nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒06‒04
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Is there any evidence of a Greenspan put? By Hall Pamela
  2. Macroeconomic Regimes By Lieven Baele; Geert Bekaert; Seonghoon Cho; Koen Inghelbrecht; Antonio Moreno
  3. Towards an Expanded Role for Asian Currencies: Issues and Prospects By Chow, Hwee Kwan
  4. Sectoral Inflation Dynamics, Idiosyncratic Shocks and Monetary Policy By Daniel Kaufmann; Sarah Lein
  5. On the Endogeneity of Inflation Targeting: Preferences Over Inflation By Nicolás de Roux; Marc Hofstetter
  6. Monetary Policy, Capital Inflows, and the Housing Boom By Sá, F.; Wieladek, T.
  7. "Income Distribution in a Monetary Economy: A Ricardo-Keynes Synthesis" By Nazim Kadri Ekinci
  8. The Role of Macroprudential Policy for Financial Stability in East Asia’s Emerging Economies By Park, Yung Chul
  9. Mortgage Rate Pass-Through in Switzerland By Iva Cecchin
  10. Fiscal and Monetary Institutions in Central, Eastern and South-Eastern European Countries By Zsolt Darvas; Valentina Kostyleva
  11. Global imbalances and the financial crisis: Link or no link? By Claudio Borio; Piti Disyatat
  12. The Multiscale Causal Dynamics of Foreign Exchange Markets By Stelios Bekiros; Massimiliano Marcellino
  13. Beginning, crises, and end of the money economy in three consistent steps By Kakarot-Handtke, Egmont

  1. By: Hall Pamela
    Abstract: Central banks have won in credibility as from the mid-eighties by keeping inflation under control. However, confidence in low inflation might have encouraged agents to excessive risk-taking, leading asset prices to rise. Moreover, the belief in a Federal Reserve guarantee against a sharp market decline spread across US markets as from the nineties. This belief, commonly referred to as the Greenspan put, raised again the question about the role of asset prices in monetary policy decisions. The problem is addressed by modeling the reaction of the Fed to stockmarket deviations from fundamentals over the period stretching from August 1987 to October 2008, which corresponds to the periods where Greenspan until January 2006 and Bernanke from thereon were chairmen. A Taylor rule describing the Fed's nominal feedback rule to inflation and economic activity on a monthly basis is extended to take account of asset prices. The indicators considered are deflation and volatility in stock prices. Furthermore, a Markov switching process allows to capture contemporaneous as well as forward-looking monetary policy responses to asset prices over the period. We find out that taking asset price deflation improves the Taylor rule fit by some 8%. In periods when the Fed was actively pursuing an expansive or restrictive monetary policy, its reaction to volatility or deflation of financial markets was significant. We also see that the reaction of the Fed to asset prices was greater during financial crises, especially when modeling a forward-looking decision process. Agents' confidence in a stronger response of the US central bank to significant market declines urging to an easing of monetary conditions in their favour was therefore not unfounded.
    Keywords: monetary policy, nominal feedback rule, asset prices, United States
    JEL: C11 C22 E44 E52 E58
    Date: 2011
  2. By: Lieven Baele; Geert Bekaert; Seonghoon Cho; Koen Inghelbrecht; Antonio Moreno
    Abstract: We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. We identify accommodating monetary policy before 1980, with activist monetary policy prevailing most but not 100% of the time thereafter. Systematic monetary policy switched to the activist regime in the 2000-2005 period through an aggressive lowering of interest rates. Discretionary policy spells became less frequent since 1985, but the Volcker period is identified as a discretionary period. Output shocks shift to the low volatility regime around 1985 whereas inflation shocks do so only around 1990, suggesting active monetary policy may have played role in anchoring inflation expectations. Shocks and policy regimes jointly drive the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and the relative role played by macro-shocks and monetary policy.
    JEL: C42 C53 E31 E32 E52 E58
    Date: 2011–05
  3. By: Chow, Hwee Kwan (Asian Development Bank Institute)
    Abstract: Notwithstanding incumbency advantages and network effects enjoyed by the United States (US) dollar, considerations about the stability of its value have led Asian countries to fear they are holding their foreign exchange reserves in a depreciating currency. At the same time, it pays for the regional countries to adjust their reserve currency composition to match the point of reference of their exchange rate policy. This paper examines empirically which regional currency or currencies seem to matter for exchange rate determination in Asia beyond the very short term. To this end, we employ country-specific Vector Autoregressive (VAR) models to compare the relative impact which fluctuations in the Asian Currency Unit (ACU), yuan and yen separately have on movements of Asian currencies. Contrary to recent evidence based on daily data, we found monthly exchange rates variations in the region are more heavily influenced by the cumulative effect of key Asian currencies than by the yuan or the yen individually within the sample period we used. To the extent that exchange rates in the region shift over time from benchmarking the US dollar towards a broad range of Asian currencies, Asian central banks will find it more attractive to cross-hold Asian bonds. This calls for the development of deep private markets in such assets, as well as institutional prerequisites for internationalizing key regional currencies.
    Keywords: asian currency unit; asian currencies; foreign exchange reserves; exchange rate policy; asian central banks
    JEL: F31 F33
    Date: 2011–05–27
  4. By: Daniel Kaufmann; Sarah Lein
    Abstract: This paper disentangles fluctuations in disaggregate prices into macroeconomic and idiosyncratic components using a factor-augmented vector autoregression (FAVAR) in order to shed light on sectoral inflation dynamics in Switzerland. We find that disaggregated prices react only slowly to monetary policy and other macroeconomic shocks, but relatively quickly to idiosyncratic shocks. We document that there is a large heterogeneity across sectors in the reaction to monetary policy shocks and show that sectors with larger volatility of idiosyncratic shocks react more readily to monetary policy. This finding stands in contrast to the rational inattention model of price setting. We also find that sectors, which change prices infrequently, react less strongly but if they do change their prices, they adjust them by a large amount. This suggests that the source of sluggish response to aggregate shocks is heterogeneity in menu costs rather than rational inattention. Furthermore, even though prices respond with a significant delay to identified monetary policy shocks, we find no evidence of a price puzzle on average. For single sectors, however, we still find a hump-shaped response which can partially be explained by the fact that, by law, rents are tied to interest rates in Switzerland.
    Keywords: monetary policy transmission, idiosyncratic shocks, rational inattention, heterogeneity in price setting, cost channel, price puzzle
    JEL: E31 E4 E5 C3
    Date: 2011
  5. By: Nicolás de Roux; Marc Hofstetter
    Abstract: Over the last quarter of a century, inflation targeting has become a popular monetary regime. Nevertheless, empirical evaluations of IT have shown contradictory results. Part of the reason is that IT in and of itself constitutes an endogenous decision and thus needs to be properly instrumented. In this paper, we show that preferences over inflation constitute a crucial determinant of IT: countries exhibiting greater inflation aversion are more likely to adopt IT.
    Date: 2011–02–20
  6. By: Sá, F.; Wieladek, T.
    Abstract: We estimate an open economy VAR model to quantify the effect of monetary policy and capital inflows shocks on the US housing market. The shocks are identified with sign restrictions derived from a standard DSGE model. We find that monetary policy shocks have a limited effect on house prices and residential investment. In contrast, capital inflows shocks driven by an increase in foreign savings have a positive and persistent effect on both housing variables. Other sources of capital inflows shocks, such as foreign monetary expansion or an increase in aggregate demand in the US, have a more limited role.
    JEL: E5 F3
    Date: 2011–05–30
  7. By: Nazim Kadri Ekinci
    Abstract: The paper provides a novel theory of income distribution and achieves an integration of monetary and value theories along Ricardian lines, extended to a monetary production economy as understood by Keynes. In a monetary economy, capital is a fund that must be maintained. This idea is captured in the circuit of capital as first defined by Marx. We introduce the circuit of fixed capital; this circuit is closed when the present value of prospective returns from employing it is equal to its supply price. In a steady-growth equilibrium with nominal wages and interest rates given, the equation that closes the circuit of fixed capital can be solved for prices, implying a definitive income distribution. Accordingly, the imputation for fixed capital costs is equivalent to that of a money contract of equal length, which is the payment per period that will repay the cost of the fixed asset, together with interest. It follows that if capital assets remain in use for a period longer than is required to amortize them, their earnings beyond that period have an element of pure rent.
    Keywords: Income Distribution; Circuits of Capital; Monetary Economy
    JEL: D33 D46 E11 E12 E25
    Date: 2011–05
  8. By: Park, Yung Chul (Asian Development Bank Institute)
    Abstract: This paper analyzes the role and scope of macroprudential policy in preventing financial instability in the context of East Asian economies. It analyzes the behavior of the housing market in a dynamic setting to identify some of the factors responsible for the volatility of housing markets and their susceptibility to boom–bust cycles, which it identifies as a key source of financial imbalances in these economies. It then discusses the causal nexus between price and financial stability and the roles and complementary nature of macroprudential and monetary policies in addressing aggregate risk in the financial system. The paper identifies currency and maturity mismatches, which contributed to the 1997–1998 Asian financial crisis, as ongoing concerns in these economies although the high levels of reserves in the region now act as a buffer.
    Keywords: macroprudential policy; monetary policy; east asian economies; asian housing market; financial imbalances; asian financial crisis
    JEL: E52 E58 G15 G28
    Date: 2011–05–26
  9. By: Iva Cecchin
    Abstract: This paper investigates the speed and completeness of the pass-through from market rates to mortgage rates in Switzerland. The pass-through dynamics are studied under a marginal funding cost perspective. By choosing the appropriate benchmark rates, this study takes into account banks' forecasts of the evolution of their funding costs. It is found that the passthrough of rates of adjustable-rate mortgages is incomplete and sluggish compared to the rates of mortgages with a fixed maturity. For the latter, changes in market rates appear to be transmitted quickly and completely, particularly when benchmark rates are falling. This finding suggests that a low-interest-rate environment stimulates competition among financial institutions. Evidence for a structural change is found for all interest rates. The structural change occurred around the beginning of 2007 for fixed-rate mortgages and in mid-2005 for floating-rate mortgages. For all mortgage rates, asymmetries are detected in the pre-break period. More specifically, the adjustment of fixed-rate-mortgage rates is characterized by downward rigidity, which supports the existence of some form of imperfect competition. By contrast, the rates of adjustable-rate mortgages exhibit upward price stickiness. This result suggests that competition was stronger in this specific mortgage-lending market. In the post-break period, no clear evidence is found in favor of asymmetries with respect to the adjustment coefficient.
    Keywords: Interest Rate Pass-Through, Monetary Policy, Mortgages, Cointegration analysis, Panel Data
    JEL: E43 E52 G21 C23
    Date: 2011
  10. By: Zsolt Darvas; Valentina Kostyleva (OECD Public Governance and Territorial Development Directorate)
    Abstract: This paper studies the role of fiscal and monetary institutions in macroeconomic stability and budgetary control in central, eastern and south-eastern European countries (CESEE) in comparison with other OECD countries. CESEE countries tend to grow faster and have more volatile output than non-CESEE OECD countries, which has implications for macroeconomic management: better fiscal and monetary institutions are needed to avoid pro-cyclical policies. The paper develops a Budgetary Discipline Index to assess whether good fiscal institutions underpin good fiscal outcomes. Even though most CESEE countries have low scores, the debt/GDP ratios declined before the crisis. This was largely the consequence of a very favourable relationship between the economic growth rate and the interest rate, but such a favourable relationship is not expected in the future. Econometric estimations confirm that better monetary institutions reduce macroeconomic volatility and that countries with better budgetary procedures have better fiscal outcomes. All these factors call for improved monetary institutions, stronger fiscal rules and better budgetary procedures in CESEE countries.
    Keywords: CESEE countries, Budgetary Discipline Index, budget process, fiscal institutions, budgetary institutions, monetary institutions, macroeconomic stability, econometric analysis, budgetary procedures, fiscal outcomes, fiscal rules
    JEL: E32 E50 H11 H60
    Date: 2011–04
  11. By: Claudio Borio; Piti Disyatat
    Abstract: Global current account imbalances have been at the forefront of policy debates over the past few years. Many observers have recently singled them out as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have helped fuel the credit booms and risk-taking in the major advanced deficit countries at the core of the crisis, by putting significant downward pressure on world interest rates and/or by simply financing the booms in those countries (the "excess saving" view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) drawing inferences about a country's cross-border financing activity based on observations of net capital flows; and (ii) explaining market interest rates through the saving-investment framework. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary economy. We conjecture that the main contributing factor to the financial crisis was not "excess saving" but the "excess elasticity" of the international monetary and financial system: the monetary and financial regimes in place failed to restrain the build-up of unsustainable credit and asset price booms ("financial imbalances"). Credit creation, a defining feature of a monetary economy, plays a key role in this story.
    Keywords: global imbalances, saving glut, money, credit, capital flows, current account, interest rates, financial crisis
    Date: 2011–05
  12. By: Stelios Bekiros; Massimiliano Marcellino
    Abstract: This paper relies on wavelet multiresolution analysis to capture the dependence structure of currency markets and reveal the complex dynamics across different timescales. It investigates the nature and direction of causal relationships among the most widely traded currencies denoted relative to the United States Dollar (USD), namely Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). The timescale analysis involves the estimation of linear vis-à-vis nonlinear and spectral causality of wavelet components and aggregate series as well as the detection of short- vs. long-run linkages and cross-scale correlations. Moreover, this study attempts to probe into the micro-foundations of across-scale heterogeneity in the causality pattern on the basis of trader behavior with different time horizons. New stylized properties emerge in the volatility structure and the implications for the flow of information across scales are inferred. The examined period starts from the introduction of the Euro and covers the dot-com bubble, the financial crisis of 2007-2010 and the Eurozone debt crisis. Technically, this paper presents an invariant discrete wavelet transform that deals efficiently with phase shifts, dyadic-length and boundary effects. It also proposes a new entropy-based methodology for the determination of the optimal decomposition level. Overall, there is no indication of a global causal behavior that dominates at all timescales. When the nonlinear effects are accounted for, the evidence of dynamical bidirectional causality implies that the pattern of leads and lags changes over time. These results may prove useful to quantify the process of integration as well as influence the greater predictability of currency markets.
    Keywords: exchange rates; wavelets; timescale analysis; causality; entropy
    JEL: C14 C32 C51 F31
    Date: 2011
  13. By: Kakarot-Handtke, Egmont
    Abstract: A crisis is but a crisis when the long run outlook is definitively positive. Then a lower turning point must exist. This implicates a vision or, in the ideal case, a formalized theory of the money economy’s possible end states. This theory has to provide an endogenous explanation of end states and crises. The equilibrium approach excludes endogenous causes in principle. Thus disturbances can only be explained by exogenous random shocks. The structural axiomatic approach, that is applied in the following, consistently defines the potential systemic crisis point and the conditions of an economic happy end.
    Keywords: New framework of conceps; Structure-centric; Axiom set; Zero profit economy; Distributed profit; Systemic crisis point; Logical end states
    JEL: E32 D33 E21 E40 B41
    Date: 2011–05–29

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