nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒02‒20
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The interdependences of central bank’s forecasts and economic agents inflation expectations.Empirical study By Magdalena Szyszko
  2. Optimal Monetary Policy in an Estimated Local Currency Pricing Model By Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi
  3. Credit Market Distortions, Asset Prices and Monetary Policy By Pfajfar, D.; Santoro, E.
  4. Expected inflation and inflation risk premium in the euro area and in the United States By Marcello Pericoli
  5. Practical Monetary Policy: Examples from Sweden and the United States By Lars E.O. Svensson
  6. The Renminbi's Role in the Global Monetary System By Prasad, Eswar; Ye, Lei (Sandy)
  7. Inflation Dynamics: The Case of Egypt By Ali, Heba
  8. Capital controls and foreign exchange policy By Marcel Fratzscher
  9. The New Keynesian Phillips Curves in Multiple Quantiles and the Asymmetry of Monetary Policy By Dong Jin Lee; Jai Hyung Yoon
  10. The Macroeconomic Effects of Reserve Requirements By Christian Glocker; Pascal Towbin
  11. Trilemma Policy Convergence Patterns and Output Volatility By Joshua Aizenman; Hiro Ito
  12. Modifying Gaussian term structure models when interest rates are near the zero lower bound (this is a revised version of CAMA working paper 36/2011) By Leo Krippner
  13. Monetary integration in Eastern and Southern Africa: choosing a currency peg for COMESA By Carlos Vieira; Isabel Vieira
  14. Designing the Optimal Conservativeness of the Central Bank By Ferré Carracedo, Montserrat; Manzano, Carolina
  15. Bernanke Was Right: Currency Manipulation Policy in Emerging Foreign Exchange Markets By Chen, Shiu-Sheng
  16. Real term structure and inflation compensation in the euro area By Marcello Pericoli
  17. Ben Bernanke and the Zero Bound By Laurence M. Ball
  18. Shocks on the Romanian foreign exchange market before and after the global crisis By Dumitriu, Ramona; Stefanescu, Razvan
  19. Financial determinants of consumer price inflation. What do dynamics in money, credit, efficiency and size tell us? By Simplice A, Asongu
  20. Nominal Stability and Financial Globalization By Michael B. Devereux; Ozge Senay; Alan Sutherland
  21. Does Inflation Targeting Matter for Attracting Foreign Direct Investment into Developing Countries? By Rene TAPSOBA
  22. Ranking, risk-taking and effort: an analysis of the ECB's foreign reserves management By Antonio Scalia; Benjamin Sahel
  23. The scapegoat theory of exchange rates: the first tests By Marcel Fratzscher; Lucio Sarno; Gabriele Zinna
  24. Monetary Policy and Unemployment in Open Economies By Philipp Engler
  25. Currency derivatives and the disconnect between exchange rate volatility and international trade By Bas Straathof; Paolo Calio
  26. Dynamics of Foreign Currency Lending in Turkey By Kutan, Ali; Ozsoz, Emre; Rengifo, Erick
  27. Loan and nonloan flows in the Australian interbank network By Andrey Sokolov; Rachel Webster; Andrew Melatos; Tien Kieu
  28. Currency Crises During the Great Recession: Is This Time Different? By Arduini, Tiziano; De Arcangelis, Giuseppe; Del Bello, Carlo Leone
  29. Foreign banks and foreign currency lending in emerging Europe By Brown, Martin; de Haas, Ralph

  1. By: Magdalena Szyszko (Wyższa Szkoła Bankowa w Poznaniu, Katedra Bankowości i Rynku Finansowego)
    Abstract: This paper focuses on the associations between the inflation forecasts of the central bank and inflation expectations of the households. The first part is of a descriptive nature. It gives the theoretical background of modern monetary policy focusing on the role of expectations. It also presents the idea of inflation forecast targeting. Then the framework of the inflation forecast targeting in four countries: the Czech Republic, Hungary, Poland and Romania is presented. The empirical part of the study is an attempt to find associations between the inflation forecasts results and inflation expectations of consumers derived on the basis of surveys. The theory gives sound background for the existence of such relationships.The interdependences are tested in several ways. The last part of the paper focuses on the results and conclusions.
    Keywords: inflation forecasts, inflation forecasts targeting, inflation expectations
    JEL: E52 E58
    Date: 2011
  2. By: Okano, Eiji; Eguchi, Masataka; Gunji, Hiroshi; Miyazaki, Tomomi
    Abstract: We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
    Keywords: local currency pricing, optimal monetary policy, CPI inflation, fixed exchange rate, Bayesian estimation
    JEL: E52 E62 F41
    Date: 2012–01
  3. By: Pfajfar, D.; Santoro, E. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We study the conditions that ensure rational expectations equilibrium (REE) determinacy and expectational stability (E-stability) in a standard sticky-price model augmented with the cost channel. We allow for varying degrees of pass-through of the policy rate to bank-lending rates. Strong cost-side effects heavily constrain the policy rate response to inflation from above, so that inflation tar- geting policies may not be capable of ensuring REE uniqueness. In such cases, it is advisable to combine inflation responses with an appropriate reaction to the output gap and/or firm profitability. The negative reaction of real activity and asset prices to inflationary shocks adds a negative force to inflation responses that counteracts the borrowing cost effect and avoids expectations of higher inflation to become self-fulfilling.
    Keywords: Monetary Policy;Cost Channel;Asset Prices;Determinacy;E-stability.
    JEL: E31 E32 E52
    Date: 2012
  4. By: Marcello Pericoli (Bank of Italy)
    Abstract: This paper uses the celebrated no-arbitrage affine Gaussian term structure model applied to index-linked and standard government bonds to derive expected inflation rates and inflation risk premia, in the euro area and in the US. Maximum likelihood estimates show that the model describes the evolution of the nominal and real term structures by using three latent factors which can be interpreted as two real factors and one inflation factor. These provide important information on expected inflation and inflation risk premia. The results highlight some striking differences between the euro area and the US. In the US, forward inflation risk premia become sizable around the start of the late-2000s financial crisis and considerably increase just before the adoption of the first unconventional monetary policy measures in March 2009. By contrast, in the euro area forward inflation risk premia remain unchanged even after the adoption of the unconventional monetary policy measures following the most acute phases of the financial crisis, in October 2008 and in May 2010. However, long-term inflation expectations have been well anchored over the past years.
    Keywords: real and nominal term structure, inflation risk premium, affine term structure, Kalman filter
    JEL: C02 G10 G12
    Date: 2012–01
  5. By: Lars E.O. Svensson
    Abstract: In the summer of 2010, the Federal Reserve’s and the Swedish Riksbank’s inflation forecasts were below the former’s mandate-consistent rate and the latter’s target, respectively, and their unemployment forecasts were above sustainable rates. Given the mandates of the Federal Reserve and the Riksbank, conditions in both countries clearly called for policy easing. The Federal Reserve maintained a minimum policy rate, soon started to communicate possible future easing, and in the fall launched QE2. In contrast, the Riksbank started a period of rapid tightening. I examine the arguments that were raised in opposition to the Federal Reserve's easing, and those for the Riksbank's tightening. Although the Swedish economy subsequently performed better than expected, probably an important reason was that the market implemented much easier financial conditions than were consistent with the Riksbank’s policy rate path. Without the policy tightening, performance would have been even better. The U.S. economy meanwhile performed worse than expected because of factors other than monetary policy. Without the policy easing, performance would have been even worse. Thus, the Federal Reserve appears to have followed its mandate in the summer of 2010, and subsequent adverse economic shocks contributed to weak performance of the U.S. economy. In contrast, the Riksbank appears to have deviated from its mandate, but favorable circumstances contributed to an economic outcome with better performance than might have been expected based on policy choices.
    JEL: E42 E43 E47 E52 E58
    Date: 2012–02
  6. By: Prasad, Eswar (Cornell University); Ye, Lei (Sandy) (Cornell University)
    Abstract: We analyze three related but distinct concepts concerning the renminbi's role in the global monetary system: (i) "internationalization" of the currency; (ii) currency convertibility; and (iii) reserve currency status. Their sequencing in relation to other policy goals such as financial sector reforms and exchange rate flexibility will affect their benefit-risk tradeoffs. We describe the measures taken and progress attained in each of these areas, and discuss the implications of these changes for the balance and sustainability of China's own economic development as well as the associated implications for the global monetary system. While China is actively promoting the internationalization of its currency, it is a long way from attaining full convertibility or meeting other prerequisites for achieving reserve currency status. Ultimately, China will proceed with capital account convertibility in its own controlled and gradual manner, with the goal being an open capital account but with significant administrative and other "soft" controls. The renminbi will play an increasingly important role in the international monetary system but is unlikely to displace the U.S. dollar anytime soon.
    Keywords: international monetary system, reserve currency, capital account liberalization, convertibility, exchange rate flexibility
    JEL: F3
    Date: 2012–02
  7. By: Ali, Heba
    Abstract: Inflation as a phenomenon has witnessed remarkable changes starting from mid-eighties of the last century. Inflation rates have become less persistent, less responsive to supply side shocks. In addition, the relative importance of demand pull inflation as one of the major determinants of inflation has decreased due to efficient monetary policies that have been adopted by central banks all over the world to reduce inflation based on anchoring inflation expectations. Moreover, the slope of Phillips curve has flattened as many factors have appeared to be more influential on inflation rather than output gap, namely inflation expectations. These changes constitute in the new economic literature what so called “Inflation Dynamics”. In this context, this study focuses on analyzing inflation dynamics in Egypt in (1980-2009) in order to identify to what extent “Inflation Dynamics” in Egypt is different from or similar to those witnessed globally. The study applied a Vector Auto Regressive model (VAR) and other econometrics models to analyze “Inflation Dynamics” in Egypt in three sub periods: the 1980s, the 1990s and the first decade of the new millennium. The study concluded that Inflation Dynamics in Egypt is completely different from those observed globally. Inflation rates in Egypt have become more persistent especially starting from 2000; Inflation shocks are now lasting longer and have a long-term impact on the future inflation paths. On the other hand, demand bull inflation still considers one of the most important inflation determinants, as it is solely responsible for explaining 30% of the changes in inflation rates. In addition, the study confirmed that inflation rates in Egypt have become more responsive to supply side shocks starting from 2006. As for the slope of Phillips curve, the study confirmed that similar to the changes observed globally, the slope of Phillips Curve for the Egypt economy has flattened reflecting the increasing importance of other inflation determinants rather than output gap.
    Keywords: Inflation; Inflation dynamics; Inflation persistence; The Egyptian economy; Demand-pull inflation; Cost-push inflation; Inflation expectations; markets and prices rigidities; Phillips curve; Government debt; Monetary policies; Vector Auto Regression (VAR)
    JEL: E31
    Date: 2011–05–19
  8. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31.
    Keywords: Capital controls, capital flows, exchange rates, financial stability, economic policy, G20.
    Date: 2012–02
  9. By: Dong Jin Lee (University of Connecticut); Jai Hyung Yoon (Andong National University)
    Abstract: This paper empirically explores the New Keynesian Phillips Curve (NKPC)in multiple quantiles and examines the risk structure of the inflation process focusing on the asymmetric monetary policy. The estimation results support the canonical NKPC in upper quantiles while the hybrid version fits better with mid-quantiles. We find evidence of an asymmetric risk such that a decrease in the expected inflation reduces the risk in the sense of dispersive order and vice versa. This result implies that tightening rather than easing money is more effective in reducing risks. Structural break tests detect a break in all quantiles around 1983. Post-break data still support the asymmetric pattern. JEL Classification: C32, E31, E52 Key words: New Keynesian Phillips Curve, multiple quantile estimation, asymmetric monetary policy, structural break
    Date: 2012–02
  10. By: Christian Glocker (WIFO); Pascal Towbin
    Abstract: When dealing with credit booms driven by capital inflows, monetary authorities in emerging markets are often reluctant to raise interest rates, as they fear that an increase attracts even more capital and appreciates the currency. A number of countries therefore use reserve requirements as an additional policy instrument. The present study provides evidence on their macroeconomic effects. We estimate a vector autoregressive (VAR) model for the Brazilian economy and identify interest rate and reserve requirement shocks. For both instruments a discretionary tightening leads to a decline in domestic credit. We find, however, very different effects for other macroeconomic aggregates. In contrast to interest rate policy, a positive reserve requirement shock leads to an exchange rate depreciation and an improvement in the current account, but also to an increase in prices. The results suggest that reserve requirement policy can complement interest rate policy in pursuing a financial stability objective, but cannot be its substitute with regards to a price stability objective.
    Keywords: Reserve Requirements, Capital Flows, Monetary Policy, Business Cycle
    Date: 2012–02–14
  11. By: Joshua Aizenman; Hiro Ito
    Abstract: We examine the open macroeconomic policy choices of developing economies from the perspective of the economic “trilemma” hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a “middle ground” among emerging market economies -- managed exchange rate flexibility underpinned by sizable holdings of international reserves, intermediate levels of monetary independence, and controlled financial integration. Emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence. Yet this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.
    JEL: F15 F2 F32 F36 F4
    Date: 2012–02
  12. By: Leo Krippner
    Abstract: With nominal interest rates near the zero lower bound (ZLB) in many major economies, it has become untenable to apply Gaussian affine term structure models (GATSMs) while ignoring their inherent theoretical deficiency of non-zero probabilities of negative interest rates. In this article I propose correcting that deficiency by adjusting the entire GATSM term structure with an explicit function of maturity that represents the optionality associated with the present and future availability of physical currency. The resulting ZLB-GATSM framework remains tractable, producing a simple closed-form analytic expression for forward rates and requiring only elementary univariate numerical integration (over time to maturity) to obtain interest rates and bond prices. I demonstrate the salient features of the ZLB-GATSM framework using a two-factor model. An illustrative application to U.S. term structure data indicates that movements in the model state variables have been consistent with unconventional monetary policy easings undertaken after the U.S. policy rate reached the ZLB in late 2008.
    JEL: E43 G12 G13
    Date: 2012–02
  13. By: Carlos Vieira (CEFAGE-UÉ, Universidade de Évora, Portugal); Isabel Vieira (CEFAGE-UÉ, Universidade de Évora, Portugal)
    Abstract: African countries involved in monetary integration projects have been advised to peg their currencies against an external anchor before the definite fixing of exchange rates. In this study we estimate optimum currency area indices to determine, between four alternatives, which international currency would be the most suitable anchor for COMESA members and for a set of other selected African economies. We conclude that the euro and the British pound prevail over the US dollar or the yen; that the euro would be the best pegging for most, but not all, COMESA members; and that some of these economies display evidence of more intense integration with third countries, with which they share membership in other (overlapping) regional economic communities, than within COMESA.
    Keywords: Optimum currency areas; Monetarry anchor; Currency pegs; African regional economic communities; African monetary integration.
    JEL: F15 F13
    Date: 2012
  14. By: Ferré Carracedo, Montserrat; Manzano, Carolina
    Abstract: In this paper we propose a new measure of the degree of conservativeness of an inde- pendent central bank and we derive the optimal value from the social welfare perspective. We show that the mere appointment of an independent central bank is not enough to achieve lower inflation, which may explain the mixed results found between central bank independence and inflation in the empirical literature. Further, the optimal central bank should not be too conservative. For instance, we will show that in some circumstances it will be optimal that the central bank is less conservative than society in the Rogoff sense. JEL classification: E58, E63. Keywords: Central bank; Conservativeness; Independence.
    Keywords: Bancs centrals, 35 - Administració pública. Govern. Assumptes militars,
    Date: 2011
  15. By: Chen, Shiu-Sheng
    Abstract: This paper examines the currency manipulation policy in the foreign exchange markets of thirteen emerging countries using a structural vector autoregressive (SVAR) framework to link the dynamics of real exchange rates and foreign reserves. It is found that for Korea, Singapore, and Taiwan, exchange rate shocks are the main source of fluctuations in foreign reserves over all time horizons. Empirical evidence suggests that these countries intervene substantially in the foreign exchange markets in order to promote export competitiveness.
    Keywords: Official Intervention; Foreign Reserves
    JEL: E58 F31
    Date: 2012–01–25
  16. By: Marcello Pericoli (Bank of Italy)
    Abstract: Estimates of the real term structure for the euro area implied by French index-linked bonds are obtained by means of a smoothing spline methodology. The real term structure allows computation of the constant-maturity inflation compensation, which is compared with the surveyed inflation expectations in order to obtain a rough measure of the inflation risk premium. The comparison between the inflation compensation and the inflation swap shows that the two variables are closely interlinked but differently affected by illiquidity during periods of stress. The methodology used in this paper is quite effective at capturing the general shape of the real term structure while smoothing through idiosyncratic variations in the yields of index-linked bonds. Real interest rates tend to be quite stable at longer horizons and the average 10-year real rate from 2002 to 2009 is close to 2 per cent. Furthermore, evidence is found that inflation compensation was held down in the period 2008-09 by an increase in the liquidity premium of index-linked bonds.
    Keywords: index-linked bond, real term structure, inflation compensation, inflation risk premium, smoothing spline
    JEL: C02 G10 G12
    Date: 2012–01
  17. By: Laurence M. Ball
    Abstract: From 2000 to 2003, when Ben Bernanke was a professor and then a Fed Governor, he wrote extensively about monetary policy at the zero bound on interest rates. He advocated aggressive stimulus policies, such as a money-financed tax cut and an inflation target of 3-4%. Yet, since U.S. interest rates hit zero in 2008, the Fed under Chairman Bernanke has taken more cautious actions. This paper asks when and why Bernanke changed his mind about zero-bound policy. The answer, at one level, is that he was influenced by analysis from the Fed staff that was presented at the FOMC meeting of June 2003. This answer raises another question: why did the staff's views influence Bernanke so strongly? I seek answers to this question in the social psychology literature on group decision-making.
    JEL: E52 E58 E65
    Date: 2012–02
  18. By: Dumitriu, Ramona; Stefanescu, Razvan
    Abstract: This paper explores some changes induced on the Romanian foreign exchange market by the global crisis. We study these changes from the perspective of number and intensity of the shocks occurred before and after the global crisis. We found some significant differences, explainable not only by the direct effects of the crisis, but also by the intervention of the National Bank of Romania.
    Keywords: Romanian Foreign Exchange Market; Shocks; Global Crisis; Monetary Policy; National Bank of Romania
    JEL: G14 G15 G01
    Date: 2011–06–03
  19. By: Simplice A, Asongu
    Abstract: Purpose – The purpose of this paper is to examine the effects of financial dynamic policy options in money, credit, efficiency and size on consumer prices. Soaring food prices have marked the geopolitical landscape of developing countries in the past few years. Design/methodology/approach – The estimation approach used is a Two-Stage-Least Squares Instrumental Variable technique. Instruments include: legal-origins; income-levels and religious-dominations. The first-step consists of justifying the choice of the estimation approach with a Hausman-test for endogeneity. In the second-step, we verify that the instrumental variables are exogenous to the endogenous components of explaining variables(financial dynamic channels) conditional on other covariates(control variables). In the third-step, the validity of the instruments is examined with the Sargan overidentifying restrictions test. Robustness checks are ensured by: (1) use of alternative indicators of each financial dynamic; (2) estimation with robust Heteroscedasticity and Autocorrelation Consistent(HAC) standard errors; and (3) adoption of two interchangeable sets of instruments. Findings – Findings broadly reveal the following: (1) money(depth) and credit(activity) which are in absolute measures have positive elasticities of inflation; while (2) financial efficiency and size in relative measures have negative elasticities of inflation. Social implications – This paper helps in providing monetary policy options in the fight against soaring consumer prices. By keeping inflationary pressures on food prices in check, sustained campaigns involving strikes, demonstrations, marches, rallies and political crises that seriously disrupt economic performance could be mitigated. Originality/value – As far as we have perused, there is yet no study that assesses monetary policy options that could be relevant in addressing the dramatic surge in the price of consumer commodities.
    Keywords: Banks; Inflation; Development; Panel; Africa
    JEL: O55 E31 O10 G20 P50
    Date: 2012–01–25
  20. By: Michael B. Devereux; Ozge Senay; Alan Sutherland
    Abstract: Over the one and a half decades prior to the global financial crisis, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This is a highly robust prediction of open economy macro models with endogenous portfolio choice. It holds across many different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.
    JEL: F3 F33 F4 F41
    Date: 2012–01
  21. By: Rene TAPSOBA (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: This paper investigates the effect of Inflation Targeting (IT) on Foreign Direct Investment (FDI). Based on panel data of 53 developing countries over the period 1980-2007, this study is the first, to the best of the author's knowledge, to evaluate directly the effect of IT on FDI. Using a variety of propensity scores-matching methods which allow controlling for selfselection in policy adoption, it finds that the treatment effect of IT on FDI is positive, statistically significant and robust to a set of alternative specifications. In terms of policy recommendations, this finding therefore suggests that if well implemented, IT adoption can be a legitimate part of the policy toolkit available to policymakers in developing countries in their competition to attract more FDI.
    Keywords: Inflation Targeting, foreign direct investment, Propensity Scores-Matching, Developing Countries.
    JEL: G11 F21 E58 E52 E31 C21
    Date: 2012
  22. By: Antonio Scalia (Bank of Italy); Benjamin Sahel (European Central Bank)
    Abstract: The investment of the ECB reserves in US dollars and yen involves an annual performance assessment of portfolio managers, located in the Eurosystem’s national central banks. Employing new data on individual portfolios during 2002-2009, we study this peculiar tournament and show the existence of risk-shifting behaviour by reserve managers related to their year-to-date ranking: interim losers increase relative risk in the second half of the year, in the same way as mutual fund managers. In the dollar case the adjustment to ranking is reduced or offset if reserve managers have achieved a positive interim performance against the benchmark. Yen reserve managers that rank low show a tendency to increase effort, as proxied by portfolio turnover. Those who ranked low in the previous year tend to reduce risk significantly. Since reserve managers should have a comparative advantage over the benchmark within a monthly horizon, possible enhancements to the design of the tournament might involve an increased reward for effort and performance by means of a convex scoring system linked to monthly, rather than annual, performance.
    Keywords: foreign exchange reserves, tournament, incentives, effort, portfolio management
    JEL: G11 E58 D81
    Date: 2012–01
  23. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.); Lucio Sarno (Finance Faculty, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK and CEPR.); Gabriele Zinna (Bank of England, Threadneedle Street, London EC2R 8AH, UK.)
    Abstract: This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. JEL Classification: F31, G10.
    Keywords: Scapegoat, exchange rates, economic fundamentals, survey data, order flow.
    Date: 2012–02
  24. By: Philipp Engler (Freie Universität Berlin)
    Abstract: After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Luchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Gali (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as high-lighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model.
    Keywords: Open economy macroeconomics, monetary policy, unemployment
    JEL: E24 E52 F32 F41
    Date: 2011–11–09
  25. By: Bas Straathof; Paolo Calio
    Abstract: <p>Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.</p><p>The impact of exchange rate volatility on international trade is small for industrialized countries, especially since the late 1980s. An explanation for this is Wei’s (1999) “hedging hypothesis”, which states that the availability of currency derivatives has changed the relation between exchange rate volatility and trade. Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.</p><p> </p>
    JEL: F13 F33 F36
    Date: 2012–02
  26. By: Kutan, Ali; Ozsoz, Emre; Rengifo, Erick
    Abstract: On June 16 2009, in what authorities called ``a surprise development'' the Turkish Government removed a provision from its existing laws that had allowed Turkish residents to borrow in foreign currency from banks operating in Turkey. The development ended a long era of foreign currency lending in Turkey at least in the sense of consumer loans. This paper studies the determinants and consequences of foreign currency lending for banks in Turkey in the run-up to this significant policy change. Our analysis uses detailed foreign and Turkish currency composition bank data for 21 commercial banks in Turkey between 2002 and 2010. We evaluate drivers of saving and lending in foreign currency(FX) in Turkey along with consequences for the banking system in particular and for the economy in general. We highlight possible risks to the Turkish banking system as a result of system's heavy exposure to both channels. In doing so, we show that the policy change was not necessarily a surprise but a cautionary step in the right direction to help keep Turkish banking system stable.
    Keywords: Dollarization; bank performance; bank profitability; Turkish economy
    JEL: O24 G28 F31 G21
    Date: 2012–01–26
  27. By: Andrey Sokolov; Rachel Webster; Andrew Melatos; Tien Kieu
    Abstract: High-value transactions between Australian banks are settled in the Reserve Bank Information and Transfer System (RITS) administered by the Reserve Bank of Australia. RITS operates on a real-time gross settlement (RTGS) basis and settles payments sourced from the SWIFT, the Austraclear, and the interbank transactions entered directly into RITS. In this paper, we analyse a dataset received from the Reserve Bank of Australia that includes all interbank transactions settled in RITS on an RTGS basis during five consecutive weekdays from 19 February 2007 inclusive, a week of relatively quiescent market conditions. The source, destination, and value of each transaction are known, which allows us to separate overnight loans from other transactions (nonloans) and reconstruct monetary flows between banks for every day in our sample. We conduct a novel analysis of the flow stability and examine the connection between loan and nonloan flows. Our aim is to understand the underlying causal mechanism connecting loan and nonloan flows. We find that the imbalances in the banks' exchange settlement funds resulting from the daily flows of nonloan transactions are almost exactly counterbalanced by the flows of overnight loans. The correlation coefficient between loan and nonloan imbalances is about -0.9 on most days. Some flows that persist over two consecutive days can be highly variable, but overall the flows are moderately stable in value. The nonloan network is characterised by a large fraction of persistent flows, whereas only half of the flows persist over any two consecutive days in the loan network. Moreover, we observe an unusual degree of coherence between persistent loan flow values on Tuesday and Wednesday. We probe static topological properties of the Australian interbank network and find them consistent with those observed in other countries.
    Date: 2012–02
  28. By: Arduini, Tiziano; De Arcangelis, Giuseppe; Del Bello, Carlo Leone
    Abstract: During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by Kaminsky and Reinhart (1999) and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) – one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only “pseudo-financial variables” (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate differential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that “this time is different”, i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.
    Keywords: Early Warning Systems; Exchange Rates; Semi-parametric Meth- ods
    JEL: F30 C14 F47 F31
    Date: 2011
  29. By: Brown, Martin; de Haas, Ralph
    Abstract: Based on survey data from 193 banks in 20 countries we provide the first bank-level analysis of the relationship between bank ownership, bank funding and foreign currency (FX) lending across emerging Europe. Our results contradict the widespread view that foreign banks have been driving FX lending to retail clients as a result of easier access to foreign wholesale funding. Our cross-sectional analysis shows that foreign banks do lend more in FX to corporate clients but not to households. Moreover, we find no evidence that wholesale funding had a strong causal effect on FX lending for either foreign or domestic banks. Panel estimations show that the foreign acquisition of a domestic bank does lead to faster growth in FX lending to households. However, this is driven by faster growth in household lending in general not by a shift towards FX lending.
    Keywords: Foreign banks; FX lending; financial integration; Emerging Europe
    JEL: F15 F36 G21
    Date: 2012–01

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