, Joshua |
| Abstract: | The emerging consensus in monetary policy and business cycle analysis is that money aggregates are not useful as an intermediate target for monetary policy or as an information variable. The uselessness of money as an intermediate target is driven by empirical research that suggests that money demand is unstable. In addition, the informational quality of money has been called into question by empirical research that fails to identify a relationship between money growth and inflation, nominal income growth, and the output gap. Nevertheless, this research is potentially flawed by the use of simple sum money aggregates, which are not consistent with economic, aggregation, or index number theory. This paper therefore re-examines previous empirical evidence on money demand and the role of money as an information variable using monetary services indexes as monetary aggregates. These aggregates have the advantage of being derived from microtheoretic foundations as well as being consistent with aggregation and index number theory. The results of the re-evaluation suggest that previous empirical work might be driven by mismeasurement. |
| Keywords: | monetary aggregates; money; business cycles; money demand; cointegrated VAR |
| JEL: | E32 E31 E42 E41 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21477&r=mon |
| By: | Xavier Freixas |
| Abstract: | This paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort. It is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend upon the well functioning of the interbank market. As the crisis developed, liquidity vanished and the interbank market collapsed, central banks had to inject much more liquidity at low interest rates than predicted by standard monetary policy models. At the same time, as the interbank market did not allow for the redistribution of liquidity among banks, central banks had to design new channels for liquidity injection. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1200&r=mon |
| By: | Xavier Freixas; Antoine Martin; David Skeie |
| Abstract: | A major lesson of the recent financial crisis is that the interbank lending market is crucial for banks facing large uncertainty regarding their liquidity needs. This paper studies the efficiency of the interbank lending market in allocating funds. We consider two different types of liquidity shocks leading to different implications for optimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held among banks, the central bank should lower the interbank rate. This view implies that the traditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregate liquidity crisis, central banks should manage the aggregate volume of liquidity. Two different instruments, interest rates and liquidity injection, are therefore required to cope with the two different types of liquidity shocks. Finally, we show that failure to cut interest rates during a crisis erodes financial stability by increasing the risk of bank runs. |
| Keywords: | Bank liquidity, interbank markets, central bank policy, financial fragility, bank runs. |
| JEL: | G21 E43 E44 E52 E58 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1202&r=mon |
| By: | Juan Ignacio Aldasoro; Václav Žďárek |
| Abstract: | In this paper, we present evidence on the statistical features of observed dispersion in HICP inflation rates in the Euro area. Our descriptive exercise shows that there is still a remarkable dispersion of HICP inflation rates across the member countries. We find that most of dispersion originates in the non-traded categories of the HICP. This suggests that the main source of dispersion in countries' headline inflation rates is in those components of the HICP where non-traded goods (services, (public) goods with regulated and administered prices) are more intensely represented. We then examine the determinants of inflation differentials in a panel of the states of the Euro area in 1999–2007 using alternative classifications of this group and three different datasets. The evidence presented shows that output gaps and a proxy for price level convergence were statistically significant. On the other hand, some determinants that were found significant in previous studies (for example Honohan and Lane, 2003, 2004; ECB, 2003) has no impact on inflation in our expanded time span (e.g. exchange rate movements) The dispersion of HICP inflation is expected to increase in the coming years as the new EU member states will join the Euro area. There are some risks for these countries connected with the common monetary policy, which is adjusted more to the conditions of stabilized advanced economies forming the core of the Euro area. This creates potential problems for the EU common monetary policy (ECB), in particular negative (positive) interest rates, their repercussions on investment processes, consumption and the possibility of creating asset bubbles. |
| Keywords: | inflation differentials, price convergence, exchange rate, panel data |
| JEL: | C23 E31 F15 F41 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-958&r=mon |
| By: | Cerdeiro, Diego A. |
| Abstract: | The paper extends Bernanke and Mihov's [6] 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. Implementation of this strategy to the case of Argentina provides the stylized facts necessary to choose among competing theoretical models of this economy. In addition to studying the effects of monetary policy innovations, the present study sheds light on the endogenous component of monetary policy. In this regard, the paper finds that, notwithstanding the relative stability of the exchange rate and the accumulation of large amounts of international reserves, the central bank in Argentina has been far from absorbing balance of payments shocks in a currency-board fashion. The growing level of international reserves can be rationalized, instead, as the monetary authority's response to terms of trade, supply and domestic currency demand shocks. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Economic Stabilization,Emerging Markets,Economic Theory&Research |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5252&r=mon |
| 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 (defi ned 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 fi ts 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 signifi cant monetary transmission process from global liquidity to other macro variables such as goods prices. We fi nd further support of the conjecture that monetary aggregates convey useful information about variables such as commodity prices which matter for aggregate demand and thus infl ation. Given this clear empirical pattern it appears justifi ed 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 fi nancial crisis, if not possibly more. |
| Keywords: | Commodity prices; cointegration; CVAR analysis; global liquidity; infl ation; international spillovers |
| JEL: | E31 E52 C32 F42 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0167&r=mon |
| By: | Ansgar Belke; Barbara von Schnurbein |
| Abstract: | We analyze the ECB Governing Council’s voting procedures. The literature has by now discussed numerous aspects of the rotation model but does not account for many institutional aspects of the voting procedure of the GC. Using the randomization scheme based on the multilinear extension (MLE) of games, we try to close three of these gaps. First, we integrate specifi c preferences of national central bank presidents, i.e. their desired interest rates. Second, we address the agenda-setting power of the ECB president. Third, we do not simulate an average of the decisions but look at every relevant point in time separately. |
| Keywords: | Euro area; European Central Bank; monetary policy; rotation; voting rights |
| JEL: | D72 D78 E58 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0175&r=mon |
| By: | Melecky, Martin |
| Abstract: | Starting from the constraints and incentives that cause countries to issue debt in foreign currency, this paper provides an overview of policy approaches for choosing the optimal currency structure of sovereign foreign-currency debt. The objective of sovereign debt managers generally includes both risk and cost minimization, while constraints to foreign-currency debt allocation originate in the parameters of the domestic macroeconomy, the shocks it faces, and the initial conditions. Overall, the main parameters that drive the solutions for optimal currency allocation of foreign-currency debt are the covariances of macrovariables with exchange rates and the variances of different exchange rates. Both the covariances and the exchange rate volatility can be deceptive when a fixed exchange rate regime is maintained, however. To adequately capture the expected covariances in the context of managed exchange rate regimes, we suggest that sovereign debt managers work with equilibrium instead of actual exchange rates. For the same reason and because the estimates of relative exchange rate variances should be forward looking, we suggest using synchronization indicators in the policy analysis to better capture the underlying drivers of exchange rate volatility across currencies. |
| Keywords: | Sovereign Debt Management; Foreign-Currency Debt; Exchange Rates and Exchange Rate Volatility; External Shocks; Developing Countries. |
| JEL: | G11 H63 F36 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21268&r=mon |
| By: | Totzek, Alexander; Wohltmann, Hans-Werner |
| Abstract: | The aim of this paper is to solve the inconsistency problem à la Barro and Gordon within a New Keynesian model and to derive time-consistent (stable) interest rate rules of Taylor-type. We find a multiplicity of stable rules. In contrast to the Kydland/Prescott-Barro/Gordon approach, implementing a monetary rule where the cost and benefit resulting from inconsistent policy coincide - which implies a net gain of inconsistent policy behavior equal to zero - is not optimal. Instead, the solution can be improved by moving into the time-consistent area where the net gain of inconsistent policy is negative. We moreover show that under a standard calibration, the standard Taylor rule is stable in the case of a cost-push shock as well as under simultaneous supply and demand shocks. -- |
| Keywords: | Optimal monetary policy,New Keynesian macroeconomics,Reputational equilibria,time-consistent simple rules |
| JEL: | A20 E52 E58 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201004&r=mon |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We assess diff erences 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 infl ation 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 likely 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 infl ation, and money and credit growth turns negative during the crisis while the sign of the asset price infl ation coeffi cient turns positive. Thus we are able to establish signifi cant diff erences 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 infl ation becomes even stronger than before. Moreover we fi nd 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: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0166&r=mon |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Stephen M. Miller (College of Business, University of Las Vegas, Nevada); Dylan van Wyk (Department of Economics, University of Pretoria) |
| Abstract: | This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980’s influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzle’s absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions. |
| Keywords: | Monetary policy, Housing sector dynamics, Large-Scale BVAR models |
| JEL: | C32 R31 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201009&r=mon |
| By: | Rangan Gupta (University of Pretoria); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Dylan van Wyk (University of Pretoria) |
| Abstract: | This paper considers how monetary policy, a Federal funds rate shock, affects the dynamics of the US housing sector and whether the financial market liberalization of the early 1980Çs influenced those dynamics. The analysis uses impulse response functions obtained from a large-scale Bayesian Vector Autoregression (LBVAR) model over the periods 1968:01 to 1982:12 and 1989:01 to 2003:12, including 21 housing-sector variables at the national and four census regions. Overall, the 100 basis point Federal funds rate shock produces larger effects on the real house prices, both at the regional level and the national level, in the post-liberalization period when compared to the pre-liberalization era. While the precision of the estimates do not imply significant differences, the finding does offer a caution. That is, the housing market appears more sensitive to monetary policy shocks in the post-liberalization period. On the one hand, this suggests that monetary policy possesses increased leverage. On the other hand, the housing market cycle traditionally contributes an important component to the aggregate business cycle. Thus, the monetary authorities may need to exercise more care in implementing Federal funds rate adjustments going forward. In addition, contractionary monetary policy exerts a negative effect on house prices at the national level, indicating the absence of the price puzzle in small structural vector autoregressive models. The puzzleÇs absence in the housing sector possibly emerges as a result of proper identification of monetary policy shocks within a data-rich environment. Finally, we find that the reaction of housing sector proves heterogeneous across regions, with the housing sector in the South driving the national data after liberalization, while before liberalization, the Middle West appears to drive the housing market. The responses in the West differ the most from the other regions. |
| Keywords: | Monetary policy, Housing price dynamics, Large-Scale BVAR models |
| JEL: | C32 R31 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2010-06&r=mon |
| By: | Peter Heemeijer; Cars Hommes; Joep Sonnemans; Jan Tuinstra |
| Abstract: | We investigate how non-specialists form inflation expectations by running an experiment using a basic Overlapping Generations (OLG) model. The participants of the experiment are students of the University of Amsterdam, who predict inflation during 50 successive periods and are rewarded based on their accuracy. We include a central bank in the OLG model which increases the money supply at a constant rate. Participants are placed in separate OLG economies and are divided over two treatments: one with a "low" and one with a "high" money supply growth. We find that participants in the second treatment have substantially more difficulty in stabilizing inflation development by submitting accurate predictions than participants in the first treatment. However, when linear prediction rules are estimated on individual predictions, there is little difference between the two treatments. In both treatments, the most popular rules are Fundamentalist Expectations (predictions equal to the inflation sample mean) and Focal Expectations (predictions equal to a constant close to equilibrium). To verify whether participants adjust their prediction rules during the experiment, the estimated rules are checked for structural breaks. We find a surprisingly small number of structural breaks in both treatments. |
| Keywords: | Experimental economics; Expectations feedback; Inflation expectations; Price stability; Anchoring. |
| JEL: | C D E1 E2 E6 G J |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:241&r=mon |
| By: | Thomas I Palley |
| Abstract: | The Federal Reserve has recently activated its newly acquired powers to pay interest on reserves of depository institutions. The Fed maintains its new policy increases economic efficiency and intends it to play a lead role in the exit from quantitative easing. This paper argues it is a bad policy that (1) has a deflationary bias; (2) is costly to taxpayers and that cost will increase as normal conditions return; and (3) establishes institutional lock-in that obstructs desirable changes to regulatory policy. The paper recommends repealing the Fed’s power to pay interest on bank reserves. Second, the Fed should repeal regulation Q that prohibits payment of interest on demand deposits. Third, the Fed should immediately implement an alternative system of asset based reserve requirements (liquidity ratios) that will improve monetary control and can help exit quantitative easing at no cost to the public purse. Now is the optimal time for this change. Lastly, the paper argues the new policy of paying interest on reserves reveals the troubling political economy governing the actions of the Federal Reserve and policy recommendations of the economics profession. |
| Keywords: | Interest on reserves, asset based reserve requirements, liquidity ratios |
| JEL: | E40 E42 E43 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp221&r=mon |
| By: | Borek Vasicek |
| Abstract: | The paper seeks to shed light on inflation dynamics of four new EU member states (the Czech Republic, Hungary, Poland and Slovakia). To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds forward-looking component, the backward-looking one is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms. |
| Keywords: | Inflation dynamics, New Keynesian Phillips curve, CEE countries, GMM estimation |
| JEL: | C32 E31 |
| Date: | 2009–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-971&r=mon |
| By: | James Mitchell; Bache, I.W., Ravazzolo, F., Vahey, S.P. |
| Abstract: | We argue that the next generation of macro modellers at Inflation Targeting central banks should adapt a methodology from the weather forecasting literature known as `ensemble modelling\\\'. In this approach, uncertainty about model specifications (e.g., initial conditions, parameters, and boundary conditions) is explicitly accounted for by constructing ensemble predictive densities from a large number of component models. The components allow the modeller to explore a wide range of uncertainties; and the resulting ensemble `integrates out\\\' these uncertainties using time-varying weights on the components. We provide two examples of this modelling strategy: (i) forecasting inflation with a disaggregate ensemble; and (ii) forecasting inflation with an ensemble DSGE. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:337&r=mon |
| By: | L. Marattin; S. Salotti |
| Abstract: | The ongoing massive fiscal policy stimulus triggered increasing concerns on the potential impact on interest rate levels, as economic theory predicts. Particularly, the deterioration of some EMU countries’ fiscal positions has been putting at risk Eurozone’ financial stability. In this paper, we estimate a Panel VAR (PVAR) model on the EMU area employing annual data from 1970 to 2008 in order to assess the qualitative and quantitative impact of public debt on interest rates Our results show that prior to the introduction of the Euro an increase in public debt led to positive and significant effect on long-term nominal interest rates, with a stronger effect for high-debt countries. After the introduction of the single currency, the effect vanishes (in line with Bernoth 2004). We interpret this result as a confirmation of the crucial role of the monetary union in weakening the automatic risk-premium-based channel between debt shocks and returns on government bond. |
| JEL: | E62 G12 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:695&r=mon |
| By: | roman Horvath; Radovan Fiser |
| Abstract: | We examine the effects of the Czech National Bank communication, macroeconomic news and interest rate differential on exchange rate volatility using generalized autoregressive conditional heteroscedasticity model. Our results suggest that central bank communication has a calming effect on exchange rate volatility. The timing of central bank communication seems to matter, too, as financial markets respond more to the communication before the policy meetings than after them. Next, macroeconomic news releases are found to reduce exchange rate volatility, while interest rate differential seems to increase it. |
| Keywords: | central bank communication, exchange rate, GARCH |
| JEL: | E52 E58 F31 |
| Date: | 2009–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-962&r=mon |
| By: | Zahid, Asghar; Frahat , Tahira |
| Abstract: | This study attempts to estimate the rate of inflation in Pakistan by a stochastic approach to index numbers which provides not only point estimate but also confidence interval for inflation estimate. There are two approaches to index number theory namely: the functional economic approach and the stochastic approach. The attraction of stochastic approach is that it estimates the rate of inflation in which uncertainty and statistical ideas play a major roll of screening index numbers. We have used extended stochastic approach to index numbers for measuring the Pakistan inflation by allowing for the systematic changes in the relative prices. We use CPI data covering the period July 2001--March 2008. |
| Keywords: | Stochastic Approach; Index numbers; Inflation;OLS |
| JEL: | E31 |
| Date: | 2010–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21513&r=mon |
| 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 fi nancial 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; fi nancial crisis; money demand |
| JEL: | C12 C22 C32 E41 E43 E58 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0171&r=mon |
| By: | Gilles Duffrenot; Kimiko Sugimoto |
| Abstract: | This paper compares different nominal anchors in the case of a fixed exchange rate regime for the future single regional currency of the Economic Community of the West African States (ECOWAS). We study the anchor choice when the countries focus the exchange rate policy to promote internal and external competitiveness. We consider four foreign anchor currencies: the us dollar, the euro, the yen and the yuan. Using a counterfactual analysis, we find little support for a dominant peg in the ECOWAS zone. In attempting to select an anchor currency, as regards internal and external competitiveness, several aspects need to be taken into consideration: the variability of the commodity prices, adverse downward trend movements, the stability of export revenues and the invoicing currency. A discriminating element is the direction toward which the anchor currency moves, while the world price of commodities evolves in the opposite direction. Our simulations show that the countries would not agree on the same anchor if they pursue several goals: maximizing the export revenues, minimizing their variability, stabilizing them and minimizing the real exchange rate misalignments from its fundamental value. |
| Keywords: | West Africa, peg, counterfactual analysis, commodity prices |
| JEL: | F31 O11 O55 |
| Date: | 2010–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-974&r=mon |
| By: | Kalina Dimitrova; Luca Fantacci |
| Abstract: | The Bulgarian monetary system was established, immediately after independence. Having experienced it already under Ottoman rule, newly independent Bulgaria adopted the bimetallic standard. Without being a member of the Latin Monetary Union, it tried broadly to follow the principles of the convention, yet with some exceptions, the most important of which concerned the limit on silver coinage. The absence of such a clause in Bulgaria turned out to be crucial since the financial needs of the recently established state triggered excessive silver coinage which resulted in a persistent agio - a positive and variable difference between the legal and the commercial value of silver coins. The interference of fiscal authorities obstructed the Bulgarian National Bank's ability to manage money in circulation and to secure the monetary stability required by economic development). The attempts of the Bulgarian monetary authorities to eliminate the agio were unsuccessful until they acquired the right to issue silver-backed banknotes. Soon after that, in 1906, Bulgaria introduced a short-lived typical Gold standard. |
| Keywords: | financial stability, monetary autonomy, fiscal interference, Bulgaria |
| JEL: | E42 E51 E63 |
| Date: | 2010–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-979&r=mon |
| By: | Lilia Costabile |
| Abstract: | In this Working Paper, PERI Research Associate Lilia Costabile explores the potential causal links running from our international monetary system to global imbalances, and from these to the crisis. She asks whether the global imbalances contribute to the current crisis, whether these imbalances are, in turn, favored by, or rooted in, the current organization of the international monetary system, and whether a Keynesian monetary system reformed might cut some of the causes of global crises at their roots. Answering these with three qualified ‘yeses,’ Costabile considers possible remedies and considers some alternative interpretations of the global crisis. |
| Keywords: | Key currencies, Keynes Plan, Global imbalances, Global crisis, International monetary system |
| JEL: | E12 F33 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp220&r=mon |
| By: | DANIEL DAIANU; LAURIAN LUNGU |
| Abstract: | What are the prospects for New Member States to join the euro-zone in the not too distant future? They seem to be in a catch-22 situation Because of the current financial crisis some Maastricht criteria would be more difficult to fulfil in the short and medium term, which would make it hard for them to join the eurozone. But there is also an argument, which highlight benefits of a faster accession due to dynamic effects for the countries involved and for the eurozone as a whole. |
| Keywords: | finance, EU, Europe, eurozone, enlargement |
| JEL: | E52 F36 |
| Date: | 2009–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2009-947&r=mon |
| By: | Jordi Galí |
| Abstract: | Much recent research has focused on the development and analysis of extensions of the New Keynesian framework that model labor market frictions and unemployment explicitly. The present paper describes some of the essential ingredients and properties of those models, and their implications for monetary policy. |
| Keywords: | Nominal rigidities, labor market frictions, wage rigidities. |
| JEL: | E32 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1198&r=mon |
| By: | Williamson, Stephen D.; Wright, Randall |
| Abstract: | This essay articulates the principles and practices of New Monetarism, our label for a recent body of work on money, banking, payments, and asset markets. We first discuss methodological issues distinguishing our approach from others: it has something in common with Old Monetarism, but there are also some important differences; it has little in common with Old or New Keynesianism. We describe the key principles of these schools and contrast them with our approach. To show how it works in practice, we build a benchmark New Monetarist model, and use it to address frontier issues concerning asset markets and banking. |
| Keywords: | New Monetarism; Monetary economoics; financial intermediation; New Keynesian |
| JEL: | E5 E6 E10 E4 G21 |
| Date: | 2010–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21486&r=mon |
| By: | Korinek, Anton; Serven, Luis |
| Abstract: | This paper shows that real exchange rate undervaluation through the accumulation of foreign reserves may improve welfare in economies with learning-by-investing externalities that arise disproportionately from the tradable sector. In the presence of targeting problems or when policy choices are restricted by multilateral agreements, first-best policies such as subsidies to capital accumulation, or subsidies to tradable production are not feasible. A neo-mercantilist policy of foreign reserve accumulation"outsources"the targeting problem or overcomes the multilateral restrictions by providing loans to foreigners that can only be used to buy up domestic tradable goods. This raises the relative price of tradable versus non-tradable goods (i.e. undervalues the real exchange rate) at the static cost of temporarily reducing tradable absorption in the domestic economy. However, since the tradable sector generates greater learning-by-investing externalities, it leads to dynamic gains in the form of higher growth. The net welfare effects of reserve accumulation depend on the balance between the static losses from lower tradable absorption versus the dynamic gains from higher growth. |
| Keywords: | Economic Theory&Research,Debt Markets,Currencies and Exchange Rates,Access to Finance,Emerging Markets |
| Date: | 2010–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5250&r=mon |
| By: | Das, Rituparna |
| Abstract: | A major part of this paper is literature review. The paper compiles in a nutshell all studies on definitions and measures of Money supply in India in a chronological yet logically consistent manner In doing so, alternative measures of money supply have been compared in this paper and it is found that the measure used by RBI is statistically more significant than the other advocated by a number of authors. |
| Keywords: | bank; RBI; deposit; money supply; money stock; M1; M3 |
| JEL: | E51 |
| Date: | 2010–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21391&r=mon |
| By: | Rashid , Abdul |
| Abstract: | This study examines the economic exchange rate exposure for 22 industries in Pakistan. The key findings of the study are as follows. Firstly, it shows that industry-level share values are statistically significantly influenced by changes in the PKR/US-dollar exchange rate in general. Secondly it reports a statistically significant lagged response of stock values to exchange rate change. Finally, the highly capital intensive industries are, however, more exposed to changes in exchange rate as compared to less capital intensive industries. The robustness of the exchange rate exposure does not fall over time. |
| Keywords: | Exchange rate exposure; Small open economy; Capital intensive industries |
| JEL: | F23 G15 |
| Date: | 2009–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7305&r=mon |