nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒10‒27
thirty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Revisiting the 1992-93 EMS crisis in the context of international political economy By Sotiropoulos, Dimitris P.
  2. MPC Voting, Forecasting and Inflation By Wojciech Charemza; Daniel Ladley
  3. On asymmetric effects in a monetary policy rule. The case of Poland By Anna Sznajderska
  4. The Role of Money in New-Keynesian Models By McCallum, Bennett T.
  5. Rational Bubbles and Macroeconomic Fluctuations. The(De-)Stabilizing Role of Monetary Policy By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  6. Central Bank Transparency and Financial Stability: Measurement, Determinants and Effects By Roman Horvath; Dan Vaško
  7. The Impact of the LCR on the Interbank Money Market By Bonner, C.; Eijffinger, S.C.W.
  8. Stability Price Index, Core Inflation and Output Volatility By Wojciech Charemza; Imran Hussain Shah
  9. The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound? By Yuriy Gorodnichenko; Johannes Wieland; Olivier Coibion
  10. Establishing Monetary Union in the Gulf Cooperation Council: What Lessons for Regional Cooperation? By Takagi, Shinji
  11. The Monetary Quantum By Ternyik, Stephen I.
  12. The interaction between the central bank and government in tail risk scenarios By Jan Willem van den End; Marco Hoeberichts
  13. Currency crisis and collapse in interwar Greece: Predicament or Policy Failure? By Nicos Christodoulakis
  14. Inflated Ordered Outcomes By Robert Brooks; Mark N. Harris; Christopher Spencer
  15. Central bank intervention and exchange rate behaviour : empirical evidence for India By Inoue, Takeshi
  16. Reserve Currencies: Factors of Evolution and their Role in the World Economy By Sergey Narkevich; Pavel Trunin
  17. Optimal policy for macro-financial stability By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
  18. Reserve Currencies: Factors of Evolution and their Role in the World Economy By Sergey Narkevich; Pavel Trunin
  19. Can we beat the random walk in forecasting CEE exchange rates? By Jakub Muck; Pawel Skrzypczynski
  20. Real exchange rate forecasting: a calibrated half-life PPP model can beat the random walk By Michele Ca’ Zorzi; Michal Rubaszek
  21. Unholy compromise in the Eurozone and how to mend it By Karl Aiginger; Stefano Micossi
  22. Market Structure and Pass-Through By Raphael Schoenle; Raphael Auer
  23. The Eurozone Crisis and Austerity Politics: A Trigger for Administrative Reform in Greece? By Stella Ladi
  24. Housing and Liquidity By Yu Zhu; Randall Wright; Chao He
  25. Currency blocs in the 21st century By Fischer, Christoph
  26. The Endogeneity of Optimum Currency Areas Criteria in the Context of Financial Crisis: Evidence from Time-Frequency Domain Analysis By Svatopluk Kapounek; Jitka Pomenkova
  27. Designing Banknote Identity By Hans de Heij
  28. Real exchange rate volatility, financial crises and nominal exchange regimes By Amalia Morales-Zumaquero; Simón Sosvilla-Rivero
  29. LIBOR, EURIBOR and the regulation of capital markets: The impact of Eurocurrency markets on monetary setting policies By Ojo, Marianne
  30. Long Horizon Uncovered Interest Parity Re-Assessed By Menzie D. Chinn; Saad Quayyum

  1. By: Sotiropoulos, Dimitris P. (Kingston University London)
    Abstract: The paper revisits the sequence of events leading to the 1992-93 crisis of the European Monetary System’s Exchange Rate Mechanism in the context of International Political Economy. The paper reconsiders the crisis, emphasising the workings of monetary unions and contemporary financial markets. The lessons to be drawn could help in understanding the contemporary crisis of the Euro area.
    Keywords: European Monetary System; monetary unions; currency crises
    JEL: F31 F36 F59 G11
    Date: 2012–10
  2. By: Wojciech Charemza; Daniel Ladley
    Abstract: This paper considers the effectiveness of monetary policy committee voting when the inflation forecast signals, upon which decisions are based, may be subject to manipulation. Using a discrete time intertemporal model, we examine the distortions resulting from such manipulation under a three-way voting system, similar to that used by the Bank of Sweden. We find that voting itself creates persistence in inflation. Whilst altering the forecast signal, even if well intentioned, results in a diminished probability of achieving the inflation target. However, if committee members ‘learn’ in a Bayesian manner, this problem is mitigated.
    Keywords: Voting Rules; Monetary Policy; Inflation Targeting
    JEL: E47 E52 E58
    Date: 2012–10
  3. By: Anna Sznajderska (National Bank of Poland)
    Abstract: Asymmetric effects in a monetary policy rule could appear due to asymmetric preferences of the central bank or/and due to nonlinearities in the economic system. It might be suspected that monetary authorities are more aggressive to the inflation rate when it is above its target level than when it is below. It also seems probable that monetary authorities have different preferences and react more strongly when the level of economic activity is low than when it is high. In this paper we investigate whether the reaction function of the National Bank of Poland (NBP) is asymmetric according to the level of inflation gap and the level of output gap. Moreover, we test whether these asymmetries might possibly stem from the nonlinearities in the Phillips curve. Threshold models are applied and two cases of unknown and known threshold value are investigated.
    Keywords: nonlinear Taylor rule, nonlinear Phillips curve, asymmetries, threshold models
    JEL: E52 E58 E30
    Date: 2012
  4. By: McCallum, Bennett T. (Carnegie Mellon University; National Bureau of Economic Research)
    Abstract: In this paper Professor McCalllum reviews the different forms researchers have attempted to introduce a meaningful role of Money in New-keynesian models typically used in the monetary policy analysis at central banks. The paper concludes that, there is still no convincing argument toward the need of including monetary aggregates into the structure of New Keynesian models.
    Date: 2012–10
  5. By: Lise Clain-Chamosset-Yvrard (Aix-Marseille Université, Greqam); Thomas Seegmuller (CNRS, Greqam)
    Keywords: Rational bubble; Cash-in-advance constraint; Collaterals; Endogenous fluctuations; Monetary policy.
    JEL: D91 E32 E52
    Date: 2012–03–23
  6. By: Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Dan Vaško (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability.
    Keywords: financial stability, transparency, central banks
    JEL: E52 E58
    Date: 2012–09
  7. By: Bonner, C.; Eijffinger, S.C.W. (Tilburg University, Center for Economic Research)
    Abstract: 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 pay and 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 banks to decrease 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: Monetary Policy;Interbank Market;Basel 3.
    JEL: G21 E42 E43
    Date: 2012
  8. By: Wojciech Charemza; Imran Hussain Shah
    Abstract: This paper examines the relationship between the ‘exclusion’ type core inflation measures and the stability price index. Empirical results for Malaysia and Pakistan suggests that, if targeting core inflation index is to stabilize output, weights of the export-oriented sectors (energy for Malaysia and foodstuffs for Pakistan) should be reduces, in relation to the consumers’ price index weights, and for import-oriented sectors, increased. It also indicates that, in order to maintain real sector stability, central bankers should include the fundamental component of the stock market prices in the price index they target.
    Keywords: Price Index; Monetary Policy; Output Stability; Financial Markets
    JEL: E52 E58 G12
    Date: 2012–10
  9. By: Yuriy Gorodnichenko (UC Berkeley); Johannes Wieland (University of California, Berkeley); Olivier Coibion (College of William and Mary)
    Abstract: We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, typically less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state- dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes.
    Date: 2012
  10. By: Takagi, Shinji (Asian Development Bank Institute)
    Abstract: The paper reviews the experience of regional economic cooperation in the Gulf Cooperation Council (GCC). Conceived as a regional security alliance, the GCC has evolved to become a common market in the making. All six GCC countries participate in the common market project, and additional countries may join. But the timing of introducing a common currency, initially targeted for 2010, remains uncertain, especially in the light of the ongoing euro area crisis. Two countries have withdrawn from the common currency project; another has ceased to comply with a prerequisite for entering the monetary union. But the GCC is not the same as the GCC Monetary Union, nor should the success of the GCC be judged solely on the basis of how many member states end up participating in the single currency.
    Keywords: monetary union; gulf cooperation council; regional cooperation; common market; common currency; single currency; euro area
    JEL: F15 F36 F55 O53
    Date: 2012–10–22
  11. By: Ternyik, Stephen I.
    Abstract: The physics of monetary systems works like a systemic quantum process and the monetary quantum moves the economic body of production via mechanic and thermodynamic entropy.This research work compiles the foundations and conclusions of quantum monetary science as new methodical tool for achieving a higher level of economic stability as dynamic efficiency.
    Keywords: monetary quantum; monetary production economy; monetophysics
    JEL: B41
    Date: 2012
  12. By: Jan Willem van den End; Marco Hoeberichts
    Abstract: We analyse the relationship between tail risk and crisis measures by governments and the central bank. Using an adjusted Merton model in a game theoretical set-up, the analysis shows that the participation constraint for interventions by the central bank and the governments is less binding if the risk of contagion is high. The strategic interaction between governments and the central bank also influences the effectiveness of the interventions. A joint effort of both the governments and central bank leads to a better outcome. To prevent a bad equilibrium a sizable commitment by both players is required. Our stylized model sheds light on the strategic interaction between EMU governments and the Eurosystem in the context of the Outright Monetary Transactions program (OMT).
    Keywords: Financial crisis; Monetary policy; Central banks; Policy coordination
    JEL: E42 E52 E61 G01 G18
    Date: 2012–10
  13. By: Nicos Christodoulakis
    Abstract: Greece in 1928 viewed the anchoring to the Gold Exchange Standard as the imperative choice of the time in order to implant financial credibility and carry over an ambitious plan of reforms to modernise the economy. But after the pound sterling exited the system in 1931, Greece, instead of following suit, chose a defence that drove interest rates at high levels, squeezed the real economy and exhausted foreign reserves. Unable to borrow from abroad, it quitted the system in 1932 and the Drachma was heavily devalued. Despite a rise in competitiveness, the erosion of real incomes cut domestic demand, unemployment continued to rise and the country entered a period of acute social and political instability. The lessons are perhaps relevant today for the costs that Greece would face by exiting the Eurozone. A model of Balance of Payments crises with partial capital controls is employed to analyze the response of currency pegs to external shocks and examine under which circumstances the regime collapses. Its main predictions are found to be in agreement with the actual outcomes in 1932.
    Keywords: Gold Exchange Standard; reserves; exchange rate.
    JEL: N14 N24 F32
    Date: 2012–07
  14. By: Robert Brooks (Department of Econometrics and Business Statistics, Monash University, Melbourne, Australia); Mark N. Harris (Department of Econometrics and Quantitative Modelling, School of Economics and Finance, Curtin Business School, Curtin University, Perth, Australia, WA 6845); Christopher Spencer (School of Business and Economics, Loughborough University, UK)
    Abstract: We extend Harris and Zhao (2007) by proposing a (Panel) Inflated Ordered Probit model, and demonstrate its usefulness by applying it to Bank of England Monetary Policy Committee voting data.
    Keywords: Panel Inflated Ordered Probit, random effects, inflated outcomes, voting, Monetary Policy Committee
    JEL: E5 C3
    Date: 2012–10
  15. By: Inoue, Takeshi
    Abstract: This paper examines the causal relationship between central bank intervention and exchange returns in India. Using monthly data from December 1997 to December 2011, the empirical results derived from the CCF approach of Cheung and Ng (1996) suggest that there is causality-in-variance from exchange rate returns to central bank intervention, but not vice versa. These findings are robust in the sense that they hold in cases where the returns were measured from either the spot rate or the forward rate. Therefore, the results of this paper suggest that the Indian central bank has intervened in the foreign exchange market to respond to exchange rate volatility, although the volatility has not been influenced by central bank intervention in the form of net purchases of foreign currency in the market.
    Keywords: India, Foreign exchange, Exchange control, Central bank, Causality-in-variance, Exchange rate, Intervention
    JEL: E58 F31
    Date: 2012–06
  16. By: Sergey Narkevich (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: This works deals with the analysis and classification of the existing theoretical and empirical models describing the factors of establishing reserve currencies, and their role in today's global payment system. The important part of the study is devoted to the concept of a regional reserve currency, and the definition of the specific factors affecting the upgrading of the currency status. The authors assess the role of regional reserve currencies in international transactions and global financial markets. In the final part of the study the authors analyze the activities that could enhance the status of the Russian ruble and turn it into a regional reserve currency.
    Keywords: Reserve Currencies, regional reserve currency
    JEL: E42 E44 E58 F31 F33 F36 F42 F55 G15
    Date: 2012
  17. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric R. Young
    Abstract: In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any precautionary intervention. Second, we show that the extent to which policymakers should intervene in a preemptive manner depends critically on the set of policy tools available and what these instruments can achieve when a crisis strikes. For example, in the context of our model, we find that, if the policy tools is constrained so that the first best cannot be achieved and the policy maker has access to only one tax instrument, it is always desirable to intervene before the crisis regardless of the instrument used. If however the policy maker has access to two instruments, it is optimal to act only during crisis times. Third and finally, we propose a computational algorithm to solve Markov-Perfect optimal policy for problems in which the policy function is not differentiable.
    Keywords: Monetary policy ; Financial stability
    Date: 2012
  18. By: Sergey Narkevich (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: This work deals with the analysis of classification of the existing theoretical and empirical models describing the factors of establishing reserve currencies, and their role in today’s global payment system. The important part of the study is devoted to the concept of a regional reserve currency, and the definition of the specific factors affecting the upgrading of the currency status. The authors assess the role of regional reserve currencies in international transactions and global financial markets. In the final part of the study the authors analyze the activities that could enhance the status of the Russian ruble and turn it into a regional reserve currency.
    Keywords: reserve currencies, world economy
    JEL: E42 E44 E58 F31 F33 F36 F42 F55 G15
    Date: 2012
  19. By: Jakub Muck (National Bank of Poland, Economic Institute; Warsaw School of Economics, Institute of Econometrics); Pawel Skrzypczynski (National Bank of Poland, Economic Institute)
    Abstract: It is commonly known that various econometric techniques fail to consistently outperform a simple random walk model in forecasting exchange rates. The aim of this study is to analyse whether this also holds for selected currencies of the CEE region as the literature relating to the ability of forecasting these exchange rates is scarce. We tackle this issue by comparing the random walk based out-of-sample forecast errors of the Polish zloty, the Czech koruna and the Hungarian forint exchange rates against the euro with the corresponding errors generated by various single- and multi-equation models of these exchange rates. The results confirm that it is very difficult to outperform a simple random walk model in our CEE currencies forecasting contest.
    Keywords: CEE currencies, exchange rate forecasting, random walk,VAR, BVAR
    JEL: C22 C32 C53 F31 G17
    Date: 2012
  20. By: Michele Ca’ Zorzi (European Central Bank); Michal Rubaszek (National Bank of Poland, Economic Institute; Warsaw School of Economics)
    Abstract: This paper brings two new insights into the Purchasing Power Parity (PPP) debate. First, even if PPP is thought to hold only in the long run, we show that a half-life PPP model outperforms the random walk in real exchange rate forecasting, also at short-term horizons. Second, we show that this result holds as long as the speed of adjustment to the sample mean is imposed and not estimated. The reason is that the estimation error of the pace of convergence distorts the results in favor of the random walk model, even if the PPP holds in the long-run.
    Keywords: Exchange rate forecasting; purchasing power parity; half-life
    JEL: C32 F31 F37
    Date: 2012
  21. By: Karl Aiginger; Stefano Micossi
    Abstract: This paper reviews the causes of the ongoing crisis in the eurozone and the policies needed to restore stability in financial markets and reassure a bewildered public. Its main message is that the EU will not overcome the crisis until it has a comprehensive and convincing set of policies in place; able to address simultaneously budgetary discipline and the sovereign debt crisis, the banking crisis, adequate liquidity provision by the ECB and dismal growth.
    Keywords: Euro crisis, monetary union, policy coordination
    JEL: E61 E63 F33 F36 F42
    Date: 2012–08
  22. By: Raphael Schoenle (Brandeis University); Raphael Auer (Swiss National Bank)
    Abstract: In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate pass-through. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass of firms affected by a particular exchange rate shock and the distribution of firms' market shares in the sector. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the pass-through rate following USD movements is up to four times as large as the pass-through rate following TPC movements. Second, we show that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share, while the USD pass-through rate is decreasing in the market share of domestic producers. In the third step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares within a sector affects the trade-partner specific TPC pass-through rate. We calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price adjustments and pass-through rates across sectors, trade partners, and sector-trade partner pairs.
    Date: 2012
  23. By: Stella Ladi
    Abstract: Greece was the first European Monetary Union country to sign a Memorandum with the European Commission and the European Central Bank in order to secure financial assistance and prevent a total collapse of its economy following the severe international economic crisis. This Memorandum (2010), offered detailed steps of structural reforms that have affected all public services in Greece. The lack of major results and the stickiness of the ‘Greek problem’ have made Greece a unique case-study for evaluating both the recipe of the international donors and the domestic capacity for reform. A historical institutionalist approach and the concept of ‘policy paradigm’ are combined in order to evaluate what are the conditions for a major administrative reform in time of crisis. The article focuses on the specific attempt to reform public administration during the Papandreou government in order to analyse the importance of both time and type of change in the success of a major reform programme.
    Keywords: Policy change; historical institutionalism; paradigm shift; Eurozone crisis; Greece.
    Date: 2012–04
  24. By: Yu Zhu (Wisconsin); Randall Wright (U Wisconsin); Chao He (University of Wisconsin-Madison)
    Abstract: We study economies where houses, in addition to providing utility as shelter, may also facilitate credit transactions, since home equity can be used as collateral. We document there were big increases in home-equity-backed consumption loans coinciding with the start of the house price boom, and suggest an explanation. When it can be used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are constant and agents fully rational house prices can display complicated equilibrium paths resembling bubbles. Our framework is tractable, with exogenous or with endogenous supply, yet captures several salient features of housing markets. The effects of monetary policy are also discussed.
    Date: 2012
  25. By: Fischer, Christoph (BOFIT)
    Abstract: Based on a classification of countries and territories according to their regime and anchor currency choice, the study considers the two major currency blocs of the present world. A nested logit regression suggests that long-term structural economic variables determine a given country’s currency bloc affiliation. The dollar bloc differs from the euro bloc in that there exists a group of countries that peg temporarily to the US dollar without having close economic affinities with the bloc. The estimated parameters are consistent with an additive random utility model interpretation. A currency bloc equilibrium in the spirit of Alesina and Barro (2002) is derived empirically.
    Keywords: anchor currency choice; nested logit; exchange rate regime classification; additive random utility model; currency bloc equilibrium
    JEL: C25 E42 F02 F31 F33
    Date: 2012–10–15
  26. By: Svatopluk Kapounek (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Jitka Pomenkova (Department of Radio Electronics, Faculty of Electrical Engineering and Communication, Brno University of Technology)
    Abstract: The European integration process is theoretically supported by optimum currency area (OCA) theory which originates from debates about fixed versus flexible exchange rates, treating a common currency as the extreme case of a fixed exchange rate. The key issues of theoretical and empirical discussions in recent years are costs and benefits of adopting a common currency. We follow the hypothesis that historically greater integration provides more highly synchronized cycles. However, the commonly used methodological approaches overestimate cyclical co-movements between the time series during the financial crisis. Our contribution is in time series decomposition elimination trend included outliers appears in the years 2007-2010. Classification-JEL: F15, C14
    Keywords: singular value decomposition, wavelet analysis, synchronization, euro area.
    Date: 2012–10
  27. By: Hans de Heij
    Abstract: Confidence in banknotes is entirely based on trust in the currency, the organisation behind it and the authenticity of the note. The authenticity may be verified by an authenticity check, one of the four main user functions of a banknote; the others are value recognition, handling and (communication) message. Central banks may follow different banknote design policies, like putting ‘authenticity check’ first. In all combinations the final banknote identity is made by the ‘design sum’ of all functions. Scientific literature to support these decisions is not available and banknote identity issues are rarely discussed at conferences on banknotes. This study addresses this lack by looking into development metrics and contributing to a better understanding of identity subjects. Once the desired identity of the banknote has been described, the banknote may be designed. These two concepts, banknote identity and banknote design, are brought together in this study. Several design methods are introduced to support the development of an identity policy, like positioning and balance diagrams, familiarity and design freedom. To be perceived as a banknote, a new design has to carry several prototypical banknote design elements; the study describes 37 of such elements, divided in currency and banknote elements. Although general principles are described, the focus of the study is on the former guilder banknotes and on the euro bank notes. In 2011 De Nederlandsche Bank researched which of these design elements are contributing most to the European identity of the euro cash money. The main conclusion of the study is that euro banknotes are designed according to the status quo of national banknotes based on trust. Supranational banknotes require an appropriate, different design policy, since they are a next development stage of tangible money.
    Keywords: Design methodology; banknote design; banknote identity; banknote communication
    Date: 2012–08
  28. By: Amalia Morales-Zumaquero (Departamento de Teoría e Historia Económica, Facultad de Ciencias Económicas y Empresariales, Universidad de Málaga); Simón Sosvilla-Rivero (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid)
    Abstract: This paper examines the sources of real exchange rate (RER) volatility in eighty countries around the world, during the period 1970 to 2011. Our main goal is to explore the role of nominal exchange rate regimes and financial crises in explaining the RER volatility. To that end, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. The results confirm that exchange rate volatility does increase with the global financial crises and detect the existence of an inverse relationship between the degree of flexibility in the exchange rate regime and RER volatility using a de facto exchange rate classification.
    Keywords: Financial Crisis, Structural Breaks, Component-GARCH Model
    JEL: G01 C22 C54 F33
    Date: 2012–10
  29. By: Ojo, Marianne
    Abstract: What factors and developments have fuelled the „cartelisation“ of capital markets? - to the extent of the rigging of EURIBOR and LIBOR rates? In what ways can EURIBOR and LIBOR rate rigging practices be addressed? How and why have offshore markets expanded to the degree and extent to which they exist today – this partly being explained through the multiplier effect, as well as the fact that onshore (national) regulations have boosted and facilitated the growth of offshore financial centers? This paper is not only aimed at addressing these issues and developments, but also highlights why (even though) the need for de regulation of national capital markets is justified, the converse appears to apply to the liberalisation of external capital markets. Furthermore, the liberalisation of global and external capital markets has provided the impetus and justification for the need to de regulate national capital markets. The need and concern for increased regulation of bond, equity markets, as well as other complex financial instruments which can be traded in OTC (Over- the-Counter) derivatives markets is evidenced by Basel III's focus. „Cartelisation“ and organised activities relating to rate rigging in global capital markets have been evidenced recently by sophisticated EURIBOR and LIBOR rate rigging practices and occurences.
    Keywords: EURIBOR (Euro Inter-Bank Offered Rate); LIBOR (London Inter-Bank Offered Rate); de regulation; monetary policies; rate rigging; equity; bond markets; derivatives; capital markets; liberalisation
    JEL: E02 D0 K2 E5 G01
    Date: 2012–10–20
  30. By: Menzie D. Chinn; Saad Quayyum
    Abstract: We review the evidence for both short and long horizon uncovered interest parity (UIP) and rational expectations over the period up to 2011, extending the sample examined in Chinn and Meredith (2004) by nearly a decade. We find that the joint hypothesis of UIP and rational expectations (known as the unbiasedness hypothesis) holds better at long horizons than at short, although the effect is somewhat weaker than documented in Chinn and Meredith (2004). Using the formula for the slope coefficient, we identify potential sources for the difference in slope coefficients at different horizons. We attribute our weaker findings for long horizon unbiasedness for certain currencies partly to the advent of extraordinarily low interest rates associated with the zero interest bound in Japan and Switzerland.
    JEL: F3
    Date: 2012–10

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