nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒08‒29
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Fixed Exchange Rate Versus Inflation Targeting: Evidence from DSGE Modelling By Viktors Ajevskis; Kristine Vitola
  2. Dual-track interest rates and the conduct of monetary policy in China By He, Dong; Wang, Honglin
  3. The impact of unconventional monetary policy on the market for collateral: The case of the French bond market By Avouyi-Dovi, S.; Idier, J.
  4. China’s new exchange rate regime, optimal basket currency and currency diversification By Zhang, Zhichao; Shi, Nan; Zhang, Xiaoli
  5. A Long-Run, Short-Run and Politico-Economic Analysis of the Welfare Costs of Inflation By Scott J. Dressler
  6. Inflation Persistence and Exchange Rate Regime: Implications for dynamic adjustment to shocks in a small open economy By Karlygash Kuralbayeva
  7. Interest Rate Pass-through During the Global Financial Crisis: The Case of Sweden By Niels-Jakob Harbo Hansen; Peter Welz
  8. What Drives Inflation in the Major OECD Economies? By Diego Moccero; Shingo Watanabe; Boris Cournède
  9. Monetary policy and housing prices; a case study of Chinese experience in 1999-2010 By Zhang, Yanbing; Hua, Xiuping; Zhao, Liang
  10. Managing a Liquidity Trap: Monetary and Fiscal Policy By Ivan Werning
  11. Exchange rate misalignments: A comparison of China today against recent historical experiences of Japan, Germany, Singapore and Taiwan By ´He, Xinhua; Qin, Duo; Liu, Yimeng
  12. Japanese Government Debt and Sustainability of Fiscal Policy By Takero Doi; Takeo Hoshi; Tatsuyoshi Okimoto
  13. Strengthening the Macroeconomic Policy Framework in South Africa By Tatiana Lysenko; Geoff Barnard
  14. Inefficient Provision of Liquidity By Oliver D. Hart; Luigi Zingales
  15. A structural modeling of exchange rate, prices and interest rates between Malaysia-China in the liberalization era By Chan, Tze-Haw
  16. The Exchange Rate Pass-Through in the New EU Member States By Jimborean, R.
  17. Comparing inflation and price-level targeting: A comprehensive review of the literature By Hatcher, Michael C.
  18. Liquidity When It Matters Most: QE and Tobin’s q By Driffill, John; Miller, Marcus
  19. The macroeconomic implication of exchange rate regimes By Josheski, Dushko; Ljubica , Cikarska; Cane, Koteski
  20. Understanding the Recent Surge in the Accumulation of International Reserves By Petar Vujanovic
  21. Why didn’t Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)? By Michael D. Bordo; Angela Redish; Hugh Rockoff
  22. "Infinite-variance, Alpha-stable Shocks in Monetary SVAR: Final Working-Paper Version" By Greg Hannsgen
  23. Greek ricochet? What drove Poles' attitudes to the euro in 2009-2010 By Andrzej Torój; Joanna Osińska
  24. Global Imbalances, Exchange Rate Pegs and Capital Flows: A Closer Look By Paul van den Noord
  25. Macroeconomic Impact of Basel III By Patrick Slovik; Boris Cournède
  26. Irving Fisher, Debt Deflation and Crises By Robert J. Shiller
  27. Inflation and financial sector correlation: the case of Bangladesh By Abu N. M. , Wahid; Muhammad, Shahbaz; Pervez, Azeem
  28. How Reliable are De Facto Exchange Rate Regime Classifications? By Barry Eichengreen; Raul Razo-Garcia
  29. ABS inflows to the United States and the global financial crisis By Carol Bertaut; Laurie Pounder DeMarco; Steve Kamin; Ralph Tryon

  1. By: Viktors Ajevskis; Kristine Vitola
    Abstract: We evaluate implications of inflation targeting versus fixed exchange rate regime for the UK, Sweden, Poland, the Czech Republic, Estonia, Latvia and Lithuania, i.e. seven EU non-euro area countries. To this end, we estimate a small open economy DSGE model and simulate a model under estimated structural parameters and different sets of policy parameters. The results obtained are compared in terms of inflation, output gap and interest rate volatility. For inflation targeting countries, a policy switch to fixed exchange rate would entail 3–6 times higher inflation volatility. In the Baltic economies, a policy change to inflation targeting with fully flexible exchange rate would amplify inflation volatility 2–4 times, whereas the existing price stabilisation and exchange rate fluctuations within the ERM II bands would entail 3–6 times more volatile inflation. Policy simulations thus show evidence that in all the countries the existing monetary rule guarantees more stable inflation and output than under alternative regimes.
    Keywords: DSGE, small open economy, fixed exchange rate, inflation targeting, Bayesian estimation
    JEL: C11 C3 C51 D58 E58 F41
    Date: 2011–07–25
  2. By: He, Dong (BOFIT); Wang, Honglin (BOFIT)
    Abstract: China has a dual-track interest-rate system: bank deposit and lending rates are regulated while money and bond rates are market-determined. The central bank also imposes an indicative target, which may not be binding at all times, for total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of price- and quantity-based policy instruments. We model the transmission of monetary policy instruments to market interest rates, which, together with the quantitative credit target in the banking system, ultimately are the means by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical results are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the findings of this study help us to understand why the central bank conducts monetary policy in China the way it does, using a combination of price and quantitative instruments with differing degrees of potency in terms of their influence on the cost of credit.
    Keywords: monetary policy; People’s Bank of China; dual-track interest rates; interest rate liberalization
    JEL: C25 C32 E52 E58
    Date: 2011–08–22
  3. By: Avouyi-Dovi, S.; Idier, J.
    Abstract: We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.
    Keywords: Monetary policy, Collateral, Liquidity, Volatility, French bond market.
    JEL: G10 C22 C53
    Date: 2011
  4. By: Zhang, Zhichao (BOFIT); Shi, Nan (BOFIT); Zhang, Xiaoli (BOFIT)
    Abstract: We build an optimising framework to analyse a class of economies that adopt an ECU-type basket currency while in transition to increased flexibility of the exchange rate regime. Instead of conventional basket pegging, such an economy uses an ECU-type currency index as a benchmark for monitoring and assessing exchange rate movements. This provides an anchoring device for the nations exchange rate regime and allows the home currencys exchange rate to fluctuate. Under the assumption that the central bank is chiefly interested in maintaining stability, the optimal structure of the basket currency is based on its contribution to minimizing the volatility of the countrys external account. A currency invariance index is applied to capture the effect of the countrys exit from exclusive linkage with the US dollar. The approach is illustrated by Chinese exchange rate policy. We find it advisable and viable for China to form a basket currency with a diversified portfolio of currencies. While the portfolios weighting scheme could favour the dollar, euro and Japanese yen, we show that the composition of the basket is open to a wide range of possibilities. Moreover, contrary to general fears, there is considerable potential for China to engage in currency diversification, which will not necessarily affect the dollars position.
    Keywords: basket currency; currency diversification; China
    JEL: E58 F31 P45
    Date: 2011–08–22
  5. By: Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University)
    Abstract: This paper assesses the long-run and short-run (i.e. along the transition path) welfare implications of permanent changes in inflation in an environment with essential money and perfectly competitive markets. The model delivers a monetary distribution that matches moments of the distribution seen in the US data. Although there is potential for wealth redistribution to deliver welfare gains from inflation, the (total) costs of 10 percent inflation relative to zero is over 7 percent of consumption. While these results suggest a dominating real-balance effect of inflation, a politico-economic analysis concludes that the prevailing (majority rule) inflation rate is above the Friedman Rule.
    Keywords: Inflation; Welfare; Transitions; Voting
    JEL: E40 E50
    Date: 2011–08
  6. By: Karlygash Kuralbayeva
    Abstract: The paper examines implications of inflation persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under inflation targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a significant backward-looking element in the inflation dynamics and the exchange rate is fixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in theh economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate.
    Keywords: inflation inertia, inflation targeting, exchange rate targeting, Phillips curve, oil shocks, small open economy
    JEL: E32 F40 F41
    Date: 2011
  7. By: Niels-Jakob Harbo Hansen; Peter Welz
    Abstract: A stable relationship between monetary policy rates and bank lending and deposit rates faced by consumers and companies is essential for the effective transmission of monetary policy decisions. This paper studies how changes in the policy rate set by the Swedish central bank, the Riksbank, have been transmitted to money market rates and, in turn, to retail rates before and during the financial turmoil that erupted in summer 2007. Historically, the Riksbank has been successful in effectively controlling money market rates, but during the financial turmoil the transmission of impulses from the policy rate to money market rates appears to have been weakened by elevated and volatile risk premia, although these increased less in Sweden than in the euro area, United Kingdom and United States. The pass-through from money market rates to retail rates is found to have been complete, but sluggish, before the turmoil. Pass-through was also faster into short-term loan rates for non-financial companies than for households. During the turmoil the pass-through from money market to lending rates has been preserved at short maturities, but not at longer maturities. Lack of access to long-term funding has likely played a role.<P>Le canal de transmission des taux d'intérêt pendant la crise financière mondiale : le cas de la Suède<BR>L’existence d’une relation stable entre les taux d’intérêt fixés par les autorités monétaires et les taux que les banques offrent aux ménages et aux entreprises est essentielle pour la transmission des décisions de politique monétaire. Cet article étudie comment les changements de taux d’intérêt de la banque centrale de Suède, la Riksbank, se répercutent sur les taux du marché monétaire, puis sur les taux proposés par les institutions financières à leurs clients, avant et pendant la crise financière démarrant en 2007. Le contrôle de la Riksbank sur les taux du marché monétaire, fort au court des dernières années, apparaît affaibli par l’importance et la volatilité des primes de risque depuis l’été 2007, même si ces dernières ont moins augmenté en Suède que dans d’autres pays de l’OCDE. La transmission des variations des taux du marché monétaire aux taux offerts par les institutions financières semble avoir été complète avant la crise, bien que lente. Elle était aussi plus rapide pour les prêts de court terme aux entreprises non-financières que pour les prêts aux ménages. Pendant la crise, le canal de transmission des taux du marché monétaire aux taux offerts par les institutions financières a été préservé pour les courtes maturités, mais affaibli pour les longues maturités. Le manque d’accès à des financements de long terme a pu jouer un rôle.
    Keywords: Sweden, interest rate pass-through, financial crisis, monetary transmission, Suède, crise financière, canaux de transmission de la politique monétaire, transmission des taux d’intérêt
    JEL: E43 E52
    Date: 2011–04–08
  8. By: Diego Moccero; Shingo Watanabe; Boris Cournède
    Abstract: This paper presents an empirical analysis of the determinants of inflation in the United States, Japan, the euro area and the United Kingdom, focusing on the role of resource utilisation, inflation expectations, inflation persistence and imported inflation. It also includes a cross-sectional analysis that focuses on inflation dynamics over episodes of persistent large slack and low inflation. The main findings of this analysis are as follows: i) During the crisis, the stability of inflation expectations has held up actual inflation, so far preventing the huge slack in resource utilisation from leading to a disinflationary spiral; ii) Disinflationary pressures also seem to have been moderated by the flattening of the Phillips curve in an environment of persistent large economic slack and low inflation; iii) The link between long-term inflation expectations and past inflation outcomes has become weaker over time and appears to have almost disappeared recently; iv) The estimated Phillips curves coupled with the November 2010 projection of explanatory variables presented in the OECD Economic Outlook No. 88 and excluding the recent period of strong commodity prices point to inflation remaining low but positive, except in Japan where deflation is expected to continue past end-2012; v) The inflation outlook and associated risks argue for withdrawing monetary policy accommodation gradually in the short term, while being vigilant about the build up of broad-based inflationary pressures over the medium term.<P>Quels sont les facteurs d'inflation dans les économies de l'OCDE<BR>Cet article présente une analyse empirique des déterminants de l'inflation aux États-Unis, au Japon, dans la zone euro et au Royaume-Uni, mettant l'accent sur le rôle de l'utilisation des ressources, les anticipations d'inflation, la persistance de l'inflation et l'inflation importée. Il propose également une analyse de la dynamique de l'inflation au cours des épisodes durables de nette sous-utilisation des capacités et de faible inflation. Les principales conclusions de cette analyse sont les suivantes: i) Pendant la crise, la stabilité des anticipations d'inflation a empêché que le sous-emploi des ressources ne conduise à une spirale déflationniste, ii) Il semble également que les pressions désinflationnistes aient été modérées par l'aplatissement de la courbe de Phillips dans un contexte de faiblesse économique persistante et de basse inflation; iii) L’influence des derniers chiffres d’inflation sur les attentes d'inflation à long terme s'est affaiblie au fil du temps et semble avoir presque disparu récemment; iv) Des prévisions fondées sur les courbes de Phillips estimées et les projections des Perspectives Économiques de l’OCDE n°88 de novembre 2010 excluant la période récente de hausse des prix des produits de base suggèrent une inflation restant faible, mais positive d’ici à fin 2012, sauf au Japon où la déflation devrait se poursuivre au moins jusqu’au-delà de cette période; v) La configuration des risques à court terme et à moyen terme plaide pour un retrait progressif de l’expansion monétaire en demeurant vigilant quant au risque d’apparition de pressions inflationnistes à moyen terme.
    Keywords: United Kingdom, Japan, United States, disinflation, euro area, Phillips curves, core and headline inflation, inflation forecast, inflation expectations, resource slack, Royaume-Uni, Japon, États-Unis, zone Euro, désinflation, courbes de Phillips, fondement et base de l'inflation, anticipations d'inflation, fluctuation des ressources
    JEL: C53 E31 E52
    Date: 2011–04–08
  9. By: Zhang, Yanbing (BOFIT); Hua, Xiuping (BOFIT); Zhao, Liang (BOFIT)
    Abstract: How do monetary policy variables affect housing prices? In this paper we apply a non-linear modelling approach, the Nonlinear Auto Regressive Moving Average with eXogenous inputs (NAR-MAX), to investigate determinants of housing prices in China over the period 1999:01 to 2010:06. The NARMAX approach has an advantage over prevailing methods in that it automatically selects linear and non-linear forms of variables and the numbers of corresponding lags according to statistical properties. Both linear and non-linear estimation results identify a number of key monetary and price variables, including most notably mortgage rate, producer price, broad money supply and real effective exchange rate. Meanwhile, some key real economic variables such as income are not independently significant. Our findings should be helpful in understanding the formation of housing prices in China and will provide some valuable insights on how to use monetary policies to manage asset prices.
    Keywords: housing prices; monetary policy; NARMAX; China
    JEL: C32 C67 E47 E52
    Date: 2011–08–22
  10. By: Ivan Werning
    Abstract: I study monetary and fiscal policy in liquidity trap scenarios, where the zero bound on the nominal interest rate is binding. I work with a continuous-time version of the standard New Keynesian model. Without commitment, the economy suffers from deflation and depressed output. I show that, surprisingly, both are exacerbated with greater price flexibility. I examine monetary and fiscal policies that maximize utility for the agent in the model and refer to these as optimal throughout the paper. I find that the optimal interest rate is set to zero past the liquidity trap and jump discretely up upon exit. Inflation may be positive throughout, so the absence of deflation is not evidence against a liquidity trap. Output, on the other hand, always starts below its efficient level and rises above it. I then study fiscal policy and show that, regardless of parameters that govern the value of “fiscal multipliers” during normal or liquidity trap times, at the start of a liquidity trap optimal spending is above its natural level. However, it declines over time and goes below its natural level. I propose a decomposition of spending according to “opportunistic” and “stimulus” motives. The former is defined as the level of government purchases that is optimal from a static, cost-benefit standpoint, taking into account that, due to slack resources, shadow costs may be lower during a slump; the latter measures deviations from the former. I show that stimulus spending may be zero throughout, or switch signs, depending on parameters. Finally, I consider the hybrid where monetary policy is discretionary, but fiscal policy has commitment. In this case, stimulus spending is typically positive and increasing throughout the trap.
    JEL: E0 H5
    Date: 2011–08
  11. By: ´He, Xinhua (BOFIT); Qin, Duo (BOFIT); Liu, Yimeng (BOFIT)
    Abstract: The familiar claim of Chinese currency manipulation is generally asserted without reference to empirical evidence. To investigate the legitimacy of the claim, we ask if the undervalued misalignment found in the real effective exchange rate (REER) of the Chinese renminbi (RMB) over the past decade has any recent historical precedents. Four cases are examined: the Japanese yen, the Deutsche mark, the Singapore dollar and the Taiwan dollar. Panel-based misalignment estimates of the REER of the four currencies are obtained using quarterly data from the late 1970s to the early 2000s. Our estimates suggest that there are precedents to the recent misalignment of the RMB in terms of magnitude, duration or breadth of currency coverage, and that a net build-up in foreign asset does not necessarily result in currency misalignment. In addition to finding little empirical justification for the claim of Chinese currency manipulation, we note that REER misalignment runs a risk of propagating inflation in the home economy.
    Keywords: REER misalignment; RMB; yen; D-mark; Singapore dollar; Taiwan dollar
    JEL: C23 F31 F41 O57
    Date: 2011–08–22
  12. By: Takero Doi; Takeo Hoshi; Tatsuyoshi Okimoto
    Abstract: We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40%-47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.
    JEL: E62 H62 H63
    Date: 2011–08
  13. By: Tatiana Lysenko; Geoff Barnard
    Abstract: South Africa’s macroeconomic framework has served the economy well, but should be strengthened to make the economy more resilient to external shocks. Enhancing the credibility of the inflation target would provide the monetary authorities with more space for flexibility in the face of exogenous shocks. To ease the pressure on the exchange rate emanating from high commodity prices and sentiment-driven surges in capital inflows, the accumulation of foreign exchange reserves by the central bank should be more rapid, and the removal of remaining controls on capital outflows should be accelerated. Fiscal policy has been generally sound, but should be tighter and more counter-cyclical during the economic upswings to prevent a structural deterioration of the fiscal balance and to create more room for manoeuvre during downturns. A fiscal rule that institutionally constrains discretionary policy may facilitate this task. It would also help ensure that the strong public commitment to address major social challenges, improve access to public services and promote long-term growth by investing in physical infrastructure and human capital can be sustained. In conjunction with a greater effort to identify and tax economic rents from natural resource extraction, consideration should be given to establishing a mechanism to manage commodity price windfalls. This paper relates to the 2010 Economic Survey of South Africa (<P>Renforcer le dispositif de la politique macroéconomique en Afrique du Sud<BR>Le dispositif de politique macroéconomique de l’Afrique du Sud a produit de bons résultats, mais il convient de le renforcer pour assurer une plus grande résistance aux chocs externes. Améliorer la crédibilité de l’objectif d’inflation donnerait aux autorités monétaires plus de latitude pour réagir aux chocs exogènes. Afin de réduire la pression à la hausse du taux de change, résultant du prix élevé des matières premières et d’entrées de capitaux spéculatifs, il faudrait que la banque centrale laisse augmenter plus rapidement ses réserves de change et que la suppression des contrôles des mouvements de capitaux encore en vigueur s’accélère. La politique budgétaire a généralement été saine, mais devrait être resserrée et devenir plus anticyclique pendant les phases de reprise, pour éviter une dégradation structurelle du solde budgétaire et élargir la marge de manoeuvre disponible pendant les récessions. Une règle budgétaire faciliterait la tâche en soumettant les mesures discrétionnaires à une contrainte institutionnelle. Elle aiderait à garantir aussi le respect durable du ferme engagement de l’État de relever les grands défis sociaux, d’améliorer l’accès aux services publics et de promouvoir la croissance à long terme en investissant dans les infrastructures physiques et le capital humain. Tout en s’efforçant davantage de recenser et de taxer les rentes économiques liées à l’exploitation des ressources naturelles, on pourrait envisager d’instituer un mécanisme de gestion des recettes exceptionnelles tirées des matières premières. Ce document se rapporte à l’Étude économique de l’OCDE de l’Afrique du Sud 2010 (
    Keywords: fiscal policy, exchange rates, capital flows, monetary policy, fiscal rules, exchange rate policy, economy, inflation, inflation targeting, South Africa, interest rates, politique budgétaire, taux de change, politique monétaire, règles budgétaires, économie, inflation, taux d'intérêt, ciblage de l’inflation, Afrique du Sud, politique de taux de change
    JEL: E30 E31 E50 E52 E58 E61 E62 F32
    Date: 2011–02–18
  14. By: Oliver D. Hart; Luigi Zingales
    Abstract: We study an economy where the lack of a simultaneous double coincidence of wants creates the need for a relatively safe asset (money). We show that, even in the absence of asymmetric information or an agency problem, the private provision of liquidity is inefficient. The reason is that liquidity affects prices and the welfare of others, and creators do not internalize this. This distortion is present even if we introduce lending and government money. To eliminate the inefficiency the government must restrict the creation of liquidity by the private sector.
    JEL: E41 E51 G21
    Date: 2011–08
  15. By: Chan, Tze-Haw
    Abstract: This study constructs a structural system that allows for possible interactions between the goods and capital markets for Malaysia vis-à-vis China in the liberalization era (1994: Jan to 2011: June). It encompasses the joint hypothesis of Purchasing Power (PPP) and Interest Rate Parity (IRP) conditions in the presence of I(1) exogenous variables. Advanced econometric procedures including the structural VARX, VECX*, over-identifying restrictions, bootstrapping, persistent profiles and generalized variance decomposition are utilized in the analyses. The finding upholds support for both PPP and IRP, when exchange rate regime and structural breaks of Asia crisis and subprime crisis are taken into accounts. Despite the direct imported inflation, exchange rate also plays a significant role in the price transmission mechanism. And, Malaysian maintains the relative monetary autonomy against China in short run, but the price channel will affect the extent of IRP condition. Lastly, the faster pace of adjustment towards price instead of interest rate equilibrium implies the nonappearance of sequencing problem in market integration. Putting together, our model contributes as an early warning system for Malaysia’s economic defense against global shocks.
    Keywords: International Parity Conditions; Market Integration; Price Transmission Mechanism; Structural VARX; Bootstrapping
    JEL: C51 F42 F36
    Date: 2011–08–01
  16. By: Jimborean, R.
    Abstract: This paper aims to complete our understanding of the relationship between changes in nominal effective exchange rates and prices in the new EU member states. We investigate the exchange rate pass-through to import, producer and consumer prices for ten Central and Eastern European countries with quarterly data from January 1996 to June 2010. In a first step, the pass-through estimates are derived from a dynamic panel data model, through the generalized method of moments. A statistically significant exchange rate pass-through to import prices is found, while no statistically significant exchange rate pass-through is estimated to consumer and producer prices. We further investigate whether exchange-rate pass-through estimates have declined in response to a change in inflation environment and find evidence of such decline only for import prices, both in the short run and the long run. In a second step, we proceed to an individual analysis, country by country, and find support for an increased heterogeneity in the exchange rate pass-through estimates. We equally test for the stability of the estimated.
    Keywords: inflation and prices, exchange rate pass-through, GMM, international topics.
    JEL: C33 E31 E42 E52 F31 O52
    Date: 2011
  17. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: This paper provides a detailed survey of the economic literature comparing inflation and price-level targeting as macroeconomic stabilisation policies. Its contributions relative to past surveys are as follows. First, rather than focusing on any particular topic, the survey gives equal emphasis to all key areas of the literature. Second, the paper discusses 'new results' in several areas, including the zero lower bound on nominal interest rates; the long-term impact of price-level targeting; and financial market considerations. Finally, the survey is written in such a way that it can be understood by economists with little or no prior knowledge of price-level targeting and the related academic literature. The survey concludes that whilst price-level targeting has a number of potential advantages, further research is needed to accurately quantify its costs and benefits and to test robustness. Potential obstacles to the introduction of price-level targeting in practice include: concerns about its credibility; lack of public understanding; and lack of prior experience with price-level targeting regimes.
    Keywords: Price-level targeting; inflation targeting; macroeconomic stabilisation
    JEL: E52 E58
    Date: 2011–08
  18. By: Driffill, John; Miller, Marcus
    Abstract: How and why do financial conditions matter for real outcomes? The ‘workhorse model of money and liquidity’ of Kiyotaki and Moore (2008) shows how--with full employment maintained by flexible prices--shifting credit constraints can affect investment and future aggregate supply. We show that, when the flex-price assumption is dropped, an adverse but temporary liquidity shock can rapidly lead to Keynesian-style demand failure. Optimistic expectations may speed recovery, but simulation results suggest that prompt liquidity infusion by the central bank--i.e. Quantitative Easing--is needed to check prolonged recession.
    Keywords: Credit Constraints; Liquidity Shocks; Temporary Equilibrium
    JEL: B22 E12 E20 E30 E44
    Date: 2011–08
  19. By: Josheski, Dushko; Ljubica , Cikarska; Cane, Koteski
    Abstract: This study investigates the relation between macroeconomic variables such as real GDP growth, inflation, unemployment rate, trade deficit and the exchange regimes. The idea is to explore whether the macroeconomic indicators give better result when are under the influence of fixed or fluctuating exchange rates. In order to obtain relevant results, we took 5 countries with fixed and 5 countries with floating exchange rates. The paper also concerns the Macedonian exchange rate regimes. Here the focus is put on two periods. The first one is from 1993- 1995 when the country had fluctuating exchange rate. The second period is from 1995 till now -2011, when Macedonia has been implementing a regime of fixed "pegged" exchange rate.
    Keywords: exchange rate; macroeconomic variables
    JEL: F40 C00 F31
    Date: 2011–08–21
  20. By: Petar Vujanovic
    Abstract: This paper looks at the empirical determinates of foreign currency reserve holdings across a panel of around 130 countries between 1980 and 2008. The paper builds on the existing literature by adopting a panel error-correction model specification and by extending the sample to include the recent period that saw a continuing acceleration in the accumulation of reserves in many countries. The results of the analysis suggest that the levels of trade and domestic financial depth are robust determinates of the level of reserves in the long run, particularly over the past decade and a half. The estimations also find that changes in GDP, the exchange rate regime, exchange rate volatility, and financial openness can all have permanent one-off effects on the level of reserves. Furthermore, country fixed effects are found to be significant, suggesting that time-invariant country specific factors are important in explaining the variance in reserve holdings across countries. Nevertheless, several countries stick out in terms of holding reserves well in excess of that implied by these empirical results, above all in recent years. Among these countries, China and Japan are particularly notable, especially when the deviation from average behaviour is expressed in dollar terms.<P>Comprendre la récente accélération de l'accumulation de réserves internationales<BR>Ce document est consacré à l’étude des déterminants économétriques des réserves de change de 1980 à 2008 à partir d’un panel de quelque 130 pays. Il s’appuie sur les publications existantes en adoptant un modèle à correction d’erreurs sur données de panel et en élargissant l’échantillon de façon à couvrir la période récente qui a été marquée par une accélération continue de l’accumulation de réserves dans de nombreux pays. Les résultats de l’analyse tendent à montrer que le volume des échanges commerciaux et la profondeur du système financier national sont des déterminants robustes du volume des réserves sur le long terme, en particulier depuis une quinzaine d’années. Les estimations permettent aussi de constater que des changements en matière de PIB, de régime de change, d’instabilité des cours de change ou d’ouverture financière sont autant de facteurs ponctuels qui peuvent produire un effet permanent sur le volume des réserves. En outre, on observe des effets fixes significatifs spécifiques aux pays, ce qui suggère que des facteurs spécifiques à des pays et invariants dans le temps sont importants pour expliquer la variance des réserves de change entre différents pays. Néanmoins, plusieurs pays continuent à détenir des réserves très supérieures à ce qu’impliquent ces résultats économétriques, surtout ces dernières années. Parmi ces pays, on retiendra en particulier la Chine et le Japon, surtout lorsque l’on exprime en dollars l’écart que présentent ces pays avec le comportement moyen.
    Keywords: trade, current account, crisis, central banks, reserves, foreign currency, money supply, sudden stop, balance courante, banque centrale, crise, échanges commerciaux, réserves, changes, masse monétaire, arrêt brutal
    JEL: E44 E58 F21 F31 F36 F41 N10 O24
    Date: 2011–05–24
  21. By: Michael D. Bordo; Angela Redish; Hugh Rockoff
    Abstract: The financial crisis of 2008 engulfed the banking system of the United States and many large European countries. Canada was a notable exception. In this paper we argue that the structure of financial systems is path dependent. The relative stability of the Canadian banks in the recent crisis compared to the United States in our view reflected the original institutional foundations laid in place in the early 19th century in the two countries. The Canadian concentrated banking system that had evolved by the end of the twentieth century had absorbed the key sources of systemic risk—the mortgage market and investment banking—and was tightly regulated by one overarching regulator. In contrast the relatively weak, fragmented, and crisis prone U.S. banking system that had evolved since the early nineteenth century, led to the rise of securities markets, investment banks and money market mutual funds (the shadow banking system) combined with multiple competing regulatory authorities. The consequence was that the systemic risk that led to the crisis of 2008 was not contained.
    JEL: N20
    Date: 2011–08
  22. By: Greg Hannsgen
    Abstract: This paper adumbrates a theory of what might be going wrong in the monetary SVAR literature and provides supporting empirical evidence. The theory is that macroeconomists may be attempting to identify structural forms that do not exist, given the true distribution of the innovations in the reduced-form VAR. The paper shows that this problem occurs whenever (1) some innovation in the VAR has an infinite-variance distribution and (2) the matrix of coefficients on the contemporaneous terms in the VAR's structural form is nonsingular. Since (2) is almost always required for SVAR analysis, it is germane to test hypothesis (1). Hence, in this paper, we fit a-stable distributions to VAR residuals and, using a parametric-bootstrap method, test the hypotheses that each of the error terms has finite variance.
    Keywords: Vector Autoregression; Levy-stable Distribution; Infinite Variance; Monetary Policy Shocks; Heavy-tailed Error Terms; Factorization; Impulse-Response Function
    JEL: C32 C46 C50 E30 E52
    Date: 2011–08
  23. By: Andrzej Torój (Ministry of Finance, Poland); Joanna Osińska (Ministry of Finance in Poland)
    Abstract: We investigate the determinants of support for the euro adoption in Poland in 2009 and 2010. Using two unique survey datasets, collected in December 2009 and June 2010, we estimate ordered and unordered logit models explaining the respondents' attitude to the introduction of the common currency. Whereas the public support has generally declined over this period, probably against the background of sovereign debt crises in the euro area, this decline was concentrated along some dimensions. We find that the declared level of information about the euro is a key driver of this support, both in 2009 and -- even more so -- in 2010, as well-informed respondents tend to be significantly more supportive of the common currency than badly-informed ones. We also find some evidence that political views influence the attitude towards the euro, but they are by no means its main determinant. During the crisis, the conviction of euro being a “strong, stable currency” has faded; instead, a negative attitude started to result from low income, high age and low economic knowledge. Surprisingly, in 2010 a more negative attitude was represented by students, white-collar workers and big city residents. All in all, the public perception of the euro does not seem to be fixed, but evolves with economic and political developments, so that new concerns appear.
    Keywords: EMU, attitudes towards the euro, public opinion, ordered logit, unordered logit
    JEL: C25 F33
    Date: 2011–08–17
  24. By: Paul van den Noord
    Abstract: This paper presents a stylised model in which either a savings glut or an exchange rate peg in emerging economies drives down the level of interest rates in advanced economies and, when it hits the zero-rate bound, produces a welfare loss. It shows that structural reform in the pursuit of better social protection and financial markets in the emerging economies reduces this negative welfare spillover. An extension of the model with the short-run dynamics of exchange-rate and capital movements shows that adverse asymmetric shocks can lead to a race to the bottom of interest rates. In that case the global coordination of monetary policies is welfare enhancing for both groups of economies. However, the coordinated equilibrium is unstable, which indicates that strong pre-commitment arrangements are required to maintain coordination. This disadvantage diminishes if structural reform is adopted to reduce the volatility in capital flows.<P>Les déséquilibres mondiaux, l'arrimage des taux de changes et les mouvements de capitaux : examen à la loupe<BR>Ce document présente un modèle simplifié dans lequel une surabondance de l’épargne ou un mécanisme d’arrimage des taux de change dans des économies émergentes fait baisser le niveau des taux d’intérêt dans les économies avancées et aboutit, lorsque l’on se heurte à la limite des taux nuls, à une perte de bien-être. Il montre que les réformes structurelles visant à améliorer la protection sociale et les marchés de capitaux dans les économies émergentes réduisent ces retombées négatives sur le bien-être. Un élargissement du modèle tenant compte de la dynamique de court terme des taux de change et des mouvements de capitaux montre que des chocs asymétriques négatifs peuvent déboucher sur une surenchère à la baisse des taux d’intérêt. Dans ce cas, une coordination mondiale des politiques monétaires améliore le bien-être des deux groupes d’économies. Toutefois, l’équilibre résultant de cette coordination est instable, ce qui indique la nécessité de solides engagements préalables visant à maintenir la coordination. Ce désavantage diminue en cas d’adoption de réformes structurelles permettant de réduire la volatilité des mouvements de capitaux.
    Keywords: exchange rates, capital flows, global imbalances, taux de change, flux de capitaux, déséquilibres mondiaux
    JEL: E52 F31 F59
    Date: 2011–04–08
  25. By: Patrick Slovik; Boris Cournède
    Abstract: The estimated medium-term impact of Basel III implementation on GDP growth is in the range of -0.05 to -0.15 percentage point per annum. Economic output is mainly affected by an increase in bank lending spreads as banks pass a rise in bank funding costs, due to higher capital requirements, to their customers. To meet the capital requirements effective in 2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points. The estimated effects on GDP growth assume no active response from monetary policy. To the extent that monetary policy will no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points.<P>Impact macro-économique de Bâle III<BR>L'impact estimé à moyen terme de la mise en conformité avec les règles de Bâle III sur la croissance du PIB est de l'ordre de -0,05 à -0,15 point de pourcentage par an. L’effet sur l’activité économique provient principalement de ce que les banques augmentent leurs marges de crédit afin de compenser la hausse de leurs coûts de financement provoquée par le durcissement des exigences de capital. Pour répondre aux exigences de fonds propres en 2015 (4,5% pour le ratio d'actions ordinaires, 6% pour le ratio de fonds propres de base), les banques devraient augmenter leurs marges de crédit d'environ 15 points de base en moyenne. Les exigences de capital en vigueur à compter de 2019 (7% pour le ratio d'actions ordinaires, 8,5% pour le ratio de fonds propres de base) pourraient augmenter les marges de crédit d’environ 50 points de base. Les effets estimés sur la croissance du PIB n’incorporent aucune réponse de la politique monétaire. Pour autant que la politique monétaire ne se heurte plus au plancher zéro des taux nominaux, l'impact de Bâle III sur la production économique pourrait être compensé par une réduction (ou un retard avant l’augmentation) des taux de la politique monétaire d'environ 30 à 80 points de base.
    Keywords: monetary policy, bank, financial intermediaries, interest rates, Basel accord, Basel III, bank regulation, bank lending, bank capital requirements, politique monétaire, banque, taux d'intérêt, intermédiaires financiers, Accord de Bâle, Bâle III, Réglementation bancaire, Crédit bancaire, Réglementation des fonds propres bancaires
    JEL: E52 G21 G28
    Date: 2011–02–14
  26. By: Robert J. Shiller (Cowles Foundation, Yale University)
    Abstract: It is the 100th anniversary of Irving Fisher’s 1911 book The Purchasing Power of Money. But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. And I think that some of his theories about variations in the purchasing power of money are very important today, have been underappreciated, and are worthy of considering anew.
    Keywords: Purchasing power of money, Indexation, Indexed bonds, Depression, Recession, Mortgages, Financial crisis
    JEL: B22
    Date: 2011–08
  27. By: Abu N. M. , Wahid; Muhammad, Shahbaz; Pervez, Azeem
    Abstract: This paper examines the impact of inflation on financial development in case of Bangladesh for the period of 1985-2005. In doing so, ARDL bounds testing approach and Error Correction Method (ECM) have been employed. Empirical findings reveal that high trends of inflation impede the performance of financial markets. GDP per capita promotes development of financial sector through its causal channels.
    Keywords: Financial Sector; Inflation; Pakistan; ARDL Approach
    JEL: A10
    Date: 2011–08–11
  28. By: Barry Eichengreen; Raul Razo-Garcia
    Abstract: We analyze disagreements over de facto exchange-rate-regime classifications using three popular de facto regime data series. While there is a moderate degree of concurrence across classifications, disagreements are not uncommon, and they are not random. They are most prevalent in middle-income countries (emerging markets) and low-income (developing) countries as opposed to advanced economies. They are most prevalent for countries with well-developed financial markets, low reserves and open capital accounts. This suggests caution when attempting to relate the exchange rate regime to financial development, the openness of the financial account, and reserve management and accumulation decisions.
    JEL: F0 F31
    Date: 2011–08
  29. By: Carol Bertaut; Laurie Pounder DeMarco; Steve Kamin; Ralph Tryon
    Abstract: The "global saving glut" (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.
    Keywords: Capital movements ; Financial crises ; Asset-backed financing ; Interest rates
    Date: 2011

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