nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒01‒03
37 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Money and inflation: some critical issues By Bennett T. McCallum; Edward Nelson
  2. "Money" By L. Randall Wray
  3. How Does Monetary Policy Change? Evidence on Inflation Targeting Countries By Jaromir Baxa; Roman Horvath; Borek Vasicek
  4. The Transmission Mechanism in Armenia: New Evidence from a Regime Switching VAR Analysis By Anke Weber; Anna R Bordon
  5. The effect of openness in a small open monetary union By Orjasniemi, Seppo
  6. Is Monetary Policy in New Members States Asymmetric? By Borek Vasicek
  7. U.S. intervention and the early dollar float: 1973-1981 By Michael D Bordo; Owen F Humpage; Anna J Schwartz
  8. To be or not to be in monetary union: A synthesis By Clerc, L.; Dellas, H.; Loisel, O.
  9. Policy Rules Under the Monetary and the Fiscal Theories of the Price-Level By Jagjit S. Chadha
  10. Letting the anchor go: Monetary policy in neutral Norway during World War I By Monica Værholm; Lars Fredrik Øksendal
  11. Monetary Autonomy in Select Asian Economies: Role of International Reserves By Hiroyuki Taguchi; Geethanjali Nataraj; Pravakar Sahoo
  12. The Norges Bank’s key rate projections and the news element of monetary policy: a wavelet based jump detection approach By Lars Winkelmann
  13. The dynamic effects of U.S. monetary policy on state unemployment By Korobilis, Dimitris; Gilmartin, Michelle
  14. U.S. Monetary Shocks and Global Stock Prices By Luc Laeven; Hui Tong
  15. Monetary Policy, Leverage, and Bank Risk-Taking By Luc Laeven; Giovanni Dell'Ariccia; Robert Marquez
  16. Non-Stationary Interest Rate Differentials and the Role of Monetary Policy By Matros, Philipp; Weber, Enzo
  17. Inflation Targeting and Pass-through Rate in East Asian Economies By Hiroyuki Taguchi; Woong-Ki Sohn
  18. Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009 By Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
  19. Fitting observed inflation expectations By Marco Del Negro; Stefano Eusepi
  20. Optimal monetary policy in a model of money and credit By Pedro Gomis-Porqueras; Daniel R. Sanches
  21. Monetary Policy and Excessive Bank Risk Taking By Itai Agur; Maria Demertzis
  22. Australasian money demand stability: Application of structural break tests By Kumar, Saten; Webber, Don J.
  23. Reforming China's Monetary Policy Framework to Meet Domestic Objectives By Paul Conway; Richard Herd; Thomas Chalaux
  24. Central bank liquidity operations during the financial market and economic crisis: observations, thoughts and questions By Pikkarainen, Pentti
  25. Monetary Policy Considerations after the Crisis: Practitioners’ Perspectives By Subir Gokarn
  26. Stochastic Convergence in the Euro Area By Giorgio Canarella; Stephen M. Miller; Stephen K. Pollard
  27. Weathering the Global Storm: The Benefits of Monetary Policy Reform in the LA5 Countries By Luis Ignacio Jácome; Ali Alichi; Ivan Luis de Oliveira Lima; Jorge Iván Canales Kriljenko
  28. Can we prevent boom-bust cycles during euro area accession? By Michał Brzoza-Brzezina; Pascal Jacquinot; Marcin Kolasa
  29. Financial Integration and the Construction of Historical Financial Data for the Euro Area By Heather M. Anderson; Mardi Dungey; Denise R Osborn; Farshid Vahid
  30. ECB Policy Making and the Financial Crisis By Janko Gorter; Fauve Stolwijk; Jan Jacobs; Jakob de Haan
  31. External imbalances in a monetary union. Does the Lawson doctrine apply to Europe? By Mariam Camarero; Josep Lluís Carrion-i-Silvestre; Cecilio Tamarit
  32. Central bank – the root cause of poverty, tax, and deficit By Subhendu, Das
  33. Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia By Kristine Vitola; Ludmila Fadejeva
  34. Monetary aspects of short-term capital inflows in the Central European Countries By Mirdala, Rajmund
  35. Semi-Structural Models for Inflation Forecasting By Maral Kichian; Fabio Rumler; Paul Corrigan
  36. Introduction to the macroeconomic dynamics: special issues on money, credit, and liquidity By Ed Nosal; Christopher Waller; Randall Wright
  37. Inflationary memory as restrictive factor of the impact of the public expense in the economic growth: lessons from high inflation Latin American countries using an innovative inflationary memory indicator By Ernesto Sheriff

  1. By: Bennett T. McCallum; Edward Nelson
    Abstract: We consider what, if any, relationship there is between monetary aggregates and inflation, and whether there is any substantial reason for modifying the current mainstream mode of policy analysis, which frequently does not consider monetary aggregates at all. We begin by considering the body of thought known as the "quantity theory of money." The quantity theory centers on the prediction that there will be a long-run proportionate reaction of the price level to an exogenous increase in the nominal money stock. The nominal homogeneity conditions that deliver the quantity-theory result are the same as those that deliver monetary neutrality, an important principle behind policy formulation. The quantity theory implies a ceteris paribus unitary relationship between inflation and money growth. Simulations of a New Keynesian model suggest that we should expect this relationship to be apparent in time series data, with no heavy averaging or filtering required, but with allowance needed for the phase shift in the relationship between monetary growth rates and inflation. While financial innovation can obscure the relationship between monetary growth and inflation, evidence of a money growth/inflation relationship does emerge from U.S. time series and G7 panel data. Various considerations suggest that studies of inflation and monetary policy behavior can benefit from including both interest rates and money in the empirical analysis.
    Date: 2010
  2. By: L. Randall Wray
    Abstract: This paper advances three fundamental propositions regarding money: (1) As R. W. Clower (1965) famously put it, money buys goods and goods buy money, but goods do not buy goods. (2) Money is always debt; it cannot be a commodity from the first proposition because, if it were, that would mean that a particular good is buying goods. (3) Default on debt is possible. These three propositions are used to build a theory of money that is linked to common themes in the heterodox literature on money. The approach taken here is integrated with Hyman Minsky’s (1986) work (which relies heavily on the work of his dissertation adviser, Joseph Schumpeter [1934]); the endogenous money approach of Basil Moore; the French-Italian circuit approach; Paul Davidson’s (1978) interpretation of John Maynard Keynes, which relies on uncertainty; Wynne Godley’s approach, which relies on accounting identities; the “K” distribution theory of Keynes, Michal Kalecki, Nicholas Kaldor, and Kenneth Boulding; the sociological approach of Ingham; and the chartalist, or state money, approach (A. M. Innes, G. F. Knapp, and Charles Goodhart). Hence, this paper takes a somewhat different route to develop the more typical heterodox conclusions about money.
    Keywords: Money; Credit; Debt; Uncertainty; Default; Unit of Account; Heterodox; Circuit Approach; Godley; Minsky; Knapp; Schumpeter; Endogenous Money
    JEL: E4 E5 E6 E11 E12 B5 B15 B22
    Date: 2010–12
  3. By: Jaromir Baxa; Roman Horvath; Borek Vasicek
    Abstract: We examine the evolution of monetary policy rules in a group of inflation targeting countries (Australia, Canada, New Zealand, Sweden and the United Kingdom) applying moment-based estimator at time-varying parameter model with endogenous regressors. Using this novel flexible framework, our main findings are threefold. First, monetary policy rules change gradually pointing to the importance of applying time-varying estimation framework. Second, the interest rate smoothing parameter is much lower that what previous time-invariant estimates of policy rules typically report. External factors matter for all countries, albeit the importance of exchange rate diminishes after the adoption of inflation targeting. Third, the response of interest rates on inflation is particularly strong during the periods, when central bankers want to break the record of high inflation such as in the U.K. or in Australia at the beginning of 1980s. Contrary to common wisdom, the response becomes less aggressive after the adoption of inflation targeting suggesting the positive effect of this regime on anchoring inflation expectations. This result is supported by our finding that inflation persistence as well as policy neutral rate typically decreased after the adoption of inflation targeting.
    Keywords: Endogenous regressors, inflation targeting, monetary policy, Taylor rule, time-varying parameter model.
    JEL: E43 E52 E58
    Date: 2010–11
  4. By: Anke Weber; Anna R Bordon
    Abstract: The introduction of inflation targeting in 2006, together with important economic developments such as dedollarization, marked the beginning of a new macroeconomic framework in Armenia, which is likely to have changed the effectiveness of monetary policy. This paper is the first attempt to analyze whether the transmission mechanism in Armenia has been subject to a structural break by employing a Markov-Switching VAR framework. Results support the existence of such a structural break around the time inflation targeting was introduced and reduced levels of dollarization were observed. Results from introducing a threshold variable into this framework furthermore show that reduced levels of dollarization are an important determinant of the effectiveness of monetary policy.
    Keywords: Armenia , Dollarization , Economic models , Exchange rate policy , Inflation targeting , Monetary policy , Monetary transmission mechanism ,
    Date: 2010–11–30
  5. By: Orjasniemi, Seppo (Bank of Finland Research)
    Abstract: In this paper we build a dynamic stochastic general equilibrium model of a small open monetary union with optimal monetary and fiscal policy, to study the transmission of country specific shocks and associated exchange rate fluctuations. We show that movements of the monetary union’s exchange rate stabilize the output fluctuations inside the monetary union, reducing the need for fiscal stabilization. We also show that, under the optimal policy, fluctuations in the exchange rate and the union-wide aggregates are affected by the differences in the degree of nominal rigidities among the monetary union member countries.
    Keywords: monetary union; monetary policy; fiscal policy; exchange rate
    JEL: E52 E62 F41
    Date: 2010–12–02
  6. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: Estimated Taylor rules became popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rule nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) a Generalized Method of Moments (GMM) estimation of models that allow discrimination between the sources of potential policy asymmetry but are conditioned by specific underlying relations (Dolado et al., 2004, 2005; Surico, 2007a,b); and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes (Hansen, 2000; Caner and Hansen, 2004). We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: monetary policy, inflation targeting, nonlinear Taylor rules, threshold estimation
    JEL: C32 E52 E58
    Date: 2010–12
  7. By: Michael D Bordo; Owen F Humpage; Anna J Schwartz
    Abstract: The dollar’s depreciation during the early floating rate period, 1973–1981, was a symptom of the Great Inflation. In that environment, sterilized foreign exchange interventions were ineffective in halting the dollar’s decline, but they showed a limited ability to smooth dollar movements. Only after the Volcker FOMC changed its monetary-policy approach and demonstrated a willingness to maintain a disinflationary stance despite severe economic weakness and high unemployment did the dollar begin a sustained appreciation. Also contributing to the ineffectiveness of the interventions was the Desk’s method of operation. The small, covert interventions, particularly prior to 1977, seemed inconsistent with an expectations channel of influence, and financing intervention with short-term borrowed funds seemed inconsistent with a portfolio-balance channel of influence. The Desk never clearly articulated an intervention transmission mechanism. The episode indicated the shortcomings of sterilized intervention and led to their cessation in April 1981.
    Keywords: Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee
    Date: 2010
  8. By: Clerc, L.; Dellas, H.; Loisel, O.
    Abstract: Monetary union can benefit countries suffering from policy credibility problems if it eliminates the inflation bias and also allows for more efficient management of certain shocks. But it also carries costs as some stabilization may be feasible even in the absence of credibility, and this may be more than what an individual country can hope for in a monetary union. In this paper, we combine the stabilization and credibility branches of the currency union literature and construct a simple welfare criterion that can be used to evaluate alternative monetary arrangements. We produce examples where monetary union may be welfare improving even for low-modest levels of inflation bias (2-3%) as long as business cycles are not too a-synchronized across countries.
    Keywords: Currency union, credibility, stabilization, inflation bias.
    JEL: E4 E5 F4
    Date: 2010
  9. By: Jagjit S. Chadha
    Abstract: Price-level determination requires co-ordination of monetary and fiscal policy to ensure a unique rational expectations equilibrium (REE). This paper derives a number of implications for simple interest rate rules resulting from various fiscal strategies. We show that fiscal choices under either the monetary theory of the price-level (MTPL) and the fiscal theory of the price-level (FTPL) can challenge widely accepted principles of monetary policy. Specifically, we show that a fiscal rule that responds aggressively to output and inflation may force the monetary authorities to adopt significantly more aggressive output and inflation stabilization policy than suggested by the the Taylor Principle. We also show how when monetary policy is severely constrained, the fiscal policy maker can act to stabilise the economy. Some policy conclusions in light of the lower zero bound for monetary policy and debt stabilization are drawn.
    Keywords: Monetary and Fiscal Policy Rules; Ricardian; Non-Ricardian Fiscal Policy
    JEL: E21 E32 E52 E63
    Date: 2010–12
  10. By: Monica Værholm (Department of Economics. Norwegian School of Economics and Business Administration); Lars Fredrik Øksendal (Department of Economics. Norwegian School of Economics and Business Administration)
    Abstract: For later generations, August 1914 has become a watershed in monetary history. In a matter of days, the belligerent and neutral countries of Europe alike suspended the gold standard. The international monetary regime that had served the world economy for close to four decades was no more. Everywhere domestic fiat money became the order of the day. Even more importantly, the war brought a fundamental change in the priorities of monetary policy: National objectives triumphed over monetary stability.
    Date: 2010–12–21
  11. By: Hiroyuki Taguchi; Geethanjali Nataraj; Pravakar Sahoo (Policy Research Institute)
    Abstract: This paper examines the trends in monetary autonomy and its interaction with financial integration, currency regime and foreign reserves for the past two decades in select Asian countries viz., Thailand, Korea, Indonesia, Philippines, and India. Our main findings are as follows: First, Thailand, Korea and Indonesia, who experienced the change in currency regime towards a floating regime, have lowered the sensitivities of their interest rates (have raised monetary autonomy) after the regime change, while India without any change in currency regime has continued to raise the sensitivities of its interest rates (has lowered monetary autonomy) in line with increased financial integration. Second, in all sample economies, the accumulation of foreign reserves has contributed to retaining monetary autonomy in terms of preventing the sensitivities of interest rates from rising. We speculate that their accumulation might take a role as an anchor for monetary autonomy to the emerging market economies facing “fear of floating”.
    Keywords: monetary autonomy, financial integration, currency regime, foreign reserves, Asian emerging market economies, fear of floating
    JEL: E52 F33 F41
    Date: 2010
  12. By: Lars Winkelmann
    Abstract: This paper investigates the information content of the Norges Bank’s key rate projections. Wavelet spectrum estimates provide the basis for estimating jump probabilities of short- and long-term interest rates on monetary policy announcement days before and after the introduction of key rate projections. The behavior of short-term interest rates reveals that key rate projections have only little effects on market’s forecasting ability of current target rate changes. In contrast, longer-term interest rates indicate that the announcement of key rate projections has significantly reduced market participants’ revisions of the expected future policy path. Therefore, the announcement of key rate projections further improves central bank communication.
    Keywords: Central bank communication, interest rate projections, wavelets, jump probabilities
    JEL: E52 E58 C14
    Date: 2010–12
  13. By: Korobilis, Dimitris; Gilmartin, Michelle
    Abstract: This paper studies the transmission of monetary shocks to state unemployment rates, within a novel structural factor-augmented VAR framework with a time-varying propagation mechanism. We find evidence of large heterogeneity over time in the responses of state unemployment rates to monetary policy shocks, which do not necessarily comply with the response of the national unemployment rate. We also find evidence of heterogeneity over the spatial dimension, although geographical proximity seems to play an important role in the transmission of monetary shocks.
    Keywords: regional unemployment; structural VAR; factor model; monetary policy
    JEL: C32 E52 R11 C11
    Date: 2010–12
  14. By: Luc Laeven; Hui Tong
    Abstract: This paper studies how U.S. monetary policy affects global stock prices. We find that global stock prices respond strongly to changes in U.S. interest rate policy, with stock prices increasing (decreasing) following unexpected monetary loosening (tightening). This impact is more pronounced for sectors that depend on external financing, and for countries that are more integrated with the global financial market. These findings suggest that financial frictions play an important role in the transmission of monetary policy, and that U.S. monetary policy influences global capital allocation.
    Keywords: Corporate sector , Cross country analysis , Economic models , Interest rate policy , International capital markets , Monetary policy , Monetary transmission mechanism , Stock prices , United States ,
    Date: 2010–12–06
  15. By: Luc Laeven; Giovanni Dell'Ariccia; Robert Marquez
    Abstract: We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through, risk shifting, and leverage. When banks can adjust their capital structures, a monetary easing leads to greater leverage and lower monitoring. However, if a bank's capital structure is fixed, the balance depends on the degree of bank capitalization: when facing a policy rate cut, well capitalized banks decrease monitoring, while highly levered banks increase it. Further, the balance of these effects depends on the structure and contestability of the banking industry, and is therefore likely to vary across countries and over time.
    Keywords: Banks , Capital , Central bank policy , Credit risk , Economic models , Financial intermediation , Monetary policy , Risk management ,
    Date: 2010–12–03
  16. By: Matros, Philipp; Weber, Enzo
    Abstract: The present work deals with a frequently detected failure of the uncovered interest rate parity (UIP) - the absence of bivariate cointegration between domestic and foreign interest rates. We explain non-stationarity of the interest differential via central bank reactions to exchange rate variations. Thereby, the exchange rate in levels introduces an additional stochastic trend into the system. Trivariate cointegration between the interest rates and the exchange rate accounts for the missing stationarity property of the interest differential. We apply the concept to the case of Turkey and Europe, where we can validate the theoretical considerations by multivariate time series techniques.
    Keywords: Uncovered Interest Rate Parity; Monetary Policy Rules; Cointegration; Vector-Error Correction Model
    JEL: E44 F31 C32
    Date: 2010–12–21
  17. By: Hiroyuki Taguchi; Woong-Ki Sohn (Policy Research Institute)
    Abstract: This article sets out to assess the performance of inflation targeting (IT) frameworks from the perspective of the pass-through effect of external price shocks into consumer price inflation, focusing on the four East Asian economies which have adopted IT, during the period of 1990-2009. We first examine their monetary policy rules to identify the IT implementation, and then investigate the linkage between inflation-responsive rules and pass-through rates, as suggested by Gagnon and Ihrig (2004). Our main findings are as follows. First, under the IT adoption, Korea has taken an inflation responsive rule in a forward-looking manner, while Indonesia and Thailand have adopted the rule in a backward-looking manner. Second, only Korea has lost pass-through under IT adoption, thereby showing the clear linkage between inflation-responsive rules and the loss of pass-through. Third, the sensitivity test of inflation expectations to import price shocks in Korea also supports this linkage. These findings imply that IT adoption, if conducted in a forward-looking manner, can be a resisting power against external price shocks, even in small, open, emerging market economies, as tested under the latest global financial crisis in Korea.
    Keywords: inflation targeting, pass-through, East Asian emerging market economies, policy reaction function, inflation expectations
    JEL: E52 F31 F41
    Date: 2010
  18. By: Gustavo Abarca; José Gonzalo Rangel; Guillermo Benavides
    Abstract: We examine two approaches characterized by different tail features to extract market expectations on the Mexican peso-US dollar exchange rate. Expectations are gauged by risk-neutral densities. The methods used to estimate these densities are the Volatility Function Technique (VFT) and the Generalized Extreme Value (GEV) approach. We compare these methods in the context of monetary policy announcements in Mexico and the US. Once the surprise component of the announcements is considered, our results indicate that, although both VFT and GEV suggest similar dynamics at the center of the distribution, these two methods show significantly different patterns in the tails. Our empirical evidence shows that the GEV model captures better the extreme values.
    Keywords: Exchange rates, monetary policy, risk-neutral densities
    JEL: C14 E44 E58 F31
    Date: 2010–12
  19. By: Marco Del Negro; Stefano Eusepi
    Abstract: This paper provides evidence on the extent to which inflation expectations generated by a standard Christiano et al. (2005)/Smets and Wouters (2003)–type DSGE model are in line with what is observed in the data. We consider three variants of this model that differ in terms of the behavior of, and the public’s information on, the central banks’ inflation target, allegedly a key determinant of inflation expectations. We find that: 1) time-variation in the inflation target is needed to capture the evolution of expectations during the post-Volcker period; 2) the variant where agents have imperfect information is strongly rejected by the data; 3) inflation expectations appear to contain information that is not present in the other series used in estimation; and 4) none of the models fully captures the dynamics of this variable.
    Keywords: Banks and banking, Central ; Inflation (Finance) ; Inflation targeting ; Bayesian statistical decision theory
    Date: 2010
  20. By: Pedro Gomis-Porqueras; Daniel R. Sanches
    Abstract: The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.
    Keywords: Monetary policy ; Disclosure of information
    Date: 2010
  21. By: Itai Agur; Maria Demertzis
    Abstract: This paper shows that a rate hike has countervailing effects on banks’ risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator cannot optimally neutralize the welfare effects that the interest rate has through bank incentives. The larger the correlation between banks’ projects, the more important the role for monetary policy. In a dynamic setting, not internalizing bank risk leads a monetary authority to keep rates low for too long after a negative shock.
    Keywords: Monetary policy; Financial stability; Maturity mismatch; Leverage; Regulation
    JEL: E43 E52 E61 G21 G28
    Date: 2010–12
  22. By: Kumar, Saten; Webber, Don J.
    Abstract: Estimates of the demand for money provide important foundations for monetary policy setting but if the estimation technique does not explicitly account for structural changes then such estimates will be biased. This paper presents an investigation into the level and stability of money demand (M1) for Australia and New Zealand over the 1960-2009 period and demonstrates that both countries experienced regime shifts; Australia also experienced an intercept shift. Application of four time series methods provide consistent results with 1984 and 1998 break dates. CUSUM and CUSUMSQ stability tests reveal that M1 demand functions were unstable over the 1984 to 1998 period for both countries although tests for stability are not rejected thereafter.
    Keywords: Money demand; Cointegration; Structural breaks; Australia; New Zealand
    JEL: C22 E41
    Date: 2010–12–05
  23. By: Paul Conway; Richard Herd; Thomas Chalaux
    Abstract: As a result of reforms and financial sector development, the People’s Bank of China (PBoC) now exerts significant control over money market interest rates. With money market conditions increasingly influencing effective commercial lending rates, the PBoC is also able to affect the cost of credit without recourse to its benchmark commercial bank rates. Furthermore, interest rates are an important determinant of investment spending in China, via the user cost of capital, and aggregate economic activity influences inflation. Hence, greater use of interest rates in implementing monetary policy would enhance macroeconomic stabilisation while avoiding a number of drawbacks of the current quantity-based approach. In addition, increased flexibility in the exchange rate would enhance its role in offsetting macroeconomic shocks and allow the PBoC more scope to tailor monetary policy to domestic macroeconomic conditions. Concurrently, changes in the PBoC’s policy stance should be predicated on informed judgments based on the monitoring of a set of indicators in conjunction with a flexible inflation objective as the nominal anchor. This paper relates to the 2010 OECD Economic Review of China (<P>Poursuivre la réforme de la politique monétaire pour accomplir les objectifs domestiques<BR>Suite à diverses réformes et au développement du secteur financier, la Banque Populaire de Chine (BPdC) contrôle désormais de façon significative les taux d’intérêt du marché monétaire. Les conditions du marché monétaire influençant de plus en plus les taux effectifs des prêts commerciaux, la BPdC est également en mesure d’influencer le coût du crédit sans recourir à ses taux d’intérêt commerciaux de référence. De plus, les taux d’intérêt sont un déterminant important de l’investissement en Chine, via le coût du capital, et l’activité exerce une influence sur l’inflation. Par conséquent, une utilisation plus active des taux d’intérêt dans la conduite de la politique monétaire contribuerait à la stabilisation macroéconomique tout en évitant certains des inconvénients de l’approche actuelle par les quantités. En outre, une plus grande flexibilité du taux de change renforcerait son rôle dans l’amortissement des chocs macroéconomiques et donnerait une plus grande latitude à la BPdC pour ajuster la politique monétaire en fonction des conditions macroéconomiques internes. Dans le même temps, les changements de politique monétaire devraient résulter d’une évaluation empirique basée sur le suivi d’une série d’indicateurs dans le cadre d’un ancrage nominal sous la forme d’un objectif d’inflation flexible. Ce document se rapporte à l’Étude économique de la Chine de l’OCDE, 2009, (
    Keywords: regulation, macroeconomic policies, China, Money, réglementation, politique macro-économique, Chine, Monnaie
    JEL: E4 E5 E6 K2 L5
    Date: 2010–12–16
  24. By: Pikkarainen, Pentti (Financial Markets, Ministry of Finance)
    Abstract: The paper concentrates on illustrating and assessing central banks’ liquidity operations during the crisis that started in August 2007. In addition to the ECB, the central banks of Sweden, Switzerland, the United Kingdom, Australia, Japan, Canada and the United States are analyzed. During the crisis the liquidity operations of central banks have converged. In many cases, central bank balance sheets have undergone extremely strong growth. The actions by central banks raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and their governance structure.
    Keywords: central banks; liquidity operations; balance sheets
    JEL: E32 E52 E58
    Date: 2010–12–22
  25. By: Subir Gokarn
    Abstract: Economic stability can be seen as an essential component of any strategy for inclusive development. To the extent that central banks play a role in providing that stability, the experience of the crisis has led to considerable thinking and debate on its implications for central bank mandates, strategies and instruments in the quest for maintaining stability. A lot of this is being articulated by central bankers around the world, as they try and distill the lessons of the crisis into what they should be doing more or less of, or differently and how they should go about fulfilling possibly changed objectives. These issues have been explored in this talk. These issues, reflected in recent articulations by a cross-section of central bankers and use this as a backdrop for our own thinking on how to deal with challenges to macroeconomic stability. [Plenary Lecture at the conference “Economic Policies for Inclusive Development†organized by Ministry of Finance, Government of India and National Institute of Public Finance and Policy at New Delhi.]
    Keywords: monetary policy, financial stability, central bank, macroeconomic stability, finance, policy,
    Date: 2010
  26. By: Giorgio Canarella (California State University, Los Angeles, and University of Nevada, Las Vegas); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas); Stephen K. Pollard (California State University, Los Angeles)
    Abstract: We investigate the dynamics of stochastic convergence of the original Euro Area countries for inflation rates, nominal interest rates, and real interest rates. We test for convergence relative to Germany, taken as the benchmark for core EU standards, using monthly data over the period January 2001 to September 2010. We examine, in a time-series framework, three different profiles of the convergence process: linear convergence, nonlinear convergence, and linear segmented convergence. Our findings both contradict and support convergence. Stochastic convergence implies the rejection of a unit root in the inflation rate, nominal interest rate, and real interest rate differentials. We find that the differentials are consistent with a unit-root hypothesis when the alternative hypothesis is I(0) with a linear trend. But we frequently, but not always, reject the unit-root hypothesis when the alternative is I(0) with a broken trend. We also note that the current financial crisis plays a significant role in dating the breaks.
    Keywords: Stochastic convergence, Nonlinearity, Unit-root tests, Structural breaks.
    JEL: F36 F42 C20 C50
    Date: 2010–12
  27. By: Luis Ignacio Jácome; Ali Alichi; Ivan Luis de Oliveira Lima; Jorge Iván Canales Kriljenko
    Abstract: This paper highlights that central banks from Brazil, Chile, Colombia, Mexico, and Peru (the LA5 countries) reaped the benefits of what they sowed in successfully weathering the global crisis. The adoption of far-reaching institutional, policy, and operational reforms during the last two decades enabled central banks to build credibility about their commitment with the objective of price stability. Thus, when the 2007 - 08 supply shock and the financial crisis hit the world, the LA5 central banks reacted swiftly and effectively based on a flexible policy framework and with the support of strong macroeconomic and financial foundations. Building on the experience of the LA5 central banks and complementing with recommendations from the IMF’s technical advice, the paper provides several suggestions for countries seeking to strengthen the effectiveness of monetary policy.
    Date: 2010–12–17
  28. By: Michał Brzoza-Brzezina (National Bank of Poland.); Pascal Jacquinot (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marcin Kolasa (National Bank of Poland.)
    Abstract: Euro-area accession caused boom-bust cycles in several catching-up economies. Declining interest rates and easier financing conditions fuelled spending and worsened the current account balance. Over time inflation deteriorated external competitiveness and lowered domestic demand, turning the boom into a bust. We ask whether such a scenario can be avoided using macroeconomic tools that are available in the period of joining a monetary union: central parity revaluation, fiscal tightening or increased taxation. While all these policies can be used to cool down the output boom, exchange rate revaluation seems the most attractive option. It simultaneously trims the expansion of output and domestic demand, reduces the cost pressure and ranks first in terms of welfare. JEL Classification: E52, E58, E63.
    Keywords: boom-bust cycles, euro area accession, dynamic general equilibrium models
    Date: 2010–12
  29. By: Heather M. Anderson; Mardi Dungey; Denise R Osborn; Farshid Vahid
    Abstract: Time series analysis for the Euro Area requires the availability of sufficiently long historical data series, but the appropriate construction methodology has received little attention. The benchmark dataset, developed by the European Central Bank for use in its Area Wide Model (AWM), is based on fixed-weight aggregation across countries with historically distinct monetary policies and financial markets of varying international importance. This paper proposes a new methodology for producing back-dated financial series for the Euro Area, that is based on the time-varying distance of periphery countries from core countries with respect to monetary integration. Historical decompositions of the residuals of vector autoregressive models of the Euro Area economy are then used to explore and compare the monetary policy implications of using the new methodology versus the use of AWM fixed weight series.
    Date: 2010
  30. By: Janko Gorter; Fauve Stolwijk; Jan Jacobs; Jakob de Haan
    Abstract: We estimate Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the period 1998.6-2010.8. We first examine whether the recent financial crisis has affected ECB policies. Our results indicate that the ECB puts stronger emphasis on maintaining price stability than earlier point estimates suggested. Next, we analyse whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging economic developments in the countries in the euro area, notably during the recent financial crisis, we do not find support for the view that policy decisions have been influenced by regional developments.
    Keywords: Taylor rule; ECB; regional influence; real time data
    JEL: C22 E52
    Date: 2010–12
  31. By: Mariam Camarero (Jaume I University); Josep Lluís Carrion-i-Silvestre (University of Barcelona); Cecilio Tamarit (University of Valencia)
    Abstract: A monetary union raises new economic questions about the interpretation and the implications of high current account de?cits for the economic performance of its members in the medium term. Recent literature has argued that conventional measures of external sustainability are misleading because they omit capital variations on net foreign asset positions. In this paper we analyze external sustainability making use of the database developed by Lane and Milesi-Ferretti (2007a) that incudes these valuation effects. The sample period studied covers from the launching of the monetary integration process in Europe (the creation of the ?European Snake? in 1972) up to 2007. The econometric methodology used accounts for the increasing cross-section dependence among EMU countries as well as possible structural breaks endogenously determined. The results point to the need of abrupt adjustments, either led by the markets or promoted by pro-active policy measures in order to offset external disequilibria. The lack of these timely interventions together with the rigidities and institutional imperfections of the present EMU are on the ground of the excessive cost in terms of growth and employment of the current crisis.
    Keywords: Current account imbalances, EMU, panel stationarity, structural breaks, cross-section dependence.
    JEL: F32 F41 C23
    Date: 2010–02
  32. By: Subhendu, Das
    Abstract: In each country the central bank is a privately owned bank with no transparency and accountability to the government of that country. It is also the only bank that can print the money for that country and does it so out of thin air. At the same time this bank wants that the government returns the money with interest. We show that this structure creates deficit, introduces tax, and causes poverty around the globe. This paper shows how central banks control the economy by manipulating the financial system it has designed. The paper explains how easily the central banks can control the unemployment, create recessions, and transfer wealth from the lower economic group to higher economic group and perpetuate the poverty. The paper also proposes three methods of eliminating central banks.
    Keywords: central banks; Federal Funds Rate; Recessions
    JEL: E0 E4 E3
    Date: 2010–12–27
  33. By: Kristine Vitola; Ludmila Fadejeva
    Abstract: The purpose of this paper is to quantify the role of financial frictions in Latvia's monetary transmission. Our model extends M. Iacoviello (9) framework along three dimensions. First, we introduce open-economy features by allowing imports of foreign consumer goods and borrowing from abroad. Second, we relax the assumption of fixed housing stock, allowing for investment. Finally, we assume a risk premium on foreign borrowing, which depends on net foreign asset position. We estimate the model by Bayesian approach and compare impulse responses to shocks under various scenarios. In addition to the baseline scenario, we explore the importance of tighter borrowing constraints and higher foreign risk premium elasticity in the model dynamics. Our findings show that tighter credit constraints weaken the transmission of shocks to housing demand and consumption. In the case of foreign interest rate and risk premium shocks, higher risk premium elasticity lessens the effect of monetary transmission on the domestic economy through higher cost of external funds.
    Keywords: financial frictions, monetary transmission, asset prices, DSGE model, Bayesian approach
    JEL: C11 E32 E44 E52 R21
    Date: 2010–12–23
  34. By: Mirdala, Rajmund
    Abstract: International capital flows represents one of the key aspect of the globalisation process and refers to the continuous relieving the cross-border capital allocation barriers reflecting in huge increase in the common financial connections among the countries during the last decades. Flows of the capital among the countries stimulated by increased investment opportunities, expected profits and better risk diversification generated many positive, symmetric and multiplicative effects. On the other hand it also increases the exposure of the countries to many negative and asynchronous defects that led economists to revaluate the overall effects of financial liberalization and dynamic increase in the international capital flows. Rigorous assessment of general effects related to short-term capital inflows requires a consideration of a wide variety of country specific assumptions and determinants. Real conditions affecting overall effects of short-term capital inflows have to be also considered in the view of (dis)equilibrium trends in the balance of payments. In the paper we analyze selected monetary aspects of short-term capital inflows in the Central European countries (Czech republic, Hungary, Poland, Slovak republic) in the period 1999-2010 using VAR (vector autoregression) approach. In order to meet this objective we estimate a vector VAR model identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Impulse-response functions are computed in order to estimate the impact of short-term capital inflows on exchange rate, money stock, price level and current account. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.
    Keywords: capital inflows; exchange rate; balance of payments; money stock; VAR; Cholesky decomposition; impulse-response function
    JEL: C32 F15
    Date: 2010–11
  35. By: Maral Kichian; Fabio Rumler; Paul Corrigan
    Abstract: We propose alternative single-equation semi-structural models for forecasting inflation in Canada, whereby structural New Keynesian models are combined with time-series features in the data. Several marginal cost measures are used, including one that in addition to unit labour cost also integrates relative price shocks known to play an important role in open-economies. Structural estimation and testing is conducted using identification-robust methods that are valid whatever the identification status of the econometric model. We find that our semi-structural models perform better than various strictly structural and conventional time series models. In the latter case, forecasting performance is significantly better, both in the short run and in the medium run.
    Keywords: Inflation and prices; Econometric and statistical methods
    JEL: C13 C53 E31
    Date: 2010
  36. By: Ed Nosal; Christopher Waller; Randall Wright
    Abstract: We motivate and provide an overview to New Monetarist Economics. We then briefly describe the individual contributions to the Macroeconomics Dynamics special issues on money, credit and liquidity.
    Keywords: Macroeconomics - Econometric models
    Date: 2010
  37. By: Ernesto Sheriff (Universidad Privada Boliviana)
    Abstract: A new inflationary memory indicator was developed and applied here. A panel was built with the selected countries considering the economic growth as dependent variable in function of the convergence hypothesis, the inflation rate, the public expense and, the recursive variance of the inflation (VARINF) as inflationary memory indicator. The expected results of the panel were that the inflation and their variability affect the growth negatively neutralizing the possible effects that it could have the public expense on the same one. Five Latin American countries with experiences of high inflation were included (Argentina, Brazil, Bolivia, Peru and Nicaragua).
    Keywords: Inflationary memory, economic growth, Latin America
    JEL: E31 E65 D87 N16
    Date: 2010–11

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