nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒09‒03
28 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Taylor Rule Exchange Rate Forecasting During the Financial Crisis By Tanya Molodtsova; David Papell
  2. Inflation dynamics: the role of public debt and policy regimes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  3. Macro-Prudential Policy and the Conduct of Monetary Policy. By Beau, D.; Clerc, L.; Mojon, B.
  4. Monetary policy and commodity terms of trade shocks in emerging market economies By Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
  5. Complexity and Monetary Policy By Orphanides, Athanasios; Wieland, Volker
  6. Asymmetric exchange rate pass-through in the Euro area: New evidence from smooth transition models By Ben Cheikh, Nidhaleddine
  7. Long-Run Money Demand in Latin-American countries: A Nonestationary Panel Data Approach By Carrera, Cesar
  8. House prices and stock prices: Different roles in the U.S. monetary transmission mechanism By Hilde C. Bjørnland; Dag Henning Jacobsen
  9. Is Monetary Policy in an Open Economy Fundamentally Different? By Tommaso Monacelli
  10. Reserve Accumulation, Growth and Financial Crises By Gianluca Benigno; Luca Fornaro
  11. Regional Monetary Cooperation in Latin America By Ocampo, José Antonio; Titelman, Daniel
  12. Trilemma Policy Convergence Patterns and Output Volatility By Aizenman, Joshua; Ito, Hiro
  13. Mussa Redux and Conditional PPP By Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
  14. Do Households Anchor their Inflation Expectations? Theory and Evidence from a Household Survey By J. Easaw; R. Golinelli; M. Malgarini
  15. The Financial Trilemma in China and a Comparative Analysis with India By Aizenman, Joshua; Sengupta, Rajeswari
  16. Adjustment patterns to commodity terms of trade shocks: the role of exchange rate and international reserves policies By Aizenman, Joshua; Edwards, Sebastian; Riera-Crichton, Daniel
  17. Monetary Rules and Sectoral Unemployment in Open Economies By William D. Craighead
  18. Register, issue, cap and trade: A proposal for ending current and future financial crises By Milne, Alistair
  19. Sailing through the Global Financial Storm: Brazil's recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks. By Luiz Awazu Pereira da Silva; Ricardo Eyer Harris
  20. Central Banks and Gold Puzzles By Aizenman, Joshua; Inoue, Kenta
  21. The crisis of euro’s governance: institutional aspects and policy issues By Schilirò, Daniele
  22. House prices, credit growth, and excess volatility: implications for monetary and macroprudential policy By Paolo Gelain; Kevin J. Lansing; Caterina Mendicino
  23. How to capture the full extent of price stickiness in credit card interest rates? By Abbas Valadkhani; Sajid Anwar; Amir Arjonandi
  24. The monetary views of Paul Einzig By Dominique Torre
  25. Too big to fail: some empirical evidence on the causes and consequences of public banking interventions in the United Kingdom By Rose, Andrew; Wieladek, Tomasz
  26. Measuring the macroeconomic costs of banking crises By Andrew Smith
  27. Monetary Shocks in a Model with Inattentive Producers By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  28. Latin American Exchange Rate Dependencies: A Regular Vine Copula Approach By Rubén Albeiro Loaiza Maya; Luis Fernando Melo Velandia

  1. By: Tanya Molodtsova; David Papell
    Abstract: This paper evaluates out-of-sample exchange rate predictability of Taylor rule models, where the central bank sets the interest rate in response to inflation and either the output or the unemployment gap, for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-2009. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, only the specification with both estimated coefficients and the unemployment gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is superior to the interest rate differentials, monetary, and purchasing power parity models.
    JEL: C22 F31
    Date: 2012–08
  2. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the equilibrium response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the equilibrium response of inflation to non-policy shocks. Moreover, a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy stances affect inflation dynamics, but because of a role for self-fulfilling beliefs due to equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a richer quantitative model.
    Keywords: Price levels ; Monetary policy ; Macroeconomics
    Date: 2012
  3. By: Beau, D.; Clerc, L.; Mojon, B.
    Abstract: In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macro-prudential policies that can “lean against credit” without affecting the short-term interest rate.
    Keywords: Monetary Policy; Financial Stability; Macro-prudential Policy; ESRB.
    JEL: E51 E58 E37 G13 G18
    Date: 2012
  4. By: Seedwell Hove; Albert Touna Mama; Fulbert Tchana Tchana
    Abstract: Commodity terms of trade shocks have continued to drive macroeconomic ‡uctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI in‡ation targeting performs relatively better than exchange rate targeting and non-traded in‡ation targeting both in terms of reducing macroeconomic volatility and enhancing welfare. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogeneous shocks is to target CPI inflation.
    Keywords: Commodity terms of trade, monetary policy; DSGE
    JEL: E52 G28
    Date: 2012
  5. By: Orphanides, Athanasios; Wieland, Volker
    Abstract: The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables.
    Keywords: complexity; ECB; Financial crisis; model uncertainty; monetary policy; robust simple rules
    JEL: E50 E52 E58
    Date: 2012–08
  6. By: Ben Cheikh, Nidhaleddine
    Abstract: This paper examines the presence of asymmetric behavior in exchange rate pass-through (ERPT) to CPI inflation in 12 euro area (EA) countries. Using a class of nonlinear smooth transition models, we test for asymmetry with respect to the direction and the magnitude of exchange rate changes. On the one hand, we find only 5 out of 12 EA countries showing asymmetric pass-through to exchange rate appreciations and depreciations. Results are somewhat mixed with no clear evidence about the direction of asymmetry. On the other hand, we report strong evidence that ERPT responds asymmetrically to the size of exchange rate changes as a result of presence of menu costs. The degree of ERPT is found to be higher for large exchange rate changes than for small ones in 9 out of 12 EA countries. --
    Keywords: exchange rate pass-through,inflation,smooth transition regression models,euro area
    JEL: C22 E31 F31 F41
    Date: 2012
  7. By: Carrera, Cesar (Banco Central de Reserva del Perú)
    Abstract: Central banks have long been interested in obtaining precise estimations of money demand given the fact that the evolution of money demand plays a key role over several monetary variables. I use Pedroni's (2002) Fully Modified Ordinary Least Square (FMOLS) to estimate the coefficients of the long-run money demand function for 15 Latin-American countries. The FMOLS technique pool information regarding common long-run relationships while allowing the associated short-run dynamics and fixed effects to be heterogeneous across different members of the panel. For this group of countries, I find evidence of a cointegrating money demand, an income elasticity of 0.94, and an interest-rate semi-elasticity of -0.01.
    Keywords: Money demand, panel cointegration, FMOLS, Latin-American
    JEL: C22 C23 E41
    Date: 2012–08
  8. By: Hilde C. Bjørnland; Dag Henning Jacobsen
    Abstract: We analyze the role of house and stock prices in the monetary policy transmission mechanism in the U.S. using a structural VAR model. The VAR is identifed using a combination of short-run and long-run (neutrality) restrictions, allowing for contemporaneous interaction between monetary policy and asset prices. By allowing the interest rate and asset prices to react simultaneously to news, we find different roles for house and stock prices in the monetary transmission mechanism. In particular, following a contractionary monetary policy shock, stock prices fall immediately, while the response in house prices is much more gradual. However, the fall in both house prices and stock prices enhances the negative response in output and inflation that has traditionally been found in the literature. Regarding the systematic response in monetary policy, stock prices play a more important role in the interest rate setting in the short run than house prices. As a consequence, shocks to house prices contribute more to GDP and inflation fluctuations than stock price shocks.
    Keywords: VAR, monetary policy, house prices, identification
    JEL: C32 E52 E44
    Date: 2012–08
  9. By: Tommaso Monacelli
    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 ?nal 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: openness, trade, imported inputs, consumption imports, exchange rate, monetary policy. JEL Classi?cation Numbers: E52, F41.
    Date: 2012
  10. By: Gianluca Benigno; Luca Fornaro
    Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: i) Faster growing countries are associated with lower net capital inflows and ii) Countries that grow faster accumulate more international reserves and receive more net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. We use the model to compare the laissez-faire equilibrium and the optimal reserve policy in an economy that is opening to international capital flows. We find that the optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. We also find that the welfare gains of reserve policy are large, in the order of 1 percent of permanent consumption equivalent.
    Keywords: foreign reserve accumulation, gross capital flows, growth, financial crises
    JEL: F31 F32 F41 F43
    Date: 2012–08
  11. By: Ocampo, José Antonio (Asian Development Bank Institute); Titelman, Daniel (Asian Development Bank Institute)
    Abstract: Latin American has the longest history of regional integration efforts in the developing world. This paper analyzes the experience of regional monetary cooperation in Latin America over the past three decades. This experience has been overall successful but also uneven, both in terms of country coverage and services provided. Although strictly not a form of monetary cooperation, development financing does play a useful complementary role by proving counter-cyclical or at least stable financing during crises, when private financing for developing countries dries up.
    Keywords: regional monetary cooperation; latin america; regional integration; development financing
    JEL: O23 O54
    Date: 2012–08–13
  12. By: Aizenman, Joshua; Ito, Hiro
    Abstract: We examine the open macroeconomic policy choices of developing economies from the perspectiveof the economic “trilemma†hypothesis. We construct an index of divergence of the threetrilemma policy choices, and evaluate its patterns in recent decades. We find that the threedimensions of the trilemma configurations are converging towards a “middle ground†amongemerging market economies -- managed exchange rate flexibility underpinned by sizable holdingsof international reserves, intermediate levels of monetary independence, and controlled financialintegration. Emerging market economies with more converged policy choices tend to experiencesmaller output volatility in the last two decades. Emerging markets with relatively low internationalreserves/GDP could experience higher levels of output volatility when they choose a policycombination with a greater degree of policy divergence. Yet this heightened output volatility effectdoes not apply to economies with relatively high international reserves/GDP holding.
    Keywords: Economics, Impossible trinity, international reserves, financial liberalization, exchange rate regime
    Date: 2012–01–22
  13. By: Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
    Abstract: Long half-lives of real exchange rates are often used as evidence against monetary sticky price models. In this study we show how exchange rate regimes alter the long-run dynamics and half-life of the real exchange rate, and we recast the classic defense of such models by Mussa (1986) from an argument based on short-run volatility to one based on long-run dynamics. The first key result is that the extremely persistent real exchange rate found commonly in post Bretton Woods data does not apply to the preceding fixed exchange rate period in our sample, where the half-live was perhaps half as large. This result suggests a reinterpretation of Mussa’s original finding, indicating that up to two thirds of the rise in variance of the real exchange rate in the recent period is actually due to the rise in persistence of the response to shocks, rather than due to a rise in the variance of shocks themselves. The second key result explains the rise in persistence over time by identifying underlying shocks using a panel VECM model. Shocks to the nominal exchange rate induce more persistent real exchange rate responses compared to price shocks, and these shocks became more prevalent under a flexible exchange rate regime.
    JEL: F15 F31
    Date: 2012–08
  14. By: J. Easaw; R. Golinelli; M. Malgarini
    Abstract: The purpose of the present paper is to study how households form inflation expectations. Using a novel survey-base dataset of Italian households’ opinions of inflation we investigate two separate, but related, types of behavior: ‘inattentiveness’ and ‘anchoring’. The present analysis extends the existing literature by incorporating explicitly inflation targets and distinguishing between aggregate and disaggregate dynamics based on demographic groups. In addition, we extend the literature by considering both the short- and long-run dynamics as households update their inflation expectations while also accounting for their state-varying behavior. All these issues provide important insights into understanding actual inflation dynamics and the conduct of monetary policy.
    JEL: D1 D84 E1 E31 C33
    Date: 2012–08
  15. By: Aizenman, Joshua; Sengupta, Rajeswari
    Abstract: A key challenge facing most emerging market economies today is how to simultaneouslymaintain monetary independence, exchange rate stability and financial integration subjectto the constraints imposed by the Trilemma, in an era of widespread globalization. In thispaper we overview and contrast the Trilemma policy choices and tradeoffs faced by thetwo key drivers of global economic growth-China and India. China’s Trilemmaconfigurations are unique relative to other emerging markets in the predominance ofexchange rate stability, and in the failure of the Trilemma regression to capture aconsistently significant role for financial integration. In contrast, the Trilemmaconfigurations of India are in line with choices made by other emerging countries. Indialike other emerging economies has overtime converged towards a middle ground betweenthe three policy objectives, and has achieved comparable levels of exchange rate stabilityand financial integration buffered by sizeable international reserves
    Keywords: Economics, Financial Trilemma, International reserves, Foreign exchange intervention, Monetary policy, Capital account openness
    Date: 2012–03–18
  16. By: Aizenman, Joshua; Edwards, Sebastian; Riera-Crichton, Daniel
    Abstract: We analyze the way in which Latin American countries have adjusted to commodityterms of trade (CTOT) shocks in the 1970-2007 period. Specifically, we investigate the degreeto which the active management of international reserves and exchange rates impacted thetransmission of international price shocks to real exchange rates. We find that active reservemanagement not only lowers the short-run impact of CTOT shocks significantly, but alsoaffects the long-run adjustment of REER, effectively lowering its volatility. We also show thatrelatively small increases in the average holdings of reserves by Latin American economies (tolevels still well below other emerging regions current averages) would provide a policy tool aseffective as a fixed exchange rate regime in insulating the economy from CTOT shocks.Reserve management could be an effective alternative to fiscal or currency policies forrelatively trade closed countries and economies with relatively poor institutions or highgovernment debt. Finally, we analyze the effects of active use of reserve accumulation aimedat smoothing REERs. The result support the view that “leaning against the wind†is potent, butmore effective when intervening to support weak currencies rather than intervening to slowdown the pace of real appreciation. The active reserve management reduces substantiallyREER volatility.
    Keywords: Economics, Terms of trade, the real exchange rate, international reserves, commodity price shocks, volatility,, exchange rate regime
    Date: 2012–01–10
  17. By: William D. Craighead (Department of Economics, Wesleyan University)
    Abstract: This paper incorporates a search-and-matching model of the labor market into a “New Open Economy Macroeconomics” framework. This allows for an examination of the behavior of tradable and nontradable sector unemployment rates under alternative monetary rules. An examination of dynamics in response to shocks to productivity, world prices and interest rates, and foreign demand suggests that monetary rules that respond to prices of domestic output rather than consumer prices may be better able to stabilize unemployment.
    Keywords: search-and-matching model, monetary rules
    JEL: F4 E5
    Date: 2012–08
  18. By: Milne, Alistair
    Abstract: A fundamental cause of the global financial crisis was excessive creation of short-term money-like liabilities (quasi-money), notably in shadow banking holdings of sub-prime MBS and other US dollar structured credit instruments and in cross-border flow of capital to the uncompetitive Euro area periphery. This paper proposes a registration system for: (i) controlling quasi-money and resulting economic externalities and systemic risks; and (ii) supporting public sector monetary issue to counter collapse of private sector credit in the aftermath of crises. This policy would trigger a profound but also economically beneficial change in the business models of both banks and long-term investors. --
    Keywords: Basel III,debt deflation,endogenous money,financial regulation,global financial crisis,limited purpose banking,maturity mismatch,narrow money,Pigouvian taxes,ring fencing,systemic financial risk,systemic financial externalities,Tobin tax
    JEL: E44 G21 G28
    Date: 2012
  19. By: Luiz Awazu Pereira da Silva; Ricardo Eyer Harris
    Abstract: Brazil sailed well through the global financial storm, using counter-cyclical policies to engineer its fast V-shaped recovery in 2010. In order to deal with inflationary pressures arising from its strong recovery, after the peak of the crisis, it used standard aggregate demand management instruments (tight fiscal and monetary policies). Brazil had also to deal with the post-QE global environment of excess liquidity in 2010-2011 where excessive capital inflows were exacerbating domestic credit growth with potentially destabilizing effects for price and financial stability. In that front, Brazil maintained and strengthened its strong financial sector regulation and supervision to continue to ensure financial stability, in particular, using a set of macroprudential instruments. While combining monetary and macroprudential instruments to lean against the financial cycle, the Central Bank of Brazil has always made clear that macroprudential measures are not a substitute for monetary policy action and are primarily geared at addressing financial stability risks. In fact, many policy makers after the global financial crisis seem to see now a complementarity between macroprudential measures and monetary policy. Accordingly, the (new) separation principle seems to evolve into using two instruments (the central bank’s base rate and a set of macroprudential tools) to address two objectives (the inflation target and a composite set of financial stability indicators). Brazil’s recent experience with monetary and macroprudential policies is a successful example of this new approach. More time and other countries’ experiences are needed to assess properly if this policy option can be generalized and replicated with similar results elsewhere.
    Date: 2012–08
  20. By: Aizenman, Joshua; Inoue, Kenta
    Abstract: We study the curious patterns of gold holding and trading by central banksduring 1979-2010. With the exception of several discrete step adjustments,central banks keep maintaining passive stocks of gold, independently of thepatterns of the real price of gold. We also observe the synchronization of goldsales by central banks, as most reduced their positions in tandem, and theirtendency to report international reserves valuation excluding gold positions.Our analysis suggests that the intensity of holding gold is correlated with ‘globalpower’ – by the history of being a past empire, or by the sheer size of a country,especially by countries that are or were the suppliers of key currencies. Theseresults are consistent with the view that central bank’s gold position signalseconomic might, and that gold retains the stature of a ‘safe haven’ asset at timesof global turbulence. The under-reporting of gold positions in the internationalreserve/GDP statistics is consistent with loss aversion, wishing to maintain asizeable gold position, while minimizing the criticism that may occur at a timewhen the price of gold declines
    Keywords: Economics, International reserves, Central banks, Gold, exchange rate regimes
    Date: 2012–02–26
  21. By: Schilirò, Daniele
    Abstract: The European Monetary Union is characterized by a crisis of governance, this has become more evident with the crisis of the euro which has shown the weaknesses of the European institutions and stressed the heterogeneity of member countries. The global financial crisis struck the euro area very severely because it coincided with the lack of appropriate policy tools to manage the crisis and with a period of weak political leadership which have made crisis management even harder. Europe needs to build the institutions of its monetary union to avoid similar crises in the future. But it is necessary a greater European integration, with a central fiscal entity at European level which requires a transfer of sovereignty from the individual Member States. This contribution first discusses the issue concerning rules and discretion in the governance of the euro. In the following section it describes the euro crisis and examines the remedies put in place, noting that despite the statements and the efforts of the European authorities the confidence in the euro is diminishing. Thus the exit of Greece from the euro or even the breakdown of the single currency has become a hypothesis discussed more frequently among economists, politicians, central bankers and businessmen. The last section of the work focuses on what’s wrong in the governance of the euro and examines the institutional aspects and the economic policy issues suggesting that the European integration serves to ensure the European citizens independence and protect their historical freedom, but also to influence and thus affect the choices from which may depend the future prosperity of European nations involved.
    Keywords: euro; crisis of governance; European integration; European institutions; economic policies
    JEL: F15 F34 F43 F33 O52 F36
    Date: 2012–01
  22. By: Paolo Gelain; Kevin J. Lansing; Caterina Mendicino
    Abstract: Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many developed countries over the past decade. We introduce excess volatility into an otherwise standard DSGE model by allowing a fraction of households to depart from fully-rational expectations. Specifically, we show that the introduction of simple moving-average forecast rules for a subset of households can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank’s interest rate rule, the imposition of more restrictive loan-to-value ratios, and the use of a modified collateral constraint that takes into account the borrower’s loan-to-income ratio. Of these, we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy. We find that while an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.
    Keywords: Housing - Prices ; Housing - Econometric models
    Date: 2012
  23. By: Abbas Valadkhani (University of Wollongong); Sajid Anwar (The University of the Sunshine Coast); Amir Arjonandi (University of Wollongong)
    Abstract: We present a new approach to evaluate the full extent of price stickiness in credit card interest rates by modifying the existing asymmetric models so that they can be adopted for testing both the amount and adjustment asymmetries as well as the lagged dynamic inertia. Consistent with similar studies, banks behave asymmetrically in response to changes in the Reserve Bank of Australia’s (RBA) target interest rate. Rate rises are passed onto the consumer faster than rate cuts and the credit card interest rate showed a very significant degree of downward rigidity. Based on the magnitude of the pass-through parameters obtained from short-run dynamic models, rate rises had a full one-to-one and instantaneous impact on credit card interest rates. However, in absolute terms the short-run effects of rate cuts were not only less than half of the rate rises but also were delayed on average by three months.
    Keywords: Interest rates; Asymmetric behaviour; Credit cards; Australia
    JEL: E43 E58 G21
    Date: 2012
  24. By: Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université de Nice Sophia Antipolis (UNS))
    Abstract: Paul Einzig was born in 1897 in Brasov but comes to London in 1919. From 1920, he begins to write articles for scienti c reviews, especially The Economic Journal, while he contributes more regularly to The Financial News, The Financial Times or The Banker. From this period to his death in 1973, he writes also many books, on very diverse subjects but devoted for the major part to monetary analysis and international nance. This paper concentrates on two subjects recurrently developed by Paul Einzig. The rst is the analysis of forward exchange market where Einzig observes anomalies in the covered interest rates parity. These observations, in accordance with those of Keynes, initiate a long controversy - still not closed -, on the origin of these anomalies. The second subject is less technical and more fundamental: what are in practice the respective properties of the di erent possible external exchange regimes? Einzig provides all his life long historical and analytical arguments to the reader interested in this question. He observes and comments regularly and in detail the crises and failures of di erent monetary arrangements. These observations and analyzes are still useful at a time when, after many years of trust in the corner solutions (free otation and monetary unions) the international community nds necessary to elaborate adequate regulations for the Eurozone policy-mix, or to control the excessive instability of the international capital flows.
    Keywords: Paul Einzig, covered interest rates parity, Gold Exchange Standard, free flotation, Romania
    Date: 2012–05–17
  25. By: Rose, Andrew (Haas School of Business); Wieladek, Tomasz (Bank of England)
    Abstract: During the 2007-09 financial crisis, the banking sector received an extraordinary level of public support. In this empirical paper, we examine the determinants of a number of public sector interventions: government funding or central bank liquidity insurance schemes, public capital injections, and nationalisations. We use bank-level data spanning all British and foreign banks operating within the United Kingdom. We use multinomial logit regression techniques and find that a bank’s size, relative to the size of the entire banking system, typically has a large positive and non-linear effect on the probability of public sector intervention for a bank. We also use instrumental variable techniques to show that British interventions helped; there is fragile evidence that the wholesale (non-core) funding of an affected institution increased significantly following capital injection or nationalisation.
    Keywords: nationalisation; capital injection; liquidity; crisis; foreign; empirical; data; logit
    JEL: G38
    Date: 2012–08–21
  26. By: Andrew Smith
    Keywords: Fractional reserve banking, financial crises, costs of banking crises
    JEL: D12 D31 I32
    Date: 2012–06
  27. By: Fernando Alvarez (University of Chicago and NBER); Francesco Lippi (University of Sassari and EIEF); Luigi Paciello (EIEF)
    Abstract: We study a sticky price model in which prices respond sluggishly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). In these set-ups firms change prices only when they gather the relevant information. We extend their analysis to the case of random transitory variation in the firm’s observation cost. We characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive observations of a firm. We show how to aggregate a continuum of those distributions to characterize the cross-sectional distribution of the times until the next adjustment, an object that is key to characterize the response of the economy to aggregate shocks. While deriving this result, we comment on some incorrect interpretation that appear in the literature about this aggregation results. Finally, we show analytically how the real effect of a monetary shock depends on the mean and the variance of the times between consecutive observations. We conclude that variation in observation cost has a modest effect on the aggregate response of the economy to a monetary shock.
    Date: 2012
  28. By: Rubén Albeiro Loaiza Maya; Luis Fernando Melo Velandia
    Abstract: This study implements a regular vine copula methodology to evaluate the level of contagion among the exchange rates of six Latin American countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru) from June 2005 to April 2012. We measure contagion in terms of tail dependence coefficients, following Fratzscher’s [1999] definition of contagion as interdependence. Our results indicate that these countries are divided into two blocs. The first bloc consists of Brazil, Colombia, Chile and Mexico, whose exchange rates exhibit the largest dependence coefficients, and the second bloc consists of Argentina and Peru, whose exchange rate dependence coefficients with other Latin American countries are low. We also found that most of the Latin American exchange rate pairs exhibit asymmetric behaviors characterized by non-significant upper tail dependence and significant lower tail dependence. These results imply that there exists contagion in Latin American exchange rates in periods of large appreciations
    Date: 2012–08–23

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