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on Monetary Economics |
| By: | Pelin Ilbas (National Bank of Belgium); Øistein Røisland (Norges Bank (Central Bank of Norway)); Tommy Sveen (BI Norwegian Business School) |
| Abstract: | We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001 - 2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule. |
| Keywords: | Optimal monetary policy, Simple rules, Central bank preferences |
| JEL: | E42 E52 E58 E61 E65 |
| Date: | 2013–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2013_04&r=mon |
| By: | Runchana Pongsaparn (Bank of Thailand); Panda Ketruangroch (Bank of Thailand); Dhanaporn Hirunwong (Bank of Thailand) |
| Abstract: | TIn achieving price stability, a common mandate of monetary policy, central banks can choose different ways to conduct monetary policy. The difference in the conduct of monetary policy lies in the instrument they use not in the monetary policy regime per se. The paper finds that the higher the level of financial development, the higher degree of monopoly power (uniqueness) in exports and the stronger the institution, the more likely a country will use interest rate as the main monetary policy instrument. Furthermore, based on three criteria: (1) controllability of policy instrument and monetary conditions (2) the degree of counter-cyclicality and (3) the effectiveness of instrument in influencing inflation and output, interest rate appears to be an appropriate monetary policy instrument for Thailand. So far, performance of the current monetary policy framework in Thailand has been fine, with transparency through communication with the general public being one of the key factors contributing to the performance and policy effectiveness. |
| Keywords: | Economic Rationales for Central Banking |
| Date: | 2012–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:bth:wpaper:2012-05&r=mon |
| By: | Urszula Szczerbowicz |
| Abstract: | This paper evaluates the impact of all ECB unconventional monetary policies implemented between 2007 and 2012 on bank and government borrowing costs. We employ event-based regressions to measure the effect of each policy. The borrowing conditions for banks are represented by money market spreads and covered bond spreads while the sovereign bond spreads reflect government borrowing costs. The results show that sovereign bond purchasing programs (SMP, OMT) proved to be the most effective in lowering longer-term borrowing costs for both banks and governments with the largest impact in periphery euroarea countries. The strong impact in the euro-area periphery suggests that the central bank intervention in sovereign market is particularly effective when the sovereign risk is important. Furthermore, both covered bond purchase programs and 3-year loans to banks reduced bank refinancing costs. |
| Keywords: | unconventional monetary policy;quantitative easing;credit easing;sovereign bond spreads;covered bond spreads;Euribor-OIS spread |
| JEL: | E43 E44 E52 E58 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-36&r=mon |
| By: | Pornpinun Chantapacdepong (Bank of Thailand); Nuttathum Chutasripanich (Bank of Thailand); Bovonvich Jindarak (Bank of Thailand) |
| Abstract: | Recently, weak central bank financial positions, especially of emerging economies, have brought into the public spotlight whether it will constrain or obstruct the policy implementation in the long run or not. The country case studies and statistical performance showed that the central bank capital erosion does not directly relate to the policy effectiveness, but it creates the vulnerabilities to the monetary policy process. The key factor helping achieve the policy objectives, even with the losses or negative capital is “central bank credibility”. The policy choices to reduce such vulnerabilities are also discussed in this paper. |
| Keywords: | Central Bank Balance Sheet and Policy Implications |
| JEL: | E58 E52 E47 |
| Date: | 2012–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:bth:wpaper:2012-07&r=mon |
| By: | Fabrice Collard (University of Bern); Harris Dellas (University of Bern); Behzad Diba (Georgetown University); Olivier Loisel (CREST(ENSAE)) |
| Abstract: | The recent financial crisis has highlighted the interconnectedness between macroeconomic and financial stability and has raised the question of whether and how to combine the corresponding main policy instruments (interest rate and bank-capital requirements). This paper offers a characterization of the jointly optimal setting of monetary and prudential policies and discusses its implications for the business cycle. The source of financial fragility is the socially excessive risk-taking by banks due to limited liability and deposit insurance. We characterize the conditions under which locally optimal (Ramsey) policy dedicates the prudential instrument to preventing inefficient risk-taking by banks; and the monetary instrument to dealing with the business cycle, with the two instruments co-varying negatively. Our analysis thus identifies circumstances that can validate the prevailing view among central bankers that standard interest-rate policy cannot serve as the first line of defense against financial instability. In addition, we also provide conditions under which the two instruments might optimally co-move positively and countercyclically. |
| Keywords: | Prudential policy, Capital requirements, Monetary policy, Ramsey-optimal policies |
| JEL: | E32 E44 E52 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2012-34&r=mon |
| By: | Michael Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 per cent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing. |
| Keywords: | inflation targeting, price-level targeting, inflation risk, monetary policy. |
| JEL: | E52 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_03&r=mon |
| By: | Poomjai Nacaskul (Bank of Thailand); Kritchaya Janjaroen (Bank of Thailand); Suparit Suwanik (Bank of Thailand) |
| Abstract: | The late-2000s global financial crisis saw increased public profiles and balance sheets of both the US and European central banks, their combined series of financial rescue measures in effect pushing the envelope of central banking modus operandi. And in general, somewhat anecdotally amongst non-crisis Asia-Pacific/emerging economies, central banks are under increased pressure to pursue growth agenda, or at least being publicly called to task as to whether strict inflation regime is all that necessary. All the while, orthodox economics appear to be bursting at the seams, as the world witnesses extreme financial-capital market events increasingly becoming the ‘new normal’, globalised banking system portending knife-edged stability dynamics consistent with high degree of epidemic, network-like systemic interconnectivities, and global catastrophe phenomena reflecting energy/ecological/environmental imbalances more and more frequently materialising as economic disequilibria. Taken together, it is only becoming more difficult to reconcile historical evolution of central banks (the institutions) and central banking (the mandate) with ever mounting stabilisation policy demands and global ‘mega-trend’ challenges over the next decades. This essay details our positive and normative analysis and posits our conceptual arguments concerning the very essence of central banks (the institutions) and central banking (the discipline). We begin with Historical Evolution, from the genesis of early ‘proto’ central banks to the emergence of modern consensus on central banking. Stylised facts and conceptual schemas drawn from that exercise then enables us to formulate the notion of Policy Space as a generalization of central bank role and responsibility. We then employ economic rationales to argue for and advocate key elements and principles in terms of Institutional Integrity as an imperative foundation for the pursuit of policy goals. The emerging evolutionary perspective also compels us to postulate a number of Paradigm Challenges facing current and future generations of central bankers. |
| Keywords: | Economic Rationales for Central Banking |
| JEL: | B52 E02 E52 E58 E61 N4 |
| Date: | 2012–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:bth:wpaper:2012-04&r=mon |
| By: | Christoph Himmels; Tatiana Kirsanova |
| Abstract: | In this paper we study the degree of precommitment that is required to eliminate multiplicity of policy equilibria, which arise if the policy maker acts under pure discretion. We apply a framework developed by Schaumburg and Tambalotti (2007) and Debortoli and Nunes (2010) to a standard New Keynesian model with government debt. We demonstrate the existence of expectation traps under limited commitment and identify the minimum degree of commitment which is needed to escape from these traps. We find that the degree of precommitment which is sufficient to generate uniqueness of the Pareto-preferred equilibrium requires the policy maker to stay in office for a period of two to five years. This is consistent with monetary policy arrangements in many developed countries. |
| Keywords: | Limited Commitment, Commitment, Discretion, Multiple Equilibria, Monetary and Fiscal Policy Interactions |
| JEL: | E31 E52 E58 E61 C61 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2012_18&r=mon |
| By: | Wanvimol Sawangngoenyuang (Bank of Thailand); Sukrita Sa-nguanpan (Bank of Thailand); Worawut Sabborriboon (Bank of Thailand) |
| Abstract: | Since 2007 global financial crisis, many central banks have tended to focus on financial stability much more than ever. Lessons learned from recent crises witness that in a period of sustained economic growth with low and stable inflation, financial imbalances could adversely affect financial system and real economy, which eventually leads to financial crises. In addition, the cost of crises becomes increasingly expensive over time because crises themselves have been more systemic. Risk from one financial institution can easily transfer to others and then to the whole financial market. Thus, current crises highlight the importance of financial stability role of central banks in two main aspects, crisis prevention and crisis management. The paper indicates that in recent financial crises, many central banks have stepped beyond their traditional roles in order to ensure financial system stability. Some instruments and measures that central banks have implemented can be considered as unconventional ones. Looking forward, these practices then lead to new challenges for central banks in three main aspects: risk identification, risk mitigation, and policy issuance process. Eventually, this paper also provides policy implications to Bank of Thailand, based on international experiences and lessons learned from recent crises. |
| Keywords: | Financial Systemic Stability |
| Date: | 2012–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:bth:wpaper:2012-06&r=mon |
| By: | Bussière, M. |
| Abstract: | The 2008 financial crisis has rekindled interest in the issue of early warning signals (EWS) of financial distress. It has also triggered renewed interest in the literature on currency crises, with many countries, especially among emerging market economies, experiencing severe exchange market pressure. While several policy institutions are in the process of developing new early warning systems, there is a lot of skepticism on the ability to predict currency crises or, more generally, any type of financial crises. This skepticism stems from the alleged poor out-of-sample performance of leading models, but also from a more fundamental objection, according to which it is by definition impossible to predict crises – what can be referred to as a new “impossibility theorem”. Moreover, another criticism of early warning systems is that they may contribute to the phenomenon they are supposed to fight (the self-fulfilling prophecies view). The objective of this paper is to challenge this skeptical view. To this aim, the paper discusses the general conditions under which the “impossibility theorem” may fail and self-fulfilling prophecies can be avoided, stemming e.g. from political economy arguments. The ability of a simple currency crisis model to provide useful information on economic vulnerabilities is illustrated by testing its out-of-sample performance in a panel of emerging market economies following the collapse of Lehman Brothers. |
| Keywords: | Exchange rates, currency crises, financial crises, early warning signals, political economy. |
| JEL: | B40 C52 C53 D72 F31 G01 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:420&r=mon |
| By: | Robert J. Barro; Sanjay Misra |
| Abstract: | From 1836 to 2011, the average real rate of price change for gold in the United States is 1.1% per year and the standard deviation is 13.1%, implying a one-standard-deviation confidence band for the mean of (0.1%, 2.1%). The covariances of gold’s real rate of price change with consumption and GDP growth rates are small and statistically insignificantly different from zero. These negligible covariances suggest that gold’s expected real rate of return—which includes an unobserved dividend yield—would be close to the risk-free rate, estimated to be around 1%. We study these properties within an asset-pricing model in which ordinary consumption and gold services are imperfect substitutes for the representative household. Disaster and other shocks impinge directly on consumption and GDP but not on stocks of gold. With a high elasticity of substitution between gold services and ordinary consumption, the model can generate a mean real rate of price change within the (0.1%, 2.1%) confidence band along with a small risk premium for gold. In this scenario, the bulk of gold’s expected return corresponds to the unobserved dividend yield (the implicit rental income from holding gold) and only a small part comprises expected real price appreciation. Nevertheless, the uncertainty in gold returns is concentrated in the price-change component. The model can explain the time-varying volatility of real gold prices if preference shocks for gold services are small under the classical gold standard but large in other periods particularly because of shifting monetary roles for gold. |
| JEL: | E44 G12 N20 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18759&r=mon |
| By: | Agnès Bénassy-Quéré; Dramane Coulibaly |
| Abstract: | We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods. |
| Keywords: | Real exchange rate;Balassa-Samuelson effect;Product market regulations;Employment protection |
| JEL: | F41 J50 L40 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-37&r=mon |