nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒12‒04
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation, Price Dispersion and Market Integration through the Lens of a Monetary Search Model By Sascha S. Becker; Dieter Nautz
  2. Central Banks’ Dilemma: Reserve Accumulation, Inflation and Financial Instability By Andreas Steiner
  3. The international monetary system, 1844-1870: Arbitrage, efficiency, liquidity By Stefano Ugolini
  4. The Origins of Foreign Exchange Policy: The National Bank of Belgium and the Quest for Monetary Independence in the 1850s By Stefano Ugolini
  5. "Japan's Deflation and the Bank of Japan's Experience with Non-traditional Monetary Policy" By Kazuo Ueda
  6. Monerary Policy Response to Oil Price Shocks By Natal, Jean-Marc
  7. Monetary and Fiscal Policy Interactions in the Post-war U.S. By Shu-Chun S. Yang; Nora Traum
  8. Inflation Uncertainty, Exchange Rate Depreciation and Volatility: Evidence from Ghana, Mozambique and Tanzania By Hassan Molana; Kwame Osei-Assibey
  9. Fixed Exchange Rate Regimes and Price Stability: Evidence from MENA Countries By Darine Ghanem
  10. L. Walras and C. Menger: Two ways on the path of modern monetary theory By Andrés Alvarez; Vincent Bignon
  11. Modeling nonlinear and heterogeneous dynamic linkages in international monetary markets By Mohamed El Hedi Arouri; Fredj Jawadi; Khuong Nguyen Duc
  12. "Japan's Bubble, America's Bubble and China's Bubble" By Kazuo Ueda
  13. Procyclical Monetary Policy and Governance By Choudhary, M. Ali; Hanif, M. Nadim; Khan, Sajawal; Rehman, Muhammad
  14. The role of monetary policy in matters relating to financial stability: Monetary policy responses adopted during the most recent Financial Crisis By Ojo, Marianne
  15. The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility? By Andreas Steiner
  16. Determinants of the exchange market pressure in the euro-candidate countries By Stavarek, Daniel
  17. The Great Moderation and the Decoupling of Monetary Policy from Long-Term Rates in the U.S. and Germany By Matthew Greenwood-Nimmo; Yongcheol Shin; Till van Treeck
  18. Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis By Matthew Greenwood-Nimmo; Yongcheol Shin
  19. Emerging Floaters: pass-throughs and (some) new commodity currencies By Emanuel Kohlscheen
  20. Text Mining and the Information Content of Bank of Canada Communications By Scott Hendry; Alison Madeley
  21. How Strong is the Case for Dollarization in Central America? An Empirical Analysis of Business Cycles, Credit Market Imperfections and the Exchange Rate By Nannette Lindenberg; Frank Westermann
  22. Modeling the link between US inflation and output: the importance of the uncertainty channel By Conrad, Christian; Karanasos, Menelaos
  23. The Coinages and Monetary Policies of Henry VIII (r. 1509-1547): Contrasts between Defensive and Aggressive Debasements By John H. Munro
  24. A New Index of Currency Mismatch and Systemic Risk By Romain Ranciere; Aaron Tornell; Athanasios Vamvakidis
  25. Crisis and Recovery: Role of the Exchange Rate Regime in Emerging Market Countries By Charalambos G. Tsangarides
  26. Financial system, innovation and regional development: a study on the relationship between liquidity preference and innovation in Brazil By João Prates Romero; Frederico G. Jayme Jr

  1. By: Sascha S. Becker; Dieter Nautz
    Abstract: Monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and, thus, on the level of market integration. For less integrated markets, the inflation-price dispersion nexus is predicted to be asymmetrically V-shaped which results in an optimal inflation rate above zero. For highly integrated markets with low search costs, however, the impact of inflation on price dispersion should only be small. Using price data of the European Union member states, this paper is the first that tests and confirms these predictions of monetary search theory.
    Keywords: Inflation, Relative price variability, Monetary search, Market integration
    JEL: C23 D40 E31 F40
    Date: 2010–11
  2. By: Andreas Steiner (Universitaet Osnabrueck)
    Abstract: Central banks’ international reserves have increased significantly in the recent past. While this accumulation has been widely perceived as precautionary savings to prevent financial crises, rising reserves might also endanger monetary and financial stability. This paper sheds new light on the implications for financial stability and assesses the consequences for monetary policy on theoretical and empirical grounds. Our estimation results show that the accumulation of reserves raises the inflation rate, both on the global and the individual-country level.
    Keywords: International Reserves, Inflation, Panel Data Analysis
    JEL: E31 E58 F31 C23
    Date: 2010–09–20
  3. By: Stefano Ugolini (Graduate Institute of International and Development Studies (Geneva))
    Abstract: This paper analyses the architecture of the international monetary system which preceded the international gold standard (1844-1870). It builds on a newly-created database made up of more than 100,000 weekly observations on exchange rates, interest rates, and bullion prices in the world’s six most important financial centers of the time. Market integration, substitutability of money market instruments, choice of the correct monetary standard reference, and currency liquidity are tested; moreover, an historical analysis is run, with special reference to financial crises. Contrary to received wisdom, the results point to a trend towards increasing multipolarism in the international monetary system before 1870.
    Keywords: International monetary system, financial integration, money markets, bimetallism
    JEL: E42 F31 N20
    Date: 2010–11–23
  4. By: Stefano Ugolini (Graduate Institute of International and Development Studies (Geneva))
    Abstract: Can the central bank of a small open economy be mandated with the maintenance of both fixed exchange rates and monetary independence, and still succeed in the long term? Looking at a pioneering experiment put in place by the National Bank of Belgium, this article shows how foreign exchange policy allowed for persistent violations of the predictions of the trilemma in the 1850s. Success was based on four main ingredients. First, the credibility of the peg was not built through the stabilisation of exchange rates, but through the stabilisation of central bank liquidity (i.e. the ‘margin of manoeuvre’ available for countercyclical action): based on constructive ambiguity, this strategy positively influenced market expectations. Second, the stock of bullion circulating in the country acted as a buffer for central bank reserves. Third, the banking system had a structural liquidity deficit towards the central bank. Fourth, the central bank was big enough to meet the domestic demand of credit and accumulate foreign reserves at the same time. These findings shed new light on the nature of monetary policy and its implementation in the 19th century.
    Keywords: Foreign exchange policy, monetary policy implementation, reserve management
    JEL: E52 E58 F31 N23
    Date: 2010–11–23
  5. By: Kazuo Ueda (Faculty of Economics, University of Tokyo,)
    Abstract: This paper offers a brief summary of non-traditional monetary policy measures adopted by the Bank of Japan (BOJ) during the last two decades, especially the period between 1998-2006, when the so-called Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) were put in place. The paper begins with a typology of policies usable at low interest and inflation rates. They are: strategy (i), managemen t of expectations about future policy rates; strategy (ii), targeted asset purchases; and strategy (iii), QE. Alternatively, QE may be decomposed into a pure attempt to inflate the central bank balance sheet, QE0, purchases of assets in dysfunctional markets, QE1 and purchases of assets to generate portfolio rebalancing, QE2. Strategy (ii), when non-sterilized, is either QE1 or QE2. Using this typology, I review the measures adopted by the BOJ and discuss evidence on the effectiveness of the measures. The broad conclusion is that strategies (i) and (ii) have affected interest rates, while no clear evidence exists so far of the effectiveness of strategy (iii), or QE0. Strategy (ii) has been effective especially in containing risk/liquidity premiums in dysfunctional money markets; that is, QE1 has been effective. The effectiveness of QE2, however, is unclear. The strategies, however, have failed to bring the economy out of the deflation trap so far. I discuss some possible reasons for this and also implications for the current U.S. situation. *Prepared for the policy panel at the 55th Economic Conference of the Federal Reserve Bank of Boston, "Revisiting Monetary Policy in a Low Inflation Environment," October 14-16, 2010.
    Date: 2010–11
  6. By: Natal, Jean-Marc (Swiss National Bank)
    Abstract: How should monetary authorities react to an oil price shock? The New Keynesian literature has concluded that ensuring perfect price stability is optimal. Yet, the contrast between theory and practice is striking: Inflation targeting central banks typically favor a longer run approach to price stability. The first contribution of this paper is to show that because oil cost shares vary with oil prices, policies that perfectly stabilize prices entail large welfare costs, which explains the reluctance of policymakers to enforce them. The policy trade-off faced by monetary authorities is meaningful because oil (energy) is an input to both production and consumption. Welfare-based optimal policies rely on unobservables, which makes them hard to implement and communicate. The second contribution of this paper is thus to analytically derive a simple interest rate rule that mimics the optimal plan in all dimensions but that only depends on observables: core inflation and the growth rates of output and oil prices. It turns out that optimal policy is hard on core inflation but cushions the economy against the real consequences of an oil price shock by reacting strongly to output growth and negatively to oil price changes. Following a Taylor rule or perfectly stabilizing prices during an oil price shock are very costly alternatives.
    Keywords: optimal monetary policy; oil shocks; divine coincidence; simple rules
    JEL: E32 E52 E58
    Date: 2010–09–02
  7. By: Shu-Chun S. Yang; Nora Traum
    Abstract: A New Keynesian model allowing for an active monetary and passive fiscal policy (AMPF) regime and a passive monetary and active fiscal policy (PMAF) regime is fit to various U.S. samples from 1955 to 2007. Data in the pre-Volcker periods strongly prefer an AMPF regime, but the estimation is not very informative about whether the inflation coefficient in the interest rate rule exceeds one in pre-Volcker samples. Also, whether a government spending increase yields positive consumption in a PMAF regime depends on price stickiness. An income tax cut can yield a negative labor response if monetary policy aggressively stabilizes output.
    Keywords: Data analysis , Economic models , Fiscal policy , Monetary policy , United States ,
    Date: 2010–11–01
  8. By: Hassan Molana; Kwame Osei-Assibey
    Abstract: While flexible exchange rates facilitate stabilisation, exchange rate fluctuations can cause real volatility. This gives policy importance to the causal relationship between exchange rate depreciation and its volatility. An exchange rate may be expected to become more volatile when the underlying currency loses value. We conjecture that a reverse causation, which further weakens the currency, may be mitigated by price stability. Data from Ghana, Mozambique and Tanzania support this: depreciation makes exchange rate more volatile for all but volatility does not causes depreciation in Tanzania which has enjoyed a more stable inflation despite all countries adopting similar macro-policies since early 1990s.
    Keywords: exchange rate, depreciation, volatility, causality, GARCH, VAR
    JEL: E3 F3 F4
    Date: 2010–10
  9. By: Darine Ghanem
    Abstract: In this study, we empirically test whether pegged regime was successful in achieving and maintaining consistently low inflation rates in 17 MENA countries over the period of 1980-2007. Taking into account unobserved country heterogeneity, as well as, the endogeneity of exchange rate regimes we estimate a dynamic panel data model of the effects of exchange rate regimes on inflation using officially announced exchange rate regimes in addition to de facto regimes in place. Our findings suggest a strong link between the choice of the exchange rate regime and inflation performance.[...]
    Date: 2010–11
  10. By: Andrés Alvarez; Vincent Bignon
    Abstract: This paper shows that modern monetary theory can be better understood through the differences between Menger and Walras. Since the 1980s attempts to establish coherent microfoundations for monetary exchange have brought Menger's theory of the origin of money to the forefront and sent walrasian methods to the backstage. However, during the first decade of the XXIth century models inspired on mengerian monetary theory, mainly represented by the search monetary approach, are trying to reintroduce neowalrasian elements. This paper aims at clarifying the main theoretical implications of this movement, through an analysis of the Menger‐Walras divide on money. This divide allows us to show new proof of the deep theoretical differences among the so‐called marginalist authors and of the richness of this historical period as a source for modern economics.
    Date: 2010
  11. By: Mohamed El Hedi Arouri (LEO, University of Orleans and EDHEC Business School Rue de Blois - BP 6739, 45067 Orléans Cedex 2, France); Fredj Jawadi (Amiens School of Management and EconomiX-CNRS 18, place Saint Michel, 80000 Amiens cedex, France); Khuong Nguyen Duc (Professor of Finance, ISC Paris School of Management 22 Boulevard du Fort de Vaux, 75848 Paris cedex 17, France)
    Abstract: In this paper we examine the dynamic linkages of international monetary markets over the 2004 - 2009 period using daily short-term interbank interest rates of three of the most advanced countries (France, United Kingdom and United States). Empirical results from vector error-correction models (VECM) and smooth transition error-correction models (STECM) indicate strong evidence of nonlinear and heterogeneous causalities between the three interest rates considered. We also find that exogenous shifts in the US short-term interest rate led those in France and in the UK within a horizon of one to two days. Finally, the national interest rate nexus appears to nonlinearly converge towards a steady state or a common long-run equilibrium because it is subject to structural change beyond a certain interest rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and US Fed) since the behavior of short-term interest rates can be viewed as an indicator of the degree of central banks’ policy interdependence.
    Keywords: international monetary market relationships, short-term interest rates, VECMs and STECMs
    JEL: B22 C52 E63
    Date: 2010
  12. 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
  13. By: Choudhary, M. Ali; Hanif, M. Nadim; Khan, Sajawal; Rehman, Muhammad
    Abstract: Weak governance adversely affects firm’s net worth and consequently the value of its collateral. This negative impact on the collateral reduces the external credit available for importing inputs constraining potential output. As a result, a stronger procyclical monetary policy stance is adopted for protecting the exchange rate and hence arresting the degradation in the collateral constraint.
    Keywords: Collateral Constraints; Governance; Monetary Policy
    JEL: F4 O1 E5
    Date: 2010–11
  14. By: Ojo, Marianne
    Abstract: As well as providing an analysis of how financial stability could be sustained through the appropriate targeting of policy instruments at debt gearing, this paper aims to provide an overview of the respective roles which governments and shareholders could assume in deterring financial institutions from overly relying on certain policy measures (role of governments) and in reducing tax burdens on tax payers (role of shareholders). The duration of the recent Crisis has also witnessed the introduction of mechanisms aimed at bailing- in financial institutions – rather than merely bailing them out. Even though monetary policy measures should ultimately be targeted at macro level, the respective roles assumed by governments and shareholders at micro level in facilitating the phasing out of certain monetary policy measures and assuming responsibility as the first resort during the impending collapse of a financial institution, are also of vital importance. This paper also aims to consider additional measures which could be implemented as a means of mitigating the number of financial instititions which could become overly dependent on monetary policy and liquidity sustenance measures provided during deteriorating financial conditions. Greater focus on strategies aimed at mitigating the number of financial institutions which could become overly dependent (bail-in strategies which could address bail outs) – rather than simply focussing on measures and exit strategies aimed at weaning such institutions after assistance has been granted to these financial institutions, could prove to be more effective. A brief comparative analysis of the monetary policy response implemented in the Euro area during the recent Financial Crisis (against that which was implemented in the United States), will also be provided in this paper.
    Keywords: monetary policy; central banks; financial crises; bail in; bail outs; liquidity; ECB; Federal Reserve; interest rates; regulation; stability; capital; Basel III
    JEL: K2 E32 E58 E52
    Date: 2010–11–24
  15. By: Andreas Steiner (Universitaet Osnabrueck)
    Abstract: Foreign exchange holdings by central banks have increased significantly in the recent past. This article explains this development as a result of the liberalization of international capital markets. First, central banks accumulate reserves in order to protect the economy from potentially detrimental effects of sudden stops of capital flows and flow reversals. Second, central banks use the accumulation of reserves as a substitute for capital controls. Changes in the level of reserves are a form to manage net capital inflows. They permit the central bank to preserve some leeway for an independent monetary and financial policy despite the classic policy trilemma. The empirical analysis of a large panel data set supports the hypothesis that the accumulation of reserves is the consequence of a “fear of capital mobility” suffered by central banks.
    Keywords: International Reserves, Capital Mobility, Macroeconomic Trilemma
    JEL: E58 F31
    Date: 2010–10–25
  16. By: Stavarek, Daniel
    Abstract: In the paper we choose the correct model specification for eight new EU Member States (NMS) to estimate the exchange market pressure (EMP) over the period 1995-2009. The results suggest that growth of domestic credit and money multiplier had a significantly positive impact on EMP. Furthermore, EMP in many NMS was determined by foreign disturbances, namely euro area’s money supply, foreign capital inflow and interest rate differential. EMP in most of NMS with flexible exchange rate regime was primarily absorbed by changes in international reserves. This forms, along with fundamentally stable EMP development in recent years, a solid basis for potential fulfilment of the exchange rate stability convergence criterion.
    Keywords: exchange market pressure; Girton-Roper model; determinants; new EU Member States
    JEL: C32 F31 F36
    Date: 2010–11–22
  17. By: Matthew Greenwood-Nimmo (Leeds University Business School); Yongcheol Shin (Leeds University Business School); Till van Treeck (Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation)
    Abstract: We apply the asymmetric ARDL model advanced by Shin, Yu and Greenwood-Nimmo (2009) to the analysis of the patterns of pass-through from policy-controlled interest rates to a variety of longer-term rates in the U.S. and Germany. Our results reveal three main phenomena. Firstly, while the e®ect of a rate hike is largely con¯ned to the short-run, the e®ect of a rate cut is muted in the short-run but non-negligible at longer horizons. We characterise this pattern as a switch from short-run positive asymmetry to long-run negative asymmetry, a pattern that potentially reconciles the con°icting empirical evidence and theoretical conjectures that dominate the existing literature. Secondly, our results con¯rm that there has been a decoupling of long-term rates from policy-controlled rates during the period of the Great Moderation in both the U.S. and Germany, albeit in a complex and nonlinear way. Thirdly, by replicating Taylor's (2007) counterfactual exercise using our asymmetric models, we ¯nd that Taylor over-estimates the importance of policy-controlled rates for the broader economy. Equivalently, our results do not support Greenspan's belief that the decoupling is a recent phenomenon. In light of our findings, we conclude that a narrow focus on the interest rate as the sole instrument of monetary policy is likely to be sub-optimal under current institutional arrangements.
    Keywords: Asymmetric ARDL Model and Dynamic Multipliers, Great Moderation, Asymmetric Interest Rate Pass-through
    JEL: C22 E43 E52
    Date: 2010
  18. By: Matthew Greenwood-Nimmo (Leeds University Business School); Yongcheol Shin (Leeds University Business School)
    Abstract: The existing empirical literature on Taylor-type interest rate rules has failed to achieve a robust consensus. Indeed, the relatively common finding that the Taylor principle does not hold has fueled a degree of controversy in the field. We attribute these mixed estimation results to a raft of empirical issues from which many existing studies suffer, including bias, inconsistency, endogeneity and a failure to adequately account for the combination of persistent and stationary variables. We propose a new method of combining I(0) and I(1) series in a system setting based on the long-run structural approach of Garratt, Lee, Pesaran and Shin (2006). The application of this method to a long sample of US data provides modest support for the operation of a Taylor-type rule, albeit with considerable inertia. We argue that estimation across rolling windows may better reflect shifts in the underlying preferences of the monetary policymakers at the Federal Reserve. Such rolling estimation provides substantial evidence that the inflation and output preferences of the Fed have varied through time, presumably reflecting the prevailing economic and political conditions, its chairmanship, and the composition of the Federal Open Market Committee. Our most significant finding is that the Taylor Principle was robustly upheld under Volcker, often upheld pre-Volcker but rarely observed post-Volcker over any horizon.
    Keywords: System Estimation with Mixed I(0) and I(1) Variables, Long-Run Structural Modelling, Rolling Estimation, Taylor Rule
    JEL: C13 C51 E58 N10
    Date: 2010
  19. By: Emanuel Kohlscheen
    Abstract: In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices.
    Date: 2010–11
  20. By: Scott Hendry; Alison Madeley
    Abstract: This paper uses Latent Semantic Analysis to extract information from Bank of Canada communication statements and investigates what type of information affects returns and volatility in short-term as well as long-term interest rate markets over the 2002-2008 period. Discussions about geopolitical risk and other external shocks, major domestic shocks (SARS and BSE), the balance of risks to the economic projection, and various forward looking statements are found to significantly affect market returns and volatility, especially for short-term markets. This effect is over and above that from the information contained in any policy interest rate surprise.
    Keywords: Financial markets; Monetary policy implementation
    JEL: G14 E58
    Date: 2010
  21. By: Nannette Lindenberg (Universitaet Osnabrueck); Frank Westermann (Universitaet Osnabrueck)
    Abstract: In this paper, we contrast two different views in the debate on official dollarization. The Mundell (1961) framework of optimal currency areas and a model on boom-bust cycles, by Schneider and Tornell (2004), who take account of credit market imperfections prevalent in middle income countries. We highlight that the role of the exchange rate is strikingly different in the two models. While in the Mundell framework the exchange rate is expected to smooth the business cycle, the other model predicts that the exchange rate plays an amplifying role. We empirically evaluate both models for eight highly dollarized Central American economies, and find that the main benefit of official dollarization derives from avoiding a mismatch between foreign currency liabilities and domestic revenues, as well as the boom-bust episodes that are likely to follow from it. Using a new method of Cubadda (1999, 2007), we furthermore test for cyclical comovement and reject the hypothesis that the countries form an optimal currency area with the United States according to the Mundell definition.
    Keywords: dollarization, real exchange rate, business cycle comovement, serial correlation, common feature, boom-bust cycles, credit market imperfections, Central America
    JEL: E32 E52 F36 O54
    Date: 2010–08–05
  22. By: Conrad, Christian; Karanasos, Menelaos
    Abstract: This paper employs an augmented version of the UECCC GARCH specification proposed in Conrad and Karanasos (2010) which allows for lagged in-mean effects, level effects as well as asymmetries in the conditional variances. In this unified framework we examine the twelve potential intertemporal relationships between inflation, growth and their respective uncertainties using US data. We find that high inflation is detrimental to output growth both directly and indirectly via the nominal uncertainty. Output growth boosts inflation but mainly indirectly through a reduction in real uncertainty. Our findings highlight that macroeconomic performance affects nominal and real uncertainty in many ways and that the bidirectional relation between inflation and growth works to a large extend indirectly via the uncertainty channel.
    Keywords: Bivariate GARCH process; volatility feedback; inflation uncertainty; output variability
    JEL: E31 C51 C32
    Date: 2010–11–26
  23. By: John H. Munro
    Abstract: The renown or infamy of Henry VIII’s Great Debasement (1542 - 1553), which the government of his successor, Edward VI, continued for another six years after his death, has unfairly obscured his earlier and far more modest coinage changes and public-spirited monetary policies. Furthermore, despite the renown of and the ample literature devoted to the Great Debasement this unusual episode in early-modern monetary history still lacks a fully accurate exposition and explanation. For example, did it begin in 1542 or 1544? How did it work, and why and how did it prove to be successful or ‘profitable’. This study seeks to provide such an accurate exposition and explanation, and thus to provide a proper contrast with Henry VIII’s earlier coinage changes and monetary policies – while also providing a brief comparison with those of Edward IV, whose debasements of 1464-65 were the last undertaken before those of Henry VIII. The subject of coinage debasements remains an arcane subject, ill understood not only by students of European history but also by many of the historians and economists who have published on topics in monetary history. A major problem is that historians have not clearly asked one fundamental question: were debasements fundamentally aggressive or defensive in nature? The second question to be asked is the nature of the goals sought from debasement: were they fundamentally monetary or fiscal? The fiscal aspect of coinage debasements is derived from the fact that in pre-modern western Europe minting was a princely or government monopoly from which the prince or government derived a fee known as seigniorage. The central thesis of this study is that ‘aggressive’ coinage debasements were undertaken primarily as fiscal policies to increase mint profits: profits from an increased mint output and from a increased seigniorage rate. In most, of not all cases, the fiscal motive was to finance warfare, even if indirectly. As this study shows, aggressive coinage debasements worked best if the offending mint could lure coinage and bullion from not only domestic but also foreign sources. Since neighbouring lands were thus affected and afflicted by such coinage debasements, their rulers were so often forced to respond with retaliatory if purely defensive coinage debasements, to protect their own mints and also their domestic money supplies from the effects of Gresham’s Law. Indeed, some variant of Gresham’s Law can be found as an excuse for coinage debasements in western Europe, especially from the fourteenth to sixteenth centuries – so that it is often difficult to tell from an ordinance whether a debasement is aggressive or defensive. The other defensive aspect of such coinage debasement was the consequence of long-term ‘wear and tear’, ‘clipping’, ‘sweating’, counterfeiting, and other factors that over time diminished the mean precious metal contents of the circulating coinage. The result was that legal-tender coins lost their agio over bullion – an agio justified by circulating coins at ‘tale’, rather than measuring them, thus saving on transaction costs. The loss of that agio prevented bullion from being delivered to the mints; and the consequences were another variant of Gresham’s Law (as examined in this paper). In sum this paper explains why Henry VIII’s two related coinage debasements of August and November 1526 were purely defensive, and as such monetary policies, while the Great Debasement was an aggressive fiscal policy, and one highly effective in financing Henry VIII’s wars with France and Scotland. The Great Debasement was not, however, medieval England’s only aggressive debasement, for the same can be shown of Edward IV’s debasements of 1464-65. The proof for these assertions lies in the mint accounts and the evidence for the mintage fees: low with purely defensive debasements; high with aggressive debasements (a factor that would not have been true if aggressive debasements were monetary in their motivations). Finally, this study also presents proof that the extent of inflation during the Great Debasement (1542-1553) was less than that anticipated by monetary formulae, so that inflation did not nullify the merchants’ gains from spending debased coins (a reason some have cited to challenge the logic and utility of medieval coinage debasements).
    Keywords: coinage debasements, gold, silver, bullion, bullionist policies, mints, mint outputs, seigniorage, brassage, inflation, deflation, fiscal policies, warfare, taxation
    JEL: E E41 E42 E51 E52 E62 F33 H11 H27 N13 N23 N43
    Date: 2010–11–26
  24. By: Romain Ranciere; Aaron Tornell; Athanasios Vamvakidis
    Abstract: This paper constructs a new measure of currency mismatch in the banking sector that controls for bank lending to unhedged borrowers. This measure explicitly takes into account the indirect exchange rate risk that banks undertake when they lend to borrowers that will not be able to repay in the event of a sharp depreciation. Such systemic risk taking is not captured by indicators that are based only on banks’ balance sheet data. The new measure is constructed for 10 emerging European economies and for a broader sample that includes 19 additional emerging economies, for the period 1998 - 2008. Comparisons with previous currency mismatch measures that do not adjust for unhedged foreign currency borrowing illustrate the advantages of the new approach. In particular, the new measure flagged the indirect currency mismatch vulnerabilities that were building up in a number of emerging economies before the recent global crisis. Measuring currency mismatch more accurately can help country authorities in their efforts to address vulnerabilities at the right time, avoiding hurting growth prospects.
    Keywords: Banking sector , Cross country analysis , Currencies , Economic models , Emerging markets , Europe , External borrowing , Financial crisis , Fiscal risk , Loans , Sovereign debt , Time series ,
    Date: 2010–11–17
  25. By: Charalambos G. Tsangarides
    Abstract: This paper examines the role of the exchange rate regime in explaining how emerging market economies fared in the recent global financial crisis, particularly in terms of output losses and growth resilience. After controlling for regime switches during the crisis, using alternative definitions for pegs, and taking account of other likely determinants, we find that the growth performance for pegs was not different from that of floats during the crisis. For the recovery period 2010-11, pegs appear to be faring worse, with growth recovering more slowly than floats. These results suggest an asymmetric effect of the regime during and recovering from the crisis. We also find that proxies of the trade and financial channels are important determinants of growth performance during the crisis, while only the trade channel appears important for the recovery thus far.
    Keywords: Currency pegs , Economic growth , Economic recovery , Emerging markets , Exchange rate regimes , Financial crisis , Floating exchange rates , Global Financial Crisis 2008-2009 ,
    Date: 2010–10–26
  26. By: João Prates Romero (Cedeplar-UFMG); Frederico G. Jayme Jr (Cedeplar-UFMG)
    Abstract: This paper discusses and assesses the features of the Brazilian Financial System, as well as the impacts of Liquidity Preference on Regional Development in Brazil. In the post-Keynesian literature, money is considered endogenous to the economic system, introduced in the economic activity through the credit provided by banks. Taken as non-neutral, banks are economic agents which can present lower or higher liquidity preference. Because of that, banks are also particularly important to the development process. Precisely, we tested the influence of credit and the role of banks in regional development. We estimate a panel across states in Brazil in order to test the impact of liquidity preference and other financial variables on Brazilian states’ number of patents, aiming at testing the importance of the bank system to technological progress and regional development. Conclusions confirm both hypotheses.
    Keywords: Monetary System, National Innovation System, Credit, Brazil
    JEL: R10 G21 O30
    Date: 2010–11

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.