nep-mon New Economics Papers
on Monetary Economics
Issue of 2010‒12‒18
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. "US 'Quantitative Easing' Is Fracturing the Global Economy" By Michael Hudson
  2. Assessing the Performance of Inflation Targeting in East Asian economies By Hiroyuki Taguchi; Chizuru Kato
  3. Inflation Dynamics and Food Prices in Ethiopia By Durevall, Dick; Loening, Josef L.; Birru, Yohannes A.
  4. Why don't people pay attention? Endogenous Sticky Information in a DSGE Model By Lena Dräger
  5. The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter? By Lucotte, Yannick
  6. Central banks: between internationalisation and domestic political control By Harold James
  7. The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914-39 By Barry Eichengreen; Marc Flandreau
  8. Central banks and competition authorities: institutional comparisons and new concerns By John Vickers
  9. Central banks' macroeconomic projections and learning By Giuseppe Ferrero; Alessandro Secchi
  10. Minimising monetary policy By Peter Stella
  11. Banking crises and the international monetary system in the Great Depression and now By Richhild Moessner; William A Allen
  12. Policymakers' Votes and Predictability of Monetary Policy By Sirchenko, Andrei
  13. Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States By Basher, Syed Abul; Elsamadisy, Elsayed Mousa
  14. How Are Inflation Targets Set? By Roman Horvath; Jakub Mateju
  15. Quantitative Easing, Credibility and the Time-Varying Dynamics of the Term Structure of Interest rate in Japan By Yusho Kagraoka; Zakaria Moussa
  16. Liability dollarization and fear of floating By Nguyen, Quoc Hung
  17. Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work? By Jan Willem van den End
  18. On the Sustainability of a Monetary Union under External Shocks: a Theoretical Result and Its Application to the Gulf Countries By Etienne Farvaque; Norimichi Matsueda
  19. Time Inconsistency and Free-Riding in a Monetary Union By V. V. Chari; Patrick J. Kehoe
  20. The changing role of central banks By Charles Goodhart
  21. Convergence to monetary equilibrium: computational simulation of a trading post economy with transaction costs By Hu, Xue; Whang, Yu-Jung; Zhang, Qiaoxi
  22. Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab By Wasim Shahid Malik; Ahsan ul HaqSatti; Ghulam Saghir
  23. Real-time Inflation Forecast Densities from Ensemble Phillips Curves By Anthony Garratt; James Mitchell; Shaun P. Vahey; Elizabeth C. Wakerly
  24. A Conditionally Heteroskedastic Global Inflation Model By Leonardo Morales-Arias; Guilherme V. Moura
  25. European corporate bond market integration: lessons from EMU By Avadanei, Andreea
  26. Error-Correction Based Panel Estimates of the Demand for Money of Selected Asian Countries with the Extreme Bounds Analysis By Rao, B. Bhaskara; Kumar, Saten
  27. Modelling the Relationship between Whole Sale Price and Consumer Price Indices: Cointegration and Causality Analysis for India By Tiwari, Aviral; Shahbaz, Muhammad
  28. Choice of Collateral Currency By Masaaki Fujii; Akihiko Takahashi
  29. Impact of Financial Liberalisation and Deregulation on Banking Sector in Pakistan By Kalbe Abbas; Manzoor Hussain Malik
  30. Combining the forecasts in the ECB survey of professional forecasters: can anything beat the simple average? By Véronique Genre; Geoff Kenny; Aidan Meyler; Allan Timmermann

  1. By: Michael Hudson
    Abstract: The Federal Reserve's quantitative easing is presented as injecting $600 billion into "the economy." But instead of getting banks lending to Americans again—households and firms—the money is going abroad, through arbitrage interest-rate speculation, currency speculation, and capital flight. No wonder foreign economies are protesting, as their currencies are being pushed up.
    Keywords: Exchange Rates; Asset-price Inflation; Monetary Policy
    JEL: E50 E58 F34 F42 G12
    Date: 2010–11
  2. By: Hiroyuki Taguchi; Chizuru Kato (Policy Research Institute)
    Abstract: This paper aims at assessing the performance of the inflation targeting framework from the quantitative perspective of the money and inflation relationship, focusing on the four East Asian economies, i.e. Korea, Indonesia, Thailand and the Philippines, who adopted the inflation targeting framework soon after the 1997-98 Asian currency crisis. Our estimation results told us that the inflation targeting framework in the sample economies, except for the Philippines, has functioned well as an anchor to curb inflation, in the sense that the framework speeds up price adjustment against money supply compared with their previous regime of pegged exchange rates. We interpret the speeding-up of price adjustment under inflation targeting framework in such a way that the framework may have been able to curb inflation through stabilizing inflationary expectations. We also found that the well-functioning inflation targeting framework was consistent with another estimation outcome: that of enhanced monetary autonomy under the post-crisis floating exchange rate regime.
    Keywords: inflation targeting framework, East Asian emerging market economy, money-inflation relationship, co-integration test, error correction estimation
    JEL: E52 F33 C23
    Date: 2010
  3. By: Durevall, Dick (Department of Economics, School of Business, Economics and Law, Göteborg University); Loening, Josef L. (World Bank); Birru, Yohannes A. (National Bank of Ethiopia)
    Abstract: During the global food crisis, Ethiopia experienced an unprecedented increase in inflation, among the highest in Africa. Using monthly data over the past decade, we estimate models of inflation to identify the importance of the factors contributing to CPI inflation and three of its major components: cereal prices, food prices, and non-food prices. Our main finding is that movements in international food and goods prices, measured in domestic currency, determined the long-run evolution of domestic prices. In the short run, agricultural supply shocks affected food inflation, causing large deviations from long-run price trends. Monetary policy seems to have accommodated price shocks, but money supply growth affected short-run non-food price inflation. Our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices, world food prices and domestic agricultural production should be considered. Omitting these factors can lead to biased results and misguide policy decisions.<p>
    Keywords: Ethiopia; Exchange rate; Food prices; Inflation; Money demand
    JEL: E31 E37 O55 Q17
    Date: 2010–12–09
  4. By: Lena Dräger (University of Hamburg, Deutchland, and KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Building on the models of sticky information, we endogenize the probability of obtaining new information by introducing a switching mechanism allowing agents to choose between costly rational expectations and costless expectations under sticky information. Thereby, the share of agents with rational expectations becomes endogenous and time-varying. While central results of sticky information models are retained, we find that the share of rational expectations is positively correlated with the variance of the variable forecasted, providing a link to models of near-rationality. Output expectations in our model are generally more rational than inflation expectations, but the share of rational inflation expectations increases with a rising variance of the interest rate. With regard to optimal monetary policy, we find that the Taylor principle provides a necessary and sufficient condition for the determinacy of the model. However, output and inflation stability are optimized if the central bank does not react too strongly to inflation, but rather also targets the output gap with a relatively large coefficient in the Taylor rule.
    Keywords: Endogenous sticky information, heterogeneous expectations, DSGE models
    JEL: E31 E52 E61
    Date: 2010–07
  5. By: Lucotte, Yannick
    Abstract: Over the last decade, a growing number of emerging countries has adopted inflation targeting as monetary policy framework. In a recent paper, Freedman and Laxton (2009) ask the question “Why Inflation Targeting?”. This paper empirically investigates this question by analyzing a large set of institutional and political factors potentially associated with a country’s choice of adopting IT. Using panel data on a sample of thirty inflation targeting and non-inflation emerging countries, for the period 1980-2006, our results suggest that central bank independence, policy-makers’ incentives, and characteristics of political system play an important role in the choice of IT, while the level of financial development and political stability do not seem to matter. Empirical findings are confirmed by extensive robustness tests.
    Keywords: Inflation targeting; central bank independence; financial development; political institutions; emerging countries
    JEL: E58 E52
    Date: 2010–11
  6. By: Harold James
    Abstract: The paper examines the exercise, the efficiency, and the legitimacy of the monetary policy-making process. The goal of central bank autonomy in recent times is the outcome of a demand for price stability. The realisation of autonomy is also a consequence of the fragmentation of national decision making, in federal systems but also in regional and international monetary arrangements. Economic and financial crisis changes the political economy, and produces a transition from seeing the central bank as producing a general or universalisable good (price stability) to interpreting monetary policy as fundamentally a tool for redistributive or factional policies. The latter will only work in the framework of national policy.
    Keywords: central bank independence, central bank governance, monetary policy financial crisis
    Date: 2010–12
  7. By: Barry Eichengreen; Marc Flandreau
    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: foreign exchange reserves, network externalities, path dependency, money markets
    Date: 2010–12
  8. By: John Vickers
    Abstract: The establishment of independent authorities for monetary policy and for competition policy was part of the institutional consensus of the Great Moderation. The paper contrasts how policy has operated in the two spheres, especially as regards the role of law. It then discusses the application of competition policy to banks before and during the crisis, and relationships between competition and financial stability. Finally, the paper considers whether the financial crisis - which has led, at least temporarily, to unorthodox and less independent monetary and competition policies - has undermined the long-term case for independence. The conclusion is that it has not. While regulation of the financial system clearly requires fundamental reform, sound money and markets free from threats to competition remain fundamental to long-run prosperity; those ends are best pursued by focused and independent monetary and competition policies.
    Keywords: central bank independence, monetary policy, competition law, merger policy, financial stability, banks
    Date: 2010–12
  9. By: Giuseppe Ferrero (Bank of Italy, Economics and International Relations); Alessandro Secchi (Bank of Italy, Economics and International Relations)
    Abstract: We study the impact of the publication of central banks&#x2019; macroeconomic projections on the dynamic properties of an economy where (i) private agents have incomplete information and form their expectations using recursive learning algorithms; (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level; and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. The set of macroeconomic projections released by the central bank crucially affects the results in terms of stability of the equilibrium and speed of convergence of the learning process. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than when there is no announcement.
    Keywords: Monetary policy, Transparency, Interest rates, Learning, Speed of convergence
    JEL: E58 E52 E43 D83
    Date: 2010–12
  10. By: Peter Stella
    Abstract: The response of leading central banks to the current financial crisis has raised the magnitude of the financial and governance risks they face. An evaluation of the financial strength of a number of those banks suggests that they are in little danger of being forced by financial losses to alter their policies. Governance risks cannot be dismissed so lightly. In engaging extensively in unorthodox policies - bearing similarities to fiscal policy - a number of central banks have risked a critical examination of their governance structures and thereby potentially jeopardised their monetary policy independence. In order to forestall this risk to monetary policy, it is argued that unconventional policies be placed under a separate governance structure that would allow them to be brought under greater political control and accountability while preserving the operational independence of monetary policy.
    Keywords: monetary policy, central banking
    Date: 2010–12
  11. By: Richhild Moessner; William A Allen
    Abstract: We compare the banking crises in 2008-09 and in the Great Depression, and analyse differences in the policy response to the two crises in light of the prevailing international monetary systems. The scale of the 2008-09 banking crisis, as measured by falls in international short-term indebtedness and total bank deposits, was smaller than that of 1931. However, central bank liquidity provision was larger in 2008-09 than in 1931, when it had been constrained in many countries by the gold standard. Liquidity shortages destroyed the international monetary system in 1931. By contrast, central bank liquidity could be, and was, provided much more freely in the flexible exchange rate environment of 2008-9. The amount of liquidity provided was 5 ½ - 7 ½ times as much as in 1931. This forestalled a general loss of confidence in the banking system. Drawing on historical experience, central banks, led by the Federal Reserve, established swap facilities quickly and flexibly to provide international liquidity, in some cases setting no upper limit to the amount that could be borrowed.
    Keywords: banking crisis, international monetary system, Great Depression, central bank liquidity
    Date: 2010–12
  12. By: Sirchenko, Andrei
    Abstract: This paper provides empirical evidence in favor of prompter and more detailed release of Monetary Policy Council's voting records, not published by National Bank of Poland before subsequent MPC meeting. The study shows that voting records, if they were available, could improve predictability of upcoming policy decisions. They reveal strong and robust predictive content as a supplementary factor after controlling for MPC policy bias and responses to inflation, real activity, exchange rates and financial market information. The voting patterns contain information not embedded in the market expectations of future policy, as revealed by the spreads and moves in the market interest rates, and even explicit forecasts of the next policy decision, made by market analysts in Reuters surveys before each policymaking meeting. Moreover, the direction of dissent explains the direction of private sector forecast bias. These findings are based on real-time data and voting patterns only, without knowledge of policymakers' names attached to each vote
    Keywords: monetary policy, interest rate, predictability, voting, real-time data
    Date: 2010–12–05
  13. By: Basher, Syed Abul; Elsamadisy, Elsayed Mousa
    Abstract: Applying nonstationary panel data econometric methods, this paper analyzes the major sources and transmission of inflation in the Gulf Cooperation Council (GCC) countries over the 1980-2008 period. We argue that, in GCC countries, money is essentially demand determined, so that the high collinearity between money and aggregate demand indicators such as non-hydrocarbon output is expected and should be dealt with accordingly. Several important results emerge from the analysis. First, the money supply stands out as a significant determinant of inflation both in short- and long-run. Both foreign prices and the nominal effective exchange rate are shown to be more successful in explaining inflation in the long-run than the short-run. The half-life of the speed of adjustment reveals that it takes about 2.9 years for 50% of a shock to the long-run equilibrium to dissipate. An implication of our results is the case it makes for more sovereign monetary policies in GCC countries.
    Keywords: Inflation; Monetary policy; Fiscal policy; Exchange rates; Oil price; Panel data.
    JEL: C32 E31 H30 E50 C33
    Date: 2010–12–09
  14. By: Roman Horvath; Jakub Mateju
    Abstract: This paper aims to contribute to a better understanding on how inflation targets are set. For this reason, we first gather evidence from official central bank and government publications and from a questionnaire sent to central banks on how inflation targets are set; we then estimate the determinants of the level of inflation target in 19 inflation targeting countries using unbalanced panel interval regressions (to deal with the issue that targets are typically set as a range rather than as a point). Inflation targets are found to reflect macroeconomic fundamentals. Higher level as well as higher variability of inflation are associated with higher target. The setting of the inflation target is also found to have an important international dimension, as higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also suggest that the larger width of inflation target is set in a more volatile macroeconomic environment. We find that central bank credibility is negatively associated with the level of inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter even in less independent central banks.
    Keywords: inflation targeting; central bank; inflation; credibility; independence;
    JEL: E31 E42 E52 E58
    Date: 2010–10
  15. By: Yusho Kagraoka (Musashi University - Musashi University); Zakaria Moussa (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: A key issue in current research about quantitative easing monetary policy (QEMP) is the ability of this strategy to impact the term structure of interest rates. Using a dynamic model for the yield curve with time-varying-parameters to the Japanese data, we provide three insights. First, the expectations hypothesis of the term structure of interest rates is generally supported even during the QEMP period. Second, the estimation results reveal that the contribution of macroeconomic variables on the variation of the yield curve is relatively small, especially during the QEMP period. As for the feed-back effect, the yield curve factors contribute only marginally to inflation variation. However, they account for more relevant part of output gap dynamics. Third, the monetary policy shock has a significant effect on yield curve level factor only during the high interest rates periods. However, the decline in the level factor during the QEMP period, while insignificant, indicates a strengthening credibility of the Bank of Japan and thus the effectiveness of its policy.
    Keywords: Quantitative Easing Policy; Macro-finance model; Time-varying-parameter VAR; Japan; Expectation channel
    Date: 2010–12–05
  16. By: Nguyen, Quoc Hung
    Abstract: This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.
    Keywords: Developing countries, Foreign exchange, Exchange control, Liability Dollarization, Fear of Floating, Imported Goods
    JEL: F31
    Date: 2010–08
  17. By: Jan Willem van den End
    Abstract: This paper presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenising liquidity risk. The model shows how banks’ reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations.
    Keywords: banking; financial stability; stress-tests; liquidity risk
    JEL: C15 E44 G21 G32
    Date: 2010–12
  18. By: Etienne Farvaque (Faculty of Economic and Social Sciences, University of Lille I); Norimichi Matsueda (School of Economics, Kwansei Gakuin University)
    Abstract: External shocks, be they political or economic, can pose a significant threat to the sustainability of a monetary union. This paper focuses on the openness of a monetary union, and examines how the degrees and characteristics of the sensitivities of its member nations towards external shocks affect the sustainability of the commitment which each of its members made when joining the union. Furthermore, we discuss the sustainability of the prospective monetary union among the Gulf Cooperation Council countries in the light of obtained insights.
    Keywords: Monetary Union, Optimum Currency Areas, External Shocks, Gulf Cooperation Council
    JEL: E58 E61 F33
    Date: 2010–12
  19. By: V. V. Chari; Patrick J. Kehoe
    Date: 2010–12–09
  20. By: Charles Goodhart
    Abstract: Although Central Banks have pursued the same objectives throughout their existence, primarily price and financial stability, the interpretation of their role in doing so has varied. We identify three stable epochs, when such interpretations had stabilised, ie 1. The Victorian era, 1840s to 1914; 2. The decades of government control, 1930s to 1960s; 3. The triumph of the markets, 1980s to 2007. Each epoch was followed by a confused inter-regnum, searching for a new consensual blueprint. The final such epoch concluded with a crisis, when it became apparent that macro-economic stability, the Great Moderation, plus (efficient) markets could not guarantee financial stability. So the search is now on for additional macro-prudential (counter-cyclical) instruments. The use of such instruments will need to be associated with controlled variations in systemic liquidity, and in the balance sheet of the Central Bank. Such control over its own balance sheet is the core, central function of any Central Bank, even more so than its role in setting short-term interest rates, which latter could be delegated. We end by surveying how relationships between Central Banks and governments may change over the next period.
    Keywords: central banks, financial stability, financial regulation, bank taxes
    Date: 2010–12
  21. By: Hu, Xue; Whang, Yu-Jung; Zhang, Qiaoxi
    Abstract: In the classic Arrow-Debreu model, the existence of money is not accommodated. However, using trading post market segmentation and requiring budget balance in each pair-wise transaction the model can converge to monetary equilibrium. Uniqueness of the common medium of exchange (commodity money) follows from scale economy in transaction costs. Also, this paper shows that existence and convergence to monetary equilibrium are totally different concept. In Full Double Coincidence of Wants situation, where previous market information helps households judging which good has highest saleableness, convergence takes place more easily than in Absence of Double Coincidence of Wants situation. This paper investigates the emergence of commodity money as the result of a tatonnement adjustment in a trading post economy. The convergence process models Menger‟s concept of saleableness – the most liquid good becomes the common medium of exchange. A computational approach is adopted to illustrate the monetary convergence as a result of decentralized adjustment process by utility maximizing households in the economy. Starting from an arbitrary initial economy, the analysis constructs a mapping from a compact economy space to monetary equilibrium or non-monetary equilibrium. By varying the transaction costs parameters and the household endowments, the paper successfully identifies the regions of parameter space where convergence to monetary equilibrium occurs as a result of decentralized adjustment process. The reasons for non-convergence are also investigated.
    Keywords: trading post
    Date: 2010–10–20
  22. By: Wasim Shahid Malik; Ahsan ul HaqSatti; Ghulam Saghir (Pakistan Institute of Development Economics)
    Abstract: Since the introduction of rational expectations in the literature, most of the research focus in the area of macroeconomics has been investigating micro foundations of macroeconomic theory and transmission channels of policy. In 1990s, macroeconomists started working on macro models incorporating the assumption of nominal rigidity with explicit modeling of optimal behaviour of individuals and firms. More recently, these models gained empirical support by looking at both aggregate as well as at firm-level data. In this regard, limited studies are available that focus on developing countries. For Pakistan, there has been little focus on micro level studies in the field of macro or monetary economics, so our study attempts to fill this gap. Besides capturing price setting behaviour, the potential effects of changes in financial cost on the overall pricing and production decisions have also been investigated. It is important to note that this study is different from others throughout carried in different countries in the sense that instead of sending questionnaires by mail, data are collected by enumerators and field supervisors. It was found that Pakistani firms perceive to be in competitive environment they operate in. Most of the clients of the firms are regular and firms’ relationship with the customers is long-term. The large majority of firms use current information when reviewing prices. Around 70 percent of firms use either a state-dependent pricing rule or combination of both time-dependent and state-dependent rules. Pakistani firms revise and change their prices usually in the months of June and July. Moreover, costs of raw materials, cost of energy and inflation are the main determinants of price increase while the competitors’ price, raw materials costs and demand changes are responsible for price decrease. When it comes to the main causes of price stickiness, implicit contract with the customers is at the top, while explicit fixed term contract of prices on the second. Further it was observed that most of the firms change their wages once in a year. About half of the firms index their workers’ wages with inflation and past inflation rate is usually used for the purpose. Labour productivity and changes in inflation rate are found to be the main causes of wage change.
    Keywords: Price Setting Behaviour, Effectiveness of Monetary Policy, Wage and Price Contracts
    JEL: E24 E31 E52 E61
    Date: 2010
  23. By: Anthony Garratt; James Mitchell; Shaun P. Vahey; Elizabeth C. Wakerly
    Abstract: We examine the effectiveness of recursive-weight and equal-weight combination strategies for forecasting using many time-varying models of the relationship be- tween inflation and the output gap. The forecast densities for inflation reflect the uncertainty across models using many statistical measures of the output gap, and allow for time-variation in the ensemble Phillips curves. Using real-time data for the US, Australia, New Zealand and Norway, we find that the recursive-weight strategy performs well, consistently giving well-calibrated forecast densities. The equal-weight strategy generates poorly-calibrated forecast densities for the US and Australian samples. There is little difference between the two strategies for our New Zealand and Norwegian data. We also find that the ensemble modelling approach performs more consistently with real-time data than with revised data in all four countries.
    JEL: C32 C53 E37
    Date: 2010–12
  24. By: Leonardo Morales-Arias; Guilherme V. Moura
    Abstract: This article proposes a multivariate model of inflation with conditionally heteroskedastic common and country-specific components. The model is estimated in one-step via Quasi-Maximum Likelihood for the G7 countries for the period Q1-1960 to Q4-2009. It is found that various model specifications considered fit well the first and second order dynamics of inflation in the G7. The estimated volatility of the common inflation component captures the international effects of the ‘Great Moderation’ and of the ‘Great Recession’. The model also shows promising capabilities for forecasting inflation in several countries
    Keywords: Global inflation, conditional heteroskedasticity, inflation forecasting
    JEL: E31 E37 F41
    Date: 2010–11
  25. By: Avadanei, Andreea
    Abstract: Abstract: The scope of this article is to point out the features of European corporate bond market, in particular its development since the euro introduction. We structured our paper on chapters that present its economic importance, the implications of the common currency in respect to its growth and the level of integration in the present context. This market, including the debt securities issued by non-financial corporations, non-monetary financial corporations and monetary financial institutions, is economically important, as it contributes to the allocation of funds to their most profitable uses. Its rapid growth since the introduction of the euro can be explained by developments in economic activity, the costs of issuance and mergers &acquisitions-related activity. The adoption of the common currency had a direct and permanent effect on debt securities issued by non-monetary financial corporations. However, the use of corporate bonds at the euro area level is not uniform across countries. Country-specific factors continue to matter, despite the fact that financial markets are gradually becoming more integrated.
    Keywords: corporate bond market; euro; financial integration; economic importance; market segmentation.
    JEL: F15 G14 G29 G15 E50
    Date: 2010–12–08
  26. By: Rao, B. Bhaskara; Kumar, Saten
    Abstract: This paper uses the extreme bounds analysis (EBA) of Leamer (1983 &1985) to analyze the robust determinants of the demand for money in a panel of 17 Asian countries for the period 1970 to 2009. These robust determinants are found to be unit root variables. Therefore, cointegration between these variables is tested with a recent time series panel method developed by Westerlund (2007). This method uses the error-correction formulation and has more power against the null of no cointegration. The results show that there is a well-defined long-run demand for money. Using the lagged error correction term from the estimated cointegrating equation, the short-run dynamic relationships are estimated. This paper, thus, suggests some useful guidelines to estimate other relationships with panel data.
    Keywords: Demand for money; Extreme bounds analysis; Panel ECM; Structural breaks
    JEL: C33 E41
    Date: 2010–12–06
  27. By: Tiwari, Aviral; Shahbaz, Muhammad
    Abstract: In this study we attempted to analyze the static and dynamic causality between producers’ prices measured by WPI and consumers’ prices measured by CPI in the context of India. We did our analysis in the framework of time series and for analysis, we applied ARDL bounds testing approach to cointegration and robustness of ARDL approach is examined through Johansen and Juselius (1990) maximum likelihood approach over the period of 1950-2009. We found the evidence of bidirectional causality between WPI and CPI in both cases i.e., in the short-run and long-run. Furthermore, outside sample forecast analysis reveals that in India, WPI leads CPI. This implies that WPI is determined by market forces and also a leading indicator of consumers’ prices and inflation. This gives an indication to the Indian policy analysts to control for factors affecting WPI in order to have control on CPI since CPI is used for indexation purposes for many wage and salary earners including government employees and hence it will be helpful in cutting down the excess government expenditure.
    Keywords: CPI and WPI; Granger causality; cointegration VDs; IRFs.
    JEL: C32 E31
    Date: 2010–11–14
  28. By: Masaaki Fujii (Graduate School of Economics, University of Tokyo); Akihiko Takahashi (Faculty of Economics, University of Tokyo)
    Abstract: Collateral has been used for a long time in the cash market and we have also experienced significant increase of its use as an important credit risk mitigation tool in the derivatives market for this decade. Despite its long history in the financial market, its importance for funding has been recognized relatively recently following the explosion of basis spreads in the crisis. This paper has demonstrated the impact of collateralization on derivatives pricing through its funding effects based on the actual data of swap markets. It has also shown the importance of the hchoiceh of collateral currency. In particular, when a contract allows multiple currencies as eligible collateral as well as its free replacement, the paper has found that the embedded hcheapest-todeliverh option can be quite valuable and significantly change the fair value of a trade. The implications of these findings for risk management have been also discussed.
    Date: 2010–12
  29. By: Kalbe Abbas; Manzoor Hussain Malik (Pakistan Institute of Development Economics)
    Abstract: The study analyses market perception about the performance of Pakistani commercial banks due to financial liberalisation and deregulation measures taken by the central bank over the last two decades. For this purpose, it uses Survey approach. To augment the results of Survey Based Approach, it employs Distribution Free Approach to measure relative cost inefficiencies of commercial banks. Out of 35 commercial banks, 15 banks have been chosen for analysis purpose. Key banking reforms remain helpful in correcting flaws in the banking sector of Pakistan. In particular, privatisation of banks, the deregulation and institutional strengthening measures and switching towards market-based monetary and credit management remain helpful in correcting the prevailing flaws. The cost inefficiency scores of banks also indicate that the efficiency of Pakistani banks have improved during 1990 to 2006. As regards group-wise efficiency estimates, foreign banks are found to be more efficient, followed by private banks, nationalised commercial banks, and privatised banks. The relative high cost inefficiency of privatised banks is most probably due to having remained under state owned structure during most of the period of the study. The financial liberalisation and the resultant competitive environment might be the key factors behind improvements in efficacy of banks.
    Keywords: Banking, Efficiency, Regulations, Financial Reforms
    JEL: E51 E58
    Date: 2010
  30. By: Véronique Genre (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Geoff Kenny (European Central Bank, DG Research, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Aidan Meyler (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Allan Timmermann (Rady School of Management and Department of Economics, University of California, San Diego, USA.)
    Abstract: In this paper, we explore the potential gains from alternative combinations of the surveyed forecasts in the ECB Survey of Professional Forecasters. Our analysis encompasses a variety of methods including statistical combinations based on principal components analysis and trimmed means, performance-based weighting, least squares estimates of optimal weights as well as Bayesian shrinkage. We provide a pseudo real–time out-of-sample performance evaluation of these alternative combinations and check the sensitivity of the results to possible data-snooping bias. The latter robustness check is also informed using a novel real time meta selection procedure which is not subject to the data-snooping critique. For GDP growth and the unemployment rate, only few of the forecast combination schemes are able to outperform the simple equal-weighted average forecast. Conversely, for the inflation rate there is stronger evidence that more refined combinations can lead to improvement over this benchmark. In particular, for this variable, the relative improvement appears significant even controlling for data snooping bias. JEL Classification: C22, C53.
    Keywords: forecast combination, forecast evaluation, data snooping, real-time data, Survey of Professional Forecasters.
    Date: 2010–12

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.