nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒09‒03
twelve papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Central Bank Transparency: Another Look By Pierre L. Siklos
  2. Currency substitution in the economies of Central Asia: How much does it cost? By Isakova, Asel
  3. Floating versus managed exchange rate regime in a DSGE model of India. By Batini, Nicoletta; Gabriel, Vasco; Levine, Paul
  4. Debt, Policy Uncertainty and Expectations Stabilization By Stefano Eusepi; Bruce Preston
  5. The Coordination Value of Monetary Exchange: Experimental Evidence By Gabriele Camera; Marco Casari
  6. Panel Data Estimates of the Demand for Money in the Pacific Island Countries By Saten Kumar
  7. Monetary policy in an uncertain world: Probability models and the design of robust monetary rules. By Levine, Paul
  8. Inflation Targeting Does Not Matter: Another Look at OECD Economies’ Output Sacrifice Ratios By Brito, Ricardo D.
  9. Business cycle convergence in EMU: A first look at the second moment By Jesús Crespo-Cuaresma; Octavio Fernández-Amador
  10. Persistence Endogeneity Via Adjustment Costs: An Assessment based on Bayesian Estimations By Sebastian Sienknecht
  11. Australia-New Zealand Currency Union: A Structural Approach By Daisy McGregor
  12. Dynamic Models of Exchange Rate Dependence Using Option Prices and Historical Returns By Leonidas Tsiaras

  1. By: Pierre L. Siklos
    Abstract: This paper extends the Dincer and Eichengreen (2007) index of central bank transparency. Improvements in transparency are notable in Central and Eastern Europe, while the index has shown much smaller rises in most other parts of the world. The pattern observed by Dincer and Eichengreen, consistent with a permanent increase in central bank transparency, is also evident in the updated results. The dramatic enhancements in central bank transparency reported earlier appear to be a feature of the late 1990s and early 2000s. Whether the subsequent data reflects limits to central banks transparency or, to some extent, transparency ‘fatigue’, is unclear.
    JEL: E0 F0
    Date: 2010–08
  2. By: Isakova, Asel (BOFIT)
    Abstract: Underdeveloped financial markets and periods of high inflation have stimulated dollarization and currency substitution in the economies of Central Asia. Some authors argue that the latter can pose serious obstacles for the effective conduct of monetary policy and can affect households’ welfare.This study uses a model with money-in-the-utility function to estimate the elasticity of substitution between domestic and foreign currencies in three economies of Central Asia - Kazakhstan, the Kyrgyz Republic and Tajikistan. Utility derived from holding money balances is represented by a CES function with money holdings denominated in two currencies. The residents are assumed to diversify their monetary holdings due to instability of the domestic currency. The steady state analysis reveals that though currency substitution decreases governments’ seigniorage revenue, holding foreign money can be welfare generating if domestic currency depreciates vis-à-vis the currencies in which households’ foreign balances holdings are denominated. De-dollarization can only be achieved through further macroeconomic stabilization that will bring price and exchange rate stability. Financial sector development will also decrease currency substitution through the provision of reliable financial instruments and the gaining of public confidence.
    Keywords: currency substitution; dollarization; monetary policy; seigniorage; welfare; transition
    JEL: E41 E58 P20
    Date: 2010–07–26
  3. By: Batini, Nicoletta (IMF and University of Surrey); Gabriel, Vasco (University of Surrey); Levine, Paul (University of Surrey)
    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 inflation 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.
    Keywords: DSGE model, Indian economy, Monetary interest rate rules, Floating versus managed exchange rate, Financial frictions
    JEL: E52 E37 E58
    Date: 2010–04
  4. By: Stefano Eusepi; Bruce Preston
    Abstract: This paper develops a model of policy regime uncertainty and its consequences for stabilizing expectations. Because of learning dynamics, uncertainty about monetary and …scal policy is shown to restrict, relative to a rational expectations analysis, the set of policies consistent with macroeconomic stability. Anchoring expectations by communicat- ing about monetary and …scal policy enlarges the set of policies consistent with stability. However, absent anchored …scal expectations, the advantages from anchoring monetary expectations are smaller the larger is the average level of indebtedness. Finally, even when expectations are stabilized in the long run, the higher are average debt levels the more persistent will be the e¤ects of disturbances out of rational expectations equilibrium.
    JEL: E52 D83 D84
    Date: 2010–07
  5. By: Gabriele Camera; Marco Casari
    Abstract: A new behavioral foundation is uncovered for why money promotes impersonal exchange. In an experiment, subjects could cooperate by intertemporally exchanging goods with anonymous opponents met at random. Indefinite repetition supported multiple equilibria, from full defection to the efficient outcome. Introducing the possibility to hold and exchange intrinsically worthless tickets affected outcomes and cooperation patterns. Tickets resembled fiat money, which emerged as a tool for equilibrium selection in the economy. Monetary exchange facilitated coordination on cooperation and redistributed surplus from defectors to cooperators. Treatments where subjects could develop a reputation revealed a limited record-keeping role for monetary exchange.
    Keywords: money, cooperation, information, trust, folk theorem, repeated games
    JEL: C90 C70 D80
    Date: 2010–08
  6. By: Saten Kumar
    Abstract: The Pedroni (2000) panel cointegration method is used to estimate the cointegrating equations for the demand for narrow money for a panel of five Pacific Island Countries (Fiji, Samoa, Solomons, Vanuatu and Papua New Guinea) for the period 1975-2007. The effects of financial reforms are analyzed with estimates from sub-sample periods. Our results suggest that there is a unique cointegrated long run relationship between real narrow money, real income and nominal rate of interest. The major finding is that the money demand function has been stable and financial reforms are yet to have any significant effects in the Pacific Island Countries.
    Keywords: Demand for money, income elasticity, semi-interest rate elasticity.
    JEL: C33 E41
    Date: 2010–08–12
  7. By: Levine, Paul (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 contemporary micro-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: 2010–07
  8. By: Brito, Ricardo D.
    Date: 2010–10
  9. By: Jesús Crespo-Cuaresma; Octavio Fernández-Amador
    Abstract: We propose the analysis of the dynamics of the standard deviation of business cycles across euro area countries in order to evaluate the patterns of cyclical convergence in the European Monetary Union for the period 1960-2008. We identify significant business cycle divergence taking place in the mid-eighties, followed by a persistent convergence period spanning most of the nineties. This convergent episode finishes roughly with the birth of the European Monetary Union. A hypothetical euro area including all the new members of the recent enlargements does not imply a sizeable decrease in the optimality of the currency union. Finally, the European synchronization differential with respect to other developed economies seems to have been diluted within a global cycle since 2004.
    Keywords: Business cycles, business cycle convergence, European Monetary Union.
    JEL: E32 E63 F02
    Date: 2010–08
  10. By: Sebastian Sienknecht (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: This paper estimates a dynamic stochastic general equilibrium (DSGE) model for the European Monetary Union by using Bayesian techniques. A salient feature of the model is an extension of the typically postulated quadratic cost structure for the monopolistic choice of price variables. As shown in Sienknecht (2010a), the enlargement of the original formulation by Rotemberg (1983) and Hairault and Portier (1993) leads to structurally more sophisticated inflation schedules than in the staggering environment by Calvo (1983) with rule-of-thumb setters. In particular, a desired lagged inflation term always arises toghether with a two-period-ahead expectational expression. The two terms are directly linked by a novel structural parameter. We confront the relationships obtained by Sienknecht (2010a) against European data and compare their data description performance against the widespread extension of the Calvo setting with rule-of-thumb behavior.
    Keywords: Bayesian, Simulation, Indexation, Model Comparison
    JEL: C11 C15 E31 E32
    Date: 2010–08–24
  11. By: Daisy McGregor (School of Economics, University of Adelaide)
    Abstract: This paper compares an Australia-New Zealand currency union to a purely fl oating exchange rate regime in the context of a structural, two-country open economy model. Micro-foundations support policy assessment by facilitating direct calculation of household welfare. Analysis focuses on changing business cycle volatilities; the role of risk is not considered. At benchmark calibration currency union is welfare reducing for both Australia and New Zealand. Sensitivity analyses reveal these results to be qualitatively robust over alternative degrees of shock correlation and shock transmission.
    Keywords: currency union, welfare analysis, exchange rate regime, Australia, New Zealand
    JEL: F22 F33 F41 F42
    Date: 2010–08
  12. By: Leonidas Tsiaras (Department of Business Studies, ASB, Aarhus University and CREATES)
    Abstract: Models for the conditional joint distribution of the U.S. Dollar/Japanese Yen and Euro/Japanese Yen exchange rates, from November 2001 until June 2007, are evaluated and compared. The conditional dependency is allowed to vary across time, as a function of either historical returns or a combination of past return data and option-implied dependence estimates. Using prices of currency options that are available in the public domain, risk-neutral dependency expectations are extracted through a copula repre- sentation of the bivariate risk-neutral density. For this purpose, we employ either the one-parameter \Normal" or a two-parameter \Gumbel Mixture" specification. The latter provides forward-looking information regarding the overall degree of covariation, as well as, the level and direction of asymmetric dependence. Specifications that include option-based measures in their information set are found to outperform, in-sample and out-of-sample, models that rely solely on historical returns.
    Keywords: Exchange Rates, Implied Correlation, Copula, Forecasting, Options
    JEL: F31 F37 G14 G15
    Date: 2010–01–12

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