nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒07‒08
thirty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Transmission in the GCC Countries By Raphael A. Espinoza; Ananthakrishnan Prasad
  2. Alternative Monetary Policy Rules for India By Michael Debabrata Patra; Muneesh Kapur
  3. Interbank Market and Macroprudential Tools in a DSGE Model By Carrera, Cesar; Vega, Hugo
  4. Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies By Luis-Felipe Zanna; Marco Airaudo
  5. Taylor rules, fear of floating and the role of the exchange rate in monetary policy: a case of observational equivalence By Juan Paez-Farrell
  6. Asset market participation, monetary policy rules and the great inflation By Roland Straub; Florin O. Bilbiie
  7. The Role of Banks in Monetary Policy Transmission in South Africa By Syden Mishi; Asrat Tsegaye
  8. Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint By Stefanie Flotho
  9. Do bank characteristics influence the effect of monetary policy on bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  10. International Monetary Reform: A Critical Appraisal of Some Proposals By Park, Yung Chul; Wyplosz, Charles
  11. Capital controls and foreign exchange policy By Marcel Fratzscher
  12. When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets By Livia Chitu; Barry Eichengreen; Arnaud Mehl
  13. Has the Euro affected the choice of invoicing currency? By Jenny E. Ligthart; Sebastian E. V. Werner
  14. Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants By Ivohasina F. Razafimahefa
  15. Credit Growth and the Effectiveness of Reserve Requirements and Other Macroprudential Instruments in Latin America By Mercedes Garcia-Escribano; Camilo Ernesto Tovar Mora; Mercedes Vera Martin
  16. Welfare Effects of Monetary Integration: the Common Monetary Area and Beyond By Xavier Debrun; Tamon Asonuma; Paul R. Masson
  17. Currency Intervention: A Case Study of an Emerging Market By Renee Fry-McKibbin; Sumila Wanaguru
  18. Resuscitating the ad hoc loss function for monetary policy analysis By Juan Paez-Farrell
  19. Optimal Liquidity and Economic Stability By Linghui Han; Il Houng Lee
  20. The Friedman rule in a model with nonlinear taxation and income misreporting By Gahvari, Firouz; Micheletto, Luca
  21. Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates By Emmanuel Farhi; Ivan Werning
  22. Exchange Rate Arrangements in the Transition to East African Monetary Union By Christopher S Adam; Pantaleo Kessy; Camillus Kombe; Stephen A O’Connell
  23. How Effective Is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence By Prachi Mishra; Peter Montiel
  24. Heterodox Central Bankers: Eccles, Prebisch and Financial Reform in 1930s By Esteban Pérez Caldentey and Matias Vernengo
  25. Euro money market spreads during the 2007-? Financial crisis By Nuno Cassola; Claudio Morana
  26. The scapegoat theory of exchange rates: the first tests By Marcel Fratzscher; Lucio Sarno; Gabriele Zinna
  27. Monetary policy deliberations: Commitee size and votig rules By Vincent Maurin; Jean-Pierre Vidal
  28. Currency intervention - the profitability of some recent international experiences By Enzo Cassino; Michelle Lewis
  29. Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable? By Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
  30. Resolving sovereign debt crises: Opening or closing the tap? By Kohler, Wilhelm
  31. Exchange Rate Pass Through to Prices in Maldives By Iyabo Masha; Chanho Park
  32. Global exchangerate configuration: do oil shocks matter? By Sascha Buetzer; Maurizio Michael Habib; Livio Stracca
  33. Episodes of Large Exchange Rate Appreciations and Reserves Accumulations in Selected Asian Economies: Is Fear of Appreciation Justified? By Victor Pontines; Reza Siregar
  34. Prevention and Resolution of Foreign Exchange Crises in East Asia By Sussangkarn, Chalongphob
  35. Transitional Dynamics of Disinflation in a Small Open Economy with Heterogeneous Agents By Sunel, Enes
  36. The Coming Resolution of the European Crisis: An Update By C. Fred Bergsten; Jacob Funk Kirkegaard

  1. By: Raphael A. Espinoza; Ananthakrishnan Prasad
    Abstract: The GCC countries maintain a policy of open capital accounts and a pegged (or nearly-pegged) exchange rate, thereby reducing their freedom to run an independent monetary policy. This paper shows, however, that the pass-through of policy rates to retail rates is on the low side, reflecting the shallowness of money markets and the manner in which GCC central banks operate. In addition to policy rates, the GCC monetary authorities use reserve requirements, loan-to-deposit ratios, and other macroprudential tools to affect liquidity and credit. Nonetheless, a panel vector auto regression model suggests that U.S. monetary policy has a strong and statistically significant impact on broad money, non-oil activity, and inflation in the GCC region. Unanticipated shocks to broad money also affect prices but do not stimulate growth. Continued efforts to develop the domestic financial markets will increase interest rate pass-through and strengthen monetary policy transmission.
    Keywords: Bahrain , Cooperation Council for the Arab States of the Gulf , Economic models , Interest rates , Kuwait , Monetary policy , Monetary transmission mechanism , Oman , Qatar , Saudi Arabia , United Arab Emirates , United States ,
    Date: 2012–05–18
  2. By: Michael Debabrata Patra; Muneesh Kapur
    Abstract: This paper empirically evaluates the operational performance of the McCallum rule, the Taylor rule and hybrid rules in India over the period 1996-2011 using quarterly data, with a view to analytically informing the conduct of monetary policy. The results show that forward-looking formulations of both rules and their hybrid version - setting a nominal output growth objective for monetary policy with an interest rate instrument - outperform contemporaneous and backward-looking specifications, especially when targeting core components of GDP and inflation, and combine the best parts of efficiency and discretion.
    Keywords: Central banks , Monetary authorities , Monetary operations ,
    Date: 2012–05–09
  3. By: Carrera, Cesar (Banco Central de Reserva del Perú); Vega, Hugo (Banco Central de Reserva del Perú; London School of Economics)
    Abstract: The interbank market helps regulate liquidity in the banking sector. Banks with outstanding resources usually lend to banks that are in needs of liquidity. Regulating the interbank market may actually benefit the policy stance of monetary policy. Introducing an interbank market in a general equilibrium model may allow better identification of the final effects of non-conventional policy tools such as reserve requirements. We introduce an interbank market in which there are two types of private banks and a central bank that has the ability to issue money into a DSGE model. Then, we use the model to analyse the effects of changes to reserve requirements (a macroprudential tool), while the central bank follows a Taylor rule to set the policy interest rate. We find that changes to reserve requirements have similar effects to interest rate hikes and that both monetary policy tools can be used jointly in order to avoid big swings in the policy rate (that could have an undesired effect on private expectations) or a zero bound (i.e. liquidity trap scenarios).
    Keywords: reserve requirements, collateral, banks, interbank market, DSGE
    JEL: E31 O42
    Date: 2012–06
  4. By: Luis-Felipe Zanna; Marco Airaudo
    Abstract: We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade.
    Keywords: Business cycles , Economic models , Flexible pricing policy , Interest rates , International trade , Monetary policy , Real effective exchange rates ,
    Date: 2012–05–11
  5. By: Juan Paez-Farrell (School of Business and Economics, Loughborough University, UK)
    Abstract: This paper considers the role of the exchange rate in monetary policy rules. It argues that much recent research aimed at determining the extent of concern for exchange rate stabilisation on the part of central banks is potentially flawed. If policy makers are subject to fear of floating – whereby they aim to stabilise exchange rates but without revealing this to the public – current estimated models cannot may provide insufficient information to determine policy objectives. In effect, several structural models may yield observationally equivalent interest rate rules. The paper uses two small open economy models to highlight this issue.
    Keywords: Small open economies, monetary policy, exchange rates, Taylor rule, fear of floating.
    JEL: E52 E58 F41
    Date: 2012–06
  6. By: Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Florin O. Bilbiie (Centre d’Economie de la Sorbonne, 106/112 Boulevard de l’Hôpital, 75647 Paris Cedex 13, France; Paris School of Economics and CEPR.)
    Abstract: This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. In an otherwise conventional sticky-price model, standard aggregate de- mand logic is inverted at low enough asset market participation: interest rate increases become expansionary; passive monetary policy ensures equilibrium determinacy and maximizes welfare. This suggests that Federal Reserve policy in the pre-Volcker era was better than conventional wisdom implies. We provide empirical evidence consistent with this hypothesis, and study the relative merits of changes in structure and shocks for reproducing the conquest of the Great Ination and the Great Moderation. JEL Classification: E310; E320; E440; E520.
    Keywords: Great Ination; Great Moderation; Limited asset markets participa- tion; Passive monetary policy rules.
    Date: 2012–05
  7. By: Syden Mishi; Asrat Tsegaye
    Abstract: The role of banks in transmission of monetary policy in an economy has been a subject of theoretical and empirical investigations. This study attempts to empirically investigate the role played by private commercial banks in South Africa in transmitting the impulses of monetary policy shocks to the rest of the economy. Focus is placed on the bank lending channel of monetary transmission due to the importance of banks in the financial system. Specifically, we examine whether the central bank's monetary policy stance affects banks' lending behaviour. We specify and test the bank lending channel of monetary policy transmission in South Africa by using a panel structural approach that distinguishes banks according to size. The results indicate the prevalence of the bank lending channel in which banks play a pivotal role in the monetary policy transmission in South Africa. Also bank size had proved to appropriately discriminate banks in South Africa according to their external finance cost.
    Date: 2012
  8. By: Stefanie Flotho (Institute for Economic Research Chair of Economic Theory, University of Freiburg)
    Abstract: This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy.
    Keywords: Monetary Union, Fiscal Policy, Zero Lower Bound on nominal interest rates, zero interest rate policy, Non-coordination
    JEL: E31 E52 E58 E61 E62 E63 F33
    Date: 2012–06
  9. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21.
    Keywords: Risk-taking channel, monetary policy, credit crisis, bank characteristics.
    Date: 2012–03
  10. By: Park, Yung Chul (Asian Development Bank Institute); Wyplosz, Charles (Asian Development Bank Institute)
    Abstract: This paper reviews some of the current debates on the reform of the international monetary system. Despite its deficiencies, the United States (US) dollar will remain the dominant currency and Special Drawing Rights (SDR) cannot serve as either an international medium of exchange or a reserve currency. The International Monetary Fund (IMF) has changed its position to accept capital controls under certain circumstances. Refining control instruments better tuned to present day markets may bring about greater acceptance. The 2008–2009 global financial crisis has dimmed much of the earlier hope for the multilateralized Chiang Mai Initiative. The currency swap arrangements portend a new form of international cooperation. Finally, for the Group of Twenty (G20) to matter, the systemically important countries need to ensure the stability of their financial systems and economies.
    Keywords: us dollars; special drawing rights; sdr; capital controls; currency swaps; g20
    JEL: F32 F33 F42
    Date: 2012–06–28
  11. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31.
    Keywords: Capital controls, capital flows, exchange rates, financial stability, economic policy, G20.
    Date: 2012–02
  12. By: Livia Chitu (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Barry Eichengreen (University of California, 603 Evans Hall, Berkeley, 94720 California, USA.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    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 Classification: F30, N20
    Keywords: foreign public debt, international monetary system, international currencies, role of the US dollar, network externalities, path dependency
    Date: 2012–05
  13. By: Jenny E. Ligthart (CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.); Sebastian E. V. Werner (Tilburg University, Warandelaan 2, 5037 AB Tilburg, The Netherlands.)
    Abstract: We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. JEL Classification: F33, F41, F42, E31, C25.
    Keywords: Euro, invoicing currency, exchange rate risk, inflation volatility, vehicle currencies, compositional multinomial logit.
    Date: 2012–01
  14. By: Ivohasina F. Razafimahefa
    Abstract: This paper analyzes the exchange rate pass-through to domestic prices and its determinants in sub-Saharan African countries. It finds that the pass-through is incomplete. The pass-through is larger following a depreciation than after an appreciation of the local currency. The average elasticity is estimated at about 0.4. It is lower in countries with more flexible exchange rate regimes and in countries with a higher income. A low inflation environment, a prudent monetary policy, and a sustainable fiscal policy are associated with a lower pass-through. The degree of pass-through has declined in the SSA region since the mid-1990s following marked improvements in macroeconomic and political environments.
    Date: 2012–06–01
  15. By: Mercedes Garcia-Escribano; Camilo Ernesto Tovar Mora; Mercedes Vera Martin
    Abstract: Over the past decade policy makers in Latin America have adopted a number of macroprudential instruments to manage the procyclicality of bank credit dynamics to the private sector and contain systemic risk. Reserve requirements, in particular, have been actively employed. Despite their widespread use, little is known about their effectiveness and how they interact with monetary policy. In this paper, we examine the role of reserve requirements and other macroprudential instruments and report new cross-country evidence on how they influence real private bank credit growth. Our results show that these instruments have a moderate and transitory effect and play a complementary role to monetary policy.
    Keywords: Banking systems , Central bank policy , Credit expansion , Latin America , Macroprudential policy , Reserve requirements ,
    Date: 2012–06–04
  16. By: Xavier Debrun; Tamon Asonuma; Paul R. Masson
    Abstract: This paper proposes a quantitative assessment of the welfare effects arising from the Common Monetary Area (CMA) and an array of broader grouping among Southern African Development Community (SADC) countries. Model simulations suggest that (i) participating in the CMA benefits all members; (ii) joining the CMA individually is beneficial for all SADC members except Angola, Mauritius and Tanzania; (iii) creating a symmetric CMA-wide monetary union with a regional central bank carries some costs in terms of foregone anti-inflationary credibility; and (iv) SADC-wide symmetric monetary union continues to be beneficial for all except Mauritius, although the gains for existing CMA members are likely to be limited.
    Keywords: Central banks , Cross country analysis , Economic indicators , Monetary unions , Southern African Development Community , Welfare ,
    Date: 2012–05–24
  17. By: Renee Fry-McKibbin; Sumila Wanaguru
    Abstract: Using a unique dataset on daily foreign exchange intervention and a new methodological framework of a latent factor model of central bank intervention, this paper addresses the effects of intervention in an emerging market. Events in financial markets from 2002 to 2010 provide a natural experiment to evaluate the short and medium term objectives of the central bank to contain excessive exchange rate volatility and to accumulate foreign reserves respectively. In the low volatility period in the first part of the sample, the central bank is successful in influencing the currency when pressure is to appreciate, accumulating international reserves. The same model estimated for the global volatility period in the second part of the sample shows the central bank intervening to mitigate excessive exchange rate volatility in line with the short-term objective.
    JEL: F31 F36 F41
    Date: 2012–06
  18. By: Juan Paez-Farrell (School of Business and Economics, Loughborough University, UK)
    Abstract: Working with micro-founded loss functions to derive and analyse optimal policy ensures consistency with the model used and overcomes the misleading prescriptions that result from using exogenous ad hoc loss functions. However, when allowance is made for the fact that different theories of inflation persistence can result in the same, observationally equivalent, hybrid New Keynesian Phillips curve such conclusions may no longer hold. Each theory implies its own loss function and will therefore result in different policy prescriptions. In this paper I analyse the welfare consequences of using ad hoc loss functions versus the micro-founded, but potentially incorrect, targeting rules.
    Keywords: Optimal monetary policy, targeting rules, loss function, robustness.
    JEL: E52 E58
    Date: 2012–06
  19. By: Linghui Han; Il Houng Lee
    Abstract: Monetary aggregates are now much less used as policy instruments as identifying the right measure has become difficult and interest rate transmission has worked well in an increasingly complex financial system. In this process, little attention was paid to the potential spillover of excess liquidity. This paper suggests a notional level of "optimal" liquidity beyond which asset prices will start to rise faster than the GDP deflator, thereby creating a gap between the face value and the real purchasing value of financial assets and widen the wedge in income between those with capital stock and those living on salaries. Such divergence will eventually lead to an abrupt and disorderly adjustment of the asset value, with repercussions on the real sector.
    Keywords: Asset prices , Economic stabilization , Liquidity , Monetary aggregates , Monetary policy , Private sector ,
    Date: 2012–05–24
  20. By: Gahvari, Firouz (Department of Economics); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: This paper develops an overlapping-generations model with money-in-the-utilityfunction and heterogeneous agents in terms of earning ability. It shows that in the presence of income misreporting the Friedman rule is in general violated. The result holds even though the government taxes reported incomes nonlinearly and agents have preferences that are separable between labor supply and other goods including real money balances.
    Keywords: Monetary policy; scal policy; redistribution; Friedman rule; income misreporting; overlapping generations; second best
    JEL: E52 H21
    Date: 2012–06–27
  21. By: Emmanuel Farhi; Ivan Werning
    Abstract: We lay down a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls (defined as maximizing the utility of a representative household). We provide sharp analytical and numerical characterizations for a variety of shocks. We find that capital controls are employed to respond to some shocks but not others. They are particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a particular country. We also discuss how the solution depends on the degree of nominal rigidity and the openness of the economy. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or if wages, in addition to prices, are sticky. Finally, we compare the single country’s optimum to a coordinated world solution. Our results show a limited need for coordination. However, the uncoordinated solution features the same capital controls as the coordinated solution.
    JEL: E5 F3 F32 F33 F41 F42
    Date: 2012–06
  22. By: Christopher S Adam; Pantaleo Kessy; Camillus Kombe; Stephen A O’Connell
    Abstract: This paper is the outcome of research collaboration between staff of the Directorate of Economic Research and Policy at the Bank of Tanzania and the International Growth Centre. The views expressed in this paper are solely those of the authors and do not necessarily reflect the official views of the Bank of Tanzania or its management. We are grateful to the research departments of the five national central banks in the East African Community (EAC) for their cooperation, to Paul Masson and participants at the Extraordinary Meeting of the Monetary Affairs Committee (MAC) of the EAC in Bujumbura (November 2011) and the Extraordinary Meeting of the Economic Affairs Sub-Committee of the MAC in Nairobi (March 2012) for their comments, and to Ishaan Irani, Lucie Moore, and Richard Peck for research assistance. All errors are our own.
    Date: 2012
  23. By: Prachi Mishra; Peter Montiel
    Abstract: This paper surveys the evidence on the effectiveness of monetary transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of monetary transmission in such countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong monetary transmission. We suspect that "facts on the ground" are an important part of the story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
    Date: 2012–06–05
  24. By: Esteban Pérez Caldentey and Matias Vernengo
    Keywords: Monetary Policy; Economic History; Heterodox Economics JEL Classification: B31, B50, E58, N10 The Great Depression led to a need to rethink the principles of central banking, as much as it had led to the rethinking of economics in general, with the Keynesian Revolution at the forefront of the theoretical changes. This paper suggests that the role of the monetary authority as a fiscal agent of government and the abandonment of the view of the economy as self-regulated were the central changes in central banking in the center. In addition, in the periphery central banks changed to try to insulate the worst effects of balance of payments crises and the use of capital controls became more common. Marriner S. Eccles, in the United States, and Raúl Prebisch, in Argentina, are paradigmatic examples of those new tendencies of central banking in the 1930s.
    Date: 2012
  25. By: Nuno Cassola (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Claudio Morana (Università di Milano-Bicocca, Dipartimento di Economia Politica, Piazza dell’Ateneo Nuovo, 1 - 20126, Milano, Italy; at International Centre for Economic Research (ICER), Torino, Italy; Centre for Research on Pensions and Welfare Policies (CeRP), Moncalieri, Italy and Fondazione ENI Enrico Mattei (FEEM), Milano, Italy;)
    Abstract: In the paper we investigate the empirical features of euro area money market turbulence during the recent …nancial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Au- toregressive model, we …nd evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and the Lehman Brothers (16 September 2008) shocks, and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors. The unfold- ing of the crisis yielded a signi…cant increase in the persistence and volatility of OIS spreads. We also …nd evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB interest rate cuts and full allotment policy. JEL Classification: C32, E43, E58, G15.
    Keywords: money market interest rates, credit/liquidity risk, frac- tionally integrated heteroskedastic factor vector autoregressive model.
    Date: 2012–05
  26. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.); Lucio Sarno (Finance Faculty, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK and CEPR.); Gabriele Zinna (Bank of England, Threadneedle Street, London EC2R 8AH, UK.)
    Abstract: This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011), as an attempt to evaluate its potential for explaining the poor empirical performance of traditional exchange rate models. This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and a decade of proprietary data on order flow, we find empirical evidence that strongly supports the empirical implications of the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. The findings have implications for exchange rate modelling, suggesting that a more accurate understanding of exchange rates requires taking into account the role of scapegoat factors and their time-varying nature. JEL Classification: F31, G10.
    Keywords: Scapegoat, exchange rates, economic fundamentals, survey data, order flow.
    Date: 2012–02
  27. By: Vincent Maurin (European University Institute, Via Roccettini, 9, 50014 Fiesole Florenz, Italy;); Jean-Pierre Vidal (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: How large should a monetary policy committee be? Which voting rule should a monetary policy committee adopt? This paper builds on Condorcets jury threorem to analyse the relationships between com- mittee size and voting rules in a model where policy discussions are subject to a time constraint. It suggests that in large committees ma- jority voting is likely to enhance policy outcomes. Under unanimity (consensus) it is preferable to limit the size of the committee. Finally, supermajority voting rules are social contrivances that contribute to policy performance in a more uncertain environment, when initial pol- icy proposals are less likely to be correct, or when payo¤s are asym- metric. JEL Classification: D71, D78, D81, E58.
    Keywords: Collective decision‐making, optimal committee sizing, deliberations, voting rules.
    Date: 2012–05
  28. By: Enzo Cassino; Michelle Lewis (Reserve Bank of New Zealand)
    Abstract: In recent years there have been high profile currency interventions by the Swiss National Bank (SNB) and the Bank of Japan (BoJ). In this note, we review these interventions, with a focus on the profitability of currency intervention, along with the relationship between profitability and the degree of exchange rate stabilisation. We also highlight the ways in which these interesting international episodes are of only limited direct relevance to thinking about current New Zealand exchange rate issues.
    Date: 2012–06
  29. By: Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
    Abstract: This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole?compared to other SSA countries?as well as in each of its ember countries.
    Keywords: Equilibrium exchange rates, CFA zone, Optimum Currency Areas, currency union sustainability
    JEL: F31 F33 C23
    Date: 2012–06
  30. By: Kohler, Wilhelm
    Abstract: This paper first describes the ingredients the present crisis in the euro zone and then evaluates the key options that policy makers face in resolving the crisis and avoiding similar crises in the future. I argue that the crisis should not be seen as caused by government profligacy alone. In many troubled countries, an unsustainable build-up of private sector debt was involved as well. I argue that a more fundamental problem is that the euro zone lacks an adjustment mechanism for balance of payments crises that may arise in its member countries, with or without excessive government deficits. The metaphor of taps to be opened or closed by policy is used to discuss the core trade offs that policy makers face. I discuss monetary taps, bailout taps, austerity taps and devaluation taps. I propose a simple model of government bond markets with sovereign insolvency to be used in order to evaluate EU-type bailouts. I discuss the pros and cons of austerity as a precondition for such bailouts, and I criticize the use of Target2 as a mechanism to absorb balance of national payments crises. --
    Keywords: Euro,Sovereign risk,Sovereign default,Government solvency,Lender of last resort,External balance,Balance of payments
    JEL: F33 F36
    Date: 2012
  31. By: Iyabo Masha; Chanho Park
    Abstract: This study examines the degree of exchange rate pass through (EPRT) into producer and consumer prices in Maldives. ERPT to consumer prices is first estimated using a nonparametric approach. A recursive vector autoregression is then used to model both consumer and producer price changes. The nonparametric estimation indicates that ERPT to consumer prices is very high, both in absolute terms and relative to other countries. The dynamics of ERPT as derived from the empirical estimation indicate that ERPT to consumer and producer prices is significant but not complete, and that the impact of exchange rate changes persists into the second year.
    Keywords: Consumer prices , Economic models , Exchange rates , Producer prices ,
    Date: 2012–05–15
  32. By: Sascha Buetzer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Maurizio Michael Habib (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Do oil shocks matter for exchange rates? This paper addresses this question based on data on real and nominal exchange rates as well as an exchange market pressure index for 44 advanced and emerging countries. We identify three structural shocks (oil supply, global demand, and oil specific demand) which raise the real oil price and analyse their effect on individual exchange rates. Contrary to the predictions of the theoretical literature, we find no evidence that exchange rates of oil exporters systematically appreciate against those of oil importers after shocks raising the real oil price. However, oil exporters experience significant appreciation pressures following an oil demand shock, which they tend to counter by accumulating foreign exchange reserves. Results for general commodity exporters are similar, showing minor differences compared with oil exporters. JEL Classification: F31, Q43.
    Keywords: Oil, structural VAR, exchange rate, exchange market pressure, global imbalances.
    Date: 2012–06
  33. By: Victor Pontines; Reza Siregar
    Abstract: The objective of our paper is to provide an empirical platform to the debate on the macroeconomic consequences of large currency appreciations. Observing the experiences of six major Asian economies (the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Singapore) and Korea) during the past two decades, the primary aim of this study is to ascertain the consequences of strong currencies, on the one hand, and reserves accumulation, on the other, for a set of vital macroeconomic indicators, namely, exports, growth and price. We then deal squarely, in retrospect, with the question of whether there is any justification to the so-called fear of appreciation phenomenon among the policy makers of these Asian economies.
    JEL: F4 F31 F32
    Date: 2012–06
  34. By: Sussangkarn, Chalongphob (Asian Development Bank Institute)
    Abstract: This paper discusses mechanisms to prevent and resolve foreign exchange crises in East Asia. Policies and mechanisms at the country level as well as regional and global levels are discussed. Policies at the level of a particular country to prevent foreign exchange crises include the management of short-term foreign currency liabilities, the adequacy of reserves, and managing episodes of rapid short-term capital inflows. The author discusses the development of regional mechanisms for crisis prevention and resolution in conjunction with the global mechanisms, including the Chiang Mai Initiative (CMI) and the Chiang Mai Initiative Multilateralization (CMIM). The author then suggests how the CMIM can evolve into an integrated crisis prevention and resolution mechanism for East Asia.
    Keywords: foreign exchange crises; east asia; chiang mai initiative
    JEL: E02 E44 E58 E63 F33 F36 F55
    Date: 2012–06–27
  35. By: Sunel, Enes
    Abstract: This study investigates quantitative properties of the transitional dynamics produced by gradual disinflation in a small open economy inhabited by heterogeneous consumers. The main exercise is to feed the empirically observed declining path for inflation into the calibrated model and account for its macroeconomic, distributional and welfare effects under alternative fiscal arrangements. The results show that (i) when uniform transfers are endogenous, gradual decline in the inflation rate from 14.25% to 2.25% increases aggregate welfare by 0.28%. (ii) When wasteful spending is endogenous, aggregate welfare increases by 0.53%. These welfare effects are substantially different from those implied by steady state comparisons. This is because when transition is accounted for, fiscal variables do not jump to their low inflation steady state levels immediately.
    Keywords: Small open economy; incomplete markets; welfare effects of inflation
    JEL: D31 E52 F41
    Date: 2012–06–26
  36. By: C. Fred Bergsten (Peterson Institute for International Economics); Jacob Funk Kirkegaard (Peterson Institute for International Economics)
    Abstract: The euro crisis is fundamentally a political crisis. At its core the crisis is about national sovereignty and the process in which European governments can agree to transfer it to new, required euro area institutions governing banking sectors and fiscal policies. This transfer of national control over domestic banking sectors and fiscal policy, say Bergsten and Kirkegaard, will happen only during an extraordinary crisis. An imminent economic catastrophe is almost certainly needed to overcome daunting political obstacles, which during normal political times is nearly impossible to accomplish. For this reason, the euro area policy response can only be reactive. Proactive decisions to resolve the crisis in one fell swoop are politically impossible and unrealistic. The authors put forward the "on the brink" theory to characterize the current process of European economic integration. Ultimately, the threat of imminent collapse of the European financial system and indeed the common currency itself would prompt euro area policymakers to take every feasible step to avoid it, including transferring sovereignty to new institutions. The threat, while it exists, is not as imminent as most mainstream commentary makes it out to be. Europe is more solid and has more time to fix its problems than financial markets and analysts think. But leaders urgently need to take a number of very far-reaching political decisions, in particular on banking and fiscal union, during 2012. Every gradual step, however small, that policymakers take on the brink is a step toward completing the decades-long political project and should not be underestimated.
    Date: 2012–06

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