nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒03‒08
fifty-four papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Money as Indicator for the Natural Rate of Interest By Helge Berger; Henning Weber
  2. Monetary Policy in a New Keynesian Model with Endogenous Growth By Barbara Annicchiarico; Lorenza Rossi
  3. Price Subsidies and the Conduct of Monetary Policy By Mohamed Safouane Ben Aissa; Nooman Rebei
  4. The role of money and monetary policy in crisis periods: the Euro area case By Benchimol, Jonathan; Fourçans, André
  5. Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule By Conrad, Christian; Eife, Thomas A.
  6. Bank of Japan’s Quantitative and Credit Easing: Are They Now More Effective? By Pelin Berkmen
  7. The role of money and monetary policy in crisis periods: the Euro area case By Jonathan Benchimol; André Fourçans
  8. Central Banks Quasi-Fiscal Policies and Inflation By Seok Gil Park
  9. Transmission Lags and Optimal Monetary Policy By Alessandro Flamini
  10. Inflation convergence in Central and Eastern Europe with a view to adopting the euro By Juan Carlos Cuestas; Luis A. Gil-Alana; Karl Taylor
  11. The Dollar Squeeze of the Financial Crisis By Jean-Marc Bottazzi; Jaime Luque; Mário R. Páscoa; Suresh Sundaresan
  12. A comment on "The effect of a common currency on the volatility of the extensive margin of trade" By Luís Alexandre Barbosa Guimarães
  13. Trend Inflation, Wage Indexation, and Determinacy in the U.S. By Guido Ascari; Nicola Branzoli; Efrem Castelnuovo
  14. Treasury Bills and/or Central Bank Bills for Absorbing Surplus Liquidity: The Main Considerations By Obert Nyawata
  15. Did Korean Monetary Policy Help Soften the Impact of the Global Financial Crisis of 2008–09? By Selim Elekdag; Harun Alp; Subir Lall
  16. The Barnett Critique After Three Decades: A New Keynesian Analysis By Michael T. Belongia; Peter N. Ireland
  17. Reserve Requirements for Price and Financial Stability - When Are They Effective? By Glocker, C.; Towbin, P.
  18. Has IMF Advice Changed After the Crisis? By Rathin Roy; Raquel Almeida Ramos
  19. Prudential Liquidity Regulation in Developing Countries: A Case Study of Rwanda By Sarah Sanya; Wayne Mitchell; Angelique Kantengwa
  20. Capital Inflows, Exchange Rate Flexibility, and Credit Booms By Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart
  21. "The European Central Bank and Why Things Are the Way They Are: A Historic Monetary Policy Pivot Point and Moment of (Relative) Clarity" By Robert Dubois
  22. Lessons of the European Crisis for Regional Monetary and Financial Integration in East Asia By Ulrich Volz
  23. Interest rates close to zero, post-crisis restructuring and natural interest rate By Cizkowicz, Piotr; Rzonca, Andrzej
  24. On the forecast accuracy and consistency of exchange rate expectations: The Spanish PwC Survey By Simón Sosvilla-Rivero; Maria del Carmen Ramos-Herrera
  25. Macroprudential Rules and Monetary Policy when Financial Frictions Matter By Jeannine Bailliu; Césaire Meh; Yahong Zhang
  26. An Assessment of Malaysian Monetary Policy during the Global Financial Crisis of 2008-09 By Selim Elekdag; Harun Alp; Subir Lall
  27. Macrofinancial Modeling at Central Banks: Recent Developments and Future Directions By Jan Vlcek; Scott Roger
  28. Monetary policy and redistribution: What can or cannot be neutralized with Mirrleesian taxes By Gahvari, Firouz; Micheletto, Luca
  29. A New Model of Trend Inflation By Joshua C C Chan; Gary Koop; Simon M Potter
  30. Interest Rate Control Rules and Macroeconomic Stability in a Heterogeneous Two-Country Model By Fujisaki, Seiya
  31. Sacrifice Ratios and Inflation Targeting: The Role of Credibility By Nicolás De Roux; Marc Hofstetter
  32. Understanding and Modelling Reset Price Inflation By Engin Kara
  33. Are Core Inflation Directional Forecasts Informative? By Tito Nícias Teixeira da Silva Filho
  34. Real wages and monetary policy: A DSGE approach By Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
  35. Forecasting the Euro: Do Forecasters Have an Asymmetric Loss Function? By Ulrich Fritsche; Christian Pierdzioch; Jan-Christoph Ruelke; Georg Stadtmann
  36. On optimality or non-optimality of the eurozone By Tomasz Brodzicki
  37. The Eastern Caribbean Currency Union: Would a Fiscal Insurance Mechanism Mitigate National Income Shocks? By Antonio Lemus; Paul Cashin
  38. Central Banks and Gold Puzzles By Joshua Aizenman; Kenta Inoue
  39. Forecasting Inflation Using Constant Gain Least Squares By Antipin, Jan-Erik; Boumediene, Farid Jimmy; Österholm, Pär
  40. Managing Non-core Liabilities and Leverage of the Banking System: A Building Block for Macroprudential Policy Making in Korea By Ali Alichi; Sang Chul Ryoo; Cheol Hong
  41. Interactions Between Sovereign Debt Management and Monetary Policy Under Fiscal Dominance and Financial Instability By Hans J. Blommestein; Philip Turner
  42. Shifting Motives: Explaining the Buildup in Official Reserves in Emerging Markets since the 1980s By Charalambos G. Tsangarides; Atish R. Ghosh; Jonathan David Ostry
  43. Breakeven inflation rates and their puzzling correlation relationships By Cette, G.; De Jong, M.
  44. How do anticipated changes to short-term market rates influence banks' retail interest rates? Evidence from the four major euro area economies By Banerjee, A.; Bystrov, V.; Mizen, P.
  45. Precautionary demand for money in a monetary business cycle model By Telyukova, Irina A.; Visschers, Ludo
  46. The enormous loans of the Deutsche Bundesbank to distressed European countries’ central banks By Eric Dor
  47. "International Reserves in Low Income Countries: Have They Served as Buffers?" By V. Crispolti; George C. Tsibouris
  48. Forecasting the Brazilian Real and the Mexican Peso: Asymmetric Loss, Forecast Rationality, and Forecaster Herding By Ulrich Fritsche; Christian Pierdzioch; Jan-Christoph Ruelke; Georg Stadtmann
  49. Capital Market Integration: Progress Ahead of the East African Community Monetary Union By Masafumi Yabara
  50. The Philippine National Bank and Credit Inflation after World War I By Yoshiko Nagano
  51. Determinants of Inflation in the Euro Area: The Role of Labor and Product Market Institutions By Hanan Morsy; Florence Jaumotte
  52. A new structural break model with application to Canadian inflation forecasting By Maheu, John; Song, Yong
  53. Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession By Nicola Cetorelli; Linda S. Goldberg
  54. Central Bank Credit to the Government: What Can We Learn from International Practices? By Luis Ignacio Jácome; Simon Baker Townsend; Marcela Matamoros-Indorf; Mrinalini Sharma

  1. By: Helge Berger; Henning Weber
    Abstract: The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.
    Keywords: Central banks , Demand for money , Economic models , Interest rates , Monetary policy , Money ,
    Date: 2012–01–10
  2. By: Barbara Annicchiarico; Lorenza Rossi (Department of Economics, University of Pavia)
    Abstract: We study monetary policy in a New Keynesian (NK) model with endogenous growth and knowledge spillovers external to each firm. We find the following results: (i) technology and government spending shocks have different effects on growth; (ii) disinflationary monetary policies entail positive effects on growth; (iii) the optimal long-run inflation rate is zero; (iv) the Ramsey dynamics implies deviation from full inflation targeting in response to technology and government spending shocks; (v) the optimal operational rule is backward looking and responds to inflation and output deviations from their long-run levels.
    Keywords: Monetary Policy, Endogenous Growth, Disinflation, Ramsey Problem, Optimal Simple Rules
    JEL: E32 E52 O42
    Date: 2012–02
  3. By: Mohamed Safouane Ben Aissa; Nooman Rebei
    Abstract: This paper investigates optimized monetary policy rules in the presence of government intervention to stabilize prices of certain categories of goods and services. The paper estimates a small-scale, structural equilibrium model with a sticky-price sector and a subsidized price sector for a large number of countries using Bayesian methods. The main result of this paper is that strict headline inflation targeting could be outperformed by sectoral inflation targeting, output gap stabilization, or a combination of these. In addition, several country cases exhibit lower performance of both headline and core inflation stabilization, the two most common policies in modern central banks' practices. For practical monetary policy design, we numerically identify country specific thresholds for the degree of government intervention in price setting under which core inflation targeting turns out to be the optimal choice in the context of implementable Taylor rules.
    Keywords: Economic models , Inflation targeting , Monetary policy , Prices , Subsidies ,
    Date: 2012–01–18
  4. By: Benchimol, Jonathan (ESSEC Business School); Fourçans, André (ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We find that money has a rather significant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area; Money; DSGE forecasting
    JEL: E31 E51 E58
    Date: 2012–02–01
  5. By: Conrad, Christian; Eife, Thomas A.
    Abstract: In a simple New Keynesian model, we derive a closed form solution for the inflation-gap persistence parameter as a function of the policy weights in the central bank’s Taylor rule. By estimating the time-varying weights that the FED attaches to inflation and the output gap, we show that the empirically observed changes in U.S. inflation-gap persistence during the period 1975 to 2010 can be well explained by changes in the conduct of monetary policy. Our findings are in line with Benati’s (2008) view that inflation persistence should not be considered a structural parameter in the sense of Lucas.
    Keywords: inflation-gap persistence; Great Moderation; monetary policy; New Keynesian model; Taylor rule
    JEL: C22 E31 E52 E58
    Date: 2012–02–17
  6. By: Pelin Berkmen
    Abstract: This paper asks whether the BoJ’s recent experience with unconventional monetary easing has been effective in supporting economic activity and inflation. Using a structural VAR model, the paper finds some evidence that BoJ’s monetary policy measures during 1998-2010 have had an impact on economic activity but less so on inflation. These results are stronger than those in earlier studies looking at the quantitative easing period up to 2006 and may reflect more effective credit channel as a result of improvements in the banking and corporate sectors. Nevertheless, the relative contribution of monetary policy measures to the variation in output and inflation is rather small.
    Keywords: Central banks , Credit , Current account balances , Deflation , Japan , Monetary policy ,
    Date: 2012–01–09
  7. By: Jonathan Benchimol (Economics Department - ESSEC Business School); André Fourçans (Economics Department - ESSEC Business School)
    Abstract: In this paper, we test two models of the Eurozone, with a special emphasis on the role of money and monetary policy during crises. The role of separability between money and consumption is investigated further and we analyse the Euro area economy during three different crises: 1992, 2001 and 2007. We …find that money has a rather signi…ficant role to play in explaining output variations during crises whereas, at the same time, the role of monetary policy on output decreases significantly. Moreover, we …find that a model with non-separability between consumption and money has better forecasting performance than a baseline separable model over crisis periods.
    Keywords: Euro area ; Money ; DSGE forecasting
    Date: 2012–02–01
  8. By: Seok Gil Park
    Abstract: Although central banks have recently taken unconventional policy actions to try to shore up macroeconomic and financial stability, little theory is available to assess the consequences of such measures. This paper offers a theoretical model with which such policies can be analyzed. In particular, the paper shows that in the absence of the fiscal authorities’ full backing of the central bank’s balance sheet, strange things can happen. For instance, an exit from quantitative easing could be inflationary and central banks cannot successfully unwind inflated balance sheets. Therefore, the fiscal authorities’ full backing of the monetary authorities’ quasi-fiscal operations is a pre-condition for effective monetary policy.
    Keywords: Central bank policy , Economic models , Fiscal policy , Inflation , Monetary policy ,
    Date: 2012–01–17
  9. By: Alessandro Flamini (Department of Economics, University of Pavia)
    Abstract: Real world monetary policy is complicated by long and variable lags in the transmission of the policy to the economy. Most of the policy models, however, abstracts from policy lags. This paper presents a model where transmission lags depend on the behaviour of a two-sector supply side of the economy and focuses on how lag length and variability affect optimal monetary policy. The paper shows that optimal monetary policy should respond more to the sector with the shortest transmission lag and that the presence of production links among sectors amplifies this response. Furthermore, the shorter or more variable the aggregate transmission lag, the more active the overall policy and the larger the response to the sector with the shortest transmission lag. Finally, the relative strength of the response to inflation and output gap depends on the intensity of the sectoral production links, and on the length of the transmission lags. Only with reasonable production links should the optimal policy respond more to in?ation than to the output gap in line with the empirical evidence.
    Keywords: Inflation targeting; monetary policy transmission mechanism; policy transmission lags; multiplicative uncertainty; Markov jump linear quadratic systems; optimal monetary policy.
    JEL: E52 E58 F41
    Date: 2012–02
  10. By: Juan Carlos Cuestas (University of Sheffield); Luis A. Gil-Alana (University of Navarra); Karl Taylor (University of Sheffield)
    Abstract: In this paper we consider inflation rate differentials between seven Central and Eastern Countries (CEECs) and the Eurozone. We focus explicitly upon a group of CEECs given that although they are already member states, they are currently not part of the Economic and Monetary Union (EMU) and must fulfil the Maastricht convergence criteria before being able to adopt the euro. However, this group of countries does not have an opt-out clause and so must eventually adopt the single currency. Hence, considering divergence in inflation rates between each country and the Eurozone is important in that evidence of persistent differences may increase the chance of asymmetric inflationary shocks. Furthermore, once a country joins the Eurozone the operation of a country specific monetary policy is no longer an option. We explicitly test for convergence in the inflation rate differentials, incorporating non-linearities in the autoregressive parameters, fractional integration with endogenous structural changes, and also consider club convergence analysis for the CEECs over the period 1997 to 2011 based on monthly data. Our empirical findings suggest that the majority of countries experience non-linearities in the inflation rate differential, however there is only evidence of a persistent difference in three out of the seven countries. Complementary to this analysis we apply the Phillips and Sul (2007) test for club convergence and find that there is evidence that most of the CEECs converge to a common steady state.
    Keywords: Central and Eastern Europe , euro adoption, inflation convergence, non-linearities
    JEL: E31 E32 C22
    Date: 2012–01
  11. By: Jean-Marc Bottazzi (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jaime Luque (Universidad Carlos III de Madrid - Departamento de Economía); Mário R. Páscoa (NOVA - School of Business and Economics - School of Business and Economics); Suresh Sundaresan (Columbia University - Columbia Business School)
    Abstract: By Covered Interest rate Parity (CIP), the FX swap implied currency 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 repro 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.
    Date: 2012–02
  12. By: Luís Alexandre Barbosa Guimarães (Faculdade de Economia, Universidade do Porto)
    Abstract: In this paper I comment on Auray, Eyquem, and Pontineau (2012). I show that their introduction of sticky-prices into Ghironi \& Melitz (2005) framework is incorrect and generates a bias in simulation results. Additionally, I find that, by introducing sticky-prices into Ghironi \& Melitz (2005) framework in a correct way, the model is able to account for the empirical findings of Auray, Eyquem, and Pontineau (2012). Finally, I also find that if central banks target a data-consistent CPI inflation, results improve quantitatively.
    Keywords: Pricing-to-market; Local currency pricing; Extensive Margin; Monetary Union; Monetary Policy
    JEL: E32 E52 F41
    Date: 2012–03
  13. By: Guido Ascari (Department of Economics and Quantitative Methods, University of Pavia); Nicola Branzoli (University of Wisconsin Madison); Efrem Castelnuovo (University of Padova and Bank of Finland)
    Abstract: We combine an estimated monetary policy rule featuring time-varying trend inflation and stochastic coefficients with a medium scale New Keynesian framework calibrated on the U.S. economy. We find the impact of variations in trend inflation on the likelihood of equilibrium determinacy to be both modest and limited to the second half of the 1970s. In contrast, our counterfactual exercises suggest that the change in the Federal Reserve's policy response to inflation is likely to have been the main driver leading the U.S. economy to a unique equilibrium during the Great Moderation. We highlight the impact of wage indexation on policymakers' ability to induce economic stability, and provide fresh evidence on the relationship between trend inflation, wage indexation and determinacy in the post-WWII U.S. economic environment. Further simulations show that rising the Federal Reserve's inflation target to four percent would be consistent with equilibrium uniqueness conditional on a policy as the one estimated on the U.S. post-1982 sample period.
    Keywords: Monetary Policy, Trend Inflation, Great Moderation, Determinacy, Wage indexation.
    JEL: C22 E3 E43 E5
    Date: 2011–10
  14. By: Obert Nyawata
    Abstract: This paper discusses the challenging question of whether central banks should use treasury bills or central bank bills for draining excess liquidity in the banking system. While recognizing that there are practical reasons for using central bank bills, the paper argues that treasury bills are the first best option especially because positive externalities for the financial sector and the rest of the economy. However, the main considerations in the choice should be: (i) operational independence for the central bank; (ii) market development; and (iii) the strengthening of the transmission of monetary policy impulses.
    Date: 2012–01–31
  15. By: Selim Elekdag; Harun Alp; Subir Lall
    Abstract: Korea was one of the Asian economies hardest hit by the global financial crisis. Anticipating the downturn that would follow the episode of extreme financial stress, the Bank of Korea (BOK) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 325 basis points. But did it work? This paper seeks a quantitative answer to the following question: Were it not for an inflation targeting framework underpinned by a flexible exchange rate regime, how much deeper would the recession have been? Taking the most intense year of the crisis as our baseline (2008:Q4–2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.1 percent contraction, the outturn would have been -2.9 percent if the BOK had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -7.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BOK helped substantially soften the impact of the global financial crisis on the Korean economy. These counterfactual experiments are based on an estimated structural model, which, along with standard nominal and real rigidities, includes a financial accelerator mechanism in an open-economy framework.
    Keywords: Economic growth , Economic indicators , Economic models , Economic recession , Exchange rate regimes , Financial crisis , Fiscal policy , Flexible exchange rate policy , Global Financial Crisis 2008-2009 , Inflation targeting , Korea, Republic of , Monetary policy , Monetary transmission mechanism ,
    Date: 2012–01–10
  16. By: Michael T. Belongia; Peter N. Ireland
    Abstract: This paper extends a New Keynesian model to include roles for currency and deposits as competing sources of liquidity services demanded by households. It shows that, both qualitatively and quantitatively, the Barnett critique applies: While a Divisia aggregate of monetary services tracks the true monetary aggregate almost perfectly, a simple-sum measure often behaves quite differently. The model also shows that movements in both quantity and price indices for monetary services correlate strongly with movements in output following a variety of shocks. Finally, the analysis characterizes the optimal monetary policy response to disturbances that originate in the financial sector.
    JEL: C43 E32 E41 E52
    Date: 2012–03
  17. By: Glocker, C.; Towbin, P.
    Abstract: Reserve requirements are a prominent policy instrument in many emerging countries. The present study investigates the circumstances under which reserve requirements are an appropriate policy tool for price or financial stability. We consider a small open economy model with sticky prices, financial frictions and a banking sector that is subject to legal reserve requirements and compute optimal interest rate and reserve requirement rules. Overall, our results indicate that reserve requirements can support the price stability objective only if financial frictions are important and lead to substantial improvements if there is a financial stability objective. Contrary to a conventional interest rate policy, reserve requirements become more effective when there is foreign currency debt.
    Keywords: Reserve Requirements, Monetary Policy, Financial Stability, Capital Flows, Business Cycle.
    JEL: E58 E52 F41 G18
    Date: 2012
  18. By: Rathin Roy (International Policy Centre for Inclusive Growth); Raquel Almeida Ramos (IPC-IG)
    Abstract: When the International Monetary Fund (IMF) was created, its purpose was to support the new system of fixed exchange rate regimes. With the breakdown of the par-value system, its article on exchange-rate arrangements?Article IV?had to be revised. Per the revised version, the IMF would annually write reports on countries? economic situation and provide policy recommendations. (?)
    Keywords: Has IMF Advice Changed After the Crisis?
    Date: 2012–02
  19. By: Sarah Sanya; Wayne Mitchell; Angelique Kantengwa
    Abstract: This paper analyses the prudential liquidity management framework, in particular the quantitative indicators employed by the central bank of Rwanda in response to the domestic liquidity crisis in 2008/09. It emphasises that the quantitative methods used in the monitoring and assessment of systemic liquidity risk are inadequate because they did not signal the liquidity crises ex-post. There are quick gains to be made from augumenting the liquidity risk indicators with more dynamic liquidity stress tests so that compliance will be achieved through lengthening the maturities of both assets and liabilities on the balance sheet as opposed to simply holding more liquid assets. The paper recommends that policy emphasis shift toward reforms that strengthen systemic liquidity risk assesment, monetary policy implementation as well as improve the efficiency of Rwanda’s financial system.
    Keywords: Bank supervision , Banking sector , Developing countries , Liquidity management , Monetary policy ,
    Date: 2012–01–20
  20. By: Esteban Vesperoni; Nicolas E. Magud; Carmen Reinhart
    Abstract: The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that bank credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.
    Date: 2012–02–03
  21. By: Robert Dubois
    Abstract: Not since the Great Depression have monetary policy matters and institutions weighed so heavily in commercial, financial, and political arenas. Apart from the eurozone crisis and global monetary policy issues, for nearly two years all else has counted for little more than noise on a relative risk basis. In major developed economies, a hypermature secular decline in interest rates is pancaking against a hard, roughly zero lower-rate bound (i.e., barring imposition of rather extreme policies such as a tax on cash holdings, which could conceivably drive rates deeply negative). Relentlessly mounting aggregate debt loads are rendering monetary- and fiscal policy-impaired governments and segments of society insolvent and struggling to escape liquidity quicksands and stubbornly low or negative growth and employment trends. At the center of the current crisis is the European Monetary Union (EMU)-a monetary union lacking fiscal and political integration. Such partial integration limits policy alternatives relative to either full federal integration of member-states or no integration at all. As we have witnessed since spring 2008, this operationally constrained middle ground progressively magnifies economic divergence and political and social discord across member-states. Given the scale and scope of the eurozone crisis, policy and actions taken (or not taken) by the European Central Bank (ECB) meaningfully impact markets large and small, and ripple with force through every major monetary policy domain. History, for the moment, has rendered the ECB the world's most important monetary policy pivot point. Since November 2011, the ECB has taken on an arguably activist liquidity-provider role relative to private banks (and, in some important measure, indirectly to sovereigns) while maintaining its long-held post as rhetorical promoter of staunch fiscal discipline relative to sovereignty-encased "peripheral" states lacking full monetary and fiscal integration. In December 2011, the ECB made clear its intention to inject massive liquidity when faced with crises of scale in future. Already demonstratively disposed toward easing due to conditions on their respective domestic fronts, other major central banks have mobilized since the third quarter of 2011. The collective global central banking policy posture has thus become more homogenized, synchronized, and directionally clear than at any time since early 2009.
    Keywords: Eurozone; Monetary Policy; Fiscal Policy; European Central Bank; European Monetary Union; Debt Monetization; Euro; Basel; Sovereign Debt; Credit Default Swaps; Liquidity; Solvency; Deleveraging; LTRO
    JEL: E02 E31 E42 E44 E51 E52 E58 E61 E62 E63 F36 H63
    Date: 2012–03
  22. By: Ulrich Volz (Asian Development Bank Institute (ADBI))
    Abstract: The debt crisis in several member states of the euro area has raised doubts on the viability of European Economic and Monetary Union (EMU) and the future of the euro. While the launch of the euro in 1999 stirred a lot of interest in regional monetary integration and even monetary unification in various parts of the world, including East Asia, the current crisis has had the opposite effect, even raising expectations of a breakup of the euro area. Indeed, the crisis has highlighted the problems and tensions that will inevitably arise within a monetary union when imbalances build up and become unsustainable. This note discusses the causes of the current European crisis and the challenges that EMU countries face in solving it. Based on this analysis, it derives five lessons for regional financial and monetary cooperation and integration in East Asia.
    Keywords: European Crisis, regional cooperation, Monetary cooperation
    JEL: E42 F33 F36 G01
    Date: 2012–02
  23. By: Cizkowicz, Piotr; Rzonca, Andrzej
    Abstract: Central banks seem not to account for the influence of interest rates close to zero on the natural interest rate after the bursting of the asset bubble which triggered financial crisis. We claim that this omission may have deleterious consequences. Should interest rates close to zero persistently decrease natural interest rates, that would mean fall in TFP growth and more limited central bank’s capacity to influence aggregate demand and price dynamics. We explain that interest rates close to zero may persistently reduce the natural interest rate because in economy requiring post-crisis restructuring they impede that process and facilitate forbearance lending, which crowds viable economic agents out of credit through a number of channels. To reduce these risks central bank could voluntarily set the lower bound for interest rates cuts at, say, 2%. The bound appropriate for a given economy should be a function of its growth and interest rates in the pre-crisis period. We argue that irrespective of central bank’s credibility such a change in the monetary policy conducting in economies requiring post-crisis restructuring would bring better outcomes than keeping there interest rates close to zero.
    Keywords: interest rates close to zero; monetary policy; new Keynesian analytical framework; restructuring; credit
    JEL: E58 E51 G34 E50
    Date: 2011–12
  24. By: Simón Sosvilla-Rivero (Universidad Complutense de Madrid); Maria del Carmen Ramos-Herrera (Universidad Complutense de Madrid)
    Abstract: We examine the predictive ability and consistency properties of exchange rate expectations for the dollar/euro using a survey conducted in Spain by PwC among a panel of experts and entrepreneurs. Our results suggest that the PwC panel have some forecasting ability for time horizons from 3 to 9 months, although only for the 3-month ahead expectations we obtain marginal evidence of unbiasedness and efficiency in the forecasts. As for the consistency properties of the exchange rate expectations formation process, we find that survey participants form stabilising expectations in the short-run and destabilising expectations in the long- run and that the expectation formation process is closer to fundamentalists than chartists.
    Keywords: Exchange rates, Forecasting; Expectations; Panel data; Econometric models
    JEL: F31 D84 C33
    Date: 2012–02
  25. By: Jeannine Bailliu; Césaire Meh; Yahong Zhang
    Abstract: This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the nature of the shock where the benefits are larger in the presence of financial shocks that have broader effects on the macroeconomy.
    Keywords: Economic models; Financial markets; Financial stability; Monetary policy framework
    JEL: E42 E50 E60
    Date: 2012
  26. By: Selim Elekdag; Harun Alp; Subir Lall
    Abstract: Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM’s monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.
    Date: 2012–01–30
  27. By: Jan Vlcek; Scott Roger
    Abstract: This paper surveys dynamic stochastic general equilibrium models with financial frictions in use by central banks and discusses priorities for future development of such models for the purpose of monetary and financial stability analysis. It highlights the need to develop macrofinancial models which allow analysis of the macroeconomic effects of macroprudential policy tools and to evaluate elements of the Basel III reforms as a priority. The paper also reviews the main approaches to introducing financial frictions into general equilibrium models.
    Keywords: Central banks , Economic models , Monetary policy , Monetary transmission mechanism ,
    Date: 2012–01–20
  28. By: Gahvari, Firouz (Department of Economics, University of Illinois); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: This paper develops an overlapping-generations model with heterogeneous agents in terms of earning ability and cash-in-advance constraint. It shows that tax pol- icy cannot fully replicate or neutralize the redistributive implications of monetary policy. While who gets the extra money becomes irrelevant, the rate of growth of money supply keeps its bite. A second lesson is that the Friedman rule is not in general optimal. The results are due to the existence of another source of het- erogeneity among individuals besides dierences in earning ability that underlies the Mirrleesian approach to optimal taxation. They hold even in the presence of a general income tax and preferences that are separable in labor supply and goods. If dierences in earning ability were the only source of heterogeneity, the scal au- thority would be able to neutralize the eects of a change in the rate of monetary growth and a version of the Friedman rule becomes optimal.
    Keywords: Monetary policy; scal policy; redistribution; Friedman rule; heterogeneity; overlapping generations; second best 1
    JEL: H21 H52
    Date: 2012–01–25
  29. By: Joshua C C Chan; Gary Koop; Simon M Potter
    Abstract: This paper introduces a new model of trend (or underlying) inflation. In contrast to many earlier approaches, which allow for trend inflation to evolve according to a random walk, ours is a bounded model which ensures that trend inflation is constrained to lie in an interval. The bounds of this interval can either be fixed or estimated from the data. Our model also allows for a time-varying degree of persistence in the transitory component of inflation. The bounds placed on trend inflation mean that standard econometric methods for estimating linear Gaussian state space models cannot be used and we develop a posterior simulation algorithm for estimating the bounded trend inflation model. In an empirical exercise with CPI inflation we find the model to work well, yielding more sensible measures of trend inflation and forecasting better than popular alternatives such as the unobserved components stochastic volatility model.
    Date: 2012–02
  30. By: Fujisaki, Seiya
    Abstract: We analyze relations between several types of interest rate control rules and equilibrium determinacy using a two-country model featuring preference and production parameters that may differ between countries, in which two kinds of goods are tradable. Such heterogeneity may violate the Taylor principle, which implies that aggressive monetary policy is desirable to attain determinate equilibrium. We evaluate the forms of interest rate control needed to attain macroeconomic stability in consideration of the heterogeneity.
    Keywords: heterogeneity; Taylor rule; open economy; equilibrium determinacy
    JEL: E52 F41
    Date: 2012–03–01
  31. By: Nicolás De Roux; Marc Hofstetter
    Abstract: Two recent papers (Gonçalves and Carvalho, 2009; and Brito, 2010) hold contradictory views regarding the role of inflation targeting during periods of disinflation. The first paper claims that inflation targeting reduces sacrifice ratios—i.e., the ratio of output losses to the change in trend inflation—during disinflations; the second paper refutes this result. We show here that inflation targeting only matters if disinflations are slow. The credibility gains of a fast disinflation make inflation targeting irrelevant for reducing the output-inflation trade-off.
    Date: 2012–02–07
  32. By: Engin Kara
    Abstract: Bils, Klenow and Malin (forthcoming) (BKM) constructed a measure of reset price inflation (i.e. the rate of change of all "desired" prices) for the US. They argue that the existing pricing models cannot explain the observed reset inflation and aggregate inflation. In this paper, I show that a model that can account for the heterogeneity in contract lengths we observe in the data matches the data on both series. I also show that the BKM measure of reset inflation is a flawed measure of the concept they wish to measure and can be quite misleading.
    Keywords: DSGE models, reset inflation, GE, Calvo, price-level targeting.
    JEL: E32 E52 E58
    Date: 2011–11
  33. By: Tito Nícias Teixeira da Silva Filho
    Abstract: Core inflation is under attack. Empirically, experts have become increasingly disappointed with its actual performance. Theoretically, while some claim that it is a key inflation predictor others argue that, by construction, that cannot be one of its main properties, at least in the short run. Even if true, core inflation could still be useful if it provides good directional inflation forecasts. The evidence presented here using U.S., Canadian and Brazilian data shows that this does not seem to be the case. Directional forecasts are often no better than a coin toss, especially from the level model. The gap model’s forecasts are wrong, on average, at least 20% of the time. More crucially, they are usually no better than a simple moving average of headline inflation.
    Date: 2012–01
  34. By: Perry, Bryan; Phillips, Kerk L.; Spencer, David E.
    Abstract: Economists have long investigated the cyclical behavior of real wages in order to draw inferences regarding the relative stickiness of prices and wages. Recent studies have adopted techniques intended to identify monetary shocks and examined the response of real wages and output or employment to such shocks. A finding that real wages are procyclical in response to a positive monetary policy shock, for example, is taken as evidence that prices are stickier than wages. In this paper, we show that factors other than wage and price stickiness affect the response of real wages to a monetary policy shock. Accordingly, examining the response of real wages is not enough to sort out the relative stickiness of prices and wages. We use two prominent DSGE models to help us address this issue. These models incorporate both sticky wages and prices but in different ways. The first model (Huang, Liu, and Phaneuf, American Economic Review, 2004) is relatively simple and is not intended for policy analysis. Its relative simplicity allows us to approach the issues both analytically and through simulations. The second model (Smets and Wouters, American Economic Review, 2007) is a relatively complex model of the U.S. economy with many frictions and intended to be useful for policy analysis. Because of its complexity, we must rely principally on simulation exercises. Using these models we offer robust evidence that the real wage response to monetary policy is affected in important ways by properties of the economy other than stickiness of wages and prices, such as the importance of intermediate goods in the production process and the size of key elasticities. Consequently, we cannot appropriately infer the relative stickiness of wages and prices from examining only the response of real wages to a monetary policy shock.
    Keywords: real wages, monetary policy, DSGE models
    JEL: E32 D52 E10
    Date: 2012–02–29
  35. By: Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Christian Pierdzioch (Helmut-Schmidt-University, Department of Economics); Jan-Christoph Ruelke (WHU – Otto Beisheim School of Management); Georg Stadtmann (University of Southern Denmark, Department of Business and Economics, and European-University Viadrina)
    Abstract: Based on the approach advanced by Elliott et al. (Rev. Ec. Studies. 72, 1197-1125,2005), we analyzed whether the loss function of a sample of exchange rate forecasters is asymmetric in the forecast error. Using forecasts of the euro/dollar exchange rate, we found that the shape of the loss function varies across forecasters. Our empirical results suggest that it is important to account for the heterogeneity of exchange rate forecasts at the microeconomic level of individual forecasters when one seeks to analyze whether forecasters form exchange rate forecasts under an asymmetric loss function.
    Keywords: Exchange rate, Forecasting, Loss function
    JEL: F31 D84
    Date: 2012–02
  36. By: Tomasz Brodzicki (Faculty of Economics, University of Gdansk)
    Abstract: Economic and Monetary Union is an unprecedented event in the monetary history of Europe. The eurozone since its creation 13 years ago expanded to 17 Member States and functioned relatively smoothly up to the outset of the global financial crisis. Only the severity of the subsequent eurozone crisis showed the actual scale of structural, institutional and governance problems it had. The differences between its core and peripheral regions became more than evident. In the present paper we discuss the optimality of the existing and the enlarged eurozone. Despite of the progress made, eurozone is far away from meeting the OCA criteria. Further enlargements, by increasing the overall internal diversity of the union, are likely to increase the gap. It seems however that even non-optimal monetary unions may function but at a significantly higher costs. In some cases the long term costs could even outweigh the benefits. The nominal convergence criteria are only partially consistent with the OCA theory, they are largely arbitrary and should be modified in the interest of the present eurozone as well as of acceding states.
    Keywords: eurozone, optimum currency area, economic and monetary integration, EMU, Maastricht criteria
    JEL: F35 F41 F42 E42
    Date: 2012–02
  37. By: Antonio Lemus; Paul Cashin
    Abstract: This paper studies the nature of the shocks affecting the Eastern Caribbean Currency Union (ECCU), and examines whether a hypothetical Eastern Caribbean fiscal insurance mechanism could insure member countries of the union against asymmetric national income shocks. The empirical results suggest that a one dollar reduction in an ECCU member country's per capita personal income could trigger, through reduced income taxes and increased transfers, flows equivalent to about 7 percent of the initial income shock. Each member of the currency union could benefit as well, although the extent of shock mitigation differs across individual countries.
    Keywords: Caribbean , Eastern Caribbean Currency Union , External shocks , Fiscal policy , Monetary unions , National income ,
    Date: 2012–01–18
  38. By: Joshua Aizenman; Kenta Inoue
    Abstract: We study the curious patterns of gold holding and trading by central banks during 1979-2010. With the exception of several discrete step adjustments, central banks keep maintaining passive stocks of gold, independently of the patterns of the real price of gold. We also observe the synchronization of gold sales by central banks, as most reduced their positions in tandem, and their tendency to report international reserves valuation excluding gold positions. Our analysis suggests that the intensity of holding gold is correlated with ‘global power’ – by the history of being a past empire, or by the sheer size of a country, especially by countries that are or were the suppliers of key currencies. These results are consistent with the view that central bank’s gold position signals economic might, and that gold retains the stature of a ‘safe haven’ asset at times of global turbulence. The under-reporting of gold positions in the international reserve/GDP statistics is consistent with loss aversion, wishing to maintain a sizeable gold position, while minimizing the criticism that may occur at a time when the price of gold declines.
    JEL: E58 F31 F33
    Date: 2012–03
  39. By: Antipin, Jan-Erik (National Institute of Economic Research); Boumediene, Farid Jimmy (Ministry of Finance); Österholm, Pär (Sveriges Riksbank)
    Abstract: This paper assesses the usefulness of constant gain least squares when forecasting inflation. An out-of-sample forecast exercise is conducted, in which univariate autoregressive models for inflation in Australia, Swe-den, the United Kingdom and the United States are used. The results suggest that it is possible to improve the forecast accuracy by employing constant gain least squares instead of ordinary least squares. In particular, when using a gain of 0.05, constant gain least squares generally outper-forms the corresponding autoregressive model estimated with ordinary least squares. In fact, at longer forecast horizons, the root mean square forecast error is reliably lowered for all four countries and for all lag lengths considered in the study.
    Keywords: Out-of-sample forecasts; Inflation
    JEL: E31 E37
    Date: 2012–02–01
  40. By: Ali Alichi; Sang Chul Ryoo; Cheol Hong
    Abstract: Korea has been active in implementing targeted macroprudential policies to address specific financial stability concerns. In this paper, we develop a conceptual model that could serve as a building block for the broader framework of macroprudential policy making in Korea. It is assumed that the policy maker imposes taxes on key aggregate financial ratios in the banking system to mitigate excessive leverage over the economic cycle. The model is calibrated for Korea. The results illustrate how countercyclical tools, such as simple taxes on key financial ratios, could be incorporated to enrich the broader macroprudential policy framework in the Korean context.
    Keywords: Banking systems , Debt , Economic models , Monetary policy ,
    Date: 2012–01–24
  41. By: Hans J. Blommestein; Philip Turner
    Abstract: This paper argues that serious fiscal vulnerabilities arising from many years of high government debt will create new and complex interactions between public debt management (PDM) and monetary policy (MP). The paper notes that, although their formal mandates have not changed, recent balance sheet policies of many Central Banks (CBs) have tended to blur the separation of their policies from fiscal policy (FP). The mandates of debt management offices (DMOs) have usually had a microeconomic focus (viz, keeping government debt markets liquid, limiting refunding risks etc). Such mandates have usually eschewed any macroeconomic policy dimension. For these reasons, all clashes in policy mandate between CBs and DMOs have been latent and not overt.
    Keywords: monetary policy, debt, debt management, sovereign debt, central banks and their policies, policy objectives, policy designs and consistency, policy coordination
    JEL: E52 E58 E61 H63
    Date: 2012–02–20
  42. By: Charalambos G. Tsangarides; Atish R. Ghosh; Jonathan David Ostry
    Abstract: Why have emerging market economies (EMEs) been stockpiling international reserves? We find that motives have varied over time—vulnerability to current account shocks was relatively important in the 1980s but, as EMEs have become more financially integrated, factors related to the magnitude of potential capital outflows have gained in importance. Reserve accumulation as a by-product of undervalued currencies has also become more important since the Asian crisis. Correspondingly, using quantile regressions, we find that the reason for holding reserves varies according to the country’s position in the global reserves distribution. High reserve holders, who tend to be more financially integrated, are motivated by insurance against capital account rather than current account shocks, and are more sensitive to the cost of holding reserves than are low-reserve holders. Currency undervaluation is a significant determinant across the reserves distribution, albeit for different reasons.
    Date: 2012–01–27
  43. By: Cette, G.; De Jong, M.
    Abstract: It is generally assumed that the two Fisher components of the interest rate -the real interest and the inflation- evolve independently over time, considering that they are driven by unrelated economical events. However, the market pricing of those components deduced from newly-available bond data does not provide conclusive evidence. While studying the price behaviour of inflation-linked (real) bonds beside nominal bonds in the major fixed-income markets, we observe that the real bond yields and the yield differentials, the breakeven inflation rates, have the propensity to be positively correlated between each other across the various countries, yet are pushed into a negative correlation relationship due to market-related price distortions. As long as those distortions are local, the net result is near-zero correlation within countries; when they become global, as in the heat of the current crisis, the correlations turn negative worldwide. In this paper insight is gained by taking an innovative worldwide study approach and thanks to revealing crisis period events.
    Keywords: inflation-linked bonds, breakeven inflation, Fisher hypothesis.
    JEL: E43 G15
    Date: 2012
  44. By: Banerjee, A.; Bystrov, V.; Mizen, P.
    Abstract: Much of the literature on interest rate pass through assumes banks set retail rates by observing current market rates. We argue instead that banks anticipate the direction of short-term market rates when setting interest rates on loans, mortgages and deposits. If anticipated rates - captured by forecasts of short-term interest rates or future markets - are important, the empirical specifications of many previous studies that omit them could be misspecified. Including such forecasts requires a detailed consideration of the information in the yield curve and alternative forecasting models. In this paper we use two methods to extract anticipated changes to short-term market rates - a level, slope, curvature model and a principal components model - at many horizons, before including them in a model of retail rate adjustment for four interest rates in four major euro area economies. We find a significant role for forecasts of market rates in determining interest rate pass through; alternative specifications with futures information yield comparable results. We conclude that it is important to include anticipated changes in market rates to avoid misspecification in pass through estimation.
    Keywords: forecasting, factor models, interest rates, pass-through.
    JEL: C32 C53 E43 E44
    Date: 2012
  45. By: Telyukova, Irina A.; Visschers, Ludo
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models,the only uncertainty aecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and nd that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables.
    Keywords: precautionary demand for money; business cycle fluctuations; money velocity fluctuations
    JEL: E32 E40 E41
    Date: 2011–12
  46. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Date: 2011–11
  47. By: V. Crispolti; George C. Tsibouris
    Abstract: This paper provides a historical perspective on the role of international reserves in low-income countries as a cushion against large external shocks over the last three decades - including the current global crisis. The results suggest that international reserves have played a role in buffering external shocks, with the resulting macroeconomic costs varying with the nature of the shock, the economy’s structural characteristics, and the level of reserves.
    Keywords: External shocks , Financial crisis , Global Financial Crisis 2008-2009 , Low-income developing countries , Reserves , Reserves adequacy ,
    Date: 2012–01–11
  48. By: Ulrich Fritsche (Department for Socioeconomics, Department for Economics, University of Hamburg); Christian Pierdzioch (Helmut-Schmidt-University, Department of Economics); Jan-Christoph Ruelke (WHU – Otto Beisheim School of Management); Georg Stadtmann (University of Southern Denmark, Department of Business and Economics, and European-University Viadrina)
    Abstract: Using forecasts of the Brazilian real and the Mexican peso, we analyze the shape of the loss function of exchange-rate forecasters and the rationality of their forecasts. We find a substantial degree of cross-sectional heterogeneity with respect to the shape of the loss function. While some forecasters seem to forecasts under an asymmetric loss function, symmetry of the loss function cannot be rejected for other forecasters. An asymmetric loss function does not necessarily make survey data of exchange-rate forecasts look rational, and the loss function seems to depend not only on the forecast error.
    Keywords: Exchange rate, Forecasting, Loss function
    JEL: F31 D84
    Date: 2012–02
  49. By: Masafumi Yabara
    Abstract: Capital markets in the East African Community (EAC) face common challenges of low capitalization and liquidity, but to different degrees. EAC member countries have made noticeable progress in developing domestic capital markets through a regional approach, removing constraints on capital transactions and harmonizing market infrastructure. Nevertheless, empirical analysis suggests capital market integration has not deepened during the past few years in the EAC, although convergence of investment returns is taking place to some extent. Learning from the experience of the West African Economic and Monetary Union and the Association of Southeast Asian Nations, EAC countries would benefit from four actions to accelerate financial market integration: (i) further harmonize market infrastructure; (ii) strengthen regional surveillance mechanisms; (iii) encourage local currency bond issuance by multilateral financial institutions; and (iv) build the capacity of the existing regional institutions.
    Keywords: Bond markets , Capital account liberalization , Capital markets , East Africa , Economic integration , Monetary unions , Stock markets ,
    Date: 2012–01–19
  50. By: Yoshiko Nagano
    Abstract: This paper discusses the mismanagement of the Philippine National Bank during the financial crisis of 1919-1922, with special reference to its extravagant commercial and industrial loans. First, it examines the financial condition of the Bank from about 1913 through the early 1920s against the background of the expansion of loan business and the export boom. Second, the Bank's role is discussed in the light of the development of three major export sectors: Manila hemp (abaca) trading, coconut processing, and sugar processing. Third, the blatant illegitimacy of the Bank's lending is detailed, given the virtual across-the-board direct involvement of the Bank's board members in the ownership and management of the companies active in these businesses.
    Date: 2012–01
  51. By: Hanan Morsy; Florence Jaumotte
    Abstract: While inflation differentials in a monetary union can be benign, reflecting a catch-up process, or an adjustment mechanism to asymmetric shocks or different business cycles, they may also indicate distortions related to inefficiencies in domestic product and labor markets that amplify or make more persistent the impact of shocks on inflation. The paper examines the determinants of inflation differentials in the euro area, with emphasis on the role of country specific labor and product market institutions. The analysis uses a traditional backward-looking Phillips curve equation and augments it to explore the role of collective bargaining systems, union density, employment protection, and product market regulation. The model is estimated over a panel dataset of 10 euro area countries over the period 1983-2007. Results show that high employment protection, intermediate coordination of collective bargaining, and high union density increase the persistence of inflation. Oil and raw materials price shocks are also more likely to be accommodated by wage increases when the degree of coordination in collective bargaining is intermediate. These results are robust to different estimation methods, model specifications, and outliers. The paper suggests that reforming labor market institutions may improve the functioning of the euro area by reducing the risk of persistent inflation differentials.
    Date: 2012–01–31
  52. By: Maheu, John; Song, Yong
    Abstract: This paper develops an efficient approach to model and forecast time-series data with an unknown number of change-points. Using a conjugate prior and conditional on time-invariant parameters, the predictive density and the posterior distribution of the change-points have closed forms. The conjugate prior is further modeled as hierarchical to exploit the information across regimes. This framework allows breaks in the variance, the regression coefficients or both. Regime duration can be modelled as a Poisson distribution. An new efficient Markov Chain Monte Carlo sampler draws the parameters as one block from the posterior distribution. An application to Canada inflation time series shows the gains in forecasting precision that our model provides.
    Keywords: multiple change-points; regime duration; inflation targeting; predictive density; MCMC
    JEL: C51 C22 C11
    Date: 2012–02–22
  53. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: Foreign banks pulled significant funding from their U.S. branches during the Great Recession. We estimate that the average-sized branch experienced a 12 percent net internal fund “withdrawal,” with the fund transfer disproportionately bigger for larger branches. This internal shock to the balance sheets of U.S. branches of foreign banks had sizable effects on their lending. On average, for each dollar of funds transferred internally to the parent, branches decreased lending supply by about 40 to 50 cents. However, the extent of the lending effects was very different across branches, depending on their pre-crisis modes of operation in the United States.
    JEL: E44 F36 G32
    Date: 2012–02
  54. By: Luis Ignacio Jácome; Simon Baker Townsend; Marcela Matamoros-Indorf; Mrinalini Sharma
    Abstract: Using a central bank legislation database, this paper documents and analyzes worldwide institutional arrangements for central bank lending to the government and identifies international practices. Key findings are: (i) in most advanced countries, central banks do not finance government expenditure; (ii) in a large number of emerging and developing countries, short-term financing is allowed in order to smooth out tax revenue fluctuations; (iii) in most countries, the terms and conditions of these loans are typically established by law, such that the amount is capped at a small proportion of annual government revenues, loans are priced at market interest rates, and their maturity falls within the same fiscal year; and (iv) in the vast majority of countries, financing other areas of the state, such as provincial governments and public enterprises, is not allowed. The paper does not address central banks’ financial support during financial crises.
    Keywords: Bank credit , Central banks , Developed countries , Developing countries , Emerging markets , Loans ,
    Date: 2012–01–18

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