nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒02‒12
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary policy transmission in an emerging market setting. By Bhattacharya, Rudrani; Patnaik, Ila; Shah, Ajay
  2. Financial volatility and optimal instrument choice: A revisit to Poole’s analysis By Dai, Meixing
  3. How to measure inflation in India? By Patnaik, Ila; Shah, Ajay; Veronese, Giovanni
  4. Monetary policy and its impact on stock market liquidity: Evidence from the euro zone By Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
  5. The Dynamic Effects of U.S. Monetary Policy on State Unemployment By Dimitris Korobilis; Michelle Gilmartin
  6. On the monetary nature of the interest rate in Keynes’s thought By Giancarlo Bertocco
  7. Modelling Monetary and Fiscal Policy in the US: A Cointegration Approach By J. James Reade
  8. Stigma in financial markets: evidence from liquidity auctions and discount window borrowing during the crisis By Olivier Armantier; Eric Ghysels; Asani Sarkar; Jeffrey Shrader
  9. Macroprudential policy - a literature review By Gabriele Galati; Richhild Moessner
  10. Imprecision of Central Bank Announcements and Credibility By Daniel Laskar
  11. Running for the exit: international banks and crisis transmission By Ralph De Haas; Neeltje Van Horen
  12. Money as an institution of capitalism.On the relationship between money and uncertainty from a Keynesian perspective By Giancarlo Bertocco
  13. Third Quarter Review of Monetary Policy 2010-11 By D Subbarao
  14. Systemic financial fragility and the monetary circuit: a stock-flow consistent approach By Marco, Passarella
  15. Uncertainty and Central Banl Transparency: A Non-Bayesian Approach By Daniel Laskar
  16. The Duration of Intermediate Exchange Rate Regimes and Capital Controls By Raul Razo-Garcia
  17. Central-Bank Government Relationship in the Context of Emerging Economic Environment By P. B. Jauasundera
  18. Purchasing Power Parity and the Taylor Rule By Hyeongwoo Kim; Masao Ogaki

  1. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: Some emerging economies have a relatively ineffective monetary policy transmis- sion owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchange-rate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.
    Keywords: Monetary policy transmission ; Exchange rate pass-through ; Exchange rate regime ; Financial development ; India
    JEL: E31 E52
    Date: 2011–01
  2. By: Dai, Meixing
    Abstract: In this paper, using an IS-LM model with reserve market, we examine weather the operating procedure actually adopted by many central banks in the world, i.e. targeting directly short run interest rates and hence indirectly market interest rates, is more efficient in stabilizing output than a monetary base operating procedure if shocks affecting the interest rate policy are taken into account. Our results suggest that for an interest rate policy to be more efficient than a monetary aggregate oriented policy, central banks should directly target market interest rates which are narrowly linked to the aggregate spending.
    Keywords: Poole’s analysis; optimal instrument choice; financial volatility; monetary policy operating procedures.
    JEL: E58 E51 E52 E44
    Date: 2010–02–18
  3. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy); Veronese, Giovanni (Bank of Italy)
    Abstract: What is the best inflation measure in India? What inflation measure is most relevant for monetary policy making in India? Questions of timeliness, weights in the price index, accuracy of food price measurement, and inclusion of services prices are relevant to the choice of measure. We show that under present conditions of measurement, the Consumer Price Index for Industrial Workers (CPI-IW) is preferable to either the Wholesale Price Index or the GDP deflator.
    Keywords: Monetary policy ; Inflation measure ; Statistical system
    JEL: E52 E58
    Date: 2011–02
  4. By: Octavio Fernández-Amador; Martin Gächter; Martin Larch; Georg Peter
    Abstract: The recent financial crisis has been characterized by unprecedented monetary policy interventions of central banks with the intention to stabilize financial markets and the real economy. This paper sheds light on the actual impact of monetary policy on stock liquidity and thereby addresses its role as a determinant of commonality in liquidity. To capture effects both at the micro and macro level of stock markets, we apply panel estimations and vector autoregressive models. Our results suggest that an expansionary monetary policy of the European Central Bank leads to an increase of stock market liquidity in the German, French and Italian markets. These findings are robust for seven proxies of liquidity and two measures of monetary policy.
    Keywords: Stock liquidity, monetary policy, euro zone
    JEL: E44 E51 E52 G12
    Date: 2011–02
  5. By: Dimitris Korobilis (Université Catholique de Louvain); Michelle Gilmartin (University of Strathclyde)
    Abstract: This paper studies the transmission of monetary shocks to state unemployment rates, within a novel structural factor-augmented VAR framework with a timevarying 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: R15 C11 E52
    Date: 2011–02
  6. By: Giancarlo Bertocco (Department of Economics, University of Insubria, Italy)
    Abstract: Keynes in the General Theory, explains the monetary nature of the interest rate by means of the liquidity preference theory. The objective of this paper is twofold. Fist, to point out the limits of an explanation of the monetary nature of the interest rate and thus of the non-neutrality of money based on the liquidity preference theory. Second, to present a different explanation of the monetary nature of the interest rate based on the arguments with which Keynes, following the General Theory, responded to the criticism levelled at the liquidity preference theory by supporters of the loanable funds theory such as Ohlin and Robertson. It is shown that this explanation is consistent with the definition of the non-neutrality of money that Keynes presented in his 1933 works in which he underlines the need to elaborate a monetary theory of production (Keynes 1933a, 408) in order to explain the phenomena of the crisis and the fluctuations in income and employment
    Date: 2011–02
  7. By: J. James Reade
    Abstract: As governments and economists worldwide reflect on the unprecedented peacetime build-ups of government deficits and debts since 2008 and the Great Recession, the importance of fiscal and monetary policy interactions and their sustainability is key. This involves both thorough theoretical and careful econometric analysis. This paper provides the latter. We use multivariate cointegration methods to investigate monetary and fiscal interactions using the example of the United States since the early 1980s. Using survey data for inflation expectations, we find that monetary policymaking is heavily forward looking, and passive in the sense that it responds to policy rule. Fiscal policy is found to be active in that it does not respond to the fiscal policy rule discovered in the data. Entering into debates on the efficacy of fiscal policy, we find that in the long-term fiscal deficits are very harmful to growth, but in the short run fiscal stimuli can be effective in restoring the economy to equilibrium. The interactions between the two policy spheres appear somewhat limted in that neither policy tool enters the policy rule of the other policy sphere, but the more passive monetary policy does movwe in reaction to fiscal policy movements - the two policy spheres are complementary in that both respond in the same direction to revive and restrain the economy in downturns and boom times respectively.
    Keywords: Monetary policy, fiscal policy, policy interactions, cointegrated VAR method
    JEL: E52 E62 C01
    Date: 2011–01
  8. By: Olivier Armantier; Eric Ghysels; Asani Sarkar; Jeffrey Shrader
    Abstract: We provide empirical evidence for the existence, magnitude, and economic impact of stigma associated with banks borrowing from the Federal Reserve’s discount window facility. We find that, during the height of the financial crisis, banks were willing to pay an average premium of at least 37 basis points (and 150 basis points after Lehman’s bankruptcy) to borrow from the Term Auction Facility rather than from the discount window. The incidence of stigma varied according to bank characteristics and market conditions. Finally, we find that discount window stigma is economically relevant since it increased banks’ borrowing costs during the crisis. Our results have important implications for the provision of liquidity by central banks.
    Keywords: Discount window ; Financial crises ; Monetary policy ; Bank liquidity ; Banks and banking - Costs ; Auctions
    Date: 2011
  9. By: Gabriele Galati; Richhild Moessner
    Abstract: The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. In recent months, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.
    Keywords: macroprudential policy
    Date: 2011–02
  10. By: Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We consider a model where the central bank faces a credibility problem in its announcements, but also cares about its credibility and, therefore, wants to make truthful announcements. We show that, although the central bank would be able to perfectly transmit its information to the private sector through precise announcements, the central bank may nonetheless prefer to make imprecise announcements. This choice of the central bank would be suboptimal from the point of view of society. However, if the central bank gives enough weight to making truthful announcements, this suboptimality disappears, because the central bank would then prefer precise announcements to imprecise announcements.
    Keywords: central bank transparency; central bank announcements; imprecise announcements; credibility
    Date: 2010–11–29
  11. By: Ralph De Haas (EBRD); Neeltje Van Horen (De Nederlandsche Bank)
    Abstract: The global financial crisis has reignited the debate about the risks of financial globalisation, in particular the international transmission of financial shocks. We use data on individual loans by the largest international banks to their various countries of operations to examine whether banks’ access to borrower information affected the transmission of the financial shock across borders. The simultaneous use of country and bank-fixed effects allows us to disentangle credit supply and demand and to control for general bank characteristics. We find that during the crisis banks continued to lend more to countries that are geographically close, where they are integrated into a network of domestic co-lenders, and where they had gained experience by building relationships with (repeat) borrowers.
    JEL: O1 P2 P5
    Date: 2011–02
  12. By: Giancarlo Bertocco (Department of Economics, University of Insubria, Italy)
    Abstract: Dillard (1987) notes that to consider money as an institution of capitalism means to emphasise that the presence of money is an essential element in explaining fluctuations in income and employment. He states that Keynes?s General Theory offers a sound explanation of money as an institution of capitalism. Keynes?s explanation is based on a necessary condition, independent of money: the presence of uncertainty. The objective of the paper is to elaborate a different explanation of the role of money as an institution of capitalism according to which the presence of money constitutes the necessary condition to justify the importance of uncertainty.
    Date: 2011–02
  13. By: D Subbarao
    Abstract: This statement sets out the Reserve Bank’s assessment of the current macroeconomic situation and forward projections.
    Keywords: monetary policy, inflation, growth, credit, reserve bank, India, macroeconomic, projections,
    Date: 2011
  14. By: Marco, Passarella
    Abstract: In the last few years, a number of scholars has referred to the crop of contributions of Hyman P. Minsky as required readings to understanding the tendency of the capitalist economies to fall into recurring crises. The so-called ‘financial instability hypothesis’ of Minsky relies, however, on very disputed assumptions. Moreover, Minsky’s analysis of capitalism must be updated on the basis of the deep changes which, during the last three decades, have concerned the world economy. In order to overcome these theoretical difficulties, section 2 of the paper deals with the analytical structure of the financial instability theory, showing why this latter cannot be regarded as a general theory of the business cycle. Sections 3, 4 and 5 deal with a simplified, but consistent, re-formulation of some of the most disputed aspects of Minsky’s theory by cross-breeding it with inputs from the ‘Circuitist’ approach and the current Post Keynesian literature. In sections 6 and 7 we analyze the impact of both capital-asset inflation and consumer credit on the financial ‘soundness’ of the economy, within a simplified stock-flow consistent monetary circuit model. Some concluding remarks are provided in the last part of the paper (section 8).
    Keywords: Financial Instability; Stock-Flow Consistency; Monetary Theory of Production
    JEL: E32 E12 B50 E44
    Date: 2011–01–28
  15. By: Daniel Laskar (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We underline that some results obtained in the literature on central bank transparency may be quite different when we take a non-Bayesian approach to uncertainty, where "ambiguity" is taken into account. We consider some specific argument of the literature (obtained under a Bayesian approach), which implies that political uncertainty can be beneficial and central bank transparency harmful. We show that when ambiguity is large enough, these results do not hold anymore: political uncertainty is always harmful and central bank transparency always beneficial. Furthermore, as soon as we depart from the Bayesian case, Knightian uncertainty is always harmful. JEL Classification: E58; E52 Keywords: central bank transparency; political uncertainty; Knightian uncertainty; ambiguity; non-Bayesian approach
    Keywords: central bank transparency; political uncertainty; Knightian uncertainty; ambiguity; non-Bayesian approach
    Date: 2010–09–27
  16. By: Raul Razo-Garcia (Department of Economics, Carleton University)
    Abstract: We perform a survival analysis of the policy composed of an intermediate ex- change rate regime and a closed nancial account. The analysis proposed is novel because we overcome the potential endogeneity between the two policies by ana- lyzing the duration of the policy mix, estimate a multiple destinations model and control for unobserved heterogeneity. The deepness of the nancial system, in ation, per capita income, size, trade openness, and the global acceptance of intermediate regimes and capital controls aect the duration of the policy mix. Finally, the evi- dence shows that the single destination model hides interesting factors aecting the duration of the regime.
    JEL: F32 F33
    Date: 2011–01–31
  17. By: P. B. Jauasundera
    Abstract: The relationship between the Central Bank and the Government is based not on a mere legal framework, but also on multifaceted political economic considerations. Although in many respects the Central Bank is independent, it has become an integral part of the Government, particularly in managing macroeconomic challenges. The recent financial crisis in most advanced countries has put the Central Banks and Governments on to one mission and to work in close collaboration. [60th Anniversary Oration of the Bank of Sri Lanka]
    Keywords: central bank, financial crisis, central bank-government relationship, South Asia, Sri Lanka
    Date: 2011
  18. By: Hyeongwoo Kim; Masao Ogaki
    Abstract: In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogoff's (1996) 3 to 5 year consensus half-life implies that firms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we find that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models.
    Keywords: Purchasing Power Parity, Calvo Pricing, Taylor Rule, Half-Life of PPP Deviations, Median Unbiased Estimator, Grid-t Confidence Interval
    JEL: C32 E52 F31
    Date: 2011–02

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