nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒02‒19
37 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Do Federal Reserve Bank Presidents Pursue Regional or National Interests? New Evidence Based on Speeches By Bernd Hayo; Matthias Neuenkirch
  2. The Macroeconomic Effects on Interest on Reserves By Peter N. Ireland
  4. On money and output in the euro area: Is money redundant? By Costas Karfakis
  5. Financial Crises and Monetary Policy: Evidence from the UK By Christopher Martin; Costas Milas
  6. Persistence of Inflationary shocks: Implications for West African Monetary Union Membership By Alagidede, Paul; Coleman, Simeon; Cuestas, Juan Carlos
  7. Fighting Inflation Within the Dollarization Context: The Case of Vietnam By Michaël Goujon
  8. Sectoral money demand and the great disinflation in the US By Alessandro Calza; Andrea Zaghini
  9. Counterfeit Quality and Verification in a Monetary Exchange By Ben Fung; Enchuan Shao
  10. Evolution of India's exchange rate regime By Ashima Goyal
  11. Forecasting Brazilian Inflation Using a Large Data Set By Francisco Marcos Rodrigues Figueiredo
  12. Asymmetric Shocks and Co-movement of Price Indices By Rao, Nasir Hamid; Bukhari, Syed Kalim Hyder
  13. The Central Banker's Case for Doing More By Adam S. Posen
  14. Monetary policy shocks in a DSGE model with a shadow banking system By Fabio Verona; Manuel M. F. Martins; Inês Drumond
  15. Real effects of inflation uncertainty in the US By Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis
  16. Multiplicative uncertainty, central bank transparency and optimal degree of conservativeness By Dai, Meixing
  17. How Rational are the Expected Inflation Rate in Australia? By Paradiso, Antonio; Rao, B. Bhaskara
  18. Term premia and the news By Michael D. Bauer
  19. India's fiscal and monetary framework: growth in an opening economy By Ashima Goyal
  20. Is Inflation Persistence Over? By Fernando N. de Oliveira; Myrian Petrassi
  21. Integrating Reform of Financial Regulation with Reform of the International Monetary System By Morris Goldstein
  22. The US stock market leads the Federal funds rate and Treasury bond yields By Kun Guo; Wei-Xing Zhou; Si-Wei Cheng; Didier Sornette
  23. The international monetary system after the financial crisis By Ettore Dorrucci; Julie McKay
  25. Currency Wars? By William R. Cline; John Williamson
  26. Forecasting the term structure of the Euro Market using Principal Component Analysis By Dauwe, Alexander; Moura, Marcelo L.
  27. Estimates of Fundamental Equilibrium Exchange Rates, May 2010 By William R. Cline; John Williamson
  28. Credit constraints and distance, what room for Central banking? The French experience (1880-1913) By Guillaume Bazot
  29. "What Happens if Germany Exits the Euro?" By Marshall Auerback
  30. Dealing with Volatile Capital Flows By Olivier Jeanne
  31. Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi By Raphael Auer
  32. Does the euro make a difference? Spatio-temporal transmission of global shocks to real effective exchange rates in an infinite VAR By Matthieu Bussière; Alexander Chudik; Arnaud Mehl
  33. Financial Policies, Investment, and the Financial Crisis: Impaired Credit Channel or Diminished Demand for Capital? By Kahle, Kathleen M.; Stulz, Rene M.
  34. Strengthening IMF Surveillance: A Comprehensive Proposal By Edwin M. Truman
  35. Making sense of China’s excessive foreign reserves By Yi Wen
  36. Perspectives on Single Euro Payments Area adoption in the light of the financial crisis By Avadanei, Andreea
  37. Price rigidity in Europe and the US: A comparative analysis using scanner data By B. VERHELST; D. VAN DEN POEL

  1. By: Bernd Hayo (Philipps-University Marburg); Matthias Neuenkirch (Philipps-University Marburg)
    Abstract: In this paper, we analyze the determinants of speeches by Federal Reserve (Fed) officials over the period January 1998 to September 2009. Econometrically, we use a probit model with regional and national macroeconomic variables to explain the subjectively coded content of these speeches. Our results are, first, that Fed Governors and presidents follow a Taylor rule when expressing their opinions: a rise in expected inflation (unemployment) makes a hawkish speech more (less) likely. Second, the content of speeches by Fed presidents is affected by both regional and national macroeconomic variables. Third, speeches by nonvoting presidents are more focused on regional economic development than are those by voting presidents. Finally, voting presidents and Governors are less backward-looking in their wording than are nonvoting presidents.
    Keywords: Central Bank Communication, Disagreement, Federal Reserve Bank, Monetary Policy, Regional Representation, Speeches
    JEL: D72 E52 E58
    Date: 2011
  2. By: Peter N. Ireland (Boston College)
    Abstract: This paper uses a New Keynesian model with banks and deposits, calibrated to match the US economy, to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require important adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish and households' portfolio shifts increase banks' demand for reserves when short-term interest rates rise. Money and monetary policy remain linked in the long run, however, since policy actions that change the price level must change the supply of reserves proportionately.
    Keywords: banking, reserves, interest, central banking
    JEL: E31 E32 E51 E52 E58
    Date: 2011–02–01
  3. By: Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
    Date: 2010–12
  4. By: Costas Karfakis (Department of Economics, University of Macedonia)
    Abstract: The relationship between money and output in the euro area is tested in the context of a two-equation model. An interesting aspect of the empirical analysis is the evidence that the real M3 has a correctly signed and statistically significant impact on business cycle fluctuations, given the real interest rate and foreign output. This finding supports the argument made by proponents of monetarism that the effects of monetary policy actions on the real economy are not fully captured by the short-term real interest rate.
    Keywords: Output gap, real money, real interest rate, simultaneous equations methods.
    JEL: E32 E51 E52 E58
    Date: 2011–01
  5. By: Christopher Martin (Department of Economics, University of Bath, UK); Costas Milas (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis (RCEA), Italy; Erastinis, Greece)
    Abstract: We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a “financial crisis” regime in which policy rates respond strongly to financial stress and a “no-crisis” Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.
    Keywords: monetary policy, financial crisis
    JEL: C51 C52 E52 E58
    Date: 2011–02
  6. By: Alagidede, Paul; Coleman, Simeon; Cuestas, Juan Carlos
    Abstract: Plans are far advanced to form a second monetary union, the West African Monetary Zone (WAMZ), in Africa. While much attention is being placed on convergence criteria and preparedness of the five aspiring member states, less attention is being placed on how the dynamics of inflation in individual countries are (dis)similar. This paper aims to stimulate debate on the long term sustainability of the union by examining the dynamics of inflation within these countries. Using Fractional Integration (FI) methods, we establish that some significant differences exist among the countries. Shocks to inflation in Sierra Leone are non mean reverting; results for The Gambia, Ghana and Guinea-Bissau suggest some inflation persistence, despite being mean reverting. Some policy implications are discussed and possible outstanding policy questions are raised.
    Keywords: Monetary unions; West Africa; stationarity; fractional integration; Inflationary shocks
    Date: 2010–10
  7. By: Michaël Goujon (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: During the transition towards a market economy, the Vietnamese economy has embarked upon a path of lasting disinflation in a context of dollarization. In this study, a model shedding light on the determinants of inflation in the case of dollarization is developed and estimated with a two-step procedure for Vietnam in the 1990s. In particular, the results of this research reveal the impact on inflation of the exchange rate variations and a measure of the excess of broad money. Then, managing the exchange rate fluctuations and avoiding any excess of broadly defined money are found to be essential. The adoption of these two strategies by Vietnamese authorities may be a significant explanation of their ability to fight inflation.
    Keywords: Vietnam ; cointegration ; Dollarization ; Demand for Money ; inflation
    Date: 2011–02–09
  8. By: Alessandro Calza (European Central Bank); Andrea Zaghini (Bank of Italy)
    Abstract: Estimates of the welfare costs of inflation based on Bailey's (1956) methodology are typically computed on the basis of aggregate money demand models. Yet, the behavior of money demand is likely to vary across sectors. As a result, the impact on welfare of changes in the inflation regime may differ between households and firms. We specifically investigate the sectoral welfare implications of the shift from the Great Inflation to the present regime of low and stable inflation. In order to do so, we estimate different functional specifications of sectoral money demand models for US households and non-financial firms using flow of funds data covering four decades. We find that the benefits were significant for both households and firms.
    Keywords: welfare cost of inflation, flow of funds data, demand for money
    JEL: E41 C22
    Date: 2011–01
  9. By: Ben Fung; Enchuan Shao
    Abstract: Recent studies on counterfeiting in a monetary search framework show that counterfeiting does not occur in a monetary equilibrium. These findings are inconsistent with the observation that counterfeiting of bank notes has been a serious problem in some countries. In this paper, we show that counterfeiting can exist as an equilibrium outcome in a model in which money is not perfectly recognizable and thus can be counterfeited. A competitive search environment is employed in which sellers post offers and buyers direct their search based on posted offers. When sellers are uninformed about the quality of the money, their offers are pooling and thus buyers can extract rents by using counterfeit money. In this case, counterfeit notes can coexist with genuine notes under certain conditions. We also explicitly model the interaction between sellers' verification decisions and counterfeiters' choices of counterfeit quality. This allows us to better understand how policies can affect counterfeiting.
    Keywords: Bank notes
    JEL: D82 D83 E42 E50
    Date: 2011
  10. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper analyzes the changing INR trends over the reform period, in the context of fundamental determinants of exchange rates. In the early reform years the chief concern was to limit appreciation from inflows, and from higher domestic inflation, given the trade deficit. So short-term nominal depreciation maintained a long-term real fix. But with two-way nominal variation, more objectives can be accommodated. We ask how the exchange rate contributed to three possible policy objectives-maintaining a real competitive exchange rate, neutralizing inflationary oil shocks, deepening foreign exchange markets and encouraging hedging. Depreciation allowed just before oil prices crashed compromised the second objective. Inadequate commitment to two-way movement, prior to the crisis, induced firms to take large currency exposures based on expected appreciation. After the crisis, capital flows were allowed to drive the exchange rate, aggravating inflation and acting against macro stabilization. Markets need some guidance to achieve policy objectives.
    Keywords: Exchange rate regimes, stabilization, inflation, markets, capital flows, hedging
    JEL: F41 F31 E52
    Date: 2010–12
  11. By: Francisco Marcos Rodrigues Figueiredo
    Abstract: The objective of this paper is to verify if exploiting the large data set available to the Central Bank of Brazil, makes it possible to obtain forecast models that are serious competitors to models typically used by the monetary authorities for forecasting inflation. Some empirical issues such as the optimal number of variables to extract the factors are also addressed. I find that the best performance of the data rich models is usually for 6-step ahead forecasts. Furthermore, the factor model with targeted predictors presents the best results among other data-rich approaches, whereas PLS forecasts show a relative poor performance.
    Date: 2010–12
  12. By: Rao, Nasir Hamid; Bukhari, Syed Kalim Hyder
    Abstract: This paper is an attempt to gauge the relationship between the long run paths of consumer price index and wholesale price index of Pakistan. For the empirical analysis the Johansen co-integration technique has been applied on monthly data (1978 to 2010) of WPI and CPI. This paper found that both the indices are co-integrated in the long run. Thus the deviations in movements of WPI and CPI in the short run are transitory and both the indices will converge to their coherent path in the long run. Therefore, inflation computed from CPI can be used as official measure of inflation without worrying for short run movements of WPI.
    Keywords: Price Level; Time Series Models; Monetary Policy
    JEL: C32 E31 E52
    Date: 2010–11–04
  13. By: Adam S. Posen (Peterson Institute for International Economics)
    Abstract: Adam S. Posen presents his view on the role of monetary policy in the global economic recovery, in particular in the large Western countries, and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Posen argues that monetary policy should continue to be aggressive about promoting recovery, and further quantitative easing should be undertaken. Policymakers face a clear and sustained uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver the desired sustained recovery on its own. In every major economy, actual output has fallen so much versus where trend growth would have put them, and trend growth has not been above potential for long enough as yet, that there remains a significant gap between what the economy could be producing at full employment and what it currently produces. Thus, policymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium term, it is on the downside. There are, however, some very serious risks if policy errors are made by tightening prematurely or even by loosening insufficiently. The risks that Posen believes the United Kingdom and other major Western countries face now are those of sustained low growth and near deflation turning into a self-fulfilling prophecy (as in Japan in the 1990s and in the United States and Europe in the 1930s) and/or of inducing a political reaction that could undermine these countries' long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity and by investors to avoid risk and prefer cash. These tendencies are already present, and insufficient monetary response is likely to worsen them. The combination of these risks with the potential attainable gains motivates Posen's call for additional monetary policy stimulus.
    Date: 2010–10
  14. By: Fabio Verona (Universidade do Porto, Faculdade de Economia and CEF.UP); Manuel M. F. Martins (Universidade do Porto, Faculdade de Economia and CEF.UP); Inês Drumond (Universidade do Porto, Faculdade de Economia and CEF.UP, and GPEARI-MFAP)
    Abstract: This paper is motivated by the recent financial crisis and addresses whether a “too low for too long” interest rate policy may generate a boom-bust cycle. We suggest a model in which a microfounded shadow banking sector is included in an otherwise state-of-the-art DSGE model. When faced with perverse incentives, financial intermediaries within the shadow banking sector can divert a fraction of stockholders’ profits for their own benefits and extend credit at a discounted rate. The model predicts that long periods of accommodative monetary policy do create the preconditions for, but do not cause per se, a boom-bust cycle. Rather, it is the combination of a persistent monetary ease with microeconomic distortions in the financial system that causes a boom-bust.
    Keywords: monetary policy; DSGE model; shadow banking system; boom-bust
    JEL: E32 E44 E52 G24
    Date: 2011–02
  15. By: Mustafa Caglayan; Ozge Kandemir; Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: We empirically investigate the effects of inflation uncertainty on output growth for the US using both monthly and quarterly data over 1985-2009. Employing a Markov regime switching approach to model output dynamics, we show that inflation uncertainty obtained from a Markov regime switching GARCH model exerts a negative and regime dependant impact on output growth. In particular, we show that the negative impact of inflation uncertainty on output growth is almost 4.5 times higher during the low growth regime than that during the high growth regime. We verify the robustness of our findings using quarterly data
    Keywords: Growth, inflation uncertainty, Markov-switching modeling, Markov-switching GARCH
    JEL: E31 E32
    Date: 2011–02
  16. By: Dai, Meixing
    Abstract: This paper extends the results of Kobayashi (2003) and Ciccarone and Marchetti (2009) by considering the optimal choice of central bank conservativeness. It is shown that the government can choose a sufficiently populist but opaque central banker so that higher multiplicative uncertainty improves the social welfare only when the society is very conservative.
    Keywords: Multiplicative uncertainty; optimal degree of conservativeness; Brainard conservatism; central bank transparency.
    JEL: E58 E52
    Date: 2010–06
  17. By: Paradiso, Antonio; Rao, B. Bhaskara
    Abstract: This paper uses the methodology of Pearce (1979) and Bhagestani and Noori (2008) to show that the expected rate of inflation by the market participants in Australia is more rational than the household survey forecasts by the Melbourne Institute.
    Keywords: ARIMA Forecasts; Expected Inflation Rate; Survey data; Australia.
    JEL: C12 C2 E3
    Date: 2011–02–08
  18. By: Michael D. Bauer
    Abstract: How do monetary policy expectations and term premia respond to news? This paper provides new answers to this question by means of a dynamic term structure model (DTSM) in which risk prices are restricted. This leads to more precise and more reliable estimates of expectations and term premium components. I provide a new econometric framework for DTSM estimation that allows the researcher to select plausible constraints from a large set of restrictions, to correctly quantify statistical uncertainty, and to incorporate model uncertainty in the inference about risk pricing. The main empirical result is that under the restrictions favored by the data the expectations component, and not the term premium, accounts for the majority of high-frequency movements of long-term interest rates and for essentially all of their procyclical response to macroeconomic news. At both high and low frequencies, term premia are more stable than implied by a DTSM with unconstrained risk prices. The apparent disconnect between long-term rates and policy rates that has puzzled macroeconomists for some time is resolved by appropriately restricting the risk adjustment in models for bond pricing.
    Keywords: Bonds - Prices ; Interest rates
    Date: 2011
  19. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Since a crisis is a shock impinging on a system, the response can be used to deduce aspects of the system's structure. Analysis of the crisis and recovery suggests aggregate supply in India is elastic but subject to upward shocks. This has implications for the exit and for fiscal consolidation. Both monetary and fiscal policy should identify measures that would reduce costs, while preventing too large a demand contraction. Specific policies are identified and Indian policies evaluated.
    Keywords: Crisis, fiscal and monetary policy, exit, aggregate supply elasticity
    JEL: E10 E52 E62
    Date: 2010–12
  20. By: Fernando N. de Oliveira; Myrian Petrassi
    Abstract: We analyze inflation persistence in several industrial and emerging countries in the recent past by estimating reduced-form models of inflation dynamics. We select a very representative group of 23 industrial and 17 emerging economies. Our sample period is comprised of quarterly data and starts in the first quarter of 1995. Our results show that inflation persistence is low and stable for all countries in our sample. It seems to be lower in industrial relative to emerging countries. Finally, even countries that have had “hyperinflation” experience in the recent past showed low levels of inflation persistence, albeit apparently higher than the other countries in our sample.
    Date: 2010–12
  21. By: Morris Goldstein (Peterson Institute for International Economics)
    Abstract: This paper links reform of the international financial regulatory system with reform of the international monetary system because as this recent global crisis demonstrates so vividly, the root causes can come from both the financial and monetary spheres and they can interact in variety of dangerous ways. On the financial regulatory side, I highlight three problems: developing a better tool kit for pricking asset-price bubbles before they get too large; shooting for national minima for regulatory bank capital that are at least twice as high those recently agreed as part of Basel III; and implementing a comprehensive approach to "too-big-to-fail" financial institutions that will rein-in their past excessive risktaking. On the international monetary side, I emphasize what needs to be done to discourage "beggar-thy-neighbor" exchange rate policies, including agreeing on a graduated set of penalties for countries that refuse persistently to honor their international obligations on exchange rate policy.
    Keywords: financial regulation, IMF surveillance, too-big-to-fail, asset-price bubbles
    JEL: F3 F33 G28 G38
    Date: 2011–02
  22. By: Kun Guo (CAS); Wei-Xing Zhou (ECUST); Si-Wei Cheng (CAS); Didier Sornette (ETH Zurich)
    Abstract: Using a recently introduced method to quantify the time varying lead-lag dependencies between pairs of economic time series (the thermal optimal path method), we test two fundamental tenets of the theory of fixed income: (i) the stock market variations and the yield changes should be anti-correlated; (ii) the change in central bank rates, as a proxy of the monetary policy of the central bank, should be a predictor of the future stock market direction. Using both monthly and weekly data, we found very similar lead-lag dependence between the S&P500 stock market index and the yields of bonds inside two groups: bond yields of short-term maturities (Federal funds rate (FFR), 3M, 6M, 1Y, 2Y, and 3Y) and bond yields of long-term maturities (5Y, 7Y, 10Y, and 20Y). In all cases, we observe the opposite of (i) and (ii). First, the stock market and yields move in the same direction. Second, the stock market leads the yields, including and especially the FFR. Moreover, we find that the short-term yields in the first group lead the long-term yields in the second group before the financial crisis that started mid-2007 and the inverse relationship holds afterwards. These results suggest that the Federal Reserve is increasingly mindful of the stock market behavior, seen at key to the recovery and health of the economy. Long-term investors seem also to have been more reactive and mindful of the signals provided by the financial stock markets than the Federal Reserve itself after the start of the financial crisis. The lead of the S&P500 stock market index over the bond yields of all maturities is confirmed by the traditional lagged cross-correlation analysis.
    Date: 2011–02
  23. By: Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Julie McKay (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: The main strength of today’s international monetary system – its flexibility and adaptability to the different needs of its users – can also become its weakness, as it may contribute to unsustainable growth models and imbalances. The global financial crisis has shown that the system cannot afford a benign neglect of the global public good of external stability, and that multilateral institutions and fora such as the IMF and the G20 need to take the initiative to set incentives for systemically important economies to address real and financial imbalances which impair stability. We draw this core conclusion from a systematic review of the literature on the current international monetary system, in particular its functioning and vulnerabilities prior to the global financial crisis. Drawing from this analysis, we assess the existing and potential avenues, driven partly by policy initiatives and partly by market forces, through which the system may be improved. JEL Classification: F02, F21, F31, F32, F33, F34, F53, F55, F59, G15
    Keywords: International monetary system, international liquidity, financial globalisation, global imbalances, capital flows, exchange rates, foreign reserves, surveillance, global financial safety net, savings glut, Triffin dilemma, International Monetary Fund, Special Drawing Rights, G20
    Date: 2011–02
  24. By: Partha Sen (Department of Economics, Delhi School of Economics, Delhi, India)
    Abstract: The use of monetary policy in India has been constrained by a loose fiscal policy and capital flows. Capital inflows have the potential to cause a Dutch Disease-type situation. The RBI has carried out sterilized intervention to prevent this. In spite of this, the trade balance and, more often than not, the current account continue to be in deficit. Thus the real exchange rate, in spite of the intervention, is inconsistent with external balance (defined as a manageable current account deficit). The problem of capital flows is a self-inflicted pain. The authorities could have kept a lid on capital flows, allowing only the most urgent inflows from a growth standpoint. It would have had a competitive edge in manufacturing. This would have allowed it to expand labor-intensive industry and help mitigate the massive poverty levels.
    Date: 2010–12
  25. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: More than a dozen countries, including Brazil, China, India, Japan, and Korea, have been intervening in the foreign exchange market to prevent their currencies from appreciating. There are fears that the second dose of quantitative easing in the United States (dubbed QE2) may worsen currency appreciation. These developments raise the prospect of a currency war, which the Group of Twenty (G-20) fears is gathering steam. Because many countries are simultaneously seeking to improve their balance of payments position, many are seeking a more competitive exchange rate. The laws of mathematics mean that some must be disappointed: A weaker exchange rate of one country implies a stronger rate of some other country or countries. Cline and Williamson argue that any agreement reached at the G-20 summit in Seoul to prevent an exchange rate war should be based on a distinction between countries with overvalued and undervalued currencies. Any accord should be designed to seek appreciation of the latter but not to debar the former from taking actions to prevent their currencies from becoming even more overvalued. Countries that are already overvalued on an effective basis--primarily floating emerging-market economies, but also Australia and New Zealand--should not be condemned for resisting further appreciation. But if a currency is substantially undervalued and the country is aggressively engaging in intervention to prevent appreciation, it is reasonable to judge that its intervention is unjustifiable. The authors show that a handful of high-surplus economies are intervening in such a fashion: China, Hong Kong, Malaysia, Singapore, Switzerland, and Taiwan. The currencies of these economies are substantially undervalued, and their current account surpluses are correspondingly excessive, pointing clearly to the desirability of currency revaluation by these countries. It would be very wrong for the G-20 to condemn all countries that are trying to prevent their exchange rates from appreciating. One needs to ask which currencies are undervalued and concentrate on preventing them from intervening and tightening capital controls.
    Date: 2010–11
  26. By: Dauwe, Alexander; Moura, Marcelo L.
    Date: 2011–10
  27. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: This policy brief updates Cline and Williamson's estimates of fundamental equilibrium exchange rates (FEERs) to May 2010 using the data to March contained in the April issue of the International Monetary Fund's World Economic Outlook. The IMF's data are updated to May by subsequent exchange rate changes and Cline's estimates of the impact of exchange rate changes on trade flows. In addition, the assumptions about current account targets have been somewhat modified from previous years: All countries are now assumed to aim to keep current account balances within 3 percent of equilibrium, whereas formerly some countries with large net foreign assets to GDP ratios (NFA/GDP) were allowed larger targeted imbalances. The fundamental question explored is what pattern of exchange rates is consistent with satisfactory medium-term evolution of the world economy, interpreted as achieving those objectives while maintaining internal balance in each country. The big disequilibrium in the pattern of exchange rates remains the undervaluation of the renminbi and the overvaluation of the dollar. The size of this disequilibrium is, however, less than previously estimated (now 15 percent on an effective basis and 24 percent bilaterally with respect to the dollar), due to the decline in the IMF's estimate of China's prospective current account surplus. The recent depreciation of the euro, while increasing the size of Euroland's prospective surplus, does not threaten to lead to an internationally unacceptable imbalance (i.e., greater than 3 percent of GDP) and therefore does not create a case for international action to reverse the rise. The yen is no longer found to be overvalued on an effective basis, although if China revalued that would create a case for a stronger yen/dollar rate. Several of the other East Asian currencies would also need to appreciate bilaterally to avoid effective undervaluation. Of the 28 other economies covered, Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan are judged to need an effective appreciation and Australia, Brazil, New Zealand, South Africa, and Turkey to need an effective depreciation.
    Date: 2010–06
  28. By: Guillaume Bazot (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Although a relative consensus is emerging about the economic effects of credit development, many controversies remain as to the role of the central bank in that development. This paper addresses the process of credit allocation by the central bank as observed on a spatial basis. It examines how and why improved geographical access to the central bank contributes to credit development by looking at the Fench experience in the ‘classical period' (1880-1913). In an environment of emerging, but highly prudent, deposit banks and the absence of a centralised money market, Banque de Fance branches had enough supply and demand to generate a network. Access to “central loans” hence reduced liquidity constraints and encouraged local banks and firms to lend. We shape the proof in two stages. First, a simple banking model presents our intuition and the mechanisms at work. Second, we take a new data set on the development of credit by French geographic area (département) to test our hypothesis using panel econometric tools. The results show the Banque de France branches having a strong and robust impact on credit development.
    Keywords: credit constraint ; distance ; soft information ; succursales of the Banque de France ; credit development
    Date: 2010–11
  29. By: Marshall Auerback
    Abstract: Like marriage, membership in the eurozone is supposed to be a lifetime commitment, “for better or for worse.” But as we know, divorce does occur, even if the marriage was entered into with the best of intentions. And the recent turmoil in Europe has given rise to the idea that the euro itself might also be reversible, and that one or more countries might revert to a national currency. The prevailing thought has been that one of the weak periphery countries would be the first to call it a day. It may not, however, work out that way: suddenly, the biggest euro-skeptics in Europe are not the perfidious English but the Germans themselves.
    Date: 2011–02
  30. By: Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The tools and mechanisms with which emerging-market countries insure themselves against volatile capital flows are in a state of flux. Most emerging-market countries had accumulated an unprecedented level of international reserves before the 2008 global financial crisis. The crisis itself led to a large increase in International Monetary Fund (IMF) resources and the introduction of a new lending facility, the Flexible Credit Line. Meanwhile, some progress was made toward transforming the Chiang Mai Initiative into an Asian Monetary Fund, and the Greek debt crisis even prompted calls for the creation of a European Monetary Fund. How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows. Jeanne concludes that the IMF and the international community should make more efforts to establish normative rules for the appropriate level of prudential reserves in emerging-market and developing countries and actively develop with its members a code of good practice for prudential capital controls.
    Date: 2010–07
  31. By: Raphael Auer
    Abstract: How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.
    Keywords: Imports - Prices ; International trade ; Labor market ; Macroeconomics ; Price levels
    Date: 2011
  32. By: Matthieu Bussière (Banque de France, 31 rue Croix des petits champs – 75001 Paris, France.); Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides evidence on whether the creation of the euro has changed the way global turbulences affect euro area and other economies. Specifically, it considers the impact of global shocks on the competitiveness of individual euro area countries and assesses whether their responses to such shocks have converged, as well as to what pattern. Technically, the paper applies a newly developed methodology based on infinite VAR theory featuring a dominant unit to a large set of over 60 countries' real effective exchange rates, including those of the individual euro area economies, and compares impulse response functions to the estimated systems before and after EMU with respect to three types of shocks: a global US dollar shock, generalised impulse response function shocks and a global shock to risk aversion. Our results show that the way euro area countries' real effective exchange rates adjust to these shocks has converged indeed, albeit to a pattern that depends crucially on the nature of the shock. This result is noteworthy given the apparent divergence in competitiveness indicators of these countries in the first ten years of EMU, which suggests that this diverging pattern is unlikely to be due to global external shocks with asymmetric effects but rather to other factors, such as country-specific domestic shocks. JEL Classification: C21, C23.
    Keywords: Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks.
    Date: 2011–02
  33. By: Kahle, Kathleen M. (University of AZ); Stulz, Rene M. (OH State University)
    Abstract: Though much of the narrative of the financial crisis has focused on the impact of a bank credit supply shock, we show that such a shock cannot explain important features of the financial and investment policies of industrial firms. These features are consistent with a dominant role for the increase in risk and the reduction in demand for goods that occurred during the crisis. The net equity issuance of small firms and unrated firms is abnormally low throughout the crisis, whereas an impaired credit supply by itself would have encouraged these firms to increase their net equity issuance. After September 2008, firms increase their cash holdings rather than use them to mitigate the impact of the credit supply shock. Firms that are more bank-dependent before the crisis do not reduce their capital expenditures more than other firms during the crisis. Finally, the evidence is strongly supportive of theories that emphasize the importance of collateral and corporate net worth in financing and investment policies, as firms with stronger balance sheets reduce capital expenditures less after September 2008.
    Date: 2011–02
  34. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The central challenge facing the global economy and financial system today is the failure of countries to limit the negative effects of their policies on other countries and on global economic and financial stability. The most prominent manifestations of this challenge are the balance-of-payments adjustment process and the notorious asymmetry therein, spillovers from other countries' financial-sector policies such as those involved in the crisis of 2007-10, and the prospect of sustained unbalanced growth in the global economy with some countries overheating and others facing substantial excess capacity. Truman proposes an approach to strengthen International Monetary Fund (IMF) surveillance over the economic and financial policies of its member countries--an approach that builds on members' IMF obligations with a view to producing significant promise of affecting their policy choices. His proposed approach has five integrated components: (1) updated obligations of IMF membership, (2) development of a set of norms to guide members in meeting those obligations, (3) a process to apply judgment in monitoring compliance with those obligations via the use of the norms, (4) accountability in the application of such judgment based on transparency, and (5) potential consequences for member countries that are judged not to have complied with their obligations. The crux of the approach is to enhance IMF members' obligations to contribute to global economic and financial stability and to strengthen IMF surveillance of those obligations through the use of norms and a transparent peer review process that leads to improved policies and outcomes.
    Date: 2010–12
  35. By: Yi Wen
    Abstract: Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies. Therefore, the massive foreign-reserve buildups by China are not necessarily the intended outcome of any government policies or an undervalued home currency, but instead a natural consequence of the country’s rapid economic growth in conjunction with an inefficient financial system (or lack of timely financial reform). A tractable growth model of precautionary saving is provided to quantitatively explain China’s extraordinary path of trade surplus and foreign-reserve accumulation in recent decades. Ironically, the analysis suggests that without a well-developed domestic financial market, the value of the renminbi (RMB) may significantly depreciate, instead of appreciate, once the Chinese government abandons the linked exchange rate and the massive amount of precautionary savings of Chinese households are unleashed toward international financial markets to search for better returns.
    Keywords: International trade ; Balance of trade - China ; International finance
    Date: 2011
  36. By: Avadanei, Andreea
    Abstract: The scope of this article is to point out how the present financial crisis is affecting the European payments landscape and the Single Euro Payments Area implementation. The current unpredictable and very challenging market situation has not fundamentally changed the fact that payment services need to continue modernization in order to become more flexible, agile and adapt in order to comply with its important purpose in society. SEPA is needed to ensure the new modern payment platform that can enable Europe to move beyond basic services, increase payments efficiency, embrace innovation and integrate further services in the trade process. Today, the turbulent market conditions could have the effect of accentuating rather than reducing the business case imperative and momentum to achieving full SEPA implementation.
    Keywords: Single Euro Payments Area; credit crunch; corporate bodies; cash management; financial turmoil
    JEL: D53 E42 G21
    Date: 2010–04–02
    Abstract: This paper uses scanner data from two large retailers to offer new insights into the extent of price rigidity in Europe and the US. Recent empirical research in this field has made extensive use of monthly data to study price stickiness and to control for the impact of temporary sales. We show that the use of monthly data is potentially highly misleading. We employ scanner data in (bi)weekly frequency and highlight the importance of high frequency data in studying price rigidity. Regular prices show roughly the same degree of flexibility in Europe and the US, in line with recent empirical research, when we study monthly price series derived from our high frequency scanner data. This finding collapses, however, when the original scanner datasets in higher base frequency are examined. Regular prices are then far more flexible in the US than in Europe. This result is robust to the type of sales filter that we apply and the statistic used to capture price rigidity.
    Keywords: price setting, scanner data, frequency of price change, sales filtering
    JEL: C33 D4 E3 L66
    Date: 2010–11

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