nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒12‒22
twenty-six papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Adjustment Mechanisms in a Currency Area By Goodhart, Charles A; Lee, D J
  2. Labor Supply and Monetary Policy By Veli Safak; B. Onur Tas
  3. Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy Structural Vector Autoregression Model Evidence By Ncube, Mthuli; Eliphas Ndou; Nombulelo Gumata
  4. Capital and Credibility of the Bank of Japan: A Perspective(in Japanese) By Atsushi Tanaka
  5. The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery By Schmitt-Grohé, Stephanie; Uribe, Martín
  6. An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey By Ekin Ayse Ozsuca; Elif Akbostanci
  7. Harvests and Financial Crises in Gold-Standard America By Christopher Hanes; Paul W. Rhode
  8. On the inclusion of the Chinese renminbi in the SDR basket. By Agnès Bénassy-Quéré; Damien Capelle
  9. What Drives Target2 Balances? Evidence From a Panel Analysis By Raphael Anton Auer
  10. Federal Reserve Private Information in Forecasting Interest Rates By B. Onur Tas
  11. Market Structure and Exchange Rate Pass-Through By Raphael Anton Auer; Raphael S. Schoenle
  12. The Impact of Debt Levels and Debt Maturity on Inflation By Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
  13. Dollar funding and the lending behavior of global banks By Victoria Ivashina; David S. Scharfstein; Jeremy C. Stein
  14. Interest Rate Pass-Through in the Euro Area during the Financial Crisis: a Multivariate Regime-Switching Approach By David ARISTEI; Manuela Gallo
  15. "Conflicting Claims in the Eurozone? Austerity's Myopic Logic and the Need for a European Federal Union in a Post-Keynesian Eurozone Center-Periphery Model" By Alberto Botta
  16. Evaluating Phillips curve based inflation forecasts in Europe: A note By Croonenbroeck, Carsten; Stadtmann, Georg
  17. The Role of Money Illusion in Nominal Price Adjustment By Luba Petersen; Abel Winn
  18. Has the Euro changed the Business Cycle? By Enders, Zeno; Jung, Philip; Müller, Gernot
  19. Which Aspects of Central Bank Transparency Matter? Constructing a Weighted Transparency Index By Csaba Csávás; Szilárd Erhart; Dániel Felcser; Anna Naszodi
  20. Euro at Risk: The Impact of Member Countries’ Credit Risk on the Stability of the Common Currency By Bekkour, Lamia; Jin, Xisong; Lehnert, Thorsten; Rasmouki, Fanou; Wolff, Christian C
  21. Monetary Shocks in a Model with Inattentive Producers By Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
  22. Crisis and calm: Demand for U.S. currency at home and abroad from the fall of the Berlin Wall to 2011 By Ruth Judson
  23. Determination of Interest Rate in India: Empirical Evidence on Fiscal Deficit-Interest Links and Financial Crowding Out. By Chakraborty, Lekha
  24. The financial cycle and macroeconomics: What have we learnt? By Claudio Borio
  25. Liquidity shocks, dollar funding costs, and the bank lending channel during the European sovereign crisis By Ricardo Correa; Horacio Sapriza; Andrei Zlate
  26. Incomplete, slow, and asymmetric price transmission in ten product markets of Bolivia By Varela, Gonzalo J.

  1. By: Goodhart, Charles A; Lee, D J
    Abstract: Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union.
    Keywords: adjustment mechanisms; assymetric shocks; banking union; fiscal transfers; migration; relative unit labour costs
    JEL: F36 F40 J60 O52
    Date: 2012–11
  2. By: Veli Safak; B. Onur Tas
    Date: 2012–12
  3. By: Ncube, Mthuli; Eliphas Ndou; Nombulelo Gumata
    Abstract: Structural vector autoregression (SVAR) models were used in this study to investigate how unexpected increases in euro area bond yields and monetary stimulus are transmitted to the South African economy using data from January 1999 to June 2008. Firstly, evidence is found that this is consistent with the predictions of the capital flow effects on asset prices, which include depressed bond yields, evaluation of stock prices and exchange rate appreciation due to euro area monetary stimulus. Secondly, the perverse effects of a large economy’s monetary stimulus into a small open economy predicted by the Mundell–Fleming model was assessed. A significant drop was found in the growth of broad money supply, interest rates declined and the trade balance deteriorated. Thirdly, the study finds that a positive shock to euro area bond yields leads to an increase in nominal bond yields and a significant, but delayed, depreciation in the exchange rate of the rand. The results of a model that extended the sample to May 2011 to include the current period of economic instability and applying counterfactual analysis thereafter suggest that the exchange rate was overvalued between 2010 and 2011.
    Date: 2012–12–10
  4. By: Atsushi Tanaka (School of Economics, Kwansei Gakuin University)
    Abstract: The Bank of Japan has used some unconventional monetary easing measures for more than a decade, and it is often pointed out that it might damage the Bank’s capital and thus jeopardize its credibility. First, this paper reviews the past literature on the role of central bank capital and how a damaged balance sheet hurts credibility. Then, this paper examines the recent situation of the Bank of Japan by applying its financial statement data in 2005-2011 to the model of Ize (2005). The examination shows that the Bank was in an unfavorable situation, but not bad enough to jeopardize its credibility thanks to its moderate use of unconventional measures. Finally, this paper summarizes some studies that should be developed in the future.
    Keywords: central bank, the Bank of Japan, capital, credibility, unconventional monetary policy
    JEL: E5
    Date: 2012–12
  5. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
    Keywords: Confidence shock; Jobless Recoveries; Liquidity Traps; Taylor Rule; Wage rigidity
    JEL: E32
    Date: 2012–12
  6. By: Ekin Ayse Ozsuca (Department of Economics, METU); Elif Akbostanci (Department of Economics, METU)
    Abstract: The mechanism by which monetary policy affects financial institutions’ risk perception and/or tolerance has been called the ‘risk-taking channel’ of monetary policy. It has been recently argued that periods of low interest rates due to expansionary monetary policy, might induce an increase in bank risk-appetite and risk-taking behavior. This paper investigates the bank specific characteristics of risk-taking behavior of the Turkish banking sector as well as the existence of risk taking channel of monetary policy in Turkey. Using bank level quarterly data over the period 2002-2012 a dynamic panel model is estimated. Our sample accounts for 53 banks that have been active in Turkey during the period. To deal with the potential endogeneity between risk and bank specific characteristics, which are explanatory variables in our model, the GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998) is used. Four alternative risk measures are used in the analysis; three accounting-based risk indicators and a market-based indicator- Expected Default Frequency. We find evidence that low levels of interest rates have a positive impact on banks’ risk-taking behavior for all the risk measures. Specifically, low short term interest rates reduce the risk of outstanding loans; however short term interest rates below a theoretical benchmark increase risk-taking of banks. This result holds for macroeconomic controls as well. Furthermore, in terms of bank specific characteristics, our analysis suggests that large, liquid and well-capitalized banks are less prone to risk-taking.
    Keywords: Monetary policy, Transmission mechanisms, Risk-taking channel, Turkey, Panel Data
    JEL: E44 E52 G21
    Date: 2012–12
  7. By: Christopher Hanes; Paul W. Rhode
    Abstract: Most American financial crises of the postbellum gold-standard era were caused by fluctuations in the cotton harvest due to exogenous factors such as weather. The transmission channel ran through export revenues and financial markets under the pre-1914 monetary regime. A poor cotton harvest depressed export revenues and reduced international demand for American assets, which depressed American stock prices, drained deposits from money-center banks and precipitated a business-cycle downturn - conditions that bred financial crises. The crises caused by cotton harvests could have been prevented by an American central bank, even under gold-standard constraints.
    JEL: E32 E4 N11
    Date: 2012–12
  8. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics); Damien Capelle (ENS-Cachan)
    Abstract: We study the impact of a broadening of the SDR basket to the Chinese currency on the composition and volatility of the basket. Although, in the past, RMB inclusion would have had negligible impact due to its limited weight, a much more significant impact can be expected in the next decades, and more so if the Chinese currency is pegged to the US dollar. If the objective is to reinforce the attractiveness of the SDR as a unit of account and a store of value through more stability, then a broadening of the SDR to the RMB could be appropriate, provided some flexibility is introduced in the Chinese exchange-rate regime. This issue of flexibility is de facto more important than that of “free usability” to make the SDR more stable, at least in the short and medium run.
    Keywords: SDR, renminbi, international monetary system, foreign exchange volatility.
    JEL: F31 F33
    Date: 2012–11
  9. By: Raphael Anton Auer
    Abstract: What are the drivers of the large Target2 (T2) balances that have emerged in the European Monetary Union since the start of the financial crisis in 2007? This paper examines the extent to which the evolution of national T2 balances can be statistically associated with cross-border financial flows and current account (CA) balances. In a quarterly panel spanning the years 1999 to 2012 and twelve countries, it is shown that while the CA and the evolution of T2 balances were unrelated until the start of the 2007 financial crisis, since then, the relation between these two variables has become statistically significant and economically sizeable. This reflects the partial "sudden stop" to private sector capital that funded CA imbalances beforehand. I next examine how different types of financial flows have evolved over the last years and how this can be related to the evolution of T2 balances. While changes in cross-border positions in the interbank market are associated with increasing T2 imbalances, cross-border inter-office flows between banks belonging to the same financial institution have reduced T2 imbalances. Flows to the banking sector that originate from private investors and non-financial firms are large in magnitude, but are only weakly correlated with the evolution of T2 balances; changes in banks' holdings of foreign government debt and deposit flows are strongly correlated with the post-2007 evolution of T2 balances. Overall, these findings point to a sizeable transfer of risk from the private to the public sector within T2 creditor nations the via the use of central bank liquidity.
    Keywords: European Monetary Union, Euro, fiscal divergence, current account imbalances, TARGET2, central bank balance sheet, financial crisis, payment system
    JEL: E42 E58 F33 F32 F55 G14 G15
    Date: 2012
  10. By: B. Onur Tas
    Date: 2012–12
  11. By: Raphael Anton Auer; Raphael S. Schoenle
    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 passthrough. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. 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 and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second 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 and origins within a sector affects the trade-partner specific pass-through rate. Third, 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 changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs.
    Keywords: Exchange Rate Pass-Through, U.S. Import Prices, Market Structure, Price Complementarities
    JEL: E3 E31 F41
    Date: 2012
  12. By: Faraglia, Elisa; Marcet, Albert; Oikonomou, Rigas; Scott, Andrew
    Abstract: In the context of a sticky price DSGE model subject to government expenditure and preference shocks where governments issue only nominal non-contingent bonds we examine the implications for optimal inflation of changes in the level and average maturity of government debt. We analyse these relationships under two different institutional settings. In one case government pursues optimal monetary and fiscal policy in a coordinated way whereas in the alternative we assume an independent monetary authority that sets interest rates according to a Taylor rule and where the fiscal authority treats bond prices as a given. We identify the main mechanisms through which inflation is affected by debt and debt maturity (a real balance effect and an implicit profit tax) and also study additional channels through which the government achieves fiscal sustainability (tax smoothing, interest rate twisting and endogenous fluctuations in bond prices). In the case of optimal coordinated monetary and fiscal policy we find that the persistence and volatility of inflation depends on the sign, size and maturity structure of government debt. High levels of government debt do lead to higher inflation and longer maturity debt leads to more persistent inflation. However even in the presence of modest price stickiness the role of inflation is minor with the majority of fiscal adjustment achieved through changes in taxes and the primary surplus. However in the case of an independent monetary authority where debt management, monetary policy and fiscal policy are not coordinated then inflation has a much more substantial and more persistent role to play. Inflation is higher, more volatile and more persistent especially in response to preference shocks and plays a major role in achieving fiscal solvency.
    Keywords: fiscal insurance; fiscal sustainability; government debt; inflation; interest rates; maturity
    JEL: E52 E62 H21 H63
    Date: 2012–12
  13. By: Victoria Ivashina; David S. Scharfstein; Jeremy C. Stein
    Abstract: A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing their funding to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending.
    Date: 2012
  14. By: David ARISTEI; Manuela Gallo
    Abstract: In this paper we use a Markov-switching vector autoregressive model to analyse the interest rate pass-through between interbank and retail bank interest rates in the Euro area. Empirical results, based on monthly data for the period 2003-2011, show that during periods of financial distress bank lending rates to both households and non-financial corporations show a reduction of their degree of pass-through from the interbank rate. Interest rates on loans to non-financial firms are found to be more affected by changes in the interbank rate than loans to households, both in times of high volatility and in normal market conditions.
    Keywords: Interest rate pass-through, financial crisis, interbank interest rate; loans interest rate; Regime-switching vector autoregressive models; Euro area.
    JEL: C32 E43 E58 G01 G21
    Date: 2012–10–08
  15. By: Alberto Botta
    Abstract: In this paper, we analyze the role of the current institutional setup of the eurozone in fostering the ongoing peripheral euro countries' sovereign debt crisis. In line with Modern Money Theory, we stress that the lack of a federal European government running anticyclical fiscal policy, the loss of euro member-states' monetary sovereignty, and the lack of a lender-of-last-resort central bank have significantly contributed to the generation, amplification, and protraction of the present crisis. In particular, we present a Post-Keynesian eurozone center-periphery model through which we show how, due to the incomplete nature of eurozone institutions with respect to a full-fledged federal union, diverging trends and conflicting claims have emerged between central and peripheral euro countries in the aftermath of the 2007-08 financial meltdown. We emphasize two points. (1) Diverging trends and conflicting claims among euro countries may represent decisive obstacles to the reform of the eurozone toward a complete federal entity. However, they may prove to be self-defeating in the long run should financial turbulences seriously deepen in large peripheral countries. (2) Austerity packages alone do not address the core problems of the eurozone. These packages would make sense only if they were included in a much wider reform agenda whose final purpose was the creation of a government banker and a federal European government that could run expansionary fiscal stances. In this sense, the unlimited bond-buying program recently launched by the European Central Bank is interpreted as a positive, albeit mild step in the right direction out of the extreme monetarism that has thus far shaped eurozone institutions.
    Keywords: Eurozone Debt Crisis; Modern Money Theory; Post-Keynesian Center-Periphery Model
    JEL: E02 E12 H63
    Date: 2012–12
  16. By: Croonenbroeck, Carsten; Stadtmann, Georg
    Abstract: We run out-of-sample forecasts for the inflation rate of 15 euro-zone countries using a NAIRU Phillips curve and a naïve reference model. Comparisons show that the naïve model returns better forecasts in almost all cases. We provide evidence that the Phillips curves' goodness of fit is rather high. However, forecasting power is comparatively low. --
    Keywords: Phillips Curve,Forecasting,Europe,RMSE
    JEL: C53 E31 E37
    Date: 2012
  17. By: Luba Petersen (Simon Fraser Unviersity); Abel Winn (Chapman University)
    Abstract: Our experiments refine and extend the work of Fehr and Tyran (2001), who suggest that money illusion can contribute significantly to nominal inertia in strategically complementary environments. By controlling for strategic uncertainty, visual focal points and cognitive load we find that participants exhibit no first order money illusion, though second order money illusion plays a minor role. The presence of a focal point in our experiments reduces the duration of price stickiness compared to FT’s original experiments when participants played against one another. What stickiness remains is explained by the difficulty of finding the NE among 1800 payoffs. Second order money illusion appears to explain the persistent asymmetry between price adjustment following positive and negative monetary shocks. However, this is a modest effect manifested in an apparent preference for (aversion to) high (low) nominal payoffs within a set of maximum real payoffs. These findings indicate that FT’s proposed form of money illusion is not a compelling explanation for sluggish price adjustment.
    Keywords: Money illusion, price adjustment, money, shock, laboratory experiment, strategic complementarities
    JEL: D21 D43 D84 D83 E4 E5
    Date: 2012–12
  18. By: Enders, Zeno; Jung, Philip; Müller, Gernot
    Abstract: In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities.
    Keywords: cross-country spillovers; EMU; euro; European business cycles; exchange rate regime; monetary policy; optimum currency area
    JEL: E32 F41 F42
    Date: 2012–11
  19. By: Csaba Csávás (Magyar Nemzeti Bank (central bank of Hungary)); Szilárd Erhart (Magyar Nemzeti Bank (central bank of Hungary)); Dániel Felcser (Magyar Nemzeti Bank (central bank of Hungary)); Anna Naszodi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: In this paper we investigate the effect of central bank transparency on survey forecasts. Similar to Ehrmann et al. (2010), we find that greater transparency can reduce the degree of disagreement across individual forecasters and it can also improve the forecasting performance of survey respondents. However, our empirical approach is more rigorous than that of Ehrmann et al. (2010) as we test both for causality and misspecification. The analysis is carried out on a panel dataset that is much richer than those used by previous studies. This unique dataset allows us to identify the effects of various aspects of transparency separately and to assign weights to them reflecting their relative importance in reducing uncertainty. Finally, we construct a new composite measure of central bank transparency using the estimated weights.
    Keywords: central bank transparency, survey forecast, weighted transparency index, dynamic panel model, overlapping observations
    JEL: C53 D83 E50
    Date: 2012
  20. By: Bekkour, Lamia; Jin, Xisong; Lehnert, Thorsten; Rasmouki, Fanou; Wolff, Christian C
    Abstract: In this paper, we empirically investigate the impact of the credit risk of Eurozone member countries on the stability of the Euro. In the absence of a common euro bond, euro-area credit risk is induced though the credit default swaps of the member countries. The stability of the euro is examined by decomposing dollar-euro exchange rate options into the moments of the risk-neutral distribution. We document that during the sovereign debt crisis changes in the creditworthiness of member countries have significant impact on the stability of the euro. In particular, an increase in member countries’ credit risk results in an increase of volatility of the dollar-euro exchange rate along with soaring tail risk induced through the risk-neutral kurtosis. We find that member countries’ credit risk is a major determinant of the euro crash risk as measured by the risk-neutral skewness. We propose a new indicator for currency stability by combining the risk-neutral moments into an aggregated risk measure and show that our results are robust to this change in measure. Noticeable is the fact that during the sovereign debt crisis, the creditworthiness of countries with vulnerable fiscal positions is the main risk-endangering factor of the euro-stability.
    Keywords: credit default swaps; currency options; currency stability; European sovereign debt crisis; risk-neutral distribution
    JEL: G1
    Date: 2012–11
  21. By: Alvarez, Fernando E; Lippi, Francesco; Paciello, Luigi
    Abstract: We study a model in which prices respond slowly to shocks because firms must pay a fixed cost to observe the determinants of the profit maximizing price, as pioneered by Caballero (1989) and Reis (2006). We extend their analysis to the case of random tran- sitory variation in the firm’s observation cost and characterize the mapping from the distribution of observation cost to the distribution of the times between consecutive re- views/price adjustments of a firm. We aggregate a continuum of firms and characterize analytically the cross-sectional distribution of the duration of reviews/prices. We establish the dependence of the real effect of a monetary shock on the distribution of price durations and hence on the distribution of observation costs and discuss applications.
    Keywords: impulse responses.; inattentiveness; monetary shocks; observation costs
    JEL: E5
    Date: 2012–11
  22. By: Ruth Judson
    Abstract: U.S. currency has long been a desirable store of value and medium of exchange in times and places where local currency or bank deposits are inferior in one or more respects. Indeed, as noted in earlier work, a substantial share of U.S. currency circulates outside the United States. Although precise measurements of stocks and flows of U.S. currency outside the United States are not available, a variety of data sources and methods have been developed to provide estimates. ; This paper reviews the raw data available for measuring international banknote flows and presents updates on indirect methods of estimating the stock of currency held abroad: the seasonal method and the biometric method. These methods require some adjustments, but they continue to indicate that a large share of U.S. currency is held abroad, especially in the $100 denomination. In addition to these existing indirect methods, I develop a framework and basic variants of a new method to estimate the share of U.S. currency held abroad. ; Although the methods and estimates are disparate, they provide support for several hypotheses regarding cross-border dollar stocks and flows. First, once a country or region begins using dollars, subsequent crises result in additional inflows: the dominant sources of international demand over the past decade and a half are the countries and regions that were known to be heavy dollar users in the early to mid-1990s. Second, economic stabilization and modernization appear to result in reversal of these inflows. Specifically, demand for U.S. currency was extremely strong through the 1990s, a period of turmoil for the former Soviet Union and for Argentina, two of the largest overseas users of U.S. currency. Demand eased in the early 2000s as conditions gradually stabilized and as financial institutions developed. However, this trend reversed sharply with the onset of the financial crisis in late 2008 and has continued since then.
    Date: 2012
  23. By: Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: Controlling for the capital flows, using the high frequency macrodata of financially deregulated regime, the paper examined whether there is any evidence of fiscal deficit determining interest rate in the context of India. The period of analysis is FY 2006-07[04] to FY 2011[04]. Quite contrary to the debates in the policy circles, the results found that increase in fiscal deficit does not cause the rise in interest rates. Using the asymmetric vector autoregressive model, it is established that the rate of interest is affected by the reserve money changes, expected inflation and volatility in the capital flows, but not the fiscal deficit. This result has significant policy implications for interest rate determination in India. The long term and short term interest rates are analysed to determine the occurrence of financial crowding out, but fiscal deficit does not appear to be causing both shorts and longs.
    Keywords: Fiscal deficit ; Asymmetric vector autoregressive model ; Financial crowding out
    JEL: E62 C32 H6
    Date: 2012–12
  24. By: Claudio Borio
    Abstract: It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.
    Keywords: financial cycle, business cycle, medium term, financial crises, monetary economy, balance sheet recessions, balance sheet repair
    Date: 2012–12
  25. By: Ricardo Correa; Horacio Sapriza; Andrei Zlate
    Abstract: This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.
    Date: 2012
  26. By: Varela, Gonzalo J.
    Abstract: With food prices on the rise, understanding the transmission of price shocks, both internationally and domestically, is central for trade policy analysis. This paper examines spatial market integration and its determinants for ten key food products in Bolivia, across the four most important cities, and with the world, over the period 1991-2008. Within Bolivia, markets for onions, chicken, sugar, and to a lower extent for potatoes, cooking oil, wheat flour, and rice are integrated. However, only chicken, sugar, cooking oil, and rice are integrated with world markets, with incomplete and slow transmission. The perennial result of asymmetric price adjustment to foreign shocks also holds for Bolivia: domestic prices respond faster when the world price increases than when it decreases. This points to a perennial recommendation: the importance of stimulating competitive practices to avoid welfare redistribution due to imperfect competition. Infrastructure improvements will also contribute to accessible food prices for the poor.
    Keywords: Markets and Market Access,Access to Markets,Emerging Markets,Food&Beverage Industry,Transport Economics Policy&Planning
    Date: 2012–12–01

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