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

  1. Money in monetary policy design: Monetary cross-checking in the New-Keynesian model By Guenter W. Beck; Volker Wieland
  2. Inflation and its Cures By Raj, Madhusudan
  3. Important Elements for Inflation Targeting for Emerging Economies By Inci Ötker; Charles Freedman
  4. Monetary Regime Change and Business Cycles By Cúrdia, Vasco; Finocchiaro, Daria
  5. Financial Crises and the Interest-rate Approach to Monetary Policy By J. Stephen Ferris; J. A. Galbraith
  6. Did the introduction of the euro impact on inflation uncertainty? - An empirical assessment By Matthias Hartmann; Helmut Herwartz
  7. An Outline of the Existing Literature on Monetary Economics in India By Das, Rituparna
  8. Implementing Official Dollarization By Luis Ignacio Jácome; Åke Lönnberg
  9. A threshold cointegration analysis of interest rate pass-through to UK mortgage rates By Ralf Becker; Denise R Osborn; Dilem Yildirim
  10. Monetary policy, housing booms and financial (im)balances By Eickmeier, Sandra; Hofmann, Boris
  11. Noisy Information, Interest Rate Shocks and the Great Moderation By Eric Mayer; Johann Scharler
  12. Heterogeneity in Bank Pricing Policies: The Czech Evidence By Roman Horvath; Anca Maria Podpiera
  13. Managing the Exit: Lessons from Japan's Reversal of Unconventional Monetary Policy By Murtaza H. Syed; Hiromi Yamaoka
  14. A double-edged sword. High interest rates in capital-control regimes By Gylfi Zoega
  15. On the nonlinear influence of Reserve Bank of Australia interventions on exchange rates By Reitz, Stefan; Ruelke, Jan C.; Taylor, Mark P.
  16. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  17. Should larger reserve holdings be more diversified? By Roland Beck; Sebastian Weber
  18. Does Foreign Exchange Reserve Decumulation Lead to Currency Appreciation? By Kathryn M.E. Dominguez; Rasmus Fatum; Pavel Vacek
  19. Financial factors in economic fluctuations By Lawrence Christiano; Roberto Motto; Massimo Rostagno
  20. Origins of persistent macroeconomic imbalances in the Euro area By Holinski Nils; Kool Clemens; Muysken Joan
  21. Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence By Andrea Vaona
  22. The Global Credit Crunch and Foreign Banks' Lending to Emerging Markets: Why Did Latin America Fare Better? By Herman Kamil; Kulwant Rai
  23. The euro and the volatility of exchange rates By Amalia Morales-Zumaquero; Simón Sosvilla-Rivero
  24. The EAGLE. A model for policy analysis of macroeconomic interdependence in the Euro area By Sandra Gomes; Pascal Jacquinot; Massimiliano Pisani
  25. The Yuan's Exchange Rates and Pass-through Effects on the Prices of Japanese and US Imports By Xing, Yuqing
  26. Revisiting Rose's common currency debate By María Santana-Gallego; Francisco J. Ledesma-Rodríguez; Jorge V. Pérez-Rodríguez

  1. By: Guenter W. Beck (Goethe University of Frankfurt, House of Finance, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany.); Volker Wieland (Goethe University of Frankfurt, House of Finance, Grueneburgplatz 1, 60323 Frankfurt am Main, Germany.)
    Abstract: In the New-Keynesian model, optimal interest rate policy under uncertainty is formulated without reference to monetary aggregates as long as certain standard assumptions on the distributions of unobservables are satisfied. The model has been criticized for failing to explain common trends in money growth and inflation, and that therefore money should be used as a cross-check in policy formulation (see Lucas (2007)). We show that the New-Keynesian model can explain such trends if one allows for the possibility of persistent central bank misperceptions. Such misperceptions motivate the search for policies that include additional robustness checks. In earlier work, we proposed an interest rate rule that is near-optimal in normal times but includes a cross-check with monetary information. In case of unusual monetary trends, interest rates are adjusted. In this paper, we show in detail how to derive the appropriate magnitude of the interest rate adjustment following a significant cross-check with monetary information, when the New-Keynesian model is the central bank’s preferred model. The cross-check is shown to be effective in offsetting persistent deviations of inflation due to central bank misperceptions. JEL Classification: E32, E41, E43, E52, E58.
    Keywords: monetary policy, New-Keynesian model, money, quantity theory, European Central Bank, policy under uncertainty.
    Date: 2010–05
  2. By: Raj, Madhusudan
    Abstract: This paper discusses the real understanding of inflation, its true causes and its root solutions.
    Keywords: Inflation; Fractional reserve banking; Welfare warfare state; Money supply; Gold standard; Commodity money; Central bank; Austrian economics.
    JEL: E31
    Date: 2010–03–31
  3. By: Inci Ötker; Charles Freedman
    Abstract: This is the fifth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed are the priority of inflation targeting over other goals, the absence of fiscal dominance, central bank independence, the degree of control over the policy interest rate, a sound methodology for forecasting, and the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.
    Keywords: Central bank autonomy , Emerging markets , Exchange rates , Fiscal policy , Inflation targeting , Interest rate policy , Monetary policy ,
    Date: 2010–05–05
  4. By: Cúrdia, Vasco (Macroeconomic and Monetary Studies Function); Finocchiaro, Daria (Research Department, Central Bank of Sweden)
    Abstract: This paper analyzes to what extent changes in monetary policy regimes influence the business cycle in a small open economy and investigates the impact of policy breaks on the estimation procedure. We estimate a DSGE model on Swedish data, explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. The results suggest that monetary policy reacted strongly to exchange rate movements in the former, and mostly to inflation in the latter. The external sector plays an important role in the economy and the international transmission mechanism is significantly affected by the choice of exchange rate regime. A counterfactual experiment that applies the inflation targeting policy rule on the disturbances from the exchange rate targeting period suggests that such a policy would have led to higher output and employment, but also to a depreciated currency, higher inflation and a more volatile economy. We also show evidence that ignoring the break in the estimation leads to spurious results for both the parameters associated with monetary policy as well as those that are policy-independent.
    Keywords: Bayesian estimation; DSGE models; target zone; inflation targeting; regime change
    JEL: C10 C50 E50 F40
    Date: 2010–04–01
  5. By: J. Stephen Ferris (Department of Economics, Carleton University); J. A. Galbraith (Department of Economics, Carleton University)
    Date: 2010–01–21
  6. By: Matthias Hartmann; Helmut Herwartz
    Abstract: We study the impact of the introduction of the European Monetary Union on inflation uncertainty. Two groups of economies, one consisting of three European Union members which are not part of the EMU and one of six OECD member economies, are used as control groups to contrast the effects of monetary unification against the counterfactual of keeping the status quo. We find that the monetary unification provides a significant payoff in terms of lower inflation uncertainty in comparison with the OECD. Regarding the difficulty of quantifying the latent inflation uncertainty, results are found to be robust over a set of four alternative estimates of inflation risk processes.
    Keywords: Monetary policy regimes,euro introduction,inflation uncertainty,uncertainty measures,Did the introduction of the euro impact on infla,Hartmann,Herwartz,European Economy. Economic Papers
    JEL: C53 E31 E42
    Date: 2009–12
  7. By: Das, Rituparna
    Abstract: As per the researchers on monetary economics, a detailed account of the changing role of money from Walrasian and Non-Walrasian settings to the more recent theories on the dynamics of the relationships between money, inflation and growth with reference to their historical evolution are available in Friedman et al. ed. (1998) and such type of theoretical work did not happen in India. There is a tendency among the Indian researchers to apply the theories developed abroad to up to date empirical data in econometrics models and then, with the help of econometric techniques and compare the results. For example Dash and Goal (2001) applied the theory of Foster (1992) and Chona (1976) applied the theory of Ahrensdorf and Thasan (1960). This paper dealt with such applications, their lacunae and attempts to resolve the issues unaddressed till 2005.
    Keywords: monetary policy; money; interest rate; Keynes; monetarist; neo Keynesian; Quantity Theory; LM curve; Nachane; Brahmananda; Tobin; post Keynesian; endogenous; money supply; financial markets; bank; credit; loan
    JEL: E0
    Date: 2010
  8. By: Luis Ignacio Jácome; Åke Lönnberg
    Abstract: This paper identifies key aspects that countries willing to officially dollarize must necessarily address. Based on country experiences, it discusses the critical institutional bases that are necessary to unilaterally introduce a new legal tender, describes the relevant operational issues to smooth the transition toward the use of the new currency, and identifies key structural reforms that are necessary to favor the sustainability over time of this monetary regime. The paper is aimed at providing preliminary guidance to policy makers and practitioners adopting official dollarization. The paper does not take a position on how appropriate this monetary arrangement is. Experiences from adopting dollarization in Ecuador, El Salvador, Kosovo, Montenegro, and Timor-Leste are illustrated briefly.
    Keywords: Bank reforms , Bank supervision , Central bank legislation , Central bank role , Central banks , Cross country analysis , Dollarization , Exchange rate policy , Fiscal reforms , Governance , Labor market reforms , Monetary policy , Trade policy ,
    Date: 2010–04–23
  9. By: Ralf Becker; Denise R Osborn; Dilem Yildirim
    Abstract: This paper empirically analyses the interest rate transmission mechanism in the United Kingdom by exploring the pass-through of the official rate to the money market rate and of the market rate to the mortgage rate. Potential asymmetries, due to financial market conditions and monetary policy, lead to the use of a nonlinear threshold error-correction model, with hypothesis tests based on non-standard bootstrap procedures that take into account the discrete nature of changes in the official rate. The empirical results indicate the presence of substantial asymmetries in both steps of the process, with these asymmetries depending on past changes in the money market rate and whether these are motivated by official rate changes. Generalized impulse response function analysis shows that adjustments differ with regard to the sign and magnitude of interest rate changes in a way that is consistent with conditions in the interbank and mortgage markets over the recent period.
    Date: 2010
  10. By: Eickmeier, Sandra; Hofmann, Boris
    Abstract: This paper uses a factor-augmented vector autoregressive model (FAVAR) estimated on U.S. data in order to analyze monetary transmission via private sector balance sheets, credit risk spreads and asset markets in an integrated setup and to explore the role of monetary policy in the three imbalances that were observed prior to the global financial crisis: high house price inflation, strong private debt growth and low credit risk spreads. The results suggest that (i) monetary policy shocks have a highly significant and persistent effect on house prices, real estate wealth and private sector debt as well as a strong short-lived effect on risk spreads in the money and mortgage markets; (ii) monetary policy shocks have contributed discernibly, but at a late stage to the unsustainable developments in house and credit markets that were observable between 2001 and 2006; (iii) financial shocks have influenced the path of policy rates prior to the crisis, and the feedback effects of financial shocks via lower policy rates on property and credit markets are found to have probably been considerable. --
    Keywords: Monetary policy,asset prices,housing,private sector balance sheets,financial crisis,factor model
    JEL: E52 E44 C3 E3 E43
    Date: 2010
  11. By: Eric Mayer (University of Wuerzburg / Department of Economics); Johann Scharler
    Abstract: In this paper we quantitatively evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model where the central bank can only observe a noisy estimate of the output gap and fnd that the less pronounced reaction of the Federal Reserve to output gap uctuations since 1979 can account for half of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s.
    Keywords: Great Moderation, New Keynesian Model, Noisy Data
    JEL: E32 E52 E58
    Date: 2010–05
  12. By: Roman Horvath; Anca Maria Podpiera
    Abstract: In this paper, we estimate the interest rate pass-through from money market to bank interest rates using various heterogeneous panel cointegration techniques to address bank heterogeneity. Based on our micro-level data from the Czech Republic, the results indicate that the nature of interest rate pass-through differs across banks in the short term (rendering estimators that constrain coefficients across groups to be identical inconsistent) and becomes homogeneous across banks only in the long term, supporting the notion of the law of one price. Mortgage rates and firm rates typically adjust to money market changes, but often less than fully in the long run. Large corporate loans have a smaller mark-up than small loans. Consumer rates have a high mark-up and are not found to exhibit a cointegration relationship with money market rates. Next, we examine how bank characteristics determine the nature of interest rate pass-through in a cross-section of Czech banks. We find evidence for relationship lending, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. Large banks are not found to price their products less competitively. Greater credit risk increases vulnerability to money market shocks.
    Keywords: Bank pricing policies, financial structure, monetary transmission.
    JEL: E43 E58 G21
    Date: 2009–12
  13. By: Murtaza H. Syed; Hiromi Yamaoka
    Abstract: In responding to the global crisis, central banks in several advanced economies ventured beyond traditional monetary policy. A variety of unorthodox measures, including purchases of public and private assets, have significantly enlarged their balance sheets. As recoveries take hold, focus will increasingly shift from countering the Great Recession to orchestrating an exit and returning to a more normal monetary framework. Five years ago, as its economy recovered from a severe financial crisis, Japan attempted just such an exit. This note revisits the Bank of Japan’s experience and draws potential lessons for managing an orderly exit today, with a focus on technical aspects, practicalities, and communication strategies. While the nature of the assets acquired during the present crisis could pose additional complications, parts of Japan’s arsenal—communication, flexibility, a sufficient set of policy tools and a strategy for using them, safeguards against potential losses, the revival of risk appetite through decisive restructuring of balance sheets, and refinements to the monetary framework upon exit—also could be important this time around.
    Keywords: Asset management , Central bank policy , Economic recovery , Financial crisis , Interest rate increases , Japan , Liquidity management , Monetary measures , Monetary policy ,
    Date: 2010–05–06
  14. By: Gylfi Zoega
    Abstract: This paper derives the relationship between central bank interest rates and exchange rates under a capital control regime. Higher interest rate may strengthen the currency by reducing consumption and imports and by inducing foreign owners of local currency assets not to sell local currency off shore. There is also an effect that goes in the opposite direction: Higher interest rates increase the flow of interest income to foreigners through the current account which makes the exchange rate fall. The historical financial crisis now under way in Iceland provides excellent testing grounds for the analysis. Overall, the experience does not suggest that cutting interest rates moderately from a very high level is likely to make a currency depreciate in a capital control regime but highlights the importance of effective enforcing of the controls.
    Date: 2009–11
  15. By: Reitz, Stefan; Ruelke, Jan C.; Taylor, Mark P.
    Abstract: This paper applies nonlinear econometric models to empirically investigate the effectiveness of the Reserve Bank of Australia (RBA) exchange rate policy. First, results from a STARTZ model are provided revealing nonlinear mean reversion of the Australian dollar exchange rate in the sense that mean reversion increases with the degree of exchange rate misalignment. Second, a STR-GARCH model suggests that RBA interventions account for this result by strengthening foreign exchange traders' confidence in fundamental analysis. This in line with the so-called coordination channel of intervention effectiveness. --
    Keywords: Foreign exchange intervention,market microstructure,smooth transition,nonlinear mean reversion
    JEL: C10 F31 F41
    Date: 2010
  16. By: Alexander Mihailov (School of Economics, University of Reading); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank); Johann Scharler (Department of Economics, University of Linz)
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Gali and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2010–05–09
  17. By: Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Sebastian Weber (Graduate Institute of International and Development Studies, Avenue de la Paix 11A, CH-1202 Geneva, Switzerland.)
    Abstract: The notable increase in international reserve holdings over the past decade and their use during the global …financial crisis of 2008/2009 has sparked renewed interest in the analysis of the optimal level of reserve holdings, in particular in countries which are subject to sudden stops. Less attention has been given to the optimal composition of reserves and even less to the joint determination of level and composition. In light of current developments, we show that despite the common belief that higher reserve levels should go along with higher diversifi…cation to minimize the opportunity costs from holding reserves, the opposite may even be true. It depends on the factors that stand behind the increase in reserves whether increased diversifi…cation is optimal or not. We estimate for a panel of 20 countries the determinants of the currency composition of reserves and show how it is affected by the different motives of reserve accumulation. In line with the recent literature on reserve levels we …find that reserve accumulation is primarily driven by precautionary motives, which in turn underpins the allocation of reserves to safe assets. While we fi…nd primarily evidence of the allocation being a function of precautionary motives, we also fi…nd some weak evidence for reserve accumulation to lead to more diversifi…ed portfolios if reserve accumulation is driven by other factors than precautionary motives. JEL Classification: F31, F33, E42, G11.
    Keywords: Reserve Accumulation, Currency Composition, Precautionary Motives.
    Date: 2010–05
  18. By: Kathryn M.E. Dominguez (University of Michigan & NBER); Rasmus Fatum (University of Alberta); Pavel Vacek (University of Alberta)
    Abstract: Many developing countries have increased their foreign reserve stocks dramatically in recent years, in large part motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency.
    Keywords: foreign exchange reserves, exchange rate determination, high- frequency volatility modeling
    JEL: E58 F31 F32
    Date: 2010–05
  19. By: Lawrence Christiano (Northwestern University, 633 Clark Street Evanston, IL 60208 Evanston, USA.); Roberto Motto (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimo Rostagno (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We augment a standard monetary DSGE model to include a banking sector and financial markets. We fit the model to Euro Area and US data. We find that agency problems in financial contracts, liquidity constraints facing banks and shocks that alter the perception of market risk and hit financial intermediation — ‘financial factors’ in short — are prime determinants of economic fluctuations. They have been critical triggers and propagators in the recent financial crisis. Financial intermediation turns an otherwise diversifiable source of idiosyncratic economic uncertainty, the ‘risk shock’, into a systemic force. JEL Classification: E3, E22, E44, E51, E52, E58, C11, G1, G21, G3.
    Keywords: DSGE model, Financial frictions, Financial shocks, Bayesian estimation, Lending channel, Funding channel.
    Date: 2010–05
  20. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    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: macroeconomics ;
    Date: 2010
  21. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation-growth nexus. When it is set equal to zero, the inflation-growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizeable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in presence of a fixed cost to wage resetting. Once adopting various semiparametric and instrumental variable estimation approaches on a cross-country/time-series dataset, we show that increasing inflation reduces real economic growth, consistently with our theoretical model with a positive intertemporal elasticity of substitution of working time.
    Keywords: inflation, growth, wage-staggering, learning-by-doing, semi- parametric estimator
    JEL: E31 E51 E52 O42 C14
    Date: 2010–05
  22. By: Herman Kamil; Kulwant Rai
    Abstract: The recent global financial turmoil raised questions about the stability of foreign banks' financing to emerging market countries. While foreign banks' lending growth to most emerging market regions contracted sharply, lending to Latin America and the Caribbean (LAC) was significantly more resilient. Analyzing detailed BIS data on global banks' lending to LAC countries-whether extended directly by their headquarters abroad or by their local affiliates in host countries-we show that the propagation of the global credit crunch was significantly more muted in countries where most of foreign banks' lending was channeled in domestic currency. We also show that foreign banks' involvement in LAC has differed in fundamental ways from that in other regions, with most of their lending to LAC conducted by their local subsidiaries, denominated in domestic currency and funded from a domestic deposit base. These characteristics help explain why LAC has not been struck as hard as other emerging markets by the global deleveraging and pullback in foreign banks' lending.
    Keywords: Bank credit , Caribbean , Credit restraint , Cross country analysis , Economic models , Emerging markets , International banking , International banks , International capital markets , Latin America , Liquidity ,
    Date: 2010–04–19
  23. By: Amalia Morales-Zumaquero (Universidad de Málaga); Simón Sosvilla-Rivero (Universidad Complutense de Madrid)
    Abstract: This paper attempts to determine whether or not the introduction of the euro affected the volatility of bilateral exchange rates all over the world. To that end, we examine the exchange rate behaviour for a set of OECD and non-OECD countries during the 1993-2007 period. Two econometric methods are implemented for this purpose: the OLS-based tests to detect multiple structural breaks, as proposed by Bai and Perron (1998, 2003), and several procedures based on Information Criterion together with the so-called sequential procedure suggested by Bai and Perron (2003). Although results suggest evidence of structural breaks in volatility across investigated variables, there is high heterogeneity regarding the located dates. Moreover, the realignments in the Exchange Rate Mechanism seem to play a significant role in the reduction of volatility in some European countries and transition economies.
    Keywords: Exchange rates, volatility
    JEL: F3
    Date: 2010–05
  24. By: Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.)
    Abstract: Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. JEL Classification: C53, E32, E52, F47.
    Keywords: Open-economy macroeconomics, DSGE models, econometric models, policy analysis.
    Date: 2010–05
  25. By: Xing, Yuqing (Asian Development Bank Institute)
    Abstract: This paper estimated the pass-though effects of yuan's exchange rates on prices of the US and Japanese imports from the People's Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. The high degree of pass-through effects were also found at the disaggregated sectoral level: food, raw materials, apparel, manufacturing, and machinery. However, further analysis indicated that the high pass-through effects in the case of Japan were mainly attributed to the PRC's policy to peg the yuan to the United States (US) dollar, and that the dollar is used as a dominant invoicing currency for the PRC's exports to Japan. After controlling the currency invoicing factor, I found no evidence that the yuan's cumulative appreciation since July 2005 was passed on to prices of Japanese imports at either the aggregate or disaggregated levels. The estimated low pass-through effects of the yuan's appreciation suggest that a moderate appreciation of the yuan would have very little impact on the PRC's trade surplus.
    Keywords: exchange rate pass-through; prc; japan; usa
    JEL: F31 F32
    Date: 2010–05–18
  26. By: María Santana-Gallego (Universidad de La Laguna); Francisco J. Ledesma-Rodríguez (Universidad de La Laguna); Jorge V. Pérez-Rodríguez (Universidad de Las Palmas)
    Abstract: The main objective of this research is to revisit the estimation of the effect of a common currency on international trade by applying the new methodology proposed by Helpman, Melitz and Rubistein (2008) and incorporating tourism to the theoretical framework. Rose (2000) estimates an empirical model of bilateral trade, finding a significant coefficient for a currency union variable of 1.2, suggesting an effect of currency unions on trade of over a 200%. Rose (2000)’s finding did not receive full acceptance and further research was consequently devoted to find reasons of such high effect. This still remains as a major puzzle in the International Economics. Rose and Van Wincoop (2001) hold that there may still be some omitted factors that drives countries to both participate in currency unions and trade more. In this research a gravity equation for trade is estimated controlling by international tourism.
    Keywords: Common currency, tourism, gravity equation
    JEL: F3
    Date: 2010–05

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