nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒09‒16
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation Targeting and Inflation Persistence in Asia-Pacific By Stefan Gerlach; Peter Tillmann
  2. Optimal monetary policy under financial sector risk By Scott Davis; Kevin X.D. Huang
  3. Lessons for monetary policy: what should the consensus be? By Otmar Issing
  4. The Implementation of Monetary Policy in China: The Interbank Market and Bank Lending By Hongyi Chen; Qianying Chen; Stefan Gerlach
  5. Welfare costs of inflation and the circulation of U. S. currency abroad By Alessandro Calza; Andrea Zaghini
  6. Money growth and inflation in the euro area: a time-frequency view By António Rua
  7. Asset Market Participation, Monetary Policy Rules and the Great Inflation By Bilbiie, Florin Ovidiu; Straub, Roland
  8. Impact of monetary policy on lending and deposit rates in Pakistan: Panel data analysis By Mohsin, Hasan Muhammad
  9. Monetary Policy and TIPS Yields before the Crisis By Gerlach, Stefan; Moretti, Laura
  10. Monetary policy, capital inflows, and the housing boom By Filipa Sá; Tomasz Wieladek
  11. Money, Financial Stability and Efficiency By Allen, Franklin; Carletti, Elena; Gale, Douglas M
  12. Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis By Rose, Andrew K; Spiegel, Mark
  13. The coexistence of commodity money and fiat money By Olivier Ledoit; Sébastien Lotz
  14. Sharing the burden: monetary and fiscal responses to a world liquidity trap By David Cook; Michael B. Devereux
  15. Is Monetary Policy in the New EU Member States Asymmetric? By Borek Vasicek
  16. Money dynamics with multiple banks of issue: evidence from Spain 1856-1874 By Galo Nuño; Pedro Tedde; Alessio Moro
  17. Low interest rates and housing booms: the role of capital inflows, monetary policy and financial innovation By Filipa Sá; Pascal Towbin; Tomasz Wieladek
  18. The Information Improving Channel of Exchange Rate Intervention: How Do Official Announcements Work? By Kentaro Iwatsubo; Satoshi Kawanishi
  19. The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study By Gaston Giordana; Ingmar Schumacher
  20. The price of liquidity: the effects of market conditions and bank characteristics By Falko Fecht; Kjell G. Nyborg; Jörg Rocholl
  21. A simulation study of an ASEAN Monetary Union (Replaces CentER DP 2010-100) By Boldea, O.; Engwerda, J.C.; Michalak, T.; Plasmans, J.E.J.; Salmah, S.
  22. The Federal Reserve as an informed foreign-exchange trader: 1973-1995 By Michael D Bordo; Owen F Humpage; Anna J Schwartz
  23. Managing financial integration and capital mobility -- policy lessons from the past two decades By Aizenman, Joshua; Pinto, Brian
  24. Globalisation effect on inflation in the great moderation era: new evidence from G10 countries By Qin, Duo; He, Xinhua
  25. Currency blocs in the 21st century By Christoph Fischer
  26. Do banking shocks matter for the U.S. economy? By Naohisa Hirakata; Nao Sudo; Kozo Ueda
  27. Statistical ensembles for money and debt By Stefano Viaggiu; Andrea Lionetto; Leonardo Bargigli; Michele Longo
  28. Foreign exchange market structure, players and evolution By Michael R. King; Carol Osler; Dagfinn Rime
  29. "Quantitative Easing, Functional Finance, and the "Neutral" Interest Rate" By Alfonso Palacio-Vera
  30. Who Should Supervise? The Structure of Bank Supervision and the Performance of the Financial System By Barry Eichengreen; Nergiz Dincer
  31. Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management By Antonio Scalia; Benjamin Sahel

  1. By: Stefan Gerlach (Institute for Monetary and Financial Stability and Goethe-University Frankfurt and Hong Kong Institute for Monetary Research); Peter Tillmann (Justus-Liebig-University Giessen and Institute for Monetary and Financial Stability and Hong Kong Institute for Monetary Research)
    Abstract: Following the Asian financial crisis in 1997-98, a number of Asian central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find a significant reduction in inflation persistence following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting do not show a decline in persistence. Measuring the performance of monetary policy strategies in terms of inflation persistence rather than the level of inflation shows that inflation targeting performs better than alternative strategies.
    Keywords: Inflation Targeting, Asia, Inflation Persistence, Monetary Policy Strategy
    JEL: C22 E31 E5
    Date: 2011–08
  2. By: Scott Davis; Kevin X.D. Huang
    Abstract: We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in the Taylor rule (the coefficients on the lagged interest rate, inflation, and the output gap) are optimally chosen, the central bank should not put any weight on endogenous fluctuations in the interbank lending spread. ; However, the central bank should adjust the risk free rate in response to fluctuations in the spread that occur because of exogenous financial shocks, but we find that the central bank should not be too aggressive in its easing policy. Optimal policy calls for a two-thirds of a percentage point cut in the risk free rate in response to a financial shock that causes a one percentage point increase in interbank lending spreads.
    Keywords: Business cycles ; Financial markets ; Monetary policy
    Date: 2011
  3. By: Otmar Issing
    Abstract: This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks' policy decisions, as is done in the ECB's encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks' inflation target.
    Keywords: Financial markets ; Monetary policy ; Banks and banking, Central
    Date: 2011
  4. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Qianying Chen (Hong Kong Institute for Monetary Research); Stefan Gerlach (Institute for Monetary and Financial Stability and University of Frankfurt and Hong Kong Institute for Monetary Research)
    Abstract: We analyze the impact of monetary policy instruments on interbank lending rates and retail bank lending in China using an extended version of the model of Porter and Xu (2009). Unlike the central banks of advanced economies, the People's Bank of China uses changes in the required reserve ratios and open market operations to influence liquidity in money markets and adjusts the regulated deposit and lending rates and loan targets to intervene in the retail deposit and lending market. These interventions prevent the interbank lending rate from signalling monetary policy stance and transmitting the effect of policy to the growth of bank loans.
    Keywords: Monetary Policy Implementation, Regulated Retail Interest Rates, Transmission Mechanism, Window Guidance, Bank Loans, China
    JEL: E42 E52 E58
    Date: 2011–08
  5. By: Alessandro Calza; Andrea Zaghini
    Abstract: Empirical studies of the "shoe-leather" costs of inflation are typically computed using M1 as a measure of money. Yet, official data on M1 includes all currency issued, regardless of the country of residence of the holder. Using monetary data adjusted for U.S. dollars abroad, we show that the failure to control for currency held by nonresidents may lead to significantly overestimating the shoe-leather costs for the domestic economy. In particular, our estimates of shoe-leather costs are minimized for a positive but moderate value of the inflation rate, thereby justifying a deviation from the Friedman rule in favor of the Fed's current policy.
    Keywords: Price levels ; Demand for money ; Monetary policy
    Date: 2011
  6. By: António Rua
    Abstract: This paper provides new insights on the relationship between money growth and inflation in the euro area over the last forty years. This highly relevant link for the European Central Bank monetary policy strategy is assessed using wavelet analysis. In particular, wavelet analysis allows to study simultaneously the relationship between money growth and inflation in the euro area at the frequency level and assess how it has changed over time. The findings indicate a stronger link between inflation and money growth at low frequencies over the whole sample period. At the typical business cycle frequency range the link is only present until the beginning of the 1980’s. Moreover, there seems to be a recent deterioration of the leading properties of money growth with respect to inflation in the euro area. These results highlight the importance of a regular assessment of the role of money growth in tracking inflation developments in the euro area since such relationship varies across frequencies and over time.
    JEL: C40 E30 E40 E50
    Date: 2011
  7. By: Bilbiie, Florin Ovidiu; Straub, Roland
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price DSGE model, whereby at low enough asset market participation, standard aggregate demand logic is inverted: interest rate increases become expansionary. Thereby, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom suggests. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Inflation and the Great Moderation.
    Keywords: aggregate demand; Bayesian estimation; Great Inflation; Great Moderation; limited asset markets participation; passive monetary policy rules; real (in)determinacy
    JEL: E31 E32 E44 E52 E58 E65 N12 N22
    Date: 2011–09
  8. By: Mohsin, Hasan Muhammad
    Abstract: The study estimates impact of monetary policy (discount rate) on lending and deposit rates in Pakistan using bank type data from November 2001 to March 2011. The study finds evidence of long run relationship between lending and discount rate but deposit rate is not cointegrated with discount rate, monetary policy instrument. The study also finds an increase in the lending rate pass through rate during restricted monetary policy times (2005-2010), whereas deposit rate pass through remains same. The study finds that overall banks pass on only 20% impact of a change in discount rate to the lenders in first month implying it is not complete. There is also significant difference in various bank types pass through rates. The pass through of deposit rate is further low at 0.16 as revealed by short run analysis. It implies that the effectiveness of monetary policy is limited in Pakistan.
    Keywords: Discount rate, pass-through, monetary policy
    JEL: E58 E00
    Date: 2011–01
  9. By: Gerlach, Stefan; Moretti, Laura
    Abstract: We make three points. First, the decade before the financial crisis in 2007 was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
    Keywords: long real interest rates; monetary policy; TIPS
    JEL: E42 E53 E58
    Date: 2011–09
  10. By: Filipa Sá; Tomasz Wieladek
    Abstract: We estimate an open economy VAR model to quantify the effect of monetary policy and capital inflows shocks on the US housing market. The shocks are identified with sign restrictions derived from a standard DSGE model. We find that monetary policy shocks have a limited effect on house prices and residential investment. In contrast, capital inflows shocks driven by an increase in foreign savings have a positive and persistent effect on both housing variables. Other sources of capital inflows shocks, such as foreign monetary expansion or an increase in aggregate demand in the US, have a more limited role.
    Keywords: Monetary policy ; Money supply ; International finance
    Date: 2011
  11. By: Allen, Franklin; Carletti, Elena; Gale, Douglas M
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Keywords: monetary policy; nominal contracts
    JEL: E42 E44 E52 E58
    Date: 2011–09
  12. By: Rose, Andrew K; Spiegel, Mark
    Abstract: While the global financial crisis was centered in the United States, it led to a surprising appreciation in the dollar, suggesting global dollar illiquidity. In response, the Federal Reserve partnered with other central banks to inject dollars into the international financial system. Empirical studies of the success of these efforts have yielded mixed results, in part because their timing is likely to be endogenous. In this paper, we examine the cross-sectional impact of these interventions. Theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the United States through trade and financial channels, less transparent holdings of dollar assets, and greater illiquidity difficulties. We examine these predictions for observed cross-sectional changes in CDS spreads, using a new proxy for innovations in perceived changes in sovereign risk based upon Google-search data. We find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the United States through either trade linkages or asset exposure. We obtain weaker results for differences in asset transparency or illiquidity. However, several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness.
    Keywords: dollar; exchange rate; Federal Reserve; financial crisis; illiquidity; swap; TAF
    JEL: E44 E58 F31 F33 F41 F42 G15 O24
    Date: 2011–09
  13. By: Olivier Ledoit; Sébastien Lotz
    Abstract: In reaction to the monetary turmoil created by the financial crisis of September 2008, both legislative and constitutional reforms have been proposed in different Countries to introduce Commodity Money longside existing National Fiat Currency. A thorough evaluation of the Economic consequences of these new proposals is warranted. This paper surveys some of the existing knowledge in Monetary and Financial Economics for the purpose of answering the significant Economic questions raised by these new political initiatives.
    Keywords: Currency competition, commodity money, fiat money, gold, safe haven, search models
    JEL: E42 E52
    Date: 2011–08
  14. By: David Cook; Michael B. Devereux
    Abstract: With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause "natural real interest rates" to fall below zero in all countries, giving rise to a global "liquidity trap." This paper explores the optimal policy response to this type of shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. ; The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policymaker to raise interest rates. ; Strikingly, the foreign country may choose to have a positive policy interest rate, even though its natural real interest rate is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the desired mix in terms of the level and composition of world expenditure. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy.
    Keywords: Monetary policy ; Fiscal policy ; Interest rates
    Date: 2011
  15. By: Borek Vasicek
    Abstract: Estimated Taylor rules have become popular as a description of monetary policy conduct. There are numerous reasons why real monetary policy can be asymmetric and estimated Taylor rules nonlinear. This paper tests whether monetary policy can be described as asymmetric in three new European Union (EU) members (the Czech Republic, Hungary, and Poland), which apply an inflation targeting regime. Two different empirical frameworks are used: (i) Generalized Method of Moments (GMM) estimation of models that allow discrimination between sources of potential policy asymmetry but are conditioned by specific underlying relations, and (ii) a flexible framework of sample splitting where nonlinearity enters via a threshold variable and monetary policy is allowed to switch between regimes. We find generally little evidence for asymmetric policy driven by nonlinearities in economic systems, some evidence for asymmetric preferences, and some interesting evidence on policy switches driven by the intensity of financial distress in the economy.
    Keywords: Inflation targeting, monetary policy, nonlinear Taylor rules, threshold estimation.
    JEL: C32 E52 E58
    Date: 2011–07
  16. By: Galo Nuño (Banco de España); Pedro Tedde (Banco de España); Alessio Moro (Università di Cagliari)
    Abstract: This paper analyzes the Spanish monetary system from 1856, when the Bank of Spain was created, to 1874, when it was awarded the monopoly of emission. This period was characterized by the emergence of an unregulated banking system, with multiple banks of issue entitled to emit bank notes. We focus on two main issues: i) the large fluctuations in the money supply during this period; and ii) the lack of a lender of last resort in the banking panic of 1866. To analyze this, we construct a new dataset on money supply aggregates. The paper also estimates the economic impact of monetary fluctuations with the help of a calibrated new Keynesian model. Our results suggest that money supply shocks had a milder effect on inflation and output than the one predicted by the theory.
    Keywords: unregulated banking, Gresham’s`law, lender of last resort, Overend and Gurney crisis
    JEL: N13 N23 E31 E5
    Date: 2011–09
  17. By: Filipa Sá; Pascal Towbin; Tomasz Wieladek
    Abstract: A number of OECD countries experienced an environment of low interest rates and a rapid Increase in real house prices and residential investment during the past decade. Different explanations have been suggested for the housing boom: expansionary monetary policy, capital inflows due to a global savings glut and excessive financial innovation combined with inappropriately lax financial regulation. In this study we examine the effects of these three factors on the housing market. We estimate a panel VAR for a sample of OECD countries and identify monetary policy and capital inflows shocks using sign restrictions. To explore how the effects of these shocks change with the structure of the mortgage market and the degree of securitization, we allow the VAR coefficients to vary with mortgage market characteristics. Our results suggest that both types of shocks have a significant and positive effect on real house prices, real credit to the private sector and residential investment. The response of housing variables to both types of shocks is stronger in countries with more developed mortgage markets. The amplification effect of mortgage-backed securitization is particularly strong for capital inflows shocks.
    Keywords: Money supply ; Capital movements
    Date: 2011
  18. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Satoshi Kawanishi (Sophia University)
    Abstract: This paper studies the relationship between official announcements and the effectiveness of foreign exchange interventions in a noisy rational expectations equilibrium model. We show that when heterogeneously informed traders have inaccurate information, an exchange rate is likely to be misaligned from its fundamental value in the presence of noise trades. Then the central bank uses the disclosure of public information to improve the accuracy of private agentsf information and encourage risk-arbitrage thereby enhancing the informativeness of the exchange rate. This effect holds, even when the central bank does not possess superior information to traders, as long as public information is not perfectly correlated with the information of traders. We provide evidence that announced interventions are more effective in periods of high implied volatility, consistent with the theoretical prediction that the implied volatility of the exchange rate is positively correlated with the information inaccuracy of traders and the degree of an exchange rate misalignment.
    Keywords: Foreign exchange intervention, Announcements, Implied volatility
    JEL: F31
    Date: 2011–08
  19. By: Gaston Giordana; Ingmar Schumacher
    Abstract: In this paper we study the impact of the Basel III liquidity regulations, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), on the bank lending channel in Luxembourg. For this aim we built, based on individual bank data, time series of the LCR and NSFR for a sample of banks covering between 82% and 100% of total assets of the banking sector. Additionally, we simulated the optimal balance sheet adjustments needed to adhere to the regulations. We extend the existing literature on the identification of the bank lending channel by adding as banks characteristics the estimated shortfalls in both the LCR and NSFR. We find a significant role for the bank lending channel in Luxembourg which mainly works through small banks with a large shortfall in the NSFR. We also show that big banks are able to increase their lending following a contractionary monetary policy shock, in line with the fact that big banks in Luxembourg are liquidity providers. Our extrapolation and simulation results suggest that the bank lending channel will no longer be effective in Luxembourg once banks adhere to the Basel III liquidity regulations. We find that adhering to the NSFR may reduce the bank lending channel more strongly than complying with the LCR.
    Keywords: bank, bank lending channel, monetary policy, Basel III, LCR, NSFR
    JEL: E51 E52 E58 G21 G28
    Date: 2011–06
  20. By: Falko Fecht (European Business School, Universität für Wirtschaft und Recht, Gustav-Stresemann-Ring 3, D-65189 Wiesbaden, Germany.); Kjell G. Nyborg (University of Zurich, Institut für Banking & Finance, Plattenstrasse 14, 8032 Zürich, Schweiz.); Jörg Rocholl (ESMT European School of Management and Technology, Schlossplatz 1, D- 10178 Berlin, Germany.)
    Abstract: We study the prices that individual banks pay for liquidity (captured by borrowing rates in repos with the central bank and benchmarked by the overnight index swap) as a function of market conditions and bank characteristics. These prices depend in particular on the distribution of liquidity across banks, which is calculated over time using individual banklevel data on reserve requirements and actual holdings. Banks pay more for liquidity when positions are more imbalanced across banks, consistent with the existence of short squeezing. We also show that small banks pay more for liquidity and are more vulnerable to squeezes. Healthier banks pay less but, contrary to what one might expect, banks in formal liquidity networks do not. State guarantees reduce the price of liquidity but do not protect against squeezes. JEL Classification: G12, G21, E43, E58, D44.
    Keywords: Banks, liquidity, money markets, repos, imbalance.
    Date: 2011–09
  21. By: Boldea, O.; Engwerda, J.C.; Michalak, T.; Plasmans, J.E.J.; Salmah, S. (Tilburg University, Center for Economic Research)
    Abstract: This paper analyzes some pros and cons of a monetary union for the ASEAN1 countries, excluding Myanmar. We estimate a stylized open-economy dynamic general equilibrium model for the ASEAN countries. Using the framework of linear quadratic differential games, we contrast the potential gains or losses for these countries due to economic shocks, in case they maintain their status-quo, they coordinate their monetary and/or fiscal policies, or form a monetary union. Assuming for all players open-loop information, we conclude that there are substantial gains from cooperation of monetary authorities. We also find that whether a monetary union improves upon monetary cooperation depends on the type of shocks and the extent of fiscal policy cooperation. Results are based both on a theoretical study of the structure of the estimated model and a simulation study.
    Keywords: ASEAN economic integration;monetary union;linear quadratic differential games;open-loop information structure.
    JEL: C61 C71 C72 C73 E17 E52 E61 F15 F42 F47
    Date: 2011
  22. By: Michael D Bordo; Owen F Humpage; Anna J Schwartz
    Abstract: If official interventions convey private information useful for price discovery in foreign-exchange markets, then they should have value as a forecast of near-term exchange-rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign-exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only about 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success, although some interventions were inefficiently large. Other potential characteristics of intervention, notably coordination and secrecy, did not seem to influence our success rates.
    Keywords: Board of Governors of the Federal Reserve System (U.S.) ; Foreign exchange
    Date: 2011
  23. By: Aizenman, Joshua; Pinto, Brian
    Abstract: The accumulated experience of emerging markets over the past two decades has laid bare the tenuous links between external financial integration and faster growth, on the one hand, and the proclivity of such integration to fuel costly crises on the other. These crises have not gone without learning. During the 1990s and 2000s, emerging markets converged to the middle ground of the policy space defined by the macroeconomic trilemma, with growing financial integration, controlled exchange rate flexibility, and proactive monetary policy. The OECD countries moved much faster toward financial integration, embracing financial liberalization, opting for a common currency in Europe, and for flexible exchange rates in other OECD countries. Following their crises of 1997-2001, emerging markets added financial stability as a goal, self-insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008-2009, which originated in the financial sector of advanced economies, meant that the OECD"overshot"the optimal degree of financial deregulation while the remarkable resilience of the emerging markets validated their public finance approach to financial integration. The story is not over: with capital flowing in droves to emerging markets once again, history could repeat itself without dynamic measures to manage capital mobility as part of a comprehensive prudential regulation effort.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Banks&Banking Reform,Economic Theory&Research
    Date: 2011–08–01
  24. By: Qin, Duo; He, Xinhua
    Abstract: The effect of globalisation on inflation is modelled and simulated for ten countries from G10 during the Great Moderation period. The results are supportive of the globalisation hypothesis. In particular, the results show that dynamic channels and magnitudes of globalisation to domestic inflation are highly heterogeneous from country to country, that increases in trade openness could be either inflationary or deflationary, while increased imports from low-cost emerging-market economies have been mostly deflationary, and that there has been almost no direct globalisation impact as far as inflation persistence is concerned while the impact on inflation variability can be positive as well as negative. Overall, globalisation is shown to have contributed positively to the aspect of low inflation rather than that of stable inflation during the Great Moderation era.
    Keywords: Inflation dynamics; globalisation
    JEL: E31 C52 F41 E37
    Date: 2011–08–26
  25. By: Christoph Fischer
    Abstract: Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country's currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the U.S. dollar without having close economic affinities with the bloc. The estimated parameters are consistent with an additive random utility model interpretation. A currency bloc equilibrium in the spirit of Alesina and Barro (2002) is derived empirically.
    Keywords: Foreign exchange ; International finance
    Date: 2011
  26. By: Naohisa Hirakata; Nao Sudo; Kozo Ueda
    Abstract: The quantitative significance of shocks to the financial intermediary (FI) has not received much attention up to now. We estimate a DSGE model with what we describe as chained credit contracts, using Bayesian technique. In the model, credit-constrained FIs intermediate funds from investors to credit-constrained entrepreneurs through two types of credit contract. We find that the shocks to the FIs' net worth play an important role in the investment dynamics, accounting for 17 percent of its variations. In particular, in the Great Recession, they are the key determinants of the investment declines, accounting for 36 percent of the variations.
    Keywords: Price levels ; Financial markets ; Monetary policy
    Date: 2011
  27. By: Stefano Viaggiu; Andrea Lionetto; Leonardo Bargigli; Michele Longo
    Abstract: We build a statistical ensemble representation of an economic system which can be interpreted as a simplified credit market. To this purpose we adopt the Boltzmann-Gibbs distribution where the role of the Hamiltonian, as recently suggested in the literature, is taken by the total money supply (i.e. including money created from debt) of a set of economic agents interacting over the credit market. As a result, we can read the main thermodynamic quantities in terms of monetary ones. Furthermore, with our formalism we recover and extend some results concerning the temperature of an economic system, previously presented in the literature by considering only the monetary base as conserved quantity. Finally we study the statistical ensemble for the Pareto distribution.
    Date: 2011–09
  28. By: Michael R. King (Richard Ivey School of Business, University of Western Ontario); Carol Osler (Brandeis International Business School, Brandeis University); Dagfinn Rime (Norges Bank (Central Bank of Norway))
    Abstract: Electronic trading has transformed foreign exchange markets over the past decade, and the pace of innovation only accelerates. This formerly opaque market is now fairly transparent and transaction costs are only a fraction of their former level. Entirely new agents have joined the fray, including retail and high-frequency traders, while foreign exchange trading volumes have tripled. Market concentration among dealers has risen reflecting the heavy investments in technology. Undeterred, some new non-bank market participants have begun to make markets, challenging the traditional foreign exchange dealers on their own turf. This paper outlines the players in this market and the structure of their interactions. It also presents new evidence on how that structure has changed over the past two decades. Throughout, it highlights issues relevant to exchange rate modelling.
    Keywords: exchange rates, algorithmic trading, market microstructure, electronic trading, high frequency trading
    JEL: F31 G12 G15 C42 C82
    Date: 2011–08–14
  29. By: Alfonso Palacio-Vera
    Abstract: The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural "liquidity trap," provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.
    Keywords: Floor System; Debt Monetization; Functional Finance; Policy Coordination; Neutral Interest Rate
    JEL: E10 E12 E44 E52 E58
    Date: 2011–09
  30. By: Barry Eichengreen; Nergiz Dincer
    Abstract: We assemble data on the structure of bank supervision, distinguishing supervision by the central bank from supervision by a nonbank governmental agency and independent from dependent governmental supervisors. Using observations for 140 countries from 1998 through 2010, we find that supervisory responsibility tends to be assigned to the central bank in low-income countries where that institution is one of few public-sector agencies with the requisite administrative capacity. It is more likely to be undertaken by a non-independent agency of the government in countries ranked high in terms of government efficiency and regulatory quality. We show that the choice of institutional arrangement makes a difference for outcomes. Countries with independent supervisors other than the central bank have fewer nonperforming loans as a share of GDP even after controlling for inflation, per capita income, and country and/or year fixed effects. Their banks are required to hold less capital against assets, presumably because they have less need to protect against loan losses. Savers in such countries enjoy higher deposit rates. There is some evidence, albeit more tentative, that countries with these arrangements are less prone to systemic banking crises.
    JEL: G0 H1
    Date: 2011–09
  31. By: Antonio Scalia (Banca d’Italia, Via Nazionale 91, 00184 Rome, Italy.); Benjamin Sahel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The investment of the ECB reserves in US dollars and yen, delegated to a network of portfolio managers in the Eurosystem’s national central banks, involves a periodic assessment of performance against a common benchmark, controlled by the ECB and subject to revision on a monthly basis. Monetary reward for the best performers is almost entirely absent, and compensation comes mainly as reputational credit following the transmission of the annual report to the Governing Council. Employing a new data set on individual portfolio variables during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case, risk-shifting is asymmetric: the adjustment to ranking is generally reduced or entirely offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. We also find that reserve managers who ranked low in the previous year tend to reduce risk significantly. Our evidence is consistent with a reserve managers’ anecdote, according to which they obtain a concave reputational reward within their national central banks, which induces risk aversion and explains the observed low usage of the risk budget. Since reserve managers should have a comparative advantage over the tactical benchmark within a monthly horizon, possible enhancements to the design of the tournament are discussed. These might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance. JEL Classification: G11, E58, D81.
    Keywords: Foreign reserves, tournament, incentives, effort, delegated portfolio management.
    Date: 2011–09

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