nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒03‒09
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Understanding Global Liquidity By Sandra Eickmeier; Leonardo Gambacorta; Boris Hofmann
  2. ECB projections as a tool for understanding policy decisions By Paul Hubert
  3. Central Bank Forecasts of Policy Interest Rates: An Evaluation of the First Years By Beechey, Meredith; Österholm, Pär
  4. On measuring the nonlinear effect of interest rates on inflation and output By Hyeong Ho Moon; Tae-Hwan Kim; Seongho Nah
  5. Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter? By Nidhaleddine Ben Cheikh
  6. The Impact of Monetary Policy Surprises on Australian Financial Futures Markets By Xinsheng Lu; Ying Zhou; Mingting Kou
  7. The influence and policy signaling role of FOMC forecasts By Paul Hubert
  8. On the use of sterilisation bonds in emerging Asia By Mehrotra, Aaron
  9. Re-Coinage as a Monetary Tax: Conditions, Consequences and Comparisons with Debasement By Svensson, Roger
  10. Foreign Exchange Inflows in Emerging Markets: How Much Are They Sterilised? By Michael Bleaney; Sharmila Devadas
  11. Economic Stability and Choice of Exchange Rate Regimes By Kaji, Sahoko
  12. Benign neglect of the long-term interest rate By Philip Turner
  13. Granger Causality from Exchange Rates to Fundamentals: What Does the Bootstrap Test Show Us? By Hsiu-Hsin Ko; Masao Ogaki
  14. Exchange Rate Pass-Through in the Global Economy. By Bussière, M.; Delle Chiaie, S.; Peltonen, T. A.

  1. By: Sandra Eickmeier; Leonardo Gambacorta; Boris Hofmann
    Abstract: We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand.
    Keywords: global liquidity, monetary policy, credit supply, credit demand, international business cycles, factor model, sign restrictions
    Date: 2013–02
  2. By: Paul Hubert (Ofce sciences-po)
    Abstract: The European Central Bank publishes inflation projections quarterly. This paper aims at establishing whether they influence private forecasts and whether they may be considered as an enhanced means of implementing policy decisions by facilitating private agents’ information processing. We provide original evidence that ECB inflation projections do influence private inflation expectations. We also find that ECB projections give information about future ECB rate movements, and that the ECB rate has different effects if complemented or not with the publication of ECB projections. We conclude that ECB projections enable private agents to correctly interpret and predict policy decisions
    Keywords: Monetary policy, ECB, Private forecasts,Influence, structural Var
    JEL: E52 E58
    Date: 2013–02
  3. By: Beechey, Meredith (Sveriges Riksbank); Österholm, Pär (National Institute of Economic Research)
    Abstract: In recent years the central banks of Norway and Sweden have published their endogenous policy interest-rate forecasts. In this paper, we evaluate those forecasts alongside policy-rate expectations inferred from market pricing. We find that for both economies there are only small differences in relative forecasting precision between the central bank and market-implied measures. However, both types of forecast fail tests for unbiasedness and efficiency at longer horizons.
    Keywords: Monetary policy; Market expectations; Norges Bank; Sveriges Riksbank
    JEL: E52
    Date: 2013–01–22
  4. By: Hyeong Ho Moon (Department of Economics, University of California at San Diego, USA); Tae-Hwan Kim (School of Economics, Yonsei University, South Korea); Seongho Nah (Bank of Korea, South Korea)
    Abstract: While economists are interested in the reaction of the interest rate to changes in the inflation rate, central bankers are usually more interested in the reverse causal relationship, i.e., the response of inflation (and output) to a change in the official interest rate as administrated by the central bank. Whether the reverse causal relationship is linear or nonlinear is an empirical issue. We investigated the reverse causal relationship by employing the LSTVAR model proposed by Weise (1999). We found strong evidence in favor of nonlinearity. As a consequence of the nonlinearity, we discovered various types of asymmetric effects of the interest rate on inflation and output. An asymmetric effect of monetary shocks of different sizes was uncovered, which implies that when the unexpected change in the official rate is doubled (i.e. from 0.25% to 0.5%), its effect on inflation and output is likely to be more than doubled. However, this finding is upheld only when the economy is in recession. The opposite result, in which the effect is smaller, is supported when the economy is expanding. Regarding the other asymmetric effect of monetary shocks with different signs, we found that central banks can expect that increasing the official rate by some certain amount (e.g. 0.25%) is likely to have much larger effect on inflation and output than decreasing the rate by the same amount (e.g. -0.25%) regardless of the state of the economy.
    Keywords: Nonlinear VAR, impulse response function, asymmetric monetary effect
    JEL: E43 E58
    Date: 2012–02–13
  5. By: Nidhaleddine Ben Cheikh (University of Rennes 1 - CREM UMR CNRS 6211, France)
    Abstract: This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.
    Keywords: Exchange Rate Pass-Through, Inflation, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–01
  6. By: Xinsheng Lu (Department of Economics and Finance, Tongji University, China); Ying Zhou (Department of Economics, Auckland University of Technology); Mingting Kou (Business School, Datong University, China)
    Abstract: This paper investigates the impact of unanticipated Australian monetary policy changes on AUD/USD exchange rate futures, 3-year and 10-year Australian Treasury bond futures, during the period from January 1997 to April 2010. Our study contributes to the literature by using both 30-day and 90-day bank accepted bill (BAB) rates to disentangle anticipated from surprise cash rate target changes in the Australian money market, and by concurrently modelling the effects of monetary surprises and other key macroeconomic announcements in Australia. The empirical results suggest that the 30-day BAB rate is served as the best proxy for the expected monetary policy actions. Further, the effect of Australian monetary surprises on volatility of all futures instruments is significant and complete when other key macroeconomic announcements are considered simultaneously.
    Keywords: monetary policy surprises, financial futures, asset return volatility
    JEL: C22 E44 G12 G14
    Date: 2013–01
  7. By: Paul Hubert (Ofce sciences-po)
    Abstract: Policymakers at the Federal Open Market Committee (FOMC) publish forecasts since 1979. We examine the effects of publishing FOMC inflation forecasts in two steps using a structural VAR model. We assess whether they influence private inflation expectations and the underlying mechanism at work: do they convey policy signals for forward guidance or help interpreting current policy decisions? We provide original evidence that FOMC inflation forecasts are able to influence private ones. We also find that FOMC forecasts give information about future Fed rate movements and affect private expectations in a different way than Fed rate shocks. This body of evidence supports the use of central bank forecasts to affect inflation expectations especially while conventional policy instruments are at the zero lower bound
    Keywords: Monetary policy, Forecasts, FOMC, influence, Policy signals, structural Var
    JEL: E52 E58
    Date: 2013–02
  8. By: Mehrotra, Aaron (BOFIT)
    Abstract: We document recent developments in the use of sterilisation bonds by six central banks in emerging Asia, and discuss the implications for monetary policy and the financial sector. An important development in the sterilisation of foreign exchange interventions in past years has been the frequent use of central banks’ own paper. There has been an attempt to lengthen the maturity structure of sterilisation bills, and maturities have risen, especially in 2010–11. The choice of sterilisation instrument is likely to depend partly on their relative costs. In particular, as the yield on central bank securities has fallen relative to the rate of remuneration of required reserves, some central banks in Asia have increasingly used central bank securities for sterilisation.
    Keywords: sterilisation bond; central bank bonds and bills; foreign exchange reserves; emerging Asia;
    JEL: E43 E50 E52 E58
    Date: 2013–01–15
  9. By: Svensson, Roger (Research Institute of Industrial Economics (IFN))
    Abstract: Re-coinage implies that old coins are declared invalid and exchanged for new ones at fixed exchange rates and dates. Empirical evidence shows that re-coinage could occur as often as twice a year within a currency area in the Middle Ages. The exchange fee at re-coinage worked as a monetary tax for trade and inhabitants. The main purpose here is to set up a simple theory about short-lived coins, which has not been done before. It turns out that re-coinage works particularly well in relatively undeveloped economies. Such economies had a small volume of coins in circulation, which facilitates both re-minting and monitoring of a short-lived coinage system. Re-coinage had both positive and negative overlapping consequences: 1) a stable coinage with respect to weight and fineness, and no long-term inflation; 2) short-term disturbances in the velocity of money, price-levels and the volume of transactions; 3) the coins' function as a store of value deteriorated; and 4) inhibitions on trade, business and the division of labor. Debasement was the alternative method for collecting a monetary tax. It was less restrictive and had lower administrative costs for the coin issuer than re-coinage. Besides low monetization, the strong position of ecclesiastical coin issuers, who disliked manipulations of weights and fineness, was likely a factor in why re-coinage was preferred to debasement. However, the costs for society as a whole could be higher for secret debasements than routine calendar driven re-coinage, due to the high uncertainty.
    Keywords: Re-coinage; SShort-lived coinage system; Debasement; Monetary tax; Monetization; Inflation; Monetary system
    JEL: E31 E42 E52 N13
    Date: 2013–01–09
  10. By: Michael Bleaney; Sharmila Devadas
    Abstract: As some emerging market economies have amassed large quantities of foreign exchange reserves, concern has arisen over the sterilisation of the domestic money stock from these flows. Existing studies focus mostly on narrow (reserve) money, and estimate a high degree of sterilisation. Empirical work on the long-run relationship between money and prices emphasises broad money, yet the long-run effect of foreign exchange inflows on broad money has been almost entirely ignored. Using a sample of quarterly data from 28 countries over the period 1990-2010, it is shown that broad money is sterilised to a significantly smaller degree than reserve money. This pattern is not confined to any particular group of countries and is unrelated to the nature of the flows (e.g. current account versus capital account surpluses). Sterilisation rates have increased in Asia during the recent period of persistent accumulation of foreign exchange reserves.
    Keywords: foreign exchange intervention, money, sterilisation, emerging markets JEL codes: E51, E52, F31, F33
    Date: 2013–02
  11. By: Kaji, Sahoko (Asian Development Bank Institute)
    Abstract: This paper emphasizes the importance of Europe’s structural problems and governance as the cause of the current euro area crisis. The euro may have led to bubbles, but member economies were not free of trouble before the euro. Many members were losing competitiveness and in need of removing structural rigidities. If anything, the euro was expected to encourage structural reform, by taking away the easy choice of monetary and fiscal expansion. We first discuss the relationship between the single currency and economic stability in Europe. We confirm the asymmetries that remained after the introduction of the euro and then discuss the governance overhaul taking place in Europe today. This overhaul was something that should have been done before introducing the euro, and its advancement may be the silver lining of this crisis. Finally, we touch upon the implications for Asia and Japan, from the point of view of the choice of exchange rate regime as a method to advance necessary reforms.
    Keywords: single currency; europe; euro area crisis; economic stability; exchange rate regimes
    JEL: F33 F41
    Date: 2013–02–20
  12. By: Philip Turner
    Abstract: Large-scale central bank purchases of government bonds have made the long-term interest rate key in the monetary policy debate. How central banks react to bond market movements has varied greatly from one episode to another. Driving the term premium in long-term rates negative may stimulate aggregate demand. And a negative term premium encourages borrowers to lengthen the maturity of their debts. Such a reduction in maturity risks makes the financial system more resilient to shocks, and in particular can help emerging economies finance their heavy infrastructure and housing investment needs more safely. But an extended period of very low long rates and high public debt creates financial stability risks. Interest rate risk in the banking system has grown, and some institutional investors face significant exposures. Central banks in the advanced economies now hold a high proportion of bonds issued by their governments, most of which have so far failed to arrest the rise in the ratio of government debt to GDP. Implementing an effective exit strategy will be difficult. Current policy frameworks should be reconsidered, with a view to clarifying the importance of the long-term interest rate for monetary policy, for financial stability and for government debt management.
    Keywords: Central banks, bond market crisis, exit strategy, sovereign debt management
    Date: 2013–02
  13. By: Hsiu-Hsin Ko (National University of Kaohsiung); Masao Ogaki
    Abstract: We use a residual-based bootstrap method to re-examine the finding of the Granger causality relationship from exchange rates to fundamentals in Engel and West (Exchange rate and fundamentals, Journal of Political Economy 2005, 113 (3), 485–517), in which the evidence for the relation is taken as evidence for the present-value model for exchange rates. The test results are against the previous findings. The Monte Carlo experiment results suggest that the causality test implemented in the previous study tends to spuriously reject null hypotheses. Thus, the existing evidence for the present value model for exchange rates is not robust.
    Keywords: Bootstrap, Granger causality, exchange rates, fundamentals
    JEL: F30 F31 C32
    Date: 2013–02
  14. By: Bussière, M.; Delle Chiaie, S.; Peltonen, T. A.
    Abstract: This paper estimates export and import price equations for 40 countries – including 19 emerging market economies (EMEs) – and aims to understand heterogeneity across countries in the degree of exchange rate pass-through to import and to export prices. Results indicate that (i) the elasticities of trade prices are sizeable in EMEs, and higher on average than in advanced economies for export prices; (ii) such elasticities are primarily influenced by macroeconomic factors; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) lower exchange rate pass-through in the United States, compared to other advanced economies, can be related to the geographical distribution of U.S. imports, more heavily concentrated in countries with high elasticity of export prices. Overall, these results yield an enhanced understanding of exchange rate pass-through, emphasizing the role of external factors.
    Keywords: emerging market economies; exchange rate pass-through; terms of trade.
    JEL: F10 F30 F41
    Date: 2013

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