nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒10‒23
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. How Does Monetary Policy Change? Evidence on Inflation Targeting Countries By Jaromír Baxa; Roman Horváth; Bořek Vašíček
  2. Monetary transmission in low income countries By Prachi Mishra; Antonio Spilimbergo; Peter Montiel
  3. US post-war monetary policy: what caused the Great Moderation? By Minford, Patrick; Ou, Zhirong
  4. Fixed Exchange Rate Regimes in Mediterranean Countries and the Experience of Cyprus By George Syrichas
  5. Interbank Lending and the Demand for Central Bank Loans - a Simple Microfoundation By Markus Pasche
  6. "A Post Keynesian Perspective on the Rise of Central Bank Independence: A Dubious Success Story in Monetary Economics" By Jörg Bibow
  7. Monetary Policy and Real Estate Prices: A Disaggregated Analysis for Switzerland By Berlemann, Michael; Freese, Julia
  8. Insulation impossible: monetary policy and regional fiscal spillovers in a federation By Cooper, R.; Kempf, H.; Peled, D.
  9. The Impact of ECB and FED announcements on the Euro Interest Rates By Andrea Monticini; David Peel; Giacomo Vaciago
  10. The Case for Reforming Euro Area Entry Criteria By Zsolt Darvas
  11. What Do Outside Experts Bring To A Committee? Evidence From The Bank of England By Stephen Eliot Hansen; Michael McMahon
  12. A Tale of Two Growth Engines: The Interactive Effects of Monetary Policy and Intellectual Property Rights By Angus C. Chu; Ching-Chong Lai; Chih-Hsing Liao
  13. Limits of Floats: The Role of Foreign Currency Debt and Import Structure By Pascal Towbin, Sebastian Weber
  14. The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914-1939 By Barry Eichengreen, Marc Flandreau
  15. Nonlinearity and Inflation Rate Differential Persistence: Evidence from the Eurozone. By Nikolaos Giannellis
  16. Assessing the Equilibrium Exchange Rate of the Cyprus Pound at the time of Euro Adoption By George Kyriacou; Maria Papageorghiou
  17. The Unending Search for a New Global Monetary and Financial Architecture By Gerardo della Paolera
  18. Sources of exchange rate dynamics in the European transition economies By Mirdala, Rajmund
  19. Do Inflation-linked Bonds Contain Information about Future Inflation? By José Valentim Machado Vicente; Osmani Teixeira de Carvalho Guillen
  20. On Some Monetarist Arithmetic By M J Manohar Rao
  21. Policy Games with Liquidity Constrained Consumers By Albonico, Alice
  22. On the Granger Causality between Median Inflation and Price Dispersion By Richard Ashley
  23. Applying the Lessons of Asia: The IMF’s Crisis Management Strategy in 2008 By Shinji Takagi
  24. Developing Asian Local Currency Bond Markets: Why and How? By Mark M. Spiegel
  25. Global policy at the zero lower bound in a large-scale DSGE model By Sandra Gomes; Pascal Jacquinot; Ricardo Mestre; João Sousa
  26. Redefining a role for central banks: The increased importance of central banks’ roles in the management of liquidity risks and macro prudential supervision in the aftermath of the Financial Crisis By Ojo, Marianne
  27. Payment systems, inside money and financial intermediation By Merrouche, Ouarda; Nier, Erlend
  28. Appreciating the Renminbi By Rod Tyers; Ying Zhang

  1. By: Jaromír Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Bořek Vašíček (Universitat Autonoma de Barcelona)
    Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom), applying a moment-based estimator in a time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually, pointing to the importance of applying a time-varying estimation framework. Second, the interest rate smoothing parameter is much lower than typically reported by previous time-invariant estimates of policy rules. External factors matter for all countries, although the importance of the exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates to inflation is particularly strong during periods when central bankers want to break a record of high inflation, such as in the UK or Australia at the beginning of the 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting, suggesting a positive anchoring effect of this regime on inflation expectations. This result is supported by our finding that inflation persistence as well as the policy neutral rate typically decreased after the adoption of inflation targeting.
    Keywords: Taylor rule, inflation targeting, monetary policy, time-varying parameter model, endogenous regressors
    JEL: E43 E52 E58
    Date: 2010–10
  2. By: Prachi Mishra (International Monetary Fund); Antonio Spilimbergo (International Monetary Fund); Peter Montiel (Williams College)
    Abstract: This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be 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.
    Keywords: monetary policy, exchange rate, interest rate, banks, credit, institutions
    Date: 2010–07
  3. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: Using indirect inference based on a VAR we confront US data from 1972 to 2007 with a standard New Keynesian model in which an optimal timeless policy is substituted for a Taylor rule. We find the model explains the data both for the Great Acceleration and the Great Moderation. The implication is that changing variances of shocks caused the reduction of volatility. Smaller Fed policy errors accounted for the fall in inflation volatility. Smaller supply shocks accounted for the fall in output volatility and smaller demand shocks for lower interest rate volatility. The same model with differing Taylor rules of the standard sorts cannot explain the data of either episode. But the model with timeless optimal policy could have generated data in which Taylor rule regressions could have been found, creating an illusion that monetary policy was following such rules.
    Keywords: Great Moderation; Shocks; Monetary policy; New Keynesian model; Bootstrap; VAR; Indirect inference; Wald statistic
    JEL: E32 E42 E52 E58
    Date: 2010–10
  4. By: George Syrichas (Central Bank of Cyprus)
    Abstract: Mediterranean countries following a fixed exchange rate regime have been confronted with some challenges that test the efficacy of the regimes in place. These challenges mostly arise from the combination of inflationary pressures and the need for further capital account liberalisation amid conditions of ample liquidity in the banking system and rapid money and credit growth. In light of these developments, some of these exchange rate targeting Mediterranean countries are assessing the framework in place or even contemplating change to a more flexible arrangement, which would allow them greater freedom to pursue domestic objectives. Theoretical and empirical considerations do not point to the superiority of a particular exchange rate regime, but provide broad guidance on the factors and conditions that are predisposed to a fixed exchange rate regime and its sustainability in a liberalised environment. The case of Cyprus confirms the view that, under certain conditions, it is possible to maintain a credible fixed exchange rate regime while advancing capital account liberalisation and still achieve the primary objective of monetary policy. Adherence to a simple monetary rule, such as an exchange rate target, can confer credibility on a central bank and deliver price stability. Another important lesson drawn from the Cyprus case is that this strategy requires an independent central bank and needs to be supplemented by additional measures. Monetary aggregates, in particular credit, should be closely monitored and controlled, if necessary. The current account also warrants close monitoring, both as an indicator of inflationary pressures and as a warning signal helping to avoid unsustainable external imbalances. Finally, capital account liberalisation requires that the authorities have in advance a well-prepared and comprehensive plan, including, first and foremost, reforms in the conduct of monetary policy and banking supervision.
    Keywords: Exchange rate policy, exchange rate pegs, monetary policy, Mediterranean countries, Cyprus.
    JEL: E31 E4 E52 F31 F33
    Date: 2010–10
  5. By: Markus Pasche (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: The paper presents a simple model of banking behavior where portfolio, liquidity, and liability management determine simultaneously the demand and supply of borrowed reserves on the interbank market. As the central bank is one player in this market due to its refinancing policy, it is able to determine the interest rate and henceforth the residual demand for central bank loans. Comparative static analysis shows how external or monetary policy shocks affect the behavior on the interbank market, the volume as well as the structure of the bank's balance sheet. It turns out that the banking firm behavior is non-linear and partially non-monotonous, indicating that the transmission of monetary measures is more complex when endogeneous banking behavior is taken into account.
    Keywords: banking firm, balance sheet, interbank market, borrowed reserves, central banking, liquidity, transmission
    JEL: E43 E58 G21
    Date: 2010–10–11
  6. By: Jörg Bibow
    Abstract: This paper critically assesses the rise of central bank independence (CBI) as an apparent success story in modern monetary economics. As to the observed rise in CBI since the late 1980s, we single out the role of peculiar German traditions in spreading CBI across continental Europe, while its global spread may be largely attributable to the rise of neoliberalism. As to the empirical evidence alleged to support CBI, we are struck by the nonexistence of any compelling evidence for such a case. The theoretical support for CBI ostensibly provided by modeling exercises on the so-called time-inconsistency problem in monetary policy is found equally wanting. Ironically, New Classical modelers promoting the idea of maximum CBI unwittingly reinstalled a (New Classical) “benevolent dictator” fiction in disguise. Post Keynesian critiques of CBI focus on the money neutrality postulate as well as potential conflicts between CBI and fundamental democratic values. John Maynard Keynes’s own contributions on the issue of CBI are found worth revisiting.
    Keywords: Central Banks; Central Bank Independence; Democratic Accountability; Monetary Policy; Time-inconsistency
    JEL: B31 B59 E50 E61
    Date: 2010–09
  7. By: Berlemann, Michael (Helmut Schmidt University, Hamburg); Freese, Julia (Helmut Schmidt University, Hamburg)
    Abstract: Most empirical studies found that monetary policy has a significant effect on house prices while stock markets remain unaffected by interest rate shocks. In this paper we conduct a more detailed analysis by studying various sub-segments of the real estate market. Employing a new dataset for Switzerland we estimate vector autoregressive models and find substitution effects between house and apartment prices on the one hand and rental prices on the other. Interestingly enough, commercial property prices do not react on interest rate variations.
    Keywords: monetary policy; interest rate shocks; real estate; stock market
    JEL: E43 E52 R21
    Date: 2010–10–14
  8. By: Cooper, R.; Kempf, H.; Peled, D.
    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 are 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: E31 E42 E58 E62
    Date: 2010
  9. By: Andrea Monticini (Catholic University, Milan, Italy); David Peel; Giacomo Vaciago
    Abstract: Employing a new method of analysis suggested by Thornton (2009) we investigate the impact of news in the ECB and FED monetary policy announcements on daily changes in Euro interest rates. We document significant impacts of ECB announcements throughout the period but only until mid-2004 of FED announcements. The latter result on the news content of FED announcements is consistent with the analysis of Thornton (2009) who reports an insignificant impact of FED announcements on changes in US interest rates over a sample period that has significant overlap with the one employed in this letter.
    Keywords: monetary policy shocks, identification, wild bootstrap
    JEL: E40 E52
    Date: 2010–09
  10. By: Zsolt Darvas (Institute of Economics - Hungarian Academy of Science, Bruegel-Brusselss)
    Abstract: The global economic and financial crisis has raised further concerns about the euro-entry criteria, in addition to other factors, such as the effective tightening of the criteria due to the enlargement of the EU from 12 to 27 members, the highly unfavourable property of business cycle dependence, the internal inconsistency of the criteria due to the structural price level convergence of Central and Eastern European countries, and the continuous violation of the criteria by euro-area members. The interest rate criterion became a highly volatile measure. Many US metropolitan areas would fail to qualify to be members of the US monetary union by applying the currently used inflation criterion to the US. It is time to reform the criteria and to strengthen their economic rationale within the legal framework of the EU treaty. A good solution would be to relate all criteria to the average of the euro area and simultaneously to extend the compliance period from the currently considered one year to a longer period.
    Keywords: Euro; EU institutions; financial crisis; Maastricht-criteria
    JEL: F33 F36 F53
    Date: 2010–09
  11. By: Stephen Eliot Hansen; Michael McMahon
    Abstract: We test whether outside experts have information not available to insiders by using the voting record of the Bank of England's Monetary Policy Committee. Members with more private information should vote more often against conventional wisdom, which we measure as the average belief of market economists about future interest rates. We find evidence that external members indeed have information not available to internals, but also use a quasi-natural experiment to show they may exaggerate their expertise to obtain reappointment. This implies that an optimal committee, even outside monetary policy, should potentially include outsiders, but needs to manage career concerns.
    Keywords: Expert Behavior, Committees, Monetary Policy.
    JEL: D70 E52
    Date: 2010–10
  12. By: Angus C. Chu (Shanghai University of Finance and Economics, China); Ching-Chong Lai (Institute of Economics, Academia Sinica, Taipei, Taiwan); Chih-Hsing Liao (National Chengchi University)
    Abstract: How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D; furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the effects of monetary policy in the AK model. In other words, the market power of firms has surprisingly opposite implications on the growth and welfare effects of monetary policy under the two growth engines (i.e., innovation versus capital accumulation). Finally, we simulate the transition dynamics of the R&D-based growth model to compute the complete welfare changes from reducing inflation.
    Keywords: economic growth, inflation, monetary policy, patent policy, R&D
    JEL: O30 O40 E41
    Date: 2010–10
  13. By: Pascal Towbin, Sebastian Weber (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in a model with high foreign currency debt and low exchange rate pass through to import prices. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.
    Keywords: Exchange Rate Regimes, Balance Sheet Effects, Pass-through, Interacted Panel VAR, External Shocks
    JEL: E30 F33 F34 F41
    Date: 2010–01–10
  14. By: Barry Eichengreen, Marc Flandreau (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper provides new evidence on the rise of the dollar as an international currency, focusing on its role in the conduct of trade and the provision of trade credit. We show that the shift to the dollar occurred much earlier than conventionally supposed: during and immediately after World War I. Not just market forces but also policy support – the Fed in its role as market maker – was important for the dollar’s overtaking of sterling as the leading international currency. On balance, this experience challenges the popular notion of international currency status as being determined mainly by market size. It suggests that the popular image of strongly increasing returns and pervasive network externalities leaving room for only one monetary technology is misleading.
    Keywords: international currency, trade credit, network externalities
    Date: 2010–08
  15. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece)
    Abstract: We employ a linear unit root test as well as a nonlinear two-regime Threshold Autoregressive (TAR) unit root test to determine whether inflation differentials in the Eurozone during the period 1970-2009 were persistent or transitory. The results imply that inflation rate differentials in the Eurozone are characterized by threshold nonlinearity. After modeling the nonlinear characteristics of the series with the appropriate unit root test, our test's results reveal that inflation rate differentials in the Eurozone are mainly persistent. Our findings imply that the higher the increase of the inflation rate differential, the more persistent the inflation rate differential is likely to be.
    Keywords: EMU; Inflation Rate Differential; Unit Root; Nonlinearity; Threshold
    JEL: C22 E31 F15 F36
    Date: 2010–07–01
  16. By: George Kyriacou (Central Bank of Cyprus); Maria Papageorghiou (Central Bank of Cyprus)
    Abstract: One of the landmark events in the recent history of Cyprus was the adoption of the euro on 1 January 2008. A crucial element of the preparatory discussions between the Cypriot authorities and the competent European bodies was the search for an agreement on the conversion rate of the Cyprus pound vis-a-vis the euro, which was decided by the Economic and Financial Affairs Council (ECOFIN) on 10 July 2007. This paper describes part of the work undertaken at the Central Bank of Cyprus as background material for these discussions. Using a qualitative and quantitative approach, the paper suggests that the exchange parity rate of the Cyprus pound vis-a-vis the euro which existed for a number of years prior to euro adoption was broadly in line with economic fundamentals. Evidence examined include the stability of the Cyprus pound vis-a-vis the euro within a credible exchange rate policy framework, robust growth, low levels of unemployment, high Foreign Direct Investment (FDI) coverage of the current account deficit as well as low and stable inflation. This conclusion is also supported by a model-based approach using the Fundamental Equilibrium Exchange Rate (FEER) framework.
    Keywords: Equilibrium exchange rate, euro adoption, FEER
    JEL: F31 F32
    Date: 2010–09
  17. By: Gerardo della Paolera (Global Development Network (GDN))
    Abstract: This paper analyzes some key features of the global monetary and financial crisis and the limitations faced by Central Banks. It also includes a brief description for the collectively previous efforts to anchor a Global Monetary and Financial regime. The main difficulties to “globalize” banking and financial reforms are illustrated in this paper. It is concluded with some open questions concerning the threats and opportunities that this crisis presents for emerging, developing and poorer countries.
    Date: 2010–10
  18. By: Mirdala, Rajmund
    Abstract: Exchange rates in the European transition economies are currently exposed to the exogenous shocks as a result of higher uncertainty on the foreign exchange markets related to the various kinds of world economic crisis implications. Higher vulnerability of exchange rates of these countries to the exogenous shocks reflects decreased confidence of financial markets to the recovery process as well as an ability of the governments to sustain persisting fiscal pressures leading to higher fiscal deficits and public debt. Another issue that emphasizes the role of exogenous shocks in determining the exchange rate development in the European transition economies is the ability of national central banks to perform “suitable” monetary policy that would be able to support the recovery process in these economies while still being able to protect exchange rate of the national currency against speculative attacks and to keep exchange rate stable in the medium term horizon. In the paper we analyze the sources of exchange rate movements in the European transition economies (Bulgaria, the Czech republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania) in the period 2000-2009 using SVAR (structural vector autoregression) approach applied on each country individual data as well as panel data. We decompose the variability of NEER and REER in these countries to permanent and temporary shocks. Impulse-response functions are also computed in order to estimate the behaviour of NEER and REER after structural one standard deviation innovations. The relevant outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU member countries - EU-12 group). This approach helps us to understand the common as well as differing features of NEER and REER determination in the European transition economies and the old EU member countries.
    Keywords: exchange rates; exogenous shocks; structural vector autoregression; variance decomposition; impulse-response function; panel data analysis
    JEL: C32 E52
    Date: 2010–05
  19. By: José Valentim Machado Vicente; Osmani Teixeira de Carvalho Guillen
    Abstract: There is a widespread belief that inflation-linked bonds are a direct source of information about inflation expectations. In this paper we address this issue by analyzing the relationship between break-even inflation (the difference between nominal and real yields) and future inflation. The dataset is extracted from Brazilian Treasury bonds covering the period from April 2005 to July 2010. We find that break-even inflation is an unbiased forecast only of the 3-month and 6-month ahead inflation. For medium horizons (12 and 18 months) break-even inflation has weak explanatory power of future inflation. Over long horizons (24 and 30 months), we report a significant, but counterintuitive, negative relationship between the break-even and realized inflations.
    Date: 2010–10
  20. By: M J Manohar Rao
    Abstract: The paper improves upon the original Sargent-Wallace (SW) version which had to resort to numerical simulations to prove this point It is also shown that incorporating the Mundeil-Tobin and Darby-Tanzi effects into the model indicates further conditions that would (in)validate the SW result
    Keywords: sargent wallace, SW, Darby-Tanzi, validate, effects, numerical, simulations, steady-state inflation, monetary accommodation, debt-financing, monetarist, arithmetic
    Date: 2010
  21. By: Albonico, Alice
    Abstract: We investigate the optimal responses of policy authorities through a model where the fiscal and the monetary policymakers are independent and play strategically. We allow for the presence of two types of consumers: ‘Ricardians’, who trade in the assets market and ‘liquidity constrained’ consumers, who spend all their disposable labor income for consumption. We find that not only the different game structures but mainly the presence of ‘liquidity constrained’ consumers is crucial in determining the optimal responses of policies. In particular, for high enough fractions of liquidity constrained consumers the way policies react to cope with a mark-up shock change significantly and the role of fiscal policy becomes more relevant.
    Keywords: policy games; optimal monetary and fiscal policy; liquidity constrained consumers;
    JEL: E63 E61
    Date: 2010–09
  22. By: Richard Ashley
    Abstract: The Granger-causal relationship between the size and dispersion of fluctuations in sub-components of the U.S. Consumer Price Index (CPI) is examined using both in-sample and post- sample tests and data from January 1968 to December 2008. Strong in-sample evidence is found for feedback between median inflation and price dispersion; the evidence for Granger-causation from median inflation to price dispersion remains strong in out-of-sample testing, but is less strong for Granger-causation in the opposite direction. The implications of these results for the variety of price-level determination models in the literature are discussed.
    Keywords: CPI, Granger, Causal Relationship, Price Dispersion, Inflation
    Date: 2010
  23. By: Shinji Takagi
    Abstract: The paper examines the recent European crisis management programs of the International Monetary Fund (IMF) to see how the lessons of Asia were applied. Compared to the Asian programs of 1997, the European programs of 2008 were better funded and their structural conditionality more focused. Other than these, the overall thrust of the programs was similar: fiscal and monetary tightening, coupled with banking reforms. [ADBI Working Paper 206]
    Keywords: European crisis, International Monetary Fund, Asian, structural, fiscal, monetary
    Date: 2010
  24. By: Mark M. Spiegel
    Abstract: This paper examines the motivation for, and the success of, regional efforts in Asia to promote local currency bond markets. The analysis demonstrates that Asian local currency bond markets made substantial gains as a region going into the current global financial crisis. However, we argue that the current financial crisis requires a reassessment of the merits of promoting local currency bond markets and the gains that have been made to date. While most of the initial motivations for encouraging the development of domestic local currency bond markets appear to remain valid, there are some exceptions. However, the degree to which success in the development of these markets will be sustained remains unknown until global financial markets regain tranquility and official interventions into these markets are removed. [ADBI Working Paper 182]
    Keywords: motivation, success, Asia, currency, markets, financial
    Date: 2010
  25. By: Sandra Gomes (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ricardo Mestre (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); João Sousa (Bank of Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal.)
    Abstract: The purpose of this paper is to analyse whether fiscal policies can alleviate the effects of the zero lower bound (ZLB) on interest rates and if they should be coordinated internationally. The analysis is carried out using EAGLE, a DSGE model of the global economy. We consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times. In this setup we find significant non-linearities in a ZLB situation that amplify the effects of fiscal shocks compared to the non-ZLB case. International coordination is helpful but does not play a major role in the results. JEL Classification: E40, E62, E63, F42.
    Keywords: Zero Lower Bound, Fiscal Multipliers, Monetary Policy, DSGE models.
    Date: 2010–10
  26. By: Ojo, Marianne
    Abstract: Over the recent years, it has increasingly been acknowledged that macro prudential policies are not only considered to be “a missing ingredient from the current policy framework”, but that there has also been “too huge a gap between macro economic policy and the regulation of individual financial institutions.” The link between monetary policy and macro prudential policies, the knowledge of central banks in matters relating to information on market conditions and their oversight of payment systems, as well as the need to bridge the existing gap between supervisory authorities and central banks whilst executing their supervisory roles and functions, have necessitated an extension of central banks role in the management of liquidity risks and macro prudential supervision. A fundamental aim of this paper is to address how an extension of central banks’ roles in macro prudential supervision can assist regulators and supervisors in bridging the afore mentioned gap between macro economic policy and the regulation of individual financial institutions. In so doing, the need for greater focus on macro prudential factors, namely, the system as a whole, as opposed to mere focus on the supervision of individual institutions will be highlighted. The expertise and knowledge with which a central bank is endowed in its role as overseer of the entire payments system – as well as the quality of information which it has access to, are some of those factors which add weight to its ability to bridge “the gap”.
    Keywords: macroprudential; Financial Crisis; central banks; Basel III; systemic risk; supervision; liquidity; information; Banking Reform Act; Financial Services Act; regulators
    JEL: K2 E58 G21 E3
    Date: 2010–10–14
  27. By: Merrouche, Ouarda; Nier, Erlend
    Abstract: This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Two channels are investigated. First, innovations in wholesale payments technology enhance the security and speed of deposits as a payment medium for customers and therefore affect the split between holdings of cash and the holdings of deposits that can be intermediated by the banking system. Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds, which reduces the need for banks to hold excess reserves. The authors examine these links empirically using payment system reforms in Eastern European countries as a laboratory. The analysis finds evidence that reforms led to a shift away from cash in favor of demand deposits and that this in turn enabled a prolonged credit expansion in the sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, this effect was not causal for the credit boom observed in these countries.
    Keywords: Banks&Banking Reform,Debt Markets,Bankruptcy and Resolution of Financial Distress,Access to Finance,Currencies and Exchange Rates
    Date: 2010–10–01
  28. By: Rod Tyers; Ying Zhang
    Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade has tightened China’s labour market. We show that, should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives the consequences would be harmful for both Chinese and global interests.
    JEL: C68 C53 E27 F21 F43 F47 O11
    Date: 2010–10

This nep-mon issue is ©2010 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.