nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒04‒10
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Bounded rationality and parameters’ uncertainty in a simple monetary policy model. By Domenico Colucci; Vincenzo Valori
  2. Will the SARB always succeed in fghting inflation with contractionary policy? By Guangling (Dave) Liu
  3. Asset Prices, Monetary Policy and Determinacy By Singh, Aarti; Stone, Sophie
  4. The British opt-out from the European Monetary Union: empirical evidence from monetary policy rules By Stefano d'Addona; Ilaria Musumeci
  5. Testing for optimal monetary policy via moment inequalities By Coroneo, Laura; Corradi, Valentina; Santos Monteiro, Paulo
  6. Balance of payments flows and exchange rate prediction in Japan By Müller-Plantenberg, Nikolas
  7. How Effective Is Central Bank Forward Guidance? By Clemens J.M. Kool; Daniel L. Thornton
  8. Liquidity, Business Cycles, and Monetary Policy By Nobuhiro Kiyotaki; John Moore
  9. Switching Monetary Policy Regimes and the Nominal Term Structure By Marcelo Ferman
  10. The Sustainability of Monetary Unions. Can the Euro Survive? By Paolo Canofari; Giancarlo Marini; Giovanni Piersanti
  11. Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows By Mouhamadou Sy
  12. Monetary policy responses to oil price fluctuations By Bodenstein, Martin; Guerrieri, Luca; Kilian, Lutz
  14. Robustness and Exchange Rate Volatility By Edouard Djeutem; Ken Kasa
  15. Federal Reserve lending to troubled banks during the financial crisis, 2007-10 By R. Alton Gilbert; Kevin L. Kliesen; Andrew P. Meyer; David C. Wheelock
  16. US inflation expectations and heterogeneous loss functions, 1968–2010 By Clements, Michael P.
  17. Sudden stops in the euro area By Silvia Merler; Jean Pisani-Ferry
  18. Inflation forecasting and the crisis: assessing the impact on the performance of different forecasting models and methods By Christian Buelens
  19. Liquidity Hoarding By Douglas Gale; Tanju Yorulmazer
  20. Nominal and Real Exchange Rate Models in South Africa: How Robust Are They? By Balázs Égert
  21. Inflation Expectations and Readiness to Spend: Cross-Sectional Evidence By Rüdiger Bachmann; Tim O. Berg; Eric R. Sims
  22. Debt Deleveraging and The Exchange Rate By Pierpaolo Benigno; Federica Romei
  23. Currency movements within and outside a currency union: The case of Germany and the euro area By Seitz, Franz; Rösl, Gerhard; Bartzsch, Nikolaus
  24. Costly Intermediation and the Friedman Rule By Benjamin Eden
  25. "Global Financial Crisis: A Minskyan Interpretation of the Causes, the Fed's Bailout, and the Future" By L. Randall Wray
  26. Inflation targeting in Korea, Indonesia, Thailand, and the Philippines : the impct on business cycle synchronization between each country and the world By Inoue, Takeshi; Toyoshima, Yuki; Hamori, Shigeyuki

  1. By: Domenico Colucci (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze); Vincenzo Valori (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)
    Abstract: We study a simple monetary model in which a central bank faces a boundedly rational private sector and has the goal of stabilizing inflation. The system’s dynamics is generated by the interaction of the expectations about inflation of the various agents involved. A modest degree of heterogeneity in such expectations is found to have interesting consequences, in particular when the central bank is uncertain about the relevant behavioral parameters. We find that a simple heuristic based on mean and variance of the distribution of behavioural parameters stabilizes the system for a wide parametric region.
    Keywords: inflation targeting, monetary policy, adaptive expectations, heterogeneous agents
    Date: 2012–02
  2. By: Guangling (Dave) Liu
    Abstract: The conventional view is that a monetary policy shock has both supply-side and demand-side effects, at least in the short run. Barth and Ramey (2001) show that the supply-side effect of a monetary policy shock may be greater than the demand-side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that, with a moderate level of cost-channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model.
    Keywords: Monetary policy, price puzzle, inflation targeting, New Keynesian model, Bayesian analysis
    JEL: E52 E31 E58 E12
    Date: 2012
  3. By: Singh, Aarti; Stone, Sophie
    Abstract: We study whether central banks should respond to asset prices in their policy rules. Using a modified version of Bernanke, Gertler and Gilchrist's (1999) model—a standard dynamic stochastic general equilibrium New Keynesian model with a financial accelerator effect—we explore how equilibrium determinacy is impacted when the central bank reacts to asset prices. Our results indicate that by reacting to asset price movements in its Taylor-type nominal interest rate feedback rule, a central bank makes determinacy of the rational expectations equilibrium more likely relative to a standard policy rule where the central bank does not react to asset prices.
    Keywords: financial accelerator; determinacy; monetary policy; Asset prices
    Date: 2012–03
  4. By: Stefano d'Addona (Department of International Studies, University of Rome 3); Ilaria Musumeci (Department of International Studies, University of Rome 3)
    Abstract: We analyze the current state of monetary integration in Europe, focusing on the United Kingdom’s position regarding the European Monetary Union (EMU). The interest rate decisions of the European Central Bank and the Bank of England are compared through different specifications of the Taylor rule. Comparison of the monetary conduct of these two institutions provides useful guidance in identifying the differences that the British Government claims motivating its refusal to join the EMU. Testing for forward-looking behavior and possible asymmetries in policy responses, we show evidence supporting the opt-out decision taken by the British Government.
    Keywords: Taylor rule; European monetary integration; Regime switching models; Interest rate smoothing
    JEL: E32 E52
    Date: 2012–03–26
  5. By: Coroneo, Laura (University of Manchester, Economics - School of Social Sciences); Corradi, Valentina (University of Warwick, Department of Economics); Santos Monteiro, Paulo (University of Warwick, Department of Economics)
    Abstract: The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy. Key words: Bootstrap ; GMM ; Moment Inequalities ; Optimal Monetary Policy. JEL Classification: C12 ; C52 ; E52 ; E58
    Date: 2012
  6. By: Müller-Plantenberg, Nikolas (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: Monetary models of exchange rates tend to focus on inflation differentials to explain exchange rate movements. This paper assesses the ability of currency flows to predict exchange rate changes. The focus is on Japan. Currency flows are assumed to depend on the level of the current account and on the international investment position, where the latter is used as a proxy for international debt repayments. A state space model is used to predict simultaneously the exchange rate and its determinants. Using rolling regressions and out-of-sample predictions, it is shown that a model featuring currency flows can predict the direction of exchange rate movements better than a random walk (with or without drift). However, as happens with standard macroeconomic models, the model is not able to outperform a random walk in terms of the mean square prediction error criterion.
    Keywords: balance of payments flows, international investment position, exchange rate prediction, out-of-sample prediction, random walk.
    JEL: F31 F32 F34 F37 C22 C53
    Date: 2012–03
  7. By: Clemens J.M. Kool; Daniel L. Thornton
    Abstract: In this paper, we use survey forecasts to investigate the impact of forward guidance on the predictability of future short- and long-term interest rates in four countries: New Zealand, Norway, Sweden, and the United States. New Zealand began providing forward guidance in 1997, Norway in 2005, and Sweden in 2007. The United States had two periods of implicit forward guidance: 2003-2005 and 2008-2011. Overall, we find little or no convincing evidence that forward guidance actually improves markets' ability to forecast future rates or that any improvement in forecasting short-term rates is reflected in longer-term yields. The weak support we do find is at the short end of the yield curve and at relatively short forecast horizons and only for Norway and Sweden. There is no evidence that forward guidance has increased the efficacy of monetary for New Zealand, the country with the longest--15-year--forward guidance history.
    Keywords: monetary policy; central bank transparency; interest rates; term structure; forecasting
    JEL: E52 E43 E47
    Date: 2012–03
  8. By: Nobuhiro Kiyotaki; John Moore
    Abstract: The paper presents a model of a monetary economy where there are differences in liquidity across assets. Money circulates because it is more liquid than other assets, not because it has any special function. There is a spectrum of returns on assets, reflecting their differences in liquidity. The model is used, first, to investigate how aggregate activity and asset prices fluctuate with shocks to productivity and liquidity; second, to examine what role government policy might have through open market operations that change the mix of assets held by the private sector. With its emphasis on liquidity rather than sticky prices, the model harks back to an earlier interpretation of Keynes (1936), following Tobin (1969).
    JEL: E10 E44 E50
    Date: 2012–03
  9. By: Marcelo Ferman
    Abstract: In this paper I propose a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. I show that, once the possibility of regime switches in the short-rate process is incorporated into investors beliefs, the average slope of the yield curve generally will contain a new component called .level risk.. Level-risk estimates, based on a Markov-Switching VAR model of the U.S. economy, are then provided. I find that the level risk was large and negative during the Great Inflation, reflecting a possible switch to lower short-rate levels in the future. Since the mid-1980s the level risk has been moderate and positive, reflecting a small but still relevant possibility of a return to the regime of the 1970s. I replicate these results in a Markov- Switching dynamic general equilibrium model, where the monetary policy rule followed by the Fed shifts between an active and a passive regime. The model also explains why in recent decades the U.S. yield curve on average has been steeper than the yield curve in countries that adopted explicit inflation targeting frameworks.
    Date: 2011–04
  10. By: Paolo Canofari (Faculty of Economics, University of Rome "Tor Vergata"); Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Piersanti (University of Teramo)
    Abstract: This paper aims to propose a new measure of exchange market pressure for countries operating in hard peg regimes, such as currency unions, currency boards or full dollarization. We use a general model of currency crisis to derive a sustainability index based upon the relationship between the shadow exchange rate and the output gap required to maintain the currency peg. We apply the new index to European Union countries in order to assess the sustainability of the Euro.
    Keywords: shadow exchange rate, currency crisis, exchange market pressure
    JEL: F3 F31 F41 G01
    Date: 2012–03–27
  11. By: Mouhamadou Sy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Département Economie - Finances - Centre d'analyse stratégique)
    Abstract: This paper proposes theoretical and empirical analysis of the effect of capital controls and alternative exchange rate regimes on the patterns of speculative capital. I argue that the exchange rate regime and its interaction with the monetary regime can explain the patterns of speculative capital around the world. I show that speculative capitals are more likely to flow into countries in which there is a contradiction between the monetary and the exchange regimes, e.g. more likely in countries with managed exchange rates. I model exchange-rate as a jump process in a stochastic dynamic portfolio optimization. Through this approach, the influence of the frequency and the size of "jumps" in the exchange rate on the allocation of speculative capital can be determined. It will also allow inflows to be endogenous. By linking the jumps to the frequency of exchange rate movements, this paper determines the effectiveness of different exchange rate regimes in fending off "hot money" for a given monetary regime. On the empirical side, I use a newly constructed data set to verify the theoretical predictions of the determinants and the patterns of speculative capital. Capital controls do not affect speculative capital.
    Keywords: Short-term Capital Flows ; Exchange Rate Regimes ; Financial Openness
    Date: 2012–04
  12. By: Bodenstein, Martin; Guerrieri, Luca; Kilian, Lutz
    Abstract: The recent volatility in global commodity prices and in the price of oil, in particular, has created renewed interest in the question of how monetary policy makers should respond to oil price fluctuations. In this paper, we discuss why this question is ill-posed and has no general answer. The central message of our analysis is that the best central bank policy response to oil price fluctuations depends on why the price of crude oil has changed. For example, an unexpected oil supply disruption in the Middle East calls for a different policy response than an unexpected increase in Chinese productivity or oil intensity. This means that policy makers need to disentangle the structural shocks that are jointly driving the price of oil and the macroeconomy and tailor their response to the observed mix of shocks. We use a multi-country DSGE model to quantify the appropriate policy responses and to analyze the optimal responses from a welfare point of view. We also reexamine the welfare gains from global monetary policy coordination in a world with trade in oil.
    Keywords: endogeneity; global economy; monetary policy; oil price; open economy; policy rule; welfare
    JEL: E32 E43 F32 Q43
    Date: 2012–04
  13. By: André Nassif; Carmem Feijó; Eliane Araújo
    Abstract: We present a Structuralist-Keynesian theoretical approach on the determinants of the real exchange rate (RER) for open emerging economies. Instead of macroeconomic fundamentals, the long-term trend of the real exchange rate level is better determined not only by structural forces and long-term economic policies, but also by both short-term macroeconomic policies and their indirect effects on other short-term economic variables. In our theoretical model, the actual real exchange rate is broken down into long-term structural and short-term components, both of which may be responsible for deviations of that actual variable from its long-term trend level. We also propose an original concept of a long-term “optimal” real exchange rate for open emerging economies. The econometric models for the Brazilian economy in the 1999–2011 period show that, among the structural variables, the GDP per capita and the terms of trade had the largest estimated coefficients correlated with the long-term trend of the RER in Brazil. As to our variables influenced by the short-term economic policies, the short-term interest rate differential and the stock of international reserves reveal the largest estimated coefficients correlated with the long-term trend of our explained variable. The econometric results show two basic conclusions: first, the Brazilian currency was persistently overvalued throughout almost all of the period under analysis; and second, the long-term “optimal” real exchange rate was reached in 2004. According to our estimation, in April 2011, the real overvaluation of the Brazilian currency in relation to the long-term “optimal” level was around 80 per cent. These findings lead us to suggest in the conclusion that a mix of policy instruments should have been used in order to reverse the overvaluation trend of the Brazilian real exchange rate, including a target for reaching the “optimal” real exchange rate in the medium and the long-run.
    Date: 2011
  14. By: Edouard Djeutem (Simon Fraser University); Ken Kasa (Simon Fraser University)
    Abstract: This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility.
    Keywords: Exchange rates; Volatility; Robustness
    JEL: F31 D81
    Date: 2012–03
  15. By: R. Alton Gilbert; Kevin L. Kliesen; Andrew P. Meyer; David C. Wheelock
    Abstract: Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: 1) Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? 2) Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year prior to failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal Reserve may lend to undercapitalized or critically undercapitalized depository institutions. We find no evidence that the Federal Reserve ever exceeded statutory limits during the recent financial crisis, recession and recovery periods. In most cases, the number of days that Federal Reserve credit was extended to an undercapitalized or critically undercapitalized depository institution was appreciably less than the number of days permitted under law. Furthermore, compared with patterns of Fed lending during 1985-90, we find that few banks that failed during 2008-10 borrowed from the Fed during their last year prior to failure, and only a few had outstanding Fed loans when they failed. Moreover, Federal Reserve loans averaged less than 1 percent of total deposit liabilities among nearly all banks that did borrow from the Fed during their last year. It is impossible to know whether the enactment of FDICIA explains differences in Federal Reserve lending practices during 2007-10 and the previous period of financial distress in the 1980s. However, it does seem clear that Federal Reserve lending to depository institutions during the recent episode was consistent with the Congressional intent of this legislation.
    Keywords: Financial crises ; Discount window ; Federal Deposit Insurance Corporation Improvement Act of 1991
    Date: 2012
  16. By: Clements, Michael P. (University of Warwick, Department of Economics)
    Abstract: The recent literature has suggested that macroeconomic forecasters may have asymmetric loss functions, and that there may be heterogeneity across forecasters in the degree to which they weigh under and over-predictions. Using an individual-level analysis that exploits the SPF respondents’ histogram forecasts, we find little evidence of asymmetric loss for the in‡ation forecasters. Key words: Disagreement ; forecast uncertainty ; asymmetric loss ; Survey of Professional Forecasters JEL Classification: C53 ; E31 ; E37
    Date: 2012
  17. By: Silvia Merler; Jean Pisani-Ferry
    Abstract: The single currency was expected to make balance of payments irrelevant between the euro-area member states. This benign view has been challenged by recent developments, especially as imbalances between euro-area central banks have widened within the TARGET2 settlement system. Current-account developments can be misleading as indicators of financial account developments in countries that receive significant official support. Greece, Ireland, Italy, Portugal and Spain experienced significant private-capital inflows from 2002 to 2007-09, followed by unambiguously massive outflows. We show that such reversals qualify as â??sudden stopsâ??. Euro-area sudden-stop episodes were clustered in three periods: the global financial crisis, a period following the agreement of the Greek programme and summer 2011. The timeline suggests contagion effects were present. We find evidence of substitution of the private capital flows with publiccomponents. In particular, weak banks in distressed countries took up a major share of the central bank refinancing. The steady divergence of intra Eurosystem net balances mirrors this. In the short term, TARGET2 imbalances could be addressed by tightening collateral requirements for central bank liquidity. For the longer term, the evidence that the euro area has been subject to internal balance-of-payment crises should be taken as a strong signal of weakness and as an invitation to reform its structures.
    Date: 2012–03
  18. By: Christian Buelens
    Abstract: This paper analyses how euro area inflation forecasts have been affected by the financial and economic crisis. Its first objective is to evaluate the accuracy of three representative groups of inflation forecasting models (rules of thumb and benchmark models; autoregressive moving average models; autoregressive distributed lag models) under a direct and an indirect approach, respectively. The second objective of the paper is to study how the absolute and relative forecasting performances of the models and approaches have been impacted by the economic and financial crisis. The paper finds that direct forecasting models selected on the basis of a penalty function generally dominate simple benchmark models. The analysis furthermore suggests that when an appropriate specification for the component-specific models is found, indirect forecasts outperform the corresponding direct forecasts. Nonetheless, in line with the findings from earlier studies, there are insufficient elements to assert a systematic superiority of one of the two approaches. Concerning the second objective, the across-the-board rise in the forecast errors of all models considered, confirms that inflation forecasting has become substantially more difficult after the onset of the crisis. However, the deterioration of the different models has been uneven: indeed, direct autoregressive distributed lag models and indirect models improved in relative terms during the crisis.
    JEL: C32 C52 C53 E31 E37 E58
    Date: 2012–03
  19. By: Douglas Gale; Tanju Yorulmazer
    Abstract: Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planners problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash.
    Date: 2011–06
  20. By: Balázs Égert
    Abstract: This paper addresses difficulties in modelling exchange rates in South Africa. Real exchange rate models of earlier research seem to be sensitive to the sample period considered, alternative variable definition, data frequency and estimation methods. Alternative exchange rate models proposed in this paper including the stock-flow approach and variants of the monetary model are not fully robust to data frequency and alternative estimation periods, either. Nevertheless, adding openness to the stock-flow approach and augmenting the monetary model with share prices and the country risk premium improves significantly the fit of the models around the large (nominal and real) depreciation episodes of 2002 and 2008. Interestingly, real commodity prices do not help explain the large depreciations. While these models do a reasonably good job in-sample, their out-of-sample forecasting properties remain poor.
    Keywords: exchange rate, real exchange rate, nominal exchange rate, commodity, Balassa-Samuelson, productivity, monetary model, stock-flow approach, openness, country risk
    JEL: E31 F31 O11 P17
    Date: 2012
  21. By: Rüdiger Bachmann; Tim O. Berg; Eric R. Sims
    Abstract: There have recently been suggestions for monetary policy to engineer higher inflation expectations so as to stimulate current spending. But what is the empirical relationship between inflation expectations and spending? We use the underlying micro data from the Michigan Survey of Consumers to test whether increased inflation expectations are indeed associated with greater reported readiness to spend. Cross-sectional data deliver the necessary variation to test whether the relationship between inflation expectations and spending changes in the recent zero lower bound regime compared to normal times, as suggested by many standard models. We find that the impact of inflation expectations on the reported readiness to spend on durable goods is statistically insignificant and small in absolute value when compared to other variables, such as household income or expected business conditions. Moreover, it appears that higher expected price changes have an adverse impact on the reported readiness to spend. A one percent increase in expected inflation reduces the probability that households have a positive attitude towards spending by about 0.1 percentage points. At the zero lower bound this small adverse effect remains, and is, if anything, slightly stronger. We also extend our analysis to the reported readiness to spend on cars and houses and obtain similar results. Altogether our results tell a cautionary tale for monetary (or fiscal) policy designed to engineer inflation expectations in order to generate greater current spending.
    JEL: D12 E21 E31 E52
    Date: 2012–03
  22. By: Pierpaolo Benigno; Federica Romei
    Abstract: Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances.
    JEL: E52 F32 F41
    Date: 2012–03
  23. By: Seitz, Franz; Rösl, Gerhard; Bartzsch, Nikolaus
    Abstract: In this paper, we analyze the volume of euro banknotes issued by Germany within the euro area with several seasonal methods. We draw a distinction between movements within Germany, circulation outside Germany but within the euro area and demand from non-euroarea countries. Our approach suggests that only about 20% of euro notes issued by Germany are used for transactions in Germany. The rest is hoarded (10%), circulates in other euro area countries (25%) or is held outside the euro area (45%). -- In dem vorliegenden Papier analysieren wir die Emissionen von Euro-Banknoten durch die Deutsche Bundesbank anhand verschiedener saisonaler Ansätze. Wir unterscheiden zwischen der Nachfrage aus Deutschland, der Haltung in anderen Euro-Ländern und Umlauf außerhalb des Euro-Währungsgebiets. Es stellt sich heraus, dass nur ca. 20 % der emittierten Banknoten für Transaktionszwecke in Deutschland gebraucht werden. Der Rest wird aus unterschiedlichen Gründen gehortet (10 %), läuft in anderen EWU-Ländern um (25 %) oder wird außerhalb des Euro-Raums gehalten.
    Keywords: Banknotes,euro,foreign demand,hoarding,transaction balances
    JEL: E41 E42 E58
    Date: 2011
  24. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: I examine the implementation of the Friedman rule under the assumption that age dependent lump sum transfers are possible and private intermediation is costly. This is done both in an infinitely lived agents model and in an overlapping generations model. I argue that in addition to a zero nominal-interest-rate policy (the so called Friedman rule) a transfer to young agents, or a government loan program is required for satiating agents with real balances. The paper also contributes to the understanding of Friedman's original article and discusses related questions about the size of the financial sector. It is shown that the adoption of the (modified) Friedman rule will crowd out private lending and borrowing. I also look at the social value of a market for contingent claims and argue that resources spent on operating a market for accidental nominal bequests are a waste from the social point of view in spite of the fact that individuals have an incentive to trade in such markets.
    Keywords: The Friedman Rule, Accidental bequests, The optimal size of the financial sector, Government loans
    JEL: E40 E52
    Date: 2012–03
  25. By: L. Randall Wray
    Abstract: This paper provides a quick review of the causes of the Global Financial Crisis that began in 2007. There were many contributing factors, but among the most important were rising inequality and stagnant incomes for most American workers, growing private sector debt in the United States and many other countries, financialization of the global economy (itself a very complex process), deregulation and desupervision of financial institutions, and overly tight fiscal policy in many nations. The analysis adopts the "stages" approach developed by Hyman P. Minsky, according to which a gradual transformation of the economy over the postwar period has in many ways reproduced the conditions that led to the Great Depression. The paper then moves on to an examination of the US government's bailout of the global financial system. While other governments played a role, the US Treasury and the Federal Reserve assumed much of the responsibility for the bailout. A detailed examination of the Fed's response shows how unprecedented—and possibly illegal-was its extension of the government's "safety net" to the biggest financial institutions. The paper closes with an assessment of the problems the bailout itself poses for the future.
    Keywords: Hyman Minsky; Global Financial Crisis; Financialization; Money Manager Capitalism; Bank Bailout; Quantitative Easing; Financial Crisis Inquiry Report; Fraud; Minsky Moment; Real Estate Bubble; MERS; Federal Reserve
    JEL: B31 E30 E32 E50 G21
    Date: 2012–03
  26. By: Inoue, Takeshi; Toyoshima, Yuki; Hamori, Shigeyuki
    Abstract: This paper empirically analyzes whether and to what extent the adoption of inflation targeting (IT) in Korea, Indonesia, Thailand and the Philippines has affected their business cycle synchronization with the rest of the world. By employing the dynamic conditional correlation (DCC) model developed by Engle (2002), we find that IT in Asia has little effect on international business cycle synchronization and the effect is positive in some of the countries, if any. These findings basically seem to be consistent with the evidence from relevant literature.
    Keywords: Southeast Asia, Indonesia, Thailand, Philippines, South Korea, Inflation, Business cycles, Asia, Business cycle synchronization, DCC, Inflation targeting
    JEL: E31 E32 E52 E58 F42 F44
    Date: 2012–03

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