nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒06‒26
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Financial Stability and Monetary Policy By Christopher Martin; Costas Milas
  2. Identifying the bank lending channel in Brazil through data frequency By Christiano Arrigoni Coelho; João Manoel Pinho de Mello; MArcio Gomes Pinto Garcia
  4. Monetary Theory from a Chinese Historical Perspective By Zheng Xueyi; Yaguang Zhang; John Whalley
  5. Sustainable monetary policy and inflation expectations By Roc Armenter
  6. A Floating versus Managed Exchange Rate Regime in a DSGE Model of India By Nicoletta Batini; Vasco Gabriel; Paul Levine; Joseph Pearlman
  7. Optimal money demand in a heterogeneous-agent cash-in-advance economy By Yi Wen
  8. Optimal monetary policy in open economies By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  9. The Optimal Inflation Rate in New Keynesian Models By Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
  10. How Should Macroeconomic Policy Respond to Foreign Financial Crises? By Anthony J Makin
  11. The Exchange Rate Regime in Asia: From Crisis to Crisis By Ila Patnaik; Ajay Shah; Anmol Sethy; Vimal Balasubramaniam
  12. The Optimal Inflation Rate in New Keynesian Models By Olivier Coibion; Yuriy Gorodnichenko; Johannes F. Wieland
  13. Has Core Inflation Been Doing a Good Job in Brazil? By Da Silva Filho, Tito Nícias Teixeira; Figueiredo, Francisco Marcos Rodrigues
  14. Government Policy in Monetary Economies By Fernando M. Martin;
  15. Welfare implications of country size in a monetary union By Mykhaylova, Olena
  16. Optimal Monetary Stabilization Policy By Michael Woodford
  17. A note on the theory of fast money flow dynamics By Andrey Sokolov; Tien Kieu; Andrew Melatos
  19. Monetary and Fiscal Policy Interactions in a Monetary Union with Country-size Asymmetry By Celsa Machado; Ana Paula Ribeiro
  21. The role of model uncertainty and learning in the U.S. postwar policy response to oil prices By Francesca Rondina
  22. Monetary Policy in an Uncertain World: Probability Models and the Design of Robust Monetary Rules By Paul Levine
  23. Money and Capital as Competing Media of Exchange in a News Economy By Fernando Martin; David Andolfatto
  24. Understanding Policy in the Great Recession: Some Unpleasant Fiscal Arithmetic By John H. Cochrane
  25. The Fed's TRAP: A Taylor-type Rule with Asset Prices By Drescher, Christian; Erler, Alexander; Krizanac, Damir
  26. Financial Dollarization and European Union Membership By Kyriakos C. Neanidis
  27. The illusive quest: do international capital controls contribute to currency stability? By Reuven Glick; Michael Hutchison
  28. Nominal Rigidities and Retail Price Dispersion in Canada over the Twentieth Century By Ross D. Hickey; David S. Jacks

  1. By: Christopher Martin (Department of Economics, University of Bath, UK); Costas Milas (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We argue that although UK monetary policy can be described using a Taylor rule in 1992-2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
    Keywords: monetary policy, financial crisis
    JEL: C51 C52 E52 E58
    Date: 2010–01
  2. By: Christiano Arrigoni Coelho (Banco Central do Brasil e Department of Economics PUC-Rio); João Manoel Pinho de Mello (Department of Economics PUC-Rio); MArcio Gomes Pinto Garcia (Department of Economics PUC-Rio)
    Abstract: Using the different response timings of credit demand and supply, we isolate supply shifts after monetary policy shocks. We show that the bank lending channel exists in Brazil: after an increase (decrease) in the basic interest rate (Selic), banks reduce (increase) the quantity of new loans and raise (lower) interest rates. However, contrary to the empirical literature for the US, we find evidence that large banks react more than smaller ones to monetary policy shocks. Results may have important implications for monetary policy transmission in light of the recent wave of concentration in the Brazilian banking industry.
    Keywords: monetary policy transmission; credit markets; bank lending channel. JEL Code: E52; E58
    Date: 2010–05
  3. By: Mohamed Benbouziane (Faculty of economics and management, Tlemcen University); Abdelhak Benamar; Mustapha Djennas
    Abstract: The objective of this paper is to test for the liquidity effect in Algeria and Morocco using multivariate threshold autoregressive model (MVTAR) as proposed by Tsay (1998). Our empirical results have several important implications. First, results do not support threshold behavior in the case of Algeria. Moreover, when using M1 as a proxy of monetary policy, the liquidity effect hypothesis is rejected in this country. When using bank deposit assets (BDA), results show that there is a negative relationship between monetary shocks and interest rate, and accordingly accepting the liquidity effect. Secondly, in the case of Morocco, however, results show an asymmetric response of interest rate to positive and negative shocks of monetary policy. Moreover, these results strongly support a threshold behavior when BDA is employed, while weakly supporting the same behavior using M1. Furthermore, and using the proxy of bank deposit assets, the liquidity effect are accepted in the low inflation regime, whereas it is rejected in the high inflation regime. Hence, the threshold behavior offers an interesting alternative for explaining the relationship between interest rates and monetary policy shocks. The results presented herein may give more insights on the transmission mechanism of monetary policy in different inflationary environments. Accordingly, a good inflation targeting policy would yield better results in this context. Indeed, the liquidity effect breaks down for the high inflation regime, as inflationary expectations are immediately responsive to money growth. In a low-inflation regime, however, money is not considered to be neutral, as it could affect output through the liquidity effect.
    Date: 2010–06
  4. By: Zheng Xueyi; Yaguang Zhang; John Whalley
    Abstract: We discuss monetary thought in ancient China from the perspective of Western monetary theory. It sets out the structure of economic activity in the various dynasties of ancient China and emphasizes the differences in monetary structure from Europe (and later North America). Imperial China was a politically integrated structure with regional segmentation of economic activities and hence with regional money. Monetary policy was one body conducted at regional level, but overseen naturally politically before national integration under the Ming dynasty (14th century). In various regions different forms of money circulated, with gold, silver, copper, and paper all present at various times. Monetary policy was guided by monetary thought, such as later in Europe. Basic concepts such as monetary function, the velocity of circulation, inflation, interest rate parity and the quantity theory were all present. The economics of Imperial China witnessed boom and bust, inflation and deflation and monetary control much like Europe to follow. Monetary thought thus seemingly preceded Western thought, and had remarkable similarities. Whether much of this thought travelled down the silk road remains unknown, but the possibility is intriguing.
    JEL: N20
    Date: 2010–06
  5. By: Roc Armenter
    Abstract: The author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation more precisely, into the best equilibrium reputation can sustain. He introduces nominal asset markets in an infinite horizon version of the Barro-Gordon model. The author then analyzes the subset of sustainable policies compatible with any given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. His results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.
    Keywords: Inflation (Finance) ; Interest rates ; Asset pricing
    Date: 2010
  6. By: Nicoletta Batini (University of Surrey and IMF); Vasco Gabriel (University of Surrey); Paul Levine (University of Surrey); Joseph Pearlman (London Metropolitan University)
    Abstract: We first develop a two-bloc model of an emerging open economy interacting with the rest of the world calibrated using Indian and US data. The model features a financial accelerator and is suitable for examining the effects of financial stress on the real economy. Three variants of the model are highlighted with increasing degrees of financial frictions. The model is used to compare two monetary interest rate regimes: domestic Inflation targeting with a floating exchange rate (FLEX(D)) and a managed exchange rate (MEX). Both rules are characterized as a Taylor-type interest rate rules. MEX involves a nominal exchange rate target in the rule and a constraint on its volatility. We find that the imposition of a low exchange rate volatility is only achieved at a significant welfare loss if the policymaker is restricted to a simple domestic in- flation plus exchange rate targeting rule. If on the other hand the policymaker can implement a complex optimal rule then an almost fixed exchange rate can be achieved at a relatively small welfare cost. This finding suggests that future research should examine alternative simple rules that mimic the fully optimal rule more closely. JEL Classification: E52, E37, E58
    Keywords: DSGE model, Indian economy, monetary interest rate rules, floating versus managed exchange rate, financial frictions.
    JEL: E52 E37 E58
    Date: 2010–04
  7. By: Yi Wen
    Abstract: Heterogeneity matters. This point is illustrated in a heterogeneous-agent, cash-in-advance economy where money serves both as a medium of exchange and as a store of value (as in Lucas, 1980). It is shown that heterogeneity can lead to dramatically different implications of monetary policies from those under the representative-agent assumption, including (i) the velocity of money is not constant but highly volatile, as in the data; (ii) lump-sum transitory money injections have expansionary effects on aggregate output despite flexible prices; and (iii) the welfare cost of anticipated inflation is potentially a couple of orders larger than the estimates of Cooley and Hansen (1989) based on a representative-agent, cash-in-advance economy.
    Keywords: Demand for money ; Monetary theory
    Date: 2010
  8. By: Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
    Abstract: Research in the international dimensions of optimal monetary policy has long been inspired by a set of fascinating questions, shaping the policy debate in at least two eras of progressive cross-border integration of goods, factors, and assets markets in the years after World War I and from Bretton Woods to today. Namely, should monetary policy respond to international variables such as exchange rates, global business cycle conditions, or global imbalances beyond their in uence on the domestic output gap and inflation? Do exchange rate movements have desirable stabilization and allocative properties? Or, on the contrary, should policymakers curb exchange rate fltuations and be concerned with, and attempt to correct, currency isalignments? Are there large gains the international community could reap by strengthening cross-border monetary cooperation? ; We revisit these classical questions by building on the choice-theoretic monetary literature encompassing the research agenda of he New Keynesian models (see, e.g., Rotemberg and Woodford 1997), the New Classical Synthesis (see, e.g., Goodfriend and King 1997), and especially the New Open Economy Macroeconomics, henceforth NOEM (see, e.g., Svensson and van Wijnbergen 1989, Obstfeld and Rogo¤ 1995). In doing so, we will naturally draw on a well-established set of general principles in stabilization theory, which go beyond open-economy issues. Yet, the main goal of our analysis is to shed light on monetary policy trade-o¤s that are inherently linked to open economies which engage in cross-border trade in goods and assets.
    Keywords: Monetary policy
    Date: 2010
  9. By: Olivier Coibion (Department of Economics, College of William and Mary); Yuriy Gorodnichenko (Department of Economics, University of California, Berkeley); Johannes Wieland (Department of Economics, niversity of California, Berkeley)
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare through three distinct channels: steady-state effects, the magnitude of the coefficients in the utility-function approximation, and the dynamics of the model. We solve for the optimal level of inflation in the model and find that, for plausible calibrations, the optimal inflation rate is low, less than two percent, even after considering a variety of extensions, including price indexation, endogenous price stickiness, capital formation, model uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability.
    Keywords: Optimal inflation, New Keynesian, zero bound, price level targeting
    JEL: E3 E4 E5
    Date: 2010–06–15
  10. By: Anthony J Makin
    Keywords: global financial crisis, national income, exchange rate, monetary policy, fiscal stimulus
    JEL: F31 F33 F41
  11. By: Ila Patnaik; Ajay Shah; Anmol Sethy; Vimal Balasubramaniam
    Abstract: Prior to the Asian financial crisis, most Asian exchange rates were de facto pegged to the US Dollar. In the crisis, many economies experienced a brief period of extreme flexibility. A `fear of floating' gave reduced flexibility when the crisis subsided, but flexibility after the crisis was greater than that seen prior to the crisis. Contrary to the idea of a durable Bretton Woods II arrangement, Asia then went on to slowly raise flexibility and reduce the role for the US Dollar. When the period from April 2008 to December 2009 is compared against periods of high in flexibility, from January 1991 to November 1991 and October 1995 to March 1997, the increase in flexibility is economically and statistically significant. This paper proposes a new measure of dollar pegging, the \Bretton Woods II score". [NIPFP WP No. 69].
    Keywords: flexibility, korea, economically, Exchange rate regime, Asia, Bretton Woods II hypothesis, dollar, pegging, US, Asia, financial crisis, china, India, macroeconomic policy, monetary policy
    Date: 2010
  12. By: Olivier Coibion; Yuriy Gorodnichenko; Johannes F. Wieland
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and show that steady-state inflation affects welfare through three distinct channels: steady-state effects, the magnitude of the coefficients in the utility-function approximation, and the dynamics of the model. We solve for the optimal level of inflation in the model and find that, for plausible calibrations, the optimal inflation rate is low, less than two percent, even after considering a variety of extensions, including price indexation, endogenous price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. In our models, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability.
    JEL: E3 E4 E5
    Date: 2010–06
  13. By: Da Silva Filho, Tito Nícias Teixeira; Figueiredo, Francisco Marcos Rodrigues
    Abstract: This paper assesses the performance of the core inflation measures calculated by the Brazilian Central Bank (BCB). The evidence shows that they do not meet some key statistical criteria that a good core inflation should have: unbiasedness and the ability to forecast inflation. That performance stems, to a large extent, from the lack of a well-grounded statistical and economical basis behind them. Three new measures are built and assessed using the same criteria. The evidence shows that their behaviour is more in accordance to what the theory claims. However, they still lack the ability to help forecasting inflation. Hence both the BCB and the market should use core inflation cautiously.
    Keywords: Core inflation; inflation; supply shocks; relative prices; volatility
    JEL: C43 E31 E52
    Date: 2009–12
  14. By: Fernando M. Martin (Simon Fraser University);
    Abstract: I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.
    Keywords: government policy; lack of commitment; financial intermediation; trading frictions; micro founded models of money
    JEL: E13 E52 E62 E63
    Date: 2010–06
  15. By: Mykhaylova, Olena
    Abstract: This paper calculates differences in welfare costs of nominal rigidities in large and small EMU countries. I use a two-country DSGE model characterized by optimizing agents, monopolistic wage and price setting, distortionary taxes and government debt dynamics. I find that these costs are virtually identical for all members of the EMU, and small countries are not at a disadvantage when it comes to the setting of the common monetary policy. This conclusion is primarily due to highly correlated technological processes in Europe, which cause national and Euro-wide inflations to move together. These findings are robust to the asset market structure, trade openness, and different specifications of the Taylor rule.
    Keywords: European monetary union; nominal rigidities; welfare costs
    JEL: E31 E58 E63 F33
    Date: 2009–08–31
  16. By: Michael Woodford
    Abstract: This paper reviews the theory of optimal monetary stabilization policy, with an emphasis on developments since the publication of Woodford (2003). The structure of optimal policy commitments is considered, both when the objective of stabilization policy is defined by an arbitrarily specified quadratic loss function, and when the objective of policy is taken to be the maximization of expected utility. Issues treated include the time inconsistency of optimal policies and the need for commitment; the relation of optimal policy from a “timeless perspective” to the Ramsey conception of optimal policy; and the advantages of forecast targeting procedures as an approach to the implementation of optimal stabilization policy. The usefulness of characterizing optimal policy in terms of a target criterion is illustrated in a range of examples. These include models with a variety of assumptions about the nature of price and wage adjustment; models that allow for sectoral heterogeneity; cases in which policy must be conducted on the basis of imperfect information; and cases in which the zero lower bound on the policy rate constrains the conduct of policy.
    JEL: E52 E61
    Date: 2010–06
  17. By: Andrey Sokolov; Tien Kieu; Andrew Melatos
    Abstract: The gauge theory of arbitrage was introduced by Ilinski in [arXiv:hep-th/9710148] and applied to fast money flows in [arXiv:cond-mat/9902044]. The theory of fast money flow dynamics attempts to model the evolution of currency exchange rates and stock prices on short, e.g.\ intra-day, time scales. It has been used to explain some of the heuristic trading rules, known as technical analysis, that are used by professional traders in the equity and foreign exchange markets. A critique of some of the underlying assumptions of the gauge theory of arbitrage was presented by Sornette in [arXiv:cond-mat/9804045]. In this paper, we present a critique of the theory of fast money flow dynamics, which was not examined by Sornette. We demonstrate that the choice of the input parameters used in [arXiv:cond-mat/9902044] results in sinusoidal oscillations of the exchange rate, in conflict with the results presented in [arXiv:cond-mat/9902044]. We also find that the dynamics predicted by the theory are generally unstable in most realistic situations, with the exchange rate tending to zero or infinity exponentially.
    Date: 2010–06
  18. By: Magda Kandil (International Monetary Fund); Mohamed Trabelsi
    Abstract: This paper tests the desirability and feasibility of establishing a monetary union in GCC countries using a multivariate structural Vector Autoregression Model (VAR) for the period 1980-2006. The paper builds on the earlier work, capitalizing on a methodology that captures supply and demand disturbances impinging on individual economies. Co-movement of shocks across countries is considered a crucial condition towards integration in a common currency area. Shocks are based on the estimation of a structural VAR model that comprises world real output, domestic output, real exchange rates and the price level. Based on correlations using demand and monetary shocks, the paper establishes the following results: (i) countries of the region are still far from the necessary conditions to ensure the success of joining a currency union. Nevertheless, for a subset of countries (Saudi Arabia, the United Arab Emirates and Qatar), conditions suggest higher potential to take the lead in endorsing and fostering a common currency zone, (ii) a higher degree of labor mobility, openness, and intra-regional mobility are still desired to accelerate regional integration and ensure a steady path towards the establishment of a currency union.
    Date: 2010–05
  19. By: Celsa Machado (ISCAP - Instituto Superior de Contabilidade e Administração do Porto); Ana Paula Ribeiro (Faculdade de Economia da Universidade do Porto and CEF.UP)
    Abstract: This paper analyses optimal discretionary non-coordinated monetary and fiscal stabilization policies in a micro-founded New-Keynesian model of a two-country monetary union with country-size asymmetry, under two policy scenarios. A balanced-budget policy scenario and a policy scenario where the presence of government debt limits the macroeconomic stabilization effort and enlarges the sources of strategic policy interactions. Numerical results indicate that non-cooperation exacerbates the fiscal policy activism of a small country while moderating that of a large country. In the balanced-budget scenario, non-cooperation improves (reduces) welfare for a small (large) country while, in the high-debt scenario, it produces the opposite results. Cooperation dominates non-cooperation for the union as a whole.
    Keywords: Monetary union; optimal fiscal and monetary policies; asymmetric countries.
    JEL: E52 E61 E62 E63
    Date: 2010–06
  20. By: Ahmet Atil Asici (Istanbul Technical University)
    Abstract: This paper aims to fill the gap between exchange rate regime choice and currency crises literatures. Through explicitly taking into account the exchange rate regime choice of countries in explaining the occurrence of currency crisis, it is tempting to think that sources of vulnerabilities, eventually leading countries to crises, might be different according to the exchange rate regime adopted by a country. This paper contributes to the empirical literature by assessing whether currency crises have regime-specific features. We propose a way to transform the variables exhibiting regime-specific features to solve the problems encountered in the empirical literature. Our regression results suggest that the odds of a crisis increase significantly in countries where chosen regimes are inconsistent with their features. In addition to standard macroeconomic indicators, countries’ regime choice should also consider what is being imposed by the natural determinants of the regime choice. Our sample consists of 163 developed and developing countries and covers the period from 1990 to 2007.
    Date: 2009–08
  21. By: Francesca Rondina
    Abstract: This paper studies optimal monetary policy in a framework that explicitly accounts for policymakers' uncertainty about the channels of transmission of oil prices into the economy. More specfically, I examine the robust response to the real price of oil that US monetary authorities would have been recommended to implement in the period 1970 2009; had they used the approach proposed by Cogley and Sargent (2005b) to incorporate model uncertainty and learning into policy decisions. In this context, I investigate the extent to which regulator' changing beliefs over different models of the economy play a role in the policy selection process. The main conclusion of this work is that, in the specific environment under analysis, one of the underlying models dominates the optimal interest rate response to oil prices. This result persists even when alternative assumptions on the model's priors change the pattern of the relative posterior probabilities, and can thus be attributed to the presence of model uncertainty itself.
    Keywords: model uncertainty, learning, robust policy, Bayesian model averaging, oil prices
    JEL: C52 E43 E58 E65
    Date: 2010–06–11
  22. By: Paul Levine (University of Surrey)
    Abstract: The past forty years or so has seen a remarkable transformation in macro-models used by central banks, policymakers and forecasting bodies. This papers describes this transformation from reduced-form behavioural equations estimated separately, through to contemporarymicro-founded dynamic stochastic general equilibrium (DSGE) models estimated by systems methods. In particular by treating DSGE models estimated by Bayesian-Maximum-Likelihood methods I argue that they can be considered as probability models in the sense described by Sims (2007) and be used for risk-assessment and policy design. This is true for any one model, but with a range of models on offer it is possible also to design interest rate rules that are simple and robust across the rival models and across the distribution of parameter estimates for each of these rivals as in Levine et al. (2008). After making models better in a number of important dimensions, a possible road ahead is to consider rival models as being distinguished by the model of expectations. This would avoid becoming 'a prisoner of a single system' at least with respect to expectations formation where, as I argue, there is relatively less consensus on the appropriate modelling strategy.
    Keywords: structured uncertainty, DSGE models, robustness, Bayesian estimation, interest-rate rules
    JEL: E52 E37 E58
    Date: 2010–04
  23. By: Fernando Martin (Simon Fraser University); David Andolfatto (Simon Fraser University)
    Abstract: Conventional theory suggests that fiat money will have value in capitalpoor economies. We demonstrate that fiat money may also have value in capital-rich economies, if the price of capital is excessively volatile. Excess asset-price volatility is generated by news; information that has no social value, but is privately useful in forming forecasts over the short-run return to capital. One advantage of fiat money is that its expected return is not linked directly to news concerning the prospects of an underlying asset. When money and capital compete as media of exchange, excess volatility in the short-term returns of liquid asset portfolios is mitigated and welfare is improved. A legal restriction that prohibits the use of capital as a payment instrument renders the expected return to money perfectly stable and, as a consequence, may generate an additional welfare benefit.
    Keywords: fiat money, capital, news shocks
    JEL: E41 E42 E52
    Date: 2009–09
  24. By: John H. Cochrane
    Abstract: I use the valuation equation of government debt to understand fiscal and monetary policy in and following the great recession of 2008-2009, to think about fiscal pressures on US inflation, and what sequence of events might surround such an inflation. I emphasize that a fiscal inflation can come well before large deficits or monetization are realized, and is likely to come with stagnation rather than a boom.
    JEL: E3 E31 E4 E5 E52 E6
    Date: 2010–06
  25. By: Drescher, Christian; Erler, Alexander; Krizanac, Damir
    Abstract: The paper examines if US monetary policy implicitly responds to asset prices. Using real-time data and a GMM framework we estimate a Taylor-type rule with an asset cycle variable, which refers to real estate prices. To analyze the Fed's responses we describe real estate price movements by means of an asset cycle dating procedure. This procedure reveals quasi real-time bull and bear markets. Our analysis yields two main findings. Firstly, the Fed does implicitly respond to real estate prices. Secondly, these responses are pro-cyclical and their intensity changes over time.
    Keywords: Fed; Monetary Policy; Taylor Rule; Asset Price Cycles; Real Estate
    JEL: E58 E52
    Date: 2010–06–14
  26. By: Kyriakos C. Neanidis
    Abstract: We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollarization. The negative effect on deposit dollarization captures the increased confidence of the private sector in the domestic currency as they consider the EU admission process to reflect their government’s commitment in promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation for a lower currency risk, which diminishes the cost of foreign currency borrowing.
    Date: 2010
  27. By: Reuven Glick; Michael Hutchison
    Abstract: We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to "depreciate" over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007-08 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.
    Keywords: Financial crises ; Capital market ; Emerging markets ; Econometric models ; Panel analysis
    Date: 2010
  28. By: Ross D. Hickey; David S. Jacks
    Abstract: We introduce a new data set on over 230,000 monthly prices for 10 goods in 50 Canadian cities over the 40 year period from 1910 to 1950. This coupled with previously published price information from the late twentieth century allows us to present one of the first comprehensive views of nominal rigidities and retail price dispersion over the past 100 years. We find that nominal rigidities have been conditioned upon prevailing rates of inflation with a greater frequency of price changes occurring in the 1920s and the 1970s. Additionally, the process of retail market integration has surprisingly followed a U-shaped trajectory, with many domestic markets being better integrated—as measured by the average dispersion of retail prices—at mid-century than in the 1990s. We also consider the linkages between nominal rigidities and price dispersion, finding results consistent with present-day data.
    JEL: E31 L11 N82
    Date: 2010–06

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