nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒10‒01
fifteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. How Flexible Can Inflation Targeting Be and Still Work? By Kenneth N. Kuttner; Adam S. Posen
  2. Overview of the Evolution of China's Central Bank and Monetary Policy: Correlation to the European Union By Skold, Alida S.
  3. Political Pressure on the National Bank of Slovakia By Peter Kukuk; Adam Gersl
  4. Low-Income Countries Vulnerabilities and the Need for an SDR-Based International Monetary System By Pietro Alessandrini; Andrea Filippo Presbitero
  5. Fiscal disciplining effect of central bank opacity: Stackelberg versus Nash equilibrium. By Meixing Dai; Moïse Sidiropoulos
  6. Monetary policy and sunspot fluctuation in the U.S. and the Euro area By Hirose, Yasuo
  7. Estimating US persistent and transitory monetary shocks: implications for monetary policy By Juan Angel Lafuente; Rafaela Pérez; Jesús Ruiz
  8. Optimal Monetary Policy with Endogenous Entry and Product Variety By Florin O. Bilbiie; Ippei Fujiwara; Fabio Ghironi
  9. Floating against the tide : Spanish monetary policy, 1870-1931 By Pablo Martín-Aceña; Elena Martínez Ruiz; Pilar Noguer Marco
  10. Eurozone inflation differentials and the ECB By Pirovano M.; Van Poeck A.
  11. Endogenous Credit Cycles By Chao Gu; Joseph Haslag
  12. How to Restore Sustainability of the Euro? By Kari E.O. Alho
  13. Monetary policy in a non-representative agent economy: A survey By Michał Brzoza-Brzezina; Marcin Kolasa; Grzegorz Koloch; Krzysztof Makarski; Michal Rubaszek
  14. Exploring oil price – exchange rate nexus for Nigeria By Zahid Muhammad; Hassan Suleiman; Reza Kouhy
  15. Beyond the economics of the euro: analysing the institutional evolution of EMU 1999-2010 By Marion Salines; Gabriel Glöckler; Zbigniew Truchlewski; Paola del Favero

  1. By: Kenneth N. Kuttner (Oberlin College, Department of Economics); Adam S. Posen (Peterson Institute for International Economics)
    Abstract: This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters' predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank's response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of England's inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.
    Keywords: Inflation targeting, inflation expectations, monetary policy
    JEL: E42 E58 E65
    Date: 2011–09
  2. By: Skold, Alida S.
    Abstract: As an innovator in the financial system, China was the first to use paper currency. Eventually the form of currency was held responsible for devastating inflation and was abandoned during the Ming Dynasty. Going forward in time, uprisings and discontent have emphasized the importance of controlling inflation. The central bank is pivotal in issuing monetary policy to control inflation and to maintain financial stability as the government transforms itself from a planned economy to a mixed market economy. The transforming economy is moving toward a free market system through series of economic reforms. The correlation between China’s structure and the European Union’s structure provides opportunities for further study to determine next steps for both.
    Keywords: China; central bank; monetary policy; inflation; economy
    JEL: E0 H60 E5
    Date: 2011–07–17
  3. By: Peter Kukuk (UniCredit Bank, Prague); Adam Gersl (Czech National Bank; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyzes political pressure on the National Bank of Slovakia, using the Havrilesky (1993) methodology based on media signalling. This methodology allows the pressure on the Central Bank of Slovakia to be compared with the pressure on the central banks to which the methodology was already applied, namely – the U.S. Federal Reserve, the Deutsche Bundesbank and the Czech National Bank. The analysis and the comparison reveals a relatively weak signalling of pressure in media in Slovakia and prevailance of financial sector representatives as the main commentaries on monetary policy of the National Bank of Slovakia in the period before euro adoption.
    Keywords: political economy, central banks, monetary policy
    JEL: E52 D78
    Date: 2011–09
  4. By: Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: The global financial crisis, the weakening role of the dollar and the increasing importance of China in the global arena are calling for a reform of the international monetary system (IMS) in the direction of a greater multilateralism. We agree with the necessity to reform the IMS and we advance a proposal based on a greater role of the Special Drawing Rights (SDRs), focusing on the potential benefits that a new monetary order could brings to Low-Income Countries (LICs). Given their extreme vulnerability to external shocks and their dependence on the exchange rate vis-vis the US dollar, poor countries would benefit from the creation of a more stable multi-currency monetary system. The new SDRs will created exogenously - with a disproportionate allocation to LICs -, but also endogenously, through the substitution account and the overdraft facility. Finally, we discuss the superiority of this proposal in the context of the current foreign assistance framework.
    Keywords: International Mometary System, Key Currency, Low-Income Countries, Reserves, SDR
    JEL: F33 F35 O11 O19
    Date: 2011–09
  5. By: Meixing Dai; Moïse Sidiropoulos
    Abstract: Several recent studies have shown that, when fiscal and monetary authorities play a Stackelberg game, central bank opacity has a fiscal disciplining effect in the sense that it induces the government to reduce taxes and public expenditures, leading hence to lower inflation and output distortions, and lower macroeconomic variability. We show in this paper that, in a Nash equilibrium, the government is still disciplined by central bank opacity. However, the disciplining effect on the level and variability of inflation and the output gap is dominated by the direct effect of opacity.
    Keywords: Distortionary taxes, output distortions, central bank transparency (opacity), fiscal disciplining effect.
    JEL: E52 E58 E62 E63 H30
    Date: 2011
  6. By: Hirose, Yasuo
    Abstract: We estimate a two-country open economy version of the New Keynesian DSGE model for the U.S. and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Our empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit different dynamics than those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, while the transmission of sunspots to the U.S. is limited.
    Keywords: Monetary Policy; Indeterminacy; Sunspot Shock; Open Economy Model; Bayesian Analysis
    JEL: E52 F41 C11 C62
    Date: 2010–11
  7. By: Juan Angel Lafuente; Rafaela Pérez; Jesús Ruiz
    Abstract: This paper proposes an estimation method for persistent and transitory monetary shocks using the monetary policy modeling proposed in Andolfatto et al, [Journal of Monetary Economics, 55 (2008), pp.: 406-422]. The contribution of the paper is threefold: a) to deal with non-Gaussian innovations, we consider a convenient reformulation of the state-space representation that enables us to use the Kalman filter as an optimal estimation algorithm. Now the state equation allows expectations play a significant role in explaining the future time evolution of monetary shocks; b) it offers the possibility to perform maximum likelihood estimation for all the parameters involved in the monetary policy, and c) as a consequence, we can estimate the conditional probability that a regime change has occurred in the current period given an observed monetary shock. Empirical evidence on US monetary policy making is provided through the lens of a Taylor rule, suggesting that the Fed’s policy was implemented accordingly with the macroeconomic conditions after the Great Moderation. The use of the particle filter produces similar quantitative and qualitative findings. However, our procedure has much less computational cost.
    Keywords: Kalman filter, Non-normality, Particle filter, Monetary policy
    JEL: C4 F3
    Date: 2011–09
  8. By: Florin O. Bilbiie (Assistant Professor, Centre d'Economie de la Sorbonne, Maison des Sciences Economiques and CEPR (E-mail:; Ippei Fujiwara (Director and Senior Economist, Financial Markets Department, Bank of Japan (E-mail:; Fabio Ghironi (Associate Professor, Boston College and NBER (E-mail:
    Abstract: We show that deviations from long-run stability of product prices are optimal in the presence of endogenous producer entry and product variety in a sticky-price model with monopolistic competition in which price stability would be optimal in the absence of entry. Specifically, a long-run positive (negative) rate of inflation is optimal when the benefit of variety to consumers falls short of (exceeds) the market incentives for creating that variety under flexible prices, governed by the desired markup. Plausible preference specifications and parameter values justify a long-run inflation rate of two percent or higher. Price indexation implies even larger deviations from long-run price stability. However, price stability (around this non-zero trend) is close to optimal in the short run, even in the presence of time-varying flexible-price markups that distort the allocation of resources across time and states. The central bank uses its leverage over real activity in the long run, but not in the short run. Our results point to the need for continued empirical research on the determinants of markups and investigation of the benefit of product variety to consumers.
    Keywords: Entry, Optimal Inflation Rate, Price Stability, Product Variety, Ramsey-Optimal Monetary Policy
    JEL: E31 F32 E52
    Date: 2011–09
  9. By: Pablo Martín-Aceña; Elena Martínez Ruiz; Pilar Noguer Marco
    Abstract: The gold standard began to emerge as a universal monetary system in the late 1870s, and it had spread throughout the world economy by 1900. It was unusual for nations to be off the gold standard, and it meant that they were detached from the international financial community. Spain never joined the gold standard club in any of its varieties, either before or after 1914. Unlike the vast majority of the European currencies, the peseta’s exchange rate fluctuated, sometimes widely, against gold and gold currencies. Gold convertibility was suspended in 1883 and never resumed. Nevertheless, the monetary authorities were aware that the Spanish economy, off the gold standard, was an outlier in the international economy and made plans to put the peseta on gold both before and after 1914.Why Spain never adopted the gold standard is a complex issue, and our paper offers a possible answer by examining the behaviour of an issuing bank that refused to accept, or resisted, its role as a central bank. Our study also provides a basis for a comparison between the Bank of Spain, some of its features and policies, with other peripheral issuing institutions. Moreover, our paper encompasses both the pre-war and the post-war periods, which allows us to present both the similarities and the differences in the exchange and monetary policies of the Spanish authorities during the era of the classical gold standard and the years of the gold exchange standard
    Keywords: Gold standard, Monetary policy, Bank of Spain
    JEL: E42 E58 N10
    Date: 2011–09
  10. By: Pirovano M.; Van Poeck A.
    Abstract: This paper presents new evidence on inflation differentials in the Euro Area from different perspectives, and extending the sample including the recent financial crisis. First, we give an informal analysis of the evolution of inflation dispersion and inflation differentials since the start of EMU. Second, we perform formal statistical analyses of the stability properties of inflation differentials in the period 1999-2010. Univariate and multivariate tests reject the null of stability of inflation differentials when conducted over the entire sample period. However, when the financial crisis is excluded, the null of stability is not rejected for the large majority of countries. This finding implies the beginning of a new tendency since the global financial turmoil, and new challenges for the common monetary policy. Finally, we analyze the determinants of inflation differentials, empirically testing a number of theories including price level equalization, productivity differentials, differences in cyclical positions, labor and product market rigidities. We conclude that inflation differentials are not the result of equilibrating, transitory forces, but rather of persistent structural and country-specific factors. This calls for structural reforms in labor and product markets, and countercyclical fiscal policy measures at the individual country level. As inflation differentials pose a serious challenge for the monetary policy of the ECB, we further believe that the ECB should be equipped with additional policy instruments to cope with them in a more direct way.
    Date: 2011–09
  11. By: Chao Gu (Department of Economics, University of Missouri-Columbia); Joseph Haslag (Department of Economics, University of Missouri-Columbia)
    Abstract: We build a model in which verifiability of private debts, timing mismatch in debt settlements and borrowing leverage lead to liquidity crisis in the financial market. Central bank can respond to the liquidity crisis by adopting an unconventional monetary policy that resembles repurchase agreements between the central bank and the lenders. This policy is effective if the timing mismatch is nominal (i.e., a settlement participation risk). It is ineffective if the timing mismatch is driven by a real shock (i.e., preference shock).
    Keywords: liquidity problem, timing mismatch, leveraging, liquidity shock, settlement risk, repurchase agreement, consumption shock
    JEL: E44 E52
    Date: 2011–09–22
  12. By: Kari E.O. Alho
    Abstract: We reassess the result of unsustainability of the euro with respect to inflation differentials claimed by Wickens (2007) by specifying an open-economy version of a two-region New Keynesian model for EMU and demonstrate that the result by Wickens does not hold in general. We are able to derive a result that the model is determinate for a wide range of policy rules so that the sustainability of the euro area and the member countries is reached over time with respect to supply and demand shocks and emerged imbalances in price levels and competitiveness. We then enlarge the numerical analysis to consider EMU and sustainability in the case, prevailing currently, where a high debt country should both restore its competitiveness and its fiscal balance, and the policies re-quired from the single monetary policy and the national fiscal policies. Strong fiscal consolidation and far-reaching successful structural reforms are needed to reach sustainability in the sense that emerged imbalances in competitiveness and price levels and the threat of ever mounting debt levels could be eliminated over the medium run. We also illustrate how the current deflationary adjustment involves a major polarisation in economic developments within the euro area.
    JEL: E43 E52 E62
    Date: 2011–09–21
  13. By: Michał Brzoza-Brzezina (National Bank of Poland, Economic Institute; Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Grzegorz Koloch (National Bank of Poland, Economic Institute); Krzysztof Makarski (National Bank of Poland, Economic Institute; Warsaw School of Economics); Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: It is well-known that central bank policies affect not only macroeconomic aggregates, but also their distribution across economic agents. Similarly, a number of papers demonstrated that heterogeneity of agents may matter for the transmission of monetary policy on macro variables. Despite this, the mainstream monetary economics literature has so far been dominated by dynamic stochastic general equilibrium (DSGE) models with representative agents. This article aims to tilt this imbalance towards heterogeneous agents setups by surveying the main positive and normative findings of this line of the literature, and suggesting areas in which these models could be implemented. In particular, we review studies that analyze the heterogeneity of (i) households’ income, (ii) households’ preferences, (iii) consumers’ age, (iv) expectations, and (v) firms’ productivity and financial position. We highlight the results on issues that, by construction, cannot be investigated in a representative agent framework and discuss important papers modifying the findings from the representative agent literature.
    Keywords: Heterogeneous Agents; Monetary Policy
    JEL: E31 E32 E43 E44 E52
    Date: 2011
  14. By: Zahid Muhammad; Hassan Suleiman; Reza Kouhy
    Abstract: This paper investigates the oil price – exchange rate nexus for Nigeria during the period 2007-2010 using daily data. The generalised autoregressive conditional heteroscedasticity (GARCH) and exponential GARCH (EGARCH) models are employed to examine the impact of oil price changes on the nominal exchange rate .The outcome of this research indicates that a rise in oil prices leads to a depreciation of the Nigerian Naira vis-à-vis the US dollar over the study period.
    Keywords: Exchange rate, oil price, Nigeria, GARCH/EGARCH
    JEL: F31 E44
    Date: 2011–09
  15. By: Marion Salines (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Gabriel Glöckler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Zbigniew Truchlewski (Central European University, Nador u. 9, 1051 Budapest, Hungary); Paola del Favero (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This Occasional Paper examines how and why the institutional framework governing EMU has evolved since the creation of the euro. Building on theories of institutionalism, the paper in particular investigates to what extent functional spillovers from the single currency into other policy domains, like macroeconomic policies or financial regulation, met with an adequate institutional response, and to what extent the existing institutional framework conditioned the response to the fi nancial crisis. The interaction between policy requirements and institutional capabilities is examined both in “ordinary times” (1999-2007) and under “crisis conditions” (2007-10). The paper uses a typology of change which helps to put into perspective both the resilience of the institutional framework of EMU and its capacity to adapt. In this respect, it allows for a better understanding and framing of the current reforms of EMU economic governance. It concludes that even though the crisis will accelerate institutional development, it will do so only gradually, as path dependence and an inbuilt bias towards incremental change will prevent policy-makers from pursuing a “clean slate” strategy. JEL Classification: D79, E02, F02, F51, F53, F55, F59
    Keywords: EMU institutional architecture, historical institutionalism, rational choice, institutional change.
    Date: 2011–09

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