nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒05‒22
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation Target Shocks and Monetary Policy Inertia in the Euro Area By Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
  2. The Central Bank Balance Sheet as an Instrument of Monetary Policy By Vasco Curdia; Michael Woodford
  3. International Monetary Transmission and Exchange Rate Regimes: Floaters vs. Non-Floaters By Kim, Soyoung; Yang, Doo Yong
  4. Monetary Policy and Heterogeneous Expectations By William A. Branch; George W. Evans
  5. Brazilian Strategy for Managing the Risk of Foreign Exchange Rate Exposure During a Crisis By Antonio Francisco A. Silva Jr.
  6. The Role and Effectiveness of Unconventional Monetary Policy By Morgan, Peter
  7. Inflation, Oil Price Volatility and Monetary Policy By Castillo, Paul; Montoro, Carlos; Tuesta, Vicente.
  8. Will China Have Serious Inflation? By Gregory C. Chow
  9. Conventional and Unconventional Monetary Policy By Vasco Curdia; Michael Woodford
  10. Heterogeneity in money holdings across euro area countries: The role of housing By Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
  11. Fluctuation Dynamics in US Interest Rates and the Role of Monetary Policy By Daniel Oliveira Cajueiro; Benjamin M. Tabak
  12. Remittances, Inflation and Exchange Rate Regimes in Small Open Economies By Ball, Christopher; Lopez, Claude; Reyes, Javier; Cruz-Zuniga, Martha
  13. Trend inflation, endogenous mark-ups and the non-vertical Phillips curve By Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
  14. Optimal Monetary Stabilization Policy By Michael Woodford
  15. Quantitative Easing: Entrance and Exit Strategies By Alan S. Blinder
  16. The Euro-dividend: public debt and interest rates in the Monetary Union By Simone Salotti; Luigi Marattin
  17. Main drivers of the ECB financial accounts and ECB financial strength over the first 11 years By Olivier Vergote; Werner Studener; Ioannis Efthymiadis; Niall Merriman
  18. Loan supply in Germany during the financial crisis By Busch, Ulrike; Scharnagl, Michael; Scheithauer, Jan
  19. The Global Economic Crisis: Impact on India and Policy Responses By Kumar, Rajiv; Vashisht, Pankaj
  20. Lessons of the Crisis for Emerging Markets By Eichengreen, Barry
  21. Payment System in Indonesia: Recent Developments and Policy Issues By Titiheruw, Ira S.; Atje, Raymond
  22. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Farhi, Emmanuel; Tirole, Jean
  23. Origins of persistent macroeconomic imbalances in the Euro area By Nils Holinski; Clemens Kool; Joan Muysken
  24. Reform of the International Financial Architecture: An Asian Perspective By Kawai, Masahiro
  25. Welfare Gains from Disinflation in an Economy With Currency Substitution (Para Ikamesinin Oldugu Bir Ekonomide Enflasyonun Dusurulmesinden Kaynaklanan Refah Kazanimlari) By H. Murat Ozbilgin
  26. Developing Asian Local Currency Bond Markets: Why and How? By Spiegel, Mark M.
  27. Financial Crisis and Crisis Management in Sweden. Lessons for Today By Jonung, Lars
  28. Payment Systems in Malaysia: Recent Developments and Issues By Basir, Amir Akmar
  29. Rethinking multipliers in a globalized world By Nallari, Raj; Mba, Leopold Engozogo

  1. By: Fève, Patrick; Matheron, Julien; Sahuc, Jean-Guillaume
    Date: 2009–07
  2. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: While many analyses of monetary policy consider only the adjustment of a central bank's target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves beyond those required to achieve an interest-rate target, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between "quantitative easing" in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves, and argue that the interest rate on reserves should be kept near the central bank's target for the policy rate at all times.
    Date: 2010
  3. By: Kim, Soyoung (Asian Development Bank Institute); Yang, Doo Yong (Asian Development Bank Institute)
    Abstract: This paper analyzes the impact of United States (US) monetary shocks on the economies of selected East Asian countries using a structural vector autoregression model. We found that the impacts of the US monetary shocks on domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of US monetary policy shocks to floating exchange rate regimes in East Asian countries, excluding Japan. In these countries, the domestic interest rate responds strongly to US interest rate changes, largely by authorities giving up monetary autonomy due to fear of floating. On the other hand, the domestic interest rate does not respond much to changes in US rates in the countries with a fixed exchange rate regime and capital account restrictions, such as the People's Republic of China and Malaysia. This may suggest that the countries with a fixed exchange rate regime enjoy a higher degree of monetary autonomy, probably with the help of capital account restrictions.
    Keywords: east asian rate regimes; floating vs. non-floating; international monetary transmission
    JEL: F32 F33
    Date: 2009–12–18
  4. By: William A. Branch; George W. Evans
    Abstract: This paper studies the implications for monetary policy of heterogeneous expectations in a New Keynesian model. The assumption of rational expec?tations is replaced with parsimonious forecasting models where agents select between predictors that are underparameterized. In a Misspecification Equilib?rium agents only select the best-performing statistical models. We demonstrate that, even when monetary policy rules satisfy the Taylor principle by adjusting nominal interest rates more than one for one with inflation, there may exist equilibria with Intrinsic Heterogeneity. Under certain conditions, there may exist multiple misspecification equilibria. We show that these findings have im?portant implications for business cycle dynamics and for the design of monetary policy.
    Keywords: Heterogeneous expectations, monetary policy, multiple equilib?ria, adaptive learning.
    JEL: G12 G14 D82 D83
    Date: 2010–04
  5. By: Antonio Francisco A. Silva Jr.
    Abstract: Even in a floating foreign exchange rate regime, monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crises. Typically, central banks intervene using foreign currency trades and/or by changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and performance equations include interventions with swap operations in the domestic market, since the Central Bank of Brazil also uses these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing holdings of international reserves and decreasing short foreign exchange rate exposure in domestic public debt after 2004 gave the country more flexibility to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as was necessary in previous crises.
    Date: 2010–04
  6. By: Morgan, Peter (Asian Development Bank Institute)
    Abstract: This paper reviews the effectiveness of unconventional monetary policies and their relevance for emerging markets. Such policies may be useful either when interbank rates fall to zero, or when a credit crunch or rise in risk premium impairs the normal transmission mechanism of monetary policy. Unconventional monetary policy measures encompass three broad categories: (i) commitment effect, i.e., verbal commitments to maintain very low interest rates for a certain period, either conditionally or unconditionally; (ii) quantitative easing, i.e., targeting the level of current account balances of the central bank; and (iii) qualitative or credit easing, which involves purchases of targeted assets to lower rates and/or increase liquidity in the target market. It also examines issues related to the exit strategy from unconventional policy, and assesses the applicability of unconventional policies for Asian economies other than Japan. <p>Most studies of the commitment effect (or duration effect) suggest that statements by a central bank regarding the duration of a policy of very low or zero interest rates also affect market expectations of interest rates, but the impact is mainly limited to shorter-term rates. The literature on the effects of quantitative easing monetary policy is less conclusive, especially when one accounts for other announcements by the central bank. Regarding qualitative easing (credit easing) policy, the effect of expanding outright purchases of government bonds on bond yields looks limited. However, other kinds of asset purchase interventions do seem to have been more successful in relieving market stresses. <p>For Asian countries aside from Japan, unconventional policies look most attractive as a way to relieve funding blockages in specific markets rather than to stimulate overall growth. Only India; Republic of Korea; Singapore; and Taipei,China adopted unconventional measures, and those of the middle two were chiefly related to their use of the Fed's swap line for United States dollars to ease dollar shortages in the region. However, if growth of United States consumption slows structurally, this may force Asian economies to rely more on unconventional monetary policy measures during future downturns.
    Keywords: unconventional monetary policy; monetary policy emerging markets
    JEL: E50 E52 E58 F41 F42
    Date: 2009–11–11
  7. By: Castillo, Paul (Banco Central de Reserva del Perú); Montoro, Carlos (Banco Central de Reserva del Perú; CENTRUM-Catolica); Tuesta, Vicente. (CENTRUM-Catolica)
    Abstract: In a fully micro-founded New Keynesian framework, we characterize analytically the relation between average inflation and oil price volatility by solving the rational expectations equilibrium of the model up to second order of accuracy. Higher oil price volatility induces higher levels of average inflation. We also show that when oil has low substitutability and the central bank responds to output fluctuations, oil price volatility matters for the level of average inflation. The model shows that when oil price volatility increases, average inflation increases whereas average output falls: this implies a trade-off also between average inflation and that of output. The analytical solution further indicates that for a given level of oil price volatility, average inflation is higher when marginal costs are convex in oil prices, the Phillips Curve is convex, and the degree of relative price dispersion is also higher. We perform a numerical exercise showing that the model with a empirically plausible Taylor rule can replicate the level of average inflation observed in the U.S. in 2000s.
    Keywords: Oil price volatility, monetary policy, perturbation method, second order solution.
    JEL: E52 E42 E12 C63
    Date: 2010–01
  8. By: Gregory C. Chow
    Abstract: There has been much concern about inflation in China recently. The People’s Bank in the last few months has raised the reserve requirement several times to control the money supply to slow down inflation. In 1985 when I was organizing a summer workshop on macroeconomics in cooperation with the Ministry of Education, Premier Zhao Ziyang asked me to forecast inflation in 1985-1986 because in 1984 the supply of money in the form of currency in circulation increased by 50 percent. I estimated an equation using data from 1952 to 1984 to explain inflation and used the equation to project forward to forecast an inflation rate for 1985 of no more than 9 percent which turned out to be correct. This equation was published in Chow (1987, equation 18) and updated using data up to 2004 in Chow (2007, pp. 34-5).
    Keywords: inflation, china, Peoples Bank, money supply
    JEL: E30 E31 E42 E58 N15
    Date: 2010–04
  9. By: Vasco Curdia (Federal Reserve Bank of New York); Michael Woodford (Columbia University - Department of Economics)
    Abstract: We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central-bank policy | variations in the size and composition of the central bank's balance sheet, and payment of interest on reserves, alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions, within a single unified framework, and to provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.
    Date: 2010
  10. By: Setzer, Ralph; Noord, Paul van den; Wolff, Guntram
    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: Money,housing,national contribution,euro area
    JEL: E41 E51 E52
    Date: 2010
  11. By: Daniel Oliveira Cajueiro; Benjamin M. Tabak
    Abstract: This paper presents empirical evidence suggesting that the degree of long-range dependence in interest rates depends on the conduct of monetary policy. We study the term structure of interest rates for the US and find evidence that global Hurst exponents change dramatically according to Chairman Tenure in the Federal Reserve Board and also with changes in the conduct of monetary policy. In the period from 1960's until the monetarist experiment in the beginning of the 1980's interest rates had a significant long-range dependence behavior. However, in the recent period, in the second part of the Volcker tenure and in the Greenspan tenure, interest rates do not present long-range dependence behavior. These empirical findings cast some light on the origins of long-range dependence behavior in financial assets.
    Date: 2010–04
  12. By: Ball, Christopher; Lopez, Claude; Reyes, Javier; Cruz-Zuniga, Martha
    Abstract: Remittances are private monetary transfers. Yet the rapidly growing literature on the subject often ignores the role that exchange rate regimes play in determining the effect remittances have on a recipient economy. This paper uses a theoretical model and panel vector autoregression techniques to explore the role exchange rate regimes play in understanding the effect of remittances. The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should temporarily increase inflation and generate an increase in the domestic money supply under a fixed regime, but temporarily decrease inflation and generate no change in the money supply under a flexible regime. These differences are borne out in the data. This adds to our understanding of the true effect of remittances on economies and suggests that other results in the literature that do not control for regimes may be biased.
    Keywords: Remittances; exchange rate regimes
    JEL: F22 F41
    Date: 2010–05
  13. By: Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
    Abstract: Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output.
    Keywords: trend inflation, long-run Phillips curve, inflation targeting, real money balances
    JEL: E52 E58 E24
    Date: 2010–04
  14. By: Michael Woodford (Columbia University - Department of Economics)
    Abstract: This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (2003). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and hence dependent on the stand that one might take on many issues that remain controversial), and on general themes that have been found to be important under a range of possible model specifications. With regard to methodology, some of the central themes of this review will be the application of the method of Ramsey policy analysis to the problem of the optimal conduct of monetary policy, and the connection that can be established between utility maximization and linear-quadratic policy problems of the sort often considered in the central banking literature. With regard to the structure of a desirable decision framework for monetary policy deliberations, some of the central themes will be the importance of commitment for a superior stabilization outcome, and more generally, the importance of advance signals about the future conduct of policy; the advantages of history-dependent policies over purely forward-looking approaches; and the usefulness of a target criterion as a way of characterizing a central bank's policy commitment.
    Date: 2010
  15. By: Alan S. Blinder (Princeton University)
    Abstract: Apparently, it can happen here. On December 16, 2008, the Federal Open Market Committee (FOMC), in an effort to fight what was shaping up to be the worst recession since 1937, reduced the federal funds rate to nearly zero.1 From then on, with all of its conventional ammunition spent, the Federal Reserve was squarely in the brave new world of quantitative easing. Chairman Ben Bernanke tried to call the Fed’s new policies credit easing, probably to differentiate them from what the Bank of Japan had done earlier in the decade, but the label did not stick.
    Keywords: Recession, Federal Reserve, open market committee, banking policy, deflation, monetary policy
    JEL: E31 E58 G21
    Date: 2010–03
  16. By: Simone Salotti (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze); Luigi Marattin (Dipartimento di Scienze Economiche, Universita` degli Studi di Bologna)
    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.
    Keywords: Panel VAR, Fiscal policy, government bond’s yields
    JEL: E62 G12
    Date: 2010–02
  17. By: Olivier Vergote (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Werner Studener (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ioannis Efthymiadis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Niall Merriman (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper analyses the main drivers of the ECB’s balance sheet and profit and loss account over the first 11 years of the ECB’s existence. Furthermore, the paper assesses the financial strength of the ECB. As monetary policy operations are normally conducted by national central banks under the impulse and instructions from the ECB, the Eurosystem balance sheet is the primary reference for the analysis of Eurosystem monetary policy operations. Three main drivers of the balance sheet and profit and loss account are identified. Firstly, financial market developments and portfolio management decisions imply changes in the value of the foreign reserve and own funds portfolios, which represent a substantial part of the balance sheet (with the share of own funds becoming increasingly larger over the period under review). At the same time, the profit and loss account depends to an important degree on interest income and expenses, realised gains and losses, and write-downs on these portfolios. Secondly, strong banknote demand has gradually increased the size of the balance sheet since the euro changeover in 2002. Banknotes in circulation also provide a strong base for seigniorage income, which is an important item of the profit and loss account. Thirdly, the liquidity-providing operations in foreign currency, which the Eurosystem has undertaken since 2007 in response to the financial crisis, increased significantly the size of the ECB’s (and the Eurosystem’s) balance sheet. In terms of income and expenses, these operations were rather immaterial at the level of the ECB, although the income generated was substantial at the Eurosystem level. The ECB has remained financially strong over the 11-year period. Factors that support the financial position are strong legislative provisions on e.g. independence and income, the use of financial buffers, seigniorage as a reliable income source and an effective loss-coverage mechanism. The main risk stems from adverse financial market developments, in particular low interest rates and depreciating foreign reserve currencies, implying security price and currency write-downs. JEL Classification: E58, E42, M41
    Keywords: central banking, central bank balance sheet, financial accounts, financial strength
    Date: 2010–05
  18. By: Busch, Ulrike; Scharnagl, Michael; Scheithauer, Jan
    Abstract: Distinguishing pure supply effects from other determinants of price and quantity in the market for loans is a notoriously difficult problem. Using German data, we employ Bayesian vector autoregressive models with sign restrictions on the impulse response functions in order to enquire the role of loan supply and monetary policy shocks for the dynamics of loans to non-financial corporations. For the three quarters following the Lehman collapse, we find very strong negative loan supply shocks, while monetary policy was essentially neutral. Nevertheless, the historical decomposition shows a cumulated negative impact of loan supply shocks and monetary policy shocks on loans to non-financial corporations, due to the lagged effects of past loan supply and monetary policy shocks. However, these negative effects on loans to non-financial corporations are overcompensated by positive other shocks, which implies that loans developed more favorably than implied by the model, over the past few quarters. --
    Keywords: Loan supply,Bayesian VAR,sign restrictions
    JEL: C11 C32 E51
    Date: 2010
  19. By: Kumar, Rajiv (Asian Development Bank Institute); Vashisht, Pankaj (Asian Development Bank Institute)
    Abstract: India's financial sector is not deeply integrated with the global financial system, which spared it the first round adverse effects of the global financial crisis and left Indian banks mostly unaffected. However, as the financial crisis morphed in to a full-blown global economic downturn, India could not escape the second round effects. The global crisis has affected India through three distinct channels: financial markets, trade flows, and exchange rates. The reversal in capital inflows, which created a credit crunch in domestic markets along with a severe deterioration in export demand, contributed to the decline of gross domestic product by more than 2 percentage points in the fiscal year 2008–2009. In line with efforts taken by governments and central banks all over the world, the Government and the Reserve Bank of India took aggressive countercyclical measures, sharply relaxing monetary policy and introducing a fiscal stimulus to boost domestic demand. However, this paper argues that with very limited fiscal maneuverability and the limited traction of monetary policy, policy measures to restore the Indian gross domestic product growth back to its potential rate of 8–9% must focus on addressing the structural constraints that are holding down private investment demand.
    Keywords: india global financial crisis; gdp growth
    JEL: E66
    Date: 2009–11–12
  20. By: Eichengreen, Barry (Asian Development Bank Institute)
    Abstract: This paper attempts to draw out the implication of the financial crisis for emerging markets. The most important implications will center on financial markets, where there will be less reliance on portfolio capital flows to finance investment and some deglobalization of banking so that the domain of bank operations more closely coincides with the domain of regulation. By contrast, the implications for other dimensions of globalization and for the structure of the international monetary system will be more limited.
    Keywords: global financial crisis; lessons; exchange rate policy; financial architecture
    JEL: F00 F30
    Date: 2009–12–15
  21. By: Titiheruw, Ira S. (Asian Development Bank Institute); Atje, Raymond (Asian Development Bank Institute)
    Abstract: This paper describes the existing payment system in Indonesia, which is comprised of cash and non-cash payment systems. The non-cash payment system has evolved swiftly due to improvements in information technology and the resulting transition from a paper-based to a card-based system. With the development of e-money, it is already moving toward a paperless payment system. As the monetary authority in Indonesia, Bank Indonesia is responsible for regulating and safeguarding the smooth and efficient operation of the national payment system. In 2004, the bank revised the blueprint of the system, which was originally introduced in 1995 in anticipation of efficiency-related challenges and legal implications arising from economic and technological development. Although Bank Indonesia expects to be able to provide equitable access and offer consumer protection, potential benefits arising from technological advances to the payment system, such as access in remote areas, remains an issue for small- and medium-sized enterprises. This paper examines this issue closely, with an eye to making the payment system more inclusive. It also examines the impact of the recent global financial crisis on Indonesia's payment system. The authors found that the system has remained safe, secure, and reliable despite some minor liquidity problems experienced by small banks in the last quarter of 2008 as the effects of the global crisis began to penetrate the country's financial sector.
    Keywords: payment system indonesia; bank indonesia payment system; indonesia financial crisis
    JEL: E42
    Date: 2009–08–31
  22. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.
    JEL: E44 E52 G28
    Date: 2009–06
  23. By: Nils Holinski; Clemens Kool; Joan Muysken
    Abstract: In this paper we document the growing dispersion of external and internal balances between countries in the North and South of the Euro area over the time period 1992 to 2007. We find a persistent divergence process that seems to have started with the introduction of the common currency and has its roots in the savings and investment behavior of private sectors. We dismiss the common argument in the literature that imbalances are the temporary outcome of an overall European economic convergence process and argue that future research should place greater emphasis on country heterogeneity in behavior to fully understand economic developments in the Euro area and to derive policy implications.
    Keywords: Euro area, current acccount imbalances, Stability and Growth Pact
    JEL: F15 F32 F41
    Date: 2010–05
  24. By: Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: The paper attempts to evaluate whether the international financial architecture is adequate for maintaining the financial stability of the East Asian economies by summarizing the lessons learned from the Asian financial crisis of 1997-1998 and the global financial crisis of 2007-2009 and reviewing the progress being made to enhance the effectiveness of the international financial architecture in crisis prevention, management and resolution. The paper finds that the international community had to experience the two crises before seriously starting to work on the reform of the international financial architecture. Facing the global financial crisis, the international community has responded by making the G20 Summit the premier forum for international economic and financial cooperation, creating a potentially more powerful Financial Stability Board, and augmenting the financial resources of the IMF. <p>The paper concludes, however, that the international financial architecture remains inadequate for the needs of many emerging market economies, including in East Asia. International Monetary Fund surveillance—particularly that of systemically important economies (such as the United States, the United Kingdom and the Euro Area)—is ineffective and its governance structure is heavily biased towards Europe and the United States. International liquidity support is insufficient in assisting countries with sound economic and financial management that are hit by externally driven crises. No international agreements exist on external (sovereign) debt restructuring, or on the cross-border resolution of insolvent, internationally active financial firms for fair burden sharing of losses between creditors and debtors, or among different national authorities. <p>The paper emphasizes the importance of a well-functioning regional financial architecture to complement and strengthen the global financial architecture. It offers advice for East Asian authorities to focus on: (i) the establishment of resilient national financial systems, including local-currency bond markets; (ii) integration of national financial markets to facilitate the mobilization of regional savings for regional investment (in infrastructure and small- and medium-sized enterprises); (iii) enhancement of regional liquidity (Chiang Mai Initiative Multilateralization) and economic surveillance mechanisms; and (iv) regional exchange rate policy coordination to achieve sustained economic growth without creating macroeconomic and financial instability.
    Keywords: asian financial crisis; global financial crisis; crisis prevention; management and resolution; the imf; the financial stability board; regional financial architecture
    JEL: F30 F32 F33 F34 F53
    Date: 2009–11–24
  25. By: H. Murat Ozbilgin
    Date: 2010
  26. By: Spiegel, Mark M. (Asian Development Bank Institute)
    Abstract: This paper examines the motivation for, and the success of, regional efforts in Asia to promote local currency bond markets. The analysis demonstrates that Asian local currency bond markets made substantial gains as a region going into the current global financial crisis. However, we argue that the current financial crisis requires a reassessment of the merits of promoting local currency bond markets and the gains that have been made to date. While most of the initial motivations for encouraging the development of domestic local currency bond markets appear to remain valid, there are some exceptions. However, the degree to which success in the development of these markets will be sustained remains unknown until global financial markets regain tranquility and official interventions into these markets are removed.
    Keywords: global rating agencies; local ratings agencies; local currency bond markets
    JEL: F36 G15 G20 G28
    Date: 2009–12–21
  27. By: Jonung, Lars (Asian Development Bank Institute)
    Abstract: This paper gives an account of the Swedish financial crisis covering the period 1985–2000, dealing with financial deregulation and the boom in the late 1980s, the bust and the financial crisis in the early 1990s, the recovery from the crisis and the bank resolution policy adopted during the crisis. The paper focuses on three issues: the causes and consequences of the financial crisis, the policy response concerning bank resolution, and the applicability of the Swedish model of bank crisis management for countries currently facing financial problems.
    Keywords: financial crisis; crisis management; bank resolution; solvency crisis; banking crisis
    JEL: E32 E44 E63 F32 F34 G21 G32 G33
    Date: 2009–11–20
  28. By: Basir, Amir Akmar (Asian Development Bank Institute)
    Abstract: Payment systems in Malaysia have been undergoing changes in recent years. Among the notable changes is the emergence of electronic-based payment systems. The central bank has been playing an active role in shaping the development of payment systems, particularly in the gradual introduction of electronic-based payment schemes, in the belief that these have the potential to increase efficiency in the economy as whole. The active introduction of e-payment instruments has increased both the value and volume of transactions per capita use of e-payment instruments in recent years. Checks continue to be the major payment instrument, however. Small- and medium-sized enterprises could benefit tremendously from the use of e-payment schemes through more efficient business operations, cost reductions, enhanced security and wider payment channel choice. Noted improvements have also resulted from the introduction of large-value payment systems, such as the payment versus payment infrastructure for the settlement of Malaysian ringgit (RM)-United States (US) dollar (US$) foreign exchange trades and the delivery versus payment settlement for US dollar securities that are issued, deposited and traded in Malaysia. The development of the domestic payment system is becoming more important in the development of a deep and active domestic financial market that promotes financial market stability and the reinvestment of savings in the country. Closer financial market integration in the region and closer cooperation and policy coordination among the monetary authorities in the region is becoming increasingly important. Eight years after implementation in Malaysia, the e-payment schemes should be studied to assess any economic benefits they may have provided.
    Keywords: malaysian payment systems; information and communication technology; asian payment systems study
    JEL: D49 G28 L98
    Date: 2009–09–16
  29. By: Nallari, Raj; Mba, Leopold Engozogo
    Abstract: This paper uses the central tool of an investment-savings and monetary-policy model with an augmented Philips curve and presents a few extensions of that model to analyze the multiplier effects of macroeconomic policies in the United States. In doing so, the authors incorporate realistic assumptions in the model related to the recent financial characteristics of the global economy. The monetary policy reaction function embeds a new augmented Taylor-rule incorporating housing and stock prices and the credit lending rate. And the household consumption and firm investment decisions incorporate housing and stock assets and the credit market frictions. The equilibrium income is derived and compared with the actual nominal gross domestic product of the United States for the period 1990 to 2009. More importantly, fiscal and trade multipliers are derived and discussed. The main finding is that government spending, tax cut, and trade multipliers are relatively smaller in size when more realistic features are incorporated in the model. The model simulation shows that the model can track actual gross domestic product reasonably well. The model should be further improved before it could be used for policy exercises.
    Keywords: Economic Theory&Research,Debt Markets,Emerging Markets,Economic Stabilization,Access to Finance
    Date: 2010–04–01

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