nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒06‒11
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Delegation and Transparency of Policy Targets: A Positive Analysis By Hielscher, Kai
  2. A Time-varying Indicator of Effective Monetary Policy Conservatism By Berlemann, Michael; Hielscher, Kai
  3. Hyperbolic Discounting and Positive Optimal Inflation By Graham, Liam; Snower, Dennis J.
  4. Dynamic Effects of Monetary Policy Shocks in Malawi By Harold Ngalawa; Nicola Viegi
  5. The effect of inflation on real commodity prices By Dennis Wesselbaum
  6. Impact of Monetary Policy on the Volatility of Stock Market in Pakistan By Qayyum, Abdul; Anwar, Saba
  7. Canadian Monetary Policy and Real and Nominal Exchange Rates By John Earl Floyd
  8. Limited asset market participation: does it really matter for monetary policy? By Ascari, Guido; Colciago , Andrea; Rossi, Lorenza
  9. Inflation Perception and Anticipation Gaps in the Eurozone By Svatopluk Kapounek; Lubor Lacina
  10. Forecasting the intraday market price of money By Andrea Monticini; Francesco Ravazzolo
  11. The Dynamics of UK and US Inflation Expectations* By Deborah Gefang; Gary Koop; Simon Potter
  12. Macroprudential Approach to Regulation-Scope and Issues By Gopinath, Shyamala
  13. Lack of Credibility, Inflation Persistence and Disinflation in Colombia By Andrés González G.; Franz Hamann
  14. Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach By Challe, Edouard; Giannitsarou, Chryssi
  15. Determinants of the Dinar-Euro Nominal Exchange Rate By Milan Nedeljkovic; Branko Urosevic
  16. Estimating Phillips Curves in Turbulent Times using the ECBs Survey of Professional Forecasters* By Gary Koop; Luca Onorante
  17. Dissent in Monetary Policy Decisions By Alessandro Riboni; Francisco J. Ruge-Murcia
  18. Banks’ responses to funding liquidity shocks: lending adjustment, liquidity hoarding and fire sales By Leo de Haan; Jan Willem van den End
  19. Rent-Seeking Origins of Central Banks: The Case of the Federal Reserve System By Tomáš Otáhal
  20. The Outlook for International Monetary System Reform in 2011: A Preliminary Report By Edwin M. Truman
  21. Deliberation and oversight in monetary policy, 1976-2008. By Bailey, Andrew; Schonhardt-Bailey, Cheryl
  22. Monetary Union, Fiscal Crisis and the Preemption of Democracy By Fritz W. Scharpf
  23. Time Variations in the Exchange Rate Pass-Through in Japan: A reexamination using the time-varying parameter VAR (Japanese) By SHIOJI Etsuro
  24. Estimates of Fundamental Equilibrium Exchange Rates, May 2011 By William R. Cline; John Williamson
  25. Forecasting In?ation Using Dynamic Model Averaging* By Gary Koop; Dimitris Korobilis

  1. By: Hielscher, Kai (Helmut Schmidt University, Hamburg)
    Abstract: We show that, in a two-stage model of monetary policy with stochastic policy targets and asymmetric information, the transparency regime chosen by the central bank does never coincide with the regime preferred by society. Independent of society’s endogenous choice of delegation, the central bank reveals its inflation target and conceals its output target. In contrast, society would prefer either transparency or opacity of both targets. As a conclusion, the choice of the transparency regime should be part of the optimal delegation solution.
    Keywords: central banking; monetary policy; communication; delegation; positive analysis
    JEL: E52 E58
    Date: 2011–06–01
  2. By: Berlemann, Michael (Helmut Schmidt University, Hamburg); Hielscher, Kai (Helmut Schmidt University, Hamburg)
    Abstract: Based on an extended version of a time-inconsistency model of monetary policy we show that the degree of effective monetary policy conservatism can be uncovered by studying to what extent central banks react to real disturbances. By estimating central bank reaction functions in moving and overlapping intervals for the period of 1985 to 2007 using an ordered logit approach in a panel setting we derive a time-varying indicator of effective monetary policy conservatism for Canada, Sweden, the UK and the US. Employing this indicator we show that increasing effective conservatism tends to lower inflation without increasing the output gap. However, while a higher degree of effective conservatism does not result in lower inflation uncertainty the variance of the output gap tends to decrease.
    Keywords: central banking; monetary policy; conservatism; central bank independence; inflation
    JEL: E31 E58
    Date: 2011–06–01
  3. By: Graham, Liam; Snower, Dennis J.
    Abstract: The Friedman rule states that steady-state welfare is maximized when there is deflation at the real rate of interest. Recent work by Khan et al. (2003) uses a richer model but still finds deflation optimal. In an otherwise standard new Keynesian model we show that, if households have hyperbolic discounting, small positive rates of inflation can be optimal. In our baseline calibration, the optimal rate of inflation is 2.1% and remains positive across a wide range of calibrations.
    Keywords: inflation targeting; monetary policy; nominal inertia; optimal monetary policy; Phillips curve; unemployment
    JEL: E20 E40 E50
    Date: 2011–05
  4. By: Harold Ngalawa (School of Economics and Finance, University of KwaZulu-Natal); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country’s monetary transmission process. In the post-1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened; and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.
    JEL: E52 E58
    Date: 2011–05
  5. By: Dennis Wesselbaum
    Abstract: Recent research has shown that economic conditions have an important effect on real commodity prices. We quantify the contribution of fluctuations in inflation to this particular link. In the data, a temporary rise in inflation causes real commodity prices to rise, as does a rise in trend inflation. We find that a simple dynamic equilibrium model of commodity supply and demand gives a realistic response of real commodity prices to inflation. Based on historical simulations, shocks to inflation played an important role in commodity price dynamics during the 1970s, but they have contributed negligibly to commodity price movements since then
    Keywords: Commodity prices, monetary policy, inflation, the 1970s
    JEL: E31 E52 E65 Q00
    Date: 2011–05
  6. By: Qayyum, Abdul; Anwar, Saba
    Abstract: This paper addresses the linkages between the monetary policy and the stock market in Pakistan. The estimation technique employed includes Engle Granger two step procedure and the bivariate EGARCH method. The results indicate that any change in the monetary policy stance have a significant impact on the volatility of the stock market. Thus contributing to the ongoing debate in the monetary policy rule literature regarding the proactive and reactive approach.
    Keywords: Interest Rate; Stock Market; Monetary Policy; EGARCH; Pakistan
    JEL: E43 G12
    Date: 2011
  7. By: John Earl Floyd
    Abstract: This paper analyzes the relationship between Canadian Monetary Policy and the movements of Canada\'s real and nominal exchange rates with respect to the U.S. A broad-based theory is developed to form the basis for subsequent empirical analysis. The main empirical result is that the Canadian real exchange rate has been determined in large part by capital movements into and out of Canada as compared to the U.S. and world energy prices. Additional important determinants were world commodity prices and Canadian and U.S. real GDPs and employment rates. No evidence of effects of unanticipated money supply shocks on the nominal and real exchange rates is found. Under conditions where exchange rate overshooting is likely to occur in response to monetary demand or supply shocks, this suggests that the Bank of Canada follows an orderly-markets style of monetary policy and the conclusion is that this is the best approach under normal conditions. Finally, it is shown that in response to a domestic inflation rate that has become permanently too high or a catastrophic situation in the U.S., the Bank of Canada can induce a one-percent short-run change in the unemployment rate by pushing the nominal and real exchange rates in the appropriate direction by between five and six percent.
    Keywords: Real Exchange Rate Canadian Monetary Policy
    JEL: A E F G
    Date: 2011–05–16
  8. By: Ascari, Guido (Department of Economics and Quantitative Methods, University of Pavia); Colciago , Andrea (University of Milano-Bicocca. Department of Economics); Rossi, Lorenza (University of Pavia)
    Abstract: We study the design of monetary policy in an economy characterized by staggered wage and price contracts together with limited asset market participation (LAMP). Contrary to previous results, we find that once nominal wage stickiness, an incontrovertible empirical fact, is considered: i) the Taylor Principle is restored as a necessary condition for equilibrium determinacy for any empirically plausible degree of LAMP; ii) the implications of LAMP for the design of optimal monetary policy are minor; iii) optimal interest rate rules become active no matter the degree of asset market participation. For these reasons we argue that LAMP is not particularly important for monetary policy.
    Keywords: optimal monetary policy; sticky wages; non-Ricardian household; determinacy; optimal simple rules
    JEL: E50 E52
    Date: 2011–05–31
  9. By: Svatopluk Kapounek (Department of Finance, FBE MENDELU in Brno); Lubor Lacina (Department of Finance, FBE MENDELU in Brno)
    Abstract: There is significant empirical evidence that the introduction of the euro led to a significant increase of perceived inflation in most countries. Such an increase and persistence in the perceived inflation might then have an impact on inflation expectations and other macroeconomic variables. The authors have used the short-term Phillips curve to describe the difference between inflation expectations and its current values, subsequently to identify the impact of this difference on other economic indicators. The paper is structured as follows: Section 1 provides an overview of the theory and empiricism on the gap between measured and perceived inflation. Section 2 then builds up the theoretical framework based on the short–term Phillips curve approach and derives two hypotheses, to be tested subsequently. Section 3 provides the methodology. Section 4 presents the modelling and results of the empirical analysis. In section 5 authors compare its results and used methodology with papers and studies on a similar topic. Finally, Section 6 concludes and provides recommendations for the economic policy.
    Keywords: monetary integration, perceived and anticipated inflation, adaptive and rational expectations hypothesis, expectations-augmented Phillips curve, stationarity, ADF test
    JEL: E42
    Date: 2011–04
  10. By: Andrea Monticini (Universita Cattolica - Milano); Francesco Ravazzolo (Norges Bank (Central Bank of Norway))
    Abstract: Market efficiency hypothesis suggests a zero level for the intraday interest rate. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. A long memory approach outperforms random walk and autoregressive benchmarks in terms of point and density forecasting. The gains are particular high when the full distribution is predicted and probabilistic assessments of future movements of the interest rate derived by the model can be used as a policy tool for central banks to plan supplementary market operations during turbulent times. Adding exogenous variables to proxy funding liquidity and counterparty risks does not improve forecast accuracy and the predictability seems to derive from the econometric properties of the series more than from news available to financial markets in realtime.
    Keywords: Interbank market, Intraday interest rate, Forecasting, Density forecasting, Policy tools.
    JEL: C22 C53 E4 E5
    Date: 2011–06–06
  11. By: Deborah Gefang (Department of Economics, University of Lan~~#badcaster); Gary Koop (Department of Economics, University of Strathclyde); Simon Potter (Research and Statistics Group, Federal Reserve Bank of New York)
    Abstract: This paper investigates the relationship between short term and long term inflation expectations in the US and the UK with a focus on inflation pass through (i.e. how changes in short term expectations affect long term expectations). An econometric methodology is used which allows us to uncover the relationship between in?ation pass through and various explanatory variables. We relate our empirical results to theoretical models of anchored, contained and unmoored inflation expectations. For neither country do we find anchored or unmoored inflation expectations. For the US, contained inflation expectations are found. For the UK, our findings are not consistent with the specific model of contained in?ation expectations presented here, but are consistent with a more broad view of expectations being constrained by the existence of an inflation target.
    Keywords: smoothly mixing regression, inflation pass through, Bayesian
    JEL: C11 C24 E37
    Date: 2011–04
  12. By: Gopinath, Shyamala (Asian Development Bank Institute)
    Abstract: This paper provides an overview of the Reserve Bank of India's approach to macroprudential regulation and systemic risk management, and reviews lessons drawn from the Indian experience. It emphasizes the need for harmonization of monetary policy and prudential objectives, which may not be possible if banking supervision is separated from central banks. It also notes that supervisors need to have the necessary independence and flexibility to act in a timely manner on the basis of available information. Macroprudential regulation is an inexact science with limitations and needs to be used in conjunction with other policies to be effective.
    Keywords: macroprudential regulation; systemic risk management; monetary policy; banking supervision; central banks
    JEL: E52 E58 G28
    Date: 2011–06–06
  13. By: Andrés González G.; Franz Hamann
    Abstract: This paper measures inflation persistence in Colombia for the period 1990-2010 and estimates the implied speed at which agents learn about the central bank’s inflation target. We estimate Erceg and Levin’s (2003) imperfect credibility model using Bayesian techniques and compare the posterior odds of this model against a conventional Neokeynesian model with ad-hoc price indexation. The odds are strongly in favor of the imperfect credibility model, suggesting that lack of credibility on the inflation target is an important source of inflation persistence. We use the model to compute the sacrifice ratio associated to 100 basis points inflation target shocks and find that it is (0.83%) in line with previous estimates for Colombia. We also find that the speed at which agents learn in the model has increased, albeit marginally, since the central bank implemented its inflation targeting strategy. Although during this period macroeconomic volatility has fallen, inflation persistence has remained roughly constant suggesting that so far, the impact of those credibility gains has been modest.
    Date: 2011–05–26
  14. By: Challe, Edouard; Giannitsarou, Chryssi
    Abstract: Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on stock prices: a 25-basis point increase in the Fed funds rate is associated with an immediate decrease in broad stock indices that may range from 0.5 to 2.3 percent, followed by a gradual decay as stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider allows for staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model.
    Keywords: Asset prices; Monetary policy; New Keynesian general equilibrium model
    JEL: E31 E52 G12
    Date: 2011–05
  15. By: Milan Nedeljkovic (National Bank of Serbia); Branko Urosevic (National Bank of Serbia)
    Abstract: This paper studies drivers of daily dynamics of the nominal dinar-euro exchange rate from September 2006 to June 2010. Using a novel semiparametric approach we are able to incorporate the evidence of nonlinearities under very weak assumptions on the underlying data generating process. We identify several factors influencing daily exchange rate returns whose importance varies over time. In the period preceeding the financial crisis, information in past returns, changes in households’ foreign currency savings and banks' net purchases of foreign currency are the most significant factors. From September 2008 onwards other factors related to changes in country's risk and the information processing in the market gain importance. NBS interventions are found to be effective with a time delay.
    Keywords: Foreign exchange market, Partially linear model, Kernel estimation
    JEL: F31 C14 G18
    Date: 2011–05
  16. By: Gary Koop (Department of Economics, University of Strathclyde); Luca Onorante (European Central Bank)
    Abstract: This paper uses forecasts from the European Central Bank?s Survey of Professional Forecasters to investigate the relationship between inflation and inflation expectations in the euro area. We use theoretical structures based on the New Keynesian and Neoclassical Phillips curves to inform our empirical work. Given the relatively short data span of the Survey of Professional Forecasters and the need to control for many explanatory variables,we use dynamic model averaging in order to ensure a parsimonious econometric specification. We use both regression-based and VAR-based methods. We find no support for the backward looking behavior embedded in the Neo-classical Phillips curve. Much more support is found for the forward looking behavior of the New Keynesian Phillips curve, but most of this support is found after the beginning of the financial crisis.
    Keywords: inflation expectations, survey of professional forecasters,Phillips curve, Bayesian
    JEL: E31 C53 C11
    Date: 2011–03
  17. By: Alessandro Riboni (Department of Economics, University of Montreal); Francisco J. Ruge-Murcia (Department of Economics, University of Montreal and Rimini Centre for Economic Analysis (RCEA))
    Abstract: Voting records indicate that dissents in monetary policy committees are frequent and predictability regressions show that they help forecast future policy decisions. In order to study whether the latter relation is causal, we construct a model of committee decision making and dissent where members' decisions are not a function of past dissents. The model is estimated using voting data from the Bank of England and the Riksbank. Stochastic simulations show that the decision-making frictions in our model help account for the predictive power of current dissents. The eect of institutional characteristics and structural parameters on dissent rates is examined using simulations as well.
    Keywords: Committees, voting models, political economy of central banking
    JEL: D7 E5
    Date: 2011–05
  18. By: Leo de Haan; Jan Willem van den End
    Abstract: The crisis of 2007-2009 has shown that financial market turbulence can lead to huge funding liquidity problems for banks. This paper provides empirical evidence on banks’ responses to wholesale funding shocks, using data of seventeen of the largest Dutch banks over the period January 2004 to April 2010. The dynamic interrelations among instruments of bank liquidity management are modelled in a panel Vector Autoregressive (p-VAR) framework. Orthogonalized impulse responses reveal that banks respond to a negative funding liquidity shock in a number of ways. First, banks reduce lending, especially wholesale lending. Second, banks hoard liquidity in the form of liquid bonds and central bank reserves. Third, banks conduct fire sales of securities, especially equity. We also find that fire sales are triggered by liquidity constraints rather than by solvency constraints.
    Keywords: Banks; Funding; Liquidity; Banking crisis
    JEL: G21 G32
    Date: 2011–04
  19. By: Tomáš Otáhal (Department of Economics, FBE MENDELU in Brno)
    Abstract: What were the purposes for establishment of central banks? Central banks are historically relatively young organizations. Their main purposes are to regulate money supply through interest rates, regulate the banking sector and act as a lender of last resort to banking sector during the time of financial crises. Historical evidence suggests that in the second half of 19th century in the USA private clearing houses were able to provide the banking sector with similar services. In this paper, we follow such evidence and provide Public Choice explanation for establishment of central banks. On the historical example of establishment of the Federal Reserve System we show that the motivation for establishment of the Federal Reserve System might be rather political instead of economic. More precisely, we argue that the Federal Reserve System was established to allow the American Federal Government to control rent- distribution through money supply control and banking sector regulation.
    Keywords: Federal Reserve System, financial markets institutions, historical example, rent-seeking
    JEL: D72 D73 N21 E42 E58
    Date: 2011–04
  20. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: Reform of the international monetary system was placed on the agenda of the Group of 20 (G-20) a year ago at the initiative of the incoming French leadership of the G-20. On November 4, 2011 in Cannes, France, the G-20 leaders will announce their conclusions and agreements after a year and half of intense dialogue and debate. The discussions cover (1) surveillance of the global economy and financial system, (2) international lender of last resort mechanisms, (3) capital flows and financial pressures, (4) the currency and reserve asset system, and (5) governance of the international monetary system. While the governance issue, in the form of governance of the International Monetary Fund (IMF), is not explicitly on the agenda of the G-20 leaders, the resignation of Dominique Strauss-Kahn as managing director of the IMF has placed it on the agenda with high priority. Based on the evidence to date, Truman expects that by the end of 2011, the result will produce a barely passing grade on substance—below B on the inflated scale of grades today—but an A for effort. As long as the process achieves the A for effort via a thorough examination of the full range of reform issues, the shortfall on substance is not crucial, and he welcomes being proved wrong on substance. More would be desirable, but the international monetary system will continue to evolve.
    Date: 2011–05
  21. By: Bailey, Andrew; Schonhardt-Bailey, Cheryl
    Abstract: Also published as Working Paper 8, 2010 of the Political Science and Political Economy Group, London School of Economics and Political Science.
    Date: 2010–11
  22. By: Fritz W. Scharpf
    Abstract: The European Monetary Union (EMU) has removed crucial instruments of macroeconomic management from the control of democratically accountable governments. Worse yet, it has been the systemic cause of destabilizing macroeconomic imbalances that member states found difficult or impossible to counteract with their remaining policy instruments. And even though the international financial crisis had its origins outside Europe, the Monetary Union has greatly increased the vulnerability of some member states to its repercussions. Its effects have undermined the economic and fiscal viability of some EMU member states, and they have frustrated political demands and expectations to an extent that may yet transform the economic crisis into a crisis of democratic legitimacy. Moreover, present efforts of EMU governments to rescue the Euro will do little to correct economic imbalances and vulnerabilities, but are likely to deepen economic problems and political alienation in both, the rescued and the rescuing polities.
    Date: 2011–05–25
  23. By: SHIOJI Etsuro
    Abstract: This paper reexamines how the influences of the exchange rate on export, import, and domestic prices have evolved over time in Japan. The most important characteristic of the analysis here is the use of the time-varying parmeter vector autoregression (VAR) approach, which allows us to analyze when, and to what extent, changes in the pass-through rate (defined as percentage response of prices to a 1% change in the exchange rate) occurred. The period under consideration is between January 1980 and January 2010. We find the following. First, the pass-through rates on import and domestic prices were both trending down during the sample period. The pass-through rate on domestic prices experienced a large decline during the 1980s, whereas a large decline for that on import prices was observed both in the 1980s and the later half of the 1990s. In contrast, the pass-through rate on export prices generally saw an upward trend, particularly during the 1980s.
    Date: 2010–11
  24. 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 April 2011. Most currencies appear to have been reasonably close to their FEERs in April 2011. The most important exceptions are China, on the weak side, and the United States, on the strong side. The countries that need to seek weaker effective rates are those with large current account deficits: Australia and New Zealand, South Africa, Turkey, (marginally) Poland and Hungary, and the United States and Brazil. These are countries with floating exchange rates that have been pushed to an overvalued level by (in most cases) capital mobility and the carry trade, reinforced in the case of the United States by the dollar's role as the currency to which many other countries peg combined with the decision of some other countries to peg their rates at an undervalued level. The countries that need to revalue their effective rates are primarily Asian: China and countries that make it a priority to avoid losing competitiveness versus China (Hong Kong, Malaysia, Singapore, and Taiwan). The authors' calculations show the need for a slightly larger effective revaluation of the Chinese currency, the renminbi, this year (17.6 percent) than last (15.3 percent) and a larger appreciation of the renminbi in terms of the dollar (28.5 percent rather than 24.2 percent).
    Date: 2011–05
  25. By: Gary Koop (Department of Economics, University of Strathclyde); Dimitris Korobilis (Center for Operations Research & Econometrics (CORE), Universite Catholique de Louvain)
    Abstract: We forecast quarterly US inflation based on the generalized Phillips curve using econometric methods which incorporate dynamic model averaging. These methods not only allow for coe¢ cients to change over time, but also allow for the entire forecasting model to change over time. We find that dynamic model averaging leads to substantial forecasting improvements over simple benchmark regressions and more sophisticated approaches such as those using time varying coefficient models. We also provide evidence on which sets of predictors are relevant for forecasting in each period.
    Keywords: Bayesian, State space model, Phillips curve
    JEL: E31 E37 C11 C53
    Date: 2011–04

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