nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒09‒30
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The Elusive Promise of Independent Central Banking By Marvin Goodfriend
  2. The use of the Eurosystem's monetary policy instruments and operational framework since 2009 By Fabian Eser; Marta; Stefano Iacobelli; Marc Rubens
  3. The Bank of Amsterdam through the lens of monetary competition By Stephen Quinn; William Roberds
  4. Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter? By Nidhaleddine Ben Cheikh
  5. The Macroeconomic Effects of Interest on Reserves By Peter N. Ireland
  6. Should Canadian Monetary Policy Respond to Asset Prices? Evidence from a Structural Model. By Daniel Komlan Fiodendji
  7. Deriving the Taylor Principle when the Central Bank Supplies Money By Davies, Ceri; Gillman, Max; Kejak, Michal
  8. International channels of the Fed’s unconventional monetary policy By Michael D. Bauer; Christopher J. Neely
  9. The Case For Temporary Inflation in the Eurozone By Schmitt-Grohé, Stephanie; Uribe, Martín
  10. Demographics, Redistribution, and Optimal Inflation By James Bullard; Carlos Garriga; Christopher J. Waller
  11. Monetary policy with heterogeneous agents By Nils Gornemann; Keith Kuester; Makoto Nakajima
  12. The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria By Christoph Himmels; Tatiana Kirsanova
  13. Federal Reserve liquidity provision during the financial crisis of 2007-2009 By Michael J. Fleming
  14. Comment on "Taylor rule exchange rate forecasting during the financial crisis" By Michael W. McCracken
  15. Banking in the Lagos-Wright Monetary Economy By KOBAYASHI Keiichiro
  16. Revisiting the effective exchange rates of the Euro By Martin Schmitz; Maarten De Clercq; Michael Fidora; Bernadette Lauro; Cristina Pinheiro
  17. The negotiations which led to the creation of the European Monetary System thirty years ago can shed light on the Eurozone’s current crisis. By Mourlon-Druol, Emmanuel
  18. The interplay of economic reforms and monetary policy: the case of the Euro area By Francesco Drudi; Alain Durré; Francesco Paolo Mongelli
  19. Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable? By Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
  20. "The Common Error of Common Sense: An Essential Rectification of the Accounting Approach" By Egmont Kakarot-Handtke
  21. Balance Sheet Channel of Monetary Policy and Economic Growth under Fiscal Dominance: Evidence from Pakistan By Shabbir, Safia
  22. New Measures of the Trilemma Hypothesis: Implications for Asia By Ito, Hiro; Kawai, Masahiro
  23. Markets and investors need to understand the Greco-German poker game, with both sides playing to protect the single currency. By Price, Edward
  24. On the Time Inconsistency of Optimal Monetary and Fiscal Policies With Many Consumer Goods By Begoña Dominguez; Pedro Gomis-Porqueras
  25. Monetary Commitment and Structural Reforms: A Dynamic Panel Analysis for Transition Economies By Belke, Ansgar; Vogel, Lukas
  26. If the Eurozone pursues greater integration and common financial policies, then the Euro will be the next global reserve currency. By Görlach, Alexander
  27. To stabilize the Eurozone, the ECB must set aside its fears and start buying governments’ bonds. By de Grauwe, Paul
  28. History, gravity and international finance By Livia Chiţu; Barry Eichengreen; Arnaud Mehl
  29. How avoiding overreaction to public information? Some insights on central bank communication practices By Emna Trabelsi
  30. Inflation forecasting using dynamic factor analysis. SAS 4GL programming approach By Adam Jêdrzejczyk

  1. By: Marvin Goodfriend (Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail:
    Abstract: Independent central banking is reviewed as it emerged first under the gold standard and later with an inconvertible paper money. Monetary and credit policy are compared and contrasted as practiced by the 19th century Bank of England and the Federal Reserve. The lesson is that wide operational and financial independence given to monetary and credit policy in the public interest subjects the central bank to incentives detrimental for macroeconomic and financial stability. An independent central bank needs the double discipline of a priority for price stability and bounds on expansive credit initiatives to secure its promise for stabilization policy.
    Keywords: Bank of England, central bank independence, credit turmoil of 2007-8, Federal Reserve, Great Inflation, lender of last resort, monetary policy
    JEL: E3 E4 E5 E6
    Date: 2012–09
  2. By: Fabian Eser (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marta (Banco de España, C/Alcalá, 48, 28014 Madrid, Spain.); Stefano Iacobelli (Banca d’Italia, Via Nazionale, 91, 00184 Roma, Italy.); Marc Rubens (National Bank of Belgium, Boulevard de Berlaimont 14, 1000 Brussels, Belgium.)
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework from the first quarter of 2009 until the second quarter 2012. The paper discusses in detail, from a liquidity management perspective, the standard and non-standard monetary policy measures taken over this period. The paper reviews the evolution of the Eurosystem balance sheet, participation in tender operations, the outright purchase programmes, patterns of reserve fulfilment, recourse to standing facilities as well as the steering of money market interest rates. JEL Classification: D02, E43, E58, E65
    Keywords: Monetary policy implementation, central bank operational framework, central bank liquidity management, non-standard monetary policy measures
    Date: 2012–08
  3. By: Stephen Quinn; William Roberds
    Abstract: In 1683 the Bank of Amsterdam introduced a form of fiat money that successfully competed with the coinage of the time. We argue that the principal motive for this monetary innovation was the uncertain value of coins circulating within the Dutch Republic. The Bank's fiat money regime persisted until the downfall of the Dutch Republic in 1795 and incorporated modern features such as gross settlement of financial obligations, open market operations, central bank repurchase agreements (the equivalent thereof), and emergency liquidity facilities.
    Date: 2012
  4. By: Nidhaleddine Ben Cheikh (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen Basse-Normandie)
    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
    Date: 2012–09–10
  5. By: Peter N. Ireland
    Abstract: This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.
    JEL: E31 E32 E51 E52 E58
    Date: 2012–09
  6. By: Daniel Komlan Fiodendji (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario)
    Abstract: Although the Bank of Canada admits asset prices are considered in its policy deliberations because of their effects on inflation or output gap, the Bank of Canada denies trying to stabilize asset prices around fundamental values. However, since the start of the Bank of Canada we have seen a boom as well as a bust in the stock market. Are we to believe that the Bank of Canada did not react to these stock market fluctuations, apart from their impact consequences on economy? We investigate this issue by using a structural model based on the New Keynesian framework that is augmented by a stock market variable. We use an econometric method that allows us to distinguish the direct effect of stock prices on Bank of Canada policy rates from indirect effects via inflation or GDP. Our results suggest that stock market stabilization plays a larger role in Bank of Canada interest rate decisions than it is willing to admit. Furthermore, these results should give new relevant insights into the influence of stock market index prices on monetary policy in Canada and should provide relevant insights regarding the opportunities and limitations of incorporating financial indicators in monetary policy decision making. They should give financial market participants, such as analysts, bankers and traders, a better understanding of the impact of stock market index prices on the Bank of Canada policy. The results imply that the preferences of the monetary authority have changed between the different subperiods. In particular, the parameter associated with the implicit target of inflation has been reduced significantly. The findings suggest that the introduction of inflation targeting in Canada was accompanied by a fundamental change in the objectives of monetary policy, not only with respect to the average target, but also in terms of precautions taken to keep inflation in check in the face of uncertainty about the economy.
    Keywords: Asset Prices, Bank of Canada, Structural Model, Inflation Target, Preferences, Interest Rate,Monetary Policy
    JEL: E44 E52 E58 E61
    Date: 2012
  7. By: Davies, Ceri; Gillman, Max (Cardiff Business School); Kejak, Michal
    Abstract: The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium “Taylor rule”. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a ‘Taylor principle’ sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy’s underlying structural parameters.
    Keywords: Taylor rule; velocity; forward-looking; misspecification bias
    JEL: E13 E31 E43 E52
    Date: 2012–08
  8. By: Michael D. Bauer; Christopher J. Neely
    Abstract: Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling effects for any country. Our preferred bias-corrected model implies large signaling effects for Canada and the United States. The idea that LSAP announcements signal information about Canadian rates is intuitively attractive because conventional US monetary policy shocks strongly predict Canadian rates.
    Keywords: Monetary policy ; Bonds ; International finance
    Date: 2012
  9. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: Since the onset of the great recession in peripheral Europe, nominal hourly wages have not fallen much from the high levels they had reached during the boom years in spite of widespread increases in unemployment. This observation evokes a well-known narrative in which nominal downward wage rigidity is at the center of the current unemployment problem. We embed downward nominal wage rigidity into a small open economy with tradable and nontradable goods and a fixed exchange-rate regime. In this model, negative external shocks cause involuntary unemployment. We analyze a number of national and supranational policy options for alleviating the unemployment problem caused by the combination of downward nominal wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a battery of domestic policies that could be effective in solving the unemployment problem, it is unlikely that a solution will come from within national borders. This leaves supranational monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full employment in peripheral Europe could be restored by raising the Euro-area annual rate of inflation to about 4 percent for the next five years.
    Keywords: currency pegs; downward wage rigidity; inflation; monetary union
    JEL: E31 E62 F41
    Date: 2012–09
  10. By: James Bullard (President and Chief Executive Officer, Federal Reserve Bank of St. Louis); Carlos Garriga (Research Officer, Federal Reserve Bank of St. Louis); Christopher J. Waller (Senior Vice President and Director of Research, Federal Reserve Bank of St. Louis (E-mail:
    Abstract: We study the interaction between population demographics, the desire for redistribution in the economy, and the optimal inflation rate in a deterministic economy with capital. The intergenerational redistribution tension is intrinsic in the general equilibrium life-cycle models we use. Young cohorts do not initially have any assets and wages are the main source of income; they prefer relatively low real interest rates, relatively high wages, and relatively high rates of inflation. Older generations work less and prefer higher rates of return from their savings, relatively low wages, and relatively low inflation. In the absence of intergenerational redistribution via lump-sum taxes and transfers, the constrained efficient competitive equilibrium entails optimal distortions on relative prices. We allow the planner to use inflation to try to achieve the optimal distortions. In the economy changes in the population structure are interpreted as the ability of a particular cohort to influence the redistributive policy. When the old have more influence on the redistributive policy, the economy has a relatively low steady state level of capital and a relatively low steady state rate of inflation. The opposite happens as young cohorts have more control of policy. These results suggest that aging population structures like those in Japan may contribute to observed low rates of inflation or even deflation.
    Keywords: monetary policy, inflation bias, deflation, central bank design
    JEL: E4 E5 D7
    Date: 2012–09
  11. By: Nils Gornemann; Keith Kuester; Makoto Nakajima
    Abstract: We build a New Keynesian model in which heterogeneous workers differ with regard to their employment status due to search and matching frictions in the labor market, their potential labor income, and their amount of savings. We use this laboratory to quantitatively assess who stands to win or lose from unanticipated monetary accommodation and who benefits most from systematic monetary stabilization policy. We find substantial redistribution effects of monetary policy shocks; a contractionary monetary policy shock increases income and welfare of the wealthiest 5 percent, while the remaining 95 percent experience lower income and welfare. Consequently, the negative effect of a contractionary monetary policy shock to social welfare is larger if heterogeneity is taken into account.
    Keywords: Monetary policy ; Unemployment
    Date: 2012
  12. By: Christoph Himmels; Tatiana Kirsanova
    Date: 2012
  13. By: Michael J. Fleming
    Abstract: This paper examines the Federal Reserve's unprecedented liquidity provision during the financial crisis of 2007-2009. It first reviews how the Fed provides liquidity in normal times. It then explains how the Fed's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity. The paper then assesses the growing empirical literature on the effectiveness of the facilities and provides insights as to where further research is warranted.
    Keywords: Financial crises ; Bank liquidity ; Troubled Asset Relief Program ; Liquidity (Economics) ; Lenders of last resort
    Date: 2012
  14. By: Michael W. McCracken
    Abstract: In this note we discuss the paper on exchange rate forecasting by Molodtsova> and Papell (2012). In particular we discuss issues related to forecast origins and forecast> horizons when higher frequency exchange rate movements are predicted using lower> frequency quarterly macroaggregates.
    Keywords: Foreign exchange rates ; Taylor's rule
    Date: 2012
  15. By: KOBAYASHI Keiichiro
    Abstract: We introduce banks in a monetary economy and analyze the effect of monetary friction on the banking sector. The basic model is a cash-in-advance economy which is a simplified version of Lagos and Wright's (2005) model. We introduce the banks using Diamond and Rajan (2001) in this economy: Bankers can produce goods more efficiently than depositors but cannot pre-commit to the use of human capital on behalf of the latter. Demand deposit contracts work as a commitment device for bankers, while leaving banks susceptible to bank runs. We show that as the inflation rate increases, the size of the banking sector expands, and the probability of bank runs occurring rises.
    Date: 2012–09
  16. By: Martin Schmitz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Maarten De Clercq (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Bernadette Lauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Cristina Pinheiro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB’s techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area. JEL Classification: F10, F30, F31, F40
    Keywords: competitiveness, effective exchange rate (EER), harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), trade weights
    Date: 2012–06
  17. By: Mourlon-Druol, Emmanuel
    Abstract: The Euro’s roots can be traced back to the creation of the European Monetary System (EMS) in 1979. Emmanuel Mourlon-Druol argues that the negotiations that led to the establishment of the EMS can shed light on the current travails of the Eurozone, and that there are some striking similarities with recent Eurozone summits. Looking at the EMS negotiations now furthers our understanding of European integration and the evolution of the world monetary system.
    Date: 2012–07–17
  18. By: Francesco Drudi (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Alain Durré (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany; IESEG-School of Management (Lille Catholic University) and LEM-CNRS (UMR 8179).); Francesco Paolo Mongelli (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany; Goethe University Frankfurt.)
    Abstract: The world has been struck by a mutating systemic financial crisis that is unprecedented in terms of financial losses and fiscal costs, geographic reach, and speed and synchronisation. The crisis from August 2007 to date can be divided into three main phases: the financial turmoil from August 2007 to the collapse of Lehman Brothers; the global financial crisis from September 2008 until spring 2010; and the euro area sovereign debt crisis from spring 2010 to the current period. While each phase has brought significant challenges, the current sovereign debt crisis has been the most critical stage for the euro area. It has brought unprecedented challenges for the monetary union and triggered extraordinary adjustments in both monetary policy and institutional arrangements at the euro area level. The purpose of this article is to outline the features of each crisis phase, to describe the actions taken by the European Central Bank (ECB) during each phase and to explain the rationale for such measures. It also discusses the need to strengthen further the economic union in order to guarantee the sustainability of the monetary union of the euro area. In this respect, it is argued that the recent institutional adjustments made at the EU level would have been necessary independently of the financial crisis. JEL Classification: D78, E52, E58, G01, H12
    Keywords: Monetary policy decision-making, Eurosystem, financial crisis, financial and institutional reforms
    Date: 2012–09
  19. By: Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
    Abstract: This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole—compared to other SSA countries—as well as in each of its member countries.
    Keywords: Equilibrium exchange rates, CFA zone, Optimum Currency Areas, currency union sustainability
    JEL: F31 F33 C23
    Date: 2012
  20. By: Egmont Kakarot-Handtke
    Abstract: This paper takes the explanatory superiority of the integrated monetary approach for granted. It will be demonstrated that the accounting approach could do even better, provided it frees itself from theoretically ill-founded notions like GDP and other artifacts of the equilibrium approach. National accounting as such does not provide a model of the economy but is, rather, the numerical reflex of the underlying theory. It is this theory that will be scrutinized, rectified, and ultimately replaced in what follows. The formal point of reference is "the integrated approach to credit, money, income, production and wealth" of Wynne Godley and Marc Lavoie.
    Keywords: New Framework of Concepts; Structure-Centric; Axiom Set, Primacy of Theory; Income; Profit; Distributed Profit; Money; Flow; Residual; Transaction Matrix; General Complementarity
    JEL: B41 E01
    Date: 2012–09
  21. By: Shabbir, Safia
    Abstract: Using micro data on non-financial listed companies in Pakistan, over the period of 2000-2010, this paper emphasizes over the impact of monetary policy on economic growth through balance sheet channel. At first step, monetary tightening deteriorates the net worth of the firms and leads to cash flow squeeze; of which later affects the economic growth. We find this impact to last for three years over the balance sheets of the firms. Since, industrial sector drives the economic growth; we forecast corporate profitability at the second step. Empirical investigation shows that corporate profitability reverts to its mean at the rate of 25 percent. During Peak, mean reversion is 30 percent while it is 19 percent during trough implying that recession stays relatively longer and economic revival is slow during recessionary phase.
    Keywords: Monetary policy; monetary transmission; balance sheet channel; forecasting; profitability
    JEL: E52 E50 H32
    Date: 2012–09–14
  22. By: Ito, Hiro (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: The authors develop a new set of indexes of exchange rate stability, monetary policy independence, and financial market openness as the metrics for the trilemma hypothesis. In their exploration, they take a different and more nuanced approach than the previous indexes developed by Aizenman, Chinn, and Ito (2008). They show that the new indexes add up to the value two, supporting the trilemma hypothesis. They locate their sample economies’ policy mixes in the famous trilemma triangle—a useful and intuitive way to illustrate the state and evolution of policy mixes. They also examine if the persistent deviation of the sum of the three indexes from the value two indicates an unsustainable policy mix and therefore needs to be corrected by economic disruptions such as economic and financial crises.
    Keywords: trilemma hypothesis; trilemma triangle; exchange rate stability; monetary policy independence; financial market openness; asia
    JEL: F15 F21 F31 F36 F41 O24
    Date: 2012–09–21
  23. By: Price, Edward
    Abstract: Edward Price argues that the recent Greek election results show that the Euro is more than a currency; it is an identity. The Germans are dealing with two opposing dilemmas: fighting to save the Euro and fighting against inflation. In the end however, he argues, we should bet on Germany fighting to save the Euro.
    Date: 2012–06–28
  24. By: Begoña Dominguez; Pedro Gomis-Porqueras
    Abstract: This paper studies optimal monetary and fiscal policies in an economy à la Lucas and Stokey (1983) and Lagos and Wright (2005) with multiple cash and credit goods. We show that optimal policies are in general time inconsistent due to insufficient number of instruments to influence future government decisions. There are two important cases where time consistency can be restored. First, if taxes in the decentralized anonymous markets are not available, the multipliers on the decentralization constraints can be utilized as additional instruments to ensure time consistency. Second, if taxes in decentralized markets are available, time consistency arises when the different cash goods satisfy the conditions necessary for optimal uniform taxation.
    Keywords: optimal policy; time consistency; taxation; money; inflation; search.
    JEL: C70 E40 E61 E62 H21
    Date: 2012–09
  25. By: Belke, Ansgar (University of Duisburg-Essen); Vogel, Lukas (European Commission)
    Abstract: This paper examines the contemporaneous relationship between the exchange rate regime and structural economic reforms for a sample of CEEC/CIS transition countries. We investigate empirically whether structural reforms are complements or substitutes for monetary commitment in the attempt to improve macroeconomic performance. Both EBRD and EFW data suggest a negative relationship between flexible exchange rate arrangements and external liberalization. Another finding from the EFW sample is that economic liberalisation has tended to be stronger under better macroeconomic fundamentals, suggesting that the impact of good macroeconomic conditions as facilitating structural reforms outweighs countervailing effects in the sense of lower reform pressure.
    Keywords: political economy of reform, panel data, structural reform, exchange rate regime, transition countries
    JEL: D78 E52 E61 F36
    Date: 2012–08
  26. By: Görlach, Alexander
    Abstract: Despite the on-going crisis in the Eurozone, Alexander Görlach argues that the euro is far from dead. Instead, he says that if the Eurozone’s heads of state are willing to sacrifice some national sovereignty for more integration, it will become nothing less than the next reserve currency of the world.
    Date: 2012–07–10
  27. By: de Grauwe, Paul
    Abstract: Government bond markets in Europe remain volatile, with Spanish and Italian bond rates at near unsustainable levels. Paul De Grauwe argues that the only institution that can stabilize these markets by buying government bonds is the European Central Bank (ECB). The ECB must now overcome its risk averse nature and take advantage of its virtually infinite resources to help to successfully restore financial stability.
    Date: 2012–07–31
  28. By: Livia Chiţu (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Barry Eichengreen (University of California, Berkeley, 603 Evans Hall, Berkeley, CA 94720, USA.); Arnaud Mehl (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze persistence in patterns of bilateral financial investment using data on US investors’ holdings of foreign bonds. We document a “history effect” in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors’ foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in currencies other than the dollar. Our findings point to history and path dependence as key sources of financial market segmentation. JEL Classification: F30, N20
    Keywords: Gravity model, international finance, geography of asset holdings, persistence, hysteresis, international role of the dollar
    Date: 2012–09
  29. By: Emna Trabelsi
    Abstract: It is argued in literature that transparency may be detrimental to welfare. Morris and Shin (2002) suggest reducing the precision of public information or withholding it. The latter seems to be unrealistic. Thus, the issue is not whether central bank should disclose or not its information, but how the central bank should disclose it. We consider a static coordination game in which the private sector receives n semi-public information plus their specific information, and we analyse the impact on the private sector's welfare. The paper consists of three parts: (1) By making assumption that no costs are attached to the provision of private information, we determined the conditions under which the central bank faces a trade-o_ between enhancing commonality and the use of more precise, but fragmented information. Such intermediate transparent strategies may prevent the bad side of public information from overpowering the good side of it. (2) The latter result is found even in presence of positive externalities. (3) Introducing costs to that framework in equilibrium shows that strategic substitutability between semi-public and private precisions is a very likely outcome.
    Keywords: Transparency, Central bank Communication, semi public information, private information, static coordination game.
    JEL: D82 D83 E58
    Date: 2012–09–14
  30. By: Adam Jêdrzejczyk (Warsaw School of Economics)
    Abstract: The purpose of this article is to introduce an original macro code written in SAS 4GL. This macro is used to automate the process of forecasting with dynamic factor analysis. Automation of the process helps to save significant amounts of time and effort for the researcher. It also enables to compare different model specifications directly and, hence, to make conclusions that would be imperceptible without such automation, which is shown on the empirical study example.
    Keywords: statistical programming, forecasting, factor models, inflation
    JEL: C22 C53 C80 E31
    Date: 2012–09–16

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