nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒10‒16
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. China’s monetary policy and the exchange rate By Aaron Mehrotra; José R. Sánchez-Fung
  2. Monetary Policy and Credit Cards: Evidence from a Small-Open Economy By Hakan Yilmazkuday
  3. Optimal Price Indices for Targeting Inflation Under Incomplete Markets By Rahul Anand; Eswar Prasad
  4. A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin By Issouf Samaké
  5. Is the New Keynesian Explanation of the Great Dis-Inflation Consistent with the Cross Country Data? By Matthew Doyle; Jean-Paul Lam
  6. Money illusion and the long-run Phillips curve in staggered wage-setting models By Andrea Vaona
  7. Monetary Transmission of Global Imbalances in Asian Countries By Il Houng Lee; Woon Gyu Choi
  8. Monetary Transmission in Low Income Countries By Prachi Mishra; Peter Montiel; Antonio Spilimbergo
  9. Does Money Matter? An Empirical Investigation By Huston, Barry; McGibany, James M; Nourzad, Farrokh
  10. Price Dynamics in China By Nathaniel John Porter
  11. A DSGE model for Iceland By Martin Seneca
  12. Estimates of the Output Gap in Armenia with Applications to Monetary and Fiscal Policy By Anke Weber; Asmaa A ElGanainy
  13. Central Bank Haircut Policy By James Chapman, Jonathan Chiu, and Miguel Molico
  14. Credit supply: identifying balance-sheet channels with loan applications and granted loans By Gabriel Jiménez; Steven Ongena; José-Luis Peydró; Jesús Saurina
  15. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
  16. Functions of Central Bank of Kosovo and the need for their advancement By Lluka, Valon
  17. Interbank tiering and money center banks By Ben R. Craig; Goetz von Peter
  18. Can Global Liquidity Forecast Asset Prices? By Reginald Darius
  19. Weathering the financial storm: The importance of fundamentals and flexibility By Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
  20. Interbank tiering and money center banks By Ben Craig; Goetz von Peter
  21. The Effectiveness of Macroeconomic Commitment in Weak(er) Institutional Environments By Sophia Gollwitzer; Marc Quintyn
  22. Financial Frictions and Credit Spreads By Ke Pang; Pierre L. Siklos
  23. Adjustment under a Currency Peg: Estonia, Latvia and Lithuania during the Global Finanacial Crisis 2008-09 By Catriona Purfield; Christoph B. Rosenberg
  24. International Reserve Adequacy in The Gambia By Eugen Tereanu
  25. New Estimates of the Equilibrium Exchange Rate: The case for the Chinese renminbi By SATO Kiyotaka; SHIMIZU Junko; Nagendra SHRESTHA; Zhaoyong ZHANG
  26. Entry dynamics and the decline in exchange-rate pass-through By Christopher Gust; Sylvain Leduc; Robert J. Vigfusson
  27. Evaluating currency crisis:A multivariate Markov switching approach By Kostas Mouratidis; Dimitris Kenourgios; Aris Samitas
  28. Asia’s Role in the Global Financial Architecture By Masahiro Kawai; Peter A. Petri
  29. Asset class diversification and delegation of responsibilities between central banks and sovereign wealth funds By Joshua Aizenman; Reuven Glick

  1. By: Aaron Mehrotra; José R. Sánchez-Fung
    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: Monetary policy - China ; Foreign exchange
    Date: 2010
  2. By: Hakan Yilmazkuday (Department of Economics, Temple University)
    Abstract: This paper uses a unique monthly data set that covers overall credit card usage in a small-open economy, Turkey, to investigate a possible credit channel of monetary policy transmission through credit cards. A reduced-form vector autoregression analysis is employed where the forecast error variance decompositions are calculated for three-year windows over the period 2002-2009. It is shown that, during the recent financial crisis that has started in 2007, the monetary policy of Turkey has shifted toward focusing on output volatility and interest-rate smoothing through setting short-term interest rates, while the inflation rate has been mostly affected by exchange rate movements and inflation inertia. Credit cards usage has an increasing effect on inflation rates through time, requiring more policy emphasis on the credit channel through credit cards. When the effects of the credit view and the money view are compared, the former seems to be more effective on the real side of the economy independent of the level of inflation.
    Keywords: Credit Cards, Monetary Policy, Credit Channel, Vector Autoregression, Turkey
    JEL: E44 E50 E60 C32
    Date: 2010–09
  3. By: Rahul Anand; Eswar Prasad
    Abstract: In models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We develop a two-sector two-good new-Keynesian model to study the optimal choice of price index in markets with financial frictions. We find that, in the presence of financial frictions, a welfare-maximizing central bank should adopt flexible headline inflation targeting a target for headline CPI inflation with some weight on the output gap. 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: Consumer price indexes , Consumption , Demand , Economic models , Emerging markets , Food production , Inflation , Inflation targeting , Monetary policy , Price elasticity , Welfare ,
    Date: 2010–09–02
  4. By: Issouf Samaké
    Abstract: This paper applies and extends a theoretical model built by Agénor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.
    Keywords: Benin , Bonds , Central bank policy , Credit , Economic models , Excess liquidity , Financial sector , Monetary policy , Monetary transmission mechanism , Monetary unions , Reserves , Sovereign debt , West African Economic and Monetary Union ,
    Date: 2010–08–19
  5. By: Matthew Doyle (Department of Economics, University of Waterloo); Jean-Paul Lam (Department of Economics, University of Waterloo)
    Abstract: A leading explanation of long run U.S. inflation trends attributes both the fall of inflation in the 1980s and the subsequent years of low and stable inflation to well run monetary policy pinning down inflationary expectations. Most other OECD economies experienced a similar rise and fall of inflation, as well as subsequent low and stable inflation over the same period. This observation has been under-explored in the literature. In this paper we exploit the international dimension of the fall of inflation to investigate the hypothesis that good monetary policy is responsible for recent inflation outcomes. Our results suggest that this theory is not compatible with the cross country data.
    JEL: E42 E50
    Date: 2010–10
  6. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We consider the effect of money illusion - defined referring to Stevens' ratio estimation function - on the long-run Phillips curve in an otherwise standard New Keynesian model of sticky wages. We show that if agents under-perceive real economic variables, negative money non-superneutralities will become more severe. On the contrary, if agents over-perceive real variables, positive money superneutralities will arise.
    Keywords: Phillips curve, inflation, nominal inertia, monetary policy, dynamic general equilibrium, money illusion, Stevens' ratio estimation function
    JEL: E3 E20 E40 E50
    Date: 2010–09
  7. By: Il Houng Lee; Woon Gyu Choi
    Abstract: The paper explores the linkages between the global and domestic monetary gaps, and estimates the effects of monetary gaps on output growth, inflation, and net saving rates using panel data for 20 Asian countries for 1980-2008. We find a significant pass-through of the global monetary gap to domestic monetary gaps, which in turn affect output growth and inflation, in individual emerging market and developing countries in Asia. Notably, we provide evidence that the global monetary condition is partly responsible for the current account surplus in Asia. We also draw implications for monetary policy coordination for global rebalancing.
    Keywords: Asia , Balance of trade , Capital flows , Economic integration , Economic models , Export competitiveness , Globalization , Inflation , Monetary policy , Production growth , Reserves , Savings ,
    Date: 2010–09–15
  8. By: Prachi Mishra; Peter Montiel; Antonio Spilimbergo
    Abstract: This paper reviews monetary transmission mechanisms in low-income countries (LICs) to identify aspects of the channels that may operate differently in LICs relative to advanced and emerging economies. Given the weak institutional frameworks, reduced role of securities markets, imperfect competition in the banking sector and the resulting high cost of bank lending to private firms, the traditional channels (interest rate, bank lending, and asset price) are impaired in LICs. The exchange rate channel is also undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.
    Date: 2010–10–01
  9. By: Huston, Barry (Department of Economics Marquette University); McGibany, James M (Department of Economics Marquette University); Nourzad, Farrokh (Department of Economics Marquette University)
    Abstract: This paper uses a simultaneous-equations model of the new consensus macroeconomic model to examine whether the inclusion of the money stock in the aggregate demand function improves the statistical fit of the model. The results indicate that the consensus model is accurate for the U.S. in that the inclusion of money does not increase the predictive power of the model. However, the results reveal that the estimated coefficients are more robust when money is included as an instrumental variable in the simultaneous equations consensus model.
    Keywords: consensus macro model, monetary policy, Phillips Curve, Taylor Rule, Economics
    JEL: C30 C52 E32
    Date: 2010–09
  10. By: Nathaniel John Porter
    Abstract: Chinese inflation, particularly non-food inflation, has been surprisingly modest in recent years. We find that supply factors, including those captured through upstream foreign commodity and producer prices, have been important drivers of non-food inflation, as has foreign demand for Chinese goods. Domestic demand and monetary conditions seem less important, possibly reflecting a large domestic output gap generated by many years of high investment. Inflation varies systemically within China, with richer (and urban) provinces having lower, more stable, inflation, but this urban inflation also influence that in lower-income provinces. Higher Mainland food inflation also raises inflation in non-Mainland China.
    Date: 2010–09–29
  11. By: Martin Seneca
    Abstract: This paper presents a dynamic stochastic general equilibrium (DSGE) model for a small open economy fitted to Icelandic data. The model has been developed at the Central Bank of Iceland as a tool for policy analysis and forecasting purposes in support of inflation targeting. As the existing macroeconometric model at the Central Bank, the model is a dynamic quarterly model. But it differs by being fully founded on well-defined microeconomic decision problems of agents in the economy. This allows for a structural interpretation of shocks to the economy. The model features endogenous capital accumulation subject to investment adjustment costs, variable capacity utilisation, habit formation in consumption, monopolistic competition in goods and labour markets, as well as sticky prices and wages. The home economy engages freely in international trade, while international financial intermediation is subject to endogenous costs. Monetary policy is conducted by an inflation targeting central bank. The model is fitted to Icelandic data for the sample period 1991-2005 through a combination of calibration and formal Bayesian estimation. The paper presents the estimation results, and it discusses the model's properties. Finally, first applications are shown to illustrate the model's potential in guiding monetary policy.
    Date: 2010–09
  12. By: Anke Weber; Asmaa A ElGanainy
    Abstract: This paper employs several econometric techniques to estimate the Armenian output gap. The findings indicate that the output gap is significantly positive in 2007 and 2008 and decreased dramatically in 2009. The paper uses these results to estimate a New Keynesian Phillips curve for Armenia, suggesting a significant role of the output gap and inflation expectations in determining current inflation. Finally, the underlying fiscal stance over the period 2000-09 is assessed by estimating the cyclically-adjusted fiscal balance. Most of Armenia’s fiscal deficit is found to be structural. Fiscal policy, while providing counter-cyclical support in 2009, has been largely pro-cyclical in the past.
    Keywords: Armenia , Business cycles , Economic growth , Economic models , Fiscal policy , Inflation , Monetary policy , Production , Time series ,
    Date: 2010–08–26
  13. By: James Chapman, Jonathan Chiu, and Miguel Molico
    Abstract: We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Setting a haircut therefore involves balancing the trade-off between relaxing the liquidity constraints of agents on one hand, and increasing potential inflation risk and distorting the portfolio choices of agents on the other. We argue that the optimal haircut is higher when the central bank is unable to lend exclusively to agents who actually need liquidity. Finally, for an unexpected drop in the haircut, the central bank can be more aggressive than when setting a permanent level of the haircut.
    Keywords: Payment, clearing, and settlement systems; Central bank research; Monetary policy implementation; Financial system regulation and policies; Financial services
    JEL: E40 E50
    Date: 2010
  14. By: Gabriel Jiménez (Banco de España); Steven Ongena (Center–Tilburg University and CEPR); José-Luis Peydró (European Central Bank); Jesús Saurina (Banco de España)
    Abstract: To identify credit availability we analyze the extensive and intensive margins of lending with loan applications and all loans granted in Spain. We find that during the period analyzed both worse economic and tighter monetary conditions reduce loan granting, especially to firms or from banks with lower capital or liquidity ratios. Moreover, responding to applications for the same loan, weak banks are less likely to grant the loan. Our results suggest that firms cannot offset the resultant credit restriction by turning to other banks. Importantly the bank-lending channel is notably stronger when we account for unobserved time-varying firm heterogeneity in loan demand and quality.
    Keywords: non-financial and financial borrower balance-sheet channels, financial accelerator, firm borrowing capacity, credit supply, business cycle, monetary policy, credit channel, net worth, capital, liquidity, 2007-09 crisis
    JEL: E32 E44 E5 G21 G28
    Date: 2010–09
  15. By: Annicchiarico, Barbara; Pelloni, Alessandra; Lorenza, Rossi
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii)the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth; volatility; business cycle; monetary policy
    JEL: O42 E32 E52
    Date: 2010–08
  16. By: Lluka, Valon
    Abstract: Central Bank of the Republic of Kosova (CBK), was established in June 2008, and is the successor of the Authority of Banking and Payments of Kosovo and the Central Banking Authority of Kosovo. Main Functions of the Central Bank of Kosovo are: • Drafting and implementation of monetary policy, • Regulation and supervision of the banking system, • Bank of the Government, • Management of foreign exhange and gold reserves. Central Bank acts as the Banker, Fiscal Agent, and Economic Adviser to Government. Developing an efficient and safe system for domestic payments is a primary function of the CBK. Creating of Electronic System for Interbank Clearing (SEKN) in 2001, first as a system of interbank payments was a major step forward in terms of facilitating the operations of domestic payments through the banking system. SEKN remains the only system of interbank payments since then, but has been raised significantly functionally in recent years, especially in 2008, aiming at modernizing and enriching ways of conducting transactions. Specifically, in 2008, was passed in web technology platform and developed the Direct Debit scheme. Facilitating the exchange of information between lending institutions is a crucial and target commitment of the CBK in order to develop interbank infrastructure for credit market advancement and promotion of financial stability.
    Keywords: Central Bank; Functions; Banking; Kosovo
    JEL: E58 E42 E52 E5
    Date: 2010–09–30
  17. By: Ben R. Craig; Goetz von Peter
    Abstract: This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for tting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
    Keywords: Interbank market ; Banks and banking, Central - Germany
    Date: 2010
  18. By: Reginald Darius
    Abstract: During the period leading up to the global financial crisis many asset classes registered rapid price increases. This coincided with a significant rise in global liquidity. This paper attempts to determine the extent to which the rise in asset prices was influenced by developments in global liquidity. We confirm that global liquidity had a significant impact on the buildup in house prices; however, the impact on equity prices was limited. In contrast to common perception, we find that the impact of global liquidity declined during the period of the Great Moderation. The paper also examines spillovers from global liquidity to domestic variables and concludes that domestic factors generally played a more significant role in house price appreciation relative to global factors. This contradicts the hypothesis of weakened potency of domestic monetary policy in the presence of increased international liquidity.
    Keywords: Asset prices , Economic growth , Forecasting models , Inflation , International liquidity , Price increases , Real estate prices , Spillovers ,
    Date: 2010–08–25
  19. By: Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
    Abstract: The recent global financial tsunami has had economic consequences that have not been witnessed since the Great Depression. But while some countries suffered a particularly large contraction in economic activity on top of a system-wide banking and currency collapse, others came off relatively lightly. In this paper, we attempt to explain this cross-country variation in post-crisis experience, using a wide variety of pre-crisis explanatory variables in a sample of 46 medium-to-high income countries. We find that domestic macroeconomic imbalances and vulnerabilities were crucial for determining the incidence and severity of the crisis. In particular, we find that the pre-crisis rate of inflation captures factors which are important in explaining the post-crisis experience. Our results also suggest an important role for financial factors. In particular, we find that large banking systems tended to be associated with a deeper and more protracted consumption contraction and a higher risk of a systemic banking or currency crisis. Our results suggest that greater exchange rate flexibility coincided with a smaller and shorter contraction, but at the same time increased the risk of a banking and currency crisis. Countries with exchange rate pegs outside EMU were hit particularly hard, while inflation targeting seemed to mitigate the crisis. Finally, we find some evidence suggesting a role for international real linkages and institutional factors. Our key results are robust to various alterations in the empirical setup and we are able to explain a significant share of the cross-country variation in the depth and duration of the crisis and provide quite sharp predictions of the incidence of banking and currency crises. This suggests that country-specific initial conditions played an important role in determining the economic impact of the crisis and, in particular, that countries with sound fundamentals and flexible economic frameworks were better able to weather the financial storm.
    Date: 2010–10
  20. By: Ben Craig; Goetz von Peter
    Abstract: This paper provides evidence that interbank markets are tiered rather than flat, in the sense that most banks do not lend to each other directly but through money center banks acting as intermediaries. We capture the concept of tiering by developing a core-periphery model, and devise a procedure for fitting the model to real-world networks. Using Bundesbank data on bilateral interbank exposures among 1800 banks, we find strong evidence of tiering in the German banking system. Econometrically, bank-specific features, such as balance sheet size, predict how banks position themselves in the interbank market. This link provides a promising avenue for understanding the formation of financial networks.
    Keywords: interbank markets, intermediation, networks, tiering, core and periphery, market structure
    Date: 2010–10
  21. By: Sophia Gollwitzer; Marc Quintyn
    Abstract: This paper analyzes the institutional conditions affecting the establishment and effectiveness of independent central banks and of budgetary institutions. It draws on the recent theory developed by North, Wallis and Weingast on the transition from a closed and fragile state to an open economic and political environment. The paper presents a composite indicator allowing for the identification of a country’s position along this transition path. The findings suggest that (i) while the establishment of autonomous central banks seems to be relatively independent from the broader institutional framework, sound budgetary institutions tend to be established in countries with higher levels of rule of law for the elites, and (ii) while central bank independence is effective in reducing inflation irrespective of a country’s position along the transition path, budget institutions seem to be most effective as a disciplining device in weak institutional environments.
    Keywords: Budgetary policy , Central bank autonomy , Central banks , Developed countries , Governance , Low-income developing countries , Political economy ,
    Date: 2010–08–23
  22. By: Ke Pang; Pierre L. Siklos
    Abstract: This paper uses the credit-friction model developed by C´urdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as in times of crisis. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads unlike quantitative easing which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.
    JEL: E43 E44 E51 E58
    Date: 2010–10
  23. By: Catriona Purfield; Christoph B. Rosenberg
    Abstract: The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.
    Keywords: Baltics , Currency pegs , Debt restructuring , Estonia , Financial crisis , Fiscal policy , Global competitiveness , Global Financial Crisis 2008-2009 , Labor market policy , Latvia , Lithuania , Private sector , Stabilization measures , Wage adjustments ,
    Date: 2010–09–15
  24. By: Eugen Tereanu
    Abstract: This paper applies intertemporal models of precautionary saving to compute an optimal level of international reserves for The Gambia. The analysis focuses on current account shocks specific to a low-income economy with a significant import component and complements a more standard, rule-of-thumb reserve adequacy assessment. The results suggest a central range from 4.5 months to 7 months of imports, which is broadly aligned with the recent actual coverage. Notwithstanding parameter sensitivity, the simulations allow for more informed policy decisions that balance flexibility with a prudent approach to reserve use.
    Keywords: Balance of payments , Economic models , Fiscal risk , Foreign exchange reserves , Gambia, The , Reserves , Reserves adequacy , Risk management , Savings ,
    Date: 2010–09–17
  25. By: SATO Kiyotaka; SHIMIZU Junko; Nagendra SHRESTHA; Zhaoyong ZHANG
    Abstract: We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.
    Date: 2010–09
  26. By: Christopher Gust; Sylvain Leduc; Robert J. Vigfusson
    Abstract: The degree of exchange-rate pass-through to import prices is low. An average passthrough estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. ; Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. ; In this paper, we model how the entry and exit decisions of exporting firms affect passthrough. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. ; We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. ; Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.
    Date: 2010
  27. By: Kostas Mouratidis (Department of Economics, The University of Sheffield); Dimitris Kenourgios; Aris Samitas
    Abstract: This paper provides an empirical framework to analyse the nature of currency crises by extending earlier work of Jeanne and Masson (2000) who suggest that a currency crisis model with multiple equilibria can be estimated using Markov regime switching (MRS) models. However, Jeanne and Masson (2000) assume that the transition probabilities across equilibria are constant and independent of fundamentals. Thus, currency crisis is driven by a sunspot unrelated to fundamentals. This paper further contributes to the literature by suggesting a multivariate MRS model to analyse the nature of currency crises. In the new set up, one can test for the impact of the unobserved dynamics of fundamentals on the probability of devaluation. Empirical evidence shows that expectations about fundamentals, which are reflected by their unobserved state variables, not only affect the probability of devaluation but also can be used to forecast a currency crisis one period ahead.
    JEL: C32 F31
    Date: 2010–10
  28. By: Masahiro Kawai; Peter A. Petri
    Abstract: The global economic and financial landscape has been transformed over the past decade by the growing economic size and financial power of emerging economies. The new G20 summit process, which includes the largest emerging economies, has established high-level international policy cooperation in this new setting. This paper argues that effective global economic governance will also require changes in key global organizations—such as the International Monetary Fund, World Bank, World Trade Organization, and the Financial Stability Board—and closer collaboration between global and regional organizations. We suggest that federalism be introduced on a global scale by creating hierarchies of global and regional organizations with overlapping ownership structures in various functional areas (as is already the case with the World Bank and regional development banks in the area of development finance). Asia could contribute to this transformation by building effective institutions to promote macroeconomic and financial stability and deepen regional trade and investment integration. [ADBI Working Paper 235]
    Keywords: global economic, financial landscape, international policy, cooperation, International Monetary Fund, World Bank, World Trade Organization, Financial Stability
    Date: 2010
  29. By: Joshua Aizenman; Reuven Glick
    Abstract: This paper presents a model comparing the optimal degree of asset class diversification abroad by a central bank and a sovereign wealth fund. We show that if the central bank manages its foreign asset holdings in order to meet balance of payments needs, particularly in reducing the probability of sudden stops in foreign capital inflows, it will place a high weight on holding safer foreign assets. In contrast, if the sovereign wealth fund, acting on behalf of the Treasury, maximizes the expected utility of a representative domestic agent, it will opt for relatively greater holding of more risky foreign assets. We also show how the diversification differences between the strategies of the bank and SWF is affected by the government’s delegation of responsibilities and by various parameters of the economy, such as the volatility of equity returns and the total amount of public foreign assets available for management.
    Keywords: Banks and banking, Central ; Sovereign wealth fund
    Date: 2010

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