nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒03‒02
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy and Rational Asset Price Bubbles By Jordi Galí
  2. Unconventional government debt purchases as a supplement to conventional monetary policy By Ellison , Martin; Tischbirek , Andreas
  3. The Hungarian Monetary Policy Model By Katalin Szilágyi; Dániel Baksa; Jaromir Benes; Ágnes Horváth; Csaba Köber; Gábor D. Soós
  4. Consumer Tendency Survey Based Inflation Expectations By Ece Oral
  5. Ramsey Monetary Policy in a New Keynesian Model with Endogenous Growth By Barbara Annicchiarico; Lorenza Rossi
  6. Exchange Rates in Target Zones - Evidence from the Danish Krone By Mark P. Taylor; Stefan Reitz
  7. Market-Based Measurement of Expectations on Short-Term Rates in Turkey By Ibrahim Burak Kanli
  8. Imperfect Information and Inflation Expectations: Evidence from Microdata By Lena Dräger; Michael Lamla
  9. The Turkish Approach to Capital Flow Volatility By Yasin Akcelik; Erdem Basci; Ergun Ermisoglu; Arif Oduncu
  10. IMF Lending and Banking Crises By Luca Papi; Andrea Filippo Presbitero; Alberto Zazzaro
  11. A new approach to probabilistic surveys of professional forecasters and its application in the monetary policy context By Halina Kowalczyk; Tomasz Lyziak; Ewa Stanisławska
  12. A Banking Union for the Euro Area By Rishi Goyal; Petya Koeva Brooks; Mahmood Pradhan; Thierry Tressel; Giovanni Dell'Ariccia; Ceyla Pazarbasioglu
  13. A Literature Overview of the Central Bank’s Knowledge Transparency By M. Haluk Guler
  14. An analytic multi-currency model with stochastic volatility and stochastic interest rates By Alessandro Gnoatto; Martino Grasselli

  1. By: Jordi Galí
    Abstract: I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth. The optimal monetary policy seeks to strike a balance between stabilization of the bubble and stabilization of aggregate demand. The paper's main findings call into question the theoretical foundations of the case for "leaning against the wind" monetary policies.
    JEL: E44 E52
    Date: 2013–02
  2. By: Ellison , Martin (University of Oxford); Tischbirek , Andreas (University of Oxford)
    Abstract: In response to the Great Financial Crisis, the Federal Reserve and the Bank of England have adopted unconventional monetary policy instruments. We investigate if one of these, purchases of long-term government debt, could be a valuable addition to conventional short-term interest rate policy even if the main policy rate is not constrained by the zero lower bound. To do so we add a stylised financial sector and central bank asset purchases to an otherwise standard New Keynesian DSGE model. Asset quantities matter for interest rates through a preferred habitat channel. If conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation.
    Keywords: quantitative easing; large-scale asset purchases; preferred habitat; optimal monetary policy
    JEL: E40 E43 E52 E58
    Date: 2013–02–18
  3. By: Katalin Szilágyi (Magyar Nemzeti Bank (central bank of Hungary)); Dániel Baksa (Magyar Nemzeti Bank (central bank of Hungary)); Jaromir Benes (International Monetary Fund); Ágnes Horváth (Magyar Nemzeti Bank (central bank of Hungary)); Csaba Köber (Magyar Nemzeti Bank (central bank of Hungary)); Gábor D. Soós (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: March 2011 marked the introduction of the Magyar Nemzeti Bank’s Monetary Policy Model (MPM), representing a paradigm shift in both macroeconomic projection and monetary policy decision support. In contrast to previous conditional projections, the MPM provides an endogenous definition of both the projected policy rate and the projected exchange rate. Given the forward-looking nature of the model, expectations of economic agents play a key role in the monetary transmission process; therefore, the future achievement of the inflation target is guaranteed by the projected path of the interest rate over the forecast horizon. In this paper, we discuss the underlying structure and logic behind the MPM, describe the key behavioural equations and examine how the channels of monetary transmission appear in the model. In addition, we present the empirical validation process in detail from calibration, through Bayesian estimation and discussion of the economic properties of the model to the historical projection exercise. Finally, we discuss the main challenges we faced during the first year of application.
    Keywords: model projection, simulation, central banking, monetary policy
    JEL: C51 E17 E52 E58
    Date: 2013
  4. By: Ece Oral
    Abstract: The expectations obtained from surveys play an important role as leading indicators for the application of the monetary policies. The ability to measure inflation expectations is an integral part of central bank policy especially for central banks that are implementing inflation-targeting regime. A forward-looking perspective is essential to the success of inflation targeting. Therefore, a central bank having primary objective of price stability are interested in inflation expectations. Qualitative data on inflation expectations obtained from surveys can be quantified into numerical indicators of the expected rates of price change. This paper presents the results of different quantification methods such as Carlson-Parkin method, balance method, regression method put into action in order to estimate Turkish consumer inflation predictions based on monthly consumer surveys. Carlson-Parkin method quantifies qualitative survey data on expectations assuming aggregate expectations are normally distributed. In order to capture non-normality, stable distributions are also considered. The quantification techniques are compared with each other as well.
    Keywords: Consumers, Inflation Expectations, Survey Data, Quantification Methods
    JEL: C10 C80 D84 E31
    Date: 2013
  5. By: Barbara Annicchiarico (University of Rome "Tor Vergata"); Lorenza Rossi (University of Pavia, Department of Economics and Business)
    Abstract: We study Ramsey monetary policy in a New Keynesian (NK) model with endogenous growth and knowledge spillovers external to each firm. We find that in contrast with the standard NK model, the Ramsey dynamics implies deviation from full inflation targeting in response to technology and government spending shocks
    Keywords: Monetary Policy, Endogenous Growth, Ramsey Problem
    JEL: E32 E52 O42
    Date: 2013–02–13
  6. By: Mark P. Taylor; Stefan Reitz
    Abstract: Although the ERM II rules allow the Danish krone to fluctuate against the euro within an official target zone of 4.5%, most of the time the exchange rate has remained in a narrow range around its unconditional mean. Estimating a Smooth Transition Autoregression Target Zone (STARTZ) model confirms that the exchange rate exhibits target zone dynamics consistent with a band of approximately 0.75 percent around its unconditional mean. We conclude that the Danmark Nationalbank intervention policy of intra-marginal operations successfully managed an informal target zone in the foreign exchange market.
    Keywords: Target Zone, STARTZ model, Intervention
    JEL: E58 F31 G15
    Date: 2013–02
  7. By: Ibrahim Burak Kanli
    Abstract: This paper aims to serve two purposes. First, it evaluates the ability of various financial market instruments to capture market expectations on short-term rate. Second, it proposes an alternative approach to obtain estimates of term premium inherent in alternative returns. Empirical results reveal that Turkish lira (TRY) returns implied by USD/TRY forward rates dominate all other return types for predicting the overnight interbank repo rate, followed by TRY interbank bid rate. Moreover, these return types are found to contain the lowest and least volatile term premium. However, forecasting ability of returns declines significantly with the introduction of the new policy framework by the Central Bank of Turkey, which utilizes “controlled degree of uncertainty” in o/n rates as an additional tool. In the recent period TRY interbank bid and ask rates stand out as returns with the highest ability to represent market expectations.
    Keywords: Monetary policy, expectations on short-term rate, market-based measures of expectations, term premium
    JEL: E43 E52 G12
    Date: 2013
  8. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Michael Lamla (KOF Swiss Economic Institute, ETH Zurich)
    Abstract: We investigate the updating behavior of individual consumers regarding their shortand 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: 2013–01
  9. By: Yasin Akcelik; Erdem Basci; Ergun Ermisoglu; Arif Oduncu
    Abstract: The shock waves of the 2008-09 global financial crisis and the 2011-12 Eurozone debt crisis hit emerging markets from the trade, the finance and the expectations channels. We focus on the finance channel in this paper. We first discuss the challenges arising from capital flow volatility in emerging economies in general. We then focus on the Turkish approach and describe in detail the new policy mix implemented by the Central Bank of the Republic of Turkey during the 2008-2012 period and the results obtained. This approach differs from others in its emphasis on the use of macroprudential policy measures rather than capital flow measures for improving domestic financial stability in face of volatile capital flows.
    Keywords: Capital flow volatility, macroprudential policy, capital flow measures
    JEL: E44 E52 E58
    Date: 2013
  10. By: Luca Papi (Universit… Politecnica delle Marche, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, MoFiR)
    Abstract: In this paper we look at the effect of International Monetary Fund (IMF) lending programs on banking crises in a large sample of developing countries, over the period 1965-2010. The endogeneity of the Fund intervention is addressed by adopting an instrumental variable (IV) strategy, in which the degree of political similarity between IMF borrowers and the G-7 is taken as an instrument for the likelihood of a country signing an IMF lending arrangement. Controlling for the standard determinants of banking crises, the IV estimates suggest that previous IMF borrowers are significantly less likely to experience a banking crisis. We also provide evidence suggesting that compliance with conditionality matters, consistent with the importance of IMF-supported financial reform, and that the positive effect of the Fund intervention on banking sector stability works through a direct liquidity provision effect.
    Keywords: Banking crises, IMF programs, Political economy
    JEL: F33 F34 F35 O11
    Date: 2013–02
  11. By: Halina Kowalczyk (National Bank of Poland, Economic Institute); Tomasz Lyziak (National Bank of Poland, Economic Institute); Ewa Stanisławska (National Bank of Poland, Economic Institute)
    Abstract: In this paper we present the NBP Survey of Professional Forecasters introduced in 2011 by the National Bank of Poland. It is a new survey that allows analysis of macroeconomic forecasts of professional economists, including their probabilistic forecasts of CPI inflation, GDP growth and the NBP reference rate. In the paper we discuss in detail survey methodology, whose some elements are novel. It refers especially to the construction of probabilistic survey questions. Instead of declaring probabilities that in a certain horizon a given variable will be in pre-defined intervals, NBP SPF experts declare median and the limits of a 90-percent probability range between the 5th and 95th percentile of their subjective probability distributions. To present the benefits from the applied design of the NBP SPF, we describe the first results obtained from the NBP SPF.
    JEL: C82 D84 E52
    Date: 2013
  12. By: Rishi Goyal; Petya Koeva Brooks; Mahmood Pradhan; Thierry Tressel; Giovanni Dell'Ariccia; Ceyla Pazarbasioglu
    Abstract: The SDN elaborates the case for, and the design of, a banking union for the euro area. It discusses the benefits and costs of a banking union, presents a steady state view of the banking union, elaborates difficult transition issues, and briefly discusses broader EU issues. As such, it assesses current plans and provides advice. It is accompanied by three background technical notes that analyze in depth the various elements of the banking union: a single supervisory framework; a single resolution and common safety net; and urgent issues related to repair of weak banks in Europe.
    Keywords: Banking systems;Europe;Euro Area;Bank supervision;Bank regulations;Bank resolution;Deposit insurance;Financial safety nets;Monetary unions;Banking Union; Single Supervisory Mechanism; Direct Recapitalization; European Stabilization Mechanism; Resolution; Deposit Insurance; Common Backstops
    Date: 2013–02–12
  13. By: M. Haluk Guler
    Abstract: Central bank transparency has received great deal of attention in recent years. However, the theoretical literature has not yet reached a consensus on the effect a higher degree of transparency has on economic welfare. In this paper, we focus one aspect of transparency, the transparency of ‘knowledge’ which refers to the disclosure of central bank forecasts about economic variables. In view of the ongoing theoretical disagreement concerning the economic effects of transparency, this paper provides an overview of the literature by looking first at the earlier studies built on the time-inconsistency models in the Barro-Gordon theoretical framework. We then investigate more recent strands of literature, which rely on the assumption that central banks are credible. Last, we conclude on the economic reasons for the mixed results of models and briefly mention the scope for further research.
    JEL: E52 E58 E59
    Date: 2013
  14. By: Alessandro Gnoatto; Martino Grasselli
    Abstract: We introduce a tractable multi-currency model with stochastic volatility and correlated stochastic interest rates that takes into account the smile in the FX market and the evolution of yield curves. The pricing of vanilla options on FX rates can be performed effciently through the FFT methodology thanks to the affinity of the model. A joint calibration exercise of the implied volatility surfaces of a triangle of FX rates shows the flexibility of our framework in dealing with the typical symmetries that characterize the FX market. Our framework is also able to describe many non trivial links between FX rates and interest rates: a second calibration exercise highlights the ability of the model to fit simultaneously FX implied volatilities while being coherent with interest rate products.
    Date: 2013–02

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