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on Monetary Economics |
| By: | Farmer, Roger E A |
| Abstract: | This paper has three parts. First, I provide a theoretical framework to explain how rational expectations models, where the central bank follows a conventional monetary policy rule, can be used to understand the history of interest rates and inflation in the period between 1951 and the Great Recession of 2008. Second, I use the framework developed in the first part of the paper to illustrate how the purchase of assets other than treasuries, for example, mortgage backed securities and long bonds, can influence inflation expectations when the interest rate is zero. Third, I show that the beginning of unconventional monetary policy in 2008 coincided with a significant increase in inflation expectations. I extend existing models of monetary policy by adding explicit markets for financial securities. Using this extended framework, I show that the purchase of assets, other than short term treasury bills, has a differential impact on the prices of risky securities. Unconventional monetary policy is an important tool in a central bank’s arsenal that can and should be used to help prevent deflation in the wake of a financial crisis. |
| Keywords: | inflation; interest rates; unconventional monetary policy; zero lower bound |
| JEL: | E31 E4 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8956&r=mon |
| By: | Carlo Rosa |
| Keywords: | Assets (Accounting) ; Federal Reserve System ; Bank of England ; Stock - Prices ; Bonds - Prices ; Federal funds rate |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:560&r=mon |
| By: | De Santis, Roberto A; Favero, Carlo A.; Roffia, Barbara |
| Abstract: | This paper argues that a stable broad money demand for the euro area over the period 1980-2011 can be obtained by modelling cross border international portfolio allocation. As a consequence, model-based excess liquidity measures, namely the difference between actual M3 growth (net of the inflation objective) and the expected money demand trend dynamics, can be useful to predict HICP inflation. |
| Keywords: | Euro area money demand; inflation forecasts; monetary policy; portfolio allocation |
| JEL: | E4 E44 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8957&r=mon |
| By: | Frankel, Jeffrey A. |
| Abstract: | The characteristics that distinguish most developing countries, compared to large industrialized countries, include: greater exposure to supply shocks in general and trade volatility in particular, procyclicality of both domestic fiscal policy and international finance, lower credibility with respect to both price stability and default risk, and other imperfect institutions. These characteristics warrant appropriate models. Models of dynamic inconsistency in monetary policy and the need for central bank independence and commitment to nominal targets apply even more strongly to developing countries. But because most developing countries are price-takers on world markets, the small open economy model, with nontraded goods, is often more useful than the two-country two-good model. Contractionary effects of devaluation are also far more important for developing countries, particularly the balance sheet effects that arise from currency mismatch. The exchange rate was the favored nominal anchor for monetary policy in inflation stabilizations of the late 1980s and early 1990s. After the currency crises of 1994-2001, the conventional wisdom anointed Inflation Targeting as the preferred monetary regime in place of exchange rate targets. But events associated with the global crisis of 2007-09 have revealed limitations to the choice of CPI for the role of price index. The participation of emerging markets in global finance is a major reason why they have by now earned their own large body of research, but it also means that they remain highly prone to problems of asymmetric information, illiquidity, default risk, moral hazard and imperfect institutions. Many of the models designed to fit emerging market countries were built around such financial market imperfections; few economists thought this inappropriate. With the global crisis of 2007-09, the tables have turned: economists should now consider drawing on the models of emerging market crises to try to understand the unexpected imperfections and failures of advanced-country financial markets. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:4669671&r=mon |
| By: | Barnett, William A.; Liu, Jia; Mattson, Ryan S.; van den Noort, Jeff |
| Abstract: | The Center for Financial Stability (CFS) has initiated a new Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM). The Director of the program is William A. Barnett, who is the originator of Divisia monetary aggregation and more broadly of the associated field of aggregation-theoretic monetary aggregation. The international section of the AMFM web site is a centralized source for Divisia monetary aggregates data and research for over 40 countries throughout the world. The components of the CFS Divisia monetary aggregates for the United States reflect closely those of the current and former simple-sum monetary aggregates provided by the Federal Reserve. The first five levels, M1, M2, M2M, MZM, and ALL, are composed of currency, deposit accounts, and money market accounts. The liquid asset extensions to M3, M4-, and M4 resemble in spirit the now discontinued M3 and L aggregates, including repurchase agreements, large denomination time deposits, commercial paper, and Treasury bills. When the Federal Reserve discontinued publishing M3 and L, the Fed stopped providing the consolidated, seasonally adjusted components. Also the Fed no longer provides the interest rates on the components. With so much of the needed component quantity and interest-rate data no longer available from the Federal Reserve, decisions about data sources needed in construction of the CFS aggregates have been far from easy and sometimes required regression interpolation. This paper documents the decisions of the CFS regarding United States data sources at the present time, with particular emphasis on Divisia M3 and M4. |
| Keywords: | Divisia monetary aggregates; monetary aggregation; index number theory; financial aggregation; data source |
| JEL: | E51 E52 C80 E41 |
| Date: | 2012–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38905&r=mon |
| By: | Efrem Castelnuovo (University of Padova) |
| Abstract: | What does a monetary policy shock do? We answer this question by estimating a new-Keynesian monetary policy DSGE model for a number of economies with a variety of empirical proxies of the business cycle. The effects of two different policy shocks, an unexpected interest rate hike conditional on a constant inflation target and an unpredicted drift in the inflation target, are scrutinized. Filter-specific Bayesian impulse responses are contrasted with those obtained by combining multiple business cycle indicators. Our results document the substantial uncertainty surrounding the estimated effects of these two policy shocks across a number of countries. |
| Keywords: | Multiple filtering, business cycle proxies, new-Keynesian business cycle model, trend inflation, monetary policy shocks. |
| JEL: | C32 E32 E37 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0145&r=mon |
| By: | KAWASAKI Kentaro |
| Abstract: | After the global financial crisis, it has become more recognized that the policy dialogues among both emerging and advanced economies on the exchange rate is necessary to prevent competitive devaluation. In this context, East Asian countries should also choose an adequate exchange rate system. However, there still exists a variety of exchange rate regimes in this area, which might suggest a possibility of coordination failure. To avoid this, the establishment of stable exchange rate linkages and the enhancement of monetary policy credibility in East Asia are needed. These discussions on common regional exchange rate policy are often related to the "Optimum Currency Area (OCA) theory" because stabilized exchange rates in the global economies are only assured by a "one size fits all" monetary policy in the end. Hence, the main purpose of this paper is to investigate whether East Asian countries—ASEAN5, China, Korea, and Japan—have developed into matching an OCA in recent years or not. While developing the earlier generalized purchasing power parity (G-PPP) model into an up-to-date non-linear econometric model and considering the adoption of the Asian monetary unit (AMU) into this area, this paper could have positive empirical results which suggest for forming a common currency in East Asia. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:12032&r=mon |
| By: | Mouhamadou Sy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Département Economie - Finances - Centre d'analyse stratégique) |
| Abstract: | This paper proposes theoretical and empirical analysis of the effect of capital controls and alternative exchange rate regimes on the patterns of speculative capital. I argue that the exchange rate regime and its interaction with the monetary regime can explain the patterns of speculative capital around the world. I show that speculative capitals are more likely to flow into countries in which there is a contradiction between the monetary and the exchange regimes, e.g. more likely in countries with managed exchange rates. I model exchange-rate as a jump process in a stochastic dynamic portfolio optimization. Through this approach, the influence of the frequency and the size of "jumps" in the exchange rate on the allocation of speculative capital can be determined. It will also allow inflows to be endogenous. By linking the jumps to the frequency of exchange rate movements, this paper determines the effectiveness of different exchange rate regimes in fending off "hot money" for a given monetary regime. On the empirical side, I use a newly constructed data set to verify the theoretical predictions of the determinants and the patterns of speculative capital. Capital controls do not affect speculative capital. |
| Keywords: | Short-term Capital Flows ; Exchange Rate Regimes ; Financial Openness |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00684591&r=mon |
| By: | Aliya Algozhina |
| Abstract: | The monetary and fiscal policy interactions have gained a new research interest after the 2008 crisis due to the global increase of fiscal debt. This paper constructs a macroeconomic model of joint fiscal and monetary policy for an emerging open economy taking into account its structural uniqueness. In particular, the two instruments of monetary policy, interest rate and foreign exchange intervention; the two instruments of fiscal policy, government consumption and government investment; and a sudden stops shock through the collateral constraint of foreign borrowings are modeled here in a single DSGE framework. The parameters are calibrated for the case of Hungary using data over 1995Q1-2011Q3. The impulse response functions show that government consumption is unproductive and increases fiscal debt as opposed to government investment, foreign exchange intervention positively affects net exports but does not stimulate an economy per se causing inflation, and a negative shock to the upper bound of leverage ratio in the collateral constraint of foreign borrowings generates a sudden stops crisis for the emerging world. Monetary and fiscal policy intimately interact in the short and medium run such that there is an immediate response of monetary instruments to fiscal shocks, while fiscal instruments adjust to monetary shocks in the medium run. |
| Keywords: | Monetary Policy, Fiscal Policy, Emerging Open Economy, Sudden Stops, Collateral Constraint |
| JEL: | E63 F41 G01 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2012:i:094&r=mon |
| By: | Frankel, Jeffrey A. |
| Abstract: | Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:5098431&r=mon |
| By: | Juraj Zeman (National Bank of Slovakia, Research Department) |
| Abstract: | Entering monetary union brings both benefits and costs. The loss of an independent monetary policy, including the loss of exchange rate policy, constrains the ability to stabilize the domestic economy in the event of asymmetric shocks. This leads to more volatile business cycles and hence lower utility of risk-averse agents in the economy. On the other hand, the common currency reduces transaction costs, thus increasing trade and growth. The objective of this article is to quantitatively evaluate these costs and benefits, using an estimated two-country DSGE model for Slovakia and the euro area. |
| Keywords: | monetary union, costs and benefits, two-country DSGE |
| JEL: | E E F F42 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:svk:wpaper:1016&r=mon |
| By: | Livia Chitu; Barry Eichengreen; Arnaud J. Mehl |
| Abstract: | This paper offers new evidence on the emergence of the dollar as the leading international currency, focusing on its role as currency of denomination in global bond markets. We show that the dollar overtook sterling much earlier than commonly supposed, as early as in 1929. Financial market development appears to have been the main factor helping the dollar to surmount sterling’s head start. The finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again. That the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not all they are cracked up to be. And that financial deepening was a key determinant of the dollar’s emergence points to the challenges facing currencies aspiring to international status. |
| JEL: | F30 N20 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18097&r=mon |
| By: | Frankel, Jeffrey A. |
| Abstract: | Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile’s structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:4735392&r=mon |
| By: | Patrick Brämer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Horst Gischer (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Toni Richter (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Mirko Weiß (German Savings Banks Association) |
| Abstract: | Our paper calls attention to the heterogeneous levels of competition in EMU banking systems. We enhanced the ECB MFI interest rate statistics by calculating a lending rate average weighted by loan volumes for each EMU member country. Employing a modified Lerner Index, our unique data set enables us to calculate banks' price setting power in the national lending business alone, instead of measuring market power for banks' total business. For 12 countries, we ultimately show that market power in the exclusive segment of lending is greater than market power in total banking business. In an OLS regression model, we investigate to what extent loan rate variations can be explained by changing degrees of market power during the period 2003-2009. Significant cross-country differences can be observed. We find that changes in the national degree of competition considerably affect funding conditions in the individual countries and therefore hinder a homogeneous transmission of ECB monetary policy. |
| Keywords: | banking competition; European Monetary Union; Lerner Index; monetary policy |
| JEL: | E43 E52 E58 L16 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:120010&r=mon |
| By: | Prazmowski, Peter A. (American Chamber of Commerce of the Dominican Republic); Sánchez-Fung, José R. (Kingston University) |
| Abstract: | The paper compares the impact of announcing exchange-rate-based versus money-based stabilisation programmes in a cross-section of countries. The analysis finds that the effect of announcing exchange-rate-based programmes is more credible, in terms of reducing inflation inertia, than the outcome associated with implementing money-based programmes. But the gap between the magnitudes of the impacts from implementing the different strategies has been falling since the 1970s. |
| Keywords: | Inflation stabilisation; credibility; nominal anchors; IMF programmes |
| JEL: | E31 E63 F41 |
| Date: | 2012–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kngedp:2012_001&r=mon |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are found to be prudential, whereas first-best solutions are not. |
| JEL: | F41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18092&r=mon |
| By: | Farley Grubb |
| 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. |
| JEL: | B12 B22 B31 D61 E41 E42 E51 E52 F11 F41 F54 N11 N21 N41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18099&r=mon |
| By: | Temitope L.A. Leshoro |
| Abstract: | How detrimental is inflation to growth in South Africa? At what level? Motivated by the adoption of inflation targeting by many countries, this paper sets out to empirically determine the threshold level of inflation in South Africa. This study adopts quarterly time series data spanning over the period 1980:Q2 to 2010:Q3. The threshold regression model developed by Khan and Senhadji (2001) was used in this study. The econometric technique used is the Ordinary Least Squares (OLS) and the model was re-estimated using the two-stage least squares instrumental variable (2SLS-IV) to check for robustness. The results show that the inflation threshold level occurs at 4 percent. At inflation levels below and up to 4 percent there is a positive but insignificant relationship between inflation and growth. The relationship becomes negative and significant when the inflation rate is above 4 percent. The tests of robustness support these findings. |
| Keywords: | Inflation, GDP Growth, Threshold level, South Africa. |
| JEL: | E31 C12 C22 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:285&r=mon |
| By: | William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics) |
| Abstract: | Cline and Williamson calculate a new set of fundamental equilibrium exchange rates (FEERs) based on the new round of International Monetary Fund (IMF) projections in the spring 2012 World Economic Outlook. These show that on a trade-weighted basis the US dollar is now overvalued by 3–4 percent, while the Chinese renminbi is undervalued 3–4 percent. Both misalignments are much lower than in previous years (6 percent overvaluation and 16 percent undervaluation respectively a year ago). Because of the large roles of China and the United States in global imbalances, the GDP-weighted absolute value of divergence from FEERs has fallen from 8.4 percent in 2009 to 2.6 percentage points in April 2012. In contrast, large imbalances and misalignments have persisted in a number of smaller economies, including Australia, New Zealand, South Africa, and Turkey on the deficit side and Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan on the surplus side. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-14&r=mon |
| By: | Buiter, Willem H.; Rahbari, Ebrahim |
| Abstract: | The paper establishes that sovereigns, like banks, need a lender of last resort (LoLR). In the euro area the ECB, with its estimated €3.4 trillion non-inflationary loss absorption capacity, is the only credible sovereign LoLR. The ECB/Eurosystem has been acting as sovereign LoLR through its SMP purchases of periphery sovereign debt in the secondary markets. It has also contributed, through the deeply subsidised bank funding it provided through the 3-year LTROs, half of a mechanism to purchase periphery sovereign debt in the primary issue markets. The other half has been financial repression requiring banks in Italy and Spain to purchase more of their own government’s debt than they would voluntarily and at below-market yields. We expect that, once Spain and Italy are under troika programmes, the Eurosystem will also lend to these sovereigns indirectly, through loans by the national central banks to the IMF which on-lends them to these sovereigns. We recommend that, to increase its effectiveness as LoLR, the ESM be given a banking license. To reduce the illegitimate and unaccountable abuse of the ECB/Eurosystem as a quasi-fiscal actor, we propose that all its credit risk-related losses be jointly and severally guaranteed/indemnified by the 17 euro area member states. |
| Keywords: | Central bank; EMU; Financial repression; Lender of Last Resort; Quasi-fiscal activities; Seigniorage |
| JEL: | E02 E31 E42 E43 E44 E63 G21 G28 H12 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8974&r=mon |