nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒10‒22
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy and TIPS Yields Before the Crisis By Stefan Gerlach; Laura Moretti
  2. Complementing Bagehot: Illiquidity and insolvency resolution By Eijffinger, Sylvester C W; Nijskens, Rob
  3. 130 years of fiscal vulnerabilities and currency crashes in advanced economies By Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel
  4. Investigating the Monetary Policy of Central Banks with Assessment Indicators By Marcel Bluhm
  5. Inflation and Welfare with Search and Price Dispersion By Liang Wang
  6. Time Preference and Interest Rate in a dynamic general Equilibrium Model By Wang, Gaowang
  7. Optimal monetary policy with durable services: user cost versus purchase price By Ko, Jun-Hyung
  8. The Effects of Monetary Policy On Real Farm Prices in South Africa By Goodness C. Aye; Rangan Gupta
  9. Households’ Foreign Currency Borrowing in Central and Eastern Europe By Jarko Fidrmuc; Mariya Hake; Helmut Stix
  10. Forecasting Inflation using Commodity Price Aggregates By Yu-chin Chen; Stephen J. Turnovsky; Eric Zivot
  11. The risk-taking channel of monetary policy in the USA: Evidence from micro-level data By Delis, Manthos D; Hasan, Iftekhar; Mylonidis, Nikolaos
  12. Monetary policy restriction and dividend behavior of Pakistani firms: an empirical analysis By Mohsin, Hasan M; Ashraf, Muhammad Shahzad
  13. Non-linear convergence in Asian interest rates and inflation rates By Kisswani, Khalid/ M.; Nusair, Salah/ A.
  14. Sticky Prices: A New Monetarist Approach By Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
  15. Interpreting the evidence for New Keynesian models of inflation dynamics By Nymoen, Ragnar; Rygh Swensen, Anders; Tveter, Eivind
  16. Exchange Rate Pass-Through and Credit Constraints: Firms Price to Market as Long as They Can By Georg H. Strasser
  17. Program for Improving Central Bank Reporting and Procedures on Remittances: Barbados By Inter-American Development Bank (IDB); Center for Latin American Monetary Studies (CEMLA)
  18. Exchange rate misalignment estimates – Sources of differences By Cheung , Yin-Wong; Fujii, Eiji

  1. By: Stefan Gerlach (Institute for Monetary and Financial Stability, Goethe University Frankfurt); Laura Moretti (Center for Financial Studies)
    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: Monetary Policy, Long Real Interest Rates, TIPS
    JEL: E43 E52 E58
    Date: 2011–09–13
  2. By: Eijffinger, Sylvester C W; Nijskens, Rob
    Abstract: During the recent financial crisis, central banks have provided liquidity and governments have set up rescue programmes to restore confidence and stability, often against the LLR principle advocated by Bagehot. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and monitors too little. A central bank can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce an additional authority that is able to bail out the bank either by injecting capital at a fixed return or by receiving an equity claim. This authority faces a trade-off: demanding a fixed premium increases investment but worsens moral hazard. Request for an equity claim by the fiscal authority reduces excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy
    Keywords: Bailout; Bank Regulation; Capital; Lender of Last Resort; Liquidity
    JEL: E58 G21 G28
    Date: 2011–10
  3. By: Fratzscher, Marcel; Mehl, Arnaud; Vansteenkiste, Isabel
    Abstract: This paper investigates the empirical link between fiscal vulnerabilities and currency crashes in advanced economies over the last 130 years, building on a new dataset of real effective exchange rates and fiscal balances for 21 countries since 1880. We find evidence that crashes depend more on prospective fiscal deficits than on actual ones, and more on the composition of public debt (i.e. rollover/sudden stop risk) than on its level per se. We also uncover significant nonlinear effects at high levels of public debt as well as significantly negative risk premia for major reserve currencies, which enjoy a lower probability of currency crash than other currencies ceteris paribus. Yet, our estimates indicate that such premia remain small in size relative to the conditional probability of a currency crash if prospective fiscal deficits or rollover/sudden stop risk are high. This suggests that a currency’s international status is not necessarily sufficient to shelter it from collapse.
    Keywords: advanced economies; banking crises; currency crashes; exchange rates; fiscal vulnerability; foreign debt; reserve currencies; total debt level
    JEL: F30 F31 N20
    Date: 2011–10
  4. By: Marcel Bluhm (Xiamen University and Center for Financial Studies)
    Abstract: This paper outlines a new method for using qualitative information to analyze the monetary policy strategy of central banks. Quantitative assessment indicators that are extracted from a central bank's public statements via the balance statistic approach are employed to estimate a Taylor-type rule. This procedure allows to directly capture a policymaker's assessments of macroeconomic variables that are relevant for its decision making process. As an application of the proposed method the monetary policy of the Bundesbank is re-investigated with a new dataset. One distinctive feature of the Bundesbank's strategy consisted of targeting growth in monetary aggregates. The analysis using the proposed method provides evidence that the Bundesbank indeed took into consideration monetary aggregates but also real economic activity and inflation developments in its monetary policy strategy since 1975.
    Keywords: Monetary Policy Rule, Statement Indicators, Bundesbank, Monetary Targeting
    JEL: E52 E58 N14
    Date: 2011–09–07
  5. By: Liang Wang (Department of Economics, University of Hawaii)
    Abstract: This paper studies the effect of inflation on welfare in a monetary economy with price dispersion and consumer search. When facing greater price dispersion with higher inflation, consumers search harder for lower prices, and increased search raises welfare by intensifying market competition. Producers post inefficiently high prices, and this creates a welfare loss. Both mechanisms are affected by the consumer's monetary balance. I develop a general equilibrium model with search frictions to incorporate the interrelationship of money, search, and endogenous price dispersion. Inflation aspects welfare through three channels: the real balance channel, the search channel, and the price posting channel. I calibrate the model to U.S. data and find that the welfare cost of 10% annual inflation is worth 3.23% of consumption; however, if either the real balance or the price posting channel is closed, the welfare cost significantly decreases to less than 0.15% of consumption. The price posting channel amplifies the welfare-diminishing effect of the real balance channel, and the aggregated negative effect exceeds the positive effect due to the search channel. The search cost only generates a negligible welfare loss.
    Keywords: Inflation, Interest Rates, Money, Price Dispersion, Search, Welfare
    JEL: E31 E40 E50 D83
    Date: 2011–07–18
  6. By: Wang, Gaowang
    Abstract: This paper reexamines the relationship between the time preference rate and the real interest rate in the neoclassical growth model by introducing Keynesian time preference. It is shown that the long-run behavior of the neoclassical growth model persists. When introduucing money by money-in-utility, money is superneutral and the optimal monetary policy is the Friedman rule.
    Keywords: Keynesian time preference; Monetary Superneutrality; Optimum Quantity of Money
    JEL: O42 E31 E5
    Date: 2011–01–01
  7. By: Ko, Jun-Hyung
    Abstract: This paper investigates the inflation rate that should be set as the target for the central bank. To this end, we develop a two-sector economy model in the existence of long-lived durables. In contrast to recent studies that have been conducted on how monetary policy can affect the role of durable goods, which examine only the production sector, we introduce a service market. Accordingly, we can endogenously derive the traditional user cost equation and the price-rent ratio. Our main findings are as follows: First, even in cases where both service and production sectors are equally sticky, the user cost is more important than the purchase price, from the perspective of welfare loss. Second, in contrast to the situation in the economy that includes only nondurables, a temporary shock persistently influences output fluctuations. However, this does not mean that welfare loss increases as the degree of durability increases. Third, welfare is found to be a strictly increasing function of durability.
    Keywords: Durables; User cost; Price-rent ratio; Optimal monetary policy
    JEL: E31 E52
    Date: 2011–09
  8. By: Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This study provides empirical evidence of aggregate, anticipated and unanticipated and asymmetric (positive and negative) effects of monetary policy on real agricultural prices in South Africa over the monthly period of 1970:01-2010:12. For this purpose, we use the Vector Autoregressive (VAR) model coupled with the monetary misperception model to distinguish between anticipated and unanticipated monetary policy shocks. Results show that the actual, anticipated and unanticipated monetary policy had significant effect on real farm prices. These findings are robust when the shocks are modelled as recursive residuals. Moreover, the positive monetary policy was consistently significant either at specific lags or jointly. With exception of the recursive anticipated monetary policy, the negative components were consistently insignificant. Further, the hypothesis of asymmetric effect was supported for the recursive anticipated monetary policy only. The effects observed in this study are quantitatively small and accounts for only a very small percentage (1.5 percent - 6.5 percent) of the variation in real farm prices.
    Keywords: Monetary policy, real farm price, asymmetric effects, recursive residuals
    JEL: C12 E52 Q11
    Date: 2011–10
  9. By: Jarko Fidrmuc (Zeppelin University Friedrichshafen, CESifo Munich, Institute for Eastern European Studies,); Mariya Hake (Oesterreichische Nationalbank); Helmut Stix (Oesterreichische Nationalbank, Economic Studies Division Central and Eastern Europe)
    Abstract: Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, the authors study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Their results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary. JEL classification: G18, G21, C25
    Keywords: Foreign currency loans, dollarization, euroization, monetary credibility, trust, CEEC
    Date: 2011–09–01
  10. By: Yu-chin Chen; Stephen J. Turnovsky; Eric Zivot
    Abstract: This paper shows that for five small commodity-exporting countries that have adopted inflation targeting monetary policies, world commodity price aggregates have predictive power for their CPI and PPI inflation, particularly once possible structural breaks are taken into account. This conclusion is robust to using either disaggregated or aggregated commodity price indexes (although the former perform better), the currency denomination of the commodity prices, and to using mixed-frequency data. In pseudo out-of-sample forecasting, commodity indexes outperform the random walk and AR(1) processes, although the improvements over the latter are sometimes modest.
    Date: 2011–09
  11. By: Delis, Manthos D; Hasan, Iftekhar; Mylonidis, Nikolaos
    Abstract: There is a growing consensus that a prolonged period of low interest rates can exert a negative impact on financial stability through the risk-taking incentives of banks. Using micro-level datasets from the US banking sector, this paper finds evidence of a highly significant negative relationship between monetary policy rates and bank-risk taking. This finding remains robust across various specifications, sub-periods and subsamples, thereby confirming the presence of an active risk-taking channel of monetary policy since the 1990s. The results, therefore, support the new responsibilities of the Fed on macro-prudential supervision to monitor systemic risks.
    Keywords: Bank risk; monetary policy; US commercial banks; Total loans; New loans
    JEL: E43 E52 G21
    Date: 2011–10–01
  12. By: Mohsin, Hasan M; Ashraf, Muhammad Shahzad
    Abstract: Studies upon impact of macro variables on firm’s dividend policy are very limited and specifically rare in Pakistan perspective. Main purpose of this research paper is to observe impact of restricted monetary policy on dividend behavior of Pakistani firms. During restricted monetary policy, cost of external funds increases and firms prefer to utilize internal funds leading to reduction in dividend payout. Behaviour of 100 listed firms, selected purposefully, has been observed for the period from 2001 to 2009 by using Lintner’ modified model.. During the research period of nine years, monetary policy has been gone through both loose and tight phases. Proposed model is dynamic one as lagged dependent variable has been used as explanatory variable. Due to certain limitations with selection of monetary policy instrument, overall stance of State Bank of Pakistan (SBP) in its annual reports has been used as a dummy variable in the model. Results of all the three estimations reveal almost same results. First lagged dividend has been proved to be most deterministic factor of dividend policy followed by current earnings. Monetary policy and lagged dividends interactive variables provide mixed results. First interactive variable has negative coefficients in all three, fixed effect, random effects and GMM, models but with insignificant p values. Second monetary policy interactive variable has positive coefficients with significant values in random effects and GMM model. Firms seem to follow relatively stable dividend policies with lower adjustment factor. As model is dynamic, GMM estimation is preferred. Monetary policy has not been observed as significant determinant of dividend policy of Pakistani firms.
    Keywords: Dividend payment; Monetary Policy
    JEL: E5 N2
    Date: 2011–08
  13. By: Kisswani, Khalid/ M.; Nusair, Salah/ A.
    Abstract: We examine the dynamics of convergence of the ASEAN5 plus the big three for nominal interest rates, inflation rates, and real interest rates. We test for convergence relative to the U.S and Japan, using monthly data over the period January 1990 - December 2010, using non-linear unit root tests. The results show strong evidence of stationary inflation and real interest rate differentials in all but China’s inflation differential relative to the U.S., and stationary nominal interest differentials in most of the cases. We interpret these results as convergence in inflation rates and real interest rates in all cases, and as nominal interest convergence in most of the cases. Moreover, examining the impact of the Asian crisis shows less number of convergences before the crisis and more convergences after the crisis. This suggests that convergence has increased after the 1997/98 Asian crisis, and that the crisis has pulled the economies together.
    Keywords: interest rates convergence; inflation convergence; nonlinear unit root tests
    JEL: E43 E31
    Date: 2011–07–12
  14. By: Allen Head; Lucy Qian Liu; Guido Menzio; Randall Wright
    Abstract: Why do some sellers set nominal prices that apparently do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption; here it is a result. We use search theory, with two consequences: prices are set in dollars, since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When the money supply increases, some sellers may keep prices constant, earning less per unit but making it up on volume, so profit stays constant. The calibrated model matches price-change data well. But, in contrast with other sticky-price models, money is neutral.
    JEL: E0
    Date: 2011–10
  15. By: Nymoen, Ragnar (Dept. of Economics, University of Oslo); Rygh Swensen, Anders (Dept. og Mathematics, University of Oslo); Tveter, Eivind (Statistics Norway)
    Abstract: We present a framework for interpretation of the empirical results of New Keynesian models of inflation dynamics. Both the rational expectations solution of the structural New Keynesian Phillips curve, NKPC, and the reduced form VAR analysis of the multivariate time series properties give insight about the joint implications of the evidence in the NKPC literature. For example, we show that the unit-root form of non-stationary may be implied for inflation even though the econometric model initally assumed stationarity. We point out and suggest a correction to an error in the literature regarding the existence or not of a rational expectations solution in the case of homogeneity and forward-dominance.
    Keywords: New Keynesian Phillips Curve; forward-looking price setting; rational expectations; VAR model
    JEL: B41 C22 E31 E52
    Date: 2011–07–19
  16. By: Georg H. Strasser (Department of Economics, Boston College)
    Abstract: The macroeconomic evidence on the short-term impact of exchange rates on exports and prices is notoriously weak. In this paper I examine the micro-foundations of this disconnect by looking at firm export and price setting decisions in response to exchange rate fluctuations and changing credit conditions. A unique German firm survey dataset allows me to study the impact of the EUR/USD exchange rate during the years 2003-2010. Its information on pricing and export expectations at the firm-level enables me to measure the instantaneous response of a firm to changing financial constraints and exchange rates, which avoids endogeneity issues. I find that primarily large firms cause the exchange rate "puzzles" in aggregate data. The exchange rate disconnect disappears for financially constrained firms. For these firms, the pass-through rate of exchange rate changes to the prices is more than twice the rate of unconstrained firms. Similarly, their exports are about twice as sensitive to exchange rate fluctuations. Credit therefore affects not only exports via trade finance, but also international relative prices by constraining the scope of feasible pricing policies. The effect of borrowing constraints is particularly strong during the recent financial crisis.
    Keywords: exchange rate pass-through, exchange rate disconnect, financing constraints, pricing to market, exports, credit crunch, trade collapse, law of one price, trade finance
    JEL: F31 E44 F40 E32 G21
    Date: 2010–10–21
  17. By: Inter-American Development Bank (IDB); Center for Latin American Monetary Studies (CEMLA)
    Abstract: The importance of international remittance flows to Latin American and Caribbean economies has increased substantially, both in terms of macroeconomic stability given the magnitude of these capital inflows, and of economic development in view of their impact on financial inclusion and poverty alleviation. The present Report, International Remittances in Barbados, is one of the descriptive documents in the series, and was prepared with the active participation of the Central Bank of Barbados. This report is based on the findings of a mission that visited Barbados in November 2009, comprising two teams that worked jointly. This document describes the remittance market in Barbados, including: the economic context, the institutional and legal framework of this market; characteristics of the issuers, of the recipients and providers of remittances, the means and channels of payment; costs of remittance, disclosure, transparency and consumer protection, as well as the methodology for the measurement of these flows.
    Keywords: Financial Sector :: Remittances, Remittances in Barbados, Remittances measurement in Barbados, Description of the remittances market in Barbados, Economic and remittances market background in Barbados, Legal and institutional framework of the remittances market in Barbados, Charact
    Date: 2010–06
  18. By: Cheung , Yin-Wong (BOFIT); Fujii, Eiji (BOFIT)
    Abstract: We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable.
    Keywords: Penn effect regression; data revision; PPP-based data; measurement factors; economic factors
    JEL: C31 E01 F31 F40
    Date: 2011–11–11

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