nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒11‒13
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The euro area interbank market and the liquidity management of the eurosystem in the financial crisis By Hauck, Achim; Neyer, Ulrike
  2. Monetary Policy Rules and Foreign Currency Positions By Bianca De Paoli; Hande Küçük-Tuger; Jens Søndergaard
  3. Liquidity Crunch in Late 2008: High-Frequency Differentials between Forward-Implied Funding Costs and Money Market Rates By Matthew S. Yiu; Joseph K. W. Fung; Lu Jin; Wai-Yip Alex Ho
  4. Surprising comparative properties of monetary models: Results from a new model database By John B. Taylor; Volker Wieland
  5. Public Debt, Distortionary Taxation, and Monetary Policy By Piergallini, Alessandro; Rodano, Giorgio
  6. Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward? By Andrew Filardo; Hans Genberg
  7. Monetary policy, asset prices and consumption in China By Koivu, Tuuli
  8. Financial Integration, Monetary Policy and Stock Prices: Empirical Evidence for the New EU Member States By Pirovano M.
  9. How much does the public know about the ECB's monetary policy? Evidence from a survey of Dutch households By Carin van der Cruijsen; David-Jan Jansen; Jakob de Haan
  10. The Taylor principle and (in-)determinacy in a New Keynesian model with hiring frictions and skill loss By Ansgar Rannenberg
  11. Has the Inclusion of Forward-Looking Statements in Monetary Policy Communications Made the Bank of Canada More Transparent? By Christine Fay; Toni Gravelle
  12. Optimality criteria of hybrid inflation-price level targeting By László Bokor
  13. Liquidity Traps: An Interest-Rate-Based Exit Strategy By Stephanie Schmitt-Grohé; Martín Uribe
  14. The monetary policy response to the financial crisis in the Euro area and in the United States: a comparison By Domenica Tropeano
  15. Exchange-rate pass-through to import prices: nonlinearities and exchange rate and inflationary regimes By Rehim Kýlýc
  16. The distributional and welfare impact of inflation in Italy. By Alessandra Cepparulo; Francesca Gastaldi; Paolo Liberati; Elena Pisano
  17. Japan's Bubble, America's Bubble and China's Bubble By Kazuo Ueda
  18. Forecasting Malaysian Exchange Rate: Do Artificial Neural Networks Work? By Chan, Tze-Haw; Lye, Chun Teck; Hooy, Chee-Wooi
  19. Inattentive Consumers and Exchange Rate Volatility By Mehmet Fatih, Ekinci
  20. Explaining the demand for money by non-financial corporations in the euro area: A macro and a micro view By Carmen Martínez-Carrascal; Julian von Landesberger
  21. Choosing an Anchor Currency for the Pacific By Stephan Freitag
  22. Measuring the Impact of Monetary Policy on Asset Prices in Turkey (Turkiye’de Para Politikasinin Finansal Varlik Fiyatlari Uzerine Etkisi) By Murat Duran; Gulserim Ozcan; Pinar Ozlu; Deren Unalmis
  23. Home Bias in Currency Forecasts By Yu-chin Chen; Kwok Ping Tsang; Wen Jen Tsay
  24. Effects of Monetary Unions on Inequalities (Para Birliklerinin Esitsizlikler Uzerindeki Etkileri) By Timur Hulagu; Devrim Ikizler
  25. The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma By Joshua Aizenman; Hiro Ito; Menzie D. Chinna
  26. A New Core Inflation Indicator for Turkey (Turkiye Ekonomisi Icin Yeni Bir Cekirdek Enflasyon Gostergesi) By Necati Tekatli
  27. The Yuan’s Exchange Rates and Pass-through Effects on the Prices of Japanese and US Imports By Yuqing Xing

  1. By: Hauck, Achim; Neyer, Ulrike
    Abstract: This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if costs of participating in the interbank market are high, the central bank assumes an intermediary function between liquidity surplus banks and liquidity deficit banks and thereby replaces the interbank market. From a policy perspective, we argue that possible measures of the Eurosystem to reactivate the interbank market may conflict, inter alia, with monetary policy aims. --
    Keywords: Liquidity,Monetary Policy Instruments,Interbank Market,Financial Crisis
    JEL: E52 E58 G21
    Date: 2010
  2. By: Bianca De Paoli; Hande Küçük-Tuger; Jens Søndergaard
    Abstract: Using an endogenous portfolio choice model, this paper examines how different monetarypolicy regimes can lead to different foreign currency positions by changing the cyclicalproperties of the nominal exchange rate. We find that strict inflation targeting regimes areassociated with a short position in foreign currency, while the opposite is true for noninflationtargeting regimes. We also explore how these different external positions affect theinternational transmission of monetary shocks through the valuation channel. When centralbanks follow inflation targeting Taylor-type rules, valuation effects of monetary expansionsare beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime(or when monetary policy puts weight on output stabilization).
    Keywords: Portfolio choice, international transmission of shocks, monetary policy
    JEL: F31 F41
    Date: 2010–11
  3. By: Matthew S. Yiu (Hong Kong Monetary Authority); Joseph K. W. Fung (Hong Kong Baptist University and Hong Kong Institute for Monetary Research); Lu Jin (Hong Kong Monetary Authority); Wai-Yip Alex Ho (Hong Kong Monetary Authority and Boston University)
    Abstract: The US Federal Reserve and the European Central Bank have adopted a number of measures, including aggressive policy rate cuts, to ease the liquidity crunch in the financial markets following the collapse of Lehman Brothers. Using high frequency spot and forward foreign exchange and interest rate quotes that are potentially executable for the period surrounding the 2008 global financial turmoil, this study examines the variations of intraday funding liquidity across the global financial markets that span different time zones. Moreover, the paper also tests how and to what extent policy actions undertaken by central banks affect the dynamics of market liquidity conditions. Similar to Hui et al. (2009), the paper uses the differential between the US dollar interest rate implied by the covered interest rate parity condition and the corresponding US dollar interest rate as a proxy for the liquidity (or the lack of it) in the US dollar money market. The study focuses on the EUR/USD exchange rate and compares the most stressful crisis period with other relatively less stressful periods. The intraday funding liquidity condition during the most tumultuous period shows that the pressures in the demand for US dollars through foreign exchange and forward markets spilled over to the Asian markets. The paper also examines how policy announcements by the central banks affect the dynamics of market liquidity. The study employs autoregressive models to capture the potential effects of monetary policy announcements on both the mean and volatility of the liquidity proxy. The empirical results show that the coordinated cuts of policy rates failed to stimulate lending in the short-term US money market, whereas the uncapped currency swap lines offered by the Federal Reserve to other central banks succeeded in easing the liquidity condition in the market. The policy is more effective and persistent for the very short end of the money market.
    Keywords: Financial Crisis, Intraday Liquidity, CIP Deviation, Monetary Policy
    JEL: G14 G15 E5
    Date: 2010–10
  4. By: John B. Taylor (Herbert Hoover Memorial Building, Stanford University, Stanford, CA 94305, U.S.A.); Volker Wieland (House of Finance, Goethe University of Frankfurt, Grueneburgplatz 1, D-60323 Frankfurt am Main, Germany.)
    Abstract: In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new database of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy rules are different in the different models. Simple model-specific policy rules that include the lagged interest rate, inflation and current and lagged output gaps are not robust. Some degree of robustness can be recovered by using rules without interest-rate smoothing or with GDP growth deviations from trend in place of the output gap. However, improvement vis-à-vis other models, comes at the cost of significant performance deterioration in the original model. Model averaging offers a much more effective strategy for improving the robustness of policy rules. JEL Classification: E12, E52, E61.
    Keywords: monetary policy rules, New-Keynesian models, model uncertainty, robustness, monetary policy transmission.
    Date: 2010–11
  5. By: Piergallini, Alessandro; Rodano, Giorgio
    Abstract: Since Leeper's (1991, Journal of Monetary Economics 27, 129-147) seminal paper, an extensive literature has argued that if fiscal policy is passive, i.e., guarantees public debt stabilization irrespectively of the inflation path, monetary policy can independently be committed to inflation targeting. This can be pursued by following the Taylor principle, i.e., responding to upward perturbations in inflation with a more than one-for-one increase in the nominal interest rate. This paper analyzes an optimizing framework in which the government can only finance public expenditures by levying distortionary taxes. It is demonstrated that households' market participation constraints and Laffer-type effects can render passive fiscal policies unfeasible. For any given target inflation rate, there exists a threshold level of public debt beyond which monetary policy independence is no longer possible. In such circumstances, the dynamics of public debt can be controlled only by means of higher inflation tax revenues: inflation dynamics in line with the fiscal theory of the price level must take place in order for macroeconomic stability to be guaranteed. Otherwise, to preserve inflation control around the steady state by following the Taylor principle, monetary policy must target a higher inflation rate.
    Keywords: Public Debt; Distortionary Taxation; Monetary and Fiscal Policy Rules
    JEL: H31 E63 H63
    Date: 2010–10–30
  6. By: Andrew Filardo; Hans Genberg
    Abstract: Monetary policy frameworks in the Asia and Pacific region have performed well in the past decade as judged by inflation outcomes. We argue that this is due to three principal factors: (i) central banks have focused on price stability as the primary objective of monetary policy, (ii) institutional setups have been put in place that are supportive of the central banks’ abilities to carry out their objectives, and (iii) economic policies in general have been supportive of the pursuit of price stability, in particular the adoption of prudent fiscal policies that have reduced concerns of fiscal dominance. [ADBI Working Paper 195]
    Keywords: Monetary, policy, frameworks, Asia, central banks, institutional
    Date: 2010
  7. By: Koivu, Tuuli (BOFIT)
    Abstract: This paper studies the wealth channel in China. Using the structural vector autoregression method, we find that a loosening of China’s monetary policy indeed leads to higher asset prices, which in turn are linked to household consumption. However, the importance of the wealth channel as a part of the monetary policy transmission mechanism in China is still limited.
    Keywords: China; monetary policy; asset prices
    JEL: E52 P24
    Date: 2010–11–05
  8. By: Pirovano M.
    Abstract: We provide empirical evidence on the interaction between monetary policy and stock prices in 4 new EU member states of Central and Eastern Europe by estimating a small open economy macroeconometric model (SVAR) identi?ed by means of short-run restrictions. Our modeling choices refl?ect the increasing integration between the NMS and the Euro Area. Our contributions are twofold. We analyze the monetary transmission mechanism through stock prices in the NMS and we determine the extent to which fi?nancial markets in the aforementioned countries are sensitive to euro area monetary policy actions. We conclude that stock prices in the NMS are more sensitive to changes in the Euro Area interest rate than to the domestic one. Only in the Czech Republic and Poland we fi?nd a signi?cant negative effect of contractionary monetary policy on stock prices. Moreover, we fi?nd that the volatility of stock prices in the NMS is mainly due to shocks related to exchange rate and Euro Area monetary policy shocks.
    Date: 2010–10
  9. By: Carin van der Cruijsen (De Nederlandsche Bank.); David-Jan Jansen (De Nederlandsche Bank.); Jakob de Haan (De Nederlandsche Bank.)
    Abstract: Does the general public know what central banks do? Is this kind of knowledge relevant? Using a survey of Dutch households, we investigate these questions for the case of the European Central Bank (ECB). Our findings suggest that knowledge on the ECB's objectives is far from perfect. Both a weak desire to be informed and unawareness of insufficient knowledge are barriers for improving the public's understanding of monetary policy. However, our results also show that more intensive use of information improves understanding, suggesting that the media channel may play an important and constructive role in building knowledge. Finally, we find that knowledge on monetary policy objectives contributes to an individual's ability to form realistic inflation expectations. JEL Classification: D12, D84, E52, E58.
    Keywords: monetary policy, knowledge, transparency, financial literacy, inflation expectations, ECB.
    Date: 2010–11
  10. By: Ansgar Rannenberg (National Bank of Belgium, Research Department)
    Abstract: We introduce skill decay during unemployment into Blanchard and Gali's (2008) New-Keynesian model with hiring frictions and real-wage rigidity. Plausible values of quarterly skill decay and real-wage rigidity turn the long-run marginal cost-unemployment relationship positive in a "European" labour market with little hiring but not in a fluid "American" one. If the marginal cost-unemployment relationship is positive, determinacy requires a passive response to inflation in the central bank's interest feedback rule if the rule features only inflation. Targeting steady state output or unemployment helps to restore determinacy. Under indeterminacy, an adverse sunspot shock increases unemployment extremely persistently.
    Keywords: Monetary policy rules, Taylor principle, Determinacy, Hysteresis, Skill decay
    JEL: E24 E52 E32 J64
    Date: 2010–11
  11. By: Christine Fay; Toni Gravelle
    Abstract: To investigate the extent to which the transparency of the Bank of Canada's monetary policy has improved, the authors examine empirically -- over the period 30 October 2000 to 31 May 2007 -- the reaction of Canadian financial markets to official Bank communications, and in particular their reaction to the recent inclusion of forwardlooking policy-rate guidance in these communications. The authors find evidence that fixed announcement date (FAD) press releases, and, to a lesser extent, speeches by Governing Council members, significantly affect near-term interest rate expectations, indicating that central bank communication conveys important information to market participants. However, the authors' results also show that FAD press releases and speeches do not significantly impact market rates over the more recent period, when forward-looking statements have been used on a regular basis. The authors investigate two explanations for this change in response: (i) market participants better understand the Bank's monetary policy reaction function as they become accustomed to the FAD regime; or, (ii) market participants focus more on the forward-looking statements and less on the Bank's discussion of the economic outlook, and therefore respond less than before to new macroeconomic data releases. The authors find evidence to support the second explanation: forward-looking statements -- even though they have been designed to be conditional -- have made the Bank's decisions on the policy rate more predictable, but not necessarily more transparent.
    Keywords: Interest rates; Central bank research; Transmission of monetary policy
    JEL: E52 E58
    Date: 2010
  12. By: László Bokor (Budapest University of Technology and Economics)
    Abstract: This paper provides a sensitivity analysis of the relative performance of inflation targeting, price level targeting, and hybrid targeting, the combination of these two. A simple, three-period, steady state to steady state economy is presented, where monetary policy is facing various sets of forward and backward looking expectations, social preferences on inflation and output gap stabilization, and degrees of cost push shock persistence. we derive optimal policy mix under the whole spectrum of these economic conditions, reporting also the criteria of the replicability of the theoretically optimal solution. The main intention of the examination is to reveal the nature of each interrelation between economic and policy parameters. The results show that (i) the relative strength of regimes depends heavily on the preconditions, and that (ii) the relationships of parameters related to the performance are non-linear and occasionally non-monotonic as well. our model specification is somewhat restrictive, however, contrary to the related literature, the examination, even in the intermediate cases, can be conducted analytically.
    Keywords: hybrid inflation-price level targeting, hybrid new keynesian Phillips curve, cost push shock persistence
    JEL: E50 E52 E58
    Date: 2010
  13. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper analyzes a potential strategy for escaping liquidity traps. The strategy is based on an augmented Taylor-type interest-rate feedback rule and differs from usual specifications in that when inflation falls below a threshold, the central bank temporarily deviates from the traditional Taylor rule by following a deterministic path for the nominal interest rate. This path reaches the intended target for this policy instrument in finite time. The policy we study is designed to raise inflationary expectations over time while at the same time maintaining all of the desirable local properties of the Taylor principle in a neighborhood of the intended inflation target. Importantly, the effectiveness of the potential exit strategy studied in this paper does not rely on the existence of an accompanying fiscalist (or non-Ricardian) fiscal stance.
    JEL: E31 E52
    Date: 2010–11
  14. By: Domenica Tropeano (University of Macerata)
    Abstract: <p>The paper aims at drawing a comparison between the reactions to the recent financial crisis by the European Central Bank and by the Federal Reserve. Though the tools used have been largely the same, the quality and quantity of the interventions has been very different depending on the different structure of financial markets in the two areas. In particular, the ECB has not replaced private markets that did not work any more as the Federal Reserve did. The policy design behind those interventions is di®erent too. The Federal Reserve through the quantitative easing policy aims at lowering both short term and long term interest rates and has recently stated that this policy may continue in the future. The European Central Bank does not justify in this way its own interventions in the market and apparently seems not have given up its traditional goal, fighting inflation. The evolution of financial markets both in the U.S and in Europe after the crisis reflect different initial conditions and expectations for the future. Thus many differences in the structure of markets and in policy design exist. This, however, will not save Europe from the consequences of future disorders in the Us markets. The crisis spread to Europe largely because of the global dimension of the inter-bank market. Given that the interconnections between European and US banks have survived the financial crisis, nothing ensures that the same thing will not happen again.</p>
    Date: 2010–10
  15. By: Rehim Kýlýc (Koc University)
    Abstract: This paper investigates the relationship between exchange rate pass-through and exchange rate appreciations/depreciations and inflation by estimating nonlinear time series models. Motivated by theoretical and empirical results in the literature, the paper proposes new econometric models that can characterize nonlinear and asymmetric dynamics between import prices and exchange rate changes in a parsimonious fashion. Findings show the presence of complete and incomplete pass-through regimes depending upon the magnitude of appreciations of a currency and inflation rates both in the short-run and in the long-run. Results also reveal threshold effects and asymmetry in the pass-through relationship over appreciations/depreciations as well as inflationary and disinflationary periods. Findings have important macroeconomic policy implications.
    Keywords: Conditional CAPM
    Date: 2010–11
  16. By: Alessandra Cepparulo; Francesca Gastaldi; Paolo Liberati; Elena Pisano
    Abstract: The entrance of Italy in the Euro area in 2001 has given rise to a wide debate about the perception of inflation on households' well-being. However, most of the debate has involved the measurement of the "correct" consumer price index at national level. Much less analysis has been carried out on the microeconomic consequences of inflation on every household and to the investigation of its distributional impact. This paper addresses this issue by performing a microsimulation analysis of the impact of inflation on Italian households in the period 1997-2007. The extension of the study allows to capture possible structural breaks in correspondence of the adoption of the euro currency in 2001, and to get insightful information on the persistence of either positive or negative impacts. All methods of investigation proposed in this paper show that the impact of inflation has an ambiguous path over the period, yet a large concentration of welfare losses is found in the period surrounding the introduction of the euro currency. In particular, poorer and larger households are found to be severely hurt by inflation and a closer inspection suggests that the prices of gas and gasoline are largely responsible in determining living conditions of Italian households in both the period around the introduction of the euro and over the decade.
    Keywords: Redistribution, Inflation, Households, Welfare.
    JEL: D12 D60 H22 I31
    Date: 2010–07
  17. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper compares the three recent episodes of boom and bust cycles in asset prices: Japan in the late 1980s to the 1990s; the U.S. since the mid 1990s; and China during the last decade. Although we have not yet seen a collapse of Chinese property prices, the increases so far are comparable to those in the other two episodes and seem to warrant a careful comparative study. I first examine the behavior of asset prices, especially, property prices in the three cases and point out some similarities. I then go on to discuss some backgrounds for the behavior of asset prices. I emphasize the role played by extremely easy monetary policy for generating bubble like asset price behaviors in the three cases. Monetary policy was shown to be easier than standard policy rules like the Taylor rule indicates. The reason for easy monetary policies is investigated. In the U.S. case the monetary authority was concerned over the risk of deflation in the early to mid 2000s. The experiences of Japan and China are quite similar in that the authorities of both countries were seriously concerned with possible deflationary effects of exchange rate appreciation on the economy. Japan let the exchange rate appreciate, while China has resisted a large scale intervention. It is shown, however, that the behavior of real exchange rates has not been that different. Implications of such a finding for the future of the Chinese economy are also discussed.
    Date: 2010–11
  18. By: Chan, Tze-Haw; Lye, Chun Teck; Hooy, Chee-Wooi
    Abstract: Being a small and open economy, the stability and predictability of Malaysian foreign exchange are crucially important. However, despite the general failure of conventional monetary models, foreign exchange misalignments and authority intervention have both caused the forecasting process an uneasy task. The present paper employs the monetary-portfolio balance exchange rate model and its modified version in the analysis. We then compare two Artificial Neural Networks (ANNs) estimation procedures (MLFN and GRNN) with random walk (RW) in the modeling-prediction process of RM/USD during the post-Bretton Wood era (1990M1-2008M8). The out-of-sample forecasting assessment reveals that the ANNs have outperformed the RW, which in particular, the MLFNs outperform GRNNs where as the latter outperform the RW models with consistency in both the exchange rate models by all evaluation criteria. In addition, the findings also show that the modified model has superior forecasting performance than the first model. In brief, economic fundamentals are vital in forecasting and explaining the RM/USD exchange rate. The findings are beneficial in policy making, investment modeling as well as corporate planning.
    Keywords: Artificial Neural Networks; Forecasting; modified monetary-portfolio balance model; RM/USD
    JEL: C53 C45 F31
    Date: 2010–04–06
  19. By: Mehmet Fatih, Ekinci
    Abstract: We present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small.
    Keywords: Sticky Information; Exchange Rate Volatility
    JEL: F3
    Date: 2010–10–31
  20. By: Carmen Martínez-Carrascal (Banco de España); Julian von Landesberger (European Central Bank)
    Abstract: This paper analyses euro area non-financial corporations (NFCs) money demand, both from a macro and a microeconomic point of view. At a macro level, money holdings are modelled as a function of real gross added value, the price level, the long-term interest rate on bank lending to non-financial corporations, the own rate of return on M3 and the real capital stock of NFCs. The results indicate that NFCs money holdings adjust quickly when deviations from their long-run level are registered, and that the large increase observed recently in NFCs money holdings has been driven by changes in their fundamentals and hence they stand in line with their long-run equilibrium level. The disaggregated analysis also shows that cash holdings are linked to balance-sheet ratios (such as non-liquid short term assets, tangible assets or indebtedness) and other variables such as the firm’ cash flow, its volatility or the size of the firm, which cannot be taken into account in the macro analysis. Likewise, results indicate that the main drivers of the increase in NFCs cash holdings in the last years have been cyclical factors, captured by gross-added value and the cash-flow respectively. Variations in the opportunity cost of holding money, have also contributed to explain M3 developments but more modestly than at the end of the nineties, when its increase contributed negatively to cash accumulation.
    Keywords: keyword, money demand, coinegrated VARs, panel estimation
    JEL: E41 C23 C32 D21
    Date: 2010–11
  21. By: Stephan Freitag
    Abstract: This paper analyses currency options for six Pacific states - Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga and Vanuatu – that issue their own currencies. Empirical estimates indicate that these states already stabilize their currencies against the US dollar because of their large and increasing trade with emerging Asia which denominates its trade in US dollars. Building on the theory of an optimal peg, we argue that the replacement of present currencies by the US dollar would strengthen these countries’ trade. Gravity model estimations indicate that adopting a common external currency would be a major stimulus to Pacific trade. While the Australian dollar has been suggested because of the Pacific’s traditional trade relations with Australia this choice would be the result of a reverse causality bias. A binary choice method is applied to trace endogeneity biases in the Pacific sample. The gains for trade from the adoption of an external currency are lower but remain positive.
    Keywords: Currency regimes, gravity model, binary choice, Pacific.
    JEL: C21 F15 F33
    Date: 2010–10–04
  22. By: Murat Duran; Gulserim Ozcan; Pinar Ozlu; Deren Unalmis
    Date: 2010
  23. By: Yu-chin Chen (University of Washington and Hong Kong Institute for Monetary Research); Kwok Ping Tsang (Virginia Tech and Hong Kong Institute for Monetary Research); Wen Jen Tsay (Academia Sinica)
    Abstract: The "home bias" phenomenon states that empirically, economic agents often under-utilize opportunities beyond their country borders, and it is well-documented in various international pricing and purchase patterns. This bias manifests in the forms of fewer exchanges of goods and net equity-holdings, as well as less arbitrage of price differences across borders than theoretically predicted to be optimal. Our paper documents another form of home bias, where market participants appear to under-weigh information beyond their borders when making currency forecasts. Using monthly data from 1995 to 2010 for seven major exchange rates relative to the US dollar, we show that excess currency returns and the errors in investors' consensus forecasts not only depend on the interest differentials between the pair of countries, but they depend more strongly on interest rates in a broader set of countries. A global short interest differential and a global long interest differential are driving the results.
    Keywords: Survey Data, Excess Currency Returns, Global Shock
    JEL: F31 G12 D84
    Date: 2010–10
  24. By: Timur Hulagu; Devrim Ikizler
    Date: 2010
  25. By: Joshua Aizenman; Hiro Ito; Menzie D. Chinna
    Abstract: This paper extends their previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, they examine the channels through which the trilemma policy configurations affect output volatility. Secondly, they investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, they look into how trilemma configurations have evolved in the aftermath of economic crises in the past. They find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. [ADBI Working Paper 213]
    Keywords: trilemma, policy, performance, economic, finances
    Date: 2010
  26. By: Necati Tekatli
    Date: 2010
  27. By: Yuqing Xing
    Abstract: This paper estimated the pass-through effects of yuan’s exchange rates on prices of the US and Japanese imports from the People’s Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. [ADBI Working Paper 216]
    Keywords: exchange rates, US, Japanese, People’s Republic of China, import,
    Date: 2010

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