nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒12‒19
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The International Monetary System: Living with Asymmetry By Obstfeld, Maurice
  2. Bank of Japan’s Monetary Easing Measures: Are They Powerful and Comprehensive? By W. Raphael Lam
  4. External Shocks and Monetary Policy in a Small Open Oil Exporting Economy By Jean Pierre Allegret; Mohamed Tahar Benkhodja
  5. Monetary Policy and Risk-Premium Shocks in Hungary: Results from a Large Bayesian VAR By Alina Carare; Adina Popescu
  6. Optimal disinflation under learning By Timothy Cogley; Christian Matthes; Argia M. Sbordone
  7. Monetary Policy Transmission in Ghana: Does the Interest Rate Channel Work? By Arto Kovanen
  8. Monetary Credibility Effects on Inflation Dynamics: A Macrohistorical Case Study. By Claude Diebolt; Mamoudou Toure; Jamel Trabelsi
  9. Does Money Matter for Inflation in Ghana? By Arto Kovanen
  10. The financial accelerator and monetary policy rules By Gunes Kamber; Christoph Thoenissen
  11. Testing the Monetary Model for Exchange Rate Determination in South Africa: Evidence from 101 Years of Data By Riane de Bruyn; Rangan Gupta; Lardo Stander
  12. Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk By Blommestein, H.J.; Eijffinger, S.C.W.; Qian, Z.
  13. Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function By Jens Klose
  14. On the Stability of Money Demand in Ghana: A Bounds Testing Approach By Jihad Dagher; Arto Kovanen
  15. International transmission of shocks, money illusion and the velocity of money By Sousa, Teresa
  16. Temporary Bubbles and Discount Window Policy By Tarishi Matsuoka
  17. Monetary regime switches and unstable objectives By Davide Debortoli; Ricardo Nunes
  18. What Can Low-Income Countries Expect from Adopting Inflation Targeting? By Edward R. Gemayel; Sarwat Jahan; Alexandra Peter
  19. Can Emerging Market Central Banks Bail Out Banks? A Cautionary Tale from Latin America By Luis Ignacio Jácome; Tahsin Saadi Sedik; Simon Townsend
  20. Detecting multiple breaks in long memory: The case of US inflation By Hassler, Uwe; Meller, Barbara
  21. Japanfs Deleveraging since the 1990s and the Bank of Japanfs Monetary Policy: Some Comparisons with the U.S. Experience since 2007 By Kazuo Ueda
  22. Inflation Dynamics in Asia: Causes, Changes, and Spillovers from China By D. Filiz Unsal; Carolina Osorio
  23. The role of expectations in U. S. inflation dynamics By Jeffrey C. Fuhrer
  24. Defending Against Speculative Attacks: Reputation, Learning, and Coordination By Chong Huang
  25. Bank Leverage Regulation and Macroeconomic Dynamics By Ian Christensen; Césaire Meh; Kevin Moran
  26. "$29,000,000,000,000: A Detailed Look at the Fed's Bailout by Funding Facility and Recipient" By James Felkerson
  27. Economic literacy and inflation expectations: evidence from a laboratory experiment By Mary A. Burke; Michael Manz
  28. Price-Level Targeting - A Real Alternative to Inflation Targeting? By Jiri Bohm; Jan Filacek; Ivana Kubicova; Romana Zamazalova
  29. Effectiveness of Capital Controls in Selected Emerging Markets in the 2000s By Annamaria Kokenyne; Chikako Baba
  30. Distribution, Domestic Politics and Monetary Cooperation in East Asia By Hamilton-Hart, Natasha
  31. Dynamic Forecasting Rules and the Complexity of Exchange Rate Dynamics By Dewachter, Hans; Houssa, Romain; Lyrio, Marco & Kaltwasser, Pablo Rovira

  1. By: Obstfeld, Maurice
    Abstract: This paper analyzes current stresses in the two key areas that concerned the architects of the original Bretton Woods system: international liquidity and exchange rate management. Despite radical changes since World War II in the market context for liquidity and exchange rate concerns, they remain central to discussions of international macroeconomic policy coordination. To take two prominent examples of specific (and related) coordination problems, liquidity issues are paramount in strategies of national self-insurance through foreign reserve accumulation, while recent attempts by emerging market economies (EMEs) to limit real currency appreciation have relied heavily on nominal exchange rate management. A central message is that a diverse set of potential asymmetries among sovereign member states provides fertile ground for a variety of coordination failures. The paper goes on to discuss institutions and policies that might mitigate some of these inefficiencies.
    Keywords: currency wars; exchange rates; global imbalances; international monetary system; liquidity; Triffin dilemma
    JEL: F32 F33 F36 F42 G15
    Date: 2011–12
  2. By: W. Raphael Lam
    Abstract: With policy rates near the zero bound, the Bank of Japan (BoJ) has introduced a series of unconventional monetary easing measures since late 2009 in response to lingering deflation and a weakening economy. These measures culminated in a new Asset Purchase Program under the Comprehensive Monetary Easing (CME) which differs from typical quantitative easing in other central banks by including purchases of risky asset in an effort to reduce term and risk premia. This note assesses the impact of monetary easing measures on financial markets using an event study approach. It finds that the BoJ’s monetary easing measures has had a statistically significant impact on lowering bond yields and improving equity prices, but no notable impact on inflation expectations.
    Keywords: Capital markets , Central banks , Financial assets , Monetary policy , Private sector ,
    Date: 2011–11–15
  3. By: Stefano D'Addona (University of Roma Tre); Ilaria Musumeci (University of Roma Tre)
    Abstract: We analyze the current state of the monetary integration in Europe focusing on the UK position regarding the European Monetary Union. The interest rates decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor Rule. The comparison of the monetary conducts provides a useful feedback when looking for the differences claimed by the British government as motivating the UK refusal to join the European Monetary Union. Testing for a forward looking behavior and possible asymmetries in the policy responses, we show evidence supporting the opt-out by the UK monetary authorities.
    Keywords: Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing.
    JEL: E32 E52
    Date: 2011
  4. By: Jean Pierre Allegret; Mohamed Tahar Benkhodja
    Abstract: To investigate the dynamic effect of external shocks on an oil exporting economy, we estimate, using Bayesian approach, a DSGE model based on the features of the Algerian economy. The main purpose is to investigate the dynamic effect of four external shocks (oil price shock, USD/EUR exchange rate shock, international inflation shock and international interest rate shock) and to examine the appropriate monetary policy strategy for Algerian economy, given its structural characteristics and the pattern of the external shocks. We analyze the impulse response functions of our external shocks according to alternative monetary rules. The welfare cost associated with each monetary policy rule has been considered. Our main findings show that, over the period 1990Q1-2010Q4, core inflation monetary rule allows better to stabilize both output and inflation. This rule also appears to be the best way to improve a social welfare.
    Keywords: Monetary policy, external shocks, oil exporting economy, Algeria, DSGE model.
    JEL: E3 E5 F4
    Date: 2011
  5. By: Alina Carare; Adina Popescu
    Abstract: We document the transmission of monetary policy and risk-premium shocks in Hungary, by applying recent advances in the Bayesian estimation of large VAR models. The method allows extracting information from over 100 series, opening the "black box" of the transmission mechanism to provide the most comprehensive description to date of the impact of these two shocks on the economy under the inflation-targeting regime. We find novel evidence that most of the channels of transmission are operational in Hungary, in spite of large liability euroization and high foreign ownership of banks and corporations. Due to financial stability concerns, monetary policy responds procyclically to risk-premium shocks. We also find that the use of such a large panel of data improves inflation forecasting performance over smaller models and renders this model suitable for policy purposes.
    Keywords: Central banks , External shocks , Hungary , Inflation targeting , Monetary policy , Monetary transmission mechanism , Risk premium ,
    Date: 2011–11–08
  6. By: Timothy Cogley; Christian Matthes; Argia M. Sbordone
    Abstract: We model transitional dynamics that emerge after the adoption of a new monetary policy rule. We assume that private agents learn about the new policy via Bayesian updating, and we study how learning affects the nature of the transition and the choice of a new rule. Temporarily explosive dynamics can emerge when there is substantial disagreement between actual and perceived policies. These dynamics make the transition highly volatile and dominate expected loss. The emergence of temporarily explosive paths depends more on uncertainty about policy-feedback parameters than about the long-run inflation target. For that reason, the central bank can at least achieve low average inflation. Its ability to move feedback parameters away from initial beliefs, however, is more constrained.
    Keywords: Monetary policy ; Bayesian statistical decision theory ; Inflation (Finance)
    Date: 2011
  7. By: Arto Kovanen
    Abstract: This paper analyzes interest rate pass-through in Ghana. Time series and bank-specific data are utilized to highlight linkages between policy, wholesale market, and retail market interest rates. Our analysis shows that responses to changes in the policy interest rate are gradual in the wholesale market. Prolonged deviation in the interbank interest rate from the prime rate illustrate the challenges the Bank of Ghana faces when targeting a short-term money market interest rate. Asymmetries in the wholesale market adjustment possibly relate to monetary policy signaling, weak policy credibility, and liquidity management. In the retail market, pass-through to deposit and lending interest rates is protracted and incomplete.1
    Keywords: Banks , Central bank policy , Financial systems , Interest rates , Monetary policy ,
    Date: 2011–11–23
  8. By: Claude Diebolt (BETA/CNRS, Université de Strasbourg & Humboldt-Universität zu Berlin.); Mamoudou Toure (BETA/CNRS, Université de Strasbourg.); Jamel Trabelsi (BETA/CNRS, Université de Strasbourg.)
    Date: 2012
  9. By: Arto Kovanen
    Abstract: Money has only limited information value for future inflation in Ghana over a typical monetary policy implementation horizon (four to eight quarters). On the other hand, currency depreciation and demand pressures (as measured by the output gap) are shown to be important predictors of future price changes. Inflation inertia is high and inflation expectations are largely based on backward-looking information, suggesting that inflation expectations are not well anchored and hence more is needed to strengthen the credibility of Ghana’s inflation-targeting regime.1
    Keywords: Capital markets , Cross country analysis , Demand for money , Economic models , Emerging markets , Inflation targeting , Interest rates , Monetary policy ,
    Date: 2011–11–22
  10. By: Gunes Kamber; Christoph Thoenissen
    Abstract: The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al. (1999), is analyzed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-speci fic volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.
    Date: 2011–12
  11. By: Riane de Bruyn (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Lardo Stander (Department of Economics, University of Pretoria)
    Abstract: Evidence in favour of the monetary model of exchange rate determination for the South African Rand is at best mixed. A co-integrating relationship between the nominal exchange rate and fundamentals forms the basis of the monetary model. With the econometric literature suggesting that it is the span of the data, and not the frequency, that determines the power of the co-integration tests, and all the studies on South Africa using short-span data of the post-Bretton Woods era, we decided to test the long-run monetary model of exchange rate determination for the South African Rand relative to the US Dollar, using annual data from 1910 – 2010. The results provide some support for the monetary model in the sense that long-run co-integration is found between the nominal exchange rate and the output and money supply deviations. However, the theoretical restrictions required by the monetary model are rejected. A vector errorcorrection model identifies both the nominal exchange rate and the monetary fundamentals as the channel for the adjustment process of deviations from the long-run equilibrium exchange rate. A subsequent comparison of nominal exchange rate forecasts based on the monetary model with those of the random walk model, suggests that the forecasting performance of the monetary model is superior.
    Keywords: Nominal exchange rate, monetary model, long-span data, forecasting
    JEL: C22 C32 C53 F31 F47
    Date: 2011–12
  12. By: Blommestein, H.J.; Eijffinger, S.C.W.; Qian, Z. (Tilburg University, Center for Economic Research)
    Abstract: This paper constructs a macro-finance model with two types of borrowers: entrepreneurs who engage in productive activities and gamblers who play in lotteries. It links a central bank's interest rate policy to expected cash ows of both types of borrowers. Via this link we study how the interactions between various shocks and different monetary policy rules affect the quality of the borrower pool faced by financial intermediaries. We find that if the economy is hit by an expansionary monetary policy shock, in the long run the proportion of entrepreneurs in the borrower pool will be persistently lower than the steady state level. This worsening of the borrower pool is more serious if the central bank does not react to output uctuations. By contrast, not reacting to output uctuations in case of a negative productivity shock avoids a persistent worsening of the borrower pool in the long run.
    Keywords: Monetary Policy;Adverse Selection;Financial Crisis
    JEL: E44 E52 G01
    Date: 2011
  13. By: Jens Klose
    Abstract: This paper uses two-dimensional asymmetric Taylor reaction functions for 16 OECD-countries to account for different reactions to the inflation rate and output by central banks before or after an election of the fiscal authorities in the respective country. Important for such an investigation is not only the period before or after an election takes place but also whether the inflation rate and output are below or above their target or potential value because this information shows whether the central bank systematically deviates from the Taylor rule. Using a Panel-GMM we observe that in the OECD-countries there are political business cycles in monetary policy with respect to the inflation and output response. However, the supporting time horizon differs between both exogenous indicators and state of variables.
    Keywords: Political business cycle; monetary policy; Taylor rule; asymmetries; Panel- GMM
    JEL: E32 E43 E52 E58
    Date: 2011–10
  14. By: Jihad Dagher; Arto Kovanen
    Abstract: This paper adopts the bounds testing procedure developed by Pesaran et al. (2001) to test the stability of the long-run money demand for Ghana. The results provide strong evidence for the presence of a stable, well-identified long-run money demand during a period of substantial changes in the financial markets. The empirical evidence points to complex dynamics between money demand and its determinants while suggesting that deviations from the equilibrium are rather short-lived.1
    Keywords: Capital markets , Demand for money , Inflation targeting , Monetary policy ,
    Date: 2011–11–22
  15. By: Sousa, Teresa
    Abstract: Money illusion is frequently invoked and frequently resisted by economists. Resisted as it contradicts the maximizing paradigm of microeconomic theory and invoked since a tendency to think in nominal rather than real terms becomes evident in the behavior of agents. This paper rationalizes money illusion in an stylized open economy model considering that private agents learn nominal aggregate demand at a level different from the one imposed by rationality. We find that the welfare effects of a productivity shock are increasing in the degree of money illusion and decreasing in the degree of openness of the economy. Furthermore we introduce a velocity of money shock revisiting the Quantity Theory of Money within the open economy micro-founded framework. An incomplete information game between Home and Foreign policymakers with monetary policy rules is developed, where sudden unstable financial conditions arise in one country, to find that allowing for velocity shocks reinforces the need for optimal monetary policy rules and to open the economies in order to avoid welfare costs. --
    Keywords: Optimal monetary policy,open economy,international transmission mechanism,money illusion,velocity of money,nominal rigidities
    JEL: E31 E52 F42
    Date: 2011
  16. By: Tarishi Matsuoka (Japan Society for the Promotion of Science and Graduate School of Economics, Kyoto University)
    Abstract: This paper presents a monetary growth model where limited communication and random relocation create endogenous roles for money and banks. The economy can exhibit two different regimes. In the first, money is a dominated asset and banks economize cash reserves. In the second, money has the same return as capital and banks use the reserves as storage. I show that the economy can experience switching between the two regimes and that cyclical bubbles can occur. In addition, discount window lending is considered as a counter-bubble policy. I also show that the discount window can simultaneously lead the economy to the social optimum and stabilize bubbly fluctuations when the economy is dynamically inefficient.
    Keywords: overlapping generations, temporary bubbles, discount window
    JEL: D90 E32 E44
    Date: 2011–12
  17. By: Davide Debortoli; Ricardo Nunes
    Abstract: Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers' behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.
    Date: 2011
  18. By: Edward R. Gemayel; Sarwat Jahan; Alexandra Peter
    Abstract: Inflation targeting (IT) is a relatively new monetary policy framework for low-income countries (LICs). The limited number of LICs with an IT framework and the short time that has elapsed since the adoption of this framework explains why there are no previous empirical studies on the performance of IT in LICs. This paper has made a first attempt at filling this gap. It finds that inflation targeting appears to be associated with lower inflation and inflation volatility. At the same time, there is no robust evidence of an adverse impact on output. This may explain the appeal of IT for many LICs, where building credibility of monetary policy is difficult and minimizing output costs of reducing inflation is imperative for social and political reasons.
    Keywords: Albania , Armenia , Cross country analysis , Developed countries , Emerging markets , Ghana , Inflation targeting , Low-income developing countries , Monetary policy ,
    Date: 2011–11–30
  19. By: Luis Ignacio Jácome; Tahsin Saadi Sedik; Simon Townsend
    Abstract: This paper investigates whether developing and emerging market countries can implement monetary policies similar to those used by advanced countries during the recent global crisis - injecting significant amounts of money into the financial system without facing major short-run adverse macroeconomic repercussions. Using panel data techniques, the paper analyzes episodes of financial turmoil in 16 Latin America during 1995-2007. The results show that developing and emerging market countries should be cautious because injecting money on a large scale into the financial system may fuel further macroeconomic instability, increasing the chances of simultaneous currency crises.
    Keywords: Banking sector , Cross country analysis , Developing countries , Emerging markets , Financial crisis , Financial systems , Latin America , Monetary policy ,
    Date: 2011–11–08
  20. By: Hassler, Uwe; Meller, Barbara
    Abstract: Multiple structural change tests by Bei and Perron (1998) are applied to the regression by Demetrescu, Kuzin and Hassler (2008) in order to detect breaks in the order of fractional integration. With this instrument we tackle time-varying inflation persistence as an important issue for monetary policy. We determine not only the location and significance of breaks in persistence, but also the number of breaks. Only one significant break in U.S. inflation persistence (measured by the long-memory parameter) is found to have taken place in 1973, while a second break in 1980 is not significant. --
    Keywords: Fractional integration,break in persistence,unknown break point,inflation dynamics
    JEL: C22 E31
    Date: 2011
  21. By: Kazuo Ueda (Faculty of Economics, University of Tokyo)
    Abstract: This paper discusses the backgrounds for the stagnant behavior of the Japanese economy during the last two decades and the failure of the Bank of Japan (BOJ) to turn the economy around. I argue that the policy authorities did not act quickly enough to mitigate the pain of the deleveraging process in the aftermath of the burst of land and stock price bubble in the early 1990s. Thus, the process became overly severe and protracted. The economy increasingly became vulnerable to negative external shocks and the decline in its population. Use of non-conventional monetary policy measures after deflationary expectations became entrenched substantially weakened their power to stimulate the economy. The U.S. economy since 2007 has exhibited many of the features seen for the Japanese economy during the last two decades; hence, the talk of the Japanization of the U.S. economy. There are, however, many dissimilarities as well as similarities between the two episodes. These are also discussed along with the analysis of Japanfs two lost decades.Popular discussions of Japanfs stagnation often focus on persistent deflation. Figure 1 shows core CPI inflation and a representative property price index for Japan and the U.S. since the peak of property prices, with the peak (T=0) assumed to be 1990 for Japan and 2006 for the U.S. In addition, it also plots investment in structures relative to GDP in Japan. Inflation in Japan has been in negative territory since 1998.1 There has been, however, no tendency for the deflation to accelerate. The cumulative decrease in the index since the late 1990s has been only about 5%. Thus, the classic debt-deflation type dynamic has not been a major cause of economic stagnation. In contrast, declines in property prices in Japan since the peak has been large and protracted-cumulating in a 60% decline at the time of writing. They led to significant deleveraging by financial institutions and non-financial corporations, which put downward pressure on aggregate demand for goods and services, especially, investment in structures, the component of aggregate demand most sensitive to property prices. The figure shows that its movements have been highly correlated with those of property prices.2 As may be seen from the figure, this component of aggregate demand alone subtracted about 0.4% per year from GDP growth during the 1990s. Such a negative feedback loop among asset prices, economic activity and, as we discuss below, financial instability has been the key feature of Japanfs stagnation. It is also interesting to note that both CPI inflation and property prices in the U.S. since the recent financial crisis have followed closely that of Japan in the 1990s, but inflation has so far avoided plunging into negative territory. Adjustment in asset prices and real investment were to some extent inevitable given the extent of the excesses created during the bubble period. The deleveraging process, however, became extremely protracted as a result of a forbearance game played by policymakers and financial institutions. Banks kept lending for a while to zombie companies in order to avoid recognition of losses on their balance sheets, and the authority stayed away for years from making the tough decision to recapitalize the banks. This resulted in a huge buildup of bad loans and eventually in a serious credit crunch in the late 1990s, which aggravated the declines in asset prices and deleveraging by banks and nonfinancial corporations. Banks increasingly became risk averse and stopped lending to risky, but promising projects. The economy slowly, but steadily lost momentum and could not grow out of the negative shocks generated by external financial crises in the late 1990s and 2000s, and the declines in its population that started in the 2000s. Deflation of the general price level did play a part in this process as well. It has hindered the effectiveness of monetary easing. This is ironic because monetary policy normally is a tool for avoiding deflation. Either the deleveraging forces outweighed the capacity of monetary policy to stimulate the economy or the BOJ easing came a bit too late. The BOJ tried to reverse the disinflation trend with fairly aggressive rate cuts - a conventional monetary policy tool-- and brought the policy rate to near zero by late 1995, effectively hitting the zero lower bound (ZLB) constraint on interest rates. Deflation, however, developed in response to economic weakness. The real interest rate has stayed at higher levels than desirable, and undermined the power of a zero interest rate to stimulate the economy, although it did not throw the economy into a deflationary spiral. Since the late 1990s, the BOJ has adopted a variety of non-conventional monetary policy measures. They have supported the financial system and prevented deflation from becoming worse, but have not turned the economy around. As I argue below, non-conventional measures work by reducing risk premiums and long-short interest rate spreads. The long period of economic stagnation had lowered these spreads to minimum levels and limited the effectiveness of such measures as was the case for conventional measures. In the following I will describe in more detail the deleveraging experience in Japan and then turn to discussing the experience of the BOJ to turn the economy around. Comparisons with the U.S. experience since 2007 are offered at each stage of the discussion
    Date: 2011–12
  22. By: D. Filiz Unsal; Carolina Osorio
    Abstract: The perception that Asia’s inflation dynamics is driven by idiosyncratic supply shocks implies, as a corollary, that there is little scope for a policy reaction to a build-up of inflationary pressures. However, Asia’s fast growth and integration over the last two decades suggest that the drivers of inflation may have changed, and that domestic demand pressures may now play a larger role than in the past. This paper presents a quantitative analysis of inflation dynamics in Asia using a Global VAR (GVAR) model, which explicitly incorporates the role of regional and global spillovers in driving Asia’s inflation. Our results suggest that over the past two decades the main drivers of inflation in Asia have been monetary and supply shocks, but also that, in recent years, the contribution of these shocks has fallen, whereas demand-side pressures have started to emerge as an important contributor to inflation in Asia.
    Keywords: Asia , China , Commodity prices , Cross country analysis , Demand , Economic models , Inflation , Spillovers ,
    Date: 2011–11–08
  23. By: Jeffrey C. Fuhrer
    Abstract: A growing body of literature examines alternatives to the rational expectations hypothesis in applied macroeconomics. This paper continues this strand of research by examining the role survey expectations play in the inflation process and reports three principal findings. One, short-run inflation expectations appear to play a significant role in explaining U.S. inflation over the past 20–25 years. Two, long-run expectations generally do not appear to have a direct influence on U.S. inflation over the same period, although these longer expectations enter indirectly as a key determinant of the short-run expectations. The restrictions implied by "trend inflation" models of inflation are generally rejected in the data. Three, by employing a "survey operator," this paper develops a first pass at a structural model that incorporates the features discussed above and assesses its performance in explaining inflation in the postwar period.
    Keywords: Inflation (Finance) ; Rational expectations (Economic theory)
    Date: 2011
  24. By: Chong Huang (Department of Economics, University of Pennsylvania)
    Abstract: How does the central bank's incentive to build a reputation affect speculators' ability to coordinate and the likelihood of the devaluation outcome during speculative currency crises? What role does market information play in speculators' coordination and the central bank's reputation building? I address these questions in a dynamic regime change game that highlights the interaction between the central bank's reputation building and speculators' individual learning. On the one hand, the central bank has private information about its value from the currency peg and decides whether to maintain it. By defending against speculative attacks, it can build a reputation of defending, which may deter future attacks. On the other hand, speculators individually learn the central bank's value, and such learning may encourage speculators to coordinate an attack. I show that though learning makes the central bank's value approximate common knowledge over time, there is a unique equilibrium when learning is slow. In this equilibrium, no speculator attacks and the central bank sustains the currency peg forever, because the central bank obtains commitment power through the incentive to build a reputation. When learning is fast, there may be equilibria with attacks. In any equilibrium with attacks, the onset of the attack depends on the entire learning process. Once speculators attack, they attack frequently and infinitely often. Consequently, the central bank has no incentive to build a reputation and abandons the currency peg almost surely.
    Keywords: Speculative attacks, Reputation, Coordination, Common Learning
    JEL: D83 D84 F31 G01
    Date: 2011–11–15
  25. By: Ian Christensen; Césaire Meh; Kevin Moran
    Abstract: This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority.
    Keywords: Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy
    JEL: E44 E52 G21
    Date: 2011
  26. By: James Felkerson
    Abstract: There have been a number of estimates of the total amount of funding provided by the Federal Reserve to bail out the financial system. For example, Bloomberg recently claimed that the cumulative commitment by the Fed (this includes asset purchases plus lending) was $7.77 trillion. As part of the Ford Foundation project "A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis," Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed's bailout of the financial system—the most comprehensive investigation of the raw data to date. This working paper is the first in a series that will report the results of this investigation. The extraordinary scope and magnitude of the recent financial crisis of 2007-09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function. The purpose of this paper is to provide a descriptive account of the Fed's response to the recent financial crisis. It begins with a brief summary of the methodology, then outlines the unconventional facilities and programs aimed at stabilizing the existing financial structure. The paper concludes with a summary of the scope and magnitude of the Fed's crisis response. The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.
    Keywords: Global Financial Crisis; Fed Bailout; Lender of Last Resort; Term Auction Facility; Central Bank Liquidity Swaps; Single Tranche Open Market Operation; Term Securities Lending Facility and Term Options Program; Maiden Lane; Primary Dealer Credit Facility; Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility; Commercial Paper Funding Facility; Term Asset-backed Securities Loan Facility; Agency Mortgage-backed Security Purchase Program; AIG Revolving Credit Facility; AIG Securities Borrowing Facility
    JEL: E58 E65 G01
    Date: 2011–12
  27. By: Mary A. Burke; Michael Manz
    Abstract: We present new experimental evidence on heterogeneity in the formation of inflation expectations and relate the variation to economic literacy and demographics. The experimental design allows us to investigate two channels through which expectations-formation may vary across individuals: (1) the choice of information and (2) the use of given information. Subjects who are more economically literate perform better along both dimensions—they choose more-relevant information and make better use of given information. Compared with survey data on inflation expectations, fewer demographic factors are associated with variation in inflation expectations, and economic literacy in most cases accounts for demographic variation in expectations.
    Keywords: Inflation (Finance) ; Financial literacy
    Date: 2011
  28. By: Jiri Bohm; Jan Filacek; Ivana Kubicova; Romana Zamazalova
    Abstract: This paper reviews price-level targeting in the light of current theoretical knowledge and past practical experience. We discuss progress in the economic debate on this issue, starting with the traditional arguments discussed in the early 1990s, moving to Svensson’s seminal paper in the late 1990s and ending with the most recent literature from the beginning of the new millennium. We devote special attention to the issues of the zero interest rate bound, time consistency and communication. Practical experience from Sweden in the 1930s and Czechoslovakia in the first few years after WWI is used to illustrate the advantages and disadvantages of price-level targeting. Finally, the similarities of price-level and inflation developments with hypothetical outcomes under price-level targeting are investigated in selected inflation-targeting countries.
    Keywords: Communication, deflation, price-level targeting, time inconsistency, zero bound.
    JEL: E31 E52 E58
    Date: 2011–10
  29. By: Annamaria Kokenyne; Chikako Baba
    Abstract: This paper estimates the effectiveness of capital controls in response to inflow surges in Brazil, Colombia, Korea, and Thailand in the 2000s. Controls are generally associated with a decrease in inflows and a lengthening of maturities, but the relationship is not statistically significant in all cases, and the effects are temporary. Controls are more successful in providing room for monetary policy than dampening currency appreciation pressures. We argue that the macroeconomic impact of capital controls depends on the extensiveness of the policy, the level of capital market development, the support provided by other policies, and the persistence of capital flows.
    Date: 2011–12–02
  30. By: Hamilton-Hart, Natasha (Asian Development Bank Institute)
    Abstract: Since the financial crises of 1997, East Asia has made modest but nonetheless significant steps towards greater regional integration and cooperation in the areas of finance and trade, accompanied by progress on institution-building at the regional level. Monetary cooperation, however, has not proceeded to anything like even the modest levels registered for other functional areas of cooperation. This paper investigates this discrepancy. It asks whether monetary cooperation is simply an unattractive proposition because it promises fewer net gains than cooperation on other issues, or whether there are other explanations for the absence of monetary cooperation in the region.
    Keywords: regional integration; east asia; monetary cooperation
    JEL: E50 F30 F50
    Date: 2011–12–08
  31. By: Dewachter, Hans; Houssa, Romain; Lyrio, Marco & Kaltwasser, Pablo Rovira
    Date: 2011–10

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