nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒11‒28
thirty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Policy Interest-Rate Pass-Through in Central America By Stephanie Medina Cas; Alejandro Carrión-Menéndez; Florencia Frantischek
  2. The theoretical framework of monetary policy revisited By Hiona Balfoussia; Sophocles N. Brissimis; Manthos D. Delis
  3. Improving the Monetary Policy Frameworks in Central America By Stephanie Medina Cas; Alejandro Carrión-Menéndez; Florencia Frantischek
  4. Talking to the inattentive public: How the media translates the Reserve Bank’s communications By Monique Reid; Stan Du Plessis
  5. Niurong as the target for NGDP targeting: Mario Draghi's nightmare? By Belgodere, Antoine
  6. Monetary operating procedures: Principles and the Indian process By Ashima Goyal
  7. A Dynamic General Equilibrium Analysis of Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk By Blommestein, Hans J.; Eijffinger, Sylvester C W; Qian, Zongxin
  8. What do we really know about the long-term evolution of central banking? Evidence from the past, insights for the present By Stefano Ugolini
  9. Persistent Liquidity Effects and Long Run Money Demand By Alvarez, Fernando E; Lippi, Francesco
  10. Negative nominal interest rates: History and current proposals By Ilgmann, Cordelius; Menner, Martin
  11. Learning by Disinflating By Alina Barnett; Martin Ellison
  12. Monetary Policy, Bank Leverage, and Financial Stability By Fabian Valencia
  13. European exchange rates volatility and its asymmetrical components during the financial crisis By Daniel Stavárek
  14. The Current Currency Situation By William R. Cline; John Williamson
  15. Inflation Dynamics in the CEMAC Region By Marcos Poplawski-Ribeiro; Carlos Caceres; Darlena Tartari
  16. Optimal Precautionary Reserves for Low-Income Countries: A Cost-Benefit Analysis By Jun Il Kim; Kazuko Shirono; Era Dabla-Norris
  17. Do Policy-Related Shocks Affect Real Exchange Rates? An Empirical Analysis Using Sign Restrictions and a Penalty-Function Approach By Taya Dumrongrittikul
  18. Financial Liberalization And Demand For Money: A Case of Pakistan By Khan , Rana Ejaz Ali; Hye, Qazi Muhammad Adnan
  19. Relative prices, the price level and inflation: Effects of asymmetric and sticky adjustment By Shruti Tripathi; Ashima Goyal
  20. Individual exchange rate forecasts and expected fundamentals By Dick, Christian D.; MacDonald, Ronald; Menkhoff, Lukas
  21. Impact of US Quantitative Easing Policy on Emerging Asia By Morgan, Peter J.
  22. Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences By Cheng Hoon Lim; Alejo Costa; Torsten Wezel; Akira Otani; Francesco Columba; Mustafa Saiyid; X. Wu; Piyabha Kongsamut
  23. Industry Effects of Bank Lending in Germany By Ivo Arnold; Clemens Kool; Katharina Raabe
  24. The External Impact of China's Exchange Rate Policy: Evidence from Firm Level Data By Barry Eichengreen; Hui Tong
  25. Exchange Rates and Individual Good’s Price Misalignment: Some Preliminary Evidence of Long-Horizon Predictability By Wei Dong; Deokwoo Nam
  26. Rapid Credit Growth: Boon or Boom-Bust? By Selim Elekdag; Yiqun Wu
  27. Firms entry, monetary policy and the international business cycle By Cavallari Lilia
  28. Management of Exchange Rate Regimes in Emerging Asia By Rajan, Ramkishen
  29. G-20 Reforms of the International Monetary System: An Evaluation By Edwin M. Truman
  30. Does G-4 Liquidity Spill Over? By Tao Sun; L. Effie Psalida
  31. External asymmetries in the euro area and the role of foreign direct investment By Nicos Christodoulakis; Vassilis Sarantides
  32. Exchange rates and prices in the Netherlands and Britain over the past four centuries By James R. Lothian; John Devereux
  33. Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models By Luis Ignacio Jácome; Erlend Nier; Jacek Osinski; Pamela Madrid
  34. Towards a Measure of Core Inflation using Singular Spectrum Analysis By Franz Ruch; Dirk Bester
  35. Do Foreign Excess Return Regressions Convey Valid Information? By Seongman Moon; Carlos Velasco
  36. The New Version of the Model MZE, Macroeconometric Model for the Eurozone By M. BARLET; M.-É. CLERC; M. GARNERO; V. LAPÈGUE; V. MARCUS

  1. By: Stephanie Medina Cas; Alejandro Carrión-Menéndez; Florencia Frantischek
    Abstract: Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.
    Keywords: Central America , Central banks , Cross country analysis , Dollarization , Inflation targeting , Interest rate policy , Monetary policy ,
    Date: 2011–10–19
  2. By: Hiona Balfoussia (Bank of Greece); Sophocles N. Brissimis; Manthos D. Delis (City University)
    Abstract: The three-equation New-Keynesian model advocated by Woodford (2003) as a self-contained system on which to base monetary policy analysis is shown to be inconsistent in the sense that its long-run static equilibrium solution implies that the interest rate is determined from two of the system’s equations, while the price level is left undetermined. The inconsistency is remedied by replacing the Taylor rule with a standard money demand equation. The modified system is seen to possess the key properties of monetarist theory for the long run, i.e. monetary neutrality with respect to real output and the real interest rate and proportionality between money and prices. Both the modified and the original New-Keynesian models are estimated on US data and their dynamic properties are examined by impulse response analysis. Our research suggests that the economic and monetary analysis of the European Central Bank could be unified into a single framework.
    Keywords: Monetary theory; Central banking; New-Keynesian model; Impulse response analysis
    JEL: E40 E47 E52 E58
    Date: 2011–09
  3. By: Stephanie Medina Cas; Alejandro Carrión-Menéndez; Florencia Frantischek
    Abstract: Several Central American (CADR) countries with independent monetary policies are strengthening their monetary frameworks and some have implemented or are moving towards inflation targeting (IT) regimes. Strengthening the monetary policy frameworks of CADR is key to improving the effectiveness of monetary policy. The paper reviews the literature on the reforms needed for strengthening the monetary policy frameworks, and examines the experiences of IT countries, Chile, Peru, and Uruguay to help distill lessons for CADR. It also constructs an index to measure the relative strength of the monetary policy framework of CADR countries.
    Keywords: Central America , Central banks , Chile , Cross country analysis , Inflation targeting , Monetary policy , Peru , Uruguay ,
    Date: 2011–10–26
  4. By: Monique Reid; Stan Du Plessis
    Abstract: Central bank communication is widely recognised as crucial to the implementation of monetary policy. This communication should enhance a central bank’s management of the inflation expectations of the financial markets as well as the general public — the latter being a part of the central bank’s audience that has received relatively little research attention. In this paper, the role of the media in transmitting the SARB’s communication to the general public is explored, with the aim of improving our understanding of its impact on the expectations channel of the monetary policy transmission mechanism. A deliberate evaluation of this channel could aid the design of future strategies to communicate with the general public.
    Keywords: South Africa, central bank communication, consistency, monetary policy transmission mechanism, transparent monetary policy.
    JEL: E42 E52 E58
    Date: 2011
  5. By: Belgodere, Antoine
    Abstract: NGDP targeting is presented by some macroeconomists as a good practice for central banks. But what should be the target value? I propose a relevant measure: the Non Increasing Unemployment Rate Of Nominal Growth (NIURONG). I use NIURONG to show how difficult would have been for European Central Bank to implement a relevant monetary policy for each Euro Area country in front of post-2008 economic downturn.
    Keywords: NDGP targeting; monetary policy; Optimal Currency Areas
    JEL: E58
    Date: 2011–11–20
  6. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: As markets deepen and interest elasticities increase it is optimal for emerging markets to shift towards an interest rate instrument since continuing monetization of the economy implies money demand shocks are large. In an extension of the classic instrument choice problem to the case of frequent supply shocks, it is shown the variance of output is lower with the interest rate rather than a monetary aggregate as instrument, if the interest elasticity of aggregate demand is negative, and the interest elasticity of money demand is high or low. It is necessary to design an appropriate monetary policy response to supply shocks. An evaluation of India's monetary policy procedures and of the recent fine-tuning of the liquidity adjustment facility finds them to be in tune with these first principles and in the direction of international best practices. But a survey of country experiences and procedures, and some aspects of the Indian context suggest further improvements.
    Keywords: Monetary policy, operating procedures, instrument problem, LAF
    JEL: E58 E52
    Date: 2011–10
  7. By: Blommestein, Hans J.; Eijffinger, Sylvester C W; Qian, Zongxin
    Abstract: This paper builds a dynamic general equilibrium macro-finance model with two types of borrowers: entrepreneurs who want to produce and gamblers who want to play a lottery. It links central bank's interest rate policy to expected cash flows of both types. This link enables us to study how the interactions between various shocks and different monetary policy rules affect the borrower pool faced by financial intermediaries. We find that when the economy is hit by an expansionary monetary policy shock, the proportion of entrepreneurs in the borrower pool will be persistently lower than the steady state level after a short period. It is lowest when the central bank does not react to output fluctuations. Quite differently, not reacting to output fluctuations avoids a persistent worsening of the borrower pool in the long run if the shock is a bad productivity shock.
    Keywords: Adverse Selection; Financial Crisis; Monetary Policy
    JEL: E44 E52
    Date: 2011–11
  8. By: Stefano Ugolini (Scuola Normale Superiore, Pisa)
    Abstract: The ongoing financial crisis is shaking central bankers’ certainties about their mission, and a rethinking of such mission can greatly benefit from a non-finalistic reassessment of how central banking has evolved over the centuries. This paper does so by taking a functional, instead of an institutional approach. The survey covers the provision of both microeconomic (financial stability) and macroeconomic (monetary stability) central banking functions in the West since the Middle Ages. The existence of a number of important trends (some unidirectional, some cyclical) is underlined. The findings have implications for the current debate on the institutional design of central banking, both in the U.S. and in the eurozone. Historical evidence suggests that neither changes in the organizational model of central banks nor government deficit monetization should necessarily be seen as evil; what is crucial to the success of any solution, is that the institutional agreement backing the existence of money-issuing organizations must be credible. The appendix provides a case study on Norway.
    Keywords: Central banking, monetary policy, financial stability, institutional design
    JEL: E42 E50 G21 N10 N20
    Date: 2011–11–21
  9. By: Alvarez, Fernando E; Lippi, Francesco
    Abstract: We present a monetary model in the presence of segmented asset markets that im- plies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties. The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand.
    Keywords: money demand
    JEL: E5
    Date: 2011–11
  10. By: Ilgmann, Cordelius; Menner, Martin
    Abstract: Given the renewed interest in negative interest rates as a means for overcoming the zero bound on nominal interest rates, this article reviews the history of negative nominal interest rates and gives a brief survey over the current proposals that received popular attention in the wake of the financial crisis of 2007/08. It is demonstrated that taxing money proposals have a long intellectual history and that instead of being the conjecture of a monetary crank, they are a serious policy proposal. In a second step the article points out that, besides the more popular debate on a Gesell tax as a means to remove the zero bound on nominal interest rates, there is a class of neoclassical search-models that advocates a negative tax on money as efficiency enhancing. This strand of the literature has so far been largely ignored by the policy debate on negative interest rates. --
    Keywords: negative interest rates,history of economic thought,Silvio Gesell,zero bound,search-theoretical models,monetary policy
    Date: 2011
  11. By: Alina Barnett; Martin Ellison
    Abstract: Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy. This paper is especially interested in how a policymaker can themselves learn by disinflating. The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation. We build a model where both the policymaker and private agents learn, and ask what happens if the poicymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation. In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level. The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker’s mandate.
    Keywords: Disinflation, Escape dynamics, Learning, Monetary policy
    JEL: D83 E52 E58
    Date: 2011
  12. By: Fabian Valencia
    Abstract: This paper develops a model to assess how monetary policy rates affect bank risk-taking. In the model, a reduction in the risk-free rate increases lending profitability by reducing funding costs and increasing the surplus the monopolistic bank extracts from borrowers. Under limited liability, this increased profitability affects only upside returns, inducing the bank to take excessive leverage and hence risk. Excessive risk-taking increases as the interest rate decreases. At a broader level, the model illustrates how a benign macroeconomic environment can lead to excessive risk-taking, and thus it highlights a role for macroprudential regulation.
    Keywords: Monetary policy , Bank rates , Profits , Interest rates on loans , Interest rates on deposits , Credit risk , Bank supervision ,
    Date: 2011–10–25
  13. By: Daniel Stavárek (Silesian University, School of Business Administration)
    Abstract: Two forms of asymmetry in the exchange rate volatility are examined in this paper. We analyze four currencies of new EU member states, two currencies of non euro area old EU members, US dollar and Swiss franc against the euro during the period financial crisis. We apply a modified TARCH model on data grouped into four phases of the financial crises differing in intensity and market sentiment. The results suggest that the exchange rates usually shared a similar trend in volatility. The presence of asymmetric attributes of the exchange rate volatility was relatively common. Similar symptoms of asymmetry were registered mainly in the new EU member states and Sweden. Appreciation movements seem to have significantly different effects on volatility than the depreciation movements of equal size (first form of asymmetry) particularly during the phases of crisis initialization and culmination. By contrast, a significant impact of divergence from the target exchange rate on the volatility (second form of asymmetry) was revealed principally during the crisis stabilization.
    Keywords: exchange rate volatility, asymmetry, TARCH model, financial crisis
    JEL: F31
    Date: 2011–11
  14. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: The currency markets have been extremely disturbed for the last three months. The period witnessed a major strengthening of the US dollar in September, then the European currency crisis, a recovery of the euro when the markets believed that the crisis was being controlled, and then a rebound of the dollar. In view of these developments, those who follow currency movements need a new guide as to how the current values of currencies compare to our estimates of fundamental equilibrium exchange rates (FEERs). The first section is devoted to a brief exposition of the main changes that have occurred since April, which our previous publication used as the benchmark. The second section updates information on the levels of effective exchange rates consistent with the FEER targets identified in our most recent estimates (Cline and Williamson 2011), as well as the FEER-consistent dollar rates as of late October. The third section steps outside our normal frame of reference in order to make some comments about the situation within Europe in view of the sovereign debt crisis currently raging there.
    Date: 2011–11
  15. By: Marcos Poplawski-Ribeiro; Carlos Caceres; Darlena Tartari
    Abstract: This paper analyses inflation dynamics in the Central African Economic and Monetary Community (CEMAC) using a constructed dataset for country-specific commodity price indices and panel cointegrated vector autoregressive (VAR) models. Imported commodity price shocks are significant in explaining inflation in the region. Governments are another driving force of inflation dynamics mainly through controlled prices and the role of capital expenditure in domestic activity. In most CEMAC countries, the largest effect of global food and fuel prices occurs after four or five quarters in noncore inflation and then decays substantially over time. Second-round effects are significant only in Cameroon and to a lesser extent in the Republic of Congo.
    Keywords: Central Africa , Central African Economic and Monetary Community , Commodity price fluctuations , Commodity prices , Cross country analysis , Economic models , Energy prices , External shocks , Food imports , Government expenditures , Imports , Inflation , Price controls ,
    Date: 2011–10–07
  16. By: Jun Il Kim; Kazuko Shirono; Era Dabla-Norris
    Abstract: This paper develops a cost-benefit approach that helps to quantify the optimal level of international reserves in low-income countries, focusing on the role of reserves in preventing and mitigating absorption drops triggered by large external shocks. The approach is applied to a sample of 49 LICs over the period 1980-2008 to yield estimates of the likelihood and severity of a crisis. The calibration results suggest that the standard metric of three months of imports is inadequate for countries with fixed exchange rate regimes. The results also highlight the role of overall policy frameworks and availability of Fund-support in determining optimal reserve levels, raising questions about the uniform applicability of standard rules of thumb across countries.
    Keywords: Economic models , External shocks , Financial crisis , Low-income developing countries , Reserves , Reserves adequacy ,
    Date: 2011–10–27
  17. By: Taya Dumrongrittikul
    Abstract: We examine the response of real exchange rates to shocks in real exchange rate determinants, a monetary policy shock, and a fiscal policy shock in 30 countries over the period 1970-2008. The country set is divided into 4 groups - European, developed-country, Asian developing-country, and non Asian developing-country groups. We propose and apply a new approach, i.e. we employ a panel Bayesian structural vector error correction model, and we impose sign restrictions with a penalty-function approach to identify the shocks. We find that most of our impulse response analysis is in line with economic theories. Specifically, there is strong evidence that trade liberalization generates a real depreciation and an increase in government spending leads to a real appreciation over the long run. We also find that a contractionary monetary policy shock has only short-run impacts on real exchange rates, corresponding to the long-run neutrality of monetary policy. The responses to a productivity shock are interesting, i.e. productivity growth in traded sectors has no effect on the real exchange rate of the Asian developing-country group, and it leads to a long-run real appreciation in the non Asian developing-country group. In contrast, this shock causes a real depreciation in the European country group over the long run. Variance decomposition suggests that international trade policy contributes the most to real exchange rate movements in most country groups, with the exception of the non Asian developing-country group, for which fiscal policy via government spending seems to be the most important.
    Keywords: Real exchange rate, Vector error correction model, Monetary policy shocks, Sign restriction, Penalty function, Identification
    JEL: C33 C51 E52 F31
    Date: 2011–11–10
  18. By: Khan , Rana Ejaz Ali; Hye, Qazi Muhammad Adnan
    Abstract: Literature in economics has identified many channels through which the financial liberalization may affect demand for money. There are evidences of stability as well as instability of demand for money due to financial development for developing economies. The objective of the current study is to examine the effect of financial liberalization on demand for money in Pakistan, i.e. whether financial liberalization has affected the demand for money or not. The issue is important as stable demand for money function is a prerequisite for formulating and operating monetary policy. To achieve the objective JJ cointegration and auto regressive distributed lag (ARDL) to the cointegration is employed to estimate the long-run equilibrium relationship between broad money M2 and composite financial liberalization index along with other determinants of demand for money like gross domestic product, real deposit rate and exchange rate. In order to assess the stability of the model, the parameter constancy tests, i.e. recursive residuals, CUSUM and CUSUMSQ tests have been applied. The empirical results indicated that for broad money, there exists long-run money demand function. The financial liberalization, gross domestic product and real deposit rate positively affect the demand for money in the long as well as short-run.
    Keywords: Demand for money; Financial liberalization; Real deposit rate; Financial reforms; Pakistan; ARDL
    JEL: E58 O53 E52 F31 E41
    Date: 2011–03–01
  19. By: Shruti Tripathi (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper examines how relative price shocks can affect the price level and then inflation. Using Indian data we find: (i) price increases exceed price decreases. Aggregate inflation depends on the distribution of relative price changes-inflation rises when the distribution is skewed to the right, (ii) such distribution based measures of supply shocks perform better than traditional measures, such as prices of energy and food. They moderate the price puzzle, whereby a rise in policy rates increases inflation, and are significant in estimations of New Keynesian aggregate supply, (iii) an average Indian firm changes prices about once in a year; the estimated Calvo parameter implies half of Indian firms reset their prices in any period, and 66 percent of firms are forward looking in their price setting. The implication of these estimated real and nominal price rigidities for policy are drawn out.
    Keywords: WPI, NKPC, asymmetric, stickiness, size, frequency, inflation
    JEL: E31 E12 C32
    Date: 2011–10
  20. By: Dick, Christian D.; MacDonald, Ronald; Menkhoff, Lukas
    Abstract: This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum. --
    Keywords: Exchange Rate Determination,Individual Expectations,Macroeconomic Fundamentals
    JEL: F31 F37 E44
    Date: 2011
  21. By: Morgan, Peter J. (Asian Development Bank Institute)
    Abstract: The adoption of quantitative easing (QE) policy by the United States (US) Federal Reserve Bank since early 2009 has aroused widespread concerns in Asia and elsewhere regarding its possible impact in terms of the weakening of the US dollar and stimulating capital outflows to emerging economies that might increase inflationary pressures in them. This report investigates possible impacts of US quantitative easing policy on Asian economies and financial markets.
    Keywords: quantitative easing; federal reserve bank; asian economies; emerging asia; financial markets
    JEL: E43 E52 E58 F31 F32
    Date: 2011–11–18
  22. By: Cheng Hoon Lim; Alejo Costa; Torsten Wezel; Akira Otani; Francesco Columba; Mustafa Saiyid; X. Wu; Piyabha Kongsamut
    Abstract: This paper provides the most comprehensive empirical study of the effectiveness of macroprudential instruments to date. Using data from 49 countries, the paper evaluates the effectiveness of macroprudential instruments in reducing systemic risk over time and across institutions and markets. The analysis suggests that many of the most frequently used instruments are effective in reducing pro-cyclicality and the effectiveness is sensitive to the type of shock facing the financial sector. Based on these findings, the paper identifies conditions under which macroprudential policy is most likely to be effective, as well as conditions under which it may have little impact.
    Keywords: Banks , Capital inflows , Credit risk , Cross country analysis , Developed countries , Emerging markets , Exchange rate regimes , Financial risk , Financial sector , Fiscal policy , Liquidity , Monetary policy ,
    Date: 2011–10–19
  23. By: Ivo Arnold; Clemens Kool; Katharina Raabe
    Abstract: We investigate the industry dimension of bank lending and its role in the monetary transmission mechanism in Germany. We use dynamic panel methods to estimate bank lending functions for eight industries for the period 1992-2002. Our evidence shows that bank lending growth predominantly depends on the industry composition of bank loan portfolios, both through the underlying cyclical fluctuations in industry-specific bank credit demand and through industry-specific credit supply effects.
    Keywords: Monetary policy transmission, credit channel, industry structure, dynamic panel data
    JEL: C23 E52 G21 L16
    Date: 2011–11
  24. By: Barry Eichengreen; Hui Tong
    Abstract: We examine the impact of renminbi revaluation on firm valuations, considering two surprise announcements of changes in China’s exchange rate policy in 2005 and 2010 and data on 6,050 firms in 44 countries. Renminbi appreciation has a positive effect on firms exporting to China but little positive or even a negative impact on those providing inputs for China’s processing exports. Stock prices rise for firms competing with China in their home market while falling for firms importing Chinese products with large imported-input content. Renminbi appreciation also reduces the valuation of financially-constrained firms, particularly in more financially integrated countries.
    JEL: F0 F3 F30 F31
    Date: 2011–11
  25. By: Wei Dong; Deokwoo Nam
    Abstract: When prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate. Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. The authors collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model’s predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. To account for small-sample bias and data-mining issues, inference is drawn from bootstrap distributions and tests of superior predictive ability (SPA) are performed. The slope coefficients and R-squares increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The out-of-sample SPA tests suggest that the authors’ price-misalignment model outperforms random walks either with or without drift for the U.S. dollar vis-à-vis the Japanese yen at the 5 per cent level of significance over long horizons.
    Keywords: Exchange rates; International topics
    JEL: F31 F47
    Date: 2011
  26. By: Selim Elekdag; Yiqun Wu
    Abstract: Episodes of rapid credit growth, especially credit booms, tend to end abruptly, typically in the form of financial crises. This paper presents the findings of a comprehensive event study focusing on 99 credit booms. Loose monetary policy stances seem to have contributed to the build-up of credit booms across both advanced and emerging economies. In particular, domestic policy rates were below trend during the pre-peak phase of credit booms and likely fuelled macroeconomic and financial imbalances. For emerging economies, while credit booms are associated with episodes of large capital inflows, international interest rates (a proxy for global liquidity) are virtually flat during these periods. Therefore, although external factors such as global liquidity conditions matter, and possibly increasingly so over time, domestic factors (especially monetary policy) also appear to be important drivers of real credit growth across emerging economies.
    Keywords: Asia , Credit expansion , Monetary policy , Liquidity , Capital inflows , Financial crisis , Interest rates , Bank soundness , Corporate sector , International liquidity ,
    Date: 2011–10–20
  27. By: Cavallari Lilia
    Abstract: This paper provides a novel theory of the international business cycle grounded on firms entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry can generate fluctuations in consumption, output and investment as large as those observed in the data while at the same time providing positive international comovements and highly volatile terms of trade. The capacity to capture these stylized facts of the international business cycle overcomes the well-known difficulties of the standard open economy real business cycle model in this regard. Numerical simulations show that floating regimes exacerbate counter-cyclical markup movements. Fixed regimes, on the other hand, lead to an increase in the volatility of?firm entry.
    Keywords: product variety, firm entry, international business cycle, monetary policy, interest rate rules, exchange rate regimes
    JEL: E31 E32 E52
    Date: 2011–11
  28. By: Rajan, Ramkishen (Asian Development Bank Institute)
    Abstract: This paper revisits the issue of exchange rate regimes in emerging Asia. It is divided into two main parts. The first part compares de jure and de facto exchange rate regimes in Asia over the decade 1999–2009. The second part focuses on the sustained stockpiling of reserves in developing and emerging Asian economies since 2000 (interrupted only briefly by the global financial crisis). The paper concludes with some observations on the management of Asian currencies in light of the global financial crisis and concerns about global imbalances.
    Keywords: exchange rate regimes; exchange rate management; emerging asia; global financial crisis; global imbalances
    JEL: F14 F31 F41
    Date: 2011–11–18
  29. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: At the recent Cannes G-20 summit, the international monetary system (IMS) reform agenda, along with a number of other important issues, was hijacked by the European crisis. Nevertheless, the G-20 countries and various international institutions conducted an intensive process of review and discussion of the IMS via conferences, working groups, and reports. A year ago French President Sarkozy and other French government officials set the agenda for IMS reform to include five elements: surveillance of the global economy and financial system, the international lender-of-last-resort mechanisms (global financial safety nets), the management of global capital flows, reserve assets and reserve currencies, and IMS governance. Little progress was made on most of these topics. On surveillance there was only one surprise in the form of commitments by a few countries to allow their automatic stabilizers to operate in the current slowdown; on the lender-of-last-resort issues, there will only be marginal steps forward; and on the management of capital flows, the progress that has been achieved over the past several years has been loosely codified, which is a substantive achievement. Overall, the G-20 summit at Cannes resulted in some useful mutual education but not much in terms of concrete accomplishments.
    Date: 2011–11
  30. By: Tao Sun; L. Effie Psalida
    Abstract: The resumption of strong capital flows into emerging markets in mid-2009 brought back the debate over whether pull or push factors are the main determinants. This paper, using panel specifications with alternative measures of global liquidity, asks the question whether G-4 liquidity expansion spills over to the rest of the world. The paper finds strong positive links between G-4 liquidity expansion and asset prices, such as equities, in the liquidity receiving economies, which indicates that the push factor plays an important role in asset prices. Liquidity also has a strong positive link with the accumulation of official reserves and with equity portfolio inflows in receiving economies. Moreover, the association between excess equity returns, excess credit growth, and global liquidity has implications for rising risks to financial stability in the receiving economies.
    Keywords: Capital inflows , Emerging markets , Exchange rate regimes , Exchange rates , Liquidity , Spillovers ,
    Date: 2011–10–17
  31. By: Nicos Christodoulakis (Athens University of Economics and Business); Vassilis Sarantides (Athens University of Economics and Business)
    Abstract: A few years after the establishment of the European Economic and Monetary Union (EMU), large asymmetries emerged in the trade balances and the current accounts of the member-states. A divide seems to separate two groups in the euro area, one with the northern countries achieving external surpluses and the other including the southern countries with large external deficits. We argue that a crucial factor in shaping productivity, and consequently affecting competitiveness and the external position of the economy, is the size and composition of Foreign Direct Investment (FDI) and find that the northern countries received more total FDI than the southern group. Moreover, the southern countries attracted more investment in real estate rather than the productive sector. Focusing on ten euro area economies over the period 1980-2009, we establish a positive relationship between FDI flows and trade balances in the northern countries, in contrast to a negative one for the southern group. Using industry-level data, we also establish a positive (negative) long-run relationship between FDI in the manufacturing (non-manufacturing) sector and the trade balance for the northern (southern) countries.
    Keywords: Euro area; trade balance; Foreign Direct Investment (FDI)
    JEL: F15 F21
    Date: 2011–06
  32. By: James R. Lothian (Fordham University); John Devereux (Queens College, CUNY)
    Abstract: This paper examines exchange-rate and price-level data for the long period 1590-2009 for the Netherlands and the United Kingdom (earlier the Dutch Republic and England), countries that at various times over this near four century span have differed substantially in terms of the pace at which their economies were developing, have operated under a variety of exchange rate regimes, and have been subjected to an extremely wide variety of real shocks. The principal conclusion of this study is the resiliency of the simple purchasing-power-parity model and of the law of one price at the microeconomic level. Both take some heavy blows during this close to four-century long sample period. In the end, however, they emerge surprisingly unscathed. Real factors at times appear to have had substantial effects on real exchange rates and hence PPP, but such effects ultimately dissipate. As a long-run equilibrium condition, PPP holds up remarkably well.
    Date: 2011–07
  33. By: Luis Ignacio Jácome; Erlend Nier; Jacek Osinski; Pamela Madrid
    Abstract: A number of countries are reviewing their institutional arrangements for financial stability to support the development of a macroprudential policy function. In some cases, this involves a rethink of the appropriate institutional boundaries between central banks and financial regulatory agencies, or the setting up of dedicated policymaking committees. In others, efforts are underway to enhance cooperation within the existing institutional structure. Against this background, this paper provides basic guidance for the design of effective arrangements, in a manner that can provide a framework for country-specific advice. After reviewing briefly the main institutional elements of existing and emerging macroprudential policy frameworks across countries, the paper identifies stylized institutional models based on key features that distinguish institutional arrangements. It develops criteria to assess the effectiveness of models, examines the strengths and weaknesses of models against these criteria, and explores ways to improve existing setups. The paper finally distills lessons and sets out desired principles for effective macroprudential policy arrangements.
    Keywords: Cross country analysis , Economic models , Fiscal policy , Governance , Monetary policy ,
    Date: 2011–10–31
  34. By: Franz Ruch; Dirk Bester
    Abstract: This paper studies volatility comovement in world equity markets between 1994 and 2008. Global volatility factors are extracted from a panel of monthly volatility proxies relating to 25 developed and 20 emerging stock markets. A dynamic factor model (FM) is estimated using two-year rolling window regressions. The FMÂ’s time-varying variance shares of global factors map variations in volatility comovement over time and across countries. The results indicate that global volatility linkages are particularly strong during Â…nancial crises in Asia (1997-8), Russia (1998), and the United States (2007-8). Emerging markets are less syncrhonised with world volatility than are developed markets. In particular, we observe decoupling between emerging and world volatilities between 2001 and 2007. Recoupling occurs during 2008, thus identifying emerging market investments as a temporary hedge against volatility spillovers from the US subprime crisis.
    Keywords: Singular Spectrum Analysis, Core Inflation, Non-parametric estimation
    JEL: C41 C14 E31 E37 N17
    Date: 2011
  35. By: Seongman Moon (Universidad Carlos III de Madrid); Carlos Velasco (Universidad Carlos III de Madrid)
    Abstract: This paper shows that the estimates in the spot return regression in the foreign exchange markets may not convey valid information if exchange rates are generated from the present value model with the near unit discount factor and unit root fundamentals. The main reason is that the present value model generates a large magnitude of a bias in the estimation of the regression accompanied by a wide distribution of the estimates. On the other hand, the implications of the present value model for the volatility and persistence of the spot return and the forward premium are consistent with the data.
    Keywords: near-unit discount factor, unit root fundamentals, contemporaneous correlation, present value model.
    JEL: C12 C14 F31
    Date: 2011–09
  36. By: M. BARLET (Drees); M.-É. CLERC (Insee); M. GARNERO (Drees); V. LAPÈGUE (Insee); V. MARCUS (SGDD)
    Abstract: This paper presents the main improvements carried out to the macroeconometric model MZE since its creation in 2003. We have back-calculated the series over the period 1980-1995, in order to make the model more stable. To our knowledge, this paper is the first application of Kllians (1998) method to estimate coefficients and centered confidence intervals for an operational macroeconometric model. The new coefficients enable to get less inflationary responses to macroeconomic shocks than the previous version of MZE. The study is more nuanced and rigorous thanks to the confidence intervals around the main scenarios. It is thus possible to check the significance of the results at any horizon. At last, the new version of MZE enables to find conventional responses to international shocks, like the inflationary effect of a rise in oil prices or the delayed impact of a depreciation of the euro on the improvement of the trade balance.
    Keywords: Macroeconometric modelling, Forecasting, Confidence interval, Bootstrap
    JEL: C3 C5 E1 E2
    Date: 2011

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