nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒04‒11
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Financial Shocks and Optimal Policy By Dellas, H.; Diba, B.; Loisel, O.
  2. Some empirical evidence of the euro area monetary policy By Forte, Antonio
  3. Distortionary fiscal policy and monetary policy goals By Klaus Adam; Roberto M. Billi
  4. Discretionary monetary policy in the Calvo model By Willem Van Zandweghe; Alexander L. Wolman
  5. Expectations and economic fluctuations: an analysis using survey data By Sylvain Leduc; Keith Sill
  6. From dollar peg to basket peg:the experience of Kuwait in view of the GCC monetary unification By Marzovilla, Olga; Mele, Marco
  7. Imperfect credit markets: implications for monetary policy By Vlieghe, Gertjan
  8. Inflation targeting and private sector forecasts By Stephen G. Cecchetti; Craig S. Hakkio
  9. The Politics of Monetary Policy By Alberto F. Alesina; Andrea Stella
  10. The Taylor rule and the practice of central banking By Pier Francesco Asso; George A. Kahn; Robert Leeson
  11. Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  12. Evolving UK macroeconomic dynamics: a time-varying factor augmented VAR By Mumtaz, Haroon
  13. "The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective" By Junko Koeda; Ryo Kato
  14. Financial System and Monetary Policy Implementation: Summary of the 2009 International Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Shigenori Shiratsuka; Wataru Takahashi; Kozo Ueda
  15. Does monetary policy affect bank risk-taking? By Yener Altunbas; Leonardo Gambacorta; David Marqués-Ibáñez
  16. The Monetary and Banking Reforms During the 1930 Depression in Argentina By Roberto Cortes Conde
  17. Housing, consumption and monetary policy - how different are the US and the euro area? By Alberto Musso; Stefano Neri; Livio Stracca
  18. Why Does Overnight Liquidity Cost More Than Intraday Liquidity? By Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine
  19. The euro area Bank Lending Survey matters - empirical evidence for credit and output growth By Gabe de Bondt; Angela Maddaloni; José-Luis Peydró; Silvia Scopel
  20. The Eurozone in the Current Crisis By Wyplosz, Charles
  21. Adjustment Cost-Driven Inflation Inertia By Sebastian Sienknecht
  22. Monetary Policy and Unemployment By Jordi Galí
  23. Learning in an Estimated Small Open Economy Model By Jarkko Jääskelä; Rebecca McKibbin
  24. Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes By A. H. Ahmad; Eric J. Pentecost
  25. Stressed, not frozen: the Federal Funds market in the financial crisis By Gara Afonso; Anna Kovner; Antoinette Schoar
  26. Firm Value, Investment and Monetary Policy By Marcelo Bianconi; Joe A. Yoshino
  27. Household decisions, credit markets and the macroeconomy: implications for the design of central bank models By John Muellbauer
  28. Public governance of central banks: an approach from new institutional economics By Yoshiharu Oritani

  1. By: Dellas, H.; Diba, B.; Loisel, O.
    Abstract: This paper incorporates banks as well as frictions in the market for bank capital into a standard New Keynesian model and considers the positive and normative implications of various financial shocks. It shows that the frictions matter significantly for the effects of the shocks and the properties of optimal monetary and fiscal policy. For instance, for shocks that increase banks' demand for liquidity, optimal monetary policy accepts an output contraction while it would not in the absence of the frictions (or under suitably conducted fiscal policy). We find that optimal monetary policy can be approximated by a simple interest-rate rule targeting inflation; and it also allows large adjustments in the money supply, a property reminiscent of Poole's analysis.
    Keywords: Financial frictions, banking, optimal policy
    JEL: E2 E4
    Date: 2010
  2. By: Forte, Antonio
    Abstract: In this paper I try to find some empirical evidence of the European Central Bank’s behaviour from its outset, January 1999, to the mid 2007, using a Taylor-type rule. I test a new and simple method for estimating the output gap in order to avoid problems linked with the estimate of the potential output. Moreover, I analyse the significance of some explanatory variables in order to understand what the basis of the E.C.B. monetary policy decisions are. Finally, I find an important evidence of the role of the Euro-Dollar nominal exchange rate in the conduct of the Euro Area monetary policy.
    Keywords: Taylor Rule; European Central Bank; Euro-Dollar exchange rate
    JEL: E43 E58 E52
    Date: 2010
  3. By: Klaus Adam; Roberto M. Billi
    Abstract: We study interactions between monetary policy, which sets nominal interest rates, and fiscal policy, which levies distortionary income taxes to finance public goods, in a standard, sticky-price economy with monopolistic competition. Policymakers? inability to commit in advance to future policies gives rise to excessive inflation and excessive public spending, resulting in welfare losses equivalent to several percent of consumption each period. We show how appointing a conservative monetary authority, which dislikes inflation more than society does, can considerably reduce these welfare losses and that optimally the monetary authority is predominantly concerned about inflation. Full conservatism, i.e., exclusive concern about inflation, entirely eliminates the welfare losses from discretionary monetary and fiscal policymaking, provided monetary policy is determined after fiscal policy each period. Full conservatism, however, is severely suboptimal when monetary policy is determined simultaneously with fiscal policy or before fiscal policy each period.
    Date: 2010
  4. By: Willem Van Zandweghe; Alexander L. Wolman
    Abstract: We study discretionary equilibrium in the Calvo pricing model for a monetary authority that chooses the money supply. The steady-state inflation rate is above eight percent for a baseline calibration, and it varies non-monotonically with the degree of price stickiness. If the initial condition involves inflation higher than steady state, discretionary policy generates an immediate drop in inflation followed by a gradual increase to the steady state. Unlike the two-period Taylor model, discretionary policy in the Calvo model does not accommodate predetermined prices in a way that inevitably leads to multiple private-sector equilibria.
    Date: 2010
  5. By: Sylvain Leduc; Keith Sill
    Abstract: Using survey-based measures of future U.S. economic activity from the Livingston Survey and the Survey of Professional Forecasters, the authors study how changes in expectations, and their interaction with monetary policy, contribute to fluctuations in macroeconomic aggregates. They find that changes in expected future economic activity are a quantitatively important driver of economic fluctuations: a perception that good times are ahead typically leads to a significant rise in current measures of economic activity and inflation. The authors also find that the short-term interest rate rises in response to expectations of good times as monetary policy tightens. Their results provide quantitative evidence on the importance of expectations-driven business cycles and on the role that monetary policy plays in shaping them.
    Keywords: Economic forecasting ; Monetary policy ; Business cycles
    Date: 2010
  6. By: Marzovilla, Olga; Mele, Marco
    Abstract: In May 2007, Kuwait unilaterally abandoned the dollar peg, adopted in 2003 as a first step towards the monetary integration of GCC countries, to return to the previous basket peg system. The decision was motivated by the need to limit the inflationary pressures resulting from prolonged depreciation of the dollar against major currencies. Given the importance the anti-inflationary objective had in this choice, the work focuses on the peculiarities of Kuwait’s economy, justifying and reviewing the price dynamics in the light of re-pegging to the basket, in the belief that its composition has been affected by inflationary trends. To this end, an econometric model "Auto-Regressive Moving Average" is proposed to define the weights of currencies in the basket and the estimate shows that Euro’s has increased during the period, consistent with the goals against inflation. This is a particularly important to the future of the planned monetary union of the GCC countries, given the renewed commitment of Kuwait to be part of it, despite the existence of different exchange rate systems in force in other countries.
    Keywords: GCC countries; exchange rate regimes; basket peg; dollar peg; inflation
    JEL: F15 F32 E31 F33 F31
    Date: 2010–03–18
  7. By: Vlieghe, Gertjan (Brevan Howard)
    Abstract: I develop a model for monetary policy analysis that features significant feedback from asset prices to macroeconomic quantities. The feedback is caused by credit market imperfections, which dynamically affect how efficiently labour and capital are being used in aggregate. I then analyse what implications this mechanism has for monetary policy. The paper offers three insights. First, the monetary transmission mechanism works not only via nominal rigidities but also via a reallocation of productive resources away from the most productive agents. Second, following an adverse productivity shock there is a dynamic trade-off between the immediate fall in output, which is an efficient response to the productivity fall, and the fall in output thereafter, which is caused by a reallocation of resources away from the most productive agents. The more the initial output fall is dampened with a temporary rise in inflation, the more the adverse future effects of the reallocation of resources are mitigated. Third, in a full welfare-based analysis of optimal monetary policy I show that it is optimal to have some inflation variability, even if the only shocks in the economy are productivity shocks. The optimal variability of inflation is small, but the costs of stabilising inflation too aggressively can be large.
    JEL: E44 E52
    Date: 2010–03–31
  8. By: Stephen G. Cecchetti; Craig S. Hakkio
    Abstract: Transparency is one of the biggest innovations in central bank policy of the past quarter century. Modern central bankers believe that they should be as clear about their objectives and actions as possible. However, is greater transparency always beneficial? Recent work suggests that when private agents have diverse sources of information, public information can cause them to overreact to the signals from the central bank, leading the economy to be too sensitive to common forecast errors. Greater transparency could be destabilizing. While this theoretical result has clear intuitive appeal, it turns on a combination of assumptions and conditions, so it remains to be established that it is of empirical relevance. ; In this paper we study the degree to which increased information about monetary policy might lead to individuals coordinating their forecasts. Specifically, we estimate a series of simple models to measure the impact of inflation targeting on the dispersion of private sector forecasts of inflation. Using a panel data set that includes 15 countries over 20 years we find no convincing evidence that adopting an inflation targeting regime leads to a reduction in the dispersion of private sector forecasts of inflation. While for some specifications adoption of inflation target does seem to reduce the standard deviation of inflation forecasts, the impact is rarely precise and always small.
    Date: 2010
  9. By: Alberto F. Alesina; Andrea Stella
    Abstract: In this paper we critically review the literature on the political economy of monetary policy, with an eye on the questions raised by the recent financial crisis. We begin with a discussion of rules versus discretion. We then examine the issue of Central Banks independence both in normal times and in times of crisis. Then we review the literature of electoral manipulation of policies. Finally we address international institutional issues concerning the feasibility, optimality and political sustainability of currency unions in which more than one country share the same currency. A brief review of the Euro experience concludes the paper.
    JEL: E52
    Date: 2010–04
  10. By: Pier Francesco Asso; George A. Kahn; Robert Leeson
    Abstract: The Taylor rule has revolutionized the way many policymakers at central banks think about monetary policy. It has framed policy actions as a systematic response to incoming information about economic conditions, as opposed to a period-by-period optimization problem. It has emphasized the importance of adjusting policy rates more than one-for-one in response to an increase in inflation. And, various versions of the Taylor rule have been incorporated into macroeconomic models that are used at central banks to understand and forecast the economy. ; This paper examines how the Taylor rule is used as an input in monetary policy deliberations and decision-making at central banks. The paper characterizes the policy environment at the time of the development of the Taylor rule and describes how and why the Taylor rule became integrated into policy discussions and, in some cases, the policy framework itself. Speeches by policymakers and transcripts and minutes of policy meetings are examined to explore the practical uses of the Taylor rule by central bankers. While many issues remain unresolved and views still differ about how the Taylor rule can best be applied in practice, the paper shows that the rule has advanced the practice of central banking.
    Date: 2010
  11. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations and external finances affect output volatility through the investment or trade channel depending on the openness of the economies. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be offset by holding higher levels of IR. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.
    JEL: F15 F21 F31 F36 F41 O24
    Date: 2010–04
  12. By: Mumtaz, Haroon (Bank of England)
    Abstract: Changes in monetary policy and shifts in dynamics of the macroeconomy are typically described using empirical models that only include a limited amount of information. Examples of such models include time-varying vector autoregressions that are estimated using output growth, inflation and a short-term interest rate. This paper extends these models by incorporating a larger amount of information in these tri-variate VARs. In particular, we use a factor augmented vector autoregression extended to incorporate time-varying coefficients and stochastic volatility in the innovation variances. The reduced-form results not only confirm the finding that the great stability period in the United Kingdom is characterised by low persistence and volatility of inflation and output but also suggest that these findings extend to money growth and asset prices. The impulse response functions display little evidence of a price puzzle indicating that the extra information incorporated in our model leads to more robust structural estimates.
    Keywords: FAVAR; great stability; time-varying parameters; stochastic volatility
    JEL: E30 E32
    Date: 2010–03–31
  13. By: Junko Koeda (Faculty of Economics, University of Tokyo); Ryo Kato (Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
    Date: 2010–03
  14. By: Shigenori Shiratsuka (Associate Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka; Wataru Takahashi (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: wataru.takahashi; Kozo Ueda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Keywords: sociate Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: shigenori.shiratsuka
    Date: 2009–08
  15. By: Yener Altunbas (Centre for Banking and Financial Studies, Bangor University, Bangor, Gwynedd LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marqués-Ibáñez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper investigates the relationship between short-term interest rates and bank risk. Using a unique database that includes quarterly balance sheet information for listed banks operating in the European Union and the United States in the last decade, we find evidence that unusually low interest rates over an extended period of time contributed to an increase in banks' risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls. JEL Classification: E44, E55, G21.
    Keywords: bank risk, monetary policy, credit crisis.
    Date: 2010–03
  16. By: Roberto Cortes Conde (Department of Economics, Universidad de San Andres)
    Keywords: monetary reform, banking reform, depression, 1930, Argentina
    Date: 2010–02
  17. By: Alberto Musso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stefano Neri (Banca d’Italia, Economic Outlook and Monetary Policy Department, Via Nazionale, 91, 00184 Roma, Italy.); Livio Stracca (European Central Bank, DG International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The paper provides a systematic empirical analysis of the role of the housing market in the macroeconomy in the US and in the euro area. First, it establishes some stylised facts concerning key variables in the housing market, such as the real house price, residential investment and mortgage debt on the two sides of the Atlantic. Then, it presents evidence from Structural Vector Autoregressions (SVAR) by focusing on the effects of three structural shocks, (i) monetary policy, (ii) credit supply and (iii) housing demand shocks on the housing market and the broader economy. We find that similarities overshadow differences as far as the role of the housing market is concerned. We find evidence pointing in the direction of a stronger role for housing in the transmission of monetary policy shocks in the US, while the evidence is less clearcut for housing demand shocks. We also find that credit supply shocks matter more in the euro area. JEL Classification: E22, E44, E52.
    Keywords: Residential investment, House prices, Credit, Monetary Policy.
    Date: 2010–02
  18. By: Bhattacharya, Joydeep; Haslag, Joseph; Martin, Antoine
    Abstract: In this paper, we argue that the observed difference in the cost of intraday and overnight liquidity is part of an optimal payments system design. In our environment, overnight liquidity affects output while intraday liquidity affects only the distribution of resources between money holders and non-money holders. The low cost of intraday liquidity is explained by the Friedman rule. The optimal cost differential achieves the twin objective of reducing the incentive to overuse money at night and encouraging payment-risk sharing during the day.
    Keywords: Friedman rule; monetary policy; Overnight liquidity; intraday liquidity; random-relocation models
    JEL: E31 E51 E58
    Date: 2009–06–01
  19. By: Gabe de Bondt (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Angela Maddaloni (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Silvia Scopel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study examines empirically the information content of the euro area Bank Lending Survey for aggregate credit and output growth. The responses of the lending survey, especially those related to loans to enterprises, are a significant leading indicator for euro area bank credit and real GDP growth. Notwithstanding the short history of the survey, the findings are robust across various specifications, including “horse races” with other well-known leading financial indicators. Our results are supportive of the existence of a bank lending, balance sheet, and risk-taking channel of monetary policy. They also suggest that price as well as non-price conditions and terms of credit standards do matter for credit and business cycles. Finally, we discuss the implications for the 2007/2009 financial and economic crisis. JEL Classification: C23, E32, E51, E52, G21, G28.
    Keywords: bank lending survey, credit cycle, business cycle, monetary policy transmission, euro area.
    Date: 2010–02
  20. By: Wyplosz, Charles (Asian Development Bank Institute)
    Abstract: This paper contrasts the United States (US) and European situations during the crisis and examines how much of the crisis has been imported by Europe from the US. The paper argues that Europe never had a chance to avoid contagion from the US. It also documents the relatively limited reaction of both monetary and fiscal authorities. Muted fiscal policy actions may well be a consequence of the Stability and Growth Pact despite its having been de facto suspended. While the European Central Bank (ECB) intervened promptly and massively to attempt to maintain liquidity in the money market, it has been slow in dealing with the upcoming recession. The concluding remarks consider the differences that the monetary union has made and their relevance.
    Keywords: us european economic crisis; global financial crisis; europe imported financial crisis
    JEL: E42 E58 E61 F32 F33
    Date: 2010–03–26
  21. By: Sebastian Sienknecht (Department of Economics, Friedrich-Schiller-University Jena)
    Abstract: This paper shows how endogeneous inflation inertia is generated by a simple modificaton of the quadratic adjustment cost structure faced by economic agents. We derive the pertinent inflation relationships based on purely nominal rigidities and show that they always involve additional expectation terms which are absent in a Calvo-type environment. However, the structural differences do not prevent dynamic adjustment paths and theoretical moments to be similar under both rigidity assumptions. An extensive application of nominal adjustment frictions leads to a full-scale macroeconomic framework able to replicate empirical responses to an interest rate shock.
    Keywords: Inflation Dynamics, New Keynesian Phillips Curve, Business Fluctuations
    JEL: E31 E32 E52
    Date: 2010–03–26
  22. 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.
    JEL: E32 E52
    Date: 2010–04
  23. By: Jarkko Jääskelä (Reserve Bank of Australia); Rebecca McKibbin (Reserve Bank of Australia)
    Abstract: Expectations of the future play a key role in the transmission of monetary policy. Over recent years, a lot of theoretical and applied macroeconomic research has been based on the assumption of rational expectations. However, estimated models based on this assumption typically fail to capture the dynamics of the economy unless mechanical sources of persistence, such as habit formation in consumption and/or indexation to past prices, are imposed. This paper develops and estimates a small open economy model for Australia assuming two different types of expectations: rational expectations and learning. Learning – where expectations are formed by extrapolating from the historical data – can be an alternative means to generate the persistence observed in the data. The paper has four key findings. First, learning does not reduce the importance of conventional mechanical forms of persistence. Second, despite this, the model with learning is able to generate real exchange rate dynamics that are consistent with empirical models but which are absent in standard theoretical models. Third, there is some tentative evidence that learning is preferred over rational expectations in terms of fitting the data. Fourth, since the adoption of inflation targeting, agents appear to be using a longer history of data to form their expectations, consistent with greater stability of inflation.
    Keywords: Learning; expectations; new Keynesian model; regime shifts
    JEL: E32 E52 E63 F41
    Date: 2010–03
  24. By: A. H. Ahmad (Dept of Economics, Loughborough University); Eric J. Pentecost (Dept of Economics, Loughborough University)
    Abstract: The impact of terms of trade shocks on a country’s output and price level are, according to economic theory, expected to vary according to the de facto exchange rate regime. This paper tests this hypothesis how terms of trade shocks impact on 22 African countries, which operate different de facto exchange rate regimes, using a structural VAR with long-run restrictions, over the period from 1980 to 2007. The empirical findings support the view that the exchange rate regime matters as to how countries respond to exogenous external shocks like terms of trade shocks, in that output variation is greater for countries with fixed regimes, while for flexible regime countries real exchange rate variation reduces the need for output variability.
    Keywords: Terms of Trade, Exchange Rate Regimes, Structural VARs
    JEL: F13 F31 F41
    Date: 2010–03
  25. By: Gara Afonso; Anna Kovner; Antoinette Schoar
    Abstract: This paper examines the impact of the financial crisis of 2008, specifically the bankruptcy of Lehman Brothers, on the federal funds market. Rather than a complete collapse of lending in the presence of a market-wide shock, we see that banks became more restrictive in their choice of counterparties. Following the Lehman bankruptcy, we find that amounts and spreads became more sensitive to a borrowing bank's characteristics. While the market did not contract dramatically, lending rates increased. Further, the market did not seem to expand to meet the increased demand predicted by the drop in other bank funding markets. We examine discount window borrowing as a proxy for unmet fed funds demand and find that the fed funds market is not indiscriminate. As expected, borrowers who access the discount window have a lower return on assets. On the lender side, we do not find that the characteristics of the lending bank significantly affect the amount of interbank loans it makes. In particular, we do not find that worse performing banks began hoarding liquidity and indiscriminately reducing their lending.
    Keywords: Federal funds ; Financial crises ; Bank liquidity ; Interbank market ; Discount window
    Date: 2010
  26. By: Marcelo Bianconi; Joe A. Yoshino
    Abstract: This paper presents empirical evidence on the effects of three nominal risk factors, local interest spreads, US interest spread, and US federal funds rate signal-to-noise ratio on the value of firms and on the cross-listing decision of firms destined to three major markets in North America, Asia, and Europe. We use firm-level data in 29 countries of cross-listing origin over a six year period, from 2000-2005. We find consistent and robust evidence that the US federal funds rate signal-to-noise ratio risk factor in the Sharpe sense provides an important benchmark for firm value across the universe of publicly traded companies; and this effect is larger for smaller firms that cross-list abroad. Countries in Asia, Europe, and South America tend to seek more funds abroad through cross-listing relative to other regions in this sample. In general, we find that the lagged local interest risk factor is positively related to current probability of cross listing. Small firms located in Asia, medium firms located in Europe, and large firms located in Asia, Europe, and South America have a higher relative probability of cross listing abroad.
    Date: 2010
  27. By: John Muellbauer
    Abstract: It is widely acknowledged that the recent generation of DSGE models failed to incorporate many of the liquidity and financial accelerator mechanisms revealed in the global financial crisis that began in 2007. This paper complements the papers presented at the 2009 BIS annual conference focused on the role of banks and other financial institutions by analysing the role of household decisions and their interplay with credit conditions and asset prices in the light of empirical evidence. In DSGE models without financial frictions, asset prices are merely a proxy for income growth expectations and play no separate role. On UK aggregate consumption evidence, section 2 of the paper shows this is strongly contradicted by the data, for all possible discount rates and both for a perfect foresight and an empirical rational expectations approach to measuring income expectations. However, an Ando-Modigliani consumption function generalised to include a role for liquidity, uncertainty, time varying credit conditions, wealth and housing collateral effects, as well as income expectations, explains the data well. Section 3 reports new evidence on the striking rejection on aggregate data of the consumption Euler equation central to all DSGE models. Section 4 shows that UK micro evidence is consistent with the generalised Ando-Modigliani model. Section 5 discusses the limitations of recent DSGE models with financial frictions and housing. Section 6 discusses some business cycle implications of amplification mechanisms and non-linearities operating via households and residential construction. It reconsiders econometric methodology appropriate for designing better evidence-based central bank policy models.
    Keywords: household decisions, housing markets, wealth, business cycle models, consumption
    Date: 2010–03
  28. By: Yoshiharu Oritani
    Abstract: The governance of central banks has two dimensions: corporate governance and public governance. Public governance is an institutional framework whereby the general public governs a central bank by and through the legislative and executive bodies in a country. This paper argues that the literature of new institutional economics sheds new light on the public governance of central banks. First, Williamson’s theory of "governance as integrity" (probity) is applied to the internal management of central banks. Moe’s theory of "public bureaucracy" is applied to the concept of central bank independence. Second, we apply agency theory to the issues associated with central bank independence and accountability. Third, public choice theory is applied to central bank independence.
    Keywords: central bank, public governance, transaction cost economics, public choice
    Date: 2010–03

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