nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒07‒17
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Committees and Model Uncertainty By Peter Tillmann
  2. Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions? By Sandra Schmidt; Dieter Nautz
  3. Commodity Prices and Inflation in the Middle East, North Africa, and Central Asia By Joseph Crowley
  4. On the Optimal Adherence to Money Targets in a New-Keynesian Framework: An Application to Low-Income Countries By D. Filiz Unsal; Rafael Portillo; Andrew Berg
  5. Inflation Dynamics in Yemen: An Empirical Analysis By Abdullah Almounsor
  6. Insulation Impossible : Fiscal Spillovers in a Monetary Union. By Russell Cooper; Hubert Kempf; Dan Peled
  7. Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries ?. By Dramane Coulibaly; Hubert Kempf
  8. Renovation of the Global Reserve Regime: Concepts and Proposals By Peter B. Kenen
  9. Financial Globalization, Financial Frictions and Optimal Monetary Policy. By Ester Faia; Eleni Iliopulos
  10. The monetary origins of the financial and economic crisis By Landais, Bernard
  11. Three Essays on Liquidity Crisis, Monetary Policy, and Banking Regulation By Cao, Jin
  12. Nominal Uncertainty and Inflation: The Role of European Union Membership By Kyriakos C. Neanidis; Christos S. Savva
  13. Monetary Policy under the Classical Gold Standard (1870s - 1914) By M Morys;
  14. The financial market impact of quantitative easing By Joyce, Michael; Lasaosa, Ana; Stevens , Ibrahim; Tong, Matthew
  15. The Euro-Project at Risk By Hauskrecht, Andreas; Stuart, Bryan; Hankel, Wilhelm
  16. Daytime is money By Kraenzlin, Sébastien; Nellen, Thomas
  17. Fiscal policy, institutional quality and central bank transparency By Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
  18. The Transmission of Shocks to the Chinese Economy in a Global Context: A Model-Based Approach By Jeannine Bailliu; Patrick Blagrave
  19. Monetary Policy and Risk Taking By Ignazio Angeloni
  20. Modelling Inflation in Australia By David Norman; Anthony Richards
  21. Exchange Rate Misalignments: Historical Experience of Japan, Germany, Singapore and Taiwan Compared to China Today By Duo Qin; Xinhua He; Yimeng Liu
  22. Estimation of a nonlinear Taylor rule using real-time U.S. data By Zisimos Koustas; Jean-Francois Lamarche
  23. Macroeconomic Uncertainty, Inflation and Growth: Regime-Dependent Effects in the G7 By Kyriakos C. Neanidis; Christos S. Savva
  24. Monetary and fiscal policy interactions with central bank transparency and public investment By Dai, Meixing; Sidiropoulos, Moïse
  25. Management of International Capital Flows: The Indian Experience By Sen Gupta, Abhijit
  26. Chronicle of currency collapses: re-examining the effects on output By Matthieu Bussière; Sweta c Saxena; Camilo Tovar
  27. Financial shocks and macroeconomic policies during the Argentine crisis of 2001-2002 By Jose MOURELLE
  28. Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models By Xiaoshan Chen; Ronald MacDonald

  1. By: Peter Tillmann (Justus Liebig University Gießen)
    Abstract: We introduce heterogeneity into a monetary policy committee by allowing the degree of model uncertainty to differ across members. It is shown that in this framework the stage at which members reach consensus matters. An aggregation protocol under which members only average policy deemed optimal from each member’s point of view leads to more volatility compared to an alternative protocol in which members agree on a common worst-case scenario from which optimal policy is then derived. The reason is that inflation, output and the interest rate are convex functions of each member’s idiosyncratic degree of model uncertainty. If the degree of model uncertainty becomes more heterogenous, inflation volatility falls due to more vigorous stabilization policy. The degree of heterogeneity across members is therefore an important determinant of macroeconomic volatility. Interestingly, the implications for the committee design under a min-max approach to model uncertainty are identical to those derived from a Bayesian approach.
    Keywords: Robustness, Model Uncertainty, Monetary Policy Committee, Optimal Monetary Policy
    JEL: E31 E32
    Date: 2010
  2. By: Sandra Schmidt; Dieter Nautz
    Abstract: This paper investigates why financial market experts misperceive the interest rate policy of the European Central Bank (ECB). Assuming a Taylor-rule-type reaction function of the ECB, we use qualitative survey data on expectations about the future interest rate, inflation, and output to discover the sources of in- dividual interest rate forecast errors. Based on a panel random coefficient model, we show that financial experts have systematically misperceived the ECB's in- terest rate rule. However, although experts tend to overestimate the impact of inflation on future interest rates, perceptions of monetary policy have become more accurate since clarification of the ECB's monetary policy strategy in May 2003. We find that this improved communication has reduced disagreement over the ECB's response to expected inflation during the financial crisis.
    Keywords: Central bank communication, Interest rate forecasts, Survey expectations, Panel random coefficient model
    JEL: E47 E52 E58 C23
    Date: 2010–07
  3. By: Joseph Crowley
    Abstract: Inflation followed a strikingly uniform pattern in all countries of the Middle East, North Africa, and Central Asia during the period 1996-2009, falling until about 2000 and then rising. International fuel prices do not help explain this pattern. This conclusion is robust even when different cross sections of countries are tested or when different regression variables are included. The pattern of inflation is explained mainly by past inflation, the strength of the US dollar, US inflation, and—depending on the subset of countries analyzed—monetary and exchange rate policies and nonfuel commodity prices.
    Keywords: Commodity prices , Cross country analysis , Dollarization , Economic models , Exchange rate policy , Exchange rates , Inflation , Middle East and Central Asia , Monetary policy , Money supply , North Africa , Oil prices , Time series ,
    Date: 2010–06–07
  4. By: D. Filiz Unsal; Rafael Portillo; Andrew Berg
    Abstract: Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This contrasts with most modern discussions of monetary policy, and with most practice. We extend the new-Keynesian model to provide a role for “M†in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issues in these countries. Ex-ante announcements/forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex-post, the policy maker must choose his relative adherence to interest rate and money growth targets. Drawing on the method in Svensson and Woodford (2004), we show that the optimal adherence to ex-ante targets is equivalent to a signal extraction problem where the central bank uses the money market information to update its estimate of the state of the economy. We estimate the model, using Bayesian methods, for Tanzania, Uganda (both de jure money targeters), and Ghana (a de jure inflation targeter), and compare the de facto adherence to targets with the optimal use of money market information in each country.
    Keywords: Central bank policy , Cross country analysis , Economic models , Ghana , Low-income developing countries , Monetary aggregates , Monetary policy , Money , Tanzania , Uganda ,
    Date: 2010–06–04
  5. By: Abdullah Almounsor
    Abstract: Yemen has had a high and volatile rate of inflation in recent years. This paper studies the underlying determinants of inflation dynamics in Yemen using three different approaches: (i) a single equation model, (ii) a Structural Vector Autoregression Model, and (iii) a Vector Error Correction Model. The outcomes suggest that inflation dynamics in Yemen are driven by international price shocks, exchange rate depreciation, domestic demand shocks, and monetary innovations. The impact of international prices and exchange rate depreciation indicate a significant pass-through of import prices. In the short run, external shocks of international prices and the exchange rate account for most variations in inflation, but domestic shocks to money supply and domestic demand explain larger variations in the medium term.
    Date: 2010–06–15
  6. By: Russell Cooper (European University Institute and University of Texas); Hubert Kempf (Centre d'Economie de la Sorbonne - Paris School of Economics et Banque de France); Dan Peled (University of Haifa - Department of Economics)
    Abstract: This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modeled here as reserve requirements. When capital markets art integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.
    Keywords: Monetary Union, inflation tax, seigniorage, monetary rules, public debt.
    JEL: H30 H87 C72
    Date: 2010–05
  7. By: Dramane Coulibaly (Centre d'Economie de la Sorbonne); Hubert Kempf (Centre d'Economie de la Sorbonne - Paris School of Economics et Banque de France)
    Abstract: In this paper, we empirically examine the effect of inflation targeting on the exchange rate pass-through to prices in emerging countries. We use a panel VAR that allows us to use the larger data set on twenty-seven emerging countries (fifteen inflation targeters and twelve inflation nontargeters). Our evidence suggests that inflation targeting in emerging countries has helped to reduce the pass-through to various price indexes (import prices, producer prices and consumer prices) from a higher level to a new level that is significantly different from zero. The variance decomposition shows that the contribution of exchange rate shocks to prices fluctuations is more important in emerging targeters compared to nontargeters, and the contribution of exchange rate shocks to price fluctuations in emerging targeters declines after adopting inflation targeting.
    Keywords: Inflation targeting, exchange rate Pass-through, panel VAR.
    JEL: E31 E52 F41
    Date: 2010–05
  8. By: Peter B. Kenen (Princeton University)
    Abstract: The subject of this paper is one about which I have written before, but this paper goes further than those published previously. It contemplates the gradual transformation of the global reserve regime by making the IMF’s quasi-currency, the SDR, the primary reserve asset of the international monetary system, which was the objective adopted when the SDR was introduced in 1969.
    Keywords: foreign exchange, currency reserves
    JEL: E42 E58 F31 F33
    Date: 2010–06
  9. By: Ester Faia (Goethe University Frankfurt et CEPREMAP); Eleni Iliopulos (Centre d'Economie de la Sorbonne - Paris School of Economice et CEPREMAP)
    Abstract: How should monetary policy be optimally designed in an environment with high degrees of financial globalization ? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed : a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization.
    Keywords: Global imabalances, collateral constraints, monetary regimes.
    JEL: E52 F1
    Date: 2010–06
  10. By: Landais, Bernard
    Abstract: Abstract The monetary policy, especially the American one, can be blamed for the remote role (2002-2004) it played in the creation of the speculative bubble which led to a financial crisis. It also has a part of the responsibility through its restrictive direction during the 2004-2006 period; this time, a direction shared by other central banks. Finally, it is more immediately involved through its lack of clear-sightedness and responsiveness in the first months of the recession.
    Keywords: Economic crisis; Financial crisis; Monetary Policy; Taylor Rule;Taylor gap; Interest Term Spread; Recession
    JEL: E0 E58 E52
    Date: 2010–03–11
  11. By: Cao, Jin
    Date: 2010–02–10
  12. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: Using a GARCH model we provide evidence that higher inflation uncertainty leads to higher inflation in the new European Union (EU) member states and candidate countries only prior to EU accession. During EU accession and entry inflation uncertainty has no effect on mean inflation. This result supports the consideration of policy regime shifts in assessing the nominal uncertainty-average inflation relationship.
    Date: 2010
  13. By: M Morys;
    Abstract: Drawing on monthly data for 12 European countries, this paper asks whether countries under the Classical Gold Standard followed the so-called “rules of the game” and, if so, whether the external constraint implied by these rules was more binding for the periphery than for the core. Our econometric focus is a probit estimation of the central bank discount rate behaviour. Three main findings emerge: First, all countries followed specific rules but rules were different for core countries as opposed to peripheral countries. The discount rate decisions of core countries were motivated by keeping the exchange-rate within the gold points. In stark contrast, the discount rate decisions of peripheral countries reflected changes in the domestic cover ratio. The main reason for the different rules was the limited effectiveness of the discount rate tool for peripheral countries which resulted in more frequent gold point violations. Consequently, peripheral countries relied on high reserve levels and oriented their discount rate policy towards maintaining the reserve level. Second, there was a substantial amount of discretionary monetary policy left to all countries, even though we find that core countries enjoyed marginally more liberty in setting their discount rate than peripheral countries. Third, interest rate decisions were influenced more by Berlin than by London, suggesting that the European branch of the Classical Gold Standard was less London-centered than hitherto assumed.
    Keywords: gold standard, rules of the game, balance-of-payment adjustment, central banking
    JEL: E4 E5 E6 F3 N13
    Date: 2010–07
  14. By: Joyce, Michael (Bank of England); Lasaosa, Ana (Bank of England); Stevens , Ibrahim (Bank of England); Tong, Matthew (Bank of England)
    Abstract: As part of its response to the global banking crisis and a sharp downturn in domestic economic prospects, the Bank of England’s Monetary Policy Committee (MPC) began a programme of large-scale asset purchases (commonly referred to as quantitative easing or QE) in March 2009, with the aim of injecting additional money into the economy and so increasing nominal spending growth to a rate consistent with meeting the CPI inflation target in the medium term. By February 2010, the MPC had made £200 billion of purchases, most of which had been of UK government securities (gilts). Based on analysis of the reaction of financial market prices and econometric estimates, this paper attempts to assess the impact of the Bank’s QE policy on asset prices. Our estimates of the reaction of gilt prices to the programme suggest that QE may have depressed gilt yields by about 100 basis points. On balance the evidence seems to suggest that the largest part of the impact of QE came through a portfolio rebalancing channel. The wider impact on other asset prices is more difficult to disentangle from other influences: the initial impact was muted but the overall effects were potentially much larger, though subject to considerable uncertainty.
    Keywords: QE; monetary policy; asset purchases; asset prices
    JEL: E44 E52 E58
    Date: 2010–07–12
  15. By: Hauskrecht, Andreas; Stuart, Bryan; Hankel, Wilhelm
    Abstract: In contrast to Robert Mundell‘s Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union.
    Keywords: Optimum currency areas; monetary union; risk spreads; central banking; exchange rates; fiscal policy
    JEL: E58 E42 E00 E44 F33
    Date: 2010–07–09
  16. By: Kraenzlin, Sébastien (Swiss National Bank); Nellen, Thomas (Swiss National Bank)
    Abstract: Based on real-time trade data from the Swiss franc overnight interbank repo market and SIX Interbank Clearing (SIC) – the Swiss real-time gross settlement (RTGS) system – we are able to gain valuable insights on the daytime value of money and its determinants: First, an implicit hourly interbank interest rate can be derived from the intraday term structure of the overnight rate. We thereby provide evidence that an implicit intraday money market exists. Second, we show that after the introduction of the foreign exchange settlement system CLS the value of intraday liquidity has increased during the hours of the CLS settlement cycle. Third, the turnover as well as the liquidity in SIC influence the intraday rate correspondingly. These facts provide evidence for the cost of immediacy. Features like RTGS, delivery-versus-payment and payment-versus-payment substitute credit risk with liquidity risk which in turn increases the value of intraday liquidity. The analysis is central bank policy relevant insofar as different designs of intraday liquidity facilities and different collateral policies result in different intraday term structures for the overnight money market.
    Keywords: interbank money market; intraday credit; term structure
    JEL: E58 G21 G28
    Date: 2010–01–31
  17. By: Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
    Abstract: This paper examines the issues of institutional quality and central bank transparency through the interaction of monetary and fiscal policies. We have found that the effects of transparency and corruption on macroeconomic performance and volatility depend on the relative importance of the marginal supply-side effects of distortionary tax and corruption, the degree of central bank conservativeness and/or the initial degree of opacity about central bank preferences. If the marginal effect of tax is relatively important, more opacity might induce higher level and volatility of inflation when the central bank is sufficiently conservative. Furthermore, opacity and tolerated corruption can mutually reinforce or weaken each other’s effects on the level and volatility of inflation. Transparency is generally a better strategy when the central bank is conservative. However, there could be a case for opacity in order to compensate for the undesirable macroeconomic effects of corruption when the central bank is liberal.
    Keywords: Central bank transparency; central bank conservativeness; fiscal bias; distortionary tax; institutional quality (corruption).
    JEL: D73 H50 E58 E52 E63 E61
    Date: 2010–07–09
  18. By: Jeannine Bailliu; Patrick Blagrave
    Abstract: To better understand the dynamics of the Chinese economy and its interaction with the global economy, the authors incorporate China into an existing model for the G-3 economies (i.e., the United States, the euro area, and Japan), paying particular attention to modelling the exchange rate and monetary policy in China. Their findings suggest that the Chinese economy adjusts more slowly to shocks, compared to the large advanced economies, because monetary policy is less effective and the real exchange rate more persistent. In addition, the authors’ model underscores the importance of spillovers from China to the G-3 economies, and vice versa, thus highlighting the need to analyze the Chinese economy in a global context.
    Keywords: Economic models; International topics; Business fluctuations and cycles; Exchange rate regimes
    JEL: E32 E52 F41
    Date: 2010
  19. By: Ignazio Angeloni
    Abstract: In this paper Bruegel Visiting Scholar Ignazio Angeloni (European Central Bank), Ester Faia (Goethe University Frankfurt, Kiel IfW and CEPREMAP)  and Marco Lo Duca (European Central Bank) examine the links between monetary policy, financial risk and the business cycle, combining data evidence and a new DSGE model with banks. The model includes banks (modeled as in Diamond and Rajan, JF 2000 and JPE 2001) and a financial accelerator (Bernanke et al., 1999 Handbook). A monetary expansion increases the propensity of banks to assume risks. In turn, financial risks affect economic activity and prices. This "risk-taking" channel of monetary transmission, absent in pure financial accelerator models, operates via the leverage decisions of banks. The model results match certain features of the data, as emerged in recent panel data studies and in our own time series estimates for the US and the euro area.
    Date: 2010–02
  20. By: David Norman (Reserve Bank of Australia); Anthony Richards (Reserve Bank of Australia)
    Abstract: This paper estimates a range of single-equation models of inflation for Australia. We find that traditional models, such as the expectations-augmented standard Phillips curve or mark-up models, outperform the more micro-founded New-Keynesian Phillips curve (NKPC) in explaining trimmed mean inflation, both in terms of in-sample fit and significance of coefficients. This in large part reflects the weak instruments problem in the estimation of the NKPC, and is partly corrected by including a direct measure of inflation expectations, but we still find that the unemployment rate or growth in marginal costs (unit labour cost and import prices) provides a better fit than either the output gap or level of real marginal costs. These traditional models also perform well in out-of-sample tests, relative to alternative models and some common benchmarks, with the standard Phillips curve clearly superior to these benchmarks on this test. As inflation has become better anchored and hence less variable, the magnitude of the errors of the single-equation models has declined, although the explanatory power (in terms of R-squared) has fallen together with this greater stability. We also investigate the empirical importance of some other variables that are commonly cited as determinants of inflation, and find little evidence that either commodity prices or the growth rate of money directly influence Australian underlying inflation.
    Keywords: inflation; modelling
    JEL: C53 E31
    Date: 2010–06
  21. By: Duo Qin (Queen Mary, University of London); Xinhua He (Chinese Academy of Social Sciences); Yimeng Liu (Beijing Normal University)
    Abstract: This is a comparative study on the historical experience of real effective exchange rate (REER) misalignment of Japanese yen, Deutsche mark, Singapore dollar and Taiwan dollar, with regard to the recent dispute over the Renminbi (RMB) valuation. Panel-based misalignment estimates of the four economies show that net foreign asset build-up does not necessarily result in currency misalignment, and the recent misalignment of RMB is not unprecedented in terms of magnitude, duration or currency coverage, whereas volatility in REER misalignment is likely to propagate to inflation of the home economy concerned. The assertion of 'RMB rate manipulation' thus lacks empirical support.
    Keywords: REER misalignment, RMB, Yen, D-mark, Singapore dollar, Taiwan dollar
    JEL: F31 F41 O57 C23
    Date: 2010–07
  22. By: Zisimos Koustas (Department of Economics, Brock University); Jean-Francois Lamarche (Department of Economics, Brock University)
    Abstract: This paper extends the work in Orphanides (2003) by re-examining the empirical evidence for a Taylor rule in a nonlinear framework. In doing so, it updates the Greenbook dataset used by the afore men- tioned author to the most recent available period. A three-regime threshold regression model is utilized to capture the possibly asymmetric policy reaction function used by the U.S. Federal Reserve. The theoretical foundations for such an approach to monetary policy are discussed in Orphanides and Wilcox (2002). Our results indicate that the estimated Taylor rule for the U.S., based on real-time Greenbook data for the period 1982:3-2003:4, is probably nonlinear.
    Keywords: Thresholds; Nonlinear Models; Taylor Rule; Real-Time Data
    JEL: C12 C13 C87
    Date: 2010–07
  23. By: Kyriakos C. Neanidis; Christos S. Savva
    Abstract: We analyze the causal effects of real and nominal macroeconomic uncertainty on inflation and output growth and examine whether these effects vary with the level of inflation and location on the business cycle. Employing a bivariate Smooth Transition VAR GARCH-M model for the G7 countries during the period 1957- 2009, we find strong nonlinearities in these effects. First, uncertainty regarding the output growth rate is related with a higher average growth rate mostly in the low-growth regime, supporting the theory of “creative destruction”. Second, higher inflation uncertainty induces lower growth rates, increasingly so at the high-inflation regime. Third, real and nominal uncertainties have mixed effects on average inflation. Nevertheless, there is a trend in favour of the Cukierman- Meltzer hypothesis in the high-inflation regime. Our results can be viewed as offering an explanation for the often mixed and ambiguous findings in the literature.
    Date: 2010
  24. By: Dai, Meixing; Sidiropoulos, Moïse
    Abstract: In this paper, we study how the interactions between central bank transparency and fiscal policy affect macroeconomic performance and volatility, in a framework where productivity-enhancing public investment could improve future growth potential. We analyze the effects of central bank’s opacity (lack of transparency) according to the marginal effect of public investment by considering the Stackelberg equilibrium where the government is the first mover and the central bank the follower. We show that the optimal choice of tax rate and public investment, when the public investment is highly productivity-enhancing, eliminates the effects of distortionary taxation and fully counterbalance both the direct and the fiscal-disciplining effects of opacity, on the level and variability of inflation and output gap. In the case where the public investment is not sufficiently productivity-enhancing, opacity could still have some disciplining effects as in the benchmark model, which ignores the effects of public investment.
    Keywords: Distortionary taxes; output distortions; productivity-enhancing public investment; central bank transparency (opacity); fiscal disciplining effect.
    JEL: E62 H21 E58 E52 E63 G30
    Date: 2010–07–06
  25. By: Sen Gupta, Abhijit
    Abstract: In this paper we devise quantitative techniques to analyze the management of foreign capital flows in India over the past three decades. The paper argues that India's overall approach towards liberalization of the capital account can be characterized as gradualist and calibrated, whereby certain agents and flows have been accorded priority in the liberalization process, from the viewpoint of ensuring financial stability. A cross country analysis indicates that the calibrated approach has resulted in India being ranked towards the lower end of the spectrum in terms of capital account openness. We analyze the extant regulations governing different types of foreign capital flow, and highlight the evolution of various types of capital flows over the recent period. To evaluate Indian macroeconomic management in the face of capital flows, we quantify the various policy options under the classic problem of "impossible trinity". We find that India, like other emerging markets, has also been confronted with the various alternatives under "impossible trinity" and has chosen to adopt an intermediate regime, juggling the objectives of monetary independence, exchange rate stability, and an open capital account as per the needs of the economy.
    Keywords: Capital Flows; Impossible Trinity; Macroeconomic Management
    JEL: E52 F41 F36
    Date: 2010–07
  26. By: Matthieu Bussière; Sweta c Saxena; Camilo Tovar
    Abstract: The impact of currency collapses (ie large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (ie ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction; and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, ie one-time events induce exchange rate and output dynamics that differ from consecutive episodes.
    Keywords: currency crisis, nominal devaluations, nominal depreciations, exchange rates, real output growth, recovery from crises
    Date: 2010–06
  27. By: Jose MOURELLE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Banco Central del Urugay)
    Abstract: The objective of this paper is analyse the determinants of the Argentine crisis of 2001-2002. In particular we analyse the role of macroeconomic policies during the crisis. The crisis coincided with a sudden stop of capital flows.We use a VAR model to better understand the shocks and mechanisms by which the crisis propagated throughout the economy. We find evidence that Argentine crisis was the consequence of an external financial shock, expressed by the increase in sovereign spread, amplified by local vulnerabilities. Fiscal policy, that faced financial restrictions, was tightened and the economy suffered additional contractionary fiscal shocks. The recession was exacerbated by a real exchange rate shock, that was appreciated. This result is the consequence of the rigid fixed exchange rate used by Argentina and the lack of coordination inside the Mercosur agreement where Brazil devaluate while Argentina not. Our analysis suggests the convenience of generate an institutional framework that allows a flexible use of fiscal and exchange rate policies to confront with adverse external shocks.
    Keywords: crisis, Argentina, country risk, fixed exchange rates, procyclical fiscal policy
    JEL: E32 F33 F34 F41
    Date: 2010–07–05
  28. By: Xiaoshan Chen; Ronald MacDonald
    Abstract: We propose an alterative approach to obtaining a permanent equilibrium exchange rate (PEER), based on an unobserved components (UC) model. This approach offers a number of advantages over the conventional cointegration-based PEER. Firstly, we do not rely on the prerequisite that cointegration has to be found between the real exchange rate and macroeconomic fundamentals to obtain non-spurious long-run relationships and the PEER. Secondly, the impact that the permanent and transitory components of the macroeconomic fundamentals have on the real exchange rate can be modelled separately in the UC model. This is important for variables, where the long and short-run effects may drive the real exchange rate in opposite directions, such as the relative government expenditure ratio.
    Keywords: Permanent Equilibrium Exchange Rate; Unobserved Components Model; Exchange rate forecasting.
    JEL: F31 F47
    Date: 2010–05

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