|
on Monetary Economics |
| By: | Chang-Jin Kim (KIEP - Korea Institute for International Economic Policy); Jong-Wha Lee |
| Abstract: | This paper examines whether changes in exchange rate arrangements have affected monetary independence in East Asian countries after the 1997 Asian crisis. We find that the sensitivity of local to U.S. interest rates has declined for many Asian countries since they adopted floating exchange rate regimes after the crisis. This empirical finding suggests that the choice of exchange rate regime is an important factor for the independence of monetary policy. Floating regimes appear to offer East Asian countries at least some degree of monetary independence after the East Asian crisis. |
| Keywords: | exchange rate regime, monetary independence, East-Asia |
| JEL: | F31 O24 O23 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:21765&r=mon |
| By: | Hanna Samaryna; Jakob de Haan |
| Abstract: | This paper examines which economic, fiscal, external, financial, and institutional characteristics of countries affect the likelihood that they adopt inflation targeting as their monetary policy strategy. We estimate a panel binary response transition model for 60 countries and two subsamples consisting of OECD and non-OECD countries over the period 1985-2008. The findings suggest that past macroeconomic performance of a country, its fiscal discipline, exchange rate arrangements, as well as the structure and development of its financial system have a significant impact on the likelihood to adopt inflation targeting. However, the determinants of inflation targeting differ between OECD and non-OECD countries. |
| Keywords: | inflation targeting; monetary policy strategy |
| JEL: | E42 E52 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:321&r=mon |
| By: | Horvath, Roman; Rusnak, Marek; Smidkova, Katerina; Zapal, Jan |
| Abstract: | Abstract We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank. |
| Keywords: | monetary policy; voting record; dissent |
| JEL: | E58 E52 |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34638&r=mon |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | Irving Fisher's encounter with the Quantity theory of Money began in the 1890s, during the debate about bimetallism, and reached its high point in 1911 with the publication of The Purchasing Power of Money. His most important refinement of the theory, derived from his recognition of bank deposits as means of exchange, was to treat their out of equilibrium recursive interaction with inflation as integral to it. This treatment underlay both his 1920s work on the business cycle as a "dance of the dollar" and his advocacy of subjecting monetary policy to a legislated price stability rule, initially to be based on his "compensated dollar" scheme. Fisher's failure to recognize the onset of the Great Depression even as it was happening was directly related to his faith in the quantity theory's seeming implication that price level stability in and of itself guaranteed the continuation of prosperity, while his subsequent work on the debt deflation theory of great depressions initially failed to repair the damage that this failure did to his reputation, and to that of the quantity theory. In the 1930s Fisher nevertheless remained an active supporter of various schemes to reflate and then stabilize the price level. His subsequent influence on the quantity theory based Monetarist counter-revolution that began in the 1950s lay, directly, in its deployment of his analysis of expected inflation on nominal interest rates, and, indirectly, in its espousal of the case for subjecting monetary policy to a legislated rule. |
| Keywords: | Quantity theory; Price level; Inflation; Deflation; Business cycle; Depression; Money; Interest; Fisher effect |
| JEL: | B1 B2 B3 E3 E4 E5 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20111&r=mon |
| By: | Gordon Wilkinson |
| Abstract: | Measures of core inflation enable a central bank to distinguish price movements that are transitory and generated by non-monetary events from those that are more permanent and related to prior monetary policy decisions. The author uses standard statistical measures to assess the behaviour of consumer prices across provinces and identify price components with more divergent price patterns. The results indicate that energy, shelter and tobacco prices are the most volatile across provinces. Very large price movements restricted to one or a few provinces suggest that the forces or events triggering those movements may be province specific and unrelated to national demand pressures. Such results suggest that constructing a type of core inflation measure called the “trimmed mean” that excludes components with exceptionally large price changes at the provincial level may offer an alternative means of assessing underlying inflationary pressures. |
| Keywords: | Inflation and prices |
| JEL: | E31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:11-2&r=mon |
| By: | Anton Nakov (Banco de España and ECB); Carlos Thomas (Banco de España) |
| Abstract: | We study optimal monetary policy from the timeless perspective in a general state-dependent pricing framework. Firms are monopolistic competitors and are subject to idiosyncratic menu cost shocks. We find that, under isoelastic preferences and no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an “envelope” property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms’ profits and therefore has no effect on the rate of price adjustment. We offer an analytic solution which does not rely on local approximation or efficiency of the steady-state. |
| Keywords: | monetary policy, state-dependent pricing, monopolistic competition |
| JEL: | E31 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1130&r=mon |
| By: | Guonan Ma; Yan Xiandong; Kostas Liu Xi |
| Abstract: | This paper examines the evolving role of reserve requirements as a policy tool in China. Since 2007, the Chinese central bank (PBC) has relied more on this tool to withdraw domestic liquidity surpluses, as a cheaper substitute for open-market operation instruments in this period of rapid FX accumulation. China's reserve requirement system has also become more complex and been used to address a range of other policy objectives, not least being macroeconomic management, financial stability and credit policy. The preference for using reserve requirements reflects the size of China's FX sterilisation task and the associated cost considerations, a quantity-oriented monetary policy framework challenged to reconcile policy dilemmas and tactical considerations. The PBC often finds it easier to reach consensus over reserve requirement decisions than interest rate decisions and enjoys greater discretion in applying this tool. The monetary effects of reserve requirements need to be explored in conjunction with other policy actions and not in isolation. Depending on the policy mix, higher reserve requirements tend to signal a tightening bias, to squeeze excess reserves of banks, to push market interest rates higher, and to help widen net interest spreads, thus tightening domestic monetary conditions. There are, however, costs to using this policy tool, as it imposes a tax burden on Chinese banks that in turn appear to have passed a significant portion of this cost onto their customers, mostly depositors and SMEs. However, the pass-through onto bank customers appears to be partial. |
| Keywords: | reserve requirements, sterilisation tools, monetary policy, net interest margin and spread, tax incidence, Chinese economy |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:360&r=mon |
| By: | Anton Nakov; Carlos Thomas |
| Abstract: | In an abstract economic model, we study optimal monetary policy from the timeless perspective under a general state-dependent pricing framework. We find that when firms are monopolistic competitors subject to idiosyncratic menu cost shocks, households have isoelastic preferences, and there is no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an "envelope" property: At zero inflation, a marginal increase in the rate of inflation has no effect on firms' profits and therefore it has no effect on the probability of price adjustment. Our results lend support to more informal statements about the suitability of the Calvo model for studying optimal monetary policy despite its apparent conflict with the Lucas critique. We offer an analytic solution that does not require local approximation or efficiency of the steady state. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-48&r=mon |
| By: | James Costain; Anton Nakov |
| Abstract: | Starting from the assumption that firms are more likely to adjust their prices when doing so is more valuable, this paper analyzes monetary policy shocks in a DSGE model with firm-level heterogeneity. The model is calibrated to retail price microdata, and inflation responses are decomposed into "intensive", "extensive", and "selection" margins. Money growth and Taylor rule shocks both have nontrivial real effects, because the low state dependence implied by the data rules out the strong selection effect associated with fixed menu costs. The response to sector-specific shocks is gradual, but inappropriate econometrics might make it appear immediate. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-50&r=mon |
| By: | Frank A.G. den Butter (VU University Amsterdam); Harro B.J.B. Maas (Utrecht University) |
| Abstract: | This paper investigates the history of the shift from expert to model based monetary policy analysis at the Dutch Central Bank (DNB) in the postwar period up to the middle of the nineteen-eighties. For reasons that will become clear expert based reasoning at DNB was referred to as normative impulse analysis. Our focus is on two aspects of this shift: (i) from an expert based monetary analysis to a model based analysis of channels of monetary transmission, and (ii) from the top down way of monetary analysis where the president of DNB acted as the monetary expert that was in line with the hierarchical organisation of DNB to the bottom up modelling approach that was set up by a group of newly hired young academic outsiders and destabilized DNB's organisation. The resulting econometric model enabled DNB to regain some of its argumentative strength in the Dutch policy arena that had become dominated by the econometric model of the Dutch Planning Bureau (of wh ich Tinbergen was the first director), but also led to tensions within DNB's organisation. In spite of efforts to incorporate the main aspects of Holtrop's monetary analysis within the model, its concomitant new research group appeared difficult to integrate within the hierarchical organisation of DNB. The model analysis resulted in the MORKMON model which replaced Holtrop's analysis in the mid 1980s and was regularly used in policy analysis and forecasting of DNB until 2011, when the model was replaced by the DELFI model. |
| Keywords: | Dutch monetarism; history of economic modelling; monetary policy |
| JEL: | B23 C52 E58 |
| Date: | 2011–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110161&r=mon |
| By: | Hatcher, Michael C. (Cardiff Business School) |
| Abstract: | Using a version of the Smets-Wouters model of the US economy augmented to include both New Keynesian and New Classical sectors, this paper investigates the performance of inflation targeting and price-level targeting when the zero lower bound on nominal interest rates is occasionally-binding. Several notable results emerge. First, the unconditional probability of hitting the lower bound is lower under price-level targeting than inflation targeting, with 'lower bound episodes' being less frequent and lasting for shorter periods of time. Second, the volatilities of key macroeconomic variables are lower under price-level targeting than inflation targeting. Third, the lower frequency and severity of lower bound episodes under price-level targeting appears to have a first-order impact on consumption, investment and output, raising their mean values. Intuitively, price-level targeting performs well because inflation expectations act as automatic stabilisers, reducing the chance of hitting or remaining at the lower bound whilst also providing stability when the economy is away from the lower bound. |
| Keywords: | Zero lower bound; occasionally-binding constraint; price-level targeting; inflation targeting |
| JEL: | E52 E58 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2011/24&r=mon |
| By: | Feige, Edgar L. |
| Abstract: | New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy Edgar L. Feige * Abstract Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $550 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS. |
| Keywords: | Overseas currency; currency abroad; underground economy; unreported economy; domestic money supply; tax gap; tax evasion; cash payments; monetary aggregates |
| JEL: | E51 O17 E52 E26 H26 E41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34778&r=mon |
| By: | Andrew Filardo |
| Abstract: | The international financial crisis of the late 2000s has revived interest in asset price bubble research. For some, the event confirmed the enduring relevance of studying asset price bubbles in our economies. For others, it was a realisation that asset price bubbles are of much greater significance than previously thought. The financial and policy preconditions that foster "frothy" asset prices which characterise bubbles have been the focus of considerable attention. While doubtless important, it is not the only aspect that requires greater understanding. We also need to develop a better understanding of the whole life-cycle of asset price bubbles, from their origins, to their expansion and spread, the inevitable collapse, and the aftermath that has to be cleaned up. It is increasingly recognised that researchers must not treat bubbles as one-off, exogenous events. The challenge is to develop a more holistic approach, and then build into our policy models endogenous bubble behavior. Such behavior may indeed be rare but nonetheless has its origins in a number of avoidable factors, not least being some combination of financial fragility, flawed policy frameworks, and poor risk management decisions. This paper contributes to our understanding of asset price bubbles by looking at assets when they are severely underpriced, i.e., when there are negative asset price bubbles. Generally, negative asset price bubbles are an underrepresented protagonist in most crisis stories, and this has certainly been the case in the recent international financial crisis. The particular illustration for this paper comes from an examination of the financial market spillovers from the West to Asia and the Pacific. Where did the spillovers come from and how will the crisis end? While there are many different ways to conceptualise the spillovers, this paper will show how cross-border spillovers led to the severe underpricing of various types of assets in Asia and the Pacific. And, just as the policy response to the bursting of the dot-com bubble in the United States may have contributed to the housing problems in the 2000s, there are concerns that accommodative monetary policy in response to the negative asset price bubble and associated macroeconomic fallout may be laying the foundation for a round of positive asset price bubbles. The paper begins with a brief discussion of a negative asset price bubble and a narrative of the international financial crisis in Asia and the Pacific. Prior to September 2008, the international financial crisis had had a limited impact on Asia-Pacific markets. To be sure there were periods of unusual stress but, by and large, the region was more focused on macroeconomic policy issues throughout much of the year. That all changed in late 2008 as the region, despite its strong economic and financial fundamentals, entered what was to become a sharp V-shaped business cycle. Through the lens of a negative asset price bubble perspective, this paper helps to shed new light on the unusual dynamics as well as the policy trade-offs faced during the crisis and afterward. Asia and the Pacific economies are particularly useful "laboratories" to examine these phenomena because of the diverse economic, financial, and policy frameworks in place. The paper also presents a simple model of endogenous asset price bubbles to clarify some of the policy issues. The model assumes there are two regions of the world that are susceptible to domestic asset price bubbles. This type of model emphasises the highly persistent nature of financial shocks associated with boom-bust dynamics and the potential spillovers across geographic borders. An asset price bubble in one economy can influence the likelihood of an asset price bubble in the other economy. Possibly most important, the actions of the policymaker in one region can affect not only the occurrence of a bubble in its domestic market but also the occurrence of a bubble in the other region. This type of model also elevates the importance of tail risk considerations for policymakers, opening up consideration of more complex monetary policy trade-offs than in conventional macroeconomic models. The paper then explores the implications, combining both the narrative from the crisis and the implications of the theoretical model to understand better the regional policy trade-offs that occurred during the international financial crisis. In addition to emphasising the critical importance of having strong economic and financial fundamentals going into a crisis period, it also highlights the value of monetary policymakers adopting state-dependent policy frameworks. During normal times, monetary policy focused on price stability makes sense. During crisis times, the priorities of a central bank may need to be adjusted by putting more weight on financial stability than on short-term inflation stability. This comes down to placing more weight on tail risks when making policy decisions. Practically, this means that short-term deviations from (implicit and explicit) inflation targets may be appropriate, if not optimal, when coming out of a crisis. The paper proceeds as follows. Section 2 lays out the basic intuition of a negative asset price bubble. Section 3 reviews the Asia-Pacific experience during the recent international financial crisis, highlighting aspects of this new bubble perspective. Section 4 then presents a simple international monetary policy model with negative asset price bubbles to explore the theoretical channels of spillovers and the policy trade-offs. Section 5 describes results. Section 6 draws on historical narrative and theoretical findings to evaluate the policy implications. Section 7 offers some conclusions. |
| Keywords: | Financial crisis, monetary policy, asset price bubble, central banking |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:356&r=mon |
| By: | Douglas A. Irwin |
| Abstract: | The Recession of 1937-38 is often cited as illustrating the dangers of withdrawing fiscal and monetary stimulus too early in a weak recovery. Yet our understanding of this severe downturn is incomplete: existing studies find that changes in fiscal policy were small in comparison to the magnitude of the downturn and that higher reserve requirements were not binding on banks. This paper focuses on a neglected change in monetary policy, the sterilization of gold inflows during 1937, and finds that it exerted a powerful contractionary force during this period. The transmission of this monetary shock to the real economy appears to have worked through lower asset (equity) prices and higher interest rates. |
| JEL: | E5 N12 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17595&r=mon |
| By: | Alessio Anzuini (Bank of Italy); Fabio Fornari (European Central Bank) |
| Abstract: | From a financial standpoint, the mechanics of the carry trade has been recently examined in Brunnermeier et al. (2009). They showed that shocks to interest rate differentials lead to carry trade activity and to significant reactions in the bilateral exchange rates vis-a-vis the US dollar that they analyse. Starting from their paper, we take a more macroeconomic standpoint and aim to identify what kind of structural shock can generate the implications of their interest rate differential shock. To this aim we add two macroeconomic variables and two indicators of confidence to the 4-variable financial VAR of Brunnermeier et al. (2009) and use sign restrictions on the impulse responses of the resulting larger VAR to identify four macroeconomic shocks. We evidence that demand shocks and confidence shocks are associated with longer-term gains from carry trade activity, relative to supply and monetary policy shocks. This finding also supports the widely reported idea that sentiment boosts position taking. |
| Keywords: | carry trade, speculative activity, sign restriction. |
| JEL: | G12 G13 G14 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_817_11&r=mon |
| By: | Carlos Vieira (CEFAGE-UE, Universidade de Évora, Portugal); Isabel Vieira (CEFAGE-UE, Universidade de Évora, Portugal) |
| Abstract: | The academic and political discussion about which countries met the conditions for joining EMU was decisively influenced by the Frankel and Rose (1997) hypothesis concerning endogenous OCA properties. The answer to their question "Is EMU more justifiable ex post than ex ante?" was a definite yes in their ex ante analysis. Our ex post examination of the euro's first decade, however suggests that the hypothesis does not hold for some countries. This paper utilizes panel data estimation techniques to compute OCA indices that help assess the OCA endogeneity hypothesis and signal current external and fiscal imbalances. |
| Keywords: | optimum currency areas, OCA index, monetary union |
| JEL: | F15 F36 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0042&r=mon |
| By: | Jean-Sébastien Pentecôte, University of Rennes 1 - CREM-CNRS |
| Abstract: | Bayoumi and Eichengreen’s (BE, 1994) article has been very influent in the empirics of the core-periphery view of fixed exchange rate agreements. They rely on the basic AS-AD macroeconomic model in order to identify supply and demand shocks through long-run restrictions in vector autoregressions. Doing this should enable one to assess the size of such disturbances and the asymmetry between countries. While reference is usually made to Blanchard and Quah (BQ, 1989), it is shown here how this factorization has been modified by BE and how the two resulting decomposition schemes can be linked. Contrary to BE’s premise, relaxing the assumption of shocks of equal size is not just a matter of scale. The empirical properties of the exchange regime are modified, especially as regards the correlation of shocks. Given the VAR setting used in the related studies, it is also established that zero-constraints on either instantaneous or long-run impulse responses provide identical results. An empirical assessment he euro currency area over 1996-2008 illustrate these points. The recorded evidence suggests that non-zero restrictions imply slope coefficients of the AS and AD curves close to values derived from New-Keynesian models. |
| Keywords: | Fixed exchange rates, core-periphery, long-run restrictions, structural VARs |
| JEL: | C32 E13 F33 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201125&r=mon |
| By: | Subhani, Dr. Muhammad Imtiaz; Osman, Ms. Amber |
| Abstract: | This study examines that out of monetary shocks (ΔM2) and real shocks in share prices (ΔYt-k), which one or both really explain share prices of Karachi stock exchange 100 index. The time series econometrics is used to investigate the data for the monthly period of January 1991 to January 2011 for money supply (M2) and share prices of KSE 100 index. The results of unit root test reveal that there is a real shock in share prices and it explains the share price of KSE 100 index temporarily, while Vector auto regression revealed that Share prices of KSE 100 index is meagerly explained by the monetary shocks. |
| Keywords: | Share Prices; Real Shocks; Monetary Shocks; Unit Root Test; Granger Causality Test |
| JEL: | O16 A11 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:34730&r=mon |
| By: | Laine, Tatu (Bank of Finland); Nummelin, Tuomas (Bank of Finland); Snellman, Heli (Bank of Finland) |
| Abstract: | This study utilises payment system data to analyse market participants’ liquidity usage and to trace interest rates paid on overnight loans. Our aim is to examine how liquidity usage has changed during the years 2006–2/2011 and to combine this information with data on overnight lending rates between market participants. It turns out that the Furfine algorithm used in the analysis produces overnight interest rates that correlate very closely with the EONIA curve. Based on Finnish payment system data, we identify four separate time periods: normal, start of turmoil, acute crisis and stabilizing period. The results show that, during the acute crisis period, TARGET2 participants holding an account with the Bank of Finland paid, on average, lower overnight interest rates than other banks in the euro area. However, the results reveal there has been some lack of confidence between Finnish participants since the onset of the financial crisis. A new indicator – the Grid – which we present here shows this very clearly. We suggest that this new indicator could be a highly useful tool for overseers in supporting financial stability analysis. |
| Keywords: | liquidity; interest rates; overnight loans; payment systems; indicators |
| JEL: | C81 E42 E43 E58 |
| Date: | 2011–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2011_023&r=mon |
| By: | Andreas Hula |
| Abstract: | With negative growth in real production in many countries and debt levels which become an increasing burden on developed societies, the calls for a change in economic policy and even the monetary system become louder and increasingly impatient. We research the consequences of a system of credit and debt, that still allows for the expansion of credit and fundamentally retains many features of the present monetary system, without the instability inherent in the present system. |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1111.3035&r=mon |
| By: | Ilgmann, Cordelius |
| Abstract: | Given the renewed interest in negative interest rates as method for removing the floor to nominal interest rates, this article offers a concise review of Gesell's life, work and its place in the history of economic thought. It provides a brief biographical sketch of Gesell, demonstrating both his relative prominence as a social reformer during the interwar years as well as his close affiliation with anarchism. The article then gives a concise summary of Gesell's theory of effective demand and interest as expounded in the Natural Economic Order, the former being neglected by most scholars working on the subject. Finally, it is demonstrated that Keynes endorsement of Gesell as a strange, unduly neglected prophet is another piece of evidence for rejecting Hick's classic interpretation of the General Theory. If one takes Keynes extensive discussion of Gesell's theory of interest as a key for understanding the General Theory, Keynes main innovation of General Theory becomes a monetary theory of interest based on uncertainty that results in liquidity preference. The limited literature on Keynes' link to Gesell, published mainly in the 1940s, has however been widely ignored in the debate about the General Theory. -- |
| Keywords: | History of Economic Thought,Theory of Interest,Negative Interest Rates,John Maynard Keynes,Silvio Gesell |
| JEL: | B19 B22 B31 E49 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cawmdp:23&r=mon |
| By: | Antonio De Socio (Bank of Italy) |
| Abstract: | After August 2007 the plumbing system that supplied banks with wholesale funding, the interbank market, failed because toxic assets obstructed the pipes. Banks were forced to squeeze liquidity in a “lemons market” or to ask for liquidity “on tap” from central banks. This paper disentangles the two components of the three-month Euribor-Eonia swap spread, credit and liquidity risk and then evaluates the decomposition. The main finding is that credit risk increased before the key events of the crisis, while liquidity risk was mainly responsible for the subsequent increases in the Euribor spread and then reacted to the systemic responses of the central banks, especially in October 2008. Moreover, the level of the spread between May 2009 and February 2010 was influenced mainly by credit risk, suggesting that European banks were still in a “lemons market” and relied on liquidity “on tap”. |
| Keywords: | interbank markets, credit risk, liquidity risk, financial crisis, Euribor spread. |
| JEL: | E43 E44 E58 G21 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_819_11&r=mon |