nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒10‒13
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Effects of monetary policy in Romania. A VAR approach. By Popescu, Iulia Vasile
  2. Infrequent Changes of the Policy Target: Robust Optimal Monetary Policy under Ambiguity By Shin-ichi Fukuda
  3. Did The Taylor Rule Stabilize Inflation in Brazil? By Rodrigo De-Losso
  4. Commodity Prices, Monetary Policy and Inflation By José de Gregorio
  5. Questioning The Taylor Rule By Rodrigo De-Losso
  6. Successful inflation targeting in Mozambique despite vulnerability to internal and external shocks By Andersson, Per-Åke; Sjö, Bo
  7. Economic Reforms and the Indirect Role of Monetary Policy By Andrea Beccarini
  8. International policy spillovers at the zero lower bound By Haberis, Alex; Lipińska, Anna
  9. Building a financial conditions index for the euro area and selected euro area countries: what does it tell us about the crisis? By Eleni Angelopoulou; Hiona Balfoussia; Heather D. Gibson
  10. The Evolution of British Monetarism: 1968-1979 By Aled Davies
  11. Working Paper 152 - Dynamics of Inflation in Uganda By AfDB
  12. Qualitative Easing: How it Works and Why it Matters By Farmer, Roger E A
  13. Europe's single supervisory mechanism and the long journey towards banking union By Nicolas Véron
  14. Working Paper 151 - The Dynamics of Inflation in Ethiopia and Kenya By AfDB
  15. House prices, credit growth, and excess volatility: Implications for monetary and macroprudential policy By Paolo Gelain; Kevin J. Lansing; Caterina Mendicino
  16. Dormant Shocks and Fiscal Virtue By Leonardo Melosi; Francesco Bianchi
  17. Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy By Luis Felipe Céspedes; Roberto Chang; Andrés Velasco
  18. The role of external and country specific factors in Hungarian inflation developments By Balázs Krusper
  19. Geographies of Monetary Economy and the European economic crisis By Jussi Ahokas
  20. Building a stable and equitable global monetary system By Bilge Erten; José Antonio Ocampo
  21. Great expectations? Evidence from Colombia’s exchange rate survey By Juan José Echavarría; Mauricio Villamizar
  22. What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market? By Jackman, Mahalia
  23. Financial Conditions and the Money-Output Relationship in Canada By Maral Kichian
  24. Optimum Currency Areas within the US and Canada a Data Analysis Approach By Chrysanthidou, Efthimia; Gogas, Periklis; Papadimitriou, Theophilos
  25. A note on forecasting emerging market exchange rates: Evidence of anti-herding By Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
  26. Gold as an Infl ation Hedge in a Time-Varying Coeffi cient Framework By Joscha Beckmann; Robert Czudaj
  27. The effects of Monetary Policy shocks across the Greek Regions By Ageliki Anagnostou; Stephanos Papadamou
  28. Inflation, Inflation Uncertainty and Output Growth: Recent Evidence from ASEAN-5 Countries By Siti Hamizah Mohd; Ahmad Zubaidi Baharumshah; Stilianos Fountas
  29. Banking systems, central banks and international reserve accumulation in East Asian economies By Shrestha, Prakash Kumar
  30. Explaining Shifts in Exchange Rate Regimes By Graham Bird; Alex Mandilaras; Helen Popper

  1. By: Popescu, Iulia Vasile
    Abstract: Understanding how monetary policy decisions affect inflation and other economic variables is particularly important. In this paper we consider the implications of monetary policy under inflation targeting regime in Romania based on a vector autoregressive method including recursive VAR and structural VAR (SVAR). Therefore, we focus on assessing the extent and persistence of monetary policy effects on gross domestic product (GDP), price level, extended monetary aggregate (M3) and exchange rate. The main results of VAR analysis reflect a negative response of consumer price index (CPI), GDP and M3 and positive nominal exchange rate behaviour to a monetary policy shock, and also a limited impact of a short-term interest rate shock in explaining the consumer prices, production and exchange rate fluctuations.
    Keywords: monetary policy; transmission mechanism; vector autoregressions
    JEL: C3 E31 E5
    Date: 2012–08–15
  2. By: Shin-ichi Fukuda (Graduate School of Economics, The University of Tokyo, Tokyo)
    Abstract: In many countries, the monetary policy instrument sometimes remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank's policy instrument remains unchanged. In the analysis, we explore how uncertainty on the private agents' expectations affects robust optimal monetary policy. We apply the Choquet expected decision theory to a new Keynesian model. A main result is that the policymaker may frequently keep the interest rate unchanged even when exogenous shocks change output gaps and inflation rates. This happens because a change of the interest rate increases additional uncertainty for the policymaker. To the extent that the policymaker has uncertainty aversion, it can therefore be optimal for the policymaker to maintain an unchanged policy stance for some significant periods and to make discontinuous changes of the target rate. Our analysis departs from previous studies in that we determine an optimal monetary policy rule that allows time-variant feedback parameters in a Taylor rule. We show that if the policymaker has small uncertainty aversion, the calibrated optimal stop-go policy rule can predict actual target rates of FRB and ECB reasonably well.
    Date: 2012–09
  3. By: Rodrigo De-Losso
    Abstract: This paper characterizes the monetary policy in Brazil through a forward-looking Taylor-rule-type reaction function before and after the Real plan, which stabilized inflation in July 1994. The results show that the interest rate response to inflation was greater than one-to-one before stabilization and smaller than that afterwards, hence inverting the Taylor’s principle. Several robustness checks, using mainly distinct proxies for output, output gap and data frequency strongly confirm the findings.
    Keywords: Taylor Rule, inflation targeting, inflation stability
    JEL: C32 C51 E52 E58
    Date: 2012–09–16
  4. By: José de Gregorio
    Abstract: During the second half of the 2000s, the world experienced a rapid and substantial rise in commodity prices. This shock posed complex challenges for monetary policy, in particular due to the significant increase in food and energy prices, and the repercussions they had on aggregate inflation measures. This paper discusses the role of commodity price shocks in monetary policy in the light of recent episodes of such shocks. It begins by discussing whether monetary policy should target core or headline inflation, and what should be the role of commodity price shocks in setting interest rates. It is argued that there are good reasons to focus on headline inflation, as most central banks actually do. Although core inflation provides a good indicator of underlying inflationary pressures, the evolution of commodity prices should not be overlooked, because of pervasive second-round effects. This paper reviews the evidence on the rise of inflation across countries and reports that food inflation, more than energy inflation, has relevant propagation effects on core inflation. This finding is particularly important in emerging market economies, where the share of food in the consumer basket is significant. The evidence also shows that countries that had lower inflation during the run up of commodity prices before the global crisis had more inflation in the subsequent rise after the global crisis, suggesting that part of the pre-crisis inflationary success may have been due to repressed inflation. This paper also discusses other factors that may explain different inflationary performances across countries.
    Date: 2012–07
  5. By: Rodrigo De-Losso
    Abstract: This article estimates a forward-looking Taylor-rule-type reaction function exclusively during Greenspan’s tenure and shows a considerable loss in both magnitude and significance of the inflation coefficient compared with the extended sample that otherwise includes Volcker’s tenure. That fact indicates that the interest rate pushing up in the early 1980s drives the coefficient towards being greater than one, when in fact it varies. A key variable in determining its size is the output gap, which is unobservable. Therefore, the paper approaches the Kalman filter to estimate the Taylor rule reaction function jointly with output gap, in order to characterize the monetary policy in the U.S. from 1960 to 2005. The results show that the point estimation of inflation is overall smaller than one-toone when the sample is split into either before and after Volcker’s appointment as Federal Reserve chairman or before and after Greenspan’s tenure. When the model allows for a drifting inflation coefficient, then the estimate is barely greater than one and often negative. Such a dynamics matches up with Greenspan’s claim that monetary policy is discretionary and that the Federal Reserve does not follow any simple rule. Consequently, an inflation coefficient inferior to one may be associated with monetary stability, disrupting the Taylor’s principle.
    Keywords: Taylor rule, Kalman Filter, Hidden variables, GMM
    JEL: E52 C32 C51
    Date: 2012–09–17
  6. By: Andersson, Per-Åke (Department of Economics, School of Business, Economics and Law, Göteborg University); Sjö, Bo (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Inflation has proven to be an important obstacle to successful economic adjustment in many countries. Despite both internal and external shocks to the economy, Mozambique has succeeded in controlling the inflation to gain high economic growth. This paper provides an econometric analysis of the dynamics behind the experience of Mozambique. Inflation is driven by both a purchasing power parity relation with South Africa and monetary factors. The result indicates that the country is using a crawling peg exchange rate regime.
    Keywords: inflation; purchasing power parity; money market; VAR model
    JEL: C32 E31 E50
    Date: 2012–10–02
  7. By: Andrea Beccarini
    Abstract: Due to pressure from some lobbies, the government is unwilling to perform structural reforms. The probability of its reelection depends, however, on a positive business cycle. The central bank may create surprise deflation even though it maximizes the public’s utility function and even if it faces a rational market. This may explain why the ECB, but not the US FED, is found to be unaffected by the inflation bias.
    Keywords: Political Business Cycles, Time Inconsistency of Monetary Policy
    JEL: E32 E58
    Date: 2012–10
  8. By: Haberis, Alex (Bank of England); Lipińska, Anna (Federal Reserve Board)
    Abstract: In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (‘home’) in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker’s trade-off between stabilising inflation and the output gap when home and foreign goods are close substitutes. This reflects the fact that looser foreign policy leads to a relatively more appreciated home real exchange rate, which induces large expenditure switching away from home goods when goods are highly substitutable – just at a time (at the ZLB) when home policy is trying to boost demand for home goods. When goods are not close substitutes the home policymaker’s ability to stabilise the economy benefits from more stimulatory foreign policy.
    Keywords: Small open economy; Policy trade-offs; Trade structure; zero lower bound
    JEL: E58 F41 F42
    Date: 2012–10–07
  9. By: Eleni Angelopoulou (Bank of Greece); Hiona Balfoussia (Bank of Greece); Heather D. Gibson (Bank of Greece)
    Abstract: In this paper we construct Financial Conditions Indices (FCIs) for the euro area, for the period 2003 to 2011, using a wide range of prices, quantities, spreads and survey data, grounded in the theoretical literature. One FCI includes monetary policy variables, while two versions of the FCI without monetary policy are also constructed. This enables us to study the impact of monetary policy on financial conditions – indeed, overall, we find evidence of monetary policy ‘leaning against the wind’. The FCIs constructed fit in well with a narrative of financial conditions since the creation of the monetary union. FCIs for individual euro area countries are also provided, with a view to comparing financial conditions in core and periphery countries. There is evidence of significant divergence both before and during the crisis, which becomes less pronounced when monetary policy variables are included in the FCI. However, the impact of monetary policy on financial conditions appears not to be entirely symmetric across the euro area.
    Keywords: fiscal policy; public debt; financial market; crisis; credit
    JEL: E61 E62 H61 H62 H63 E32
    Date: 2012–07
  10. By: Aled Davies (Mansfield College, University of Oxford)
    Abstract: How far were monetary targets imposed on the post-1974 Labour Government by international and domestic financial markets enthused with the doctrines of ‘monetarism’? The following paper attempts to answer this question by demonstrating the complex and contingent nature of the ascent of British ‘monetarism’ after 1968. It describes the post-devaluation valorisation of the ‘money supply’ which led investors to realign their expectations with the behaviour of the monetary aggregates. The collapse of the global fixed-exchange rate regime, coupled with vast domestic inflationary pressures after 1973, determined that investors came to employ the ‘money supply’ as a convenient new measure with which to assess the ‘soundness’ of British economic management. The critical juncture of the 1976 Sterling crisis forced the Labour Government into a reluctant adoption of monetary targets as part of a desperate attempt to regain market confidence. The result was to impose significant constraints on the Government’s economic policymaking freedom, as attempts were made to retain favourable money supply figures exposed to the short-term volatility of increasingly-globalised and highly-capitalized financial markets.
    Date: 2012–10–02
  11. By: AfDB
    Date: 2012–09–10
  12. By: Farmer, Roger E A
    Abstract: This paper is about the effectiveness of qualitative easing; a government policy that is designed to mitigate risk through central bank purchases of privately held risky assets and their replacement by government debt, with a return that is guaranteed by the taxpayer. Policies of this kind have recently been carried out by national central banks, backed by implicit guarantees from national treasuries. I construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where agents are unable to participate in financial markets that open before they are born. I show that a change in the asset composition of the central bank’s balance sheet will change equilibrium asset prices. Further, I prove that a policy in which the central bank stabilizes fluctuations in the stock market is Pareto improving and is costless to implement.
    Keywords: fiscal policy; monetary policy; qualitative easing
    JEL: E0 E5 E52 E62
    Date: 2012–09
  13. By: Nicolas Véron
    Abstract: Problems in the banking system are at the core of the current crisis. The establishment of a banking union is a necessary (though not sufficient) condition for eventual crisis resolution that respects the integrity of the euro. The European Commissionâ??s proposal for the establishment of a Single Supervisory Mechanism and related reform of the European Banking Authority (EBA) do not and cannot create a fully-fledged banking union, but represent a broadly adequate step on the basis of the leadersâ?? declaration of 29 June 2012 and of the decision to use Article 127(6) of the treaty as legal basis. The proposal rightly endows the European Central Bank (ECB) with broad authority over banks within the supervisory mechanismâ??s geographical perimeter; however, the status of non-euro area member states willing to participate in this mechanism, and the governance and decision-making processes of the ECB in this respect, call for further elaboration. Further adjustments are also desirable in the proposed reform of the EBA, even though they must probably retain a stopgap character pending the more substantial review planned in 2014. This Policy Contribution was prepared as a briefing paper for the European Parliament Economic and Monetary Affairs Committeeâ??s Monetary Dialogue.
    Date: 2012–10
  14. By: AfDB
    Date: 2012–09–10
  15. By: Paolo Gelain (Norges Bank (Central Bank of Norway)); Kevin J. Lansing (FRB San Francisco and Norges Bank (Central Bank of Norway)); Caterina Mendicino (Bank of Portugal)
    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 thatresemble 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 theintroduction 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: Asset pricing, Excess volatility, Credit cycles, Housing bubbles, Monetary policy, Macroprudential policy
    JEL: E32 E44 G12 O40
    Date: 2012–08–20
  16. By: Leonardo Melosi (London Business School); Francesco Bianchi (Duke University)
    Abstract: We develop a model in which the current behavior of the fiscal and monetary authorities influence agents' beliefs about the way debt will be stabilized. The standard policy mix consists of a virtuous fiscal authority that moves taxes in response to debt and a Central Bank that has full control over inflation. When policy makers deviate from this virtuous policy mix, agents conduct Bayesian learning to infer the likely duration of the deviation. As agents observe more and more deviations, they become increasingly pessimistic about a prompt return to the virtuous regime and inflation starts moving to keep debt on a stable path. Shocks which were dormant under the virtuous policy mix start now manifesting themselves. These changes are initially imperceptible, but they unfold over decades and accelerate as agents get convinced that the fiscal authority will not raise taxes. Dormant fiscal shocks can account for the run-up of inflation in the `70s and the deflationary pressure of the early 2000s. We point out that the currently low long term interest rates and inflation expectations might hide the true risk of inflation faced by the US economy.
    Date: 2012
  17. By: Luis Felipe Céspedes; Roberto Chang; Andrés Velasco
    Abstract: This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. The exchange rate can affect the financial intermediaries' international credit limit via a net worth effect and a leverage ratio effect; the latter is novel and depends on the equilibrium link between exchange rates and interest spreads. Unconventional policies are nonneutral if and only if financial constraints are binding in equilibrium. Credit programs are more effective if targeted towards financial intermediaries rather than the corporate sector. Sterilized foreign exchange interventions matter because the increased availability of tradables, resulting from the sterilizing credit, can relax financial frictions; this perspective is new in the literature. Finally, self fulfilling expectations can lead to the coexistence of financially constrained and unconstrained equilibria, justifying a policy of defending the exchange rate and the accumulation of international reserves.
    JEL: E58 F34 F41
    Date: 2012–10
  18. By: Balázs Krusper (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: Recent literature suggests that the co-movement of inflation is rather strong across countries. We use a factor model to asses this co-movement within the EU, while we differentiate between common (EU) and regional (CEE) effects. We find that price dynamics in Western European countries share a common pattern, while CEE countries can be divided into subgroups according to their inflation history. Results indicate that the monetary policy regime is a very important source of the difference among CEE countries. This method also allows us to examine how external and country-specific components contributed to the Hungarian inflation. We find that Hungary, similar to other countries in the region, experienced a disinflation period before the EU accession. However, country specific components (e.g. VAT changes or monetary policy) also played an important role.
    Keywords: inflation dynamics, factor model
    JEL: C33 E31 E42 E58
    Date: 2012
  19. By: Jussi Ahokas
    Abstract: The paper deals with the geographies of the European economic crisis that had its origins in the global financial crisis of 2008-09. The crisis pushed many European economies into a deep recession and caused a mass unemployment in many countries. The crisis is analysed in a monetary economy framework that builds upon the post-Keynesian economic theories such as the monetary theory of production and the chartalist theory of money. These theories focus on the operational realities of banking, credit creation and finance as well as processes of production, income creation and government spending. Hence, the theoretical framework constructed in the paper provides a comprehensive analytical tool for examining relationships between money, finance and production, the key elements of the monetary economy. It is argued in the paper that the monetary economy perspective has a lot to offer for the geographical analysis of the economic crises and the contemporary economic system in general. In other words, it is argued that economists and economic geographers need to pay more attention to the central dynamics of monetary economy. The geographical investigation of the commanding processes of monetary economy conducted in the paper brings up the essential dynamics behind the European economic crisis. The analysis will be focused on the processes that turned the financial crisis into a recession of real economy. In addition, a brief look is taken at the anatomy of the European sovereign debt crisis. The empirical analysis shows that the geographical differences in demand structures, in the liquidity preferences of different economic actors and in the basic institutional structures of monetary economy were essential elements of the crisis. The first conclusion of the paper is that the European economic crisis was a characteristic crisis of monetary economy where money and monetary conditions affect motives and decisions of the economic actors. The second conclusion is that the geographical perspective is necessary in order to expose the central dynamics of the crisis and dynamics of monetary economy in general. Therefore, the theoretical framework constructed in the paper should be utilized more widely in the geographical analysis of contemporary economic system in the future. Keywords: Financial crisis, Economic crisis, Monetary economy, Regional development JEL: G01, R00, E59
    Date: 2012–10
  20. By: Bilge Erten; José Antonio Ocampo
    Abstract: This paper argues that SDRs should become a more relevant instrument of international monetary cooperation. This requires transforming them into a pure reserve asset and the IMF into a fully SDR-funded institution. SDRs would then be issued counter-cyclically and treated as deposits of countries in the IMF, which can in turn lend to countries. This approach would correct basic deficiencies of the current global monetary system. Complementary reforms include a substitution account for an orderly and smooth transition from major reserve currencies to SDRs, and the issuance of SDR-denominated bonds as an alternative to other major short-term assets.
    Keywords: Special drawing rights,international monetary system,innovative development finance, governance of the IMF
    JEL: F33 E52 F55 H87
    Date: 2012–08
  21. By: Juan José Echavarría; Mauricio Villamizar
    Abstract: In this document we use the Expectations Survey conducted monthly by the Central Bank of Colombia during the period of October 2003 – August 2012. We find that exchange rate revaluations were generally followed by expectations of further revaluation in the short run (1 month), but by expectations of devaluations in the long run (1 year), and that expectations are stabilizing both in the short and long run. The forward rate is generally different from the future spot rate, mainly because forecast errors are on average different from cero. This suggests that exchange rate expectations are not rational. The role of the risk premium is also important, albeit statistically significant only for the 1 year ahead forecasts (not for 1 month). One month expectations are much better predictors than the models of extrapolative, adaptive or regressive expectations or even the forward discount, and all of them outperform a random walk. But results are almost the opposite for 1 year. In this case traders and analysts could actually do much better by following some simple models or by looking at some key variables rather than by following the strategy that they pursue today..
    Keywords: Exchange rate expectations, risk premium, market efficiency, forecasting accuracy, random walk, forward discount, rational expectations hypothesis. Classification JEL: C23, C53, C83, F31, F37.
    Date: 2012–10
  22. By: Jackman, Mahalia
    Abstract: The Central Bank of Barbados often intervenes – buys or sells from the foreign exchange (FX) reserves – to ensure the daily clearing of the FX market. This paper estimates an FX intervention function for Barbados using a dynamic complementary log-log model. Three general findings emerged: (i) dynamics play an important role in the Central Bank’s intervention function, meaning that the probability that an intervention takes place today is conditional upon an intervention taking place at least one day prior. This most likely reflects the fact that deficits/surpluses on the FX market tend to be persistent, resulting in intervention over a consecutive number of days; (ii) there appears to be some differences in the response of Central Bank interventions to the other key variables. Particularly, seasonal fluctuations in tourism and interest rate spreads are likely to impact the probability of a sale intervention, but don’t seem to affect the likelihood of a purchase intervention. Moreover, an influx of real estate flows is likely to increase the probability that a purchase intervention takes place, but might have limited impact on the marginal propensity of a sale intervention. Finally, (iii) ‘oil price shocks’ is the only exogenous variable which appears to impact both sale and purchase interventions.
    Keywords: Foreign exchange; intervention;fixed exchange rate
    JEL: E58 F31 N26
    Date: 2012–03
  23. By: Maral Kichian
    Abstract: We propose a drifting-coefficient model to empirically study the effect of money on output growth in Canada and to examine the role of prevailing financial conditions for that relationship. We show that such a time-varying approach can be a useful way of modelling the impact of money on growth, and can partly reconcile the lack of concensus in the literature on the question of whether money affects growth. In addition, we find that credit conditions also play a role in that relationship. In particular, there is an additional negative short-run impact of money on growth when credit is not readily available, supporting the precautionary motive for holding money. Finally, money is found to have no effect on output growth in the long-run.
    Keywords: Monetary aggregates; Credit and credit aggregates; Business fluctuations and cycles
    JEL: E44 E51
    Date: 2012
  24. By: Chrysanthidou, Efthimia (Democritus University of Thrace, Department of International Economic Relations and Development); Gogas, Periklis (Democritus University of Thrace, Department of International Economic Relations and Development); Papadimitriou, Theophilos (Democritus University of Thrace, Department of International Economic Relations and Development)
    Abstract: Over the last few decades Robert Mundell’s theory (1963) of Optimum Currency Areas (OCA) has attracted significant attention between researchers and policy makers especially after the formation of the European Monetary Union and the debate over whether the eurozone countries actually consist an OCA. In this paper, we take this debate to the area that was originally the subject of Mundell’s motivation: the US and Canada. We employ the methodology of Correspondence Analysis and Hierarchical Cluster Analysis, in a sample of macroeconomic data from the fifty US states and ten Canadian provinces for 2009 in an effort to investigate whether the current currency split between north (Canada) and south (the US) is an OCA or possibly another split may be more appropriate. Our results show that three OCAs are identified within US states and Canadian provinces: one that includes regions of eastern US and Canada, one that includes regions of central-eastern and eastern US and Canada and finally one with regions of western US and Canada.
    Keywords: Optimum Currency Areas; Data Analysis
    JEL: E44
    Date: 2012–09–27
  25. By: Pierdzioch, Christian; Rülke, Jan-Christoph; Stadtmann, Georg
    Abstract: Using survey forecasts of a large number of Asian, European, and South American emerging market exchange rates, we studied empirically whether evidence of herding or antiherding behavior of exchange-rate forecasters can be detected in the cross-section of forecasts. Emerging market exchange-rate forecasts are consistent with herding (anti-herding) if forecasts are biased towards (away from) the consensus forecast. Our empirical findings provide strong evidence of anti-herding of emerging market exchange-rate forecasters. --
    JEL: F31 D84 C33
    Date: 2012
  26. By: Joscha Beckmann; Robert Czudaj
    Abstract: This study analyzes the question whether gold provides the ability of hedging against inflation from a new perspective. Using data for four major economies, namely the USA, the UK, the Euro Area, and Japan, we allow for nonlinearity and discriminate between long-run and time-varying short-run dynamics. Thus, we conduct a Markov-switching vector error correction model (MS-VECM) approach for a sample period ranging from January 1970 to December 2011. Our main findings are threefold: First, we show that gold is partially able to hedge future inflation in the long-run and this ability is stronger for the USA and the UK compared to Japan and the Euro Area. In addition, the adjustment of the general price level is characterized by regime-dependence, implying that the usefulness of gold as an inflation hedge for investors crucially depends on the time horizon. Finally, one regime approximately accounts for times of turbulences while the other roughly corresponds to 'normal times'.
    Keywords: Cointegration; gold price; inflation hedge; Markov-switching error correction
    JEL: C32 E31 E44
    Date: 2012–08
  27. By: Ageliki Anagnostou; Stephanos Papadamou
    Abstract: In this paper, we examine the impact of monetary policy shocks to the real economy by investigating the effects on different regions. Annual data for GDP, employment and investment from 12 regions in Greece are used for the period 1980 to 2009. By using an unrestricted VAR model and the impulse response analysis our results show that an interest rate shock affects the economic activity across regions differently. Furthermore in our investigation, we use a dynamic PANEL VAR model so as to investigate the dynamic variation of the impact of interest rates controlling also for time and cross regions fixed effects associated with specific time invariant regions’ characteristics as well as with time variant characteristics attributed to the integration process of these regions. Therefore, these findings are very important to policy makers.
    Date: 2012–10
  28. By: Siti Hamizah Mohd (Department of Economics, Universiti Putra Malaysia); Ahmad Zubaidi Baharumshah (Department of Economics, Universiti Putra Malaysia); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper investigates the links between inflation, its uncertainty and economic growth in five ASEAN countries over the period 1980: Q1-2011: Q3. We rely on the Exponential GARCH (EGARCH) model to explore the causal relationship among the three variables. The major findings are: (i) inflation uncertainty increases more in response to positive inflation surprises than to negative surprises in all countries; (ii) inflationary shocks affect positively inflation uncertainty as predicted by the Friedman-Ball hypothesis; (iii) there is no evidence to suggest that inflation uncertainty causes inflation, and; (iv) there is evidence that inflation affects growth negatively, both directly and indirectly (via the inflation uncertainty channel). The indirect effect is clearly stronger as it applies in all countries in the sample.
    Keywords: inflation, inflation uncertainty, output growth, ASEAN
    JEL: C22 E31 E52
    Date: 2012–07
  29. By: Shrestha, Prakash Kumar
    Abstract: This paper examines changes in the balance sheets of the banking system in five East Asian economies which were affected by the 1997 Asian Crisis. These countries have persistently accumulated foreign currency reserves since the crisis. This paper estimates the impact of reserve accumulation on some important balance sheet variables such as liquid assets, credits and deposits of the banking system by applying panel data techniques. Estimates using data from Thailand, South Korea, Malaysia, Philippines and Indonesia show that reserve accumulation has a positive impact on the liquid assets and deposits of the banking system, but not on credit flows, after controlling for the effect of other potential variables. --
    Keywords: international reserves,central banks,banking systems and East Asian countries
    JEL: F31 E58 G21
    Date: 2012
  30. By: Graham Bird (University of Surrey); Alex Mandilaras (University of Surrey); Helen Popper (Santa Clara University)
    Abstract: Issues surrounding exchange rates continue to fascinate both economists and political scientists. Although a relatively large literature has grown around attempting to explain the choice of exchange rate regime, empirical estimation has failed to find a generally satisfactory explanation of it. Shifts between exchange rate regimes are even less well understood. This paper focuses on such shifts and examines them by estimating both an economics only specification and one that is augmented with political variables. As a robustness check we also estimate a data driven specification using a large and comprehensive set of economic and political variables. In addition, we examine shifts between international macroeconomic archetypes to see whether similar factors are at work. In terms of exchange rate regime shifts, we find that although unobservable country specific factors are significant, there are other systematically important factors including, in particular, economic growth and IMF involvement. Central bank independence, financial openness and the incidence of crises may also exert an influence. In contrast, we find that selected political variables are generally insignificant in affecting shifts, although they may influence the size of shifts, once they happen.
    JEL: F30 F33
    Date: 2012–09

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