nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒01‒30
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Quantitative and credit easing policies at the zero lower bound on the nominal interest rate By Dai, Meixing
  2. Why Are Target Interest Rate Changes So Persistent? By Olivier Coibion; Yuriy Gorodnichenko
  3. Optimal indexation of government bonds and monetary policy By Hatcher, Michael C.
  4. A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area By Harashima, Taiji
  5. Keynesian and Austrian Perspective on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth. By Mathilde Maurel; Gunther Schnabl
  6. Are euro area inflation rates misaligned? By Lopez, Claude; Papell, David
  7. To devaluate or not to devalue? How East European countries responded to the outflow of capital in 1997-99 and in 2008-09 By Vladimir Popov
  8. Sources of Unemployment Fluctuations in the USA and in the Euro Area in the Last Decade By Antonio Ribba
  9. Testing the Invariance of Expectations Models of Inflation By Nymoen, Ragnar; L. Castle, Jennifer; A. Doornik, Jurgen; F. Hendry, David
  10. Credit Risk Transfers and the Macroeconomy By Ester Faia
  11. The development of non-monetary means of payment By Minzyuk, Larysa
  12. The Cost Channel Reconsidered: A Comment Using an Identification-Robust Approach By Vasco Gabriel; Luis Martins
  13. Estimating Inflation-at-Risk (IaR) using Extreme Value Theory (EVT) By Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
  14. The Fall of the Vanishing Interim Regime Hypothesis: Towards a New Paradigm of the Choice of the Exchange Rate Regimes By Michal Jurek
  15. Legal and Actual Central Bank Independence: A Case Study of Bank Indonesia By Haan, Jakob de; Kadek Dian Sutrisna Artha, I.
  16. Continuous time modeling of interest rates: An empirical study on the Turkish short rate By Bayraci, Selcuk; UNAL, GAZANFER
  17. What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices? By Harrison Hong; Motohiro Yogo
  18. An empirical investigation of the nexus among money balances, commodity prices and consumer goods'prices By Grigoli, Francesco
  19. Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities By Marc Flandreau, Kim Oosterlinck
  20. Inflation and consumption in a long term perspective with level shift By Casadio, Paolo; Paradiso, Antonio
  21. Should the optimal portfolio be region-specific? A multi-region model with monetary policy and asset price co-movements By Leung, Charles Ka Yui; Teo, Wing Leong
  22. The implementation of Gulf Dinar among the GCC member countries and its possible impacts By Abdelghani, Echchabi; Osman, Sayid; Isares, Mahamad; Khalid, Sorhiran; Zulhilmi, Zulkifli
  23. Wake up economists! - Currency-issuing central governments have no budget constraint By Lawn, Philip
  24. Current Account Imbalances Coming Back By Joseph E. Gagnon
  25. "How Does Yield Curve Predict GDP Growth? A Macro-Finance Approach Revisited" By Junko Koeda
  26. The impact of the Eurosystem's covered bond purchase programme on the primary and secondary markets By John Beirne; Lars Dalitz; Jacob Ejsing; Magdalena Grothe; Simone Manganelli; Fernando Monar; Benjamin Sahel; Matjaž Sušec; Jens Tapking; Tana Vong
  27. Adaptive Forecasting of Exchange Rates with Panel Data By Leonardo Morales-Arias; Alexander Dross
  28. The microstructure of the money market before and after the financial crisis: a network perspective By Silvia Gabrieli
  29. The Crisis of the Eurozone By Dorothee Bohle

  1. By: Dai, Meixing
    Abstract: Using a New-Keynesian model extended to include credit, money and reserve markets, we examine the dynamics of inflation and output gap under some monetary policy options adopted when the economy is hit by large negative real, financial and monetary shocks. Relaxing the assumption that market interest rates are perfectly controlled by the central bank using the funds rate operating procedure, we have shown that the equilibrium at the zero lower bound on the nominal discount rate is stable (or cyclically stable, depending on monetary and financial parameters) and constitutes a liquidity trap, making the central bank’s communication skills useless in the crisis management. While the quantitative easing policy allows attenuating the effects of crisis, it is not always sufficient to restore the normal equilibrium. Nevertheless, quantitative and credit easing policies coupled with the zero discount rate policy could stabilize the economy and make central bank’s communication potentially credible during the crisis.
    Keywords: Zero lower bound (ZLB) on the nominal interest rate; zero interest rate policy; liquidity trap; quantitative easing policy; credit easing policy; dynamic stability.
    JEL: E43 E51 E58 E52 E44
    Date: 2011
  2. By: Olivier Coibion; Yuriy Gorodnichenko
    Abstract: We investigate the source of the high persistence in the Federal Funds Rate relative to the predictions of simple Taylor rules. While much of the literature assumes that this reflects interest-smoothing on the part of monetary policy-makers, an alternative explanation is that it represents persistent monetary policy shocks. Applying real-time data of the Federal Reserve’s macroeconomic forecasts, we document that the empirical evidence strongly favors the interest-smoothing explanation. This result obtains in nested specifications with higher order interest smoothing and persistent shocks, a feature missing in previous work. We also show that policy inertia is present in response to economic fluctuations not driven by exogenous monetary policy shocks. Finally, we argue that the predictability of future interest rates by Greenbook forecasts supports the policy inertia interpretation of historical monetary policy actions.
    JEL: E4 E5 E6
    Date: 2011–01
  3. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: Using an overlapping generations model in which the young save for old age using indexed and nominal government bonds, this paper investigates how optimal indexation is influenced by monetary policy. In order to do so, two monetary policies with markedly different long run implications are examined: inflation targeting and price-level targeting. Optimal indexation differs significantly under the two regimes. Under inflation targeting, long-term inflation uncertainty is substantial due to base-level drift in the price level. Nominal bonds are thus a poor store of value and optimal indexation is relatively high (76 per cent). With price-level targeting, by contrast, long-term inflation uncertainty is minimal because the price level is trend-stationary. This makes nominal bonds a better store of value compared to indexed bonds, reducing optimal indexation somewhat (26 per cent). Importantly for these results, the model captures two imperfections of indexation (indexation bias and lagged indexation) that are calibrated to the UK case.
    Keywords: optimal indexation; government bonds; inflation targeting; price-level targeting
    JEL: E52 E58
    Date: 2011–01
  4. By: Harashima, Taiji
    Abstract: This paper examines the mechanism of persistent inflation differentials, current account imbalances, and fiscal deficits in the euro area by constructing a multi-country model in which the optimization behaviors of governments as well as those of households, firms, and the European Central Bank are explicitly incorporated. The model indicates that governments can temporarily adhere to their own intrinsic preferences because fiscal policies are not unified in the euro area. This behavior generates problems, such as inflation differentials, and the stability and growth pact does not appear to be sufficiently effective in preventing such deviations. The results in this paper imply that the balance between national sovereignty and economic stability should be shifted more to the side of stability and that the euro area has to become more politically unified. In addition, the inflation differentials provide clear evidence that inflation acceleration is not caused by monetary policies but by government behavior because monetary policies are unified in the euro area whereas fiscal policies are not.
    Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal deficit; Time preference; The European Central Bank; The stability and growth pact
    JEL: E58 E63 F33 O52 N14
    Date: 2011–01–18
  5. By: Mathilde Maurel (Centre d'Economie de la Sorbonne); Gunther Schnabl (Université de Leipzig)
    Abstract: The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell's (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/ volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.
    Keywords: Exchange rate regime, crisis, shock adjustment, theory of optimum currency areas, Mundell, Schumpeter, Hayek, competitive depreciations, currency war.
    JEL: F31 F32
    Date: 2011–01
  6. By: Lopez, Claude; Papell, David
    Abstract: We study the behavior of inflation rates among Euro countries. More specifically, we are interested in testing whether and when group convergence dictated by the Maastricht treaty occurs, and we assess the impact of events such as the advent of the Euro and the 2008 financial crisis. Due to the small size of the estimation sample, we propose a new procedure that increases the power of panel unit root tests when used to study group-wise convergence. Applying this new procedure to Euro Area inflation, we find strong and lasting evidence of convergence among the inflation rates soon after the implementation of the Maastricht treaty and a dramatic decrease in the persistence of the differential after the occurrence of the single currency. Furthermore, while we find divergence among some of the Euro countries prior to the 2008 financial crisis, the convergence is strengthened after the crisis for all countries except Greece.
    Keywords: groupwise convergence; inflation; euro; 2008 crisis
    JEL: C32 E31
    Date: 2010
  7. By: Vladimir Popov (New Economic School, Moscow)
    Abstract: If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output. The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis.
    Date: 2011–01
  8. By: Antonio Ribba
    Abstract: The aim of this paper is to investigate the role played by macroeconomic shocks in shaping unemployment fluctuations, both in the USA and in the Euro area, in the recent, European Monetary Union, period. The task is accomplished by estimating a VAR model which jointly considers US and European variables. We identify the structural disturbances through sign restrictions on the dynamic response of variables. Our results show that there are real effects of monetary policy shocks and of non-monetary policy, financial shocks in both economic areas. Moreover, a significant role is also exerted by business cycle, adverse aggregate demand shocks. We provide an estimation of the relative importance of the identified structural shocks in explaining the variability of inflation and unemployment. Not surprisingly, in the last decade an important role has been played by financial shocks.
    Keywords: Structural VARs; Euro Area; Monetary Policy; Unemployment
    JEL: C32 E40
    Date: 2010–04
  9. By: Nymoen, Ragnar (Dept. of Economics, University of Oslo); L. Castle, Jennifer (Magdalen college, Oxford); A. Doornik, Jurgen (Nuffield College, Oxford); F. Hendry, David (University of Oxford)
    Abstract: The new-Keynesian Phillips curve (NKPC) includes expected future inflation to explain current inflation. Such models are estimated by replacing the expected value by the future outcome, using InstrumentalVariables or Generalized Method of Momentsmethods. However, the underlying theory does not allow for various non-stationarities–although crises, breaks and regimes shifts are relatively common. We analytically investigate the consequences for NKPC estimation of breaks in data processes, then apply the new technique of impulse-indicator saturation to salient published studies to check their viability. The coefficient of the future value becomes insignificant after modelling breaks.
    Keywords: New-Keynesian Phillips curve; Inflation expectations; Structural breaks; Impulse-indicator saturation.
    JEL: C22 C51
    Date: 2010–11–11
  10. By: Ester Faia
    Abstract: The recent financial crisis has highlighted the limits of the “originate to distribute“ model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39]) and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and in.ation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk
    Keywords: credit risk transfer, dual moral hazard, monetary policy, liquidity, welfare
    JEL: E3 E5 G3
    Date: 2011–01
  11. By: Minzyuk, Larysa
    Abstract: This paper develops a model to investigate the private enforcement of non-monetary inter-firm payments in Russia during the 1990s. Since acceptability of means of payment can have a self-reinforcing nature, the dominance of non-monetary means of payment over money in Russia might have been a result of the driving forces of the demonetiziation equilibrium. We propose a very simple search model to explore acceptability of means of payment different from legal tender - fiat money, commodity money, and trade credit. In each case, we show that monetization through the proposed means of payment is always a possible trade pattern.
    Keywords: privately created means of payment; fiat money; commodity money; reputations; Russia
    JEL: D83 E00
    Date: 2010
  12. By: Vasco Gabriel (University of Surrey and NIPE-UM, Portugal); Luis Martins (UNIDE, ISCTE-LUI, Portugal)
    Abstract: We re-examine the empirical relevance of the cost channel of monetary policy (e.g. Ravenna and Walsh, 2006), employing recently developed moment-conditions inference methods, including identiÂ…cation-robust procedures. Using US data, our results suggest that the cost channel effect is poorly identiÂ…ed and we are thus unable to corroborate the previous results in the literature
    Keywords: Cost channel, Phillips curve, GMM, Generalized Empirical Likelihood, Weak IdentiÂ…cation
    JEL: C22 E31 E32
    Date: 2010–09
  13. By: Santos, Edward P.; Mapa, Dennis S.; Glindro, Eloisa T.
    Abstract: The Bangko Sentral ng Pilipinas (BSP) has the primary responsibility of maintaining stable prices conducive to a balanced and sustainable economic growth. The year 2008 posed a challenge to the BSP’s monetary policy making as inflation hit an official 17-year high of 12.5 percent in August after 10 months of continuous acceleration. The alarming double-digit inflation rate was attributed to rising fuel and food prices, particularly the price of rice. A high inflation rate has impact on poverty since inflation affects the poor more than the rich. From a macroeconomic perspective, high level of inflation is not conducive to economic growth. This paper proposes a method of estimating Inflation-at-Risk (IaR) similar to the Value-at-Risk (VaR) used to estimate risk in the financial market. The IaR represents the maximum inflation over a target horizon for a given low pre-specified probability. It can serve as an early warning system that can be used by the BSP to identify whether the level of inflation is extreme enough to be considered an imminent threat to its inflation objective. The extreme value theory (EVT), which deals with the frequency and magnitude of very low probability events, is used as the basis for building a model in estimating the IaR. The estimates of the IaR using the peaks-over-threshold (POT) model suggest that the while the inflation rate experienced in 2008 can not be considered as an extreme value, it was very near the estimated 90 percent IaR.
    Keywords: Inflation-at-Risk (IaR); Extreme Value Theory (EVT); Peaks-over-Threshold (POT)
    JEL: E31 C52 C01
    Date: 2011–01
  14. By: Michal Jurek (The Poznan University of Economics, Banking Department)
    Abstract: This paper verifies strong and weak versions of the vanishing interim regime hypothesis (so-called bipolar view). It is shown herein that the strong as well as weak version of this hypothesis can be discredited. Empirical observations support the bipolar view only for the advanced countries, but not for emerging and developing ones. On the contrary – the number of interim regimes, used by emerging and developing countries more than doubled in the 1999–2008 period. Results of the logistic regression analysis also challenge a bipolar view. Moreover, they provide a strong support for the view that the probability of the use of interim regimes in emerging and developing countries significantly differs in various regions of the world. This can be treated as an evidence of the existence of other factors that influence these countries’ choices concerning exchange rate regimes, partly resulting from differences in institutional fundamentals and different economic structures as well as macroeconomic policy stabilization programs.
    Keywords: bipolar view, exchange rate regimes, monetary policy
    JEL: E42 E52 F31
    Date: 2010
  15. By: Haan, Jakob de; Kadek Dian Sutrisna Artha, I. (Groningen University)
    Abstract: Indicators of central bank independence (CBI) based on the interpretation central bank laws in place may not capture the actual independence of the central bank. This paper develops an indicator of actual independence of the Bank Indonesia (BI), the central bank of Indonesia, for the period 1953-2008 and compares it with a new legal CBI indicator based on Cukierman (1992). The indicator of actual independence captures institutional and economic factors that affect CBI. We find that before 1999, legal and actual independence of BI diverged substantially. After a new central bank law was enacted, the legal independence of BI increased and converged to actual independence.
    Date: 2010
  16. By: Bayraci, Selcuk; UNAL, GAZANFER
    Abstract: We proposed a continuous time ARMA known as CARMA(p,q) model for modeling the interest rate dynamics. CARMA(p,q) models have an advantage over their discrete time counterparts that they allow using Ito formulas and provide closed-form solutions for bond and bond option prices. We demonstrate the capabilities of CARMA(p,q) models by using Turkish short rate. The Turkish Republic Central Bank’s benchmark bond prices are used to calculate short-term interest rates between the period of 15.07.2006 and 15.07.2008. ARMA(1,1) model and CARMA(1,0) model are chosen as best suitable models in modeling the Turkish short rate.
    Keywords: Interest rate modeling; Continuous-time ARMA (CARMA)process; Lévy process
    JEL: C51 C01
    Date: 2010–11–15
  17. By: Harrison Hong; Motohiro Yogo
    Abstract: Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical and predict asset-price fluctuations better than a number of alternative variables including past prices. In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open interest is a more informative signal of future economic activity and inflation than past prices because of hedging demand and downward-sloping demand curves in futures markets.
    JEL: E31 E37 F31 G12 G13
    Date: 2011–01
  18. By: Grigoli, Francesco
    Abstract: This paper aims to identify the nexus between the excess of liquidity in the United States and commodity prices over the 1983-2006 period. In particular, it assesses whether commodity prices react more powerfully than consumer goods'prices to changes in real money balances. Within a cointegrated vector autoregressive framework, the author investigates whether consumer prices and commodity prices react to excess liquidity, and if the different price elasticities of supply for goods and commodities allow for differences in the dynamic paths of price adjustment to a liquidity shock. The results show a positive relationship between real money and real commodity prices and provide empirical evidence for a stronger response of commodity prices with respect to consumer goods'prices. This could imply that, if the magnitude of the reaction is due the fact that consumer goods'prices are slower to react, then their long-run value can be predicted with the help of commodity prices. The findings support the view that the latter should be considered as a valid monetary indicator.
    Keywords: Markets and Market Access,Emerging Markets,Economic Theory&Research,Commodities,E-Business
    Date: 2011–01–01
  19. By: Marc Flandreau, Kim Oosterlinck (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.
    Keywords: Exchange rate regime, gold standard, bimetallism, credibility, silver risk
    JEL: F33 N20
    Date: 2011–01
  20. By: Casadio, Paolo; Paradiso, Antonio
    Abstract: This article examines the existence and stability of the consumption function in the United States of America (US) economy during a sample period, beginning in the 1950s. In order to obtain a stable long run relationship, we have introduced two innovative elements into the analysis of the life-cycle of the consumption function with wealth effects: 1) a shift level break in the cointegrating relationship, and 2) using inflation as an additional explanatory variable. By implementing a well structured estimation strategy we found that, after taking the shift level break into account, a cointegration including inflation exists and is more stable for the critical sub-samples than traditional consumption function models.
    Keywords: Consumption; Cointegration; Inflation; Shift level break
    JEL: C20 E21
    Date: 2010–09–11
  21. By: Leung, Charles Ka Yui; Teo, Wing Leong
    Abstract: A multi-region, dynamic stochastic general equilibrium (MRDSGE) model is built to show that differences in the price elasticity of housing supply can be related to stylized facts on regional differences in (1) house price level, (2) house price volatility, (3) monetary policy propagation mechanism and (4) household asset portfolio. In addition, regional house prices are found to move more closely with regional fundamentals than with the national GDP. The correlation between the national stock price and the regional housing price also vary significantly across regions, which suggests that optimal portfolio should be region specific.
    Keywords: regional economic difference; monetary policy; housing market; region-specific portfolio
    JEL: R10 E32 E52
    Date: 2010–12
  22. By: Abdelghani, Echchabi; Osman, Sayid; Isares, Mahamad; Khalid, Sorhiran; Zulhilmi, Zulkifli
    Abstract: The paper analyses the issues surrounding the planned implementation of the Gulf Dinar among the six members of the Gulf Cooperation Council (GCC) – the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the state of Kuwait. The paper will begin with laying down the foundation of attempting to draw any similarities and differences in terms of each country’s economic fundamentals. It will then assess the grand idea for a monetary union by looking at the pros and cons, intra-regional trade, labour and capital movement and the political will of all six GCC countries. Updated issues that may have hampered the introduction of the Gulf Dinar will then be analysed by looking at the economic convergence criteria and its implications. Comparison with the European Monetary Union will be made throughout the paper, where necessary. The paper ends will then come out with a number of suggestions that may improve the implementation of the Gulf Dinar. Lastly, the paper will discuss the political implications of the implementation of the Gulf Dinar as the sole currency for the Gulf countries.
    Keywords: Gulf Dinar; GCC; Khaleej Dinar; Monetary Union; European Union
    JEL: F0 F2 F1 E6 E4
    Date: 2011–01–19
  23. By: Lawn, Philip
    Abstract: Abstract: Despite what mainstream economists preach, currency-issuing central governments have no budget constraint. It is therefore incumbent upon them to use their unique spending and taxing powers to achieve the broader goal of sustainable development. Their failure to do so has meant that nations have fallen well short of realising their full potential. Rather than accept the neo-liberal myth that ‘small government is best’, the citizens of a nation should welcome the central-government’s responsible use of their unique spending and taxing powers to provide sufficient public goods and critical infrastructure, achieve and maintain full employment, resolve critical social and environmental concerns, and meet the requirements of an aging population. Should central governments fail in their responsibility to prudently use their unique powers, public disapproval is best registered through the ballot box, not through degenerative debates that distort the facts about the operation of a modern, fiat-currency economy.
    Keywords: Keywords: Central governments; government budgets; fiscal and monetary policy; sustainable development
    JEL: E62 B50
    Date: 2011–01–05
  24. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances.
    Keywords: exchange rate, G-20, official financial flows, sterilized intervention
    Date: 2011–01
  25. By: Junko Koeda (Faculty of Economics, University of Tokyo)
    Abstract: This note analyzes the yield-curve predictability for GDP growth by modifying the time-series property of the interest rate process in Ang, Piazzesi, and Wei (2006). When interest rates have a unit root and term spreads are stationary, the short rate's forecasting role changes, and the combined information from the short rate and term spread intuitively reveals the relationship between the shift of yield curves and GDP growth.
    Date: 2011–01
  26. By: John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Lars Dalitz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jacob Ejsing (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Magdalena Grothe (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Simone Manganelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Fernando Monar (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Benjamin Sahel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Matjaž Sušec (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Jens Tapking (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Tana Vong (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper provides an assessment of the impact of the covered bond purchase programme (hereafter referred to as the CBPP) relative to its policy objectives. The analysis presented on the impact of the CBPP on both the primary and secondary bond markets indicates that the Programme has been an effective policy instrument. It has contributed to: (i) a decline in money market term rates, (ii) an easing of funding conditions for credit institutions and enterprises, (iii) encouraging credit institutions to maintain and expand their lending to clients, and (iv) improving market liquidity in important segments of the private debt securities market. The paper also provides an overview of the investment strategy of the the Eurosystem with regard to the CBPP portfolio. JEL Classification: G12, G14, G21
    Keywords: covered bonds, liquidity, primary market, secondary market
    Date: 2011–01
  27. By: Leonardo Morales-Arias (University of Kiel); Alexander Dross
    Abstract: This article investigates the statistical and economic implications of adaptive forecasting of exchange rates with panel data and alternative predictors. The candidate exchange rate predictors are drawn from (i) macroeconomic 'fundamentals', (ii) return/volatility of asset markets and (iii) cyclical and confidence indices. Exchange rate forecasts at various horizons are obtained from each of the potential predictors using single market, mean group and pooled estimates by means of rolling window and recursive forecasting schemes. The capabilities of single predictors and of adaptive techniques for combining the generated exchange rate forecasts are subsequently examined by means of statistical and economic performance measures. The forward premium and a predictor based on a Taylor rule yield the most promising forecasting results out of the macro 'fundamentals' considered. For recursive forecasting, confidence indices and volatility in-mean yield more accurate forecasts than most of the macro 'fundamentals'. Adaptive forecast combinations techniques improve forecasting precision and lead to better market timing than most single predictors at higher horizons.
    Keywords: exchange rate forecasting; panel data; forecast combinations; market timing
    JEL: C20 F31 G12
    Date: 2010–10–01
  28. By: Silvia Gabrieli (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: This paper provides an in depth microstructure analysis of the euro money market by taking a network perspective. Banks are the nodes of the networks; unsecured overnight loans form the links connecting the nodes. Daily interbank networks verify the same stylised facts documented for many real complex systems: they are highly sparse, far from being complete, exhibit the small world property and a power-law distribution of degree (the number of counterparties each bank establishes credit relationships with). On the other hand, the tendency of banks to cluster, i.e. to form groups where ties are relatively denser, is much lower than in other real networks. The time patterns of some network statistics provide interesting insights into the evolution of the potential for financial contagion; the partition of the network into smaller connected subnetworks documents a move against market integration; heterogeneous developments across banks of different size offer insights into banks’ behaviour. An analysis of banks’ prominence in the market is undertaken using centrality measures: the various indicators suggest that the biggest banks are also the most connected before the onset of the crisis; however, medium/small and very small banks’ centralities increase progressively after August 2007 as these banks increase their “influence” as liquidity providers. The rich set of measures described in this paper represents a key input for future research.
    Keywords: Network analysis; Network centrality indicators; Money market; Financial crisis
    JEL: D85 G10 G21
    Date: 2011–01–19
  29. By: Dorothee Bohle
    Abstract: An important tension had been underlying the first decade of the European Monetary Union. On the one hand, governments had embraced a revolutionary prospect when designing its institutions. They called on market forces and supranational institutions to limit popular democracy and scale back the interventionist state. On the other hand, they were unprepared to live up to this prospect. Hence the accumulation of large economic imbalances and their culmination in the Greek crisis and the instability of the Union’s periphery. These developments have given governments pause. With breathtaking speed, elites have agreed on the need for austerity. But it is difficult to see how the current attempt to return to the spirit of Maastricht would fare any better than before. Permanent austerity is fraught with economic irresponsibility and political risks. Europe therefore needs a new political debate about how much it wants to allow markets to determine the fate of its citizens and countries.
    Keywords: EMU; legitimacy
    Date: 2010–10–15

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