nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒03‒28
35 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Central-banking challenges for the Riksbank: Monetary policy, financial-stability policy and asset management By Svensson, Lars E O
  2. Long-Term Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge By Eusepi, Stefano; Giannoni, Marc; Preston, Bruce
  3. Robustly Optimal Monetary Policy in a Microfounded New Keynesian Model By Adam, Klaus; Woodford, Michael
  4. Measuring the natural yield curve By Michał Brzoza-Brzezina; Jacek Kotłowski
  5. On the Implementation of Sound Money By Volodymyr Vysochansky
  6. The Role of Central Banks in Financial Stability: How has it changed? By Buiter, Willem H.
  7. Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies By Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
  8. Capital Controls with International Reserve Accumulation: Can this Be Optimal? By Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
  9. The ECB and the Interbank Market By Giannone, Domenico; Lenza, Michele; Pill, Huw; Reichlin, Lucrezia
  10. Fear of a two-speed monetary union: what does a basic correlation scatter plot tell us? By Jean-Sébastien Pentecôte
  11. Capital controls and foreign exchange policy By Fratzscher, Marcel
  12. Monetary policy, bank size and bank lending: evidence from Australia(new version) By liu, luke
  13. Policy Mix Coherence: What Does it Mean for Monetary Policy in West Africa? By Nasser Ary Tanimoune; Jean-Louis Combes; Rene Tapsoba
  14. Nominal Stability and Financial Globalization By Devereux, Michael B; Senay, Ozge; Sutherland, Alan
  15. Money aggregates and economic activity during the Great Depression and 2007-11 By Belliveau, Stefan
  16. Sources of Risk in Currency Returns By Chernov, Mikhail; Graveline, Jeremy; Zviadadze, Irina
  17. Precautionary hoarding of liquidity and inter-bank markets: Evidence from the sub-prime crisis By Acharya, Viral V; Merrouche, Ouarda
  18. Stability and policy rules in emerging markets By Ashima Goyal; Shruti Tripathi
  19. Sizing Up Repo By Krishnamurthy, Arvind; Nagel, Stefan; Orlov, Dmitry
  20. Exchange-Rate Dark Matter By Martin D. D. Evans
  21. Evaluating FOMC forecast ranges: an interval data approach By Henning Fischer; Marta García-Bárzana; Peter Tillmann; Peter Winker
  22. Short-run forecasting of the euro-dollar exchange rate with economic fundamentals By Marcos dal Bianco; Maximo Camacho; Gabriel Perez-Quiros
  23. Monetary Policy Transmission in a Model with Animal Spirits and House Price Booms and Busts By Bofinger, Peter; Debes, Sebastian; Gareis, Johannes; Mayer, Eric
  24. Capital Inflows and Asset Prices: Evidence from Emerging Asia By Peter Tillmann
  25. Politica monetara în sistemele financiare moderne By Paun, Cristian
  26. REAL Exchange Rate Misalignment and Economic Performance of WEST AFRICAN MONETARY ZONE:Implications for macroeconomic unionisation By Raji, Rahman Olanrewaju
  27. The Scapegoat Theory of Exchange Rates: The First Tests By Fratzscher, Marcel; Sarno, Lucio; Zinna, Gabriele
  28. Tommaso Padoa-Schioppa and the origins of the euro By Ivo Maes
  29. Monetary Policy and Output Gap : Mind the Composition By Harun Alp; Fethi Ogunc; Cagri Sarikaya
  30. A Darwinian Perspective on "Exchange Rate Undervaluation" By Du, Qingyuang; Wei, Shang-Jin
  31. On the optimal supply of liquidity with borrowing constraints By Lippi, Francesco; Trachter, Nicholas
  32. Rent dissipation or government predation ? The notes issuance activity in Italy 1865-1882 By Antoine Gentier; Giuseppina Gianfreda; Nathalie Janson
  33. Short-Term Inflation Forecasting Models For Turkey and a Forecast Combination Analysis By Kurmas Akdogan; Selen Baser; Meltem Gulenay Chadwick; Dilara Ertug; Timur Hulagu; Sevim Kosem; Fethi Ogunc; M. Utku Ozmen; Necati Tekatli
  34. International reserves and gross capital flows. Dynamics during financial stress By Enrique Alberola; Aitor Erce; José María Serena
  35. Aid and the Fiscal and Monetary Responses to Dutch Disease By Roe, Alan R.

  1. By: Svensson, Lars E O
    Abstract: The Riksbank faces challenges with regard to each of its three core functions, conducting monetary policy with the objective of stabilising inflation around the inflation target and resource utilisation around a sustainable level, promoting a safe and efficient payment system and thereby conducting a policy for financial stability, and managing its financial assets to attain a good risk-adjusted rate of return without prejudice to the first two core functions. I conclude that the challenges are best met by focusing monetary policy exclusively on stabilising inflation around the inflation target and resource utilisation around a sustainable level and not treating the policy rate, housing prices or household debt as separate explicit or implicit target variables, by not confusing monetary policy with financial-stability policy but treating them as separate policies, and by eliminating the large unnecessary currency risk in the Riksbank’s balance sheet.
    Keywords: central bank asset management; macroprudential policy; monetary policy
    JEL: E42 E52 E58 G18 G28
    Date: 2012–02
  2. By: Eusepi, Stefano; Giannoni, Marc; Preston, Bruce
    Abstract: Under rational expectations monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure --- anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment the expectations hypothesis of the yield curve need not hold, a situation called unanchored financial market expectations. Whether or not financial market expectations are anchored, private sector imperfect knowledge mitigates the efficacy of optimal monetary policy. Under anchored expectations, slow adjustment of interest-rate beliefs limits scope to adjust current interest-rate policy in response to evolving macroeconomic conditions. Imperfect knowledge represents an additional distortion confronting policy, leading to greater inflation and output volatility relative to rational expectations. Under unanchored expectations, current interest-rate policy is divorced from interest-rate expectations. This permits aggressive adjustment in current interest-rate policy to stabilize inflation and output. However, unanchored expectations are shown to raise significantly the probability of encountering the zero lower bound constraint on nominal interest rates. This constraint is more severe the longer is the average maturity structure of the public debt.
    Keywords: Expectations Hypothesis of the Yield Curve; Expectations Stabilization; Long Debt; Optimal Monetary Policy; Transmission of Monetary Policy
    JEL: D83 D84 E32
    Date: 2012–02
  3. By: Adam, Klaus; Woodford, Michael
    Abstract: We consider optimal monetary stabilization policy in a New Keynesian model with explicit microfoundations, when the central bank recognizes that private-sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs close enough to model-consistency. We show how to characterize robustly optimal policy without restricting consideration a priori to a particular parametric family of candidate policy rules. We show that robustly optimal policy can be implemented through commitment to a target criterion involving only the paths of inflation and a suitably defined output gap, but that a concern for robustness requires greater resistance to surprise increases in inflation than would be considered optimal if one could count on the private sector to have 'rational expectations'.
    Keywords: belief distortions; near-rational expectations; robust control; target criterion
    JEL: D81 D84 E52
    Date: 2012–02
  4. By: Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Jacek Kotłowski (National Bank of Poland, Warsaw School of Economics)
    Abstract: We generalize the concept of the natural rate of interest (Laubach and Williams, 2003; Woodford, 2003) by defining and estimating the the natural yield curve (NYC) - the term structure of natural interest rates. Our motivation stems i.a. from the observation that at times when central banks attempt to directly affect long-term interest rates (e.g. via quantitative easing) the gap between the short-term real and natural rate is no more a good indicator of the monetary policy stance. We estimate the NYC on US data, document its main properties and show i.a. that in the period 2008-2011 the NYC allows to better capture the US monetary policy stance than the short-term natural rate.
    Keywords: Natural rate of interest, natural yield curve, unconventional monetary policy, Kalman filter
    JEL: C32 E43 E52
    Date: 2012
  5. By: Volodymyr Vysochansky (Uzhhorod University)
    Abstract: World financial crisis unveiled the shaky state of modern monetary system, based on a centralized fiat money supply and fractional-reserve banking. The scale of the crisis and the threat of major inflation, which has already become a reality on commodities markets, confirm the instability of the monetary system. In order to discover weak spots of the system and consider possible solutions on how to remove them, it is necessary to revise the nature of its elements, first of all, money. The article is devoted to the issues of commodities backed money and approaches of its implementation. Model of unregulated money creation/withdrawal, which is based on ETF technology and exchange infrastructure, is proposed as an incentive to stimulate discussion about possible improvement of the modern monetary system.
    Keywords: money, commodities, exchange traded funds, monetary system regulation
    JEL: E4 E5 G1
    Date: 2012–02–29
  6. By: Buiter, Willem H.
    Abstract: The roles of central banks in the advanced economies have expanded and multiplied since the beginning of the crisis. The conventional monetary policy roles - setting interest rates in the pursuit of macroeconomic stability and acting as lender of last resort and market maker of last resort to provide funding liquidity and market liquidity to illiquid but insolvent counterparties - have both been transformed. With official policy rates near or at the effective lower bound, the size of the central bank's balance sheet and the composition of its assets and liabilities have become the new, 'poor man's', monetary policy instruments. The LLR and MMLR roles have expanded to include solvency support for SIFIs and, in the euro area, the provision of liquidity support and solvency support for sovereigns also. Concentrating too many financial stability responsibilities, including macro-prudential and micro-prudential regulation, in the central bank risks undermining the independence of the central bank where it is likely to be useful -- the conventional monetary policy roles. The non-inflationary loss-absorption capacity (NILAC) of the leading central banks is vast. For the ECB/Eurosystem we estimate it at no less than EUR3.2 trillion, for the Fed at over $7 trillion. This is tax payers' money that is not under the effective control of the fiscal authorities. The central banks have used their balance sheets and their NILACs to engage in quasi-fiscal actions that have been essential to prevent even greater financial turmoil and possible disaster, but that also have important distributional impacts between sectors, financial institutions, individuals and nations. The ECB was forced into this illegitimate role by the fiscal vacuum at the heart of the euro area; the Fed by the fiscal paralysis of the US Federal government institutions.
    Keywords: Accountability; Central banks; Financial stability; Non-inflationary loss absorption capacity
    JEL: E41 E52 E58 E63 G01 H63
    Date: 2012–01
  7. By: Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
    Abstract: disturbances, generating macroeconomic instabilities. The adoption of inflation targeting (IT) by many emerging market economies has raised the questions about its relative suitability in dealing with these shocks compared with other regimes. This paper tests the robustness of inflation targeting compared to monetary targeting and exchange rate targeting regimes in coping with commodity terms of trade shocks. It uses a panel VAR technique to analyse in a comparative framework, aggregate impulse response functions and variance decompositions of variables to commodity terms of trade shocks. The results show that in general, IT countries respond better to commodity terms of trade shocks especially with respect to inflation and output gap. However, exchange rates are more volatile in IT countries than in exchange rate targeting countries. The results suggest that EMEs countries can reduce the adverse effects of commodity terms of trade fluctuations when they adopt inflation targeting, but they also need to pay attention to exchange rate movements.
    Keywords: In‡ation targeting, commodity terms of trade shocks, emerging markets, panel VAR.
    JEL: E52 G28
    Date: 2012
  8. By: Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick
    Abstract: Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments.
    Keywords: Capital controls; International reserves
    JEL: E58 F36 F41
    Date: 2012–01
  9. By: Giannone, Domenico; Lenza, Michele; Pill, Huw; Reichlin, Lucrezia
    Abstract: This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al., 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.
    Keywords: interbank market; Non-standard monetary policy measures
    JEL: E5 E58
    Date: 2012–02
  10. By: Jean-Sébastien Pentecôte (University of Rennes 1 - CREM, (UMR 6211 CNRS))
    Abstract: I extend the Bayoumi-Eichengreen (1993) approach by extracting new information from a scatter plot of correlation coefficients between shocks in order to better visualize how far a given country is from a monetary union. Indexes of distance and relative strength can be derived from either a nonlinear or a linear combination of correlations in connexion with distinct welfare loss functions. Using quarterly data on ten countries over 1979:I-2011:IV, shocks have become more symmetric within, but also outside, the euro area. Despite less asymmetry in shock asymmetry since 1999, new statistical tests support the idea of a two-speed EMU.
    Keywords: monetary union, euro, shock asymmetry, distance, VAR identification
    JEL: F33 F36 D6 E2
    Date: 2012–03
  11. By: Fratzscher, Marcel
    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.
    Keywords: capital controls; capital flows; economic policy; exchange rates; financial stability; G20
    JEL: F30 F31
    Date: 2012–01
  12. By: liu, luke
    Abstract: This study explores how monetary policy changes flow through the banking sector in Australia. Drawing on data between 2004 and 2010, we divide banks into three groups according to their size, and examine the impact of cash rate change on lending of different types of loans. We found the response of bank lending after a monetary policy change varies with the size of the bank as well as the types of loan.
    Keywords: monetary policy; transmission mechanism; bank size
    JEL: E42 E52 G32
    Date: 2012–03–19
  13. By: Nasser Ary Tanimoune (School of International Development and Global Studies - School of International Development and Global Studies - University of Ottawa); Jean-Louis Combes (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Rene Tapsoba (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This article examines the influence of Policy Mix coherence in Economic Community of West African States (ECOWAS). The paper innovates in two ways. First, through an interaction between the monetary conditions index and the primary structural fiscal balance, we highlight coherence-type complementarities between monetary policy and fiscal policy with regard to their effects on economic activity. Second, we show that the influence of the coherence of policy mix on the effect of monetary policy is different according to the stance of the economy within the four possible regimes of policy mix, mostly in the WAEMU subsample, where integration is deeper than in the non-WAEMU countries, thanks to the common currency (the Franc CFA) they share. The analysis is based upon a panel dataset from 1990 to 2006 and remains robust to alternative specifications used to calculate the monetary conditions index. Our results contribute to the debate regarding the prospect of an ECOWAS-wide common currency. Indeed, given the heterogeneity in the economic structure of its members States, more policy mix coherence seems necessary to avoid unexpected impacts of monetary policy on economic activity.
    Keywords: Policy Mix;Structural Fiscal Balance;Monetary Conditions Index;Economic Community of West African States.
    Date: 2012–03–13
  14. By: Devereux, Michael B; Senay, Ozge; Sutherland, Alan
    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.
    Keywords: Country Portfolios; Financial Globalization; Nominal stability
    JEL: E52 E58 F41
    Date: 2012–02
  15. By: Belliveau, Stefan
    Abstract: This working paper examines monetary aggregates as means of explaining economic activity. Comparative analysis of the Great Depression and the years 2007-11 is used to test the explanatory power of monetary aggregates in accordance with their use in monetarist explanations of the Great Depression. A conclusion from this analysis is that monetarist theory can structure monetary-aggregate data to produce useful insights about economic activity for the years 2007-11.
    Keywords: Price level; money supply; monetary policy; monetarism; Great Depression
    JEL: E31 N12 E50
    Date: 2012–03–15
  16. By: Chernov, Mikhail; Graveline, Jeremy; Zviadadze, Irina
    Abstract: We quantify the sources of risk in currency returns as a first step toward understanding the returns reported for the carry trade. To do this, we develop and estimate an empirical model of exchange rate dynamics using daily data for four currencies relative to the US dollar: the Australian dollar, the British pound, the Swiss franc, and the Japanese yen. The model includes (i) Gaussian shocks with stochastic variance, (ii) jumps up and down in the exchange rate, and (iii) jumps in the variance. We identify these components using data on exchange rates and at-the-money implied variances. We find that the probability of a jump depreciation (appreciation) in the exchange rate is increasing in the domestic (foreign) interest rate. The probability of jumps in variance is increasing in the variance but not related to interest rates. Many of the jumps in exchange rates are associated with macroeconomic and political news, but jumps in variance are not. Overall, jumps account for 25% of total currency risk over horizons of one to three months.
    Keywords: Bayesian MCMC; carry trades; exchange rates; implied volatility; jumps
    JEL: C58 F31 G12
    Date: 2012–01
  17. By: Acharya, Viral V; Merrouche, Ouarda
    Abstract: We study the liquidity demand of large settlement (first-tier) banks in the UK and its effect on the Sterling Money Markets before and during the sub-prime crisis of 2007-08. Liquidity holdings of large settlement banks experienced on average a 30% increase in the period immediately following 9th August, 2007, the day when money markets froze, igniting the crisis. In the UK, unlike in the US until October 2008, the remuneration of reserves accounts provides strong incentives for banks to park liquidity at the central bank rather than lend in the market. We show that following this structural break, settlement bank liquidity had a precautionary nature in that it rose on calendar days with a large amount of payment activity and for banks with greater credit risk. We establish that the liquidity demand by settlement banks caused overnight inter-bank rates to rise and volumes to decline, an effect virtually absent in the pre-crisis period. This liquidity effect on inter-bank rates occurred in both unsecured borrowing as well as borrowing secured by UK government bonds. Further, using bilateral data we show that the effect was more strongly linked to lender risk than to borrower risk.
    Keywords: cash; contagion; counterparty risk; funding risk; money markets; rollover risk; systemic risk
    JEL: E42 E58 G21 G28
    Date: 2012–02
  18. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Stability results for an open economy DSGE adapted to an emerging market (SOEME) with a dualistic structure have the same structure as in the original model, but those derived for the simulated version turn out to impose no restriction on the coefficient of inflation, but rather a threshold on the coefficient of the output gap. Other rigidities, lags and some degree of backward looking behavior in the simulated SOEME model arising from its calibration to an emerging market, may be helping provide a nominal anchor. Estimation of a Taylor rule for India, simulations in the SOEME model itself and a variant with government debt, confirm the analytical result. Implications are, first, optimization can be as effective as following a monetary policy rule. Second, knowledge of the specific rigidities in an economy can give useful inputs for the design of policy-their effect on stability should be more carefully researched.
    Keywords: DSGE, emerging economy, rigidities, stability, optimization, Taylor rule
    JEL: E26 E52
    Date: 2012–01
  19. By: Krishnamurthy, Arvind; Nagel, Stefan; Orlov, Dmitry
    Abstract: We measure the repo funding extended by money market funds (MMF) and securities lenders to the shadow banking system, including quantities, haircuts, and repo rates by type of underlying collateral. We find that repo played only a small role in funding private sector assets prior to the crisis, as most repos are backed by Treasury and Agency collateral. Repo with private sector collateral contracts during the crisis, but the magnitude is relatively insignificant compared with the contraction in asset-backed commercial paper (ABCP). While relatively small in aggregate, the contraction in repo particularly affected key dealer banks with large exposures to private sector securities, which then had knock-on effects on security markets, and led these dealer banks to resort to the Fed's emergency lending programs. We also find that haircuts in MMF-to-dealer repo rise less than the dealer-to-dealer or dealer-to-hedge fund repo haircuts reported in earlier papers. This finding suggests that the contraction in repo led dealers to take defensive actions, given their own capital and liquidity problems, raising credit terms to their borrowers. The picture that emerges from these findings looks less like a traditional bank run of depositors and more like a credit crunch among dealer banks.
    Keywords: Dealer Banks; Financial Crisis; Repurchase Agreements; Shadow Banking
    JEL: E51 G01 G21 G24
    Date: 2012–02
  20. By: Martin D. D. Evans (Department of Economics, Georgetown University)
    Abstract: Dark matter is believed to account for 83 percent of the matter in the universe and plays a central role in cosmology modeling. This paper argues that an analogous form of dark matter plays a similarly important role in international macroeconomics. Like its cosmological counterpart, exchange-rate dark matter cannot be directly observed, but its existence can be inferred from observations on the real exchange rates and interest rates. In the first part of this paper I show that dark matter is the dominant driver of short- and medium-term changes in real exchange rates for the G-7 countries; accounting for more than 90 percent of the variance at the five-year horizon. Although standard models stress the role of real interest differentials as the proximate drivers of real exchange-rate variations, my findings indicate that they are empirically unimportant. To understand the nature of exchange-rate dark matter, the second part of the paper develops an open-economy DSGE model in which the risk shocks driving households’ habits interact with collateral constraints and incomplete markets. The model not only shows that risk shocks can account for the role of dark matter as a driver of real exchange-rate dynamics, but also that these same shocks have significant macroeconomic implications. My analysis suggests that exchange rates appear disconnected from traditional macroeconomic fundamentals because they are particularly susceptible to risk shocks that play an important role in international macroeconomics
    Keywords: Exchange Rate Dynamics, Open-Economy Macro Models, Habits, Incomplete Markets, Collateral Constraints.
    Date: 2012–01–01
  21. By: Henning Fischer (University of Giessen); Marta García-Bárzana (University of Oviedo); Peter Tillmann (University of Giessen); Peter Winker (University of Giessen)
    Abstract: The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve publishes the range of members’ forecasts for key macroeconomic variables, but not the distribution of forecasts within this range. To evaluate these projections, previous papers compare the midpoint of the ranges with the realized outcome. This paper proposes a new approach to forecast evaluation that takes account of the interval nature of projections. It is shown that using the conventional Mincer-Zarnowitz approach to evaluate FOMC forecasts misses important information contained in the width of the forecast interval. This additional information plays a minor role at short forecast horizons but turns out to be of crucial importance for inflation and unemployment forecasts 18 months into the future. At long horizons the variation of members’ projections contains information which is more relevant for explaining future inflation than information embodied in the midpoint.
    Keywords: Forecast evaluation, interval data, Federal Reserve, monetary policy
    JEL: C53 E37 E58
    Date: 2012
  22. By: Marcos dal Bianco (BBVA Research); Maximo Camacho (Universidad de Murcia); Gabriel Perez-Quiros (Banco de España)
    Abstract: We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fi t and, more importantly, encouraging outof-sample forecasting results at horizons ranging from one week to one month. Specifi cally, we obtain statistically signifi cant improvements upon the hard-to-beat random walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model improves greatly when we use the direction-of-change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate has an equal chance to go up or down, with statistically signifi cant improvements.
    Keywords: euro-dollar rate, exchange rate forecasting, State-space model, mixed frequencies
    JEL: F31 F37 C01 C22
    Date: 2012–02
  23. By: Bofinger, Peter; Debes, Sebastian; Gareis, Johannes; Mayer, Eric
    Abstract: Can monetary policy trigger pronounced boom-bust cycles in house prices and create persistent business cycles? We address this question by building heuristics into an otherwise standard DSGE model. As a result, monetary policy sets off waves of optimism and pessimism ('animal spirits') that drive house prices, which, in turn, have strong repercussions on the business cycle. We compare our findings to a standard model with rational expectations by means of impulse responses. We suggest that a standard Taylor rule is not well-suited to maintain macroeconomic stability. Instead, an augmented rule that incorporates house prices is shown to be superior.
    Keywords: animal spirits; housing markets; monetary policy
    JEL: D83 E32 E52
    Date: 2012–01
  24. By: Peter Tillmann (University of Giessen)
    Abstract: The withdrawal of foreign capital from emerging countries at the height of the recent financial crisis and its quick return sparked a debate about the impact of capital flow surges on asset markets. This paper addresses the response of property prices to an inflow of foreign capital. For that purpose we estimate a panel VAR on a set of Asian emerging market economies, for which the waves of inflows were particularly pronounced, and identify capital inflow shocks based on sign restrictions. Our results suggest that capital inflow shocks have a significant effect on the appreciation of house prices and equity prices. Capital inflow shocks account for - roughly - twice the portion of overall house price changes they explain in OECD countries. We also address crosscountry differences in the house price responses to shocks, which are most likely due to differences in the monetary policy response to capital inflows.
    Keywords: Capital Inflows, House Prices, Monetary Policy, Sign Restrictions, Panel VAR
    JEL: F32 F41 E32
    Date: 2012
  25. By: Paun, Cristian
    Abstract: Monetary policy is one of the most sensitive problems in the modern financial systems. Money production of central banks and commercial banks generates a lot of problems in the prices mechanism, structure of production and is the major source of error in entrepreneurial decision. This paper discuss the major problems with modern monetary policies regarding: concept and function of money as a medium of exchange, (non)neutrality of money, independence of central banks, ineffectiveness of some specific monetary tools like inflation targeting is. There are a lot of mistakes produced from a long time that influenced and continue to influence the (in)stability of financial systems.
    Keywords: Monetary policy; Central Banks; fiat money; fractional reserve system
    JEL: B22 G01 G21
    Date: 2012–03–12
  26. By: Raji, Rahman Olanrewaju
    Abstract: The study assessed the real exchange rate misalignment and economic performance of WAMZ economies to determine its implications on economic unionization. The study uses Generalised Method of Moment of Dynamic Panel Estimation Method and supported with Cross Country Correlation Approach which comprises Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone covering the period from 2000 commencement of the zone to 2010 from international financial statistics of international monetary fund. The study discovered that the zone experiences asymmetrical correlations between real exchange rate misalignment and economic performance while the inclusion of equilibrium real exchange rate revealed a symmetrical relationship with economic performance. Further revelation in the study happened to be the cross country correlations which unveiled that four countries emerged to have a moderate degree of symmetrical relationship using some macroeconomic variables such real exchange rate, misaligned real exchange rate, openness, inflation and output. The study concluded by admonishing the zone to commence with four promising economies such as a Gambia, Ghana, Nigeria and Sierra Leone.
    Keywords: WAMZ; misalignment real exchange rate; currency union
    JEL: C33 F31 F43 F36
    Date: 2012–03–15
  27. By: Fratzscher, Marcel; Sarno, Lucio; Zinna, Gabriele
    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.
    Keywords: economic fundamentals; exchange rates; order flow; scapegoat; survey data
    JEL: F31 G10
    Date: 2012–02
  28. By: Ivo Maes (National Bank of Belgium, Research Department; Université catholique de Louvain, Robert Triffin Chair; HUB; ICHEC Brussels Management School)
    Abstract: Tommaso Padoa-Schioppa was one of the great architects of the euro. He is remembered in particular as co-rapporteur for the Delors Committee and as a founding member of the European Central Bank's Executive Board. For Padoa-Schioppa, becoming Director-General of the European Commission's DG II (from 1979 to 1983), was a defining moment in his career and life. This period is the main focus of this paper. At the Commission, Padoa-Schioppa's main priority was the European Monetary System, which was launched in March 1979. He was closely involved in several projects to strengthen the EMS, to improve economic policy convergence and the position of the ECU. The other main objective for Padoa-Schioppa was the strengthening of DG II's analytical capacity, especially its model-building capacity and its links with the academic world. As such, he played a crucial role in the professionalisation of economics at the Commission and in preparing DG II for the important role it would play in the EMU process. At the Commission, Padoa-Schioppa became also immersed in several European networks. Of crucial importance here were his contacts with Jacques Delors. This would be of major importance for his further career, becoming one of the architects of the single currency.
    Keywords: Padoa-Schioppa, Euro, EMS, EMU, Economic governance, European Commission
    JEL: A11 B20 E60 F02 N14 P16
    Date: 2012–03
  29. By: Harun Alp; Fethi Ogunc; Cagri Sarikaya
    Abstract: [TR] Bu calismada Bayesci yontem kullanilarak Turkiye’de çikti acigini temel bilesenlerine ayristiran bir çerçeve sunulmaktadir. Sonuclarimiz, Lehman krizini takip eden surecte Turkiye’de ic ve dis talep arasinda ciddi bir ayrisma yasanirken, ekonomi genelinde asiri bir isinma olmadigini gostermektedir. Bu bulgular, Turkiye Cumhuriyet Merkez Bankasi'nin (TCMB) yeni politika cercevesine zemin hazirlayan ve kayda deger bir enflasyon baskisi olmaksizin hizli kredi buyumesi ve artan cari islemler acigi ile tanimlanabilecek iktisadi gorunume iliskin goruslerini desteklemektedir. Bu kosullar altinda salt toplam cikti acigina dayandirilan geleneksel para politikasi yaklasimi finansal istikrar ile uyumlu olmayan bir politika onermesinde bulunabilecektir. Bu baglamda,cikti acigi bilesenlerinin turetilmesi, tutarli politikalarin tasarlanmasinda karar alicilara yardimci olacaktir. [EN] We estimate an output gap measure for Turkey in a Bayesian framework with special reference to its components. Our results suggest that Turkey experienced a notable divergence between domestic and external demand with no sign of overheating for the whole economy in the post-Lehman crisis period. This finding confirms the basis for the new policy framework of the Central Bank of Turkey (CBT), which was characterized by rapid credit expansion and growing current account deficit without significant inflationary pressures. Under these circumstances, conventional monetary policy practice focusing solely on aggregate output gap may suggest policy prescriptions inconsistent with financial stability. In this regard, extracting the components of output gap would help policymakers make a suitable policy design to avoid any contradiction among objectives.
    Date: 2012
  30. By: Du, Qingyuang; Wei, Shang-Jin
    Abstract: Though the real exchange rate is a key price for most economies, our understanding of its determinants is still incomplete. This paper studies the implications of status competition in the marriage market for the real exchange rate. In theory, a rise in the sex ratio (increasing relative surplus of men) can generate a decline in the real exchange rate (RER) through both a savings channel and an effective labor supply channel. The effects can be quantitatively large if the biological desire for a marriage partner is strong. Empirically, we show that within China, those regions with a faster increase in the sex ratio also exhibit a faster decline in the RER (the relative price of nontradables). Furthermore, across countries, those with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. As an application, the estimation suggests that these structural factors can account for the Chinese exchange rate almost completely.
    Keywords: currency manipulation; equilibrium real exchange rate; surplus men
    JEL: F3 F4 J1 J7
    Date: 2012–03
  31. By: Lippi, Francesco; Trachter, Nicholas
    Abstract: We characterize policies for the supply of liquidity in an economy where agents have a precautionary savings motive due to random production opportunities and the presence of borrowing constraints. We show that a socially efficient provision of liquidity involves a trade-off between insurance and production incentives. Two scenarios are studied: if no aggregate information is available to the policy maker, constant flat expansions are socially beneficial if unproductive spells are sufficiently long. If some aggregate information is available, a socially beneficial state-dependent policy prescribes expanding the supply of liquidity in recessions and contracting it in expansions.
    Keywords: Friedman rule; Heterogenous agents; Incomplete markets; Liquidity; Precautionary savings; State dependent policy.
    JEL: E5
    Date: 2012–03
  32. By: Antoine Gentier (CERGAM-CAE, Aix-Marseille Université); Giuseppina Gianfreda (University of Tuscia); Nathalie Janson (Rouen School of Management)
    Abstract: The aim of the paper is to examine the hypothesis of rent dissipation in the case of the Italian banking system during the suspension of gold convertibility. The major bank of the new born state of Italy – the Banca Nazionale nel regno d’Italia – experienced over the period 1866-1881 a decrease in its profitability inconsistent with the suspension of convertibility exclusively granted to its notes until 1874 but consistent with rent-seeking activity. The Banca Nazionale d’Italia was giving up present profit in order to maximize its chance to get the monopoly over money issue. Under these circumstances the rent seeking cost is not represented by the bribes offered to civil servants but by the forgone profit borne by shareholders. The complex relationships between banks and government in order to capture the benefits of seignoriage lead to a rent seeking game with evolving rules. The government changed the rules, and adopted an opportunistic behavior.
    Keywords: rent-seeking, dissipation of the rent, seignoriage, free banking, investment effort, social waste
    JEL: N23 G21 G28 E42 D72 D73
    Date: 2011
  33. By: Kurmas Akdogan; Selen Baser; Meltem Gulenay Chadwick; Dilara Ertug; Timur Hulagu; Sevim Kosem; Fethi Ogunc; M. Utku Ozmen; Necati Tekatli
    Abstract: In this paper, we produce short term forecasts for the inflation in Turkey, using a large number of econometric models. In particular, we employ univariate models, decomposition based approaches (both in frequency and time domain), a Phillips curve motivated time varying parameter model, a suite of VAR and Bayesian VAR models and dynamic factor models. Our findings suggest that the models which incorporate more economic information outperform the benchmark random walk, and the relative performance of forecasts are on average 30 percent better for the first two quarters ahead. We further combine our forecasts by means of several weighting schemes. Results reveal that, the forecast combination leads to a reduction in forecast error compared to most of the models, although some of the individual models perform alike in certain horizons.
    Keywords: Short-term Forecasting, Forecast Combination
    JEL: C52 C53 E37
    Date: 2012
  34. By: Enrique Alberola (Banco de España); Aitor Erce (Banco de España); José María Serena (Banco de España)
    Abstract: This paper explores the role of international reserves as a stabilizer of international capital flows during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database using event analyses and standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves are useful during financial stress. International reserves facilitate financial disinvestment overseas by residents, offsetting the simultaneous drop in foreign financing
    Keywords: Gross capital flows, international reserves, systemic crises, capital retrenchment
    JEL: F21 F32 F33
    Date: 2012–02
  35. By: Roe, Alan R.
    Abstract: This study assesses the fiscal and monetary management challenges that can be associated with large inflows of foreign aid. It provides a brief overview of the literature on Dutch Disease (DD) as applied to mineral wealth and then assesses the conventional policy responses that are available to mitigate the main problems that can be caused by DD. This discussion incorporates an identification of the additional issues and transmission mechanisms that arise when the source of DD is a surge in foreign aid. This analysis is designed to illuminate the circumstances in which an aid-induced DD effect is likely to call for countervailing macroeconomic policy interventions, and when other approaches may be more appropriate. The study concludes with an empirical assessment of the relative importance of mineral-based and aid-based DD problems in low- and middle-income economies. It suggestsâ..contrary to the mainstream literatureâ..that foreign aid and mineral exports typically create joint macroeconomic management problems for such countries.
    Keywords: Aid, Dutch disease, monetary policy, fiscal policy
    Date: 2011

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