nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒02‒16
23 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Imperfect Information and Inflation Expectations: Evidence from Microdata By Michael J. Lamla; Lena Dräger
  2. The Future of International Liquidity and the Role of China By Alan M. Taylor
  3. Chinese monetary policy – from theory to practice By Körner, Finn Marten; Ehnts, Dirk H.
  4. Monetary Policy, Inflation Illusion and the Taylor Principle: An Experimental Study By Wolfgang Luhan; Johann Scharler
  5. Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates By McKinnon, Ronald; Liu, Zhao
  6. Monetary regime change and business cycles By Vasco Cúrdia; Daria Finocchiaro
  7. Financial markets and the response of monetary policy to uncertainty in South Africa By Ruthira Naraidoo; Leroi Raputsoane
  8. The importance of the distribution sector for exchange rate pass-through in a small open economy. A large scale macroeconometric modelling approach By Pål Boug, Ådne Cappelen and Torbjørn Eika
  9. Foreign Exchange Intervention in Colombia By Hernando Vargas Herrera; Andrés González; Diego Rodríguez
  10. "Lessons from an Unconventional Central Banker" By Thorvald Grung Moe
  11. Inflation expectations in Spain: The Spanish PwC Survey By María del Carmen Ramos-Herrera; Simon Sosvilla-Rivero
  12. "Arresting Financial Crises: The Fed versus the Classicals" By Thomas M. Humphrey
  13. Making the most of High Inflation By Wojciech Charemza; Svetlana Makarova; Imran Shah
  14. Comparison of Simple Sum and Divisia Monetary Aggregates in GDP Forecasting: A Support Vector Machines Approach By Periklis Gogas; Theophilos Papadimitriou; Elvira Takli
  15. Explaining interest rate decisions when the MPC members believe in different stories By Carl Andreas Claussen; Øistein Røisland
  16. Macroprudential policy and imbalances in the euro area By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  17. Reserve Options Mechanism and FX Volatility By Arif Oduncu; Yasin Akcelik; Ergun Ermisoglu
  18. Estimating the impacts of U.S. LSAPs on emerging market economies’ local currency bond markets By Jeffrey Moore; Sunwoo Nam; Myeongguk Suh; Alexander Tepper
  19. Currency Demand during the Global Financial Crisis: Evidence from Australia By Tom Cusbert; Thomas Rohling
  20. Inflation-rate Derivatives: From Market Model to Foreign Currency Analogy By Lixin Wu
  21. Forecasting annual inflation with power transformations: the case of inflation targeting countries By Héctor Manuel Záarte Solano; Angélica Rengifo Gómez
  22. "A 'Trojan Horse' in Daoguang China?: Explaining the flows of silver (and opium) in and out of China" By Irigoin, Alejandra
  23. Uncertainty at the zero lower bound By Taisuke Nakata

  1. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Lena Dräger (University of Hamburg, Hamburg, Germany)
    Abstract: We investigate the updating behavior of individual consumers regarding their short and long-run inflation expectations. Utilizing the University of Michigan Survey of Consumer’s rotating panel microstructure, we can identify whether individuals adjust their inflation expectations over a period of six months. We find evidence that the updating frequency has been underestimated. Furthermore, looking at the possible determinants of an update we find support for imperfect information models. Moreover, individual expectations are found to be more accurate after an update and forecast accuracy is affected by inflation volatility measures and news regarding inflation. Finally, the updating frequency is found to significantly move spreads in bond markets.
    Keywords: Rational Inattention, updating inflation expectations, microdata, news
    JEL: D84 E31
    Date: 2013–02
  2. By: Alan M. Taylor
    Abstract: This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments’ precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions.
    JEL: F01 F02 F33
    Date: 2013–02
  3. By: Körner, Finn Marten; Ehnts, Dirk H.
    Abstract: Chinese monetary policy constitutes a marked example of a clash between theory and practice. In theory, a fixed exchange rate regime with capital mobility turns the money supply into an endogenous variable while expansionary pressure can be alleviated by the central bank by foreign currency transactions. For China, this standard view is contended by the 'compensation thesis' as proposed by Lavoie and Wang (2012) according to which the central bank maintains discretion over money supply by using alternative balance sheet instruments. In this paper we show that the People's Bank of China's (PBoC) activities can be better characterized by the 'compensation thesis' view of alternative money supply operations. In addition, we can thus characterize the PBoC's policy stance as being directed at targeting inflation and exchange rate stability via a five-phase policy mix using sterilization bonds and reserve requirements according to macroeconomic conditions. After downgrading the loans-to-deposits ratio of 75% to the status of an indicator and given the rise in lending despite a high reserve ratio, the quantity-driven approach to monetary policy of the PBoC faces an uncertain future.
    Keywords: Chineses monetary policy; Nominal exchange rate; Money supply; Mundell-Fleming; Compensation thesis; Modern Money Theory; Sterilization; Loans-to-deposit ratio; Reserve requirement ratio; Credit and money suppply growth
    JEL: E58 E31 E5 F31 G21
    Date: 2013–02–07
  4. By: Wolfgang Luhan; Johann Scharler
    Abstract: We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, then the average inflation rate persistently deviates from the target. We find that these deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.
    Keywords: Taylor principle, Interest Rate Rule, Inflation Illusion, Laboratory Experiment
    JEL: E30 E52 C90
    Date: 2013–01
  5. By: McKinnon, Ronald (Stanford University); Liu, Zhao (Stanford University)
    Abstract: Under near zero United States (US) interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with "hot money" inflows. Emerging market central banks intervene to prevent their currencies from rising precipitously. They subsequently lose monetary control and begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis. This cyclical inflation on the dollar’s periphery only registers in the US core consumer price index (CPI) with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is repressed. Because the People’s Republic of China (PRC) is forced to keep its interest rates below market-clearing levels, it also suffers from "financial repression," although in a form differing from that in the US.
    Keywords: Dollar standard; carry trades; commodity price inflation
    JEL: F31 F32
    Date: 2013–01–01
  6. By: Vasco Cúrdia; Daria Finocchiaro
    Abstract: This paper proposes a simple method to structurally estimate a model over a period of time containing a regime shift. It then evaluates to which degree it is relevant to explicitly acknowledge the break in the estimation procedure. We apply our method on Swedish data, and estimate a DSGE model explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. We show that ignoring the break in the estimation leads to spurious estimates of model parameters including parameters in both policy and non-policy economic relations. Accounting for the regime change suggests that monetary policy reacted strongly to exchange rate movements in the first regime, and mostly to inflation in the second. The sources of business cycle fluctuations and their transmission mechanism are significantly affected by the exchange rate regime.
    Date: 2013
  7. By: Ruthira Naraidoo (Department of Economics, University of Pretoria); Leroi Raputsoane (South African Reserve Bank)
    Abstract: This paper assesses the impact of uncertainty about the true state of the economy on monetary policy in South Africa since the adoption of inflation targeting. The paper also analyses the impact of uncertainty about the conditions in financial markets on the interest rate setting behavior that describes the South African Reserve Bank’s monetary policy decisions over and above using inflation and output as indicator variables. The results indicate that the effect of uncertainty on the interest rates has led to a more cautious monetary policy stance by the monetary authorities consistent with a large body of literature that recognizes that an excessively activist policy can increase economic instability. The results further show that uncertainty about the state of the economy clusters around the financial crisis periods in 2003 and from 2007 to 2009. The uncertainty about inflation was important to the interest rate setting behavior in 2003, while the uncertainty about the conditions in financial markets was important to the interest rate setting behavior between 2007 and 2009.
    Keywords: Monetary policy, Uncertainty, Financial market conditions
    JEL: C51 E43 E44 E58
    Date: 2013–02
  8. By: Pål Boug, Ådne Cappelen and Torbjørn Eika (Statistics Norway)
    Abstract: The degree of exchange rate pass-through to domestic goods prices has important implications for monetary policy in small open economies with floating exchange rates. Evidence indicates that pass-through is faster to import prices than to consumer prices. Price setting behaviour in the distribution sector is suggested as one important explanation. If distribution costs and trade margins are important price components of imported consumer goods, adjustment of import prices and consumer prices to exchange rate movements may differ. We present evidence on these issues for Norway by estimating a cointegrated VAR model for the pricing behaviour in the distribution sector, paying particular attention to exchange rate channels likely to operate through trade margins. Embedding this model into a large scale macroeconometric model of the Norwegian economy, which inter alia includes the pricing-to-market hypothesis and price-wage and wage-wage spirals between industries, we find exchange rate pass-through to be quite rapid to import prices and fairly slow to consumer prices. We show the importance of the pricing behaviour in the distribution sector in that trade margins act as cushions to exchange rate fluctuations, thereby delaying pass-through significantly to consumer prices. A forecasting exercise demonstrates that exchange rate pass-through to trade margins has not changed in the wake of the financial crises and the switch to inflation targeting. We also find significant inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks.
    Keywords: Exchange rate pass-through; pricing behaviour; the distribution sector; econometric modelling and macroeconomic analysis.
    JEL: C51 C52 E31 F31
    Date: 2013–01
  9. By: Hernando Vargas Herrera; Andrés González; Diego Rodríguez
    Abstract: Banco de la República’s FX intervention policy is described, with a focus on its objectives and main features. Then, based on a survey of the effectiveness of sterilized intervention in Colombia, it is argued that this tool is not useful to cope with the challenges posed by medium term external factors such as quantitative easing in advanced economies, reduced risk premiums in emerging economies or high international commodity prices. The duration of the impact of sterilized intervention on the exchange rate (if any) is much shorter than the effects of those factors. Finally, it is argued that if sterilized FX intervention is effective due to the operation of the portfolio balance channel, it may also have an expansionary effect on credit supply and aggregate demand. In this case, the macroeconomic outcomes of intervention depend on the monetary policy response. This issue is studied with a small open economy DSGE. In general, FX intervention implies a volatility of credit and consumption that is higher than under a more efficient allocation and under alternative monetary regimes without intervention. Furthermore, the more inclined the central bank is to meet an inflation target, the stronger its response to the expansionary effects of the intervention and, consequently, the lower the impact of the intervention on the exchange rate.
    Keywords: Monetary Policy, Foreign Exchange Intervention. Classification JEL: F31; F32; F33; E37
    Date: 2013–02
  10. By: Thorvald Grung Moe
    Abstract: The global financial crisis has generated renewed interest in the 1951 Treasury - Federal Reserve Accord and its lessons for central bank independence. A broader interpretation of the Accord and of Marriner S. Eccles's role at the Federal Reserve should teach central bankers that independence can be crucial for fighting inflation, but also encourage them to be more supportive of government efforts to fight deflation and mass unemployment.
    Date: 2013–01
  11. By: María del Carmen Ramos-Herrera (Universidad Complutense de Madrid. Instituto Complutense de Estudios Internacionales (ICEI)); Simon Sosvilla-Rivero (Departamento de Economía Cuantitativa (Department of Quantitative Economics), Facultad de Ciencias Económicas y Empresariales (Faculty of Economics and Business), Universidad Complutense de Madrid (Complutense University of Madrid),)
    Abstract: We examine the predictive ability, the consistency properties and the possible driving forces of inflation expectations, using a survey conducted in Spain by PwC among a panel of experts and entrepreneurs. When analysing the headline inflation rate, our results suggest that the PwC panel has some forecasting ability for time horizons from 3 to 9, improving when it comes to predict the core inflation rate. Nevertheless, the results indicate that predictions made by survey participants are neither unbiased nor efficient predictors of future inflation rates, regardless of the measures of inflation used. As for the consistency properties of the inflation expectations formation process, we find that panel members form stabilising expectations in the case of the headline inflation rate, both in the short and in the long-run, although in the case of the core inflation rate, consistency remains indeterminate. Finally, we find that inflation expectations are very persistent and that they appear to incorporate the information content of some macroeconomic variables (current core inflation and growth rate, the USD/EUR exchange rate, the ECB inflation target and changes in the ECB official short-term interest rate).
    Keywords: Inflation, Forecasting, Expectations, Panel data, Econometric models.
    JEL: E31 D84 C33
    Date: 2013–01
  12. By: Thomas M. Humphrey
    Abstract: Nineteenth-century British economists Henry Thornton and Walter Bagehot established the classical rules of behavior for a central bank, acting as lender of last resort, seeking to avert panics and crises: Lend freely (to temporarily illiquid but solvent borrowers only) against the security of sound collateral and at above-market, penalty interest rates. Deny aid to unsound, insolvent borrowers. Preannounce your commitment to lend freely in all future panics. Also lend for short periods only, and have a clear, simple, certain exit strategy. The purpose is to prevent bank runs and money-stock collapses--collapses that, by reducing spending and prices, will, in the face of downward inflexibility of nominal wages, produce falls in output and employment. In the financial crisis of 2008-09 the Federal Reserve adhered to some of the classical rules--albeit using a credit-easing rather than a money stock–protection rationale--while deviating from others. Consistent with the classicals, the Fed filled the market with liquidity while lending to a wide variety of borrowers on an extended array of assets. But it departed from the classical prescription in charging subsidy rather than penalty rates, in lending against tarnished collateral and/or purchasing assets of questionable value, in bailing out insolvent borrowers, in extending its lending deadlines beyond intervals approved by classicals, and in failing both to precommit to avert all future crises and to articulate an unambiguous exit strategy. Given that classicals demonstrated that satiating panic-induced demands for cash are sufficient to end crises, the Fed might think of abandoning its costly and arguably inessential deviations from the classical model and, instead, return to it.
    Keywords: Lender of Last Resort; Financial Crises; Bank Panics; Bank Runs; Bailouts; Penalty Rates; Collateral; High-powered Monetary Base; Broad Money Stock; Multiplier; Federal Reserve Policy; Liquidity; Insolvency; Emergency Lending; Credit Risk Spreads; Systemic Risks; Classical Economists
    JEL: E44 E51 E58
    Date: 2013–02
  13. By: Wojciech Charemza; Svetlana Makarova; Imran Shah
    Abstract: The paper analyses inflationary real effects in situation where there are frequent episodes of high inflation. It is conjectured with the increase in high inflation, and when differences between the expected and output-neutral inflation become large, output stimulation through inflationary shocks is more effective than otherwise. It is shown that this conjecture is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations. This leads to a simple policy prescription that anti-inflationary monetary decisions should be undertaken in periods where the expected inflation exceeds output-neutral.
    Keywords: High Inflation Episodes; Real Effects Indicators; Developing Countries; Impulse Response Analysis
    JEL: E31 N15 O11
    Date: 2013–01
  14. By: Periklis Gogas (Department of International Economic Relations and Development, Democritus University of Thrace, Greece); Theophilos Papadimitriou (Department of International Economic Relations and Development, Democritus University of Thrace, Greece); Elvira Takli (Department of International Economic Relations and Development, Democritus University of Thrace, Greece)
    Abstract: In this study we compare the forecasting ability of the simple sum and Divisia monetary aggregates with respect to U.S. gross domestic product. We use two alternative Divisia aggregates, the series produced by the Center for Financial Stability (CFS Divisia) and the ones produced by the Federal Reserve Bank of St. Louis (MSI Divisia). The empirical analysis is done within a machine learning framework employing a Support Vector Regression (SVR) model equipped with two kernels: the linear and the radial basis function kernel. Our training data span the period from 1967Q1 to 2007Q4 and the out-of-sample forecasts are performed on a one quarter ahead forecasting horizon on the period 2008Q1 to 2011Q4. Our tests show that the Divisia monetary aggregates are superior to the simple sum monetary aggregates in terms of standard forecast evaluation statistics.
    Keywords: GDP forecasting; SVR; Simple Sum; Divisia
    JEL: C22 E47 E50
    Date: 2013–01
  15. By: Carl Andreas Claussen (Sveriges Riksbank (Central Bank of Sweden)); Øistein Røisland (Norges Bank (Central Bank of Norway))
    Abstract: Modern central banks do not only announce the interest rate decision, they also communicate a "story" that explains why they reached the particular decision. When decisions are made by a committee, it could be difficult to find a story that is both consistent with the decision and representative for the committee. Two alternatives that give a unique and consistent story are: (i) vote on the interest rate and let the winner decide the story, (ii) vote on the elements of the story and let the interest rate follow from the story. The two procedures tend to give different interest rate decisions and different stories due to an aggregation inconsistency called the "discursive dilemma". We investigate the quality of the stories under the two approaches, and find that alternative (ii) gives stories that tend to be closer to the true (but unobservable) story. Thus, our results give an argument in favour of premise-based, as opposed to conclusion-based, decisionmaking.
    Keywords: Monetary policy committees, Communication, Judgment aggregation, Discursive dilemma
    JEL: E52 E58 D71
    Date: 2013–02–08
  16. By: Michał Brzoza-Brzezina (National Bank of Poland, Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (National Bank of Poland, Warsaw School of Economics)
    Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy applied to the peripheral countries could contribute to providing more macroeconomic stability in this region. To this end we build a twoeconomy macrofinancial DSGE model and simulate the effects of macroprudential policies under the assumption of asymmetric shocks hitting the core and the periphery. We find that macroprudential policy is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect.
    Keywords: euro-area imbalances, macroprudential policy, DSGE with banking sector
    JEL: E32 E44 E58
    Date: 2013
  17. By: Arif Oduncu; Yasin Akcelik; Ergun Ermisoglu
    Abstract: Reserve Options Mechanism (ROM), which is the option to hold FX or gold reserves in increasing tranches in place of Turkish Lira reserve requirements of Turkish banks, was designed and launched by the Central Bank of the Republic of Turkey (CBRT). ROM is a tool unique to the CBRT and it is aimed to support the FX reserve management of the banking system and to limit the adverse effects of excess capital flow volatility on the macroeconomic and financial stability of Turkey. In this paper, we study the effectiveness of ROM on the volatility of Turkish Lira, and to the best of our knowledge, it is the first analytical paper on investigating the effects of the ROM. The results suggest that ROM is an effective policy tool in decreasing the volatility of Turkish lira in the sample period.
    Keywords: Reserve Options Mechanism, Volatility of Turkish Lira, Central Bank of the Republic of Turkey’s Policy Mix, GARCH
    JEL: C12 C58 E58 G10
    Date: 2013
  18. By: Jeffrey Moore; Sunwoo Nam; Myeongguk Suh; Alexander Tepper
    Abstract: This paper examines whether large-scale asset purchases (LSAPs) by the Federal Reserve influenced capital flows out of the United States and into emerging market economies (EMEs) and also analyzes the degree of pass-through from long-term U.S. government bond yields to long-term EME bond yields. Using panel data from a broad array of EMEs, our empirical estimates suggest that a 10-basis-point reduction in long-term U.S. Treasury yields results in a 0.4-percentage-point increase in the foreign ownership share of emerging market debt. This, in turn, is estimated to reduce government bond yields in EMEs by approximately 1.7 basis points. Federal Reserve LSAPs, which most previous studies have found reduced ten-year U.S. Treasury yields between 60 and 110 basis points during our sample period, therefore likely contributed to U.S. outflows into EMEs and marginal reductions in longer-term EME government bond yields. These effects are qualitatively similar to conventional U.S. monetary policy easing. To assess the robustness of these estimates, we also employ event study and vector autoregression methodologies, finding broadly similar results using these methods. While these results hold in the aggregate, marginal effects vary notably across emerging market countries.
    Keywords: Flow of funds ; Open market operations ; Emerging markets ; Treasury bonds ; Rate of return ; Debts, External ; Government securities
    Date: 2013
  19. By: Tom Cusbert (Reserve Bank of Australia); Thomas Rohling (Reserve Bank of Australia)
    Abstract: Australian financial institutions remained healthy throughout the global financial crisis and their deposits were guaranteed by the Federal Government. Nevertheless, demand for currency increased abnormally quickly in late 2008, resulting in an additional $5 billion (or 12 per cent) of Australian banknotes on issue by the end of that year. The rise in currency demand began in mid October 2008, around four weeks after the collapse of Lehman Brothers and concurrently with policy responses of the Reserve Bank of Australia (RBA) and the Federal Government. The surge in currency demand did not have any destabilising effect on the banking system – indeed bank deposits also rose during the period. However, the rise in currency demand did raise some issues for the RBA's banknote distribution operations. Traditional methods of currency demand suggest a role for interest rate reductions and the Federal Government stimulus payments to households in explaining the increase in currency holdings. We estimate that these factors can only account for around 20 per cent of the observed increase in currency holdings. The remainder of the rise could be due to an increase in precautionary holdings by people concerned about the liquidity or solvency of financial institutions and by financial institutions as a contingency. This is consistent with the disproportionate rise in demand for high-denomination banknotes at this time.
    Keywords: currency demand; banknote demand; financial crisis
    JEL: C22 E41
    Date: 2013–01
  20. By: Lixin Wu
    Abstract: In this paper, we establish a market model for the term structure of forward inflation rates based on the risk-neutral dynamics of nominal and real zero-coupon bonds. Under the market model, we can price inflation caplets as well as inflation swaptions with a formula similar to the Black's formula, thus justify the current market practice. We demonstrate how to further extend the market model to cope with volatility smiles. Moreover, we establish a consistency condition on the volatility of real zero-coupon bonds using arbitrage arguments, and with that re-derive the model of Jarrow and Yildirim (2003) with real forward rates based on "foreign currency analogy", and thus interconnect the two modeling paradigms.
    Date: 2013–02
  21. By: Héctor Manuel Záarte Solano; Angélica Rengifo Gómez
    Abstract: This paper investigates whether transforming the Consumer Price Index with a class of power transformations lead to an improvement of inflation forecasting accuracy. We use one of the prototypical models to forecast short run inflation which is known as the univariate time series ARIMA . This model is based on past inflation which is traditionally approximated by the difference of logarithms of the underlying consumer price index. The common practice of applying the logarithm could damage the forecast precision if this transformation does not stabilize the variance adequately. In this paper we investigate the benefits of incorporating these transformations using a sample of 28 countries that has adopted the inflation targeting framework. An appropriate transformation reduces problems with estimation, prediction and inference. The choice of the parameter is done by bayesian grounds.
    Date: 2013–02–05
  22. By: Irigoin, Alejandra
    Abstract: Economic historians have offered several explanations for China’s cycles of silverisation and de-silverisation in the 18th and 19th centuries focusing either on exogenous supply shortages in world silver markets or an outflow of silver as a consequence of opium imports. This paper challenges both existing “supply-side” and “demand-side” explanations. Section two shows that the supply side change was not a decline in the quantity of silver but in the quality of imported silver coins after the 1820s. Section three shows that this led to a decline in demand because China did not perform as a classic bi-metallic system as usually assumed. Because China lacked monetary sovereignty, the Chinese adopted a foreign coin, the Spanish American peso as the preferred means of payment in some areas of southern China, and increasingly further into the interior. Section four presents evidence for the exchange rate premium of the Spanish American silver coin over other coins and, more importantly, over silver sycee in China after the 1790s. This allowed for large-scale arbitrage by means of acquiring silver sycee in China for export, while bringing coined silver to China. Underlying this sort of 'dollarization' in China was opium. Hence section five shows that opium imports did not trigger the outflow of silver. Instead the flight of silver in fact seems to be the cause for large opium imports.
    Keywords: Monetary history of China; bimetallic system; 'dollarization'; silver trade; Opium imports; Daoguang depression
    JEL: E42 N25 N00 N15
    Date: 2013–01–20
  23. By: Taisuke Nakata
    Abstract: This paper examines how the presence of uncertainty alters allocations and prices when the nominal interest rate is constrained by the zero lower bound. I conduct the analysis using a standard New Keynesian model in which the nominal interest rate is determined according to a truncated Taylor rule. I find that an increase in the variance of shocks to the discount factor process reduces consumption, inflation, and output by a substantially larger amount when the zero lower bound is binding than when it is not. Due to the zero lower bound constraint, policy functions for the real interest rates and the marginal costs of production are highly convex and concave, respectively. As a result, a mean-preserving spread in the shock distribution increases the expectation of future real interest rates and decreases the expectation of future real marginal costs, which lead forward-looking households and firms to reduce consumption and set lower prices today. The more flexible prices are, the larger the effects of uncertainty are at the zero lower bound.
    Date: 2013

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