nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒06‒18
nineteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Oil Price Shocks and Cyclical Dynamics in an Asymmetric Monetary Union By Volker Clausen; Hans-Werner Wohltmann
  2. The information content of central bank interest rate projections: Evidence from New Zealand By Gunda-Alexandra Detmers; Dieter Nautz
  3. Cross-section Dependence and the Monetary Exchange Rate Mode – A Panel Analysis By Joscha Beckmann; Ansgar Belke; Frauke Dobnik
  4. Estimating Central Bank preferences in a small open economy: Sweden 1995-2009 By Gaetano D’Adamo
  5. Monetary Policy and Asset Price Volatility: Should We Refill the Bernanke-Gertler Prescription? By Kenneth Kuttner
  6. The Optimal Inflation Tax in the Presence of Imperfect Deposit – Currency Substitution By Eduardo Olaberría
  7. The optimal width of the central bank standing facilities corridor and banks' day-to-day liquidity management By Ulrich Bindseil; Juliusz Jabłecki
  8. Central bank transparency, the accuracy of professional forecasts, and interest rate volatility By Menno Middeldorp
  9. Does Monetary Policy Affect Stock Market Uncertainty? – Empirical Evidence from the United States By Mario Jovanovic
  10. A note on bank lending in times of large bank reserves By Antoine Martin; James McAndrews; David Skeie
  11. Central Bank Forecasts as a Coordination Device By Jan Filacek; Branislav Saxa
  12. Exchange Rate Policy in Small Rich Economies By Francis Breedon; Thórarinn G. Pétursson; Andrew K. Rose
  13. Should central banks lean against changes in asset prices? By Sylvain Leduc; Jean-Marc Natal
  14. The Effects of Monetary Policy "News" and "Surprises" By Fabio Milani; John Treadwell
  15. Welfare and excess volatility of exchange rates By M. Salto; T. Pietra
  16. Paradigm shift? A critique of the IMF’s new approach to capital controls By Daniela Gabor
  17. Sticky Prices vs. Sticky Information – A Cross-Country Study of Inflation Dynamics By Christian Bredemeier; Henry Goecke
  18. Financial Integration at Times of Financial Instability By Jan Babecky; Lubos Komarek; Zlatuse Komarkova
  19. A comparative analysis of alternative univariate time series models in forecasting Turkish inflation By Catik, A. Nazif; Karaçuka, Mehmet

  1. By: Volker Clausen; Hans-Werner Wohltmann
    Abstract: This paper analyzes the dynamic effects of anticipated and unanticipated oil price increases in a small two-country monetary union, which is simultaneously characterized by asymmetric wage adjustments and asymmetric interest rate sensitivities of private absorption. Common external oil price disturbances lead in this asymmetric macroeconomic setup to temporary divergences in output developments across the monetary union. In the case of anticipated oil price increases the relative cyclical position is reversed in the course of the adjustment process. Complete stabilization of the output variables throughout the overall adjustment process requires a restrictive monetary policy being time inconsistent from a quantitative but time consistent from a qualitative point of view. That means that the central bank credibly announces a future reduction in the growth rate of the nominal money stock but actually implements a reduction, which is less restrictive than the original announcement.
    Keywords: EMU; international policy transmission; oil price shock; time inconsistency; monetary policy
    JEL: E63 F41
    Date: 2011–03
  2. By: Gunda-Alexandra Detmers; Dieter Nautz
    Abstract: The Reserve Bank of New Zealand (RBNZ) has been the first central bank that began to publish interest rate projections in order to improve its guidance of monetary policy. This paper provides new evidence on the role of interest rate projections for market expectations about future shortterm rates and the behavior of long-term interest rates in New Zealand. We find that interest rate projections up to four quarters ahead play a significant role for the RBNZs expectations management before the crisis, while their empirical relevance has decreased ever since. For interest rate projections at longer horizons, the information content seems to be only weak and partially destabilizing.
    Keywords: Central bank interest rate projections, central bank communication, expectations management of central banks
    JEL: E52 E58
    Date: 2011–06
  3. By: Joscha Beckmann; Ansgar Belke; Frauke Dobnik
    Abstract: This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence for a cross-section cointegration relationship between the exchange rates and fundamentals which is driven by those common international trends. In addition, the estimated coefficients of income and money are in line with the suggestions of the monetary model.
    Keywords: Monetary exchange rate model; common factors; panel data; cointegration; vector error-correction models
    JEL: C32 C23 F31 F41
    Date: 2011–04
  4. By: Gaetano D’Adamo (Department of Economics, University of Bologna)
    Abstract: Interest Rate rules are often estimated as simple reaction functions linking the policy interest rate to variables such as (forecasted) inflation and the output gap; however, the coefficients estimated with this approach are convolutions of structural and preference parameters. I propose an approach to estimate Central Bank preferences starting from the Central Bank's optimization problem within a small open economy. When we consider open economies in a regime of Inflation Targeting, the issue of the role of the exchange rate in the Monetary Policy rule becomes relevant. The empirical analysis is conducted on Sweden, to verify whether the recent stabilization of the Krona/Euro exchange rate was due to “Fear of Floating”; the results show that the exchange rate might not have played a role in monetary policy, suggesting that the stabilization probably occurred as a result of increased economic integration and business cycle convergence.
    Keywords: Interest Rate Rules, Inflation Targeting, Central Bank Preferences, Fear of Floating.
    JEL: E42 E52 F31
    Date: 2011–05
  5. By: Kenneth Kuttner (Williams College)
    Abstract: Bernanke and Gertler’s influential 1999 article "Asset Price Bubbles and Monetary Policy" made the case that monetary policy should respond to asset prices only to the extent that they have implications for future inflation. This paper revisits that prescription in light of the 2007– 09 financial crisis. After reviewing the Bernanke-Gertler logic, the paper surveys the recent evolution of views on the appropriate policy response to asset price fluctuations, and discusses the conditions under which a proactive policy would be justified. There is almost no discernible relationship between interest rates and stock and property prices across countries during the years leading up to the crisis, however. While a theoretical case could be made to give some weight to financial stability in setting monetary policy, the evidence presented in the paper suggests that incremental interest rate adjustments are unlikely to be effective in restraining excessive asset price appreciation.
    JEL: E52 E58 E44 G12
    Date: 2011–05
  6. By: Eduardo Olaberría
    Abstract: During the last decades, technological innovation has generated a major transformation in payment systems, stimulating a widespread use of different forms of electronic money and increasing substitutability between deposits and currency in transactions. A big advantage of deposits is that, unlike currency, they can pay nominal interest on the average balance at a very low cost. As a result, in most developed countries an increasing number of people chose debit cards to make transactions. Despite the huge impact that these cards have had on everyday life, little is known about their consequences for the optimal conduct of monetary policy. This paper contributes to the literature on optimal monetary and fiscal policy by analyzing how the presence of imperfect deposit-currency substitution affects inflationary taxation in a public finance framework. The paper presents a model where financial intermediaries supply deposits that can be used to buy goods and services. In order to produce deposits, financial intermediaries must incur a cost. It is shown that if this cost is zero, the optimal inflation tax is zero. However, in the more realistic case in which this cost is positive, the optimal inflation tax is positive whenever there are revenue needs. Furthermore, the higher the cost of producing deposits, the higher is the optimal inflation tax. These results suggest that central banks in countries with less productive financial intermediaries (implying a higher cost of producing deposits), should optimally choose to have higher inflation rates.
    Date: 2011–03
  7. By: Ulrich Bindseil (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Juliusz Jabłecki (National Bank of Poland and Faculty of Economic Sciences, Warsaw University.)
    Abstract: Containing short-term volatility of the overnight interest rate is normally considered the main objective of central bank standing facilities. This paper develops a simple stochastic model to show how the width of the central bank standing facilities corridor affects banks’ day-to-day liquidity management and the volatility of the overnight rate. It is shown that the wider the corridor, the greater the interbank turnover, the leaner the central bank’s balance sheet (i.e. the lower the average recourse to standing facilities) and the greater short-term interest rate volatility. The obtained relationships are matched with central bank preferences to obtain an optimal corridor width. The model is tested against euro area and Hungarian daily data encompassing the financial crisis that began in 2007. JEL Classification: E4, E5.
    Keywords: standing facilities, money market, liquidity management.
    Date: 2011–06
  8. By: Menno Middeldorp
    Abstract: Central banks worldwide have become more transparent. An important reason is that democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Most empirical studies support this view. However, there are three reasons why more research is needed. First, some (mostly theoretical) work suggests that transparency has an adverse effect on predictability. Second, empirical studies have mostly focused on average predictability before and after specific reforms in a small set of advanced economies. Third, less is known about the effect on interest rate volatility. To extend the literature, I use the Dincer and Eichengreen (2007) transparency index for twenty-four economies of varying income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility.
    Date: 2011
  9. By: Mario Jovanovic
    Abstract: This paper investigates the response of US stock market uncertainty to monetary policy of the Federal Reserve Bank. It can be shown that monetary policy significantly Granger-causes stock market confidence. By using monthly closing prices of the VIX as a stock market uncertainty proxy and a copula-based Markov approach the stable nonlinear relation between confidence and uncertainty is demonstrated. The monetary policy effect on stock market uncertainty is therefore separable into a linear and nonlinear part.
    Keywords: Stock market confi dence; temporal dependence; copula
    JEL: C12 C22 E43 E52
    Date: 2011–01
  10. By: Antoine Martin; James McAndrews; David Skeie
    Abstract: The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve’s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks’ lending decisions. We find that large reserve balances do not lead to excessive bank credit and may instead be contractionary.
    Date: 2011
  11. By: Jan Filacek; Branislav Saxa
    Abstract: Do private analysts coordinate their forecasts via central bank forecasts? In this paper, we examine private and central bank forecasts for the Czech Republic. The evolution of the standard deviation of private forecasts as well as the distance from the central bank’s forecasts are used to study whether a coordination effect exists, how it is influenced by uncertainty, and the effects of changes in central bank communication. The results suggest that private analysts coordinate their forecasts for the interest rate and inflation, while no or limited evidence exists for the exchange rate and GDP growth.
    Keywords: Central bank, coordination, forecast.
    JEL: E27 E37 E47 E58
    Date: 2010–12
  12. By: Francis Breedon; Thórarinn G. Pétursson; Andrew K. Rose
    Abstract: We look at the exchange rate policy choices and outcomes for small rich economies. Small rich economies face significant policy challenges due to proportionately greater economic volatility than larger economies. These economies usually choose some form of fixed exchange rate regime, particularly in the very small economies where the per capita cost of independent monetary policy is relatively high. When such countries do choose a free or managed floating regime, they appear to derive no benefit from those regimes; their exchange rate volatility seems to rise without any significant change in fundamental economic volatility. Thus, for these countries, floating exchange rates seem to create problems for policy makers without solving any.
    Date: 2011–06
  13. By: Sylvain Leduc; Jean-Marc Natal
    Abstract: How should monetary policy be conducted in the presence of endogenous feedback loops between asset prices, firms’ financial health, and economic activity? We reconsider this question in the context of the financial accelerator model and show that, when the level of natural output is inefficient, the optimal monetary policy under commitment leans considerably against movements in asset prices and risk premia. We demonstrate that an endogenous feedback loop is crucial for this result and that price stability is otherwise quasi-optimal absent this feature. We also show that the optimal policy can be closely approximated and implemented using a speed-limit rule that places a substantial weight on the growth of financial variables.
    Keywords: Monetary policy ; Asset pricing
    Date: 2011
  14. By: Fabio Milani (Department of Economics, University of California-Irvine); John Treadwell (Department of Economics, University of California-Irvine)
    Abstract: There is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks. The shocks that are investigated, however, almost exclusively represent unanticipated changes in policy, which surprise the private sector and which are typically found to have a delayed and sluggish effect on output. In this paper, we estimate a New Keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks. The paper shows that the conventional estimates confound two distinct effects on output: an effect due to unanticipated or “surprise” shocks, which is smaller and more short-lived than the response usually obtained in the literature, and a large, delayed, and persistent effect due to anticipated policy shocks or "news." News shocks play a larger role in influencing the business cycle than unanticipated policy shocks, although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited.
    Keywords: Anticipated and unanticipated monetary policy shocks; News shocks; New Keynesian model with news shocks; Effects of monetary policy onoutput
    JEL: E32 E52 E58
    Date: 2011–05
  15. By: M. Salto; T. Pietra
    Abstract: We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena.
    JEL: D52
    Date: 2011–06
  16. By: Daniela Gabor (University of the West of England)
    Abstract: The global financial crisis forcefully highlighted the importance of developing mechanisms to curb the effects of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. This paper explores the analytical framework underlying the IMF’s new position, arguing that its sequencing strategy offers a formulaic solution that neglects the institutional make-up of money and currency markets, is asymmetric in its emphasis on the upturn of the liquidity cycle and sanctions capital-controls only as a last-resort solution. The new approach can have perverse impacts, increasing vulnerability where banks play an important role in the intermediation of capital inflows. The paper offers alternative policy solutions that focus on realigning bank incentives towards longer horizons and sustainable growth models, combining carefully designed central bank liquidity strategies and institutional changes in the banking sector.
    Keywords: IMF, capital controls, financial crisis, global liquidity, shadow banks, sterilizations, central banks.
    JEL: E58 E63 F3 G1 O11 O2
    Date: 2011–06
  17. By: Christian Bredemeier; Henry Goecke
    Abstract: This paper empirically compares sticky-price and sticky-information Phillips curves considering inflation dynamics in six countries (US, UK, Germany, France, Canada, and Japan). We evaluate the models‘ abilities to match empirical second moments of inflation. Under baseline calibrations, the two models perform similarly in almost all countries. Under estimated parametrizations, sticky information performs better in France while sticky prices dominate in the UK and Germany. Sticky prices match unconditional moments of inflation dynamics better while sticky information is more successful in matching co-movement of inflation with demand. Both models‘ performances worsen where inflation dynamics diff er from the US benchmark.
    Keywords: Phillips curve; sticky information; sticky prices
    JEL: E31 E32 E37
    Date: 2011–04
  18. By: Jan Babecky; Lubos Komarek; Zlatuse Komarkova
    Abstract: This article analyzes the phenomenon of financial integration on both the theoretical and empirical levels, focusing primarily on assessing the impacts of the current financial crisis. In the theoretical section we first look at the definition of financial integration and summarize the benefits and costs associated with this process. We go on to examine the relationship between financial integration and financial instability, emphasizing the priority role of financial innovation. The subsequent empirical section provides an analysis of the speed and level of integration of the Czech financial market and the markets of selected inflation-targeting Central European economies (Hungary and Poland) and advanced Western European economies (Sweden and the United Kingdom) with the euro area. The results for the Czech Republic reveal that a process of increasing financial integration has been going on steadily since the end of the 1990s and also that the financial crisis caused only temporary price divergence of the Czech financial market from the euro area market.
    Keywords: Beta-convergence, financial crisis, financial integration, gamma-convergence, new EU Member States, propagation of shocks, sigma-convergence.
    JEL: C23 G12 G15
    Date: 2010–12
  19. By: Catik, A. Nazif; Karaçuka, Mehmet
    Abstract: This paper analyses inflation forecasting power of artificial neural networks with alternative univariate time series models for Turkey. The forecasting accuracy of the models is compared in terms of both static and dynamic forecasts for the period between 1982:1 and 2009:12. We find that at earlier forecast horizons conventional models, especially ARFIMA and ARIMA, provide better one-step ahead forecasting performance. However, unobserved components model turns out to be the best performer in terms of dynamic forecasts. The superiority of the unobserved components model suggests that inflation in Turkey has time varying pattern and conventional models are not able to track underlying trend of inflation in the long run. --
    Keywords: Inflation forecasting,Neural networks,Unobserved components model
    JEL: C45 C53 E31 E37
    Date: 2011

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