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on Monetary Economics |
| By: | David-Jan Jansen; Jakob de Haan |
| Abstract: | Wordscores uses word frequencies to extract information from texts with known policy positions. Wordscores uses this information to estimate the unknown policy positions of so - called virgin texts. We apply Wordscores to the ECB President’s introductory statements following Governing Council meetings. We code policy positions of statements from the first three years of the Economic and Monetary Union (our reference texts) using various indicators of ECB communication as well as actual rate decisions. Treating introductory statements from 2002 to July 2009 as virgin texts, Wordscores is able to present a fairly accurate picture of ECB policy decisions during that period. The results also suggest changes in ECB communications occurred: using more introductory statements as reference texts improves the match between estimated positions and actual policy. Overall, we would characterize ECB communication during the first decade of EMU as internally consistent. At the same time, communication was flexible enough to adapt to changed circumstances. |
| Keywords: | central bank communication; ECB; consistency; content analysis |
| JEL: | E52 E58 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:259&r=mon |
| By: | Mehrotra, Aaron (BOFIT); Sánchez-Fung, José R. (BOFIT) |
| Abstract: | The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success. |
| Keywords: | exchange rate; hybrid McCallum-Taylor monetary policy reaction function; SVAR; survey-based inflation expectations; China |
| JEL: | E42 E52 |
| Date: | 2010–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2010_010&r=mon |
| By: | Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University) |
| Abstract: | In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. In this paper, we develop a two-sector two-good closed economy new Keynesian model to study the optimal choice of price index in markets with financial frictions. Financial frictions that limit credit-constrained consumers’ access to financial markets make demand insensitive to interest rate fluctuations. The demand of credit-constrained consumers is determined by their real wage, which depends on prices in the flexible price sector. Thus, prices in the flexible price sector influence aggregate demand and, for monetary policy to have its desired effect, the central bank has to stabilize price movements in the flexible price sector. Also, in the presence of financial frictions, stabilizing core inflation is no longer equivalent to stabilizing output fluctuations. Our analysis suggests that in the presence of financial frictions a welfare-maximizing central bank should adopt flexible headline inflation targeting – a target based on headline rather than core inflation, and with some weight on the output gap. We discuss why these results are particularly relevant for emerging markets, where the share of food expenditures in total consumption expenditures is high and a large proportion of consumers are credit-constrained. |
| Keywords: | inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions, liquidity constraints |
| JEL: | E31 E52 E61 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp5137&r=mon |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Avenue, Athens 10250, Greece.); Manthos D. Delis (University of Ioannina, Department of Economics, Ioannina 45110, Greece.) |
| Abstract: | Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. JEL Classification: E44, E52, G21, C14. |
| Keywords: | Monetary policy, Bank heterogeneity, Risk-taking, Bank performance. |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101233&r=mon |
| By: | Mario Cerrato; Alexander Kadow; Ronald MacDonald |
| Abstract: | The so-called German Dominance Hypothesis (GDH) claimed that Bundesbank policies were transmitted into other European Monetary System (EMS) interest rates during the pre-euro era. We reformulate this hypothesis for the Central and Eastern European (CEE) countries that are on the verge of accessing the eurozone. We test this "Euro Dominance Hypothesis (EDH)" in a novel way using a global vector autoregressive (GVAR) approach that combines country-specic error correction models in a global system. We find that euro area monetary policies are transmitted into CEE interest rates which provides evidence for monetary integration between the eurozone and CEE countries. Our framework also allows for introducing global monetary shocks to provide empirical evidence regarding the eects of the recent nancial crisis on monetary integration in Europe. |
| Keywords: | German Dominance Hypothesis, Global VAR, Central and Eastern Europe, monetary integration, European integration. |
| JEL: | E58 F36 G15 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2010_21&r=mon |
| By: | Yu-Wei Hu |
| Abstract: | Summary for non-specialistsWith rapid economic growth and continuing economic integration with the outside world, China's foreign exchange (FX) reserves have witnessed considerable accumulation. As of 2009 it amounted to USD 2.4 trillion, accounting for just under 1/3 of the global FX reserves. Rapid growth of FX reserves at this speed has created various problems, e.g. inflationary pressure and huge holding costs.In this paper by analyzing the SAFE - Chinese governmental agency in charge of administering the FX reserves in the country, we review how Chinese FX reserves are currently managed and their performance so far. Then, in the light of these findings and borrowing literature from the current debate on Sovereign Wealth Funds (SWFs), several reform proposals are presented regarding how to better tackle the problems relating to these rapidly accumulated FX reserves in China. It is argued that the proposed reform options not only benefit China, but also help in addressing some wider issues (e.g. global imbalances), therefore contributing to a more harmonious global economy. |
| Keywords: | Yu-Wei Hu foreign exchange rate policy monetary policy China management of foreign exchange reserves international portfolio investment |
| JEL: | E5 E58 F31 F34 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0421&r=mon |
| By: | Lucjan T. Orlowski |
| Abstract: | Summary for non-specialistsThis study draws attention to the proliferation of tail risks in financial markets prior to and during the course of the recent global financial crisis. It examines the level of tail risks in selected equity, interbank lending and foreign exchange markets in selected EU Member States in relation to the United States. The extent of tail risks is assessed by applying general error distribution (GED) parameterization in GARCH volatility tests of the examined variables. The empirical tests prove that tail risks were pronounced across all of the examined European financial markets throughout the crisis. They were also significant prior to the crisis outbreak. The analyzed interbank lending markets exhibited more extreme volatility outbursts than the equity and foreign exchange markets. Several countercyclical monetary and macroprudential policies aimed at abating tail risks are identified and discussed. Flexible capital adequacy and contingent capital requirements for financial institutions are advocated. |
| Keywords: | Global financial crisis equity markets foreign exchange markets monetary policies macroprudential policies Orlowski |
| JEL: | E44 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0416&r=mon |
| By: | Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium. |
| Keywords: | Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries |
| Date: | 2010–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00484808_v3&r=mon |
| By: | Arturo J. Galindo, Alejandro Izquierdo, and Liliana Rojas-Suarez |
| Abstract: | This paper explores the impact of international financial integration on credit markets in Latin America. Using a cross-country dataset covering 17 Latin American countries between 1996 and 2008, the authors find that financial integration amplifies the impact of international financial shocks on aggregate credit and interestrate fluctuations. Despite this pernicious effect, the net impact of integration on deepening credit markets is positive and dominates for the large majority of states of nature. The paper also uses a detailed bank-level dataset covering more than 500 banks in Latin America for a similar time period to explore the role of financial integration—captured through the participation of foreign banks—in propagating external shocks. The authors find that interest rates charged and loans supplied by foreign-owned banks respond more to external financial shocks than those supplied by domestically owned banks. However, this result does not hold for all foreign banks: Spanish banks in the sample behave more like domestic banks and do not amplify the impact of foreign shocks on credit and interest rates. Important policy recommendations to avoid foreign banks’ amplification of external financial shocks include the establishment of ring-fencing mechanisms, the development of early-warning systems, and the incorporation for agreements between domestic and foreign supervisors. |
| Keywords: | foreign banks, credit, interest rates, financial shocks |
| JEL: | F36 G0 G21 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:203&r=mon |