|
on Monetary Economics |
| By: | Hernando Vargas; Pamela Cardozo |
| Abstract: | We analyse three models to determine the conditions under which reserve requirements are used as a part of an optimal monetary policy framework in an inflation targeting regime. In all cases the Central Bank (CB) minimizes an objective function that depends on deviations of inflation from its target, the output gap and deviations of reserve requirements from its optimal long term level. In a closed economy model we find that optimal monetary policy implies setting reserve requirements at their long term level, while adjusting the policy interest rate to face macroeconomic shocks. Reserve requirements are included in an optimal monetary policy response in an open economy model with the same CB objective function and in a closed economy model in which the CB objective function includes financial stability. The relevance, magnitude and direction of the movements of reserve requirements depend on the parameters of the economy and the shocks that affect it. |
| Keywords: | Reserve Requirements, Inflation Targeting, Monetary Policy. Classification JEL: E51, E52, E58. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:716i&r=mon |
| By: | Daniel L. Thornton |
| Abstract: | Since the late 1980s the Fed has implemented monetary policy by adjusting its target for the overnight federal funds rate. Money’s role in monetary policy has been tertiary, at best. Indeed, several influential economists have suggested that money is irrelevant for monetary policy. They suggest that central banks can control inflation by (i) controlling a very short-term nominal interest rate and (ii) influencing financial market participants’ expectation of the future policy rate in order to exert greater control over longer-term rates. I offer an alternative perspective: namely, that money is essential for the central bank’s control over the price level and that the monetary authority’s control over interest rates is exaggerated. |
| Keywords: | Monetary policy ; Money ; Federal funds rate |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-020&r=mon |
| By: | Pavel Trunin (Gaidar Institute for Economic Policy); Natalia Luksha (Gaidar Institute for Economic Policy) |
| Abstract: | This article deals with the Russia's 2011 monetary policy. The authors focus on the monetary market issues, inflationary development. They also point out to the main measures in the sphere of the monetary policy and the balance of paiments, and the RUR exchange rate. |
| Keywords: | monetary policy, money market, inflation, balance of payments, exchange rate |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gai:ppaper:10&r=mon |
| By: | William T. Gavin; Benjamin D. Keen |
| Abstract: | This article uses a DSGE framework to evaluate the role of monetary policy in determining the likelihood of encountering the zero lower bound. We find that the probability of experiencing episodes of being at zero lower bound depends almost exclusively on the monetary policy rule. A policy rule, such as the one proposed by Taylor (1993) which is based on the dual mandate is highly likely to lead to episodes of zero short-term interest rates if the central bank is not committed to its inflation target. Our results on nominal interest rate and inflation dynamics do not depend on the particular mechanism that makes monetary policy have real effects. The key and necessary assumption is that expectations are forward looking. The bottom line in models in which monetary policy can influence the real economy is that a central bank must be committed to a long-run average-inflation objective if it wishes to achieve a dual mandate while avoiding the zero lower bound. |
| Keywords: | Interest rates ; Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-026&r=mon |
| By: | Shanaka J. Peiris; Ding Ding |
| Abstract: | Pacific Islands countries are vulnerable to commodity price shocks, and this poses challenges to monetary policy. The high degree of exchange rate pass-through to headline inflation and the weak monetary transmission mechanism in PICs suggest a greater efficacy of exchange rate changes in affecting inflation rather than monetary policy. To assess the tradeoff between the use of the exchange rate and monetary policy in macroeconomic stabilization, we employ a model-based approach to examine the optimal policy in response to the historical distribution of exogenous shocks in a Pacific Island (Tonga). The empirical evidence and model simulations tilt in the favor of exchange rate policy given the close relationship between exchange rate changes and headline inflation and the low interest rate sensitivity of aggregate demand. |
| Keywords: | Commodity prices , Economic models , Exchange rates , External shocks , Monetary policy , Monetary transmission mechanism , Pacific Island Countries , |
| Date: | 2012–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/176&r=mon |
| By: | Michael Funke; Michael Paetz; Qianying Chen, |
| Abstract: | Monetary policy in mainland China differs from conventional central bank- ing in several respects. The central bank regulates retail lending and deposit rates, influences the credit supply via window guidance, and, in recent years has even used the required reserve ratio as a tool for fine-tuning monetary pol- icy. This paper develops a New Keynesian DSGE model to captures China’s unconventional monetary policy toolkit. We find that credit quotas are impor- tant as the interest-rate corridor distorts the efficient reactions of the economy. Moreover, for China’s central bankers the choice of a particular monetary pol- icy tool or a the appropriate combination of instruments depends on the source of the shock. |
| Keywords: | DSGE models, monetary policy, China, macroprudential policy |
| JEL: | E42 E52 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:21207&r=mon |
| By: | Nicholas Apergis (University of Piraeus); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Effrosyni Alevizopoulou (University of Piraeus) |
| Abstract: | The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results. |
| Keywords: | Monetary policy rules, bank lending channel, European banks, GMM methodology |
| JEL: | G21 E52 C33 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-10&r=mon |
| By: | Serhan Cevik; Katerina Teksoz |
| Abstract: | This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries. |
| Keywords: | Monetary policy , Inflation , Interest rates on loans , Currency pegs , Bank credit , Economic growth , Economic conditions , Cooperation Council for the Arab States of the Gulf , |
| Date: | 2012–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/191&r=mon |
| By: | Petreski, Marjan; Jovanovic, Branimir |
| Abstract: | Any attempt to model monetary policy in China has to take into account two ‘specifics’ of the Chinese monetary policy: the reliance on several operational instruments, both quantitative (open market operations, discount rate, reserve requirement) and qualitative (selective credit allowances, window guidance etc.), as well as the combined strategy pursued by the People’s Bank of China, i.e. the two intermediate targets - the exchange rate and the money growth. In this paper we analyze monetary policy in China using a small, three-equation New Keynesian model, considering these issues as follows: first, the qualitative instruments are estimated by using the Kalman filter, as no data on them exist. Then, a monetary-policy index is created as a weighted average of the quantitative and the qualitative instruments, which is in turn included in the model instead of the interest rate. Finally, the two intermediate targets (monetary growth and exchange rate) are included in the monetary-policy rule. Our results suggest that monetary authorities in China consider stabilizing inflation and output gap when making their decisions. Intermediate targets, in particular the growth of the monetary aggregates, appear to be important determinants of the monetary-policy behaviour, implying that their omission might be a serious drawback of any analysis. We also find that omitting the qualitative instruments can lead to wrong conclusions about monetary-policy conduct. |
| Keywords: | New Keynesian model; China; monetary policy |
| JEL: | E43 E12 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40497&r=mon |
| By: | Nir Klein |
| Abstract: | This paper applies a state-space approach to estimate the implicit inflation target of the South African Reserve Bank (SARB) since the adoption of the Inflation Targeting (IT) framework. The paper's findings are two. First, although the official inflation target range is 3.6 percent, in practice, the SARB seems to have aimed for the upper segment of the band (41.2 .6 percent) for most of the period, despite the substantial variation of the output gap. Second, the estimation results show that the implicit inflation target varied over time, and in recent years it has shifted toward the upper limit of the inflation target range. This perhaps suggests that since the outbreak of the financial crisis in 2008, the SARB's tolerance for higher inflation has somewhat increased to better support economic activity. |
| Keywords: | Central banks , Economic models , Inflation targeting , Monetary policy , |
| Date: | 2012–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/177&r=mon |
| By: | Kornél Kisgergely (Ministry for National Economy (Hungary)) |
| Abstract: | This paper empirically tests whether monetary policy can have a perverse effect on aggregate demand in emerging economies, because of short-term speculative inflows. For this purpose, a bayesian VAR is estimated on a panel of six major emerging countries. Monetary and risk shocks are identified by imposing only very mild restrictions. It is found that a positive interest rate shock results in a persistent decline in production and inflation. The net foreign asset position even improves in most of the countries. Thus no large net inflows are observed and there is no sign of a perverse effect on aggregate demand. More interestingly, central banks loosen interest rate policy significantly and persistently in the face of a capital inflow shock, possibly to dampen the immediate disinflationary effect of the appreciation and/or to protect balance sheets from exchange rate volatility. In some specifications this results in overheating (positive industrial production gap and inflation) in the medium-term. Thus central banks might amplify the effect of risk premium shocks by cutting interest rates–rather than raising them—when capital flows in. |
| Keywords: | carry trade, monetary policy, emerging markets |
| JEL: | C11 C33 C54 E44 E58 F32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2012/3&r=mon |
| By: | Roman Horváth (Charles University, Prague and IOS, Regensburg); Kateřina Šmídková; Jan Zápal |
| Abstract: | We assess whether the voting records of central bank boards are informative about future monetary policy using data on five inflation targeting countries (the Czech Republic, Hungary, Poland, Sweden and the United Kingdom). We find that in all countries the voting records, namely the difference between the average voted-for and actually implemented policy rate, signal future monetary policy, making a case for publishing the records. This result holds even if we control for the financial market expectations; include the voting records from the period covering the current global financial crisis and examine the differences in timing and style of the voting record announcements. |
| Keywords: | monetary policy, voting record, transparency, collective decision-making |
| JEL: | D78 E52 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:316&r=mon |
| By: | Hippolyte D'Albis (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne); Emmanuelle Augeraud-Véron (MIA - Mathématiques, Image et Applications - Université de La Rochelle : EA3165); Hermen Jan Hupkes (University of Missouri - Columbia - Mathematics Department) |
| Abstract: | This paper proposes conditions for the existence and uniqueness of solutions to systems of differential equations with delays or advances in which some variables are non-predetermined. An application to the issue of optimal interest rate policy is then develop in a flexible-price model where money enters the utility function. Central banks have the choice between a rule that depends on past inflation rates or one that depends on predicted interest rates. When inflation rates are selected over a bounded time interval, the problem is characterized by a system of delay or advanced differential equations. We then prove that if the central bank's forecast horizon is not too long, an active and forward-looking monetary policy is not too destabilizing : the equilibrium trajectory is unique and monotonic. |
| Keywords: | Interest rate rules; indeterminacy; functionnal differential equations |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00721289&r=mon |
| By: | Daniel R. Sanches |
| Abstract: | We show the existence of an inherent instability associated with a purely private monetary system due to the role of endogenous debt limits in the creation of private money. Because the bankers’ ability to issue liabilities that circulate as a medium of exchange depends on beliefs about future credit conditions, there can be multiple equilibria. Some of these equilibria have undesirable properties: Self-fulfilling collapses of the banking system and persistent fluctuations in the aggregate supply of bank liabilities are possible. In response to this inherent instability of private money, we formulate a government intervention that guarantees that the economy remains arbitrarily close to the constrained efficient allocation. In particular, we define an operational procedure for a central bank capable of ensuring the stability of the monetary system. |
| Keywords: | Banks and banking, Central |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-19&r=mon |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We propose an alternative way of estimating Taylor reaction functions if the zero-lower-bound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state-space model that additionally generates a time-varying series for the equilibrium real interest rate and the potential output - both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre- and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth. |
| Keywords: | Zero-lower-bound; Federal Reserve; European Central Bank; equilibrium real interest rate; Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0343&r=mon |
| By: | Yung Chul Park (Asian Development Bank Institute (ADBI)); Charles Wyplosz |
| 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: | International monetary reforms, International monetary system, IMF, SDR, capital control, currency swap, financial system |
| JEL: | F32 F33 F42 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23313&r=mon |
| By: | Paulo Brito (Universidade Técnica de Lisboa, and UECE); Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Alessandro Piergallini (Faculty of Economics, University of Rome "Tor Vergata") |
| Abstract: | This paper analyzes global dynamics in an overlapping generations general equilibrium model with housing-wealth effects. It shows that monetary policy cannot burst rational bubbles in the housing market. Under monetary policy rules of the Taylor-type, there exist global self-fulfilling paths of house prices along a heteroclinic orbit connecting multiple equilibria. From bifurcation analysis, the orbit features a boom (bust) in house prices when monetary policy is more (less) active. The paper also demonstrates that boom or busts cannot be ruled out by interest-rate feedback rules responding to both inflation and house prices |
| Keywords: | House Prices; Housing-Wealth Effects; Monetary Policy Rules; Global Determinacy; Heteroclinic Orbits. |
| JEL: | E62 H60 C20 |
| Date: | 2012–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:250&r=mon |
| By: | Yung Chul Park (Asian Development Bank Institute (ADBI)); Charles Wyplosz |
| 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: | International monetary reforms, International monetary system, IMF, SDR, capital control, currency swap, financial system |
| JEL: | F32 F33 F42 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23313&r=mon |
| By: | Lieven Baele (Finance Department, CentER, and Netspar, Tilburg University); Geert Bekaert (Graduate School of Business, Columbia University, and NBER); Seonghoon Cho (School of Economics, Yonsei University); Koen Inghelbrecht (Department Financial Economics, Ghent University, and Finance Department, University College Ghent); Antonio Moreno (Department of Economics, University of Navarra) |
| Abstract: | We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. Output and inflation shocks shift to the low volatility regime around 1985 and 1990, respectively. However, we also identify multiple shifts between accommodating and active monetary policy regimes, which play an as important role as shock volatility in driving the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and quantify the relative role played by macro-shocks and monetary policy. The estimated rational expectations model exhibits indeterminacy in the mean square stability sense, mainly because monetary policy is excessively passive. |
| Keywords: | Monetary Policy, Regime-Switching, Survey Expectations, New-Keynesian Models, Great Moderation, Macr |
| JEL: | E31 E32 E52 E58 C42 C53 |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0312&r=mon |
| By: | Csávás, Csaba; Erhart, Szilárd; Naszódi, Anna; Pintér, Klára |
| Abstract: | There is ample empirical evidence in the literature for the positive effect of central bank transparency on the economy. The main channel is that transparency reduces the uncertainty regarding future monetary policy and thereby it helps agents to make better investment, and saving decisions. In this paper, we document how the degree of transparency of central banks in Central and Eastern Europe has changed during periods of financial stress, and we argue that during the recent financial crisis central banks became less transparent. We investigate also how these changes affected the uncertainty in these economies, measured by the degree of disagreement across professional forecasters over the future short-term and long-term interest rates and also by their forecast accuracy. |
| Keywords: | central banking; transparency; financial crises; survey expectations; forecasting |
| JEL: | E58 E44 E47 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40335&r=mon |
| By: | Ramon Marimon; Juan Pablo Nicolini; Pedro Teles |
| Abstract: | The interplay between competition and trust as efficiency-enhancing mechanisms in the private provision of money is studied. With commitment, trust is automatically achieved and competition ensures efficiency. Without commitment, competition plays no role. Trust does play a role but requires a bound on efficiency. Stationary inflation must be non-negative and, therefore, the Friedman rule cannot be achieved. The quality of money can be observed only after its purchasing capacity is realized. In this sense, money is an experience good. |
| Keywords: | Inflation (Finance) |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:467&r=mon |
| By: | Stephane Auray (CREST-Ensai, Universite du Littoral Cote d'Opale (EQUIPPE),GREDI and CIRPEE); Paul Gomme (Concordia University and CIREQ); Shen Guo (School of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China) |
| Keywords: | Pigou cycles, comovement problem, monetary policy |
| JEL: | E3 E5 E4 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:12007&r=mon |
| By: | Gábor, Tamás |
| Abstract: | The author examines China’s monetary policy in the light of the sterilization process of the excess liquidity caused by the permanent foreign exchange rate intervention. The tools of the neutralization of the monetary oversupply, its effectiveness and its costs are also investigated. With the help of Two-stage least squares (2SLS) regression method it is demonstrated that the sterilization process of the yuan has been almost a total success on the level of the monetary base, and has been partially effective on the level of the M2 supply in the past 15 years. With a cost-benefit analysis it is highlighted that the practice of the monetary sterilization – which is thought to be loss-making in the literature – has been a profitable operation of the central bank up to date. After the demonstration of the monetary sterilization, the economic relationship between China and the European Union is investigated. It is pointed out that China’s role as a global importer and a global investor has been significantly appreciated. Thanks to China’s active economic presence in the European market during the crisis, the recession of the European economies were probably much moderate. |
| Keywords: | China monetary sterilization; 2SLS; European Union; crisis |
| JEL: | G15 E52 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40362&r=mon |
| By: | Julia Bersch; Yasuhisa Ojima; Steven Barnett |
| Abstract: | Inflation in Mongolia resembles a roller coaster ride with sharp rises and steep drops. Understanding why is critical for formulating and assessing monetary policy. Food prices are found to be a key driver of inflation, and, not surprising given Mongolia’s geography, are determined primarily by local supply conditions, highly seasonal, and subject to large but short-lived shocks (usually weather related). Nonetheless, demand factors are also found to be significant in explaining price movements and empirical evidence suggests that a 10 percent increase in government wages, for example, would push up underlying inflation by 1 percentage point. So, while inflation will remain volatile due to agricultural shocks, there is space for macroeconomic stabilization policy to help reduce inflation volatility. |
| Keywords: | Agricultural prices , Consumer price indexes , Economic models , Fiscal policy , Government expenditures , Inflation , Inflation rates , Monetary policy , |
| Date: | 2012–07–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/192&r=mon |
| By: | Etienne B. Yehoue |
| Abstract: | The financial crisis in the advanced countries that began in 2007 has led central bankers to adopt unconventional policy measures as policy interest rates neared the zero bound. One suggestion (Blanchard, Dell’Ariccia, and Mauro, 2010) has been to raise inflation targets to provide more room for policy rate easing during crises. This paper addresses a different issue: the relationship between inflation and welfare. The literature is surveyed and a model is developed. A key conclusion is that an increase in inflation targets gives rise to additional welfare costs, even after the extra room to maneuver above the zero lower bound for nominal policy rates is taken into account. Based on parameter values that fit U.S. data, the additional welfare costs of raising inflation targets from 2 to 4 percent are estimated at about 0.3 percent of annual real income. A rise to 10 percent would yield additional welfare costs of about 1 percent of real income. Other parameter values yield welfare costs as high as 7 (respectively 30) percent of real income for raising inflation targets from 2 to 4 (respectively from 2 to 10) percent. The full costs of raising inflation targets are likely to be higher because the model used to generate these estimates does not account for higher inflation-induced volatility. |
| Keywords: | Financial crisis , Global Financial Crisis 2008-2009 , Inflation targeting , Interest rates , Interest rate policy , Price stabilization , Welfare , Monetary policy , |
| Date: | 2012–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/189&r=mon |
| By: | Beatrice D. Simo - Kengne (Department of Economics, University of Pretoria); Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Rangan Gupta (Department of Economics, University of Pretoria); Monique Reid (Department of Economics, University of Stellenbosch); Goodness C. Aye (Department of Economics, University of Pretoria) |
| Abstract: | This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that central banker reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions. |
| Keywords: | Monetary policy, House prices, Regime switching |
| JEL: | C22 C32 E52 R31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers166&r=mon |
| By: | Roth, Felix (Centre for European Policy Studies (CEPS)); Jonung, Lars (Department of Economics, Lund University); Nowak-Lehmann D., Felicitas (University of Göttingen) |
| Abstract: | This paper analyses the evolution of public support for the single European currency, the euro, from 1990 to 2011, focusing on the most recent period of financial and sovereign debt crisis. Exploring a huge database of more than half a million observations covering the 12 original euro area member countries, we find that the ongoing crisis has only marginally reduced citizens’ support for the euro. This result is in stark contrast to a sharp fall in public trust in the European Central Bank. We conclude that the crisis – at least so far - has hardly dented popular support for the euro while the central bank supplying the single currency has lost sharply in public trust. Thus, the euro appears to have established a credibility of its own – separate from the institutional framework behind the euro. |
| Keywords: | Support for the euro; European Monetary Union; euro area crisis |
| JEL: | C23 E31 E42 E65 |
| Date: | 2012–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2012_020&r=mon |
| By: | Christopher Otrok (Department of Economics, University of Missouri-Columbia); Gianluca Benigno; Huigang Chen; Alessandro Rebucci; Eric R. Young |
| Abstract: | This paper studies monetary and macro-prudential policies in a simple model with both a nominal rigidity and a financial friction that give rise to price and financial stability objectives. We find that lowering the degree of nominal rigidity or increasing the strength of the interest rate response to inflation is always welfare increasing in the model, despite a tradeoff between price and financial stability that we document. Even though crises become more severe as the economy moves toward price flexibility, the cost of the nominal rigidity is always higher than the cost of the financial friction in welfare terms in the model. We also find that macro-prudential policy implemented by augmenting traditional monetary policy with a reaction to debt is always welfare increasing despite making crises more severe. In contrast, implementing macro-prudential policy with a separate tax on debt is always welfare decreasing despite making crises relatively less severe. The key difference lies in the behaviour of the nominal exchange rate, that is more depreciated in the economy with the tax on debt and increases the initial debt burden. |
| Keywords: | Financial Frictions, Financial Crises, Financial Stability, Macro-Prudential Policies, Nominal Rigidities, Monetary Policy. |
| JEL: | E52 F37 F41 |
| Date: | 2012–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1208&r=mon |
| By: | Samuel G. Hanson; Jeremy C. Stein |
| Abstract: | Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-46&r=mon |
| By: | Michal Franta; Jan Libich; Petr Stehlik |
| Abstract: | The fiscal position of many countries is worrying - and getting worse. Should formally independent central bankers be concerned about observed fiscal excesses spilling over to monetary policy and jeopardizing price stability? To provide some insights, this paper tracks the interactions between fiscal and monetary policies in the data across time and space. It makes three main contributions. The first one is methodological: we combine two recent econometric procedures - time-varying parameter vector autoregression with sign restrictions identification - and discuss the advantages of this approach. The second contribution is positive: we show how monetary-fiscal interactions and other macroeconomic variables have changed over time in six industrial countries (Australia, Canada, Japan, Switzerland, the UK, and the U.S.). The third contribution is normative: the paper highlights the role of the institutional design of each policy on the outcomes of both policies. Specifically, it first offers some evidence that an explicit long-term commitment of monetary policy (a legislated numerical target for average inflation) gives the central bank stronger grounds for not accommodating debt-financed fiscal shocks. Our second set of (albeit weaker) results then indicates that this threat of a policy tug-of-war may improve the government's incentives and fiscal outcomes - reducing the probability of both a fiscal crisis and unpleasant monetarist arithmetic. |
| Keywords: | Fiscal gap, monetary-fiscal interactions, sign restrictions, time-varying parameters VAR, unpleasant monetarist arithmetic. |
| JEL: | C10 E61 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2012/06&r=mon |
| By: | Jean Pisani-Ferry; Silvia Merler |
| Abstract: | The euro area today consists of a competitive, moderately leveraged North and an uncompetitive, over-indebted South. Its main macroeconomic challenge is to carry out the adjustment required to restore the competitiveness of its southern part and eliminate its excessive public and private debt burden. This paper investigates the relationship between fiscal and competitiveness adjustment in a stylised model with two countries in a monetary union, North and South. To restore competitiveness, South implements a more restrictive fiscal policy than North. We consider two scenarios. In the first, monetary policy aims at keeping inflation constant in the North. The South therefore needs to deflate to regain competitiveness, which worsens the debt dynamics. In the second, monetary policy aims at keeping inflation constant in the monetary union as a whole. This results in more monetary stimulus, inflation in the North is higher, and this in turn helps the debt dynamics in the South. Our main findings are: The differential fiscal stance between North and South is what determines real exchange rate changes. South therefore needs to tighten more. There is no escape from relative austerity.If monetary policy aims at keeping inflation stable in the North and the initial debt is above a certain threshold, debt dynamics are perverse: fiscal retrenchment is self-defeating;If monetary policy targets average inflation instead, which implies higher inflation in the North, the initial debt threshold above which the debt dynamics become perverse is higher. Accepting more inflation at home is therefore a way for the North to contribute to restoring debt sustainability in the South.Structural reforms in the South improve the debt dynamics if the initial debt is not too high. Again, targeting average inflation rather than inflation in the North helps strengthen the favourable effects of structural reforms. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:740&r=mon |
| By: | Monacelli, Tommaso |
| Abstract: | Openness per se requires optimal monetary policy to deviate from the canonical closed-economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. I review this argument using a simple partial equilibrium analysis in an economy that trades in final consumption goods. I then extend the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors. |
| Keywords: | consumption imports; exchange rate; imported inputs; monetary policy; openness; trade |
| JEL: | E52 F41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9087&r=mon |
| By: | Ács, Attila |
| Abstract: | The recent financial and economic crisis highlighted the importance to better understand the relationship between liquidity developments and asset price movements. Central banks with focus on inflation targeting allowed asset price inflation, following burst, with its devastating consequences for the financial system and real economy. Equilibrium price should emanate from fundamentals. However liquidity conditions are part of fundamental variables and should be taken into consideration as explanatory variables in the process of asset pricing. Furthermore in many cases assets serve as collateral in refinancing which means that refinancing conditions influence values of pledged assets. |
| Keywords: | liquidity; asset pricing; broker dealer; repo; error correction |
| JEL: | G12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40331&r=mon |
| By: | Efraim Benmelech |
| Abstract: | The U.S. Federal Reserve used the Term Auction Facility (TAF) to provide term funding to eligible depository institutions from December 2007 to March 2010. According to the Fed, the purpose of TAF was to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations. The overall goal of the TAF was to ensure that liquidity provisions could be disseminated efficiently even when the unsecured interbank markets were under stress. In this paper I use the TAF micro-level loan data and find that about 60 percent of TAF loans went to foreign banks that pledged asset-backed securities as collateral for these loans. The data and analysis illustrate the major role that foreign – in particular, European – banks currently play in the U.S. financial system and the resultant currency mismatch in their balance sheets. The data suggest that foreign banks had to borrow from the Federal Reserve Bank to meet their dollar-denominated liabilities. |
| JEL: | E44 E52 E58 G01 G21 G28 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18304&r=mon |
| By: | Paul Levine (University of Surrey); Joseph Pearlman (Loughborough University); Bo Yang (University of Surrey) |
| Abstract: | This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II information significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particulary serious for welfare. At the same time we find that II with lags introduces a 'tying ones hands' effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case. |
| JEL: | C11 C52 E12 E32 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1012&r=mon |
| By: | Chu, Angus C.; Ji, Lei |
| Abstract: | In this note, we develop a monetary Schumpeterian growth model to explore the effects of monetary policy on endogenous market structure, economic growth and social welfare. We find that an increase in the nominal interest rate reduces the equilibrium number of firms. Although long-run economic growth is independent of the nominal interest rate due to a scale-invariant property of the model, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption during the transition path. Taking into account transition dynamics, we find that social welfare is decreasing in the nominal interest rate; therefore, Friedman rule is socially optimal in this economy. |
| Keywords: | monetary policy; economic growth; R&D; endogenous market structure |
| JEL: | O30 O40 E41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40467&r=mon |
| By: | Abhijit Sen Gupta (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper evaluates the extent of exchange rate coordination among Asian economies using a hypothetical Asian Currency Unit. Rising interdependence among Asian economies makes it vital for these economies to have a certain degree of exchange rate stability. However, the empirical evidence using an Asian Currency Unit suggests a widening deviation in exchange rate movements of the Asian currencies. The deviation has been driven by the adoption of different exchange rate regimes by the participating countries indicating diverse policy objectives. There are a number of institutions in the region that can assist exchange rate coordination and greater economic and financial integration. These institutions, including a multilateralized swap arrangement, a regional surveillance mechanism, and a bond fund; have to be significantly strengthened for them to play a role in fostering greater economic cooperation. The denomination of financial assets in the Asian Currency Unit in transactions involving these institutions would also enhance exchange rate cooperation. |
| Keywords: | Exchange rate coordination, Asia, Asian Currency Unit, exchange rate stability, financial cooperation |
| JEL: | F36 F55 F15 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23321&r=mon |
| By: | Manuk Ghazanchyan; Nils O Maehle; Olumuyiwa Adedeji; Janet Gale Stotsky |
| Abstract: | This study examines the relationship between the foreign exchange regime and macroeconomic performance in Eastern Africa. The study focuses on seven countries, five of which decisively liberalized their foreign exchange regimes. The study assesses the relationship between (i) growth and various determinants, including the exchange regime, the real exchange rate, and current account liberalization; and (ii) inflation and various determinants, including lagged inflation, the nominal exchange rate, the exchange regime, and liberalization. We find that in our sample, for the determinants of growth, investment and the real exchange rate are significant determinants but not the exchange regime or liberalization; and for inflation, the lagged inflation rate, nominal exchange rate, and the de facto regime are significant. Exchange rate pass-through is limited. |
| Keywords: | Economic growth , East Africa , Exchange rate regimes , Foreign exchange , |
| Date: | 2012–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/148&r=mon |
| By: | Giancarlo Marini (Faculty of Economics, University of Rome "Tor Vergata"); Giovanni Piersanti (University of Teramo) |
| Abstract: | Currency and ?nancial turmoils in international capital markets have been the focus of an extensive theoretical research which started around 30 years ago. This paper provides a synthetic overview of this theoretical modeling. We analyze the basic analytical framework corresponding to the dominant theoretical approaches, and discuss their extensions to include the ?nancial sector, contagion across markets and countries, capital ?ows and borrowing constraints, strategic interactions among agents and equilibrium selection. In the ?nal section we focus on the relevant policy issue of crisis prevention and optimal foreign regime choice in a world of full ?nancial integration. |
| Keywords: | Exchange Rate Regimes, Speculative Attacks, Currency Crises, Financial Crises, Global Games |
| JEL: | F30 F31 F32 F33 F41 G01 C70 |
| Date: | 2012–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:rtv:ceisrp:245&r=mon |
| By: | Masayuki Susai (Nagasaki University); Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | We investigate the intra-day effect of interventions in both the post- global crisis and pre-crisis periods by the Bank of Japan (BOJ) in foreign exchange markets using limit order data at intra-day high frequency. First, we find that the relationship between order flow and market return in dollar/yen exchange markets breaks down following unexpected and very high volumes of offer/sell orders by BOJ interventions. Then, a simple methodology of using large recursive residual is proposed to detect the exact timing of interventions. Second, the dataset allows measuring how long an individual limit order stays in the market. With the measured lifetime of limit orders, we find interventions, detected by the proposed methodology, significantly reduce the life-time of limit order in the market. By applying the same methodology on non-intervention days, we find no such evidence on the life-time of limit orders although large recursive residuals are also pervasive in non-intervention days. |
| Keywords: | the Bank of Japan; Central bank interventions; Foreign exchange market; Life time of limit order; Order flow. |
| JEL: | F31 G12 G14 G15 E58 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:kyu:dpaper:56&r=mon |
| By: | Noriaki Kinoshita; Cameron McLoughlin |
| Abstract: | The degree of an economy’s monetization, which has an important implication on economic growth, can be affected by the conduct of monetary policy, financial sector reform, and episodes of financial crises. The paper finds that monetization--measured by the ratio of broad money to nominal GDP-- in low- to middle-income countries is significantly correlated with per-capita GDP, real interest rates, and financial sector reform. It suggests that maintaining an upward momentum in monetization can be an important policy objective, particularly for low-income countries, and that monetary and financial sector policies need to be conducive to enhancing monetization. |
| Keywords: | Bank reforms , Economic growth , Economic models , Financial sector , Low-income developing countries , Monetary policy , |
| Date: | 2012–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/160&r=mon |
| By: | Francesco Giuli; Massimiliano Tancioni |
| Abstract: | This paper adds to the large literature on the e¤ects of technology shocks empirically and theoretically. Using a SVEC model, we rst show that not only hours but also investment decline temporarily following a technology improvement. This result is robust with respect to important data and identi cation issues addressed in the literature. We then show that the negative response of inputs is consistent with an estimated monetary DSGE model in which the presence of strategic complementarity in price setting, in addition to nominal rigidities, lowers the sensitivity of prices to marginal costs, and monetary policy does not fully accommodate the shock. |
| Keywords: | Technology shocks, Inputs dynamics, Structural Vector Error Correction model, New-Keynesian DSGE model, Bayesian inference |
| JEL: | C11 C32 E22 E32 E52 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0161&r=mon |
| By: | Stephane Auray (CREST-Ensai, Universite du Littoral Cote d'Opale (EQUIPPE),GREDI and CIRPEE); Paul Gomme (Concordia University and CIREQ); Shen Guo (School of Public Finance and Public Policy, Central University of Finance and Economics, Beijing, China) |
| Abstract: | Capturing the boom phase of Pigou cycles and resolving the comovement problem requires positive sectoral comovement. This paper addresses these observations using a two sector New Keynesian model. Price rigidities dampen movements in the relative price of durables following a monetary policy shock. Durables and nondurables are estimated to be complements in utility, allowing for a resolution of the comovement problem for modest degrees of price rigidity. Nominal rigidities also make firms forward-looking in their pricing behaviour which leads to relative price dynamics that generate positive sectoral comovement in the boom phase of a Pigou cycle. |
| Keywords: | Pigou cycles, comovement problem, monetary policy |
| JEL: | E3 E5 E4 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:12006&r=mon |
| By: | John H. MUNRO |
| Abstract: | This paper is a critique of Michael Postan's famous Malthusian-Ricardo model demonstrating that late-medieval prices and wages were essentially determined by demographic factors, especially after the Black Death, while contending that monetary factors played no role in determining prices or wages. His central argument is simple: that rapid and drastic depopulation (falling perhaps from ca. 1320) - by about 50% in England ca. 1450 - drastically altered the land:labour ratio so that real wages increased, both from a rise in the marginal productivity of labour and also from a corresponding fall in the costs of foodstuffs. As Ricardo had argued, a population decline necessarily led to lower grain prices, reduced rents, as well as to increased real wages. A related part of Postan's model is the contention that grain prices alone fell after the Black Death, while prices of most livestock products and especially industrial products rose, thus producing a widening divergence in commodity prices in late-medieval Europe. This paper seeks to show that monetary factors also played a role in determining or influencing both prices and real wages in medieval Europe, both before and after the Black Death. The evidence produced here reveals cycles of inflation and deflation from the late 12th to early 16th century: with a sharp deflation before the Black Death, an equally severe inflation for the quarter century following the Black Death, which was then followed by steep deflation into the early 15th century, after which the deflationary trend was broken only by the final phase of the Hundred Years' War and by civil wars in Flanders. Deflation resumed in the very late 15th century, enduring until the eve of the inflationary European Price Revolution, from ca. 1515-20 to ca. 1650. The tables in this paper demonstrate that during both periods of inflation and of deflation, agricultural and industrial prices rose and fell together, if not necessarily in full tandem. These cycles of inflation and deflation were essentially due to monetary and not demographic factors; but differences in relative prices can be explained as well by real factors. Thus the core theme of the paper: 'money matters', though monetary factors certainly do not explain all economic phenomena. The final section of the paper deals with post-Plague real wages, demonstrating first a sharp fall in real wages following the Black Death and then a sharp rise in real wages from the later 14th century. That was essentially a result and function of downward nominal wage-stickiness during the deflations that took place in this era, especially during the two bullion famines of ca. 1370 - ca. 1415 and ca. 1440 - 1475. An examination of the root causes of wage-stickiness, essentially a post-Plague phenomenon, has been more thoroughly explored in many other of my online working papers and numerous publications (since 2003). The statistical evidence on prices and wages is taken from both England and Flanders (up to ca. 1500): i.e., from both a basically rural agrarian economy (England) and a much more commercialized, industrialized, urbanized economy (Flanders). If such radically different economies experienced the same trends in commodity prices and wages (nominal and real)- as they did, the agrarian-based Ricardo model cannot provide the full explanation - so that again a role for monetary factors must be allowed, all the more so in light of the detailed monetary evidence supplied in this paper. |
| Keywords: | Ricardo; Malthus; Postan; marginal productivity; population; nominal wages; real wages; agricultural labourers; building craftsmen; masters and journeymen; money; bullion; credit; inflation; deflation; relative prices; England; Flanders; Middle Ages |
| JEL: | E E41 E42 E51 E52 E62 F33 H11 H27 N13 N23 N43 |
| Date: | 2012–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-463&r=mon |
| By: | Kerényi, Ádám |
| Abstract: | In October 2008 the main Hungarian public finance actors: the government, the National Bank of Hungary (MNB) and experts cited the high public debt and volume of unsecured foreign-currency loans as the main reasons for the economy’s vulnerability. On the other hand according to the formal president of the MNB the first and foremost it was the inadequate level of foreign exchange reserves that made Hungary among the first to request outside assistance, in the form of international credit just after the Lehman bankruptcy. That critical time the MNB was only partially able to fulfil its role as the ‘lender of last resort’, and the Treasury was not able at all to conduct an anti-cyclical keynesian fiscal policy due to the previous fiscal years when the government lost its international creditworthiness. Hungarian Treasury (NGM) in November 2011 – three years later than the previous package – requested again outside assistance, in the form of international credit or insurance from the Monetary Fund and European authorities. A rethinking of fiscal and monetary policy, and the comprehensive restructuring of the Hungarian economic-policy mix, are essential in the interests of avoiding the following stops and goes periods and of halting the social and economic disintegration of the country. Instead of good governance Hungary needs co-governance between the fiscal and monetary policy. The Fiscal Council might be a very useful institution to help and moderate this process with its new president. A Lucasian regime change is expected in the Hungarian economy. |
| Keywords: | macroeconomic policy; macroeconomic aspects of public finance; fiscal policy; monetary policy |
| JEL: | E62 E50 E61 E60 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40352&r=mon |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the first best unconstrained allocation. In this benchmark economy, prudential capital controls are optimal only when the set of policy tools is restricted so that they are the only policy instrument available. |
| Keywords: | Capital controls, exchange rate policy, financial frictions, financial crises, financial stability, optimal taxation, prudential policies, planning problem |
| JEL: | E52 F37 F41 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1160&r=mon |
| By: | Fabrizio Mattesini (Università di Roma "Tor Vergata"); Giuseppina Gianfreda (Università della Tuscia) |
| Abstract: | We study the Italian monetary regime from 1861 to the creation of the Bank of Italy in 1893. The regime was characterized by a multi- plicity of note issuers although one of them, the BNS, rapidly became the dominant bank of the country following a process of territorial expansion. We carefully describe the evolution of the system and we analyze its functioning by studying the acceptaibility of banknotes. Since by law banknotes had to be redeemed at par, acceptability is measured by the number of days notes were in circulation. We es- timate the acceptability of the BNS notes in the provinces were the bank had branches and we ?nd that the entry of a smaller issuer lim- ited the capacity of the dominant bank to keep its notes in circulation at local level. We take this as evidence that competition in notes issue worked as an e¤ective discipline device and we argue the fall of the sys- tem should not be readily attributed to the failure of the competittive mechanism. |
| Keywords: | money acceptability,notes redemption, multiple issuers. |
| JEL: | E42 N13 C33 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lui:lleewp:12100&r=mon |
| By: | Schmid, Peter Alfons |
| Abstract: | The Euro Zone (EZ)’s economies are under great stress since last decade’s financial crisis. Diverging interest rates, high debt burdens and sluggish growth in several member countries led to various rescue activities. Nevertheless, financial markets have still not calmed and the break-up of the EZ is discussed openly. Contrary to the popular belief I show that the Euro itself has been a success story so far but the EZ suffers under a debt crisis and huge economic imbalances. An overhaul of the EZ’s institutional framework, however, is necessary. |
| Keywords: | financial crisis; Euro crisis; current account imbalances; monetary union |
| JEL: | F34 E42 |
| Date: | 2012–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40390&r=mon |
| By: | S. Boragan Aruoba; Morris A. Davis; Randall Wright |
| Abstract: | We study models incorporating money, household production, and investment in housing. Inflation, as a tax on market activity, encourages substitution into household production, and thus investment in household capital. Hence, inflation increases the (appropriately deflated) value of the housing stock. This is documented in various data sources. A calibrated model accounts for a fifth to a half of the observed relationships. While this leaves much to be explained, it demonstrates the channel is economically relevant. We also show models with home production imply higher costs of inflation than models without it, especially when home and market goods are close substitutes. |
| JEL: | E41 E52 R21 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18276&r=mon |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young |
| Abstract: | In the aftermath of the global nancial crisis, a new policy paradigm has emerged> in which old-fashioned policies such as capital controls and other government distor-> tions have become part of the standard policy toolkit (the so-called macro-prudential> policies). On the wave of this seemingly unanimous policy consensus, a new strand> of theoretical literature contends that capital controls are welfare enhancing and can> be justi ed rigorously because of second-best considerations. Within the same the-> oretical framework adopted in this fast-growing literature, we show that a credible> commitment to support the exchange rate in crisis times always welfare-dominates> prudential capital controls as it can achieve the rst best unconstrained allocation.> In this benchmark economy, prudential capital controls are optimal only when the set> of policy tools is restricted so that they are the only policy instrument available. |
| Keywords: | Foreign exchange rates ; Capital market |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-025&r=mon |
| By: | Chalongphob Sussangkarn (Asian Development Bank Institute (ADBI)) |
| 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 crisis, East Asia, foreign currency liability, crisis prevention, regional mechanism, global mechanism |
| JEL: | E02 E44 E58 E63 F33 F36 F55 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23314&r=mon |
| By: | Edouard Challe (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Banque de France - -, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Chryssi Giannitsarou (University of Cambridge - Faculty of Economics, CEPR - Center for Economic Policy Research - CEPR) |
| Abstract: | Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on real stock prices: a 25-basis point increase in the nominal interest rate is associated with an immediate decrease in broad real stock indices that may range from 0.6 to 2.2 percent, followed by a gradual decay as real stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider is a production economy with elastic labor supply, staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model. |
| Keywords: | Monetary policy; Asset prices; New Keynesian general equilibrium model |
| Date: | 2012–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00719956&r=mon |
| By: | Anders Aslund (Peterson Institute for International Economics) |
| Abstract: | One of the big questions of our time is whether the Economic and Monetary Union (EMU) will survive. Too often, analysts discuss a possible departure of one or several countries from the euro area as little more than a devaluation, but Åslund argues that any country’s exit from the euro area would be a far greater event with potentially odious consequences. A Greek exit would not be merely a devaluation for Greece but would unleash a domino effect of international bank runs and disrupt the EMU payments mechanism, which would lead to a serious, presumably mortal, disintegration of the EMU. It would inflict immense harm not only on Greece but also on other countries in the European Union and the world at large. When a monetary union with huge uncleared balances is broken up, the international payments mechanism within the union breaks up, impeding all economic interaction. Åslund’s critical argument for a domino effect is that the EMU already has large uncleared interbank balances in its so-called Target2 system. Exit of any country is likely to break this centralized EMU payments mechanism. These rising uncleared balances are a serious concern because nobody can know how they will be treated if the EMU broke up. Any attempt to cap them would risk disruption of the EMU. These balances need to be resolved but in a fashion that safeguards the integrity of the EMU. However, this can hardly be done by anything less than fully securing the sustainability of the EMU. If the euro area does break up, Åslund says, the damage will vary greatly depending on the policies pursued. On the basis of prior dissolutions of currency zones, such as the ruble zone in 1992/1993, he suggests that an amicable, fast, and coordinated end of the EMU would minimize the harm. |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-20&r=mon |
| By: | Raghbendra Jha; Varsha S. Kulkarni |
| Abstract: | This paper extends the New Keynesian Phillips curve model to include inflation volatility and tests the determinants of such volatility for India. It provides results on the determinants of inflation volatility and expected inflation volatility for OLS and ARDL (1,1) models and for change in inflation volatility and change in expected inflation volatility using ECM models. Output gap affects change in expected inflation volatility (in the ECM model) and not in the other models. Major determinants of inflation volatility and expected inflation volatility are identified. |
| Keywords: | Inflation, Inflation volatility, ARDL model, ECM model, Output gap, India |
| JEL: | E31 E32 E42 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:pas:asarcc:2012-11&r=mon |
| By: | Guillermo A. Calvo |
| Abstract: | Fiat money contains the seeds of its own destruction. It has no intrinsic value and, yet, it can be exchanged for valuable consumption and production goods. As Hahn (1965) shows, this situation puts fiat money's market value or liquidity premium at the brink of collapse. In this paper I will argue that (1) sticky prices, especially when staggered, provide output backing to fiat money, helping to sustain fiat money's liquidity premium and, thus, lowering the risk of a liquidity meltdown. I call this view the Price Theory of Money; (2) fixed-income assets linked to fiat money, especially if they are perceived to have low counter-party risk (like US Treasury bills, AAA bonds or Asset-Backed Securities) can take advantage of point (1) to become quasi-moneys; (3) this gives incentives to the private sector to create those assets; (4) however, unless protected by a Lender of Last Resort, the new assets' liquidity premium can quickly and massively evaporate in what I call (with a wink to the Bard) a Prospero's Liquidity Trap; (5) the latter lowers the market value of loan collateral and clogs the credit channel, bringing about a credit event or Sudden Stop, with severe output and employment consequences. |
| JEL: | E31 E41 E44 E58 F31 F41 F42 |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18285&r=mon |
| By: | Bill Russell; Rosen Azad Chowdhury |
| Abstract: | ‘Modern’ Phillips curve theories predict inflation is an integrated, or near integrated, process. However, inflation appears bounded above and below in developed economies and so cannot be ‘truly’ integrated and more likely stationary around a shifting mean. If agents believe inflation is integrated as in the ‘modern’ theories then they are making systematic errors concerning the statistical process of inflation. An alternative theory of the Phillips curve is developed that is consistent with the ‘true’ statistical process of inflation. It is demonstrated that United States inflation data is consistent with the alternative theory but not with the existing ‘modern’ theories. |
| Keywords: | Phillips curve, inflation, structural breaks, GARCH, non-stationary data |
| JEL: | C22 C23 E31 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:dun:dpaper:265&r=mon |
| By: | Ismael Martinez-Martinez; Ricardo Lopez-Ruiz |
| Abstract: | Boltzmann-Gibbs distribution arises as the statistical equilibrium probability distribution of money among the agents of a closed economic system where random and undirected exchanges are allowed. When considering a model with uniform savings in the exchanges, the final distribution is close to the gamma family. In this work, we implement these exchange rules on networks and we find that these stationary probability distributions are robust and they are not affected by the topology of the underlying network. We introduce a new family of interactions: random but directed ones. In this case, it is found the topology to be determinant and the mean money per economic agent is related to the degree of the node representing the agent in the network. The relation between the mean money per economic agent and its degree is shown to be linear. |
| Date: | 2012–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1208.0451&r=mon |