nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒09‒22
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The fiscal implications of a banking union By Jean Pisani-Ferry; Guntram B. Wolff
  2. Factor Model Forecasts of Exchange Rates By Charles Engel; Nelson C. Mark; Kenneth D. West
  3. The impact of the LCR on the interbank money market By Bonner, Clemens; Eijffinger, Sylvester C W
  4. Uncertainty and Disagreement in Forecasting Inflation: Evidence from the Laboratory (Revised version of CentER DP 2011-053) By Pfajfar, D.; Zakelj, B.
  5. Monetary Policy in Resource-Rich Developing Economies By Ruslan Aliyev
  6. Required Reserves as a Credit Policy Tool By Yasin Mimir; Enes Sunel; Temel Taskin
  7. Nonlinear mechanism of the exchange rate pass-through: Does business cycle matter? By Ben Cheikh, Nidhaleddine
  8. In Search of an Optimal Strategy for Yuan’s Real Revaluation By Dai, Meixing
  9. Essays on globalization, monetary policy and financial crisis'. By Qian, Z.
  10. Tobinfs q as a transmission channel for nontraditional monetary policy: The case of Japan By Yuzo Honda; Minoru Tachibana
  11. Financial innovation, macroeconomic volatility and the great moderation By Zaghini, Andrea; Bencivelli, Lorenzo
  12. Working Paper 152 - Dynamics of Inflation in Uganda By AfDB
  13. Working Paper 151 - The Dynamics of Inflation in Ethiopia and Kenya By AfDB
  14. A Survey on Time Varying Parameter Taylor Rule: A Model Modified with Interest Rate Pass Through By Ebru Yuksel; Kývýlcým Metin Ozcan; Ozan Hatipoglu
  15. Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices By Jonathan Witmer
  16. Testing the Lucas critique for the Turkish money demand function By Yıldırım, Metin; Korap, Levent
  17. Capital Controls in Brazil: Stemming a Tide with a Signal? By Jinjarak, Y; Noy, I; Zheng, H
  18. Some Reflections on the Recent Financial Crisis By Gary B. Gorton

  1. By: Jean Pisani-Ferry; Guntram B. Wolff
    Abstract: Systemic banking crises are a threat to all countries whatever their development level. They can entail major fiscal costs that can undermine the sustainability of public finances. More than anywhere else, however, a number of euro-area countries have been affected by a lethal negative feedback loop between banking and sovereign risk, followed by disintegration of the financial system, real economic fragmentation and the exposure of the European Central Bank. Recognising the systemic dimension of the problem, the Euro-Area Summit of June 2012 called for the creation of a banking union with common supervision and the possibility for the European Stability Mechanism to recapitalise banks directly. The findings of this paper were presented at the Informal ECOFIN in Nicosia on 14 September 2012.
    Date: 2012–09
  2. By: Charles Engel; Nelson C. Mark; Kenneth D. West
    Abstract: We construct factors from a cross section of exchange rates and use the idiosyncratic deviations from the factors to forecast. In a stylized data generating process, we show that such forecasts can be effective even if there is essentially no serial correlation in the univariate exchange rate processes. We apply the technique to a panel of bilateral U.S. dollar rates against 17 OECD countries. We forecast using factors, and using factors combined with any of fundamentals suggested by Taylor rule, monetary and purchasing power parity (PPP) models. For long horizon (8 and 12 quarter) forecasts, we tend to improve on the forecast of a “no change” benchmark in the late (1999-2007) but not early (1987-1998) parts of our sample.
    JEL: C53 C58 F37 G17
    Date: 2012–09
  3. By: Bonner, Clemens; Eijffinger, Sylvester C W
    Abstract: This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces a negative impact on lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.
    Keywords: Basel 3; Interbank Market; Interest Rate
    JEL: E42 E43 G21
    Date: 2012–09
  4. By: Pfajfar, D.; Zakelj, B. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper compares the behavior of subjects' uncertainty in different monetary policy environments when forecasting inflation in the laboratory. We find that inflation targeting produces lower uncertainty and higher accuracy of interval forecasts than inflation forecast targeting. We also establish several stylized facts about the behavior of individual uncertainty, aggregate distribution of forecasts, and disagreement between individuals. We find that the average confidence interval is the measure that performs best in forecasting inflation uncertainty. Subjects correctly perceive the underlying inflation uncertainty in only 60% of cases and tend to report asymmetric confidence intervals, perceiving higher uncertainty with respect to inflation increases.
    Keywords: Laboratory Experiments;Confidence Bounds;New Keynesian Model;Inflation Expectations.
    JEL: C91 C92 E37 D80
    Date: 2012
  5. By: Ruslan Aliyev
    Abstract: The economic literature acknowledges that to avoid the resource curse, resource- rich countries should restrict fiscal expansion and save a significant part of resource revenues outside the domestic economy. However, in these countries governments tend to ineffectively spend a considerable part of windfall revenues in the short run. In this research I construct a DSGE model for a small, open economy to show that if fiscal indiscipline in the form of immediate responses to foreign resource revenue changes is inevitable, then monetary policy can help improve the allocation problem. The simulation results indicate that targeting the exchange rate or price level through foreign exchange interventions by the central bank can soften the negative effects of Dutch Disease and stabilize the economy in the face of volatile natural resource revenues in the short run. I also find that a fixed exchange rate regime outperforms price level targeting by delivering higher isolation and hence less vulnerability to shocks in natural resource revenues. In contrast, if the central bank chooses to pursue a laissez faire policy, i.e., not to intervene, then the economy becomes vulnerable to shocks in foreign resource revenues and the resource curse becomes more severe.
    Keywords: monetary policy; Dutch disease; resource-rich countries; macroeconomic stabilization;
    JEL: E52 E63 F4
    Date: 2012–08
  6. By: Yasin Mimir; Enes Sunel; Temel Taskin
    Abstract: This paper conducts a quantitative investigation of the role of reserve requirements as a macroprudential policy tool. We build a monetary DSGE model with a banking sector in which (i) an agency problem between households and banks leads to endogenous capital constraints for banks in obtaining funds from households, (ii) banks are subject to time-varying reserve requirements that countercyclically respond to expected credit growth, (iii) households face cash-in-advance constraints, requiring them to hold real balances, and (iv) standard productivity and money growth shocks are two sources of aggregate uncertainty. We calibrate the model to the Turkish economy which is representative of using reserve requirements as a macroprudential policy tool recently. We also consider the impact of financial shocks that affect the net worth of financial intermediaries. We find that (i) the time-varying required reserve ratio rule countervails the negative effects of the financial accelerator mechanism triggered by adverse macroeconomic and financial shocks, (ii) in response to TFP and money growth shocks, countercyclical reserves policy reduces the volatilities of key real macroeconomic and financial variables compared to fixed reserves policy over the business cycle, and (iii) a time-varying reserve requirement policy is welfare superior to a fixed reserve requirement policy. The credit policy is most effective when the economy is hit by a financial shock. Time-varying required reserves policy reduces the intertemporal distortions created by the credit spreads at expense of generating higher inflation volatility, indicating an interesting trade-off between price stability and financial stability.
    Keywords: Banking sector, time-varying reserve requirements, macroeconomic and financial shocks
    JEL: E44 E51 G21 G28
    Date: 2012
  7. By: Ben Cheikh, Nidhaleddine
    Abstract: This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.
    Keywords: Exchange Rate Pass-Through; Inflation; Smooth Transition Regression
    JEL: E31 C22 F31
    Date: 2012–09
  8. By: Dai, Meixing
    Abstract: International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting RMB’s exchange rate. Taking into consideration of the facts that the yuan’s undervaluation is caused by an array of domestic and international factors and the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for renminbi’s gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorb external imbalances hence strengthening the foundation of China’s long-term growth.
    Keywords: Real revaluation; renminbi (RMB); foreign reserves; external imbalances; macroeconomic adjustment
    JEL: E52 F41 E61 F31
    Date: 2012–09
  9. By: Qian, Z. (Tilburg University)
    Abstract: Abstract: This thesis focuses on three interlinked topics. Chapter 2 studies the determinants of sovereign CDS spreads in Greece, Ireland, Italy, Portugal and Spain during the recent global financial crisis and European debt crisis. Chapter 3 introduces a model on the interactions between monetary policy rules and long-run financial stability. Chapter 4 studies the effect of openness on the output gap-inflation tradeoff faced by central banks.
    Date: 2012
  10. By: Yuzo Honda (Kansai University); Minoru Tachibana (Osaka Prefectural University)
    Abstract: The purpose of this paper is to provide objective statistical evidence on the effectiveness of nontraditional monetary policy. The quantitative easing monetary policy, adopted by the Bank of Japan for the period from March 2001 to March 2006, had a stimulating effect on investment and production at least through the Tobinfs q channel.
    Keywords: Quantitative easing, Stock prices, Newly issued stocks, Investment, Vector autoregression
    JEL: E51
    Date: 2012–09
  11. By: Zaghini, Andrea; Bencivelli, Lorenzo
    Abstract: In the paper we propose an assessment of the role of financial innovation in shaping US macroeconomic dynamics. We extend an existing model by Christiano, Eichenbaum and Evans which studied the transmission of monetary policy impulses to business and corporate sector financing variables just before the Great Moderation period. By investigating the properties of the model over a longer time span we show that in the later period a change in the monetary policy transmission mechanism is likely to have occurred. In particular, we argue that the role of financial innovation has significantly altered the transmission of shocks
    Keywords: Great Moderation; Monetary policy; Financial Innovation
    JEL: C32 E32 E52
    Date: 2012–09–01
  12. By: AfDB
    Date: 2012–09–10
  13. By: AfDB
    Date: 2012–09–10
  14. By: Ebru Yuksel; Kývýlcým Metin Ozcan; Ozan Hatipoglu
    Date: 2012–08
  15. By: Jonathan Witmer
    Abstract: Recent reform proposals call for an elimination of the constant net asset value (NAV) or “buck” in money market mutual funds to reduce the occurrence of runs. Outside the United States, there are several countries that have money market mutual funds with and without constant NAVs. Using daily data on individual fund flows from these countries, this paper evaluates whether the reliance on a constant NAV is associated with a higher frequency of sustained fund outflows. Preliminary evidence suggests that funds with a constant NAV are more likely to experience sustained outflows, even after controlling for country fixed effects and other factors. Moreover, these sustained outflows in constant NAV money market funds were more acute during the period of the run on the Reserve Primary fund, and were subdued after the U.S. Treasury guarantee program for money market funds was put in place. Consistent with the theory that constant NAV funds receive additional implicit support from fund sponsors, fund liquidations are less prevalent in funds with a constant NAV following periods of larger outflows.
    Keywords: Financial markets; Financial stability; Market structure and pricing
    JEL: F30 G01 G18 G20
    Date: 2012
  16. By: Yıldırım, Metin; Korap, Levent
    Abstract: This paper aims to test the prevalence of the Lucas critique by use of an applied modelling approach. The Turkish narrow money demand is chosen for investigation purposes and an extensive statistical-based econometric application has been carried out to observe whether the model in question has been exposed to the content of such a critique. The results confirm the theory to explain the behavioral foundations of aggregate monetary economics approaches and reveal that no evidence can be found in favor of the non-rejection of the Lucas critique that leads us to infer that the modelling attempt can be considered by the researcher a feedback model which is able to encompass a whole class of expectation models.
    Keywords: Money Demand; Lucas Critique; Turkish Economy;
    JEL: C32 E61 E41
    Date: 2012
  17. By: Jinjarak, Y; Noy, I; Zheng, H
    Abstract: Controls on capital inflows have been experiencing a period akin to a renaissance since the beginning of the global financial crisis in 2008, with several prominent countries choosing to impose controls; e.g., Thailand, Korea, Peru, Indonesia, and Brazil. We focus on the case of Brazil, a country that instituted five changes in its capital account regime in 2008-2011, and ask what the impacts of these policy changes were. Using the Abadie et al. (2010) synthetic control methodology, we construct counterfactuals (i.e., Brazil with no capital account policy change) for each policy change event. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls are relaxed as was done in the immediate aftermath of the Lehman bankruptcy in 2008 and in January 2011 by the newly inaugurated government of Dilma Rousseff. We hypothesize that price-based capital controls’ only perceptible effect are to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government was widely perceived as ambivalent to markets. An imposition of controls was not perceived as ‘news’ and thus had no impact. A willingness to remove controls was perceived, however, as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be.
    Keywords: Capital controls, Brazil, Economic policy,
    Date: 2012–08–22
  18. By: Gary B. Gorton
    Abstract: Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis of 2007-2008 provides the opportunity to reassess our understanding of crises. All financial crises are at root bank runs, because bank debt—of all forms—is vulnerable to sudden exit by bank debt holders. The current crisis raises issues for crisis theory. And, empirically, studying crises is challenging because of small samples and incomplete data.
    JEL: E02 E3 E30 E32 E44 G01 G1 G2 G21
    Date: 2012–09

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