nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒05‒15
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Flixibility in floating Exchange Rate Regimes: Currency Denomination and Import Shares By Troeger, Vera
  2. Monetary Policy, Asset Prices and Adaptive Learning By Vicente da Gama Machado
  3. Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic By Roman Horváth; Michal Franta; Marek Rusnák
  4. Monetary Policy and Central Banking after the Crisis: The Implications of Rethinking Macroeconomic Theory By Thomas I. Palley
  5. First Impressions Matter: Signalling as a Source of Policy Dynamics By Stephen Hansen; Michael McMahon
  6. Arbitrage, liquidity and exit: the repo and federal funds markets before, during, and emerging from the financial crisis By Morten L. Bech; Elizabeth Klee; Viktors Stebunovs
  7. Central Bank Independence and Macro-prudential Regulation By Fabian Valencia; Kenichi Ueda
  8. Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions By Zsolt Darvas
  9. Revisiting the Great Moderation using the Method of Indirect Inference By Minford, Patrick; Ou, Zhirong
  10. International policy spillovers at the zero lower bound By Alex Haberis; Anna Lipinska
  11. Monetary Policy and Rational Asset Price Bubbles By Jordi Galí
  12. Hoarding of International Reserves and Sterilization in Dollarized and Indebted Countries : an effective monetary policy? By Layal Mansour
  13. Information disclosure and exchange media By David Andolfatto; Fernando M. Martin
  14. Inflation Expectations of the Inattentive General Public By Monique Reid
  15. Money is an Experience Good: Competition and Trust in the Private Provision of Money By Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
  16. New evidence of heterogeneous bank interest rate pass-through in the euro area By Dominik Bernhofer; Till van Treeck
  17. Money and Collateral By Manmohan Singh; Peter Stella
  18. Economic (in)stability under monetary targeting By Luca Sessa
  19. Price stability and financial imbalances: rethinking the macrofinancial framework after the 2007-8 financial crisis By Panzera, Fabio S.
  20. Does ECOWAS make sense? By Banik, Nilanjan; Yoonus, C.A.
  21. Money and prices in the Maghreb countries: cointegration and causality analyses By Benamar, Abdelhak; CHERIF, Nasreddine; Benbouziane, Mohamed
  22. After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area? By Catherine Prettner; Klaus Prettner
  23. Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics By Francesco Bianchi
  24. The Federal Reserve's portfolio and its effects on mortgage markets By Diana Hancock; Wayne Passmore
  25. Notes on Agents’ Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy By Honkapohja, Seppo; Mitra, Kaushik; Evans, George W.
  26. Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions By Emanuel Kohlscheen
  27. Recognizability and Liquidity of Assets By Young Sik Kim; Manjong Lee
  28. How has mobile banking stimulated financial development in Africa? By Simplice A , Asongu
  29. The Euro/Dollar Exchange Rate: Chaotic or Non-Chaotic? By Daniela Federici; Giancarlo Gandolfo
  30. International Capital Flows to Emerging and Developing Countries: National and Global Determinants By Byrne, Joseph P.; Fiess, Norbert
  31. Prudential Policy for Peggers By Stephanie Schmitt-Grohe; Martin Uribe

  1. By: Troeger, Vera (University of Warwick)
    Abstract: This paper argues that the degree of monetary flexibility a government enjoys does not only depend on the implemented monetary institutions such as exchange rate arrangements and central bank independence but also on the economic and financial relationships with key currency areas. I develop a formal theoretical framework explaining the degree of monetary independence in open economies under flexible exchange rate regimes by trading relations and financial integration. The model suggests that a) higher import shares from the key currency area increase the imported inflation when monetary authorities try to offset an exogenous shock by cutting back the interest rate while the base country does not encounter a similar shock, and b) the more cross border assets of a country are denominated in the base currency the higher the exchange rate effects of interest rate differences to the interest rate of the key currency area. The presented empirical evidence largely supports the theoretical predictions.
    Date: 2012
  2. By: Vicente da Gama Machado
    Abstract: Following recent episodes of financial distress, the interaction between monetary policy and asset price fluctuations has gained renewed attention. Here, we assess the role of asset price misalignments in monetary policy in an adaptive learning context. Our model first extends Bullard and Mitra (2002), including an additional role for asset prices. From the point of view of the E-Stability criterion, commonly used in the learning literature, we find that a response to stock prices is not desirable under both a forward expectations policy rule and an interest rate rule responding to contemporaneous values. Heterogeneous beliefs about the dynamics of asset price fluctuations, inflation and the output gap are introduced and we also evaluate an optimal monetary policy rule including a weight on asset prices. Overall we find that the Taylor principle remains important over all interest rate rules analysed and that central banks should act cautiously when considering the introduction of stock prices in monetary policy.
    Date: 2012–04
  3. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Franta (Czech National Bank); Marek Rusnák (Czech National Bank)
    Abstract: We investigate the evolution of the monetary policy transmission mechanism in the Czech Republic over the 1996-2010 period by employing a time-varying parameters Bayesian vector autoregression model with stochastic volatility. We evaluate whether the response of GDP and the price level to exchange rate or interest rate shocks changes over time, with a focus on the period of the recent financial crisis. Furthermore, we augment the estimated system with a lending rate and credit growth to shed light on the relative importance of financial shocks for the macroeconomic environment. Our results suggest that output and prices have become increasingly responsive to monetary policy shocks, probably reflecting financial sector deepening, more persistent monetary policy shocks, and overall economic development associated with disinflation. On the other hand, exchange rate pass-through has weakened somewhat over time, suggesting improved credibility of inflation targeting in the Czech Republic with anchored inflation expectations. We find that credit shocks had a more sizeable impact on output and prices during the period of bank restructuring with difficult access to credit. In general, our results show that financial shocks are less important for the aggregate economy in an environment of a stable financial system.
    Keywords: Monetary policy transmission; Sign restrictions; Time-varying parameters
    JEL: E44 E52
    Date: 2012–04
  4. By: Thomas I. Palley
    Abstract: The financial crisis and Great Recession have prompted a rethink of monetary policy and central banking. The status quo insider rethink focuses on the role of monetary policy in dealing with asset bubbles; making the central bank the banking system supervisor; and how to deal with the problem of the zero lower bound to nominal interest rates. This paper presents an outsider reform program that focuses on central bank governance and independence; reshaping the economic philosophy of central banks to be more intellectually open-minded; major monetary policy reform that includes adoption of an inflation target equal to the minimum unemployment rate of inflation (MURI) and implementation of asset based reserve requirements; and regulatory reform that addresses problems of flawed incentives, excessive leverage, and maturity mismatch.The proposed outsider reform program is rooted in a rethink of macroeconomic theory compelled by the crisis. There are some overlaps between the insider and outsider reform programs but they are more form than substance. That is dangerous because it can confuse debate if similarity of form is mistaken for similarity of substance.The insider program makes no changes to macroeconomic theory and is uncritical of the Federal Reserve's past actions. From its perspective, any failings of the Federal Reserve have been unwitting sins of omission. The outsider program fundamentally challenges existing macroeconomic theory and is also highly critical of the Federal Reserve. From its perspective the failings of the Federal Reserve have included significant sins of commission rooted in political capture, cognitive capture and intellectual hubris.The outsider critique can be taken even further. The Federal Reserve is already legally mandated to pursue maximum employment with price stability. However, it needs institutional transformation that makes it think of itself as an agent for helping realize the "American Dream". That means it should have a duty to shape the allocation of credit and the financial system in ways that ensure growth, full employment and a fair shake for all.
    Date: 2011
  5. By: Stephen Hansen; Michael McMahon
    Abstract: We first establish that policymakers on the Bank of England's Monetary Policy Committee choose lower interest rates with experience. We then reject increasing confidence in private information or learning about the structure of the macroeconomy as explanations for this shift. Instead, a model in which voters signal their hawkishness to observers better ts the data. The motivation for signalling is consistent with wanting to control inflation expectations, but not career concerns or pleasing colleagues. There is also no evidence of capture by industry. The paper suggests that policy-motivated reputation building may be important for explaining dynamics in experts' policy choices.
    Keywords: Signalling, Learning, Monetary Policy
    JEL: D78 E52
    Date: 2011–08
  6. By: Morten L. Bech; Elizabeth Klee; Viktors Stebunovs
    Abstract: This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely due to limits to arbitrage and idiosyncratic market factors. In addition, during the early part of the crisis, the pricing of federal funds, which are unsecured loans, indicated a marked jump in perceived credit risk. Moreover, the liquidity effect for the federal funds rate, or the change in the federal funds rate associated with an exogenous change in reserve balances, weakened greatly with the increase in supply of these balances over the crisis, implying a non-linear demand for federal funds. Using these analyses, the paper then shows simulations of the dynamic effects and balance sheet mechanics of liquidity draining on the federal funds and repo rates--a tool that might be used in an exit strategy to tighten monetary policy.
    Date: 2012
  7. By: Fabian Valencia; Kenichi Ueda
    Abstract: We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
    Keywords: Central bank autonomy , Central banks , Economic models , Monetary policy ,
    Date: 2012–04–23
  8. By: Zsolt Darvas
    Abstract: We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a timevarying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.
    Date: 2012–05
  9. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation — among them monetary policy shocks the Fed injected into inflation.
    Keywords: Great Moderation; Shocks; Monetary policy; Optimal Timeless Rule; Taylor Rule; Indirect Inference; Wald statistic
    JEL: E42 E52 E58
    Date: 2012–05
  10. By: Alex Haberis; Anna Lipinska
    Abstract: In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable--just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker's ability to stabilise the economy benefits from more stimulatory foreign policy.
    Date: 2012
  11. By: Jordi Galí
    Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an OLG model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
    Keywords: monetary policy rules, stabilization policies, asset price volatility
    JEL: E44 E52
    Date: 2011–11
  12. By: Layal Mansour (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: The primary aim of this paper is to explore the effectiveness of Hoarding International Reserves and Sterilization in dollarized and indebted countries such as Turkey and Lebanon, by measuring the sterilization coefficient, and the offset coefficient. It also focuses on exploring the link between the sources of Reserves and the external debt. Using monthly data collected from the International Monetary Fund and from the Central Banks of Turkey and Lebanon between January 1994 and February 2011, we applied a 2SLS regression models and we identified explanatory variables that enabled us to estimate the aforementioned coefficients. Our results showed that despite their theoretical practice of sterilization policy, economic constrains of these countries contribute to weaken the efficacy expected from monetary policies.
    Keywords: Monetary policy, International Reserve, Sterilization, Foreign Liabilities,Dollarized countries, Turkey, Lebanon
    JEL: E52 E58 F30 F34
    Date: 2012
  13. By: David Andolfatto; Fernando M. Martin
    Abstract: When commitment is lacking, intertemporal trade is facilitated with the use of exchange media—interpreted broadly to include monetary and collateral assets. We study the properties of a model commonly used to motivate monetary exchange, extended to include a physical asset whose expected short-run return is subject to a news shock, but whose expected long-run return is stable. The nondisclosure of news enhances the asset’s property as an exchange medium, and generally improves social welfare. When a nondisclosure policy is infeasible, the framework admits a role for government debt, including fiat money. When lump-sum taxation is not permitted, fiat money may still improve welfare—but only if its circulation is supported by a cash-in-advance constraint.>
    Keywords: Disclosure of information ; Monetary policy - United States
    Date: 2012
  14. By: Monique Reid (Department of Economics, University of Stellenbosch)
    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 ‘sticky’ 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
  15. By: Ramon Marimon; Juan Pablo Nicolini; Pedro Teles
    Abstract: We study the interplay between competition and trust as efficiency- enhancing mechanisms in the private provision of money. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can only be observed after its purchasing capacity is realized. In that sense money is an experience good.
    Keywords: E40, E50, E58, E60
    Date: 2011–05
  16. By: Dominik Bernhofer; Till van Treeck (IMK at the Hans Boeckler Foundation)
    Abstract: We analyse the bank interest rate pass-through in the euro area for the period 1999:1 - 2009:11, relating market interest rates to bank retail rates of comparable maturities. We first estimate single equation error correction models for seven interest rate categories and ten euro area countries and find that the interest rate pass-through displays substantial heterogeneity especially in the short run, but also in the long run. We then apply the pooled mean group estimator (PMGE) advanced by Pesaran et al. (1999), allowing for country-specific interest rate pass-through in the short run, while constraining the long-run pass-through to be homogeneous across countries. We find significant evidence of substantial heterogeneity in the short-run passthrough. Finally, we conduct sub-sample analysis and conclude that the degree of heterogeneity and the overall efficiency of the interest rate pass-through have not improved in the second half of the existence of the European Monetary Union.
    Date: 2011
  17. By: Manmohan Singh; Peter Stella
    Abstract: Between 1980 and before the recent crisis, the ratio of financial market debt to liquid assets rose exponentially in the U.S. (and in other financial markets), reflecting in part the greater use of securitized assets to collateralize borrowing. The subsequent crisis has reduced the pool of assets considered acceptable as collateral, resulting in a liquidity shortage. When trying to address this, policy makers will need to consider concepts of liquidity besides the traditional metric of excess bank reserves and do more than merely substitute central bank money for collateral that currently remains highly liquid.
    Keywords: Asset management , Central banks , Money , Securities markets ,
    Date: 2012–04–10
  18. By: Luca Sessa (Bank of Italy)
    Abstract: Monetary growth targeting is often seen as an effective way of supporting macroeconomic stability. We scrutinize this property by checking whether multiplicity of equilibria, in the form of local indeterminacy (LI), can be both a possible and a plausible outcome of a basic model with an exogenous money growth policy rule. We address the question in different versions of the Sidrauski-Brock-Calvo framework, which isolates the contribution of monetary non-neutralities and monetary targeting. In line with previous literature, real effects of money are found to be a necessary condition for LI: we identify a single pattern for their magnitude if they are to be sufficient too. While the most elementary setups are unable to plausibly generate large enough real effects, LI becomes significantly more likely as one realistically considers additional channels of transmission of monetary expansions onto the real economy: in particular, we show that models in which holding money is valuable to both households and firms may yield a LI outcome for empirically relevant parameterizations, therefore casting some doubt on the stabilizing properties of monetary monitoring.
    Keywords: local indeterminacy, monetary targeting, real effects of money, money-in-the-utility-function, money-in-the-production-function
    JEL: E5 E58 E52 E41
    Date: 2012–03
  19. By: Panzera, Fabio S.
    Abstract: During the two decades preceding the 2007-8 financial crisis, both advanced and emerging market economies experienced larger credit growth and asset price fluctuations than in the more distant past. These phenomena were largely due to the establishment of credible inflation targeting regimes, whose excessive focus on medium-run price stability bred unsustainable credit and asset price dynamics, to the detriment of financial stability over longer time horizons. As the financial crisis spread to the whole economy in the late 2008, many economists came to believe that monetary policy should actively lean against financial imbalances - thus challenging the canonical New Keynesian paradigm. This paper reviews the relevance of that paradigm in light of the recent financial crisis, arguing that the whole macrofinancial stability framework, rather than monetary policy per se, needs to be considered anew. In particular, some macro-prudential tools and a counter-cyclical tax on private debt could be useful instruments to counter overly credit expansion and, accordingly, smooth asset price fluctuations.
    Keywords: inflation targeting ; New Keynesian consensus ; financial imbalances ; macro-prudential regulation ; counter-cyclical tax on debt
    JEL: E32 E58 G01 G18
    Date: 2011–12–15
  20. By: Banik, Nilanjan; Yoonus, C.A.
    Abstract: This paper investigates empirically the possibility of forming an Optimum Currency Area (OCA) among member countries of Economic Community of West African States (ECOWAS) region. Under OCA, member countries share a common currency (like, the Euro), while foregoing their autonomy with respect to their use of monetary policy instruments. We say that the countries are good candidates for forming an OCA if there is a long run relationship in the trend (permanent) component of output. Our results indicate existence of long run relationship in the trend component of GDP among the member countries in the ECOWAS region. Hence is the plausibility for forming an OCA.
    Keywords: Monetary Union; ECOWAS; Beveridge-Nelson Decomposition
    JEL: F15
    Date: 2011–06–12
  21. By: Benamar, Abdelhak; CHERIF, Nasreddine; Benbouziane, Mohamed
    Abstract: Inflation has been the major global economic problem for most economies throughout the world over the last three decades. It affects individuals, businesses and governments. Many competing hypotheses have been advanced in the literature to explain its causes and give the appropriate remedial policies. One of these hypotheses is central to the quantity theory of money. According to this hypothesis, inflation results solely from a maintained expansion of the money stock at rates in excess of increases in the amount of money demanded in the economy. The paper examines the money-price relationship in the Three Maghreb countries (namely Algeria, Morocco and Tunisia) using Granger causality test. The results do not tend to support the quantity theorist’s view that money and prices have a long-run relationship, i.e., they do not tend to drift apart in the long run. However, as suggested by Granger (1986) money and prices could still cointegrate if other variables, which may have influenced prices, were included in the cointegration regressions. Second, the finding of a unidirectional causation from money to prices in the case of Morocco and Tunisia is in line with the monetarist’s view that money precedes and causes inflation. In fact, this finding supports Darrat’s (1986) finding that money causes inflation in Morocco and Tunisia. Thus the monetary authorities in these two countries can consider control of the money supply (M1) or (M2) to influence and control inflation. As suggested by monetarists, this can be best achieved by maintaining a steady rate of growth of the money supply, roughly corresponding to the long-run growth of the real output. Our results also show the apparent absence of causality between money and prices in the case of Algeria which is not easy to explain. A possible explanation may be that the data for the Consumer Price Index (CPI) are not reliable. This may be true given that the prices, which are reported by the authorities, are always lower than those actually paid in the market place.
    Keywords: Cointegration – bootstrap- money – prices- Granger causality – inflation – Maghreb
    JEL: C32 E31 E52
    Date: 2011–12–21
  22. By: Catherine Prettner (Department of Economics, Vienna University of Economics and Business); Klaus Prettner (Harvard University, Center for Population and Development Studies)
    Abstract: This article investigates the interrelations between the initial members of the Euro area and five important Central and Eastern European economies. We set up a theoretical open economy model to derive the Purchasing Power Parity, the Interest Rate Parity, the Fisher Inflation Parity, and an output gap relation. After taking convergence into account, they are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates on the respective other area as well as the implications of shocks in the exchange rate and in relative prices on both areas. The results show a high degree of interconnectedness between the two economies. There are strong positive spillovers in output to the respective other region with the magnitude of the impact being similarly strong in both areas. Furthermore, we find a multiplier effect being present in Eastern Europe and some evidence for the European Central Banks’ desire towards price stability.
    Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis
    JEL: C11 C32 F41
    Date: 2012–03
  23. By: Francesco Bianchi
    Abstract: The evolution of the U.S. economy over the last 50 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, the behavior of the Federal Reserve is identifi…ed by repeated fluctuations between a Hawk- and a Dove- regime, instead of by the traditional pre- and post- Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late '70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a set of tools to handle some of the technical difficulties that arise in rational expectation models with Markov-switching regimes.
    Date: 2012
  24. By: Diana Hancock; Wayne Passmore
    Abstract: We provide an empirical analysis of the effects of the Federal Reserve's asset holdings on MBS yields and mortgage rates. We argue that understanding the particulars of the U.S. mortgage markets, particularly the linkages between the secondary and primary mortgage markets, is important. We find evidence that the Federal Reserve's portfolio holdings influence mortgage markets, through both a "portfolio balancing channel" and an "excess reserves" channel. These two channels can work in opposite directions and their magnitudes are difficult to estimate, but on net, larger Federal Reserve's portfolio holdings seem to have placed a significant downward influence on MBS yields and mortgage rates.
    Date: 2012
  25. By: Honkapohja, Seppo; Mitra, Kaushik; Evans, George W.
    Abstract: These notes try to clarify some discussions on the formulation of individual intertemporal behavior under adaptive learning in representative agent models. First, we discuss two suggested approaches and related issues in the context of a simple consumption-saving model. Second, we show that the analysis of learning in the NewKeynesian monetary policy model based on “Euler equations” provides a consistent and valid approach.
    Keywords: Euler equation, New Keynesian, Adaptive learning,
    Date: 2011
  26. By: Emanuel Kohlscheen
    Abstract: This study presents indirect evidence of the effectiveness of sterilized interventions in Brazil based on the complete records of daily customer order flow data reported by Brazilian dealers as well as foreign exchange intervention data over a time span of 10 years (2002-2011). We find that the effect of USD sales by end-users on the BRL/USD was much stronger on days in which the BCB did not intervene in the spot foreign exchange market. The regressions suggest that a 1% appreciation of the Real would have required the sale of 2.0 bn USD by final customers on days in which the Central Bank refrained from intervening. This compares to required sales of 5.5 bn USD on days in which the Central Bank was present in the market. This large effect, in spite of the fact that the median intervention amounted to only 140 mn USD, can be interpreted as evidence for the indirect damping channel. Furthermore, we find that order flows coming from outside of the financial sector have a (considerably) stronger effect on the BRL/USD exchange rate than those coming from financial customers. We argue that some studies may have failed to find significant effects of BCB interventions due to a problem of reverse causality, as in a regime of discretionary interventions the decision to intervene is often taken during trading hours.
    Date: 2012–04
  27. By: Young Sik Kim (Department of Economics & SIRFE, Seoul National University Seoul, Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper incorporates the recognizability of assets explicitly into the standard search model of exchange to determine the liquidity returns as an equilibrium outcome. Assuming that money is universally recognizable but bond is not, the two types of the single-coincidence meetings arise?one where both money and bond are accepted and the other where only money is accepted as medium of exchange?depending on a seller¡¯s strategy of accepting or rejecting the bond of unrecognized quality and a buyer¡¯s strategy of carrying the counterfeit bond. The equilibrium restrictions imply that the liquidity differentials between money and bond tend to increase with the recognizability problem. With the relatively mild recognizability problem, there only exists an equilibrium where all the buyers bring the authentic bond to the decentralized market and sellers always accept the bond of unrecognized quality, and hence money and bond become equally liquid. As the recognizability problem becomes sufficiently severe, there only exists an equilibrium where some buyers bring the counterfeit bond, but sellers randomize between accepting and rejecting the bond of unrecognized quality. Money commands higher liquidity than bond by providing the additional liquidity service when sellers reject the bond of unrecognized quality as well as when they recognize the counterfeit bond. The coexistence of money and bond requires a higher full (liquidity augmented) return for bond than money, implying a positive liquidity premium.
    Keywords: recognizability, liquidity, asset prices
    JEL: E40
    Date: 2012
  28. By: Simplice A , Asongu
    Abstract: In the first empirical assessment of the incidence of mobile banking on financial intermediary development in Africa, we use two definitions of the financial system: the traditional IFS (2008) and Asongu (2011) measures of financial sector importance. When the conception of a financial system is based only on banks and other financial institution (IFS, 2008), mobile banking has a negative incidence on traditional financial intermediary dynamics of depth, activity and size. However, when a previously missing informal-financial sector component is integrated into the definition (Asongu, 2011), mobile-banking has a positive incidence on informal financial intermediary development. Three major implications result from the findings. (1) There is a growing role of informal finance in developing countries. (2) The incidence of the burgeoning phenomenon of mobile-banking cannot be effectively assessed at a macroeconomic level by traditional financial development indicators. (3) It is a wake-up call for scholarly research on informal financial intermediary development indicators which will oriented monetary policy; since a great chunk of the monetary base(M0) in less developed countries is now captured by mobile-banking.
    Keywords: Banking; Mobile Phones; Shadow Economy; Financial Development; Africa
    JEL: O17 E00 O33 D60 G20
    Date: 2012–05–04
  29. By: Daniela Federici; Giancarlo Gandolfo
    Abstract: The aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents' beliefs, in order to explore non-linearities and possible chaotic behaviour. The theoretical model contains an intrinsic non-linearity that gives rise to a jerk differential equation, which is in principle capable of generating chaos. The model is econometrically estimated in continuous time with Euro/Dollar data and examined for the possible presence of chaotic motion. Our results indicate that the possibility of chaotic dynamics has to be rejected.
    Keywords: Exchange rate, chaos, jerk equation, continuous time econometrics
    JEL: F31 F37 C49 C61
    Date: 2011–09
  30. By: Byrne, Joseph P.; Fiess, Norbert
    Abstract: This paper examines international capital flows to emerging and developing countries. We assess whether commonalities exist, the permanence of shocks to commonalities and their determinants. Also, we consider individual country coherence with global capital flows and we measure the extent of co-movements in the volatility of capital flows. Our results suggest there are commonalities in capital inflows, although aggregate or disaggregate capital flows respond differently to shocks. We find that the US long run real interest rate is an important determinant of global capital flows, and real commodity prices are relevant but to a lesser extent. We also find a role for human capital in explaining why some countries can successfully ride the wave of financial globalisation.
    Keywords: Capital Flows, Emerging Markets, Developing Countries, Global Factors,
    Date: 2011
  31. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: This paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy in this model and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period.
    JEL: E31 E62 F41
    Date: 2012–05

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