|
on Monetary Economics |
| By: | Bernd Hayo; Pierre-Guillaume Méon |
| Keywords: | European Central Bank, Monetary Policy Committee, Decision rules |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/130369&r=mon |
| By: | Ellyne, Mark; Veller, Carl |
| Abstract: | Since its adoption of inflation targeting in 2000, the South African Reserve Bank has been accused of placing too great an emphasis on meeting its inflation target, and too small an emphasis on the high rate of unemployment in the country. On the other hand, the SARB has regularly missed its inflation target. We attempt to characterise the SARB's inflation targeting policy by analysing the Bank's interest rate setting behaviour before and after the adoption of inflation targeting, making use of Taylor-like rules to determine whether the SARB has emphasised inflation, the output gap, the real exchange rate, and asset price deviations in its monetary policy. We find that the SARB has significantly changed its behaviour with the adoption of inflation targeting, and show that the SARB runs a very flexible inflation targeting regime, with strong emphasis on the output gap. Indeed, we find evidence that the emphasis on inflation is too low, and potentially conducive to instability in the inflation process. |
| Keywords: | South Africa; monetary policy; inflation targeting |
| JEL: | E58 E52 |
| Date: | 2011–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42134&r=mon |
| By: | Alexey Ponomarenko (Bank of Russia); Elena Vasilieva (Bank of Russia); Franziska Schobert (Deutsche Bundesbank) |
| Abstract: | The paper investigates to what extent some basic tools of the ECBs monetary analysis can be useful for other central banks given their specific institutional, economic and financial environment. We take the case of the Bank of Russia in order to show how to adjust methods and techniques of monetary analysis for an economy that differs from the euro area as regards, for instance, the role of the exchange rate, the impact of dollarization and the functioning of sovereign wealth funds. A special focus of the analysis is the estimation of money demand functions for different monetary aggregates. The results suggest that there are stable relationships with respect to income and wealth and to a lesser extent to uncertainty variables and opportunity costs. Furthermore, the analysis also delivers preliminary results of the information content of money for inflation and for real economic development. JEL Classification: E41, E52, E58 |
| Keywords: | Money demand, transition countries, cointegration analysis, inflation, real economic activity |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121471&r=mon |
| By: | Paolo Angelini (Banca d’Italia); Stefano Neri (Banca d’Italia); Fabio Panetta (Banca d’Italia) |
| Abstract: | We use a dynamic general equilibrium model featuring a banking sector to assess the interaction between macroprudential policy and monetary policy. We find that in “normal” times (when the economic cycle is driven by supply shocks) macroprudential policy generates only modest benefits for macroeconomic stability over a “monetary-policy-only” world. And lack of cooperation between the macroprudential authority and the central bank may even result in conflicting policies, hence suboptimal results. The benefits of introducing macroprudential policy tend to be sizeable when financial shocks, which affect the supply of loans, are important drivers of economic dynamics. In these cases a cooperative central bank will “lend a hand” to the macroprudential authority, working for broader objectives than just price stability in order to improve overall economic stability. From a welfare perspective, the results do not yield a uniform ranking of the regimes and, at the same time, highlight important redistributive effects of both supply and financial shocks. JEL Classification: E44, E58, E61 |
| Keywords: | Macroprudential policy, monetary policy, capital requirements |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121449&r=mon |
| By: | Zhang, Cathy |
| Abstract: | This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. A calibration of the generalized model shows that for the U.S. dollar, the welfare cost of losing international status ranges from 1.3% to 2.1% of GDP per year. |
| Keywords: | international currencies; monetary search; liquidity; information frictions |
| JEL: | E42 E4 |
| Date: | 2013–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42114&r=mon |
| By: | Gaballo, G. |
| Abstract: | In an otherwise unique-equilibrium model, agents are segmented into a few informational islands according to the signal they receive about others' expectations. Even if agents perfectly observe fundamentals, rational-exuberance equilibria (REX) can arise as they put weight on expectational signals to refine their forecasts. Constant-gain adaptive learning can trigger jumps between the equilibrium where only fundamentals are weighted and a REX. This determines regime switching in macro volatility despite unchanged monetary policy and time-invariant distribution of exogenous shocks. In this context, a tight inflation-targeting policy can lower expectational complementarity preventing rational exuberance, although its effect is non-monotone. |
| Keywords: | non-fundamental volatility; perpetual learning; comovements in expectations; professional forecasters. |
| JEL: | E3 E5 D8 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:402&r=mon |
| By: | Annari de Waal (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, suitable for a small open economy like South Africa. This type of model is known as an augmented vector error correction model (VECM), referred to by VECX*. We compile the foreign variables with trade-weighted three-year moving average data for 32 countries, to account for the significant change in trade shares over time. This model is novel for South Africa, in two ways: it is the first VECX* developed to analyse monetary policy in the country and the first model that uses time-varying trade weights for the creation of the foreign series. We find three significant long-run economic relations: the augmented purchasing power parity, the uncovered interest parity and the Fisher parity. These long-run relations are imposed on the VECX* to investigate the effect of a monetary policy shock on inflation. The results suggest the effective functioning of the monetary transmission mechanism in South Africa. |
| Keywords: | South Africa, monetary policy, structural cointegrated vector autoregressive model, augmented VECM, VECX* |
| JEL: | C50 E52 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201231&r=mon |
| By: | Mario Porqueddu (Bank of Italy); Fabrizio Venditti (Bank of Italy) |
| Abstract: | This paper analyzes the relationship between commodity prices and consumer food prices in the euro area and in its largest economies (Germany, France and Italy) and tests whether the latter respond asymmetrically to shocks to the former. The issue is of particular interest for those monetary authorities that target headline consumer price inflation, which has been heavily influenced by pronounced swings in international commodity prices in the past decade. The empirical analysis is based on two distinct but complementary approaches. First, we employ a structural model to identify a shock to commodity prices and verify using formal econometric tests whether the Impulse Response Functions of food consumer prices is invariant to the sign of the commodity price shock. Next, we employ predictive regressions and examine the relative forecasting ability of linear models compared with that of models that allow for sign-dependent nonlinearities. Overall, the empirical analysis uncovers very little evidence of asymmetries. |
| Keywords: | Food prices, Asymmetry, Inflation |
| JEL: | C32 C53 E31 Q17 |
| Date: | 2012–09 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_878_12&r=mon |
| By: | Annari de Waal and Reneé van Eyden |
| Abstract: | We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, suitable for a small open economy like South Africa. This type of model is known as an augmented vector error correction model (VECM), referred to by VECX*. We compile the foreign variables with trade-weighted three-year moving average data for 32 countries, to account for the significant change in trade shares over time. This model is novel for South Africa, in two ways: it is the first VECX* developed to analyse monetary policy in the country and the first model that uses time-varying trade weights for the creation of the foreign series. We find three significant long-run economic relations: the augmented purchasing power parity, the uncovered interest parity and the Fisher parity. These long-run relations are imposed on the VECX* to investigate the effect of a monetary policy shock on inflation. The results suggest the effective functioning of the monetary transmission mechanism in South Africa. |
| Keywords: | South Africa, monetary policy, structural cointegrated vector autoregressive model, augmented VECM, VECX* |
| JEL: | C50 E52 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:316&r=mon |
| By: | Pierre-Richard Agenor; Koray Alper; Luiz Pereira da Silva |
| Abstract: | This paper examines the roles of bank capital regulation and monetary policy in mitigating procyclicality and promoting macroeconomic and financial stability. The analysis is based on a dynamic stochastic model with imperfect credit markets. Macroeconomic stability is defined in terms of a weighted average of inflation and output gap volatility, whereas financial stability is defined in terms of three alternative indicators (real house prices, the credit-to-GDP ratio, and the loan spread), both individually and in combination. Numerical experiments associated with a housing demand shock show that in a number of cases, even if monetary policy can react strongly to inflation deviations from target, combining a credit-augmented interest rate rule and a Basel III-type countercyclical capital regulatory rule may be optimal for promoting overall economic stability. The greater the degree of policy interest rate smoothing, and the stronger the policymaker’s concern with financial stability, the larger is the sensitivity of the regulatory rule to credit growth gaps. |
| Keywords: | Financial Stability, Credit, Monetary Policy |
| JEL: | E44 E51 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1228&r=mon |
| By: | Joshua C C Chan; Gary Koop; Simon M Potter |
| Abstract: | In this paper, we develop a bivariate unobserved components model for inflation and unemployment. The unobserved components are trend inflation and the non-accelerating inflation rate of unemployment (NAIRU). Our model also incorporates a time-varying Phillips curve and time-varying inflation persistence. What sets this paper apart from the existing literature is that we do not use unbounded random walks for the unobserved components, but rather use bounded random walks. For instance, trend inflation is assumed to evolve within bounds. Our empirical work shows the importance of bounding. We find that our bounded bivariate model forecasts better than many alternatives, including a version of our model with unbounded unobserved components. Our model also yields sensible estimates of trend inflation, NAIRU, inflation persistence and the slope of the Phillips. |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2012-590&r=mon |
| By: | Mattéo Luciani |
| Abstract: | This paper studies the role of the Federal Reserve’s policy in the recent boom and bustof the housing market, and in the ensuing recession. By estimating a Structural DynamicFactor model on a panel of 109 US quarterly variables from 1982 to 2010, we find that,although the Federal Reserve’s policy between 2002 and 2004 was slightly expansionary,its contribution to the recent housing cycle was negligible. We also show that a morerestrictive policy would have smoothed the cycle but not prevented the recession. Wethus find no role for the Federal Reserve in causing the recession. |
| Keywords: | structural factor model; business cycle; monetary policy; housing |
| JEL: | C32 E32 E52 R20 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/129931&r=mon |
| By: | Gianluca Benigno; Huigang Chen; Chris Otrok; Alessandro Rebucci; Eric 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 make r 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: | Bailouts, capital controls, exchange rate policy, financial frictions, financial crises, macro-financial stability, macro-prudential policies |
| JEL: | E52 F37 F41 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1172&r=mon |
| By: | Yasin Akcelik; Orcan Cortuk; Ibrahim M. Turhan |
| Abstract: | We study the trilemma configuration of the Turkish economy for the period between 2002 and 2012. The paper starts by empirically testing the Mundell-Fleming theoretical concept of an \impossible trinity" (trilemma) for Turkey, following Aizenman, Chinn and Ito (ACI, 2008). This includes calculating the trilemma indices and regressing them on a constant. We show that there is a misspecification with ACI approach and improve the specification by applying a Kalman filter to the classical linear regression that enables us to capture the time-varying importance of policy decisions within the trilemma framework. By comparing the residuals of each approach, we show that Kalman filter analysis has superior results. Then, our analysis continues by revealing a role for central bank foreign reserves and required reserves in mitigating the trilemma tradeoffs { we show that foreign reserves to GDP ratio and required reserve ratio have positive significant impact on the residuals obtained from the trilemma regression, thus making the policy tradeoffs smaller. |
| Keywords: | Trilemma, impossible trinity, required reserves, international reserves, central bank policies |
| JEL: | E44 E58 F39 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1229&r=mon |
| By: | Feige, Edgar L. |
| Abstract: | The rapid growth of substitutes for cash, particularly debit and credit cards, has led economists to predict the advent of the “cashless society”. Yet cash holdings in most developed economies continue to grow and in the U.S., per capita currency holdings now amount to $3000. This paper revisits the long-standing controversy concerning the whereabouts of U.S. cash. Specifically, we employ a previously confidential data source on net shipments of U.S. currency abroad to re-estimate the fraction of U.S. currency held overseas. Contrary to the widely cited figure that 65 percent of U.S. currency is abroad, we now find that direct evidence supports the notion that overseas holdings amount to less than 25 percent. Currently, the official figure for the percent of U.S. currency held abroad as published by the Federal Reserve in their Flow of Funds Accounts and by the Bureau of Economic Analysis in the U.S. Balance of Payments Accounts is 37 percent. This official figure is a proxy variable that is supposed to mimic the previously confidential data series maintained by the New York Federal Reserve. Judson (2012) made this series public enabling us to discover that the official estimates of currency abroad require downward revision to reflect accurately the newly released data on actual cash shipments abroad. We also review the “indirect” approaches to estimating the fraction of currency overseas employed by Porter and Judson (1996) and Judson (2012). We find that these indirect methods to be innovative but deeply flawed due to violations of their restrictive assumptions. Moreover, sensitivity analysis reveals the estimates highly sensitive to alternative specifying assumptions. We conclude that the large estimates of currency abroad obtained by these methods are spurious. The paper also examines the temporal pattern of overseas holdings of U.S. currency and finds that the observed decline in the demand for U.S cash abroad coincides with the growing popularity of the Euro and its growth as a second currency held outside the Euro area between 2003 and 2008. These new findings have significant implications for estimating the domestic money supply and other domestic monetary aggregates; for estimating the net benefits of seigniorage earnings of the Federal Reserve; for forecasting changes in output and prices and for estimating the amount of unreported income and tax evasion in the U.S. |
| Keywords: | Overseas Currency; cashless society; currency abroad; underground economy; seigniorage; |
| JEL: | C82 E51 E01 E26 O17 F24 E41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42169&r=mon |
| By: | Luciano Fanti |
| Abstract: | We extend the two-period-lived-agent overlapping generations model with endogenous fertility and demand for money to understand whether and how the introduction of a money sector modifies what we have so far learned about fertility behaviours. It is shown that the existence of money may tend to exacerbate existing problems of either under-population or over-population. |
| Keywords: | Fertility; Money; Overlapping generations. |
| JEL: | J13 E41 O41 |
| Date: | 2012–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pie:dsedps:2012/145&r=mon |
| By: | Surajeet Chakravarty (Department of Economics, University of Exeter); Miguel A. Fonseca (Department of Economics, University of Exeter); Todd Kaplan (Department of Economics, University of Exeter) |
| Abstract: | To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signicantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets. |
| Keywords: | bank runs, contagion, experiment, multiple equilibria. |
| JEL: | C72 C92 D43 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:exe:wpaper:1206&r=mon |