nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒03‒16
33 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Interest Rate Expectations in the Media and Central Bank Communication By Michael J. Lamla; Jan-Egbert Sturm
  2. Monetary Policy, Inflation Illusion and the Taylor Principle – An Experimental Study By Wolfgang J. Luhan; Johann Scharler
  3. China's Monetary Policy Communication: Money Markets not only Listen, They also Understand By Alicia Garcia-Herrero; Eric Girardin
  4. Central Bank Independence and the Signaling Effect of Intervention: A Preliminary Exploration By Shinji Takagi; Hiroki Okada
  5. The International Monetary System in Flux: Overview and Prospects By Pedro Bação; António Portugal Durate; Mariana Simões
  6. Testing for optimal monetary policy via moment inequalities By Laura Coroneo; Valentina Corradi; Paulo Santos Monteiro
  7. Speculative Runs on Interest Rate Pegs By Marco Bassetto; Christopher Phelan
  8. The impact of yuan internationalization on the euro-dollar exchange rate. By Agnès Bénassy-Quéré; Yeganeh Forouheshfar
  9. Does Easing Monetary Policy Increase Financial Instability? By Ambrogio Cesa-Bianchi; Alessandro Rebucci
  10. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Augustin Landier; David Sraer; David Thesmar
  11. Should Central Banks publish interest rate forecasts? - A Survey By Phan, Tuan
  12. Not Just the Great Contraction: Friedman and Schwartz’s A Monetary History of the United States 1867 to 1960 By Michael D. Bordo; Hugh Rockoff
  13. How Much Has Private Credit Lending Reacted to Monetary Policy in China? The Case of Wenzhou By Duo Qin; Zhong Xu; Xue-Chun Zhang
  14. Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests By Timo Bettendorf; Wenjuan Chen; ;
  15. Fiscal Limits and Monetary Policy By Eric M. Leeper
  16. The Historical Role of the European Shadow Banking System in the Development and Evolution of Our Monetary Institutions By Lazcano, I. C.
  17. Canadian Monetary Policy Analysis using a Structural VARMA Model By Mala Raghavan; George Athanasopoulos; Param Silvapulle
  18. Non-Linear Taylor Rule through Threshold Estimation By Bhaduri, Saumitra; Sethudurai, Raja
  19. The Impact of Cartelization, Money, and Productivity Shocks on the International Great Depression By Harold L. Cole; Lee E. Ohanian
  20. Portfolio balance effects of the SNB's bond purchase program By Andreas Kettemann; Signe Krogstrup
  21. Towards a New EMU By Fritz Breuss
  22. Memory and the Limits of Money By Thomas Wiseman
  23. Interest rate volatility: a consol rate-based measure By Vincent Brousseau; Alain Durré
  24. Monetary Neutrality under Evolutionary Dominance of Bounded Rationality By Gilberto Tadeu Lima; Jaylson Jair da Silveira
  25. Time Instability of the U.S. Monetary System: Multiple Break Tests and Reduced Rank TVP VAR By Dukpa Kim; Yohei Yamamoto
  26. The Road to Sustainable Growth in Emerging Markets: The Role of Structural and Monetary Policies in Turkey By Aysan, Ahmet Faruk; Güler, Mustafa Haluk; Orman, Cüneyt
  27. Money, fiscal policy, and interest rates: A critique of Modern Monetary Theory By Thomas I. Palley
  28. Recessions after Systemic Banking Crises: Does it matter how Governments intervene? By Sweder van Wijnbergen; Timotej Homar
  29. Monetary Equilibria and Knightian Uncertainty By Eisei Ohtaki; Hiroyuki Ozaki
  30. The Fisher Relation in the Great Depression and the Great Recession By David Laidler
  31. Money in the Production Function By Jonathan Benchimol
  32. Business cycle and monetary policy analysis with market rigidities and financial frictions By M. Casares; Luca Deidda; JE. Galdon-Sanchez
  33. The Eurozone: Piecemeal Approach to an Optimum Currency Area By Heinz Handler

  1. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: While there is ample evidence how central bank communication and interest rate decisions are perceived by financial markets, insights regarding the response of the public is lacking. Media is known to be an important transmitter of news to the public. Based on articles in the Financial Times Europe, we test how expectations on the future course of monetary policy presented in the media are affected by central bank communication and interest rate decisions.
    Keywords: European Central Bank, monetary policy announcements, central bank communication, media expectations
    JEL: E52 E58
    Date: 2013–03
  2. By: Wolfgang J. 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: 2013–02
  3. By: Alicia Garcia-Herrero (Banco Bilbao Vizcaya Argentaria (BBVA) and Lingnan University and Hong Kong Institute for Monetary Research); Eric Girardin (Aix-Marseille University and French National Center for Scientific Research (CNRS) and ˆ[cole des Hautes ˆ[tudes en Sciences Sociales (EHESS) and Hong Kong Institute for Monetary Research)
    Abstract: Central bank communication is becoming a key aspect of monetary policy as a consequence of financial liberalization and the introduction of market instruments to conduct monetary policy. How much the market listens and, possibly, understands the People's Bank of China (PBoC) should be a key question for the central bank in modernising its monetary policy toolkit. In this paper, we tackle this issue empirically and find that China's money markets not only listen to the PBoC's words but understand the tone of monetary policy which the PBoC intends to convey in its messages. First, we find that the volatility and volume of money market rates change right after communication from the PBoC's governing body. Second, we find a statistically significant rise in interbank rates following communication with a hawkish tone. All in all, our results show strong evidence of effective oral and written communication by the PBoC aimed at China's money markets.
    Keywords: China Monetary Policy Communication, Money Market
    JEL: E52 E58 E43
    Date: 2013–02
  4. By: Shinji Takagi (Graduate School of Economics, Osaka University); Hiroki Okada (Graduate School of Economics, Osaka University)
    Abstract: This note explores the signaling effect of foreign exchange market intervention in countries, such as Japan, the United Kingdom and the United States, where separate agencies are responsible for intervention and monetary policy. An important part of the signaling effect operates when an entity conducting intervention makes a credible commitment to a change in future monetary policy, suggesting that its effectiveness hinges upon whether the central bank is independent of government oversight. We test this conjecture by comparing the consistency of intervention and future monetary policy in Japan before and after April 1998, when central bank independence was established by the new Bank of Japan Law. As expected, the signaling effect of intervention weakened after the central bank became independent.
    Keywords: foreign exchange market intervention; Japanese intervention; central bank independence; signaling effect of intervention
    JEL: E42 F31 F33
    Date: 2013–03
  5. By: Pedro Bação (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Durate (Faculty of Economics, University of Coimbra and GEMF, Portugal); Mariana Simões (Faculty of Economics, University of Coimbra, Portugal)
    Abstract: This paper analyses the architecture of the International Monetary System (IMS) and the role of reserve currencies in it. We begin by describing the evolution of the IMS from the Gold Standard to the Bretton Woods system and the European integration process that led to the creation of the euro. We then discuss the role played by the euro in the IMS as an international reserve currency. Drawing on econometric estimations, we extrapolate the evolution of the shares in international reserves of the euro, the US dollar and the renminbi. In the discussion, we take into account the current sovereign debt crisis and the possibility of a currency war taking place as a result of the reportedly excessive undervaluation of the renminbi and of the expansionist monetary policies undertaken in several advanced economies, namely in the USA. The text ends with a review of proposals for reducing the likelihood of currency wars, which may disrupt the functioning of the current IMS.
    Keywords: currency war; euro; financial crisis; International Monetary System; exchange rate misalignments.
    JEL: E52 F31 F33 G15
    Date: 2013–01
  6. By: Laura Coroneo; Valentina Corradi; Paulo Santos Monteiro
    Abstract: The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime, commonly commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the United States economy.
    Keywords: Bootstrap; GMM; Moment Inequalities; Optimal Monetary Policy
    JEL: C12 C52 E52 E58
    Date: 2013–03
  7. By: Marco Bassetto; Christopher Phelan
    Abstract: In this paper we show that interest rate rules lead to multiple equilibria when the central bank faces a limit to its ability to print money, or when private agents are limited in the amount of bonds that can be pledged to the central bank in exchange for money. Some of the equilibria are familiar and common to the environments where limits to money growth are not considered. However, new equilibria emerge, where money growth and inflation are higher. These equilibria involve a run on the central bank's interest target: households borrow as much as possible from the central bank, and the shadow interest rate in the private market is different from the policy target.
    JEL: E42 E43 E52 E61
    Date: 2013–03
  8. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics et CESIfo); Yeganeh Forouheshfar (Université Paris-Dauphine)
    Abstract: We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China, yuan, exchange-rate regime, euro, dollar.
    JEL: F31 F33
    Date: 2013–02
  9. By: Ambrogio Cesa-Bianchi; Alessandro Rebucci
    Abstract: This paper develops a model featuring both a macroeconomic and a financial stability objective that speaks to the interaction between monetary and macroprudential policies. First, we find that interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they lead to greater financial instability in response to contractionary shocks, while they act as an automatic financial stabilizer in response to expansionary shocks. Second, we find that when the policy interest rate is the only instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. This has important implications for the role played by U. S. monetary policy in the run-up to the global financial crisis: the model suggests that the weak link in the U. S. policy framework was not the monetary policy stance after 2002, but rather the absence of an effective second policy pillar aimed at preserving financial stability.
    JEL: E44 E52 E61
    Date: 2013–02
  10. By: Augustin Landier; David Sraer; David Thesmar
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    JEL: E51 E52 G2 G21 G3
    Date: 2013–02
  11. By: Phan, Tuan
    Abstract: As a particular form of transparency, nowadays some central banks publish their interest rate forecasts while many others refuse to do that. Whether the publication is good or bad for economic performance and social welfares is now a hotly debatable subject. This paper provides a review of the literature in both theoretical and empirical aspects. We also establish a criteria table which could be used as a preliminary guideline for central banks in answering the question whether they should reveal the forecasts, and how to publish the policy rate inclinations. The suggested conclusion is that interest rate projections should be considered as one of the last items that central banks should reveal and they should be very careful in publishing its policy rate forecasts.
    Keywords: Central bank, transparency, interest rate forecasts
    JEL: E58
    Date: 2013–03–01
  12. By: Michael D. Bordo; Hugh Rockoff
    Abstract: A Monetary History of the United States 1867 to 1960 published in 1963 was written as part of an extensive NBER research project on Money and Business Cycles started in the 1950s. The project resulted in three more books and many important articles. A Monetary History was designed to provide historical evidence for the modern quantity theory of money. The principal lessons of the modern quantity theory of the long-run neutrality of money, the transitory effects of monetary policy on real economic activity, and the importance of stable money and of monetary rules have all been absorbed in modern macro models. A Monetary History , unlike the other books, has endured the test of time and has become a classic whose reputation has grown with age. It succeeded because it was based on narrative and not an explicit model. The narrative methodology pioneered by Friedman and Schwartz and the beautifully written story still captures the imaginations of new generations of economists.
    JEL: B22 N1
    Date: 2013–02
  13. By: Duo Qin (Department of Economics, SOAS, University of London, UK); Zhong Xu (People's Bank of China); Xue-Chun Zhang (People's Bank of China)
    Abstract: This study investigates empirically what the major factors are which have driven Wenzhou’s informal credit market and how much that market is responsive to monetary policies and the formal banking conditions nationwide. The main findings are: (i) the informal credit lending rates are highly receptive to monetary policies; (ii) the market is dominantly demand driven; (iii) the informal lending is substitutive to bank savings in the short run but complementary to banking lending in the long run; and (iv) the market is complementary to excessive investments in the local real estate market.
    Keywords: informal credit market, monetary policy
    JEL: G19 E52 O16
    Date: 2013–02
  14. By: Timo Bettendorf; Wenjuan Chen; ;
    Abstract: There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. We find strong evidence of explosive behavior in the nominal Sterling-dollar exchange rate. However, this explosive behavior should not be simply interpreted as evidence of rational bubbles, as we show that it might be driven by the relative prices of traded goods.
    Keywords: exchange rates, rational bubbles, sequential unit root test
    JEL: C1 F3
    Date: 2013–02
  15. By: Eric M. Leeper
    Abstract: Every economy faces a "fiscal limit" that delivers the maximum government debt-GDP ratio that can be sustained without appreciable risk of default or higher inflation. But governments in advanced economies issue substantial nominal debt and nominal debt is a commitment to repay in nominal units. When such economies are approaching their fiscal limits, debt can be devalued through higher current and future inflation rates. The paper develops a simple bond market supply-demand apparatus to explain how fiscal policy can be a source of inflation, while monetary policy merely determines the timing of inflation.
    JEL: E31 E52 E62 E63
    Date: 2013–03
  16. By: Lazcano, I. C.
    Abstract: When we hear about the 2008 Lehman Brothers crisis, immediately we relate it to the concept of "shadow banking system"; however, the credit intermediation involving lightly regulated entities and activities outside the traditional banking system are not new for the European Financial Systems, after all, many innovations developed in the past, were adopted by European nations and exported to the rest of the world (i.e. coinage and central banking), and European innovators unleashed several financial crises related to "shadowy" financial intermediaries (i.e. the Gebroeders de Neufville crisis of 1763). However, despite not many academics, legislators and regulators even agree on what "shadow banking" is, this latter does not refer exclusively to the functions of credit intermediation and maturity transformation. This concept also refers to the creation of assets such as digital media of exchange which are designed under the influence of Friedrich Hayek and the Austrian School of Economics. This lack of a uniform definition of "shadow banking" has limited our regulatory efforts on key issues like the private money creation, a source of vulnerability in the financial system that, paradoxically, at the same time could result in an opportunity to renovate European institutions, heirs of the tradition of the Wisselbank and the Bank of England which, during the seventeenth century, faced monetary innovations and led the European monetary revolution that originated the current monetary and regulatory practices implemented around the world.
    Keywords: Europe; shadow banking; world-system; central banking; financial innovation; regulation
    Date: 2013
  17. By: Mala Raghavan; George Athanasopoulos; Param Silvapulle
    Abstract: This paper builds a structural VARMA (SVARMA) model for investigating Canadian monetary policy. Despite the support for a VARMA model for monetary policy analysis, the traditional VAR and SVAR models have predominantly been used in the literature mainly due to difficulties associated with the identification and estimation of such a model. Using the scalar component model (SCM) proposed by Athanasopoulos and Vahid (2008a), this paper first identifies a VARMA model and then constructs a SVARMA model for Canadian monetary policy. We included the SVAR model in our study for a comparison purpose. Relative to this model, the impulse responses generated by the SVARMA model appear to be consistent with those predicted by various economic theoretical models, and solves the economic puzzles found commonly in the empirical literature on monetary policy. The successful construction and implementation of the SVARMA model for Canadian monetary policy analysis along with its promising impulse responses, indicate the suitability of this framework for small open economies.
    Keywords: VARMA models, Identification, Impulse responses, Open economy, Transmission mechanism
    Date: 2013
  18. By: Bhaduri, Saumitra; Sethudurai, Raja
    Abstract: This paper tries to identify non-linearity in the estimation of Taylor type reaction function for Reserve Bank of India using a threshold estimation technique of Hansen (2000). For the monthly data from March 2001 to October 2009 with Repo rate as the policy rate the estimation significantly identifies two thresholds with inflation and one threshold with output gap as threshold variables. We compared this model with that of a naïve univariate model and the typical Taylor type reaction function, the results are in support of the non-linear model in predicting the repo rate at turning points with more accuracy than the other two competing models.
    Keywords: Policy reaction function, threshold estimation, Taylor rule
    JEL: E5 E52 E58
    Date: 2013–03–08
  19. By: Harold L. Cole; Lee E. Ohanian
    Abstract: This study exploits panel data from 18 countries to assess the contributions of cartelization policies, monetary shocks, and productivity shocks on macroeconomic activity during the Great Depression. To construct a parsimonious and common model framework, we use the fact that many cartel policies are observationally equivalent to a country-specific labor tax wedge. We estimate a monetary DSGE model with cartel wedges along with productivity and monetary shocks. Our main finding is that cartel policy shocks account for the bulk of the Depression in the countries that adopted significant cartel policies, including the large depressions in the U.S., Germany, Italy, and Australia, and that the estimated cartel policy shocks plausibly coincide with the actual evolution of policies in these countries. In contrast, cartel policy shocks in the countries that did not significantly change policies were small and account for little of their Depressions.
    JEL: F1 N12
    Date: 2013–02
  20. By: Andreas Kettemann; Signe Krogstrup
    Abstract: This paper carries out an empirical investigation of the impact on bond spreads of the announcement, purchases and exit from the SNB's bond purchase program in 2009-2010. We find evidence in favor of a narrowing yield spread of covered bonds as a result of the program. The effect materialized in the days following the announcement of the SNB's intention to buy bonds issued by private sector borrowers, as markets learned that the SNB was buying covered bonds. The specification of the bond spreads used allows us to identify this effect as a discounted portfolio balance effect of the expected purchases, as distinct from policy signalling. In contrast, we find no evidence of a further effect of the actual purchases and subsequent sales on bond spreads.
    Keywords: portfolio balance, credit spread, corporate spread, unconventional monetary policy, central bank asset purchases, credit easing, zero lower bound
    JEL: E5 G1
    Date: 2013
  21. By: Fritz Breuss (WIFO)
    Abstract: The global financial and economic crisis in 2008-09 followed by a "Euro crisis" – not a crisis of the Euro but a sovereign debt (and/or banking) crisis in some Euro countries – forced to reforms of the asymmetric policy design of the Economic and Monetary Union (EMU). Starting with ad-hoc rescue operations for Greece, Ireland and Portugal a whole bunch of reform steps were necessary to make the Euro area "crisis-proof" for the future. Whether the measures taken are already enough to make the EMU better functioning in future crises is an open question. Nevertheless, the crisis proved to act like Schumpeter's "process of creative destruction": the old (not crisis-proof) institutional set-up has been gradually changed towards a more centralised fiscal policy at EU/Euro area level within a new EMU economic governance. Besides the improvement of the policy instruments of the "Economic Union" of EMU, also the ECB with its monetary policy entered more and more into the role of a lender of last resort of the banking sector. More far-reaching plans (that of Barroso and of Van Rompuy) are already on the table which should transform the European Union from a "Fiscal and Transfer Union" over a "Banking Union" into a genuine EMU with the final goal of a "Political Union", not to mention the "United States of Europe" (USE).
    Keywords: Economic and Monetary Union, Eurozone, European Integration, EU
    Date: 2012–03–06
  22. By: Thomas Wiseman (Department of Economics, The University of Texas at Austin)
    Abstract: I study a simplified version of Trejos and Wright’s (1995) random matching environment. If histories are observable, then full efficiency is achievable in equilibrium in the limit as agents become patient. In contrast, if histories are not observed, then payoffs in any monetary equilibrium (one in which agents exchange a good for an indivisible unit of fiat money) with a fixed stock of money are bounded away from efficiency. The gap disappears as the stock of money grows, but for any fixed level of patience, efficiency falls to zero if the stock of money is too high. The key insight is that the fraction of agents with zero money holdings in steady state converges to a positive level as patience increases.
    Keywords: fiat money, memory, random matching
    JEL: C73 D82 E4
    Date: 2013–02
  23. By: Vincent Brousseau (European Central Bank); Alain Durré (European Central Bank; IESEG - School of Management; Lille Economie & Management)
    Abstract: In this paper we propose a new methodology to estimate the volatility of interest rates in the euro area money market. In particular, our approach aims at avoiding the limitations of currently available measures, i.e. the dependency on arbitrary choices in terms of maturity and frequencies and/or of factors other than pure interest rates, e.g. credit risk or liquidity risk. The measure is constructed as the implied instantaneous volatility of a consol bond that would be priced on the EONIA swap curve over the sample period from 4 January 1999 to 20 November 2012. We show that this measure tracks well the historical volatility, in the sense that dividing the consol excess returns by this volatility removes nearly entirely excess of kurtosis and volatility clustering, bringing them close to an ordinary Gaussian white noise. JEL Classification: E43, E58, C22, C32
    Keywords: consol rate, historical volatility, overnight money market, interbank o¤ered interest rates
    Date: 2013–01
  24. By: Gilberto Tadeu Lima; Jaylson Jair da Silveira
    Abstract: We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock. To this end, we develop an approach based on a new analytical notion to which we refer as boundedly rational inattentiveness. We investigate the behavior of the price level in an context in which a firm can either pay a cost to update its information set and establish the optimal price (Nash strategy) or freely use information from the previous period and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. Although the bounded rationality strategy is the only survivor in the long-run evolutionary equilibrium, money is nonetheless neutral. The evolutionary learning dynamics takes the information-updating process to an equilibrium configuration in which, despite all firms play the bounded rationality strategy, the corresponding price level is the symmetric Nash equilibrium price.
    Keywords: bounded rationality; evolutionary dynamics; monetary neutrality
    JEL: E31 C73 D83
    Date: 2013–02–20
  25. By: Dukpa Kim; Yohei Yamamoto
    Abstract: Earlier attempts to find evidence of time varying coefficients in the U.S. monetary vector autoregression have been only partially successful. Structural break tests applied to typical data sets often fail to reject the null hypothesis of no break. Bayesian inferences using time varying parameter vector autoregressions provide posterior median values that capture some important movements over time, but the associated confidence intervals are often very wide and make the entire results less conclusive. We apply recently developed multiple structural break tests and find statistically significant evidence of time varying coefficients. We also develop a reduced rank time varying parameter vector autoregression with multivariate stochastic volatility. Our model has a smaller number of free parameters thereby yielding tighter confidence intervals than previously employed unrestricted time varying parameter models.
    Keywords: Time Varying Monetary Policy Rule, Ináation Persistence, Multivariate Stochastic Volatility
    JEL: C32 E52
    Date: 2013–02
  26. By: Aysan, Ahmet Faruk; Güler, Mustafa Haluk; Orman, Cüneyt
    Abstract: The last decade witnessed an unprecedented economic growth in Emerging Market Economies (EMEs). EMEs have also been the main drivers of growth in the recovery following the global financial crisis. Nevertheless, EMEs continue to face a number of institutional and structural challenges that may pose risks to the sustainability of their recent growth performance, with potentially significant repercussions for the world economy. In this paper, we present a detailed account of Turkey’s experience in dealing with various institutional and structural challenges during the last decade and provide evidence that taking the right steps can enable EMEs materialize their full growth potential going forward. Successful institutional and structural reforms can also provide room for monetary policymakers to effectively navigate their economies through turbulent times such as the recent global financial crisis.
    Keywords: Economic Growth, Structural and Institutional Reforms, Crises, Monetary Policy, Turkey, Central and Eastern Europe
    JEL: E52 E63 F30 F43 N10 O10
    Date: 2013–02–26
  27. By: Thomas I. Palley
    Abstract: This paper excavates the set of ideas known as modern monetary theory (MMT). The principal conclusion is that the macroeconomics of MMT is a restatement of elementary well-understood Keynesian macroeconomics. There is nothing new in MMT's construction of monetary macroeconomics that warrants the distinct nomenclature of MMT. Moreover, MMT over-simplifies the challenges of attaining non-inflationary full employment by ignoring the dilemmas posed by Phillips curve analysis; the dilemmas associated with maintaining real and financial sector stability; and the dilemmas confronting open economies. Its policy recommendations also rest on over-simplistic analysis that takes little account of political economy difficulties, and its interest rate policy recommendation would likely generate instability. At this time of high unemployment, when too many policymakers are being drawn toward mistaken fiscal austerity, MMT's polemic on behalf of expansionary fiscal policy is useful. However, that does not justify turning a blind eye to MMT's oversimplifications of macroeconomic theory and policy.
    Keywords: modern monetary theory, money financed budget deficits, fiscal policy
    JEL: E00 E02 E10 E12 E24 E40 E58 E62 E63
    Date: 2013
  28. By: Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam)
    Abstract: Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect.
    Keywords: Financial crises; intervention policies; zombie banks; economic recovery; bank restructuring; bank recapitalization
    JEL: E44 E58 G21 G28
    Date: 2013–03–04
  29. By: Eisei Ohtaki (Faculty of Economics, Keio University); Hiroyuki Ozaki (Faculty of Economics, Keio University)
    Abstract: This article considers a pure-endowment stationary stochastic overlapping generations economy, in which agents have maximin expected utility preferences. Two main results are obtained. First, we show that multiple stationary monetary equilibria exist, and hence real as well as price indeterminacy arises under the assumption that aggregate shock exists. Second, we show that each of these stationary monetary equilibria is conditionally Pareto optimal; i.e., no other stationary allocations strictly Pareto dominate the equilibrium allocations.
    Date: 2013–02
  30. By: David Laidler (University of Western Ontario)
    Abstract: The Fisher relation played a very different role in debates surrounding the Great Depression and the more recent Great Recession. This paper explores some of these differences, and suggests an explanation for them derived from a sketch of the idea’s evolution between the two events, thus providing a brief case study of the interaction of economic ideas and economic events that is a central feature of the History of Economic Thought.
    Keywords: Interest rates, nominal vs. real, Inflation, deflation, expectations, depression, recession, Keynesian Economics; Monetarism; Monetary Policy
    JEL: B22 B26 E31 E32 E43
    Date: 2013
  31. By: Jonathan Benchimol (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, PhD Program - ESSEC Business School)
    Abstract: This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis. Our simulations suggest that money plays a negligible role in the dynamics of output and inflation, despite its inclusion in the production function. In addition, we introduce the flexible-price real money balances concept.
    Keywords: Money in the production function; DSGE; Bayesian estimation.
    Date: 2013–02–01
  32. By: M. Casares; Luca Deidda; JE. Galdon-Sanchez
    Abstract: We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates a financial accelerator mechanism, borrowing constraints, and frictions on both setting prices and wages. After an adverse financial shock, the slow-adjustment process on wage cuts results in higher production marginal costs, lower firm earnings, and a subsequent reduction in equity that explains the increase in the cost of borrowing and the credit crunch. The real effects of adverse financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (real rigidities in the financial sector). In the monetary policy analysis, a Taylor (1983)-style rule performs slightly better when incorporating a small response coefficient to the spread between borrowing and saving interest rates.
    Keywords: financial accelerator; nominal rigidities; real rigidities
    JEL: E44 E32
    Date: 2013
  33. By: Heinz Handler (WIFO)
    Abstract: Soon after the establishment of the Eurozone it became obvious that the structural differences between member countries would not abate, as expected, but rather gradually widen. Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. This paper discusses the literature which associates the economic characteristics of EMU with arguments of the optimum currency area (OCA) theory and asks for missing capstones that would meliorate EMU to eventually resemble an OCA. As potential candidates for such building blocks, some sort of fiscal union and lender of last resort may qualify, drawing on the experiences of other currency unions and federal states. The financial and debt crisis has revealed that the endogenous forces within a currency union may be too slow to absorb the shocks originating from the crisis. For a currency union to survive in such a situation it is all the more important that the OCA criteria are met and/or that complementary institutions are in place. However, as actual developments in the Eurozone reveal, the political process of approaching an OCA is piecemeal rather than comprehensive and prompt.
    Date: 2013–02–25

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