nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒05‒08
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Room for Manoeuvre – Monetary Policy Over the Next Eighteen Months, and the Allure of Price-Level Targeting By Philippe Bergevin; David Laidler
  2. The development of monetary policy in the 20th century – some reflections By Otmar Issing
  3. Inflation, price dispersion and market integration through the lens of a monetary search model By Becker, Sascha; Nautz, Dieter
  4. Money and Risk Aversion in a DSGE Framework: A Bayesian Application to the Euro Zone By Benchimol, Jonathan; Fourçans, André
  5. Examining the Ability of Core Inflation to Capture the Overall Trend of Total Inflation By Tierney, Heather L.R.
  6. The euro: It can't happen, It's a bad idea, It won't last. US economists on the EMU, 1989-2002 By Lars Jonung; Eoin Drea
  7. Heterogeneity in money holdings across euro area countries: the role of housing By Ralph Setzer; Paul van den Noord; Guntram B. Wolff
  8. The Barnett Critique After Three Decades: A New Keynesian Analysis By Michael T. Belongia; Peter N. Ireland
  9. Real-Time Data Revisions and the PCE Measure of Inflation By Tierney, Heather L.R.
  10. China’s Growing Influence in Southeast Asia - Monetary Policy and Equity Markets By Johansson, Anders C.
  11. A century of macroeconomic and monetary thought at the National Bank of Belgium By Ivo Maes
  12. Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market. By Avouyi-Dovi, S.; Julien, I.
  13. News versus sunspot shocks in a New Keynesian model By Karnizova, Lilia
  14. credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman By Ugo Albertazzi; Domenico J. Marchetti

  1. By: Philippe Bergevin (C.D. Howe Institute); David Laidler (C.D. Howe Institute)
    Abstract: Moving to price-level targeting from inflation-rate targeting could be a sound option for the Bank of Canada after 2011, when its current agreement with the Minister of Finance is up for renewal. However, the authors say the viability of that option rests on whether the Bank can maintain its credibility in monetary policy over the coming months, as it seeks a balance between providing support to the still fragile economic recovery and avoiding a resurgence of inflation above its 2 percent inflation target.
    Keywords: Monetary Policy, Bank of Canada, price-level targeting, inflation-rate targeting, exchange rate
    JEL: E58 E52 E31 E42
    Date: 2010–04
  2. By: Otmar Issing (Center for Financial Studies, Frankfurt am Main)
    Abstract: In this paper I outline – from a practitioner’s as well as from a researcher’s perspective – several of the key developments that took place during the last century in monetary policy. In particular, I describe how the monetary system evolved from gold standard, prevailing throughout most of the last century, to paper money and how the norm in central banking changed from pure discretion after World War II to transparency and independence. I furthermore analyze how the exchange rate regime under Bretton-Woods impacted on countries’ monetary policy and, with a focus on Europe, how European Monetary Union (EMU) emerged from the European Monetary System (EMS). I then outline today’s relatively broad consensus on monetary policy and how it developed from a learning process on the side of central banks and important contributions from research. Finally, after arguing that the ECB’s monetary policy which fruitfully combines past experience and current research is a successful and promising approach, I outline some challenges lying ahead
    Keywords: monetary policy, monetary system, European Monetary Union, ECB
    JEL: A11 B22 E42 E58 F33 N10
    Date: 2010–04
  3. By: Becker, Sascha; Nautz, Dieter
    Abstract: Recent monetary search models emphasize that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which implies an optimal inflation rate above zero. For highly integrated markets, however, theory suggests that the impact of inflation on price dispersion disappears. Employing price data of the European Union member states, this paper is the first that empirically tests these implications of monetary search theory. --
    Keywords: Inflation,Relative price variability,Monetary search models,European market integration
    JEL: E31 C23
    Date: 2010
  4. By: Benchimol, Jonathan (CES, University Paris 1 Panthéon-Sorbonne and Department of Economics, ESSEC Business School); Fourçans, André (ESSEC Business School, Department of Economics)
    Abstract: In this paper, we set up and test a model of the Euro zone, with a special emphasis on the role of money. The model follows the New Keynesian DSGE framework, money being introduced in the utility function with a non-separability assumption. By using bayesian estimation techniques, we shed light on the determinants of output and inflation, but also of the interest rate, real money balances, flexible-price output and flexible-price real money balances variances. The role of money is investigated further. We find that its impact on output depends on the degree of agents’ risk aversion, increases with this degree, and becomes significant when risk aversion is high enough. The direct impact of the money variable on inflation variability is essentially minor whatever the risk aversion level, the interest rate (monetary policy) being the overwhelming explanatory factor.
    Keywords: Bayesian Estimation; DSGE Model; Euro Area; Money
    JEL: E31 E51 E58
    Date: 2010–04
  5. By: Tierney, Heather L.R.
    Abstract: This paper examines whether core inflation is able to predict the overall trend of total inflation using real-time data in a parametric and nonparametric framework. Specifically, two sample periods and five in-sample forecast horizons in two measures of inflation, which are the personal consumption expenditure and the consumer price index, are used in the exclusions-from core inflation persistence model. This paper finds that core inflation is only able to capture the overall trend of total inflation for the twelve-quarter in-sample forecast horizon using the consumer price index in both the parametric and nonparametric models in the longer sample period. The nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons.
    Keywords: Inflation Persistence; Real-Time Data; Monetary Policy; Nonparametrics; In-Sample Forecasting
    JEL: C53 C14 E52
    Date: 2009–08
  6. By: Lars Jonung; Eoin Drea
    Abstract: This study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question.
    Keywords: The euro, optimum currency area, ECB, EMU, Federal Reserve System, monetary unification, Europe, United States, Jonung, Drea
    JEL: B22 E E5 F02 F33 F41
    Date: 2009–12
  7. By: Ralph Setzer; Paul van den Noord; Guntram B. Wolff
    Abstract: In this paper we examine why monetary aggregates of euro area Member States have developed differently since the inception of the euro. We derive a money demand equation that incorporates housing wealth and collateral as well as substitution effects on real money holdings. Empirically, we show that cross-country differences in real balances are determined not only by income differences, a standard determinant of money demand, but also by house price developments.Higher house prices and higher user costs of housing are both associated with larger money holdings. Country-specific money holdings are also connected with structural features of the housing market.
    Keywords: european union eu setzer wolff van den Noord euro area money heterogeneity money holdings
    JEL: E41 E51 E52
    Date: 2010–02
  8. By: Michael T. Belongia (University of Mississipp); Peter N. Ireland (Boston College)
    Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of real and nominal shocks. Finally, the analysis characterizes the optimal monetary policy response to shocks that originate in an explicitly-modeled financial sector.
    Keywords: Barnet critique, Divisia, liquidity, aggregation
    JEL: C43 E32 E41 E52
    Date: 2010–05–01
  9. By: Tierney, Heather L.R.
    Abstract: This paper tracks data revisions in the Personal Consumption Expenditure using the exclusions-from-core inflation persistence model. Keeping the number of observations the same, the regression parameters of earlier vintages of real-time data, beginning with vintage 1996:Q1, are tested for coincidence against the regression parameters of the last vintage of real-time data, used in this paper, which is vintage 2008:Q2 in a parametric and two nonparametric frameworks. The effects of data revisions are not detectable in the vast majority of cases in the parametric model, but the flexibility of the two nonparametric models is able to utilize the data revisions.
    Keywords: Inflation Persistence; Real-Time Data; Monetary Policy; Nonparametrics; In-Sample Forecasting
    JEL: C53 C14 E52
    Date: 2010–02
  10. By: Johansson, Anders C. (China Economic Research Center)
    Abstract: We use structural VAR models with short-run restrictions to analyze the potential transmission of China’s monetary policy shocks to equity markets in Southeast Asia. Our results show that several of the markets in the region are influenced by China’s monetary policy, even though the effect is modest. The impact of a monetary expansion in China is significant and positive for four of the five Southeast Asian equity markets, indicating an increase in demand for goods and services in both China and abroad, which in turn shows up in the foreign equity market. The results provide evidence of China’s growing influence in Southeast Asia and its financial markets. The transmission effect is still quite small, but can be expected to increase if the current trends of deepening economic integration between China and Southeast Asia and a maturing Chinese central bank continue.
    Keywords: Monetary policy; stock market; structural vector autoregressive model; monetary transmission; China; Southeast Asia
    JEL: C32 E44 E52 F42 G10
    Date: 2010–05–01
  11. By: Ivo Maes (National Bank of Belgium, Research Department; Université catholique de Louvain, Robert Triffin Chair; HUBrussel; ICHEC Brussels Management School)
    Abstract: "A century of macroeconomic and monetary thought at the National Bank of Belgium" traces the history of economic research at the National Bank of Belgium, from the early decades of the 20th century to its present functioning in the Eurosystem. The study also goes into the major economic policy debates, as well as the specific lines of macroeconomic and monetary thinking at the National Bank of Belgium. The focus is very much on the role of the Research Department in policymaking and its dialogue (and debates) with the academic community
    Keywords: National Bank of Belgium, central banking, monetary theory, economic research
    JEL: A11 B22 E42 E58 N10
    Date: 2010–04
  12. By: Avouyi-Dovi, S.; Julien, I.
    Abstract: We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.
    Keywords: Monetary policy, collateral, liquidity, volatility, French bond market.
    JEL: G10 C22 C53
    Date: 2010
  13. By: Karnizova, Lilia
    Abstract: Separately, news and sunspot shocks have been shown empirically to be determinants of changes in expectations. This paper considers both of them together in a simple New Keynesian monetary business cycle model. A full set of rational expectations solutions is derived analytically. The analytical characterization allows an explicit comparison of news about future monetary policy and sunspots. The key distinction between the shocks lies in their relation to the realized policy shock. If monetary policy is 'passive', both types of shocks affect model dynamics through forecast errors. The effect of the news on forecast errors is not unique, and the dynamics induced by news and sunspot shocks can be observationally equivalent. If monetary policy is 'active', the sunspots are irrelevant, and the model responses to the news shocks are unique. In both cases, news shocks strengthen the endogenous propagation of the model, since anticipation of future changes prolongs agents' reaction. --
    Keywords: News shocks,sunspots,expectations,monetary policy,indeterminacy
    JEL: E32 E47 E52
    Date: 2010
  14. By: Ugo Albertazzi (Bank of Italy); Domenico J. Marchetti (Bank of Italy)
    Abstract: This paper analyzes the effects of the financial crisis on credit supply by using highly detailed data on bank-firm relationships in Italy after Lehman’s collapse. We control for firms’ unobservable characteristics, such as credit demand and borrowers’ risk, by exploiting multiple lending. We find evidence of a contraction of credit supply, associated to low bank capitalization and scarce liquidity. The ability of borrowers to compensate through substitution across banks appears to have been limited. We also document that larger less-capitalized banks reallocated loans away from riskier firms, contributing to credit pro-cyclicality. Such ‘flight to quality’ has not occurred for smaller less-capitalized banks. We argue that this may have reflected, among other things, evergreening practices. We provide corroborating evidence based on data on borrowers' productivity and interest rates at bank-firm level.
    Keywords: credit supply, bank capital, flight to quality, evergreening
    JEL: E44 E51 G21 G34 L16
    Date: 2010–04

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