nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒04‒23
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Ensuring price stability in post-crisis Asia: lessons from the recovery By Andrew Filardo
  2. National and Provincial Inflation in Canada: Experiences under Inflation Targeting By Graham M. Voss; M. Chaban
  3. Commodity Prices and Inflation Expectations in the United States By Oya Celasun; Lev Ratnovski; Roxana Mihet
  4. Transparency and Monetary Policy Effectiveness By Romain Baeriswyl; Camille Cornand
  5. Reserves, Liquidity and Money: An Assessment of Balance sheet Policies By Jagjit S. Chadha; Luisa Corrado; Jack Meaning
  6. Monetary Policies and Nigerian Economy:Simulations from Dynamic Stochastic General Equilibrium(DSGE)Model By Nwaobi, Godwin
  7. Exchange Rate Volatility Under Peg: Do Trade Patterns Matter? By Constant Lonkeng Ngouana
  8. The changing role of expectations in US monetary policy: A new look using the Livingston Survey By Banerjee, A.; Malik, S.
  9. Dissent Voting Behavior of Central Bankers: What Do We Really Know? By Roman Horváth; Kateøina Šmídková; Jan Zápal; Marek Rusnák
  10. The impact of macro news and central bank communication on emerging European forex markets By Balázs Égert; Evžen Kočenda
  11. The High-Frequency Response of the Rand-Dollar rate to Inflation Surprises By Greg Farrell; Shakill Hassan; Nicola Viegi
  12. Learning by disinflating By Barnett, Alina; Ellison, Martin
  13. Current accounts in Europe: implications of the external imbalances for the future of the common monetary policy By Agnieszka Gehringer
  14. Robust Delegation with Uncertain Monetary Policy Preferences By Marco M. Sorge
  15. Analysis of an unannounced foreign exchange regime change By Khemraj, Tarron; Pasha, Sukrishnalall
  16. Inflation Expectations of the Inattentive General Public By Monique Reid
  17. Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia By Jaromir Benes; Alfredo Baldini; Mai Dao; Rafael Portillo; Andrew Berg
  18. Exchange rate expectations of chartists and fundamentalists By Dick, Christian D.; Menkhoff, Lukas
  19. "Is Paper Money just Paper Money/ Experimentation and Local Variation in the Fiat Paper Monies Issued by the Colonial Government of British North America, 1690-1775: Part I" By Farley Grubb
  20. The Euro – A “MUST” for Small European States? By Renate Ohr; Mehmet Özalbayrak
  21. External Information and Monetary Policy Transmission in New EU Member States: Results from FAVAR Models By Zlatina Balabanova; Ralf Brüggemann
  22. "Fiddling in Euroland as the Global Meltdown Nears" By James Felkerson
  23. Oil Shocks and the Euro as an Optimum Currency Area By Luís Francisco Aguiar; Teresa Maria Rodrigues; Maria Joana Soares
  24. Spillover Effects of Exchange Rates: A Study of the Renminbi By Aaditya Mattoo; Prachi Mishra; Arvind Subramanian
  25. When banking systems meet currencies By Chang, Chia-Ying

  1. By: Andrew Filardo
    Abstract: Asian central banks have adopted monetary policy frameworks over the past decade that have, by and large, worked well both to ensure price stability during the pre-crisis period and to navigate the shoals during the recent international financial crisis. Inflation concerns in recent years nonetheless raise the possibility that existing monetary policy frameworks in Asia may be contributing to procyclical inflation swings. Three particular aspects of the policy environment are highlighted. They include the approach of monetary policy to commodity price cycles, to the uneven global recovery and to the new financial stability mandates.
    Keywords: Central banking, international financial crisis, monetary policy frameworks in Asia, commodity prices, financial stability and monetary policy
    Date: 2012–04
  2. By: Graham M. Voss (Department of Economics, University of Victoria); M. Chaban
    Abstract: We examine the behaviour of national and provincial inflation in Canada under inflation targeting to determine the extent to which the inflation targeting regime adopted by the Bank of Canada in the 1990s has anchored inflation expectations. Inflation expectations are well anchored when there are no predictable departures of inflation from target at sufficiently distant horizons. To examine this condition, we consider the out of sample prediction of monthly inflation with specific focus on whether deviations from the 1-3% target band are consistently predictable. We find support for well anchored inflation expectations at the national level and some but not all provinces.
    Keywords: Inflation, monetary policy, inflation targeting, forecasting
    JEL: E31 E58
    Date: 2012–04–13
  3. By: Oya Celasun; Lev Ratnovski; Roxana Mihet
    Abstract: U.S. monetary policy can remain extraordinarily accommodative only if longer-term inflation expectations stay well-anchored, including in response to commodity price shocks. We find that oil price shocks have a statistically significant, but economically small impact on longer-term inflation compensation embedded in U.S. Treasury bonds. The estimated effect is larger for the post-crisis period, and robust to controlling for measures of liquidity risk premia. Oil price shocks are also correlated with the variance of longer-term inflation expectations in the University of Michigan Survey of Consumers in the post-crisis period. These results are not attributable to looser monetary policy - oil price increases were associated with expectations of a faster monetary tightening after the crisis. Overall, the findings are consistent with some impact of commodity prices on long-term inflation expectations and/or on inflation rate risk.
    Keywords: Agricultural prices , Commodity prices , External shocks , Inflation , Monetary policy , Oil prices , Price increases ,
    Date: 2012–03–27
  4. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilising the price level and stabilising the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilisation of the output gap too heavily in its objective function.
    Keywords: Information, monetary policy, transparency
    Date: 2011
  5. By: Jagjit S. Chadha; Luisa Corrado; Jack Meaning
    Abstract: The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate.
    Keywords: non-conventional monetary interest on reserves; monetary and fiscal policy instruments; Basel III
    JEL: E31 E40 E51
    Date: 2012–04
  6. By: Nwaobi, Godwin
    Abstract: Traditionally, the task of monetary management is usually performed by the monetary authority on behalf of government. However, a key challenge in monetary management is how to deal with uncertainty. Thus, the relevant policy questions must include how best the available instruments of monetary policy be deployed in shock prone mature stabilizers. Therefore, the basic thrust of this paper is to evaluate monetary policy - tradeoffs using a dynamic stochastic general equilibrium(DSGE)model estimated on data for Nigeria.
    Keywords: dynamic; stochastic; general; equilibrium; dsge; nigeria; monetary management; shocks; var; monetary policy; fiscal policy; exchange rate; central bank
    JEL: D50 C68 C63 C50 E58
    Date: 2012–04–17
  7. By: Constant Lonkeng Ngouana
    Abstract: This paper assesses the role of trade patterns in shaping the volatility of the effective exchange rate under two alternative peg regimes: a hard peg to a single currency and a peg to a basket of currencies. I link the changes in the nominal effective exchange rate of a pegged currency to the fluctuations of its anchor vis-a-vis other major currencies, with an emphasis on the dynamics of trade patterns. In an application to the WAEMU (West African Economic and Monetary Union), I find that the nominal effective exchange rate of the union was twice as volatile under the hard peg to the euro as it would have been under a hypothetical basket peg over the past decade. This result was driven by the substantial shifts that occurred in WAEMU trade patterns, away from euro area countries and toward the Â"BICs" (Brazil, India, and China). These findings suggest that policymakers should pay as much attention to the type of peg as to pegging in itself, with a particular focus on the dynamics of trade patterns.
    Keywords: Currency pegs , Exchange rates , Trade , West African Economic and Monetary Union ,
    Date: 2012–03–09
  8. By: Banerjee, A.; Malik, S.
    Abstract: Using a Bayesian structural vector autoregression (TVP-SVAR) with time-varying parameters and volatility we investigate monetary policy in the United States, in particular its interaction with the formation of inflation expectations and the linkages between monetary policy, inflation expectations and the behaviour of CPI inflation. We use Livingston Survey data for expected inflation, measured at a bi-annual frequency, actual inflation, unemployment and a nominal interest rate to estimate the VAR and show the significant changes that have occurred in the responses of these variables to monetary policy shocks or to shocks to expected and actual inflation. In so doing, we generalize the analysis undertaken by Leduc, Sill and Stark (2007) to allow for a more nuanced and detailed look at questions such as the impact of different chairmanship regimes at the Federal Reserve Board, the role of good policy versus good luck, and second round inflation effects. While some of the questions asked have a relatively long history, the methods used to undertake our investigations are very new, and the time-varying structure allows us to offer a more detailed picture. In using these methods we also undertake a substantial technical discussion to unearth the appropriateness of the TVP-SVAR models hitherto estimated in the literature, in particular the role of the choice of priors in determining the outcome of the estimations. As we discuss in the paper, this is an important issue which has remained rather hidden in the discussions surrounding the estimation of TVP-SVARs, yet may have a substantially important role to play in determining the results obtained.
    Keywords: monetary policy, expectations, inflation, time variation, VARs, impulse responses.
    JEL: E52 E31 C32
    Date: 2012
  9. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Kateøina Šmídková (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Jan Zápal (London School of Economics); Marek Rusnák (Czech National Bank)
    Abstract: We examine the determinants of the dissent in central bank boards’ voting records about monetary policy rates in the Czech Republic, Hungary, Sweden, the U.K. and the U.S. In contrast to previous studies, we consider about 25 different macroeconomic, financial, institutional, psychological or preference-related factors jointly and deal formally with the attendant model uncertainty using Bayesian model averaging. We find that the rate of dissent is between 5% and 20% in these central banks. Our results suggest that most regressors, including those capturing the effect of inflation and output, are not robust determinants of voting dissent. The difference in central bankers’ preferences is likely to drive the dissent in the U.S. Fed and the Bank of England. For the Czech and Hungarian central banks, average dissent tends to be larger when policy rates are changed. Some evidence is also found that food price volatility tends to increase the voting dissent in the U.S. Fed and in Riksbank.
    Keywords: monetary policy, voting record, dissent
    JEL: E52 E58
    Date: 2012–02
  10. By: Balázs Égert; Evžen Kočenda
    Abstract: We analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. In doing so, we first estimate standard and extended versions of the monetary model to capture deviations from the long-term monetary equilibrium. In the second stage, we employ a high-frequency GARCH model that includes accurately identified macroeconomic news, central bank communication and emerging market risk and allows for non-linear behavior as regards the deviation from equilibrium. Surprisingly, there is little support for non-linearity in the data. During the pre-crisis period (2004–2007) the major CEE currencies generally respond to macroeconomic news in an intuitive manner that corresponds to exchange rate-related theories. During the crisis (2008–2009), the responsiveness breaks down and the currencies react to news on the key economic indicator (real GDP growth). There is a lack of responsiveness to central bank communications during the pre-crisis period but all currencies react to central bank verbal interventions during the crisis. Our results show that the CEE currencies react to both macroeconomic news and central bank communications but this responsiveness differs during the pre-crisis and crisis periods. Detailed responses vary across the currencies and we conjecture that the exchange rate regime and the extent to which particular currencies are traded on the international forex market are potential explanations behind these differences.
    Keywords: exchange rate, macroeconomic news, central bank communication, monetary model, Central Europe, European Union
    JEL: E31 F31 O11 P17
    Date: 2012
  11. By: Greg Farrell; Shakill Hassan; Nicola Viegi
    Abstract: We examine the high-frequency response of the rand-dollar nominal rate within ten-minute intervals around (…five minutes before, …five minutes after) official infl‡ation announcements, and show that the rand appreciates (respectively, depreciates) on impact when in‡flation is higher (respectively, lower) than expected. The effect only applies after the adoption of infl‡ation targeting, and is stronger for “good” news. Our …ndings are rationalizable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) in‡flation targeting policy in South Africa; and can be used to monitor changes in currency market perceptions about the monetary policy regime.
    Keywords: high-frequency exchange rates; in‡flation surprises; Taylor rules; in‡flation targeting; credibility.
    JEL: E31 E52 F30 F31
    Date: 2012
  12. By: Barnett, Alina (Bank of England); Ellison, Martin (Department of Economics, University of Oxford, and Bank of Finland)
    Abstract: Disinflationary episodes are a valuable source of information for economic agents trying to learn about the economy. In this paper we are particularly interested in how policymakers can themselves learn by disinflating. The approach differs from the existing literature, which typically focuses on the learning of private agents during a disinflation. We build a model where both the policymaker and private agents learn, and ask what happens if the policymaker has to disinflate to satisfy a new central bank mandate specifying greater emphasis on inflation stabilisation. In this case, our results show that inflation may fall dramatically before it gradually rises to its new long run level. The potential for inflation to undershoot its long run level during a disinflationary episode suggests that caution should be exercised when assessing the success of any change in the policymaker’s mandate.
    Keywords: disinflation; escape dynamics; learning; monetary policy
    JEL: D83 E52 E58
    Date: 2012–03–30
  13. By: Agnieszka Gehringer
    Abstract: The paper discusses the seriousness of current account imbalances in the last few decades in Europe, with a particular focus on the European Monetary Union. A closer look at the development of current accounts in European economies suggests the existence of some serious structural problems that might jeopardize economic performance of single countries, but even more importantly, of the entire monetary union. Although current account positions have been subject of numerous research projects till now, scarce interest has been offered regarding specifically the situation in the member states of the euro area and in the euro candidate countries. This lack of interest could be justified among others with the myopic conviction expressed in the literature that current account positions become irrelevant in a monetary union. Instead, there are conceptual reasons to be worried about external imbalances in a currency area, and particularly, in the current as well as potentially enlarged EMU.
    Keywords: current account imbalances, monetary union, central and eastern European countries, southern European countries
    JEL: F F F
    Date: 2012–03–05
  14. By: Marco M. Sorge
    Abstract: Recent research has renewed interest in the exploration of the optimal design of monetary policy institutions in the presence of uncertainty. In this paper, we revisit the rationale for delegation to a weight-conservative central banker when the social planner’s knowledge about the true preferences of delegates is ex ante ambiguous and he exhibits a preference for robustness. In this context, a robust (worst-case oriented) delegation strategy is intended to minimize the maximum welfare loss over the uncertainty set, when no prior probability distribution for the preference bias (conservatism-gap) is available. We find that both over and underconservatism may emerge with respect to the certainty case, for robust delegation is shown to be model-dependent. Most importantly, under reasonable model’s parameterizations, Rogoff’s principle is reversed: it is optimal for society to appoint a weight-liberal central banker.
    Keywords: Delegation; Conservative central bank; Preference uncertainty; Minmax policy.
    JEL: E52 E58
    Date: 2012–04–05
  15. By: Khemraj, Tarron; Pasha, Sukrishnalall
    Abstract: Starting in 2004 the Guyanese foreign exchange rate has been remarkably stable relative to earlier periods. This paper explores the reasons for the stability of the rate. First, the degree of concentration in the foreign exchange market has increased, thus making the task of moral suasion relatively straightforward once this policy tool comes to bear on the dominant trader (s). Second, long-term or non-volatile capital inflows make the exchange rate less susceptible to sudden reversal. Third, commercial banks, the dominant foreign exchange traders, have large outlays of assets in domestic currency, thus their desire for exchange rate stability. The econometric exercise is consistent with the notion that trader market power has contributed to lower volatility in the G$/US exchange rate. The paper also presents a model that analyzes monetary policy effects in the presence of a mark-up or threshold interest rate.
    Keywords: exchange rate; foreign exchange market; market power
    JEL: F21 F41 F31 G21
    Date: 2011–05–02
  16. By: Monique Reid
    Abstract: The majority of academic research on central bank communication has analysed a central bank’s audience as a single group. Analyses, especially empirical research have focused almost exclusively on a central bank’s interaction with the financial markets, facilitated by the availability of high-quality, high-frequency asset price data. In practice, a central bank’s audience is heterogeneous, and recognising this is advantageous for both modelling purposes and effective central bank communication. Many central banks use a range of communication tools to reach their various audiences, but little formal analysis has been conducted to guide policy design and communication strategies. Gathering and processing information are costly for the general public, so they make rational decisions that limit the time and resources they allocate to these tasks. As a result, aggregate inflation expectations of the public as a whole can be described as ‘stick' in that the spread of information about inflation expectations through the economy is not instantaneous. A body of literature has emerged over the past decade, led by Mankiw and Reis (2001), who developed the Sticky Information Phillips Curve (SIPC), and Carroll (2002, 2003), who proposed microfoundations for the SIPC. This paper follows Carroll (2002, 2003) in adopting epidemiological models to provide insight into how the general public in South Africa forms its inflation expectations. This enables an estimation of the speed at which the South African general public updates its inflation expectations (information stickiness). Agent-based models, which explain the complex aggregate inflation expectations of the general public from the agent level upwards, are then used to verify these estimates of information stickiness and explore the microfoundations of aggregate inflation expectations
    Keywords: South Africa, sticky information, inflation expectations, inattentive general public
    JEL: D82 D83 E31 E52 E58
    Date: 2012
  17. By: Jaromir Benes; Alfredo Baldini; Mai Dao; Rafael Portillo; Andrew Berg
    Abstract: We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries.
    Date: 2012–04–05
  18. By: Dick, Christian D.; Menkhoff, Lukas
    Abstract: This paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately. These groups indeed form expectations differently. Chartists change their expectations more often; however, all professionals' expectations vary considerably as they generally follow strong exchange rate trends. In line with non-linear exchange rate-modeling, professionals expect mean reversion only if exchange rates deviate much from PPP. Chartists survive in FX markets as they forecast equally accurately as fundamentalists. Unexpected from an efficient market viewpoint, chartists even outperform fundamentalists at short horizons. Overall, these findings clearly support the chartist-fundamentalist approach. --
    Keywords: exchange rate formation,expectation formation,heterogeneous agent models,forecasting performance
    JEL: F31 G15 D84
    Date: 2012
  19. By: Farley Grubb (Department of Economics, University of Delaware)
    Abstract: The British North American colonies were the first western economies to rely on legislative-issued fiat paper monies as their principal internal media of exchange. This system arose piecemeal. It was monetary experimentation on a grand scale. In the absence of banks and treasuries that exchanged local fiat monies at fixed rates for specie monies (outside monies) on demand, colonial governments experimented with other ways to anchor their fiat monies to real values in the economy. These mechanisms included tax-redemption, interest-bearing notes, land-backed mortgage loans, sinking funds, and legal tender laws. The structure and performance of these mechanisms are explained. [The colonies] cannot keep Gold and Silver among them sufficient for the Purposes of their internal Commerce... Paper Bills called Bills of Credit or Paper Money have therefore in the colonies long been substituted for real Money. Various Ways of issuing these and on different Foundations, have at different Times been thought of and practised.... On the whole no Method has been found to give any Degree of fixed, steady, uniform Value to Bills of Credit in America ...
    Keywords: Adam Smith, barter, bearer bonds, Benjamin Franklin, bills of credit, colonial America currency substitution, fiat currency, interest-bearing money, legal tender, paper money, quantity theory of money, sinking fund, specie money, tax-redemption.
    Date: 2012
  20. By: Renate Ohr; Mehmet Özalbayrak
    Abstract: This paper deals with the question of what impact membership of the European Monetary Union (EMU) has had on small European states. We will also analyze whether or to what extent a large number of small member states affect the EMU itself when they vastly outnumber the large countries. We conclude that the small countries in the European Union are far from creating a homogeneous group. They differ in the length of EU membership, income per capita, membership and non-membership of the EMU, production structure, foreign trade policy, and stability readiness. However, they do share some characteristics, particularly their relatively high openness, through which domestic macroeconomic variables are easily influenced by external shocks. The welfare gains of a small country joining the eurozone depend on the extent to which the benefits (if existent) of higher financial credibility outweigh the loss of autonomous monetary policy. Finally, with regard to their significance in the EMU, in no case should cutbacks be made for small countries concerning the stability requirements.
    Keywords: Euro, European Monetary Union, economic integration, small open economy
    JEL: E42 E5 F15 F33 F55 O52
    Date: 2012–01–31
  21. By: Zlatina Balabanova (Department of Economics, University of Konstanz, Germany); Ralf Brüggemann (Department of Economics, University of Konstanz, Germany)
    Abstract: We investigate the e_ects of monetary policy shocks in the new European Union member states Czech Republic, Hungary, Poland and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector-autoregressive models that employ the information from non-stationary factor time series. One set of VAR models includes factors obtained from a large cross-section of time series from EMU countries, while another set includes factors obtained from other acceding countries. We use cohesion analysis to facilitate the interpretation of the different factor time series. We find that including the EMU factors does not greatly affect the impulse response patterns in acceding countries. In contrast, including factors from other accession countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking into account external economic developments properly is crucial for the analysis of monetary policy in the new EU member states.
    Keywords: Factor-augmented VARs, impulse-response analysis, monetary policy shocks, central and eastern European countries, European monetary union
    JEL: C32 C50 E52 C38
    Date: 2012–03–27
  22. By: James Felkerson
    Abstract: The extraordinary scope and magnitude of the financial crisis of 2007–09 required an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort (LOLR) function. In an attempt to stabilize financial markets during the worst financial crisis since the Great Crash of 1929, the Fed engaged in loans, guarantees, and outright purchases of financial assets that were not only unprecedented, but cumulatively amounted to over twice current US GDP as well. the purpose of this brief is to provide a descriptive account of the Fed's response to the recent crisis-to delineate the essential characteristics and logistical specifics of the veritable "alphabet soup" of LOLR machinery rolled out to save the world financial system. It represents the most comprehensive investigation of the raw data to date, one that draws on three discrete measures: the peak outstanding commitment at a given point in time; the total peak flow of commitments (loans plus asset purchases), which helps identify periods of maximum financial system distress; and, finally, the total amouunt of loans and asset purchases made between January 2007 and March 2012. This third number, which is a cumulative measure, reveals that the total Fed response exceeded $29 trillion. Providing this account from such varying angles is a necessary first step in any attempt to fully understand the actions of the central bank in this critical period—and a prerequisite for thinking about how to shape policy for future crises.
    Date: 2012–04
  23. By: Luís Francisco Aguiar (Universidade do Minho - NIPE); Teresa Maria Rodrigues (University of Minho); Maria Joana Soares (Universidade do Minho)
    Abstract: SWe use wavelet analysis to study the impact of the Euro adoption on the oil price macroeconomy relation in the Euroland. We uncover evidence that the oil-macroeconomy relation changed in the past decades. We show that after the Euro adoption some countries became more similar with respect to how their macroeconomies react to oil shocks. However, we also conclude that the adoption of the common currency did not contribute to a higher degree of synchronization between Portugal, Ireland and Belgium and the rest of the countries in the Euroland. On the contrary, in these countries the macroeconomic reaction to an oil shock became more asymmetric after adopting the Euro.
    Keywords: Oil prices; Business cyles, the Euro, Optimum Currency Areas; Wavelet analysis
    JEL: Q43 C22 E32 F44
    Date: 2012
  24. By: Aaditya Mattoo; Prachi Mishra; Arvind Subramanian
    Abstract: This paper estimates the impact of China’s exchange rate changes on exports of competitor countries in third markets, which we call the "spillover effect". We use recent theory to develop an identification strategy in which competition between China and its developing country competitors in specific products and destinations plays a key role. We exploit the variation - afforded by disaggregated trade data - across exporters, importers, product, and time to estimate this spillover effect. We find robust evidence of a statistically and quantitatively significant spillover effect. Our estimates suggest that a 10 percent appreciation of China’s real exchange rate boosts on average a developing country’s exports of a typical 4-digit HS product category to third markets by about 1.5-2 percent. The magnitude of the spillover effect varies systematically with product characteristics as implied by theory.
    Keywords: China , Competition , Developing countries , Exchange rate adjustments , Exchange rates , Exports , Spillovers ,
    Date: 2012–03–27
  25. By: Chang, Chia-Ying
    Abstract: In this paper, we examine the link of investment portfolio decisions of households and investment on international capital flows. I extend Bencivenga and Smith (1991)’s overlapping generation model to an open economy and combine with capital market imperfections in Kiyotake and Moore (1997) to address how the portfolio decisions of one countrty might affect that of the other country. In this general equilibrium framework with flexible exchange rate, I find that the investment portfolio deicisions of households are crucial for the directions of capital inflows. In other words, the portfolio decision of individuals in one country is crucial for the deposit and loan rate, which would affect where the capital inflows from the foreign investors.
    Keywords: international capital markets, capital flows, portfolio decisions, financial intermediaries,
    Date: 2012–03–16

This nep-mon issue is ©2012 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.