nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒05‒22
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Hemlock for policy response: Monetary policy, exchange rates and labour unions in SEE and CIS during the crisis By Branimir Jovanovic; Marjan Petreski
  2. Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy By Stephen Hall; P.A.V.B. Swamy; George S. Tavlas
  3. The High-Frequency Response of the Rand-Dollar Rate to Inflation Surprises By Greg Farrell; Shakill Hassan; Nicola Viegi
  4. Relative price effects of monetary policy shock in Malaysia: a svar study By Abdul Karim, Zulkefly; Zaidi , Mohd. Azlan Shah; W.N.W, Azman-Saini
  5. Inflation Derivatives Under Inflation Target Regimes By Mordecai Avriel; Jens Hilscher; Alon Raviv
  6. Changes in the Effects of Monetary Policy on Disaggregate Price Dynamics By Christiane Baumeister; Philip Liu; Haroon Mumtaz
  7. Hoarding of International Reserves and Sterilization in Dollarized and Indebted Countries : an effective monetary policy? By Layal Mansour
  8. Fiscal consolidation in an open economy By Christopher J. Erceg; Jesper Lindé
  9. Empirical Evidence on the Generalized Taylor Principle By Mario Jovanovi´c
  10. New Paradigms in Central Banking? By Athanasios Orphanides
  11. Reform of the international monetary system : a jagged history and uncertain prospects By Lin, Justin Yifu; Fardoust, Shahrokh; Rosenblatt, David
  12. The Euro crisis: a historical perspective . By Mourlon-Druol, Emmanuel
  13. Disinflation effects in a medium-scale New Keynesian model: money supply rule versus interest rate rule By Guido Ascari; Tiziano Ropele
  14. Inflation forecasting in Angola: a fractional approach By Carlos P. Barros; Luis A. Gil-Alana
  15. Milton Friedman, the Demand for Money and the ECB’s Monetary-Policy Strategy By Clive Fraser
  16. Changes in bank lending standards and the macroeconomy By William F. Bassett; Mary Beth Chosak; John C. Driscoll; Egon Zakrajsek
  17. "The Euro Debt Crisis and Germany's Euro Trilemma" By Jorg Bibow
  18. Monetary Policy and Fiscal Limits with No-Default By Gliksberg, Baruch
  19. Exchange Return Co-movements and Volatility Spillovers Before and After the Introduction of Euro By Nikolaos Antonakakis
  20. Monetary Policy, Liquidity, and Growth By Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
  21. The correlation between money and output in the United Kingdom: resolution of a puzzle By Edward Nelson
  22. "Chronic Specie Scarcity and Efficient Barter: The Problem of Maintaining an Outside Money Supply in British Colonial America " By Farley Grubb
  23. The Impact of Policy Shocks on Financial Structure: Empirical Results from Japan By Moayedi, Vafa; Aminfard, Matin
  24. Putting currency misalignment into gravity: The currency union effect reconsidered By Hogrefe, Jan; Jung, Benjamin; Kohler, Wilhelm K.
  25. The failure of Financial Macroeconomics and What to Do About It. By Jean-Bernard Chatelain; Kirsten Ralf
  26. Country Size, Currency Unions, and International Asset Returns By Tarek Alexander Hassan

  1. By: Branimir Jovanovic; Marjan Petreski
    Abstract: The objective of this paper is to assess whether the level of unionization and the rigidity of the exchange rate affected wages and monetary policy in SEE and CIS during the ongoing economic crisis. Towards that end, a New Keynesian model with price and wage rigidities is used. The model is estimated with a panel GMM over the period January 2002 – March 2011 on sample of 19 countries. Several findings emerge. First, the output gap is found not to depend on the real interest rate, in accordance with the underdeveloped financial markets in these economies. Second, inflation is found not to depend on the output gap, but on the wage gap, which stresses the relevance of the labour unions for the inflation dynamics in these countries. Third, the labour wedge that arises from the monopolistic competition in the labour market works mainly through the wage gap, not the output gap, in accordance with the high unemployment in these countries. Fourth, monetary policy responded counter-cyclically during the crisis in countries with weak trade unions, differently from countries with strong unions: in crisis times, weak economy drags wages down in low-unionized countries and monetary policy relaxes in these countries, both due to lower wages and due to the weaker economy; on the other hand, strong unions prevent a weak economy to drag wages down in crisis times and central banks in these countries are found not to react to economic activity, prices or wages. Fifth, the fixed exchange rate is found to restrain monetary policy in times of crisis, too – in countries with flexible exchange rates, monetary policy during the crisis responds to movements in output gap and reserves, in contrast to countries with fixed exchange rate, where monetary policy does not respond to any domestic macroeconomic variable.
    Keywords: monetary policy, fixed exchange rate, wage bargaining, unionization, SEE, CIS
    JEL: E52 F0 F31 J51 P20
    Date: 2012–05
  2. By: Stephen Hall; P.A.V.B. Swamy; George S. Tavlas
    Abstract: The European Central Bank (ECB) assigns a greater weight to the role of money in its monetary-policy strategy than most, if not all, other major central banks. Nevertheless, reflecting the view that the demand for money became unstable in the early-2000s, some commentators in the press have reported that the ECB has “downgraded” the role of money-demand functions in its strategy. This paper explains the ECB’s monetary-policy strategy and shows the considerable influence of Milton Friedman’s contributions on the formulation of that strategy. The paper also provides new evidence on the stability of euro-area money-demand. Following a conjecture made by Friedman (1956), we assign a role to uncertainty in the money-demand function. We find that, although uncertainty is mean–reverting, it is none-the-less non-stationary, subject to wide swings, and has substantial effects on the demand for money.
    Keywords: ECB’s monetary-policy strategy; Milton Friedman; money demand
    JEL: C20 E41
    Date: 2012–04
  3. By: Greg Farrell (South African Reserve Bank and Wits University); Shakill Hassan (South African Reserve Bank and University of Cape Town); Nicola Viegi (Department of Economics, University of Pretoria)
    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 inflation announcements, and show that the rand appreciates (respectively, depreciates) on impact when inflation is higher (respectively, lower) than expected. The effect only applies after the adoption of inflation targeting, and is stronger for good news. Our findings are rationalisable by the belief, among market participants, in a credible (though perhaps not particularly aggressive) inflation 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, inflation surprises, Taylor rules, inflation targeting, credibility
    JEL: E31 E52 F30 F31
    Date: 2012–05
  4. By: Abdul Karim, Zulkefly; Zaidi , Mohd. Azlan Shah; W.N.W, Azman-Saini
    Abstract: Studies on Malaysia monetary policy mostly examine the effect of monetary policy change on output and inflation in aggregate terms. While sectoral output effects of monetary policy have also been investigated, there is however a lack in the study on the effect of policy change on disaggregated inflation. This paper attempts to examine the later issue by employing structural vector autoregressive (SVAR) model. By estimating the model separately for each sub-group of Malaysian consumer price index, we find that a modest monetary policy shock results in varying degree of responses in disaggregated inflation. In other words, some sub-group inflation react instantly while others respond sluggishly to a monetary policy shock. In contrast to aggregate inflation response, there is also evidence of price puzzle. The results give some insight to monetary authority on how to control inflation in aggregate as well as in disaggregate terms and in turn manage the cost of living issues in Malaysia.
    Keywords: monetary policy; SVAR; inflation; relative price
    JEL: C32 E31 E52
    Date: 2011–06–15
  5. By: Mordecai Avriel (Technion-Israel Institute of Technology); Jens Hilscher (International Business School, Brandeis University); Alon Raviv (International Business School, Brandeis University)
    Abstract: Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the pricing of inflation derivatives. We develop a flexible model of inflation targeting in which the central bank's intervention to steer inflation towards the target depends on past deviations and the policymaker's ability or will to enforce the target. We use our model to price inflation derivatives and demonstrate the impact of inflation targeting on derivative pricing.
    Keywords: Infl?ation derivatives, Infl?ation targeting, Target zones, Option pricing
    JEL: G12 G13
    Date: 2012–04
  6. By: Christiane Baumeister; Philip Liu; Haroon Mumtaz
    Abstract: We examine the evolution of the effects of monetary policy shocks on the distribution of disaggregate prices and quantities of personal consumption expenditures to assess the contribution of monetary policy to changes in U.S. inflation dynamics. Given that the transmission of monetary policy to aggregate inflation is determined by the responses of its underlying components, the degree of monetary non-neutrality is ultimately the result of relative price effects at the sectoral level. We provide evidence of considerable heterogeneity in sectoral price responses by introducing time variation in a factoraugmented vector autoregression model. Over time the majority of individual prices respond negatively after a contractionary monetary policy shock and the price dispersion diminishes. We link these empirical findings to a multi-sector DSGE model and show that they are consistent with firms’ heterogeneous pricing decisions and changes in the importance of the cost channel of monetary policy and the degree of wage flexibility.
    Keywords: Econometric and statistical methods; Transmission of monetary policy
    JEL: E30 E32
    Date: 2012
  7. By: Layal Mansour (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    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
    Date: 2012–05–09
  8. By: Christopher J. Erceg; Jesper Lindé
    Abstract: This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
    Date: 2012
  9. By: Mario Jovanovi´c
    Abstract: During financial crises central banks usually decrease interest rates in order to reduce financial uncertainty. This behavior increases inflation risk. The trade-off between inflation and uncertainty stabilization can be modeled by the generalized Taylor rule, which describes inflation sensitivity as a function of financial uncertainty instead of a constant parameter. Based on the GMM-estimation of the generalized approach I confirm the suggested uncertainty-dependent inflation sensitivity of the Fed. Prolonged deviations from the Taylor principle are not evident. This implies that the Fed does not deemphasize inflation stabilization in favor of uncertainty stabilization – especially during the peak of the latest sub-prime crisis.
    Keywords: Financial instability; time-varying inflation sensitivity
    JEL: E44 E58
    Date: 2012–04
  10. By: Athanasios Orphanides (Central Bank of Cyprus)
    Abstract: This paper reviews whether and how the ongoing financial crisis has influenced central banking policy practice. Taking a historical perspective, it argues that throughout the existence of central banks the main objective has remained the same¯stability. What has been evolving over time, and has been influenced by the crisis, is our understanding about how to achieve and maintain stability over time. The paper focuses on the role and relative importance of price stability, economic stability and financial stability arguing that while the crisis has not materially shifted views regarding the monetary policy framework, it has highlighted the need for greater emphasis on financial stability than was appreciated before the crisis. It further argues that central banks must not only have a strong role in macro-prudential supervision but have more direct involvement in micro-supervision of the banking sector. Lastly, the paper argues that the crisis has reaffirmed that strong economic governance is a prerequisite for stability in a monetary union and, in the context of the euro area sovereign crisis, discusses the tremendous costs stemming from of lack of sufficient progress regarding economic governance going forward.
    Keywords: Monetary policy, financial stability, economic governance, micro-prudential supervision, macro-prudential supervision
    JEL: E52 E58 E63
    Date: 2011–11
  11. By: Lin, Justin Yifu; Fardoust, Shahrokh; Rosenblatt, David
    Abstract: This paper analyzes the historical evolution of the international monetary system in the context of the rising role of developing countries in the world economy and the emerging multi-polar growth setting. It evaluates the stability of the current"non-system"and how the global economic context is likely to affect that stability in the coming years with potential adverse effects on both advanced and developing economies. Given the likely trend toward a multi-polar reserve currency system, the paper evaluates the stability of the emerging system, as well as the current proposals for reform of the international monetary system. The paper concludes that more ambitious reforms of the system may be needed to meaningfully reduce future global economic and financial instability.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Fiscal&Monetary Policy
    Date: 2012–05–01
  12. By: Mourlon-Druol, Emmanuel
    Abstract: In this research report IDEAS explores the current euro crisis by looking at the debates preceding the conception of the euro. How can the early days of EU monetary cooperation help us understand today's predicament? And what lessons can we draw from them for the euro? Emmanuel Mourlon-Druol is Pinto Fellow at LSE IDEAS. Today's debates about the viability of the eurozone bear a striking resemblance with those about the creation of a European single currency in the late twentieth century. The early steps of European monetary cooperation, the negotiations over the creation of the European Monetary System (EMS), those over the creation of the euro, as well as the other plans suggested which eventually failed (the proposal for a European parallel currency for instance), help us better understand the challenges that the euro faces today. Many of the issues at stake then are indeed still central to debates now. The question of the transfer of resources from richer to poorer member states, the adoption of a German-inspired interpretation of monetary policy, to take but two examples, are issues that anyone reading today's newspapers will be familiar with. This paper argues that looking at these past debates do not just provide an insight into the past – but also helps us better understand our current predicament.
    Date: 2011–06
  13. By: Guido Ascari (University of Pavia); Tiziano Ropele (Bank of Italy)
    Abstract: Empirical studies show that successful disinflations entail a period of output contraction. Using a medium-scale New Keynesian model, we compare the effects of disinflations of different speed and timing, implemented through either a money supply or an interest rate rule. In terms of transitional output loss, cold-turkey disinflations under an interest rate rule are less costly than those under a money supply rule and are accomplished more rapidly. Furthermore, gradual or anticipated disinflations deliver lower sacrifice ratios. From a welfare perspective, despite the transitional economic contraction, disinflations are overall welfare-improving. Interestingly, the overall welfare gain is not affected by how the disinflation is actually implemented: what really matters is the achievement of a permanently lower inflation rate.
    Keywords: disinflation, sacrifice ratio, nonlinearities
    JEL: E31 E5
    Date: 2012–04
  14. By: Carlos P. Barros; Luis A. Gil-Alana
    Abstract: This paper forecasts inflation in Angola with an ARFIMA (AutoRegressive Fractionally Integrated Moving Average) model. It is found that inflation in Angola is a highly persistent variable with an order of integration constrained between 0 and 1. Moreover, a structural break is found in August, 1996. Using the second sub-sample for forecasting purposes, the results reveal that inflation will remain low, assuming that prudent macroeconomic policies are maintained.
    Keywords: Angola; inflation, long memory
    JEL: C22
    Date: 2012–02
  15. By: Clive Fraser
    Abstract: I model a single-club economy with heterogeneous consumers as an aggregative game. I give a sufficient condition, normality of demand for the club good in full income, for the existence and uniqueness of a Nash equilbrium by the Cornes-Hartley (2007) method. Then, confining attention to club quality functions that are homogeneous in the investment in the club facility and the aggregate usage of the club, I examine when the sufficient condition is satisfied. I show that, under common assumptions on the utility function, this occurs for all positive degrees of homogeneity.
    Keywords: Nash equilibrium; heterogeneous clubs; aggregative game; homogeneous function; existence; uniqueness
    JEL: C7 D1 D5 H4
    Date: 2012–03
  16. By: William F. Bassett; Mary Beth Chosak; John C. Driscoll; Egon Zakrajsek
    Abstract: Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between -1.0 and -1.5.
    Date: 2012
  17. By: Jorg Bibow
    Abstract: This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it. It is argued that the crisis is not primarily a "sovereign debt crisis" but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all--perpetual export surpluses, a no transfer / no bailout monetary union, and a "clean," independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global "too big to fail" threat, and presents a moral hazard of perhaps unprecedented scale to the global community.
    Keywords: Euro; Monetary Union; Banking Crisis; Balance-of-Payments Crisis; Sovereign Debt Crisis; Competitiveness Imbalances; Fiscal Transfers; Bailouts; Austerity
    JEL: E42 E52 E58 E65 F36 G01
    Date: 2012–05
  18. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper discusses monetary and fiscal interactions in fiscal stress with no outright default. Two distortions prevail in the economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include: a ceiling on the equilibrium Debt-to-GDP ratio; zero elasticity of tax revenues; a political intolerance of rising tax rates; A Laffer curve emerges endogenously. In equilibrium, fiscal solvency is brought about through adjustments to the level of nominal prices. Three regimes achieve this goal: FC - an interaction of a fiscal rule that targets both output and public debt with a neutral monetary policy; FD - an interaction of a fiscal rule that targets the primary deficit with an active monetary policy; FDA - an interaction of an austere fiscal rule with a passive monetary policy.
    Keywords: Distorting Taxes; Finance Constraint; Fiscal Limits; Fiscal Rules; Fiscal Theory of Prices;
    JEL: E42 E62 E63 H60
    Date: 2012–04–30
  19. By: Nikolaos Antonakakis
    Abstract: This paper examines co-movements and volatility spillovers in the returns of the euro, the British pound, the Swiss franc and the Japanese yen vis-à-vis the US dollar before and after the introduction of the euro. Based on dynamic correlations, variance decompositions, generalized VAR analysis, and a newly introduced spillover index, the results suggest significant co-movements and volatility spillovers across the four exchange returns, but their extend is, on average, lower in the latter period. Return co-movements and volatility spillovers show large variability though, and are positively associated with extreme economic episodes and, to a lower extend, with appreciations of the US dollar. Moreover, the euro (Deutsche mark) is the dominant currency in volatility transmission with a net volatility spillover of 8% (15%) to all other markets, while the British pound is the dominant net receiver of volatility with a net volatility spillover of -11% (-13%), in the post- (pre-) euro period. The nature of crossmarket volatility spillovers is found to be bidirectional though, with the highest volatility spillovers occurring between the European markets. The economic implications of these findings for central bank interventions, international portfolio diversification and currency risk management are then discussed.
    Keywords: Exchange returns co-movement, Volatility spillover, Vector autoregression, Variance decomposition, Spillover index, Multivariate GARCH
    JEL: C32 F31 G15
    Date: 2012–05
  20. By: Philippe Aghion; Emmanuel Farhi; Enisse Kharroubi
    Abstract: In this paper, we use cross-industry, cross-country panel data to test whether industry growth is positively affected by the interaction between the reactivity of real short term interest rates to the business cycle and industry-level measures of financial constraints. Financial constraints are measured, either by the extent to which an industry is prone to being "credit constrained", or by the extent to which it is prone to being "liquidity constrained". Our main findings are that: (i) the interaction between credit or liquidity constraints and monetary policy countercyclicality, has a positive, significant, and robust impact on the average annual rate of labor productivity in the domestic industry; (ii) these interaction effects tend to be more significant in downturns than in upturns.
    JEL: E32 E43 E52
    Date: 2012–05
  21. By: Edward Nelson
    Abstract: Friedman and Schwartz (1982) and Goodhart (1982) report a zero correlation between money growth and output growth in U.K. historical data. This finding is puzzling, as there is wide agreement that changes in monetary policy are frequently nonneutral in the short run and that the U.K. experience, in particular, is replete with instances of real effects of monetary policy actions. This paper proposes a resolution to the puzzle. An analysis conducted on subperiods shows that a positive money growth/output growth correlation is indeed recoverable from U.K. historical data. Strike activity in the 1970s and shifts in the terms of trade during the interwar period are the two factors primarily responsible for obscuring the positive correlation between money and output in the United Kingdom.
    Date: 2012
  22. By: Farley Grubb (Department of Economics, University of Delaware)
    Abstract: Colonial Americans complained that gold and silver coins (specie) were chronically scarce. These coins could be acquired only through importation. Given unrestricted trade in specie, market arbitrage should have eliminated chronic scarcity. A model of efficient barter and local inside money is developed to show how chronic specie scarcity in colonial America could prevail despite unrestricted specie-market arbitrage, thus justifying colonial complaints. The creation of inside fiat paper monies by colonial governments was a welfare-enhancing response to preexisting chronic specie scarcity, not the cause of that scarcity.
    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.
    JEL: B12 B22 B31 D61 E41 E42 E52 F11 F41 F54 N11 N21 N41
    Date: 2012
  23. By: Moayedi, Vafa; Aminfard, Matin
    Abstract: This study examines the relationship between Japan’s financial structure and the country’s fiscal/monetary policy. Vector Error Correction models are utilized to investigate the effect of policy shocks on financial structure development during a sample period of 48 years. Our findings reveal signs of an existing long-run relationship between policy variables and financial structure. Policymakers in Japan may have effectively influenced Japan’s financial structure development via fiscal and monetary actions. This result strengthens the assumption of a volatile financial structure due to policy interference. This study is the first of its kind and is intended to stimulate further research and debate.
    Keywords: Financial Structure; Fiscal Policy; Japan; Monetary Policy; VEC
    JEL: E62 E63
    Date: 2011–12–09
  24. By: Hogrefe, Jan; Jung, Benjamin; Kohler, Wilhelm K.
    Abstract: Member countries of a currency union like the euro area have absorbed asymmetric shocks in ways that are inconsistent with a common nominal anchor. Based on a reformulation of the gravity model that allows for such bilateral misalignment, we disentangle the conventional microeconomic trade effect and macroeconomic trade effects deriving from bilateral misalignment within currency unions. Econometric estimation reveals that for the euro area the misalignment channel exerts a significant trade effect on bilateral exports. We retrieve country-specific estimates of the misalignment-induced effect on trade which demonstrate heterogeneous outlooks across countries for the costs and benefits from adopting the euro. --
    Keywords: Euro,gravity model,exchange rates,trade imbalances
    JEL: F12 F13 F15
    Date: 2012
  25. By: Jean-Bernard Chatelain (Centre d'Economie de la Sorbonne - Paris School of Economics); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur (ESCE))
    Abstract: The bargaining power of international banks is currently still very high as compared to what it was at the time of the Bretton Woods conference. As a consequence, systemic financial crises are likely to remain recurrent phenomena with large effects on macroeconomic aggregates. Mainstream macroeconomic models dealing with financial frictions failed to explain at least eight features of the ongoing crisis. We therefore suggest two complementary assumptions : (I) A systemic bankruptcy risk stable equilibrium may be feasible, besides another stable equilibrium related to a stability corridor, (II) inefficient financial markets rarely ensure that the price of an asset is equal to its "fundamental long term value". Both assumptions are compatible with a structural research programme taking into account the Lucas' critique (1976) but may start a creative destruction process of the Lucas' view of business cycles theory.
    Keywords: Asset prices, liquidity trap, monetary policy, financial stability, business cycles, liquidity trap, dynamic stochastic general equilibrium models.
    JEL: E3 E4 E5 E6
    Date: 2012–05
  26. By: Tarek Alexander Hassan
    Abstract: Differences in real interest rates across developed economies are puzzlingly large and persistent. I propose a simple explanation: Bonds issued in the currencies of larger economies are expensive because they insure against shocks that affect a larger fraction of the world economy. I show that differences in the size of economies indeed explain a large fraction of the cross-sectional variation in currency returns. The data also support a number of additional implications of the model: The introduction of a currency union lowers interest rates in participating countries and stocks in the non-traded sector of larger economies pay lower expected returns.
    JEL: F3 F31 F4 G0 G12 G15
    Date: 2012–05

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