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on Monetary Economics |
| By: | Mandler, Martin |
| Abstract: | We estimate monetary policy reaction functions with threshold effects for the Deutsche Bundesbank using a real-time data set. Estimates based on the deviation of inflation from the Bundesbank's inflation target as threshold variable suggest a switch to a stronger output gap response in the reaction function if past inflation was high. The reaction function in the regime with higher inflation implies an overall less contractionary monetary policy than that for the low inflation regime. A modified model with three regimes shows this result to be related to periods of substantial excess inflation. We explore a threshold reaction function with a moving inflation target that captures a gradual adjustment of an intermediate to a long-term inflation target and find the Bundesbank to follow a more restrictive monetary policy stance if inflation is above the intermediate-term inflation target. |
| Keywords: | Deutsche Bundesbank; monetary policy reaction function; threshold regression; instrumental variables; real-time data |
| JEL: | E58 E52 C22 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32430&r=mon |
| By: | Zaheer, S.; Ongena, S.; Wijnbergen, S.J.G. van (Tilburg University, Center for Economic Research) |
| Abstract: | We investigate the differences in banks’ responses to monetary policy shocks across bank size, liquidity, and type, i.e., conventional versus Islamic, in Pakistan between 2002:II to 2010:I. We find that following a monetary contraction, small banks with liquid balance sheets cut their lending less than other small banks. In contrast large banks maintain their lending irrespective of their liquidity positions. Islamic banks, though similar in size to small banks, respond to monetary policy shocks as large banks. Hence ceteris paribus the credit channel of monetary policy may weaken when Islamic banking grows in relative importance. |
| Keywords: | Monetary policy;Islamic Banking;Pakistan. |
| JEL: | E5 G2 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2011078&r=mon |
| By: | Jaromir Baxa; Roman Horvath; Borek Vasicek |
| Abstract: | We examine whether and how selected central banks responded to episodes of financial stress over the last three decades. We employ a new monetary-policy rule estimation methodology which allows for time-varying response coefficients and corrects for endogeneity. This flexible framework applied to the USA, the UK, Australia, Canada, and Sweden, together with a new financial stress dataset developed by the International Monetary Fund, not only allows testing of whether central banks responded to financial stress, but also detects the periods and types of stress that were the most worrying for monetary authorities and quantifies the intensity of the policy response. Our findings suggest that central banks often change policy rates, mainly decreasing them in the face of high financial stress. However, the size of the policy response varies substantially over time as well as across countries, with the 2008–2009 financial crisis being the period of the most severe and generalized response. With regard to the specific components of financial stress, most central banks seemed to respond to stock-market stress and bank stress, while exchange-rate stress is found to drive the reaction of central banks only in more open economies. |
| Keywords: | Endogenous regressors, financial stress, monetary policy, Taylor rule, time-varying parameter model. |
| JEL: | E43 E52 E58 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2011/03&r=mon |
| By: | Lena Dräger (University of Hamburg and ETH Zurich) |
| Abstract: | The DSGE model with endogenous and time-varying sticky information in Dräger (2010) is extended by allowing agents’ recursive choice between forecasts under rational or sticky information to affect the model solution. Dynamic equilibrium paths generate highly persistent series for output, inflation and the nominal interest rate. Agents choose predictors in a near-rational manner and we find that the share of agents with rational expectations reacts to the overall variability of aggregate variables. The model can generate hump-shaped responses of inflation and output to a monetary policy shock if the degree of inattentiveness is sufficiently high. Finally, feedback from agents’ degree of inattentiveness to the model solution affects the determinacy region of the model. The Taylor principle is then only a necessary condition for determinacy, and monetary policy should target the output gap as well in order to ensure a unique and stable solution. |
| Keywords: | Endogenous sticky information, heterogeneous expectations, DSGE models, persistence. |
| JEL: | E31 E37 E52 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hep:macppr:201103&r=mon |
| By: | Raissi, M. |
| Abstract: | Ravenna and Walsh (2010) develop a linear quadratic framework for optimal monetary policy analysis in a New Keynesian model featuring search and matching frictions and show that maximization of expected utility of the representative household is equivalent to minimizing a quadratic loss function that consists of inflation, and two appropriately defined gaps involving unemployment and labor market tightness. This paper generalizes their analysis, most importantly by relaxing the Hosios (1990) condition which eliminates the distortions resulting from labor market inefficiencies, such that the equilibrium level of unemployment under flexible prices would not necessarily be optimal. I take account of steady-state distortions using the methodology of Benigno and Woodford (2005) and derive a quadratic loss function that involves the same three terms, albeit with different relative weights and definitions for unemployment- and labor market tightness gaps. I evaluate the resulting loss function subject to a simple set of log-linearized equilibrium relationships and perform policy analysis. The key result of the paper is that search externalities give rise to an endogenous cost push term in the new Keynesian Phillips curve, suggesting a case against complete price stability as the only goal of monetary policy, because there is now a trade-off between stabilizing inflation and reducing inefficient unemployment fluctuations. Transitory movements of inflation in this environment helps job creation and hence prevents excessive volatility of unemployment. |
| JEL: | E52 E61 J64 |
| Date: | 2011–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1146&r=mon |
| By: | Frankel, Jeffrey A. (Harvard University) |
| Abstract: | Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards. |
| JEL: | E50 F40 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-027&r=mon |
| By: | Itai Agur; Maria Demertzis |
| Abstract: | If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts brief is crucial as bank risk responds primarily to rates that are kept "too low for too long". Within this shorter time span, cuts must then be deeper than otherwise to also achieve standard objectives. |
| Keywords: | Monetary policy; Financial stability |
| JEL: | E52 G21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:303&r=mon |
| By: | Albaity, Mohamed Shikh |
| Abstract: | Previous studies found that Islamic stock market index in Malaysia (KLSI), does not react, or react negatively to interest rate, although one of the main criteria of Islamic finance is to avoid business and activities that yield interest because of its prohibition in Islamic laws. On the other hand, studies of Islamic stock market index in the US (DJIMI) found that there is no impact of interest rate on DJIMI. These two stock market indices have different screening criteria and different composite of securities. This study aims at investigating the monetary policy variables impact, the effect of interest rate, and the use of stock market indices as a hedge against inflation. It also examines the volatilities of monetary variables, interest rates, and inflation rate on two Islamic stock market indices. Using time series analysis such as GARCH the results are as follows. It is found that in the variance univariate models of the conventional indices that M1, M3, inflation rate, and real growth in GDP are significant in influencing KLCI volatility, while M2, M3, inflation rate and interest rate affected DJINA volatility. On the other hand, in the Islamic indices, KLSI and DJIMI variance is influenced by M2, M3, and inflation rate. In addition, in the multivariate model, DJIMI is influenced by the interest rate and the inflation rate in the mean and variance equations. In contrast, KLSI is influenced commonly in the mean and variance equations by M3, and the inflation rate. -- |
| Keywords: | Macroeconomic volatility,GARCH,Islamic index |
| JEL: | E4 E6 F4 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201126&r=mon |
| By: | Marián Dinga (CERGE-EI); Vilma Dingová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper studies the effect of the euro introduction on international FDI flows. Using country-pair data on 35 OECD economies during 1997-2008 and adopting the propensity score matching as identification strategy, we investigate the impact of the euro on capital reallocation. In general, the euro exhibits no significant impact on FDI. However, the effect becomes significant on the subset of EU countries, increasing FDI flows by 14.3 to 42.5 percent. Furthermore, we find that the EU membership fosters FDI flows much more than the euro, increasing FDI flows by 55 to 166 percent. Among other FDI determinants, high gross domestic product, low distance between countries and low unit labor costs in target country have a positive effect on FDI. On the contrary, long-term exchange rate volatility deters FDI flows. |
| Keywords: | monetary union, foreign direct investment, common currency area, euro |
| JEL: | E42 F15 F21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_25&r=mon |
| By: | Kakarot-Handtke, Egmont |
| Abstract: | The quantity theory is disjunct to the hard core of general equilibrium theory. It does not relate to the formal foundations of standard economics and, vice versa, from the behavioral axioms of standard economics a rationale for using money cannot be derived. The present paper leaves the standard axioms aside and reconstructs the quantity theory from entirely new structural axiomatic foundations. This gives a coherent view of the interrelations of quantity of money, transaction money, saving–dissaving, liquidity–illiquidity, rates of interest, leverage, allocation, prices, profits, unit of account, and employment. |
| Keywords: | New framework of concepts; Structure-centric; Axiom set; Money-credit symmetry; Endogeneity; Accommodation; Neutrality; Store of value; Overlapping generations; Full gold-backing; Declarative changes of the unit of account; Contract equation; Perfect inflation; Real balance effect |
| JEL: | E10 E40 E20 |
| Date: | 2011–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32421&r=mon |
| By: | Luis F. Martins |
| Abstract: | In this paper, we examine the empirical validity of the baseline version of the forward-looking monetary policy reaction function proposed by Clarida, Gali, and Gertler (2000). For that purpose, we propose a moment conditions model averaging estimator in the Generalized Method of Moments and Generalized Empirical Likelihood setups. We derive some of their asymptotic properties under correctly specified and misspecified models. Although the model averaging estimates and the standard procedures point to a stabilizing policy rule during the Paul Volcker and Alan Greenspan tenures but not so during the pre-Volker period, our results cast serious doubts on the significance of the cyclical output variable as a forcing variable in the FED funds dynamics during the Volcker-Greenspan period. |
| JEL: | C22 C52 E43 E52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201116&r=mon |
| By: | Faiz ur, rehman; Wasim, shahid malik |
| Abstract: | The study aims at investigating, whether or not the cost channel of monetary policy is effective in Pakistan. The cost channel is one of the theoretical justifications of Price Puzzle, a phenomenon that has been observed in a number of empirical studies. Using Structural Vector Autoregression (SVAR) and data from different industries of manufacturing sector of Pakistan over the period 2001:M07-2008:M04, we find strong evidence in favor of Price Puzzle in major industries. In industries like textile, food and beverages, pharmaceuticals, automobiles, and fertilizers, cost channel dominates the traditional demand channel. Same behavior is observed for aggregate price level in the overall manufacturing sector. The main reason for the result is the dependency of the above mentioned industries on short-term borrowing to finance their operational liquidity. |
| Keywords: | Cost Channel; Price Puzzle; Working Capital; Monetary Policy; Marginal Cost; Structural Vector Autoregression (SVAR) |
| JEL: | E32 E31 C22 |
| Date: | 2010–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32349&r=mon |
| By: | Andrés González (Banco de la República, Bogotá, Colombia.); Kirstin Hubrich (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Timo Teräsvirta (CREATES, Aarhus University, Denmark.) |
| Abstract: | We propose a new method for medium-term forecasting using exogenous information. We first show how a shifting-mean autoregressive model can be used to describe characteristic features in inflation series. This implies that we decompose the inflation process into a slowly moving nonstationary component and dynamic short-run fluctuations around it. An important feature of our model is that it provides a way of combining the information in the sample and exogenous information about the quantity to be forecast. This makes it possible to form a single model-based inflation forecast that also incorporates the exogenous information. We demonstrate, both theoretically and by simulations, how this is done by using the penalised likelihood for estimating the model parameters. In forecasting inflation, the central bank inflation target, if it exists, is a natural example of such exogenous information. We illustrate the application of our method by an out-of-sample forecasting experiment for euro area and UK inflation. We find that for euro area inflation taking the exogenous information into account improves the forecasting accuracy compared to that of a number of relevant benchmark models but this is not so for the UK. Explanations to these outcomes are discussed. JEL Classification: C22, C52, C53, E31, E47. |
| Keywords: | Nonlinear forecast, nonlinear model, nonlinear trend, penalised likelihood, structural shift, time-varying parameter. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111363&r=mon |
| By: | Ramon Marimon; Juan Pablo Nicolini; Pedro Teles |
| Abstract: | We study the interplay between competition and trust as efficiency enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved.<br>The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good. |
| JEL: | E40 E50 E58 E60 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201118&r=mon |
| By: | Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II) |
| Abstract: | This paper studies the impact of the main external shocks which the eurozone and member states have undergone since the start of the 2000s. Such shocks have been monetary (drop in global interest rates), financial (two stock market crises) and real (rising oil prices and an accumulation of global current account imbalances). We have used a structural VAR (SVAR) methodology, on the basis of which we have defined four structural shocks: external, supply, demand and monetary. The estimates obtained using SVAR models enabled us to determine the impact of these shocks on the eurozone and its member countries. The study highlights the diversity of reactions inside the eurozone. The repercussions of the oil and monetary shocks were fairly similar in all eurozone countries - excepting the Netherlands and the United Kingdom - but financial crises and global imbalances have had very different effects. External shocks explain one-fifth of the growth differential and current account balance variance and about one-third of fluctuations in the real effective exchange rate in Europe. The impact of the oil crisis was particularly large, but it pushed the euro down. Global imbalances explain a large proportion of exchange rate fluctuations but drove the euro up. Furthermore the response functions to financial and monetary crises are similar, except for current account functions. A financial crisis seems to result in the withdrawal of larger volumes of assets than a monetary crisis. The study thus highlights the diversity of the reactions in the eurozone and shows that external shocks do more to explain variations in the real effective exchange rate than in the growth differential or current account, while underlining the particularly important part played by global imbalances in European exchange rate fluctuations. |
| Keywords: | global imbalances, current account, eurozone, structural VAR model, contemporary and long-term restrictions, external shock, exogeneity hypothesis. |
| Date: | 2011–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-00610024&r=mon |
| By: | Aizenman, Joshua (Asian Development Bank Institute); Jinjarak, Yothin (Asian Development Bank Institute); Park, Donghyun (Asian Development Bank Institute) |
| Abstract: | Motivated by the unprecedented rise of swap agreements between the central banks of developed economies and their developing economy counterparts, this paper evaluates Asian swap arrangements and their association with the build-up of foreign reserves prior to the 2008–2009 global financial crisis. The evidence suggests that there is a limited scope for swaps to substitute for reserves. Furthermore, the selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation. |
| Keywords: | reserves; swaps; dollar standard; asia; trade and financial linkages |
| JEL: | F15 F31 F32 |
| Date: | 2011–07–22 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0297&r=mon |
| By: | Cysne, Rubens Penha |
| Abstract: | This paper shows that in economies with several monies the Bailey-Divisia multidimensional consumers surplus formula may emerge asan exact general-equilibrium measure of the welfare costs of in ation,provided that preferences are quasilinear. |
| Date: | 2011–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:epgewp:720&r=mon |