nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒01‒25
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Are unconventional monetary policies effective? By Urszula Szcserbowicz;
  2. The term structure of inflation compensation in the nominal yield curve By Mehmet Pasaogullari; Simeon Tsonevy
  3. Do central banks forecast influence private agents ? Forecasting performance vs. signals By Paul Hubert;
  4. Central Bank Forecasts as an Instrument of Monetary Policy By Paul Hubert;
  5. Monetary Policy and Share Pricing Business in Nigeria By ADESOYE, A. Bolaji; ATANDA, Akinwande Abdulmaliq
  6. The dollar squeeze of the financial crisis By Jean-Marc Bottazzi; Jaime Luque; Mario R. Pascoa; Suresh Sundaresan
  7. Stock prices and monetary policy: Re-examining the issue in a New Keynesian model with endogenous investment By Grossi, Michele; Tamborini, Roberto
  8. Measuring the effects of monetary policy in Pakistan: A factor augmented vector autoregressive approach By Munir, Kashif; Qayyum, Abdul
  9. Are the Effects of Monetary Policy Asymmetric in India? Evidence from a Nonlinear Vector Autoregression Approach By Goodness C. Aye; Rangan Gupta
  10. A Bayesian evaluation of alternative models of trend inflation By Todd E. Clark; Taeyoung Doh
  11. Where It All Began: Lending of Last Resort and the Bank of England During the Overend, Gurney Panic of 1866. By Marc Flandreau; Stefano Ugolini
  12. How have global shocks impacted the real effective exchange rates of individual Euro area countries since the Euro's creation? By Matthieu Bussiere; Alexander Chudik; Arnaud Mehl
  13. The chinese financial system at the Dawn of the 21st century: An Overview By Yulu, Chen; Yong, Ma; Ke, Tang
  14. Exogenous Information, Endogenous Information and Optimal Monetary Policy By Luigi Paciello; Mirko Wiederholt
  15. Is Monetary Policy a Growth Stimulant in Nigeria? A Vector Autoregressive Approach By ADESOYE, A. Bolaji; MAKU, Olukayode E.; ATANDA, Akinwande Abdulmaliq
  16. The Flows of the Pacific: Asian foreign exchange markets through tranquility and turbulence By Dagfinn Rime and Hans Jørgen Tranvåg
  17. Implementing repurchase agreements in emerging markets By Osterberg, William P.
  18. Symmetry of External Shock responses within the Andean Community of Nations : A SVAR Approach By Andrea Gabriela Bonilla Bolaños
  19. Survey of Research on Financial Sector Modeling within DSGE Models: What Central Banks Can Learn from It By Frantisek Brazdik; Michal Hlavacek; Ales Marsal
  20. Forecast combination for discrete choice models: predicting FOMC monetary policy decisions By Laurent Pauwels; Andrey Vasnev
  21. The Nixon Shock after Forty Years: The Import Surcharge Revisited By Douglas A. Irwin
  22. Exchange rate exposure under liquidity constraints By Sarah Guillou; Stefano Schiavo
  23. Reducing overreaction to central banks' disclosures : theory and experiment By Romain Baeriswyl; Camille Cornand
  24. Financial Frictions and the Interest-Rate Differential in a Dollarized Economy By Vega, Hugo
  25. How do credit supply shocks propagate internationally? A GVAR approach By Eickmeier, Sandra; Ng, Tim
  26. Do External Political Pressures Affect the Renminbi Exchange Rate? By Laurent Pauwels; Li-Gang Liu
  27. International Reserves and the Composition of Equity Capital Inflows By Xingwang Qian; Andreas Steiner
  28. Was the Emergence of the International Gold Standard Expected? Melodramatic Evidence from Indian Government Securities. By Marc Flandreau; Kim Oosterlinck
  29. Short-run forecasting of the euro-dollar exchange rate with economic fundamentals By Marcos dal Bianco; Maximo Camacho; Gabriel Perez-Quiros
  30. The Euro crisis and the new impossible trinity By Jean Pisani-Ferry

  1. By: Urszula Szcserbowicz (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Keywords: unconventional monetary policy,inflation expectations,long-term interest rates, Libor-OIS spread, announcements effects
    JEL: E43 E44 E52 E58
    Date: 2011–07
  2. By: Mehmet Pasaogullari; Simeon Tsonevy
    Abstract: We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Taking advantage of the well-documented change in UK monetary policy to adopt inflation targeting, we estimate our model using nominal and inflation-linked Treasury bond data from the UK from 1985 to 2007. We find that this model can account for the term structure of inflation compensation in the nominal yield curve by generating regime-dependent conditional expectations of future inflation.
    Keywords: Inflation targeting ; Monetary policy - Great Britain
    Date: 2011
  3. By: Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Abstract: Focusing on a set of central banks that publish their internal macroeconomic forecasts in real time enables one to shed light on the expectations channel of monetary policy. The main contribution of this paper is to assess whether central bank forecasts influence private forecasts. The response is positive for inflation forecasts in Sweden, the UK and Japan. To disentangle the sources of influence of central banks, two concepts are proposed: endogenous influence, which is due to more accurate central bank forecasts, and exogenous influence, which is due to central bank signals on either future policy decisions or private information. Original empirical evidence on the central bank forecasting performance relative to private agents is provided, and estimates show that in Sweden, more accurate inflation forecasts generate specific central bank influence that is different from the influence from signals. The publication of forecasts may therefore refer to two central banking strategies that aim to shape private expectations: forecasting or policymaking.
    Keywords: Monetary Policy; Imperfect Information; Communication; Endogenous Influence; Exogenous Influence.
    JEL: E52 E58
    Date: 2011–10
  4. By: Paul Hubert (Observatoire Français des Conjonctures Économiques); (Observatoire Français des Conjonctures Économiques)
    Abstract: Policymakers at the Federal Open Market Committee (FOMC) publish macroeconomic forecasts since 1979. Some studies find that these forecasts do not contain useful information to predict these macroeconomic variables compared to other forecasts. In this paper, we examine the value of publishing these FOMC forecasts in two steps. We assess whether they influence private forecasts and whether they may be considered as a policy instrument. We provide original evidence that FOMC forecasts are able to influence private expectations. We also find that FOMC forecasts give information about future Fed rate movements, affect policy variables in a different way from the Fed rate, and respond differently to macro shocks.
    Keywords: Monetary Policy, Forecasts, FOMC, Influence, Policy signals, Structural VAR.
    JEL: E52 E58
    Date: 2011–11
  5. By: ADESOYE, A. Bolaji; ATANDA, Akinwande Abdulmaliq
    Abstract: The anatomy of Nigerian financial system is composed of the money and capital markets. Monetary policy is a framework used by the apex bank to regulate the flow of loanable funds in the economy, though the pricing of equity used by private investors to raise capital from the economy is carried out at the capital market end of the system. As earlier empirical studies have shown the relationship between monetary policy and stock market, this study provide a precise insight in the mechanism of interaction that co-exist between monetary policy and share pricing in Nigeria. The study identified money supply and interest rate (credit creation) as the main channels through which monetary policy influence sharing pricing in an open economy like Nigeria.
    Keywords: Monetary Policy; Share Pricing; Monetary instruments; Money supply; Equity/capital market; money market; financial system; IPO pricing; Nigeria
    JEL: G12 G15 E52 G0
    Date: 2012
  6. By: Jean-Marc Bottazzi; Jaime Luque; Mario R. Pascoa; Suresh Sundaresan
    Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currrency interest rates should coincide with actual interest rates. When a difference occurs, the residual is referred to as the cross currency basis. We link the Euro- Dollar currency basis (e.g. in 2008) to shadow prices of dollar funding constraints and interpret the basis as the relative physical possession value of the scarcer currency, or the “convenience yield” associated with that currency. This is similar to specialness in repo markets, expressing the physical possession value of a security. We examine how the coordinated central banks intervention can reduce the currency basis.
    Keywords: FX swaps, Repo, Euro-Dollar currency basis, The 2008 dollar squeeze, Possession
    JEL: D52 D53 G12 G14 G15 G18
    Date: 2011–12
  7. By: Grossi, Michele; Tamborini, Roberto
    Abstract: In this paper, the authors present a New Keynesian quantitative model with endogenous investment and a stock-market sector to shed further light on two unsettled issues: whether central banks should include some financial indicator in their policy rules, and what indicator may be expected to generate better stabilization performance. For comparative purposes, the authors replicate the policy framework and assessment strategy of the well-known no-inclusion model of Bernanke-Gertler (1999, 2000) and assess performance of five policy rules. Two of these are traditional Taylor rules (i.e., do not incorporate financial indicators) that differ in the relative weight they put on output and inflation gaps. The other three are financial Taylor rules. These involve the addition of one financial indicator in each case. Specifically, the deviation from trend of stock prices, of Tobin's q (the rate of change in stock prices relative to capital stock) and of investment. The authors obtain results that are at variance with Bernanke-Gertler, first, because the best performing rule of the traditional rules is output aggressive instead of inflation aggressive and, second, because the financial rule with Tobin's q outperforms the traditional inflation-aggressive one under all dimensions and cases. However, the authors cannot draw a univocal conclusion as regards the comparison between the financial rule with Tobin's q and the traditional but output aggressive rule. --
    Keywords: New Keynesian models,monetary policy,stock markets and bubbles
    JEL: E5 E52
    Date: 2011
  8. By: Munir, Kashif; Qayyum, Abdul
    Abstract: This paper examines the effects of monetary policy in Pakistan economy using a data rich environment. We used the Factor Augmented Vector Autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compare the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with theory and better than VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. FAVAR model supports the effectiveness of interest rate channel in Pakistan.
    Keywords: Monetary Policy; VAR; FAVAR
    JEL: C32 E52
    Date: 2012–01–16
  9. By: Goodness C. Aye (Department of Agricultural Economics, University of Agriculture, Makurdi, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper uses Indian quarterly data for the period of 1960:Q2-2011:Q2 to test for nonlinearity in a standard monetary vector autoregression (VAR) model comprising of output, price and money, using an estimation strategy that is consistent with wide range of structural models. We find that positive and negative monetary policy shocks have an immediate short-live and a delayed persistent asymmetric effect on output and price respectively. In addition, we show that compared to a linear VAR, the nonlinear VAR has a bigger impact of a monetary policy shock on output and price. In general, we conclude that there are clear gains from modelling monetary policy using a nonlinear VAR framework.
    Keywords: Asymmetric Effects, Monetary Policy, Linear and Nonlinear VAR, India
    JEL: C32 E23 E31 E51 E52
    Date: 2012–01
  10. By: Todd E. Clark; Taeyoung Doh
    Abstract: With the concept of trend inflation now widely understood as to be important as a measure of the public's perception of the inflation goal of the central bank and important to the accuracy of longer-term inflation forecasts, this paper uses Bayesian methods to assess alternative models of trend inflation. Reflecting models common in reduced-form inflation modeling and forecasting, we specify a range of models of inflation, including: AR with constant trend; AR with trend equal to last period's inflation rate; local level model; AR with random walk trend; AR with trend equal to the long-run expectation from the Survey of Professional Forecasters; and AR with time-varying parameters. We consider versions of the models with constant shock variances and with stochastic volatility. We first use Bayesian metrics to compare the fits of the alternative models. We then use Bayesian methods of model averaging to account for uncertainty surrounding the model of trend inflation, to obtain an alternative estimate of trend inflation in the U.S. and to generate medium-term, model-average forecasts of inflation. Our analysis yields two broad results. First, in model fit and density forecast accuracy, models with stochastic volatility consistently dominate those with constant volatility. Second, for the specification of trend inflation, it is difficult to say that one model of trend inflation is the best. Among alternative models of the trend in core PCE inflation, the local level specification of Stock and Watson (2007) and the survey-based trend specification are about equally good. Among competing models of trend GDP inflation, several trend specifications seem to be about equally good.
    Keywords: Bayesian statistical decision theory ; Inflation (Finance) - Mathematical models ; Forecasting
    Date: 2011
  11. By: Marc Flandreau (Graduate Institute of International Studies and Development, Geneva); Stefano Ugolini (Scuola Normale Superiore, Pisa)
    Abstract: The National Monetary Commission was deeply concerned with importing best practice. One important focus was the connection between the money market and international trade. It was said that Britain’s lead in the market for “acceptances” originating in international trade was the basis of its sterling predominance. In this article, we use a so-far unexplored source to document the portfolio of bills that was brought up to the Bank of England for discount and study the behavior of the Bank of England during the crisis of 1866 (the so-called Overend-Gurney panic) when the Bank began adopting lending of last resort policies (Bignon, Flandreau and Ugolini 2011). We compare 1865 (a “normal” year) to 1866. Important findings include: (a) the statistical predominance of foreign bills in the material brought to the Bank of England; (b) the correlation between the geography of bills and British trade patterns; (c) a marked contrast between normal times lending and crisis lending in that main financial intermediaries and the “shadow banking system” only showed up at the Bank’s window during crises; (d) the importance of money market investors (bills brokers) as chief conduit of liquidity provision in crisis; (e) the importance of Bank of England’s supervisory policies in ensuring lending-of-last resort operations without enhancing moral hazard. An implication of our findings is that Bank of England’s ability to control moral hazard for financial intermediaries involved in acceptances was another reason for the rise of sterling as an international currency.
    Date: 2011–02
  12. By: Matthieu Bussiere; Alexander Chudik; Arnaud Mehl
    Abstract: This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. ; We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. ; By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks.
    Keywords: Economic and Monetary Union ; Vector autoregression
    Date: 2011
  13. By: Yulu, Chen; Yong, Ma; Ke, Tang
    Abstract: Based on a systematic review and summarization of China’s 30 years of financial reform and development, this paper comprehensively analyzes the past, present and future development of China’s financial system and also presents the mechanism for China’s financial development from the view of political economics. Generally, the Chinese financial system is bank-oriented. The property rights structure, led by state-owned banks, is the prominent feature of the Chinese banking system. Equity, bond, money, currency and real estate markets have been developing rapidly; however, the development rate of these markets varies, and institutional construction generally falls behind the market development. China’s financial decision-making authority belongs to the State Council, and the financial supervision system adopts the mode of “separate regulation.” China’s state-driven, progressive financial reforms have promoted the formation of the government-led financial structure, which is composed of three parts: first, monetary policy, balancing both inflation control and economic growth; second, bank credit expansion under the implicit guarantee of the state; and third, the adjustable pegged exchange rate system based on capital controls. The next phase of financial reform in China will mainly focus on the following four key goals: first, to further improve the corporate governance and the mixed operation of financial institutions; second, to construct the institution of a financial market system and improve the effectiveness of the financial markets; third, to re-integrate regulatory resources, combine macro- and micro-prudent views, and establish a comprehensive framework for financial stability; fourth, to promote the liberalization of interest rates, marketization of the exchange rate and the opening of capital accounts based on a progressive approach and to improve the openness of the financial system based on macroeconomic stability.
    Keywords: China; Financial System; Bank-oriented; Political Economics
    JEL: K0 G2 O5
    Date: 2011–07
  14. By: Luigi Paciello (EIEF); Mirko Wiederholt (Northwestern University)
    Abstract: This paper studies optimal monetary policy when decision-makers in firms choose how much attention they devote to aggregate conditions. When the amount of attention that decision-makers in firms devote to aggregate conditions is exogenous, complete price stabilization is optimal only in response to shocks that cause efficient fluctuations under perfect information. When decision-makers in firms choose how much attention they devote to aggregate conditions, complete price stabilization is optimal also in response to shocks that cause inefficient fluctuations under perfect information. Hence, recognizing that decision-makers in firms can choose how much attention they devote to aggregate conditions has major implications for optimal policy.
    Date: 2011
  15. By: ADESOYE, A. Bolaji; MAKU, Olukayode E.; ATANDA, Akinwande Abdulmaliq
    Abstract: This paper critically examines the dynamic interaction between monetary policy tools in stimulating economic growth, as well as stabilizing the economy from external shocks in Nigeria. The paper considered key monetary time series variables and real growth of output in formulating Vector Autoregressive (VAR) models which showed interdependence interaction between the period of 1970 and 2007. The time series properties of the selected variables are examined using the Augmented Dickey-Fuller unit root test and the results revealed that only growth of real output and broad money supply are stationary at levels, while saving, lending and exchange rates were found stationary at first difference. The long-run dynamic interaction was established through the Johansen’s Trace and Maximum Eigenvalue tests. The pair-wise Granger-Causality test conducted showed that the growth rate of real output is not a leading indicator for any monetary variables. Other innovation accounting tests were also carried out like impulse responses function to test for the response of growth in real output to innovation shock on monetary variables. Also, the forecast error variance decomposition (FEVD) is used to decompose the monetary shock on the growth rate of real output in Nigeria. Proper policy recommendations were proffered based on the results emanated from the econometric analyses.
    Keywords: Monetary policy; Monetary Instruments; Economic growth; VAR; Impulse shock response; Variance decomposition
    JEL: C51 C32 E0 E52 E00
    Date: 2012
  16. By: Dagfinn Rime and Hans Jørgen Tranvåg (Department of Economics, Norwegian University of Science and Technology)
    Abstract: Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow.
    Date: 2012–01–06
  17. By: Osterberg, William P.
    Abstract: Repurchase Agreements (repos) have received increasing scrutiny as a result of their involvement in the recent financial crisis. While viewed as an important part of the ‘shadow banking system’ allowing non-banks to access liquidity and expand leverage, the legal and accounting status of most ‘repos’ is still unclear. Meanwhile, the usage of ‘repos’ in the development of emerging financial markets continues to expand, playing a pivotal role in monetary operations and fixed income markets. In this briefing, I discuss the main issues surrounding ‘repos’ in relatively undeveloped markets (EMs1) including the legal status of the first leg of the ‘repo’ as a true sale and the distinction between ‘repos’ and ‘sell-buybacks.’ I also discuss aspects of EMs that are relevant to the adoption of ‘repos.’ Primary among these is the thinness of markets, the legal status of ‘repos,’ accounting practices, monetary policy. Recommendations are offered regarding specific issues common to these countries.
    Keywords: Repurchase agreement; Collateralized loan; Market thinness; Treasuries; Margining; Counterparty risk; Liquidity ratios; Sell-buyback
    JEL: O17 G18 O16
    Date: 2011–07
  18. By: Andrea Gabriela Bonilla Bolaños (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: This article studies the symmetry in reactions of the Andean Community of Nations (CAN) economies to external shocks in order to analyze the group's evolution towards economic integration. The undertaking of a Monetary Union project in South America enhances the usefulness of evaluating shocks within this region according to the Optimal Currency Area Theory. A Structural VAR model with non-recursive contemporaneous restrictions is built for each economy and a correlation analysis is performed. The results evidence that the CAN has evolved positively towards structural convergence.
    Keywords: Latin American countries; Monetary Union; OCA Theory; Structural VAR
    Date: 2012–01–09
  19. By: Frantisek Brazdik; Michal Hlavacek; Ales Marsal
    Abstract: This survey gives insight into the ongoing research in financial frictions modeling. The recent financial turmoil has fueled interest in operationalizing financial frictions concepts and introducing them into tools for policy makers. The rapid growth of the literature on these issues is the motivation for our review of the presented approaches. The empirical facts that motivate the inclusion of financial frictions are surveyed. This survey provides a description of the basic approaches for introducing financial frictions into dynamic stochastic general equilibrium models. The significance and empirical identification of the financial accelerator effect is then discussed. The role of financial frictions models in CNB monetary and macroprudential policy is also described. It is concluded that given the heterogeneity of the approaches to financial frictions it is beneficial for the conduct of monetary policy to focus on the development of satellite approaches. The role of financial frictions in DSGE models for macroprudential policy is also discussed, as these models can be used to generate stress-testing scenarios. It can be concluded that DSGE models with financial frictions could complement current stress-testing practice, but are not able to replace stress tests.
    Keywords: DSGE models, financial accelerator, financial frictions.
    JEL: E21 E22 E27 E59
    Date: 2011–12
  20. By: Laurent Pauwels (The University of Sydney Business School); Andrey Vasnev (The University of Sydney Business School)
    Abstract: This paper provides a methodology for combining forecasts based on several discrete choice models. This is achieved primarily by combining one-step-ahead probability forecast associated with each model. The paper applies well-established scoring rules for qualitative response models in the context of forecast combination. Log-scores and quadratic-scores are both used to evaluate the forecasting accuracy of each model and to combine the probability forecasts. In addition to producing point forecasts, the effect of sampling variation is also assessed. This methodology is applied to forecast the US Federal Open Market Committee (FOMC) decisions in changing the federal funds target rate. Several of the economic fundamentals influencing the FOMC decisions are nonstationary over time and are modelled in a similar fashion to Hu and Phillips (2004a, JoE). The empirical results show that combining forecasted probabilities using scores mostly outperforms both equal weight combination and forecasts based on multivariate models.
    Keywords: Forecast combination, Probability forecast, Discrete choice models, Monetary policy decisions
    Date: 2011–06
  21. By: Douglas A. Irwin
    Abstract: On August 15, 1971, President Richard Nixon closed the gold window and imposed a 10 percent surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. The import surcharge was lifted four months later after the Smithsonian agreement led to new exchange rate parities. This paper examines the political, economic, and legal issues surrounding the import surcharge. This historical episode may shed light on the possible use of trade sanctions as part of the effort to get China to allow the renminbi to appreciate more rapidly.
    JEL: F13 F42 F5 N12
    Date: 2012–01
  22. By: Sarah Guillou (Observatoire Français des Conjonctures Économiques); Stefano Schiavo (Università di Trento)
    Keywords: Export,exchange rate,exposure,financial constraints, heterogeneity,productivity .
    JEL: F23 F31 G
    Date: 2011–06
  23. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: Financial markets are known for overreacting to public information. Central banks can reduce this overreaction either by disclosing information to a fraction of market participants only (partial publicity) or by disclosing information to all participants but with ambiguity (partial transparency). We show that, in theory, both communication strategies are strictly equivalent in the sense that overreaction can be indi-erently mitigated by reducing the degree of publicity or by reducing the degree of transparency. We run a laboratory experiment to test whether theoretical predictions hold in a game played by human beings. In line with theory, the experiment does not allow the formulation of a clear preference in favor of either communication strategy. This paper, however, makes a case for partial transparency rather than partial publicity because the latter seems increasingly diffcult to implement in the present information age and is associated with discrimination as well as fairness issues.
    Keywords: heterogeneous information; public information; overreaction; transparency; coordination; experiment
    Date: 2012–01–09
  24. By: Vega, Hugo (Banco Central de Reserva del Perú; London School of Economics)
    Abstract: This paper presents a partial equilibrium characterization of the credit market in an economy with partial …financial dollarization. Financial frictions, in the form of costly state veri…cation and banking regulation restrictions, are introduced and their impact on lending and deposit interest rates denominated in domestic and foreign currency studied. The analysis shows that reserve requirements act as a tax that leads banks to decrease deposit rates, while the wedge between foreign and domestic currency lending rates is decreasing in exchange rate volatility and increasing in the degree of correlation between entrepreneurs returns and the exchange rate.
    Date: 2012–01
  25. By: Eickmeier, Sandra; Ng, Tim
    Abstract: We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. --
    Keywords: international business cycles,credit supply shocks,trade and financial integration,Global VAR,sign restrictions
    JEL: F41 F44 F36 F15 C3
    Date: 2011
  26. By: Laurent Pauwels (The University of Sydney Business School); Li-Gang Liu (ANZ Research ANZ, Hong Kong)
    Abstract: This paper investigates whether external political pressure for faster renminbi (RMB) appreciation affect both the daily returns and the conditional volatility of the RMB central parity rate. We construct several political pressure indicators pertaining to the RMB exchange rate, with a special emphasis on the US pressure, to test the hypothesis. After controlling for Chinese macroeconomic surprise news, we find that US and non-US political pressure does not have a significant influence on RMB's daily returns. However, evidence suggests that political pressures, and especially those from the US, have statistically significant impacts on the conditional volatility of the RMB. Furthermore, we conduct the same exercise on the 12-month RMB nondeliverable forward rate (NDF). We find that the NDF market is highly responsive to macroeconomic surprise news and there is some evidence that Sino-US bilateral meetings affect the conditional volatility of the RMB NDF.
    Keywords: Renminbi exchange rate, Event studies, Political pressures, Non-deliverable forward, Macroeconomic news
    JEL: F31 G10
    Date: 2011–07
  27. By: Xingwang Qian; Andreas Steiner (Universitaet Osnabrueck)
    Abstract: We study the effect of central banks’ international reserve hoardings on the composition of equity capital inflows, namely the ratio of portfolio equity investment (PEI) to foreign direct investment (FDI). Foreign investors’ decisions regarding the location and the type of equity capital investment might be influenced by a country’s level of international reserves. In a simple theoretical model, we show that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of portfolio equity inflows. Hence, higher reserves are expected to increase the inflow of portfolio equity investment relative to FDI. We test this hypothesis for a sample of emerging markets during the period 1980-2007 using static and dynamic panel data methods. The results suggest that higher levels of reserves are associated with a larger ratio of PEI inflows relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far: Reserves contribute to deeper domestic financial markets and facilitate domestic firms’ access to foreign financing.
    Keywords: International Reserves, Capital Inflows, Equity Capital
    JEL: F3 F4
    Date: 2012–01–12
  28. By: Marc Flandreau (Graduate Institute of International Studies and Development, Geneva); Kim Oosterlinck (Solvay Brussels School of Economics and Management, Université Libre de Bruxelles)
    Abstract: The emergence of the gold standard has for a long time been viewed as inevitable. Fluctuations of the gold-silver exchange rate in world markets were accused to lead to brutal and unsustainable switches of bimetallic countries’ money supplies. However, more recent work has shown that the option character of bimetallism provided a stabilizing feedback loop. Using original data, this paper provides support to the new view. Using quotation prices for Indian Government bonds, we analyze agents’ expectations between 1860 and 1890. The intuition is that the spread between gold and silver bonds issued by the same entity (India) and backed by a credible agent (Britain) is a “pure” measure of the silver risk. The analysis shows that up until 1874 markets were expecting bimetallism to last. It is only after this date that markets gradually started requiring a premium to hold silver bonds indicating their belief that gold would eventually become the only metallic standard.
    Keywords: Exchange rate regime, gold standard, bimetallism, credibility, silver risk
    JEL: F33 N20
    Date: 2011–01
  29. By: Marcos dal Bianco; Maximo Camacho; Gabriel Perez-Quiros
    Abstract: We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements.
    Keywords: Euro-dollar rate, Exchange rate forecasting, State-space model, Mixed frequencies
    JEL: F31 F37 C01 C22
    Date: 2012–01
  30. By: Jean Pisani-Ferry
    Abstract: The search for solutions to the euro crisis is based on a partial diagnosis that overemphasises the lack of enforcement of existing fiscal rules. Europeâ??s leaders should rather address the euro areaâ??s inherent weaknesses revealed by the crisis.At the core of euro-area vulnerability is an impossible trinity of strict no-monetary financing, bank-sovereign interdependence and no co-responsibility for public debt. This Policy Contribution assesses the corresponding three options for reform: a broader European Central Bank (ECB) mandate, the building of a banking federation, and fiscal union with common bonds. None will be easy.The least feasible option is a change to the ECBâ??s mandate; changing market perceptions would require the ECB to credibly commit overwhelming forces, and the ECB is simply not in a position to make such a commitment.The building of a banking federation, meanwhile, involves reforms that are bound to be difficult. Incremental progress is likely, but a breakthrough less so.This leaves fiscal union. It faces major obstacles, but a decision to move in this direction would signal to the markets and ECB a commitment to stronger Economic and Monetary Union. One possibility would be to introduce a limited, experimental scheme through which trust could be rebuilt. This Policy Contribution draws on presentations made at the XXIV Moneda y Crédito Symposium, Madrid, 3 November 2011, at the Asia-Europe Economic Forum conference in Seoul, 9 December, and at De Nederlandsche Bank in Amsterdam on 17 December. I am very grateful to Silvia Merler for excellent research assistance. I thank participants in these seminars and Bruegel colleagues for comments and criticisms.
    Date: 2012–01

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