nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒07‒21
twenty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Who Supports the ECB? Evidence from Eurobarometer Survey Data By Etienne Farvaque; Muhammad Azmat Hayat; Alexander Mihailov
  2. The Reserve Equation and The Analytics of Pakistan's Monetary Policy By Hassan, Rubina; Mirza, M. Shahzad
  3. International Transmission of Monetary Shocks and the Non-Neutrality of International Money By Wenli Cheng; Dingsheng Zhang
  4. A New Approach to Inflation Aversion By Gaowang Wang
  5. Monetary Policy Rules in the BRICS: How Important is Nonlinearity? By Fredj Jawadi; Sushanta K. Mallick; Ricardo M. Sousa
  6. Unions Power, Collective Bargaining and Optimal Monetary Policy By Ester Faia; Lorenza Rossi
  7. Limited Asset Market Participation: Does it Really Matter for Monetary Policy? By Guido Ascari; Andrea Colciago; Lorenza Rossi
  8. The Role of Monetary Policy in Turkey during the Global Financial Crisis By Selim Elekdag; Harun Alp
  9. Endogenous Growth, Monetary Shocks and Nominal Rigidities By Barbara Annicchiarico; Alessandra Pelloni; Lorenza Rossi
  10. Exchange Rate Pass-Through over the Business Cycle in Singapore By Joey Chew; Siang Meng Tan; Sam Ouliaris
  11. Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far By Kotaro Ishi; Kenji Fujita; Mark R. Stone
  12. The Basel III framework for liquidity standards and monetary policy implementation By Ulrich Bindseil; Jeroen Lamoot
  13. Did the Indian capital controls work as a tool of macroeconomic policy? By Patnaik, Ila; Shah, Ajay
  14. How to Solve the Price Puzzle? A Meta-Analysis By Marek Rusnak; Tomas Havranek; Roman Horvath
  15. International Reserve Adequacy in Central America By Kristin Magnusson
  16. Developing ASEAN5 Bond Markets: What Still Needs to be Done? By Simon Gray; Ana Carvajal; Andreas Jobst; Joshua Felman
  17. The Extrapolative Component in Exchange Rate Expectations and the Not-So-Puzzling Interest Parity: The Case of Uruguay By Gonzalo Varela
  18. The External Impact of China's Exchange Rate Policy: Evidence from Firm Level Data By Hui Tong; Barry J. Eichengreen
  19. A convergence-sensitive optimum-currency-area index By Michal Skořepa
  20. Global Liquidity: Availability of Funds for Safe and Risky Assets By Akito Matsumoto

  1. By: Etienne Farvaque (Department of Economics, University of Lille 1); Muhammad Azmat Hayat (Department of Economics, University of Lille 1); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: This paper addresses empirically the still debated issue of the legitimacy of the European Central Bank (ECB) with regard to European polities, presenting evidence on public opinion support for the ECB as elicited from responses in the recent waves of the Eurobarometer survey. We employ a rich set of potential determinants, combining macroeconomic and socio-demographic data in logistic regressions, to explain trust in the ECB. We find that people with higher level of income and education and centre to right-wing political orientation tend to support the ECB, as well as people with optimistic expectations on the economic situation. Moreover, our results indicate that socio-demographic determinants of trust in the ECB dominate macroeconomic ones, in particular inflation performance, by a considerable margin of magnitude and in a quite robust way. The policy relevance of such results is important for ECB’s communication strategy with the EU public, especially in the years ahead of likely reforms of the European Monetary Union (EMU).
    Keywords: European Central Bank, communication, legitimacy, determinants of trust, Eurobarometer survey, logistic regression
    JEL: C23 E58 F33 H11 Z13
    Date: 2011–07–08
  2. By: Hassan, Rubina; Mirza, M. Shahzad
    Abstract: This paper deals with the computation and analysis of some fundamental reserve aggregates and associated monetary statistics which impart important information regarding the design and conduct of monetary policy at the State Bank of Pakistan. Specifically, we compute the data series for borrowed, unborrowed, free and drainable reserves using balance sheet data published by the State Bank of Pakistan for the period 1985-2009. Results show that Pakistan’s monetary policy revolves around managing the exchange rate while using the t-bill rate as the key policy instrument. However, the value of the t-bill rate is both incorrectly and sub-optimally related to macroeconomic fundamentals rendering monetary policy time inconsistent. This hinges on the finding that since 2000-01, State Bank of Pakistan is targeting net free reserves of the banking system at 4% of total private deposits. Among other observations, we find that the scope of open market operations as a tool of monetary policy remains but limited and that this limited role of open market defenses derives from an indiscreet concern of the central bank to sterilize its own foreign exchange reserves. Furthermore, the growth rate of unborrowed plus drainable reserves bears a strong negative correlation with the annual average rate of inflation, which, on account of the former being consistently negative since 2005, implies that the government and the State Bank of Pakistan both have absolutely no concern for controlling inflation.
    Keywords: Measurement of Money Supply; Analysis of Monetary Policy; Central Banks and Their Policies; Taylor Rule; Operational Targets of Monetary Policy.
    JEL: E51 E58 E52
    Date: 2010–11
  3. By: Wenli Cheng (Department of Economics, Monash University); Dingsheng Zhang (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper investigates how monetary shocks are transmitted internationally. It shows that where a national currency is used as an international medium of exchange, the international money is non-neutral. In particular, an increase in the supply of international money leads to a transfer of real resources to the international money-issuing country from its trading partner. It also induces an expansion of the non-tradable sector in the international money-issuing country, and an expansion the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.
    Keywords: demand for money, demand for international currency, monetary policy, exchange rate, non-neutrality of money
    JEL: F11 F31 E41 E52
    Date: 2011
  4. By: Gaowang Wang (Wuhan University)
    Abstract: This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing in?ation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.
    Keywords: Inflation Aversion, Endogenous Time Preference, Monetary Superneutrality, Optimum Quantity of Money
    JEL: E31 E5 O41
    Date: 2011–11
  5. By: Fredj Jawadi (University of Evry Val d?Essone & Amiens School of Management); Sushanta K. Mallick (Queen Mary University of London); Ricardo M. Sousa (Universidade do Minho - NIPE)
    Abstract: Given limited research on monetary policy rules in emerging markets, this paper estimates monetary policy rules for five key emerging market economies: Brazil, Russia, India, China and South Africa (BRICS) analysing whether the monetary authority reacts to changes in financial markets, in monetary conditions, in the foreign exchange sector and in the commodity price. To get a deeper understanding of the central bank’s behaviour, we assess the importance of nonlinearity using a smooth transition (STAR) model. Using quarterly data, we find strong evidence that the monetary policy followed by the Central Banks in the BRICS varies from one country to another and that it exhibits nonlinearity. In particular, considerations about economic growth (in the cases of Brazil and Russia), inflation (for India and China) and stability of financial markets (in South Africa) seem to be the major drivers of such nonlinear monetary policy behaviour. Moreover, the findings suggest that the monetary authorities pursue, with the exception of India, a target range for the threshold variable rather than a specific point target. In fact, the exponential smooth transition regression (ESTR) model seems to be the best description of the monetary policy rule in these countries.
    Keywords: monetary policy, emerging markets, smooth transition.
    JEL: E37 E52
    Date: 2011
  6. By: Ester Faia (Department of Money and Macro, Goethe University Frankfurt); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We study Ramsey policies and optimal monetary policy rules in a model with sticky prices and unionized labour markets. Collective wage bargaining and unions monopoly power dampen wage fluctuations and amplify employment fluctuations relatively to a DNK model. The optimal monetary policy must trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations induced by unions' monopoly power. In this context the monetary authority uses inflation as a tax on unions' rents. The optimal monetary policy rule targets unemployment alongside inflation.
    Date: 2010–10
  7. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Andrea Colciago (Department of Economics, University of Milano Bicocca); Lorenza Rossi (Department of Economics and Quantitative Methods, 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 effect 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 this reasons we argue that LAMP does not matter much for monetary policy.
    Keywords: optimal monetary policy, sticky wages, non-Ricardian household, determinacy, optimal simple rules.
    JEL: E50 E52
    Date: 2010–10
  8. By: Selim Elekdag; Harun Alp
    Abstract: Turkey is an interesting case study because it was one of the hardest hit emerging economies by the global financial crisis, with a year-over-year contraction of 15 percent during the first quarter of 2009. At the same time, anticipating the fallout from the crisis, the Central Bank of the Republic of Turkey (CBRT) decreased policy rates by an astounding 1025 basis points over the November 2008 to November 2009 period. In this context, this paper addresses the following broad question: If an inflation targeting framework underpinned by a flexible exchange rate regime was not adopted, how much deeper would the recent recession have been? Counterfactual experiments based on an estimated structural model provide quantitative evidence which suggests that the recession would have been substantially more severe. In other words, the interest rate cuts implemented by the CBRT and exchange rate flexibility both helped substantially soften the impact of the global financial crisis.
    Date: 2011–06–28
  9. By: Barbara Annicchiarico (Department of Economics, University of Rome ‘Tor Vergata’); Alessandra Pelloni (Department of Economics, University of Rome ‘Tor Vergata’); Lorenza Rossi (Department of Economics and Quantitative Methods, University of Pavia)
    Abstract: We introduce endogenous growth in an otherwise standard NK model with staggered prices and wages. Some results follow: (i) monetary volatility negatively affects long-run growth; (ii) the relation between nominal volatility and growth depends on the persistence of the nominal shocks and on the Taylor rule considered; (iii) a Taylor rule with smoothing increases the negative effect of nominal volatility on mean growth.
    Keywords: Growth, volatility, business cycle, monetary policy
    JEL: E32 E52 O42
    Date: 2010–08
  10. By: Joey Chew; Siang Meng Tan; Sam Ouliaris
    Abstract: This paper investigates exchange rate pass-through in Singapore using band-pass spectral regression techniques, allowing for asymmetric effects over the business cycle. First stage pass-through is estimated to be complete and relatively quick, confirming existing views that the exchange rate provides an effective tool to moderate imported inflation in Singapore. Asymmetric pass-through effects over the business cycle are also detected, with importers passing on a smaller share of exchange rate movements during boom periods as compared to recessions. This result suggest that Singapore’s exchange rate policy could afford to "lean against the wind," especially during cyclical expansions.
    Keywords: Business cycles , Economic models , Exchange rate policy , Monetary policy , Singapore ,
    Date: 2011–06–17
  11. By: Kotaro Ishi; Kenji Fujita; Mark R. Stone
    Abstract: What is the case for adding the unconventional balance sheet policies used by major central banks since 2007 to the standard policy toolkit? The record so far suggests that the new liquidity providing policies in support of financial stability generally warrant inclusion. As the balance sheet policies aimed at macroeconomic stability were used only by a small number of highly credible central banks facing a lower bound constraint on conventional interest rate policy, they are not relevant for most central banks or states of the world. Best practices of these policies are documented in this paper.
    Keywords: Central bank role , Central banks , Financial risk , Financial stability , Liquidity management , Monetary policy , Risk management ,
    Date: 2011–06–22
  12. By: Ulrich Bindseil; Jeroen Lamoot
    Abstract: Basel III introduces for the first time an international framework for liquidity risk regulation, reflecting the experience of excessive liquidity risk taking of banks in the run up to the financial crisis that erupted in August 2007, and associated negative externalities. As central banks play a crucial role in the liquidity provision to banks during normal times and in a financial crisis, the treatment of central bank operations in the regulation is obviously important. To ensure internalisation of liquidity risks (i.e. pricing of liquidity risk) and to address excessive reliance ex ante on central bank liquidity support by the banks, the regulation deliberately does not establish a direct close link with the monetary policy operational framework. While this reflects the purpose of the regulation and is also natural outcome of an international rule being applied under a multitude of very different monetary policy operational frameworks, this paper shows that the interaction between the two areas can be substantial, depending on the operational and collateral framework of the central bank. This implies the need for further study and the development of policies at the central bank and regulatory/supervisory side on how to handle these potential interactions in practice.
    Keywords: Basle III, Liquidity Risk, Banking Regulation, monetary policy implementation
    JEL: E58 G21 G28
    Date: 2011–07
  13. By: Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: In 2010 and 2011, there has been a fresh wave of interest in cap- ital controls. India is one of the few large countries with a complex system of capital controls, and hence offers an opportunity to assess the extent to which these help achieve goals of macroeconomic and fi- nancial policy. We find that the capital controls were associated with poor governance, were unable to sustain the erstwhile exchange rate regime, and did not support financial stability. India's experience is thus inconsistent with the revisionist view of capital controls. Macroe- conomic policy in India has moved away from the erstwhile strategies, towards greater exchange rate flexibility combined with capital ac- count liberalisation.
    Keywords: Capital controls ; Exchange rate regime ; Monetary policy ; Impossible trinity ; Financial stability
    JEL: F32 F33
    Date: 2011–04
  14. By: Marek Rusnak; Tomas Havranek; Roman Horvath
    Abstract: The short-run increase in prices following an unexpected tightening of monetary policy represents a frequently reported puzzle. Yet the puzzle is surprisingly easy to explain away when all published models are quantitatively reviewed. We collect about 1,000 point estimates of impulse responses from 70 articles using vector autoregressive models and present a simple method of research synthesis for graphical results. We find some evidence of publication selection against the price puzzle. Our results suggest that the reported impulse responses depend systematically on the study design: when misspecifications are filtered out, the average impulse response shows that prices decrease soon after a tightening. The long-run response of prices to monetary policy shocks depends on the characteristics of the economy.
    Keywords: Meta-analysis, monetary policy transmission, price puzzle, publication selection bias.
    JEL: E52
    Date: 2011–07
  15. By: Kristin Magnusson
    Abstract: Countries’ absolute and relative international reserves adequacy has recently attracted considerable attention. The analysis has however concentrated on the largest and most advanced economies. We apply various methodologies for assessing reserve adequacy in Central America, taking into account the region’s high degree of deposit dollarization. We find that reserve cover is low both in an absolute and relative sense, suggesting further reserve accumulation is an important policy option for reducing vulnerabilities.
    Keywords: Central America , Costa Rica , Dominican Republic , Economic models , Emerging markets , Guatemala , Honduras , Nicaragua , Reserves accumulation , Reserves adequacy ,
    Date: 2011–06–20
  16. By: Simon Gray; Ana Carvajal; Andreas Jobst; Joshua Felman
    Abstract: This paper examines a range of issues relating to bond markets in the ASEAN5 (Indonesia, Malaysia, Philippines, Singapore and Thailand) - physical infrastructure including trading, clearing and settlement; regulation, supervision and legal underpinnings; and derivatives markets - and finds that the frameworks compare well with other Emerging Markets, following a decade of reform. A number of areas where further enhancements could be made are highlighted. The paper also examines the interrelationship between central bank management of short-term interest rates and domestic currency liquidity, and development of the wider money and bond markets; and suggests some lessons from the recent crisis in developed country financial markets which may be important for the future development of the ASEAN5 markets.
    Keywords: Asia , Bond markets , Central banks , Financial crisis , Global Financial Crisis 2008-2009 , Indonesia , Liquidity management , Malaysia , Philippines , Singapore , Taxation , Thailand ,
    Date: 2011–06–09
  17. By: Gonzalo Varela (Department of Economics, University of Sussex)
    Abstract: This paper analyses the importance attached to the past behaviour of the exchange rate when forming expectations and tests for the uncovered interest parity hypothesis. Using interest rate dierentials for Uruguay over 1980-2010, we identify a strong and time-varying extrapolative component in exchange rate expectations. Agents attach more importance to the past behaviour of exchange rates the higher the level of in ation is. Yet agents are able to internalise policy announcements and external events that are likely to aect exchange rate fun- damentals. Further, we nd deviations from the uncovered interest parity hy- pothesis. These are lower than those usually reported for developed economies. Also, they tend to be higher for the period of low in ation and freely oating exchange rates. As long as what it takes to predict well is rather simple | i.e. look backwards, follow policy announcements, the interest rate dierential per- forms well. Once the exchange rate determination model becomes more intricate or less familiar to the agents, they tend to fail at predicting exchange rate depre- ciations. These results point to expectational failures as a likely explanation for the `uncovered interest parity puzzle'.
    Keywords: Exchange rates, Uncovered interest parity, Expectations, Emerging Economies, Bias, Puzzle
    JEL: F31 G14
    Date: 2011–02
  18. By: Hui Tong; Barry J. Eichengreen
    Abstract: We examine the impact of renminbi revaluation on foreign firm valuations, considering two surprise announcements of changes in China’s exchange rate policy in 2005 and 2010 and employing data on some 6,000 firms in 44 economies. Stock returns rise with renminbi revaluation expectations. This reaction appears to reflect a combination of improvements in general market sentiment and specific trade effects. Expected renminbi appreciation has a positive effect on firms exporting to China but a negative impact on those providing inputs for the country’s processing exports. Stock prices rise for firms competing with China in their home market but fall for firms importing Chinese products with large imported-input content. There is also some evidence that expected renminbi appreciation reduces the valuation of financially-constrained firms, presumably because appreciation implies reduced Chinese purchases of foreign securities. The results carry over when we consider ten instances of market-perceived changes in prospective Chinese currency policy.
    Date: 2011–07–05
  19. By: Michal Skořepa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: A number of authors have used the concept of an optimum currency area (or OCA) index to assess the relative proximity of various pairs of economies to the ideal of an optimum currency area. Alas, a significant deficiency of this approach as used so far is that it provides no room for long-term real income convergence - a frequently observed process that can be viewed as a specific type of long-term asymmetric shock. In this paper, a novel way to construct the OCA index is suggested that is sensitive to any real convergence (or divergence) between the two economies under study. Estimation of this convergence-sensitive OCA index for a sample of OECD economies yields an intuitively plausible result: real convergence gains on significance within the OCA index after an initial sample, a group of advanced OECD economies, is broadened with a group of emerging economies. Applied to the 2001-2008 period, the convergence-sensitive index shows a few Central and Eastern European late-transition economies to be better prepared for a common currency with Germany than several current euro area members.
    Keywords: optimum currency area, OCA index, real convergence, real exchange rate, trend appreciation
    JEL: E58 F15 F31 O2
    Date: 2011–07
  20. By: Akito Matsumoto
    Abstract: What is global liquidity and how does it affect an economy? The paper addresses that question by looking at liquidity from two different perspectives: global liquidity as availability of funds in safe and risky asset markets. This distinction between safe and risky asset markets is important due to market segmentation, which called for unconventional monetary policy to restore a function of risky asset markets. To analyze the effect of global liquidity, I construct proxy variables and then asses how they affect an emerging economy whose interest rate is affected by a world risk-free rate and a risk premium. Using the data from four major Latin American countries, I find that these two aspects of global liquidity have similar effects on economic performance in emerging market economies except for their effect on inflation.
    Keywords: Asset prices , Cross country analysis , Economic models , Emerging markets , External shocks , Financial risk , Investment , Latin America , Liquidity , Risk premium ,
    Date: 2011–06–10

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