nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒04‒16
nineteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. What lies beneath? A time-varying FAVAR model for the UK transmission mechanism By Haroon Mumtaz; Pawel Zabczyk; Colin Ellis
  2. Imperfect information, real-time data and monetary policy in the euro area By Stefano Neri; Tiziano Ropele
  3. Policy Rule Coefficients Driven by Latent Factors: Monetary and Fiscal Policy Interactions in an Endowment Economy By Gonzalez-Astudillo, Manuel
  4. Bank-characteristics, lending channel and monetary policy in Malaysia: evidence from bank-level data By Abdul Majid, Muhamed Zulkhibri
  5. Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations By Thomas I. Palley
  6. A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights By Chu, Angus C.; Lai, Ching-Chong; Liao, Chih-Hsing
  7. Asian Monetary Unit and Monetary Cooperation in Asia By Ogawa, Eiji; Shimizu, Junko
  8. A note on expectational stability under non-zero trend inflation By Teruyoshi Kobayashi; Ichiro Muto
  9. Fiscal policy, pricing frictions and monetary accommodation By Fabio Canova; Evi Pappa
  10. Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium By Dai, Meixing; Sidiropoulos, Moïse
  11. Fixing Canada’s CPI: A Simple and Sensible Policy Change for Minister Flaherty By Christopher Ragan
  12. Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets? By Luigi Bonatti; Andrea Fracasso
  13. Monetary and macroprudential policies By Paolo Angelini; Stefano Neri; Fabio Panetta
  14. How relevant is monetary policy to explain Mexican unemployment fluctuations? By Islas-Camargo, Alejandro; Cortez, Willy W.
  15. The US Dollar-Euro exchange rate and US-EMU bond yield differentials: A Causality Analysis By Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  16. Perspectives on Fulfilling the Nominal and Real Convergence Criteria by Romania for the Adoption of Euro Currency By Geza, Paula; Giurca Vasilescu, Laura
  17. Ordering Policy Rules with an Unconditional Welfare Measure By Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
  18. "It's Time to Rein In the Fed" By Scott Fullwiler; L. Randall Wray
  19. The performance of the Eurosystem's fixed rate tenders since 2004: Theory and evidence By Christian EWERHART; Nuno CASSOLA; Natacha VALLA

  1. By: Haroon Mumtaz (Centre for Central Banking Studies, Bank of England.); Pawel Zabczyk (Bank of England and European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Colin Ellis (University of Birmingham and BVCA.)
    Abstract: This paper uses a time-varying Factor Augmented VAR to investigate the evolving transmission of monetary policy and demand shocks in the UK. Simultaneous estimation of time-varying impulse responses of a large set of macroeconomic variables and disaggregated prices suggest that the response of inflation, money supply and asset prices to monetary policy and demand shocks has changed over the sample period. In particular, during the post-1992 inflation targeting period, monetary policy shocks started having a bigger impact on prices, a smaller impact on activity and began contributing more to overall volatility. In contrast, demand shocks had the largest impact on these variables before the 1990s. We also document changes in the response of disaggregated prices, with the median reaction to contractionary policy shocks becoming more negative and the distribution more dispersed post-1992. JEL Classification: C38, E44, E52.
    Keywords: Transmission mechanism, monetary policy, Factor Augmented VAR, timevarying coefficients, sign restrictions.
    Date: 2011–04
  2. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: An important concern for the European Central Bank (ECB), and all central banks alike, is the necessity of making decisions in real time under conditions of great uncertainty about the underlying state of the economy. We address this concern by estimating on real-time data a New Keynesian model for the euro area under the assumption of imperfect information. In comparison to models that maintain the assumption of perfect information and are estimated on ex-post revised, we find that: (i) the estimated policy rule becomes more inertial and less aggressive towards inflation; (ii) the ECB is confronted with a more severe trade-off in the stabilization of inflation and the output gap.
    Keywords: monetary policy, imperfect information, real-time data
    JEL: E47 E52 E58
    Date: 2011–03
  3. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper I formulate, solve and estimate an endowment version of a macroeconomic dynamic stochastic general equilibrium model with monetary and fiscal policy rules whose coefficients are time-varying and contemporaneously correlated. The aim of the paper is to identify from data the interactions between monetary and fiscal policies that have prevailed in the U.S. economy. The monetary authority uses a Taylor rule and the fiscal authority uses a rule in which taxes respond to lagged debt deviations. Policy rule coefficients are modeled as logistic functions of stationary correlated latent factors, introducing long-run interactions between monetary and fiscal policies. There are three main findings of the paper: First, monetary policy has reacted strongly to inflation deviations along, almost, the entire analyzed period, with a loose policy only during the periods 1979:1-1981:3 and 2008:4-2009:2. Second, regimes under which a determinacy condition is in place occur 54.25% of the time, while regimes with exploding local dynamics occur 45.34% of the time, and there is an association between the duration of these unstable regimes and the volatility of inflation. Third, tightening monetary policy in terms of increasing the reaction of the central bank with respect to inflation deviations, given the situation of the economy in the third quarter of 2010, implies an increase in inflation of the order of 3%.
    Keywords: Time-varying policy rules, Monetary and fiscal policy interactions, Nonlinear state-space models.
    JEL: C32 E63 C11
    Date: 2011–03–30
  4. By: Abdul Majid, Muhamed Zulkhibri
    Abstract: Based on a bank-level panel dataset for Malaysian banks from 1997 to 2005, this paper analyzes the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via bank lending channel in a fairly well-developed financial system. The dynamic panel regression results provide evidence in favour of the bank lending channel theory and consistent with other empirical evidences that the bank lending channel operating via small and low liquidity banks. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market structure and regulatory, influence the way financial institutions react to monetary policy shock with finance companies react stronger than commercial banks to monetary shock. The results also suggest that banks with higher concentration of corporate loans seem to face greater financial constraint and limited access to other sources finance.
    Keywords: Banking Lending; Credit Channels; Monetary Policy; Malaysia
    JEL: E58 E52 E44
    Date: 2010–09–01
  5. By: Thomas I. Palley (New America Foundation, Washington DC)
    Abstract: This paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.
    Keywords: Phillips curve, formation of inflation expectations, incorporation of inflation expectations, backward bending Phillips curve.
    JEL: E00 E31 E52
    Date: 2011
  6. By: Chu, Angus C.; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D. Furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the growth and welfare effects of monetary policy in the AK model. Therefore, the market power of firms has drastically different implications on the welfare cost of inflation under the two growth engines (i.e., innovation versus capital accumulation). We also calibrate the two models using data in the US and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in the two economies. Finally, we simulate transition dynamics of the R&D model in order to compute the complete welfare changes from reducing inflation.
    Keywords: economic growth; inflation; monetary policy; patent policy; R&D
    JEL: O30 O40 E41
    Date: 2010–10
  7. By: Ogawa, Eiji (Asian Development Bank Institute); Shimizu, Junko (Asian Development Bank Institute)
    Abstract: Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following: first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.
    Keywords: asian monetary unit; asian monetary cooperation; asian financial cooperation; chiang mai initiative; exchange rate policy; common currency basket; asian currencies
    JEL: F31 F33 F36
    Date: 2011–04–05
  8. By: Teruyoshi Kobayashi (Graduate School of Economics, Kobe University); Ichiro Muto (Bank of Japan)
    Abstract: This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.
    Keywords: Adaptive learning, E-stability, Taylor rule, trend inflation
    JEL: D84 E31 E52
    Date: 2011–04
  9. By: Fabio Canova; Evi Pappa
    Abstract: We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.
    Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics
    JEL: C32 E62 E63
    Date: 2011–03
  10. By: Dai, Meixing; Sidiropoulos, Moïse
    Abstract: In a Stackelberg equilibrium, central bank opacity has a fiscal disciplining effect in the sense that it induces the government to reduce taxes and public expenditures, leading hence to lower inflation and output distortions. This effect could disappear or be dominated by the direct effect of opacity when the fiscal and monetary authorities play a Nash game.
    Keywords: Distortionary taxes; output distortions; central bank transparency (opacity); fiscal disciplining effect.
    JEL: E62 E58 E52 H30 E63
    Date: 2011
  11. By: Christopher Ragan (McGill University)
    Abstract: Fixing measurement errors in the Consumer Price Index is a small idea that offers big payoffs to Canadians and the government. In this paper, the author says if the upcoming federal budget devoted the resources needed to improve Statistics Canada’s measurement of the Consumer Price Index, Canadians would have a truer sense of changes in the cost of living, monetary policy would be guided by a more accurate measure of inflation, and Minister Flaherty would more easily achieve the government’s commitment to balance the federal budget by 2015/16.
    Keywords: Monetary Policy, Consumer Price Index (CPI), Statistics Canada, inflation rate
    JEL: E31
    Date: 2011–03
  12. By: Luigi Bonatti; Andrea Fracasso
    Abstract: It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China’s real exchange rate may have negative consequences on employment in the US and in China.
    Keywords: China-US co-dependency; global imbalances; reserve accumulation; external debt
    JEL: F32 F41
    Date: 2011
  13. By: Paolo Angelini (Banca d'Italia); Stefano Neri (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial or housing market shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability.
    Keywords: macroprudential policy, monetary policy, capital requirements
    JEL: E44 E58 E61
    Date: 2011–03
  14. By: Islas-Camargo, Alejandro; Cortez, Willy W.
    Abstract: In this paper we analyze the effects of a monetary policy shock on Mexican unemployment rates. Unlike previous studies we re-estimate unemployment rates so that these alternative rates are comparable to those of the OECD member countries. We find that in response to tightening monetary policy, unemployment increases with a characteristic hump-shaped pattern found in other studies. Our empirical results indicate that unemployment elasticity is low and yet the velocity of adjustment to return to the initial point is rather high. We interpret these findings as being the result of two characteristics of Mexico’s labor market: (i) high labor regulation (which includes labor intervention in hiring-firing decisions), and (ii) the existence of a large informal sector and low enforcement of labor regulation.
    Keywords: unemployment rates; structural VAR; monetary policy; Mexico
    JEL: C32 E24 E52
    Date: 2011–01–12
  15. By: Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
    Abstract: This paper test for causality between the US Dollar-Euro exchange rate and US-EMU bond yield differentials. To that end, we apply Hsiao (1981)’s sequential procedure to daily data covering the 1999-2011 period. Our results suggest the existence of statistically significant Granger causality running one-way from bond yield differentials to the exchange rate, but not the other way around.
    Keywords: Causality, Exchange rate, Long-term interest rates, Rolling regression
    JEL: C32 F31 F33 G15
    Date: 2011–03
  16. By: Geza, Paula; Giurca Vasilescu, Laura
    Abstract: In the present, Romania is considered a fragile state. While the lowest point of recession seems to have been exceed, the instability continues to characterize for a period all efforts and steps taken for economic recovery. Regarding the real convergence criteria, on December 2010 Romania presently continues to meet only the criterion regarding the sustainability of fiscal position while the assessment of the criterion related to the stability of the exchange rate cannot be performed accurately as long as the national currency – Leu - does not participate to the Exchange Rate Mechanism II (ERM II).
    Keywords: Real convergence criteria; Nominal convergence criteria; Euro adoption; Romania
    JEL: E42 F36
    Date: 2011–04–01
  17. By: Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan
    Abstract: The unconditional expectation of social welfare is often used to assess alternative macroeconomic policy rules in applied quantitative research. It is shown that it is generally possible to derive a linear-quadratic problem that approximates the exact non-linear problem where the unconditional expectation of the objective is maximised and the steady-state is distorted. Thus, the measure of policy performance is a linear combination of second moments of economic variables which is relatively easy to compute numerically, and can be used to rank alternative policy rules. The approach is applied to a simple Calvo-type model under various monetary policy rules.
    Keywords: Linear-quadratic approximation; unconditional expectations; optimal monetary policy; ranking simple policy rules.
    JEL: E20 E32 F32 F41
    Date: 2011–03
  18. By: Scott Fullwiler; L. Randall Wray
    Abstract: Scott Fullwiler and Senior Scholar L. Randall Wray review the roles of the Federal Reserve and the Treasury in the context of quantitative easing, and find that the financial crisis has highlighted the limited oversight of Congress and the limited transparency of the Fed. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is whether the Fed should be able to commit the public purse in times of national crisis.
    Date: 2011–04
  19. By: Christian EWERHART (University of Zurich); Nuno CASSOLA (European Central Bank); Natacha VALLA (Goldman Sachs)
    Abstract: Despite the possibility of overbidding, the Eurosystem has con- tinued using the fixed rate tender in its liquidity management. We document this fact for liquidity-absorbing fine-tuning operations, the USD term auc- tion facility, and EUR/CHF foreign exchange swaps. The mechanism is then studied in an auction-theoretic setting with privately known declining marginal valuations. An equilibrium exists even when bids are costless and the allotment is pre-announced. In this equilibrium, the extent of strate- gic overbidding is limited, and there is a bound below which the allotment quota never falls. In an extension with adaptive expectations, temporarily elevated overbidding factors quickly return to equilibrium levels.
    Keywords: Eurosystem, Fixed rate tender, Overbidding, Existence of Bayesian Nash equilibrium, Dynamics, Efficiency
    JEL: C72 D44 E58
    Date: 2010–08

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