nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒07‒13
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Global Liquidity Trap By Ippei Fujiwara; Tomoyuki Nakajima; Nao Sudo; Yuki Teranishi
  2. Inflation persistence, Price Indexation and Optimal Simple Interest Rate Rules By Guido Ascari; Nicola Branzoli
  3. Unveiling the monetary policy rule in euro area By Thanassis Kazanas; Elias Tzavalis
  4. Small Lessons from the Recent Euro-Dollar Skirmishes By Dino Martellato
  5. Individual Expectations and Aggregate Macro Behavior By Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenica Massaro
  6. Optimal monetary policy and default By Lizarazo, Sandra; Da-Rocha, Jose-Maria
  7. What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK By Herbert Buscher; Hubert Gabrisch
  8. TARGET2 Unlimited: Monetary Policy Implications of Asymmetric Liquidity Management within the Euro Area By Abad, José M; Loeffler, Axel; Zemanek, Holger
  9. Asset Prices, Monetary Policy, and Aggregate Fluctuations: An Empirical Investigation By Lichao Cheng; Yi Jin; Zhixiong Zeng
  10. Canadian Monetary Policy and Real and Nominal Exchange Rates [Revised] By John E. Floyd
  11. The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules By Guido Ascari; Neil Rankin
  12. How Well Does Sticky Information Explain the Dynamics of Inflation, Output, and Real Wages? By J. A. CARRILLO
  13. The Euro-project at risk By Hankel, Wilhelm; Hauskrecht, Andreas; Stuart, Bryan
  14. ECB Reaction Functions and the Crisis of 2008 By Gerlach, Stefan; Lewis, John
  15. Monetary policy trade-offs in a portfolio model with endogenous asset supply By Schüder, Stefan
  16. Foreign exchange reserve management in the 19th century: The National Bank of Belgium in the 1850s By Stefano Ugolini
  17. Monetary Policy Trade-Offs in a Portfolio Model with Endogenous Asset Supply By Stefan Schüder
  18. Labor Market Participation, Unemployment and Monetary Policy By Alessia Campolmi; Stefano Gnocchi
  19. U.S. Core Inflation: A Wavelet Analysis By Kevin Dowd; John Cotter
  20. Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs By Maurice J. Roche; Michael J. Moore
  21. The Microstructure of Currency Markets By Martin Evans
  22. The trend of the real exchange rate overvaluation in open emerging economies: the case of Brazil By André Nassif; Carmem Feijó; Eliane Araújo
  23. The international propagation of the financial crisis of 2008 and a comparison with 1931 By William A. Allen; Richhild Moessner
  24. Beating the Random Walk in Central and Eastern Europe by Survey Forecasts By Anna Naszódi
  25. Monetary Policy and Automatic Stabilizers: the Role of Progressive Taxation By Fabrizio Mattesini; Lorenza Rossi

  1. By: Ippei Fujiwara (Bank of Japan); Tomoyuki Nakajima (Kyoto University); Nao Sudo (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: Using a two-country New Open Economy Macroeconomics model, we analyze how monetary policy should respond to a "global liquidity trap," where the two countries may fall into a liquidity trap simultaneously. We first characterize optimal monetary policy, and show that the optimal rate of infl ation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. We find that the interest-rate rule targeting the producer price index performs very well in this respect.
    Keywords: Zero interest rate policy; two-country model; international spillover; monetary policy coordination
    JEL: E52 E58 F41
    Date: 2011–06
  2. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Nicola Branzoli (University of Wisconsin Madison)
    Abstract: We study the properties of the optimal nominal interest rate policy under different levels of price indexation. In our model indexation regulates the sources of inflation persistence. When indexation is zero, the inflation gap is purely forward- looking and inflation persistence depends only on the level of trend inflation, while full indexation makes the inflation gap persistent and it eliminates the effects of trend inflation. We show that in the former case the optimal policy is inertial and targets inflation stability while in the latter the optimal policy has no inertia and targets the real interest rate. We compare our results with empirical estimates of the FED's policy in the post-WWII era.
    Keywords: Inflation Persistence, Taylor Rule, New Keynesian model, Indexation
    JEL: E31 E52
    Date: 2010–11
  3. By: Thanassis Kazanas (Athens University of Economics and Business); Elias Tzavalis (Athens University of Economics and Business)
    Abstract: This paper provides evidence that, since the sign of Maastricht Treaty, euro-area monetary authorities mainly follow a strong anti-inflationary policy. This policy can be described by a threshold monetary policy rule model which allows for distinct inflation policy regimes: a low and high. The paper finds that these authorities react more strongly to positive deviations of inflation and/or output from their target levels rather than to the negative. They do not seem to react at all to negative deviations of output from its target level in the low-inflation regime. We argue that this behaviour can be attributed to the attitude of the monetary authorities to build up credibility on stabilizing inflationary expectations. To evaluate the policy implications of the above euro-area monetary policy rule behaviour, the paper simulates a small New Keynesian model. This exercise clearly indicates that the absence of reaction of the euro-area monetary authorities to negative output gap when inflation is very low reduces their efficiency on dampening the effects of negative demand shocks on the economy.
    Keywords: Monetary policy, threshold models; regime-switching; generalized method of moments; New Keynesian model
    JEL: E52 C13 C30
    Date: 2011–05
  4. By: Dino Martellato (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We investigate in this paper the skirmishes that the US dollar and the euro had from 2007 to 2011 and, in particular, the two distinct sharp falls that the single currency had in 2008 and 2010. We basically consider how impulses coming from domestic money markets impact on the USD/EUR exchange rate through the Eurocurrency market. Our findings show that the cycles in the spreads in the LIBOR rates have a bearing on the direction of change in the spot exchange rate in a way which is different from that predicted by the interest rate parity. The exposure of the value of reserve currencies to the vagaries of the outside circulation in the Eurocurrency and FX markets is only one of the many different policy implications of the current arrangement of the international monetary system. In the final part of the paper we also discuss some of those tied to the very existence of the international money market and to competition among old and emerging global currencies and financial centres.
    Keywords: Exchange rates, LIBOR rates, reserve currencies, financial centres.
    JEL: F31 F33 F36
    Date: 2011
  5. By: Tiziana Assenza; Peter Heemeijer; Cars Hommes; Domenica Massaro
    Abstract: The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. We find that a more aggressive monetary policy that sets the interest rate more than point for point in response to inflation stabilizes inflation in our experimental economies. We use a simple model of individual learning, with a performance-based evolutionary selection among heterogeneous forecasting heuristics, to explain coordination of individual expectations and aggregate macro behavior observed in the laboratory experiments. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behaviour and oscillatory convergence. A simple heterogeneous expectations switching model fits individual learning as well as aggregate outcomes and outperforms homogeneous expectations benchmarks.
    Keywords: Experiments; Monetary Policy; Expectations; Heterogeneity
    JEL: C91 C92 E52
    Date: 2011–05
  6. By: Lizarazo, Sandra; Da-Rocha, Jose-Maria
    Abstract: In a context in which individuals might default on their debts and subsequently be excluded from credit markets, holding money helps agents smooth their consumption during periods in which they cannot borrow. Therefore holding money makes the punishment to default less severe. In this context, by affecting money demand, monetary policy can affect incentives to default; determining optimal monetary policy can then be thought of as equivalent to choosing the optimal default rate. Since each economy might have a different optimal default rate, each economy might have a different optimal monetary policy different from the Friedman rule. Specifically, we compare the US to Colombia, using a model with idiosyncratic labor income risk and fiat money. Given differences in enforcement of debt contracts, and differences in income variability and persistence, we find that high inflation is costlier for developing countries compared to developed countries.
    Keywords: Default; Inflation; Fiat Money; Friedman rule; Endogenous Borrowing Constraints; Precautionary Savings.
    JEL: E52 E44 E21 E41
    Date: 2011–06–29
  7. By: Herbert Buscher; Hubert Gabrisch
    Abstract: This study deals with the question whether the central banks of Sweden, Denmark and the UK can really influence short-term money markets and thus, would lose this influence in case of Euro adoption. We use a GARCH-M-GED model with daily money market rates. The model reveals the co-movement between the Euribor and the shortterm interest rates in these three countries. A high degree of co-movement might be seen as an argument for a weak impact of the central bank on its money markets. But this argument might only hold for tranquil times. Our approach reveals, in addition, whether there is a specific reaction of the money markets in turbulent times. Our finding is that the policy of the European Central Bank (ECB) has indeed a significant impact on the three money market rates, and there is no specific benefit for these countries to stay outside the Euro area. However, the GARCH-M-GED model further reveals risk divergence and unstable volatilities of risk in the case of adverse monetary shocks to the economy for Sweden and Denmark, compared to the Euro area. We conclude that the danger of adverse monetary developments cannot be addressed by a common monetary policy for these both countries, and this can be seen as an argument to stay outside the Euro area
    Keywords: Euro adoption, EMS, money markets, interest rates, GARCH-M-GED models, international financial markets
    JEL: E42 E43 F36 G15
    Date: 2011–07
  8. By: Abad, José M; Loeffler, Axel; Zemanek, Holger
    Abstract: This paper analyses the implications of a continued divergence of TARGET2 balances for monetary policy in the euro area. The accumulation of TARGET2 claims (liabilities) would make ECB’s liquidity management asymmetric once the TARGET2 claims in core countries have crowded out central bank credit in those regions. Then while providing scarce liquidity to banks in countries with TARGET2 liabilities, the ECB will need to absorb excess liquidity in countries with TARGET2 claims. We discuss three alternatives and its implications to absorb excess liquidity in core regions: (1) Using market based measures might accelerate the capital flight from periphery to core countries and would add to the accumulation of risky assets by the ECB. (2) Conducting non-market based measures such as imposing differential (unremunerated) reserve requirements would distort banking markets and would support the development of shadow banking. (3) Staying passive would lead to decreasing interest rates in core Europe entailing inflationary pressure and overinvestment in those regions and possibly future instability of the banking system.
    Keywords: TARGET2 balances; monetary policy; euro area; Eurosystem; excess liquidity
    JEL: F32 E42 E58 E52 F36
    Date: 2011–07–02
  9. By: Lichao Cheng; Yi Jin; Zhixiong Zeng
    Abstract: This paper studies empirically the dynamic interactions between asset prices, monetary policy, and aggregate fluctuations during the Volcker-Greenspan period. Using a simple structural vector autoregression framework, we investigate the effects of monetary policy on output, inflation and asset prices, the interactions of asset prices with the aggregate economy, as well as the relationship between stock price and house price. Several robust findings emerge. The systematic response of monetary policy to output and inflation is also found to play an important role in stabilizing the aggregate economy. In addition, the results call for special attention to be paid to house price when studying the dynamic relationships between asset prices and macroeconomic fluctuations.
    Keywords: House prices; stock prices; systematic monetary policy; structural vector autoregressions.
    JEL: E31 E32 E44 E52
    Date: 2011–06
  10. By: John E. Floyd
    Abstract: 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: Canadian Monetary Policy Real Exchange Rates
    JEL: E F
    Date: 2011–06–15
  11. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Neil Rankin (Department of Economics and Related Studies, University of York)
    Abstract: We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lumpsum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.
    Keywords: staggered prices, overlapping generations, government debt, fiscal policy effectiveness, monetary policy rules
    JEL: E62 E63
    Date: 2010–11
  12. By: J. A. CARRILLO
    Abstract: This paper finds that a model with pervasive information frictions is less successful than a standard model featuring nominal rigidities, inflation indexation, and habit persistence in generating the dynamics triggered by technology shocks, as estimated by a vector autoregression using key U.S. macroeconomic time series. The real wage responses after a permanent increase in productivity tilt the balance clearly in favor of the standard model. The sticky information model overestimates the speed of adjustment in the real wage and is hence particularly unsuccessful in replicating its inertial response, whereas the standard model relies on inflation indexation in wage-setting to achieve a better fit. The two models are, however, statistically equivalent in mimicking the responses of output, inflation, the real wage and the federal funds rate after a shock in monetary policy.
    Keywords: Sticky prices, sticky information, inflation indexation, monetary and technology shocks
    JEL: E31 E52 C15
    Date: 2011–06
  13. By: Hankel, Wilhelm; Hauskrecht, Andreas; Stuart, Bryan
    Abstract: In contrast to Robert Mundell's Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union. --
    Keywords: Optimum currency areas,monetary union,risk spreads,central banking,exchange rates,fiscal policy
    JEL: E42 E63 F15 F33 F34
    Date: 2010
  14. By: Gerlach, Stefan; Lewis, John
    Abstract: We study ECB’s interest rate setting in 1999-2010 using a reaction function in which forecasts of future economic growth and inflation enter as regressors. Allowing for a gradual switch between two reaction functions, we detect a shift after Lehman Brothers failed in September 2008 when the pre-crisis reaction function first indicates that interest rates may become constrained by the zero lower bound. Furthermore, the interest rate cuts in late 2008 were more aggressive than forecast by the pre-crisis reaction function. These findings are compatible with the literature on optimal monetary policy in the presence of a zero lower bound.
    Keywords: ECB; reaction functions; smooth transition; zero lower bound
    JEL: C2 E52
    Date: 2011–07
  15. By: Schüder, Stefan
    Abstract: This paper develops an open economy portfolio balance model with endogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of inflation, currency devaluation, distortions of interest rates, and risk clusters on the central bank’s balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank’s balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an inefficient international allocation of real capital investments.
    Keywords: portfolio balance; monetary policy; macroeconomic risk; exchange rate; real capital investments
    JEL: E52 E44 E10
    Date: 2011–06–25
  16. By: Stefano Ugolini (Scuola Normale Superiore, Pisa)
    Abstract: As well as the current one, the wave of globalization culminated in 1913 was marked by increasing accumulation of foreign exchange reserves. But what did ‘reserves’ mean in the past, how were they managed, and how much relevant are the differences between then and now? This paper is the first attempt to investigate 19th-century reserve management from central banks’ perspective. Building on a significant case study (the National Bank of Belgium, i.e. the ‘inventor’ of foreign exchange policy, in the 1850s), it shows that risk management practices in the past differed considerably from nowadays. The structure of the international monetary system allowed central banks to minimize financial risk, while poor institutional design enhanced operational risk: this is in stark contrast with the present situation, in which operational risk has been minimized and financial risk has considerably increased. Yet 19th-century reserve management was apparently not conducive to major losses for central banks, while the opposite seems to have been the case in the 21st century.
    Keywords: Foreign exchange reserves, international monetary systems, central banking, risk management
    JEL: E42 E58 G11 N23
    Date: 2011–07–05
  17. By: Stefan Schüder
    Abstract: This paper develops an open economy portfolio balance model with en¬dogenous asset supply. Domestic producers finance capital goods through credit and bonds in accordance with debt capital costs as well as through equity assets. Private households hold a portfolio of domestic and foreign assets, shift balances depending on risk-return considerations, and maximise real consumption in accordance with the real exchange rate. Within this general equilibrium model, it can be shown that expansive monetary interventions, being applied throughout the course of economic crises, stabilise the real amount of domestic investments at the cost of inflation, currency devaluation, distortions of interest rates, and risk clusters on the central bank’s balance sheet. Furthermore, through exchange rate stabilising interventions, the central bank is able to stabilise the real amount of domestic investments and in turn the main goal of exchange rate stabilisation is also achieved. However, either risk clusters on central bank’s balance sheet or changes in the domestic price level emerge. This consequently results in both types of central bank interventions promoting an inefficient international allocation of real capital investments.
    Keywords: portfolio balance, monetary policy, macroeconomic risk, exchange rate, real capital investments
    JEL: E10 E44 E52
    Date: 2011–06–27
  18. By: Alessia Campolmi (Central European University; Magyar Nemzeti Bank (central bank of Hungary)); Stefano Gnocchi (Universitat Autonoma de Barcelona)
    Abstract: In the present paper we examine how the introduction of endogenous participation in an otherwise standard DSGE model with matching frictions and nominal rigidities affects business cycle dynamics and monetary policy. The contribution of the paper is threefold: first, we show that the model provides a good fit for employment and unemployment volatility, as well as participation volatility and its correlation with output for US data. Second, we show that in such a model, and contrary to a model with exogenous participation, a monetary authority that becomes more aggressive in fighting inflation decreases the volatility of employment and unemployment. Finally, we show the role of search costs in shaping those results.
    Keywords: matching frictions, endogenous participation, monetary policy
    JEL: E24 E32 E52
    Date: 2011
  19. By: Kevin Dowd (The University of Nottingham, UK); John Cotter (University College Dublin, Ireland)
    Abstract: This paper proposes the use of wavelet methods to estimate U.S. core inflation. It explains wavelet methods and suggests they are ideally suited to this task. Comparisons are made with traditional CPI-based and regression-based measures for their performance in following trend inflation and predicting future inflation. Results suggest that wavelet-based measures perform better, and sometimes much better, than the traditional approaches. These results suggest that wavelet methods are a promising avenue for future research on core inflation.
    Keywords: core inflation, wavelets, trend inflation, inflation prediction
    Date: 2011–06–24
  20. By: Maurice J. Roche (Department of Economics, Ryerson University, Toronto, Canada); Michael J. Moore (School of Management and Economics, The Queen's University of Belfast, Belfast, Northern Ireland)
    Abstract: We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with „deep? habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.
    Keywords: Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence
    JEL: F31 F41 G12
    Date: 2009–10
  21. By: Martin Evans (Department of Economics, Georgetown University)
    Abstract: This article summarizes exchange-rate research using microstructure models. It first lays out the key features of the foreign exchange market and describes how they are incorporated into a canonical model of currency trading. The empirical implications of the model are then examined. The article also discusses how currency trading links spot rate dynamics to macroeconomic conditions, and how this link sheds light on some long-standing puzzles concerning the behavior of exchange rates. Classification-JEL Codes:
    Keywords: Currency Trading, Exchange Rates, Exchange Rate Puzzles, Exchange Rate Fundamentals, Foreign Exchange Market, Microstructure, Order Flow, Risk Premium
    Date: 2010–07–10
  22. By: André Nassif (Universidade Federal Fluminense e BNDES); Carmem Feijó (Universidade Federal Fluminense); Eliane Araújo (Universidade Estadual de Maringá)
    Abstract: We present a Structuralist-Keynesian theoretical approach on the determining factors of the real exchange rate for open emerging economies. Instead of macroeconomic fundamentals, the long-term trend of the real exchange rate level is better determined not only by structural forces and long-term economic policies, but also by both short-term macroeconomic policies and their indirect effects on other short-term economic variables. In our theoretical model, the actual real exchange rate is broken down into long-term structural and short-term components, and both of which may be responsible for deviations of that actual variable from its long-term trend level. The econometric model for the Brazilian economy in the 1999-2010 period shows that the terms of trade and the short-term interest rate differential are the most significant variables that explain the long-term trend of the real exchange rate overvaluation in Brazil. We also propose an index of overvaluation and an original definition of a long-term “optimal” real exchange rate for open emerging economies. The econometric results show two basic conclusions: first the Brazilian currency was persistently overvalued throughout almost all of the period under analysis; and second, the long-term “optimal” real exchange rate was reached in 2004. In January 2011, the average nominal exchange rate should be around 2.91 Brazilian reais per US dollar for reaching that “optimal” level, against an observed average nominal exchange rate of 1.67 Brazilian reais per US dollar. According to this estimation, in January 2011, the real overvaluation of the Brazilian currency in relation to the long-term ¨optimal¨ level was around 74 per cent. These findings lead us to suggest in the conclusion that a mix of policy instruments should be used in order to reverse the overvaluation trend of the Brazilian real exchange rate, including a target for reaching the “optimal” real exchange rate in the medium and the long-run.
    Keywords: real exchange rate, real overvaluation, economic policy dilemmas, Brazil
    JEL: F30 F31 F39
    Date: 2011
  23. By: William A. Allen; Richhild Moessner
    Abstract: We examine the international propagation of the financial crisis of 2008, and compare it with that of the crisis of 1931. We argue that the collateral squeeze in the United States, which became intense after the failure of Lehman Brothers created doubts about the stability of other financial companies, was an important propagator in 2008. We identify some common features in the propagation of the two crises, the most important being the flight to liquidity and safety. In both crises, deposit outflows were not the only important sources of liquidity pressure on banks: in 1931, the central European acceptances of the London merchant banks were a serious problem, as, in 2008, were the liquidity commitments that commercial banks had provided to shadow banks. And in both crises, the behaviour of creditors towards debtors, and the valuation of assets by creditors, were very important. However, there was a very important difference between the two crises in the range and nature of assets that were regarded as liquid and safe. Central banks in 2008, with no gold standard constraint, could liquefy illiquid assets on a much greater scale.
    Keywords: financial crisis, liquidity, international monetary system, Great Depression
    Date: 2011–07
  24. By: Anna Naszódi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: This paper investigates the forecasting ability of survey data on exchange rate expectations with multiple forecast horizons. The survey forecasts are on the exchange rates of five Central and Eastern European currencies: Czech Koruna, Hungarian Forint, Polish Zloty, Romanian Leu and Slovakian Koruna. First, different term-structure models are fitted on the survey forecasts. Then, the forecasting performances of the fitted forecasts are compared. The fitted forecasts for the 5 months horizon and beyond are proved to be significantly better than the random walk on the pooled data of the five currencies. The best performing term-structure model is the one that assumes an exponential relationship between the forecast and the forecast horizon, and has time-varying parameters.
    Keywords: evaluating forecasts, exchange rate, survey forecast, time-varying parameter, term-structure of forecasts
    JEL: F31 F36 G13
    Date: 2011
  25. By: Fabrizio Mattesini (University of Rome "Tor Vergata"); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We study the e¤ects of progressive labor income taxation in an otherwise standard NK model. We show that progressive taxation (i) introduces a trade-o¤ between output and in?ation stabilization and a¤ects the slope of the Phillips Curve; (ii) acts as automatic stabilizer changing the responses of the economy to technology shocks and demand shocks (iii) alters the prescription for the optimal discretionary interest rate rule. We also show that the welfare gains from commitment decrease as labor income taxes become more progressive. Quantitatively, the model is able to reproduce the observed negative correlation between the volatility of output, hours and in?ation and the degree of progressivity of labor income taxation.
    JEL: E50 E52 E58
    Date: 2010–11

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