nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒04‒06
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Are Public Preferences Reflected in Monetary Policy Reaction Functions? By Matthias Neuenkirch
  2. The Potential Instruments of Monetary Policy By C.A.E. Goodhart
  3. Predicting Bank of England’s Asset Purchase Decisions with MPC Voting Records By Matthias Neuenkirch
  4. Exchange rates, monetary policy statements, and uncovered interest parity: before and after the zero lower bound By Michael T. Kiley
  5. Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model By Atsushi Tanaka
  6. The Effect of Unconventional Monetary Policy on the Macro Economy: Evidence from Japan's Quantitative Easing Policy Period By Masahiko Shibamoto; Minoru Tachibana
  7. The impact of yuan internationalization on the euro-dollar exchange rate By Agnès Bénassy-Quéré; Yeganeh Forouheshfar
  8. Optimal Monetary Policy in Response to Shifts in the Beveridge Curve By Mariya Mileva
  9. The Condition and Problems of the Practical Use of China's Foreign-Exchange Reserves By Zhongling Qi
  10. The response of equity prices to movements in long-term interest rates associated with monetary policy statements: before and after the zero lower bound By Michael T. Kiley
  11. Central bank independence: monetary policies in selected jurisdictions (I) By Felix, Ayadi; Marianne, Ojo
  12. Central bank independence: monetary policies in selected jurisdictions (II) By Ayadi, Felix; Ojo, Marianne
  13. Central bank independence: monetary policies in selected jurisdictions (III) By Ojo, Marianne; Ayadi, Felix
  14. Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe By Muhammad Khan; Mazen Kebewar; Nikolay Nenovsky
  15. Monetary policy statements, Treasury yields, and private yields: before and after the zero lower bound By Michael T. Kiley
  16. Money as gold versus money as water By Colignatus, Thomas
  17. The impact of unconventional monetary policy on the market for collateral: The case of the French bond market. By Avouyi-Dovi, Sanvi; Idier, Julien
  18. Commitment vs. discretion in the UK: An empirical investigation of the monetary and fiscal policy regime By Tatiana Kirsanova; Stephanus le Roux
  19. Federal reserve forecasts: asymmetry and state-dependence By Julieta Caunedo; Riccardo DiCecio; Ivana Komunjer; Michael T. Owyang
  20. Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective By Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
  21. A theory of rollover risk, sudden stops, and foreign reserves By Sewon Hur; Illenin O. Kondo
  22. Estimating shadow-rate term structure models with near-zero yields By Jens H.E. Christensen; Glenn D. Rudebusch
  23. Three essays on imbalances in a monetary union. By HJORTSØ, Ida Maria
  24. Modeling exchange rate dynamics in India using stock market indices and macroeconomic variables By Sinha, Pankaj; Kohli, Deepti
  25. Inefficiency in Survey Exchange Rates Forecasts By Francesca Pancotto; Filippo Maria Pericoli; Marco Pistagnesi
  26. The Forward Premium Puzzle And The Euro By Nagayasu, Jun
  27. Europe´s crisis without end: The consequences of neoliberalism run amok By Thomas I. Palley

  1. By: Matthias Neuenkirch (University of Aachen)
    Abstract: In this paper, we test whether public preferences for price stability (obtained from the Eurobarometer survey) are actually reflected in the interest rates set by eight central banks. We estimate augmented Taylor (1993) rules for the period 1976-1993 using the dynamic GMM estimator. We find, first, that interest rates do reflect society's preferences since the central banks raise rates when society's inflation aversion is above its long-run trend. Second, the reaction to inflation is non-linearly increasing in the degree of inflation aversion. Third, this emphasis on fighting inflation does not have a detrimental effect on output stabilization. We conclude with some implications concerning the democratic legitimation of central banks.
    Keywords: Central Bank, Democratic Legitimation, Eurobarometer, Inflation Aversion, Monetary Policy, Public Preferences, Taylor Rules.
    JEL: D71 E31 E43 E52 E58
    Date: 2013
  2. By: C.A.E. Goodhart
    Abstract: None
    Date: 2012
  3. By: Matthias Neuenkirch (University of Aachen)
    Abstract: We use MPC voting records to predict changes in the volume of asset purchases. We find, first, that minority voting favoring an increase in the volume of asset purchases raises the probability of an actual increase at the next meeting. Second, minority voting supporting a higher Bank Rate decreases the likelihood of further asset purchases.
    Keywords: Asset Purchases, Bank of England, Monetary Policy, Monetary Policy Committee, Predictability, Voting Records
    JEL: E43 E52 E58
    Date: 2013
  4. By: Michael T. Kiley
    Abstract: While uncovered interest parity (UIP) fails unconditionally, UIP conditional on monetary policy actions remains a cornerstone of macroeconomic models used for monetary policy analysis. We posit that monetary policy actions are partially revealed by FOMC statements and propose a new identification strategy to uncover the degree to which such policy actions induce comovement in exchange rates and long-term interest rates consistent with uncovered interest parity. We reach three conclusions. First, there is evidence in favor of UIP at long horizons, conditional on monetary policy actions, for Dollar/Euro and Dollar/Yen exchange rates. Second, short-run movements in exchange rates following monetary policy surprises are consistent with the overshooting prediction of Dornbusch (1976), although our approach cannot test UIP at short horizons. Finally, we examine the degree to which monetary policy statements since the onset of the zero-lower bound (ZLB) on the short-term interest rate in the United States have engendered different comovement between long-term interest rates and exchange rates and find little evidence for a change in relationships.
    Date: 2013
  5. By: Atsushi Tanaka (School of Economics, Kwansei Gakuin University)
    Abstract: In this paper, we develop a simple dynamic optimization model of a central bank, in which the bank’s profit affects its balance sheet. The model derives the transversality condition that is necessary for a central bank to be sustainable and to conduct an optimal monetary policy. In this sense, the transversality condition needs to be satisfied to maintain central bank credibility. We discuss some factors affecting the transversality condition and show that what is important to satisfy the condition and thus to maintain central bank credibility is not capital alone but the financial strength that generates no sustained loss.
    Keywords: central bank, capital, financial strength, credibility, monetary policy
    JEL: E5
    Date: 2013–03
  6. By: Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Minoru Tachibana (School of Economics, Osaka Prefecture University, Japan)
    Abstract: This paper assesses the effectiveness of unonventional monetary policy on the macro ecnomy. It focuses on the Japanese economy during the Bank of Japan's quantitative easing policy period, and analyzes the effects of monetary policy shocks and systematic monetary policy using the vector autoregression model with simultaneous interaction between stock prices and policy decisions. The main finding is that unconventional monetary policy has a significant effect on the macro economy, which is closely in line with the existing evidence under the conventional monetary policy setting. The output effects work through the transmission linking the stock market and the real economy, while it plays a limited role in terms of the price effects. The analysis also suggests that the Bank of Japan's systematic policy responses mitigate severe downward pressure on the real economy generated from the stock market.
    Keywords: Unconventional monetary policy, Vector autoregression model, Interaction between monetary policy and stock market, Effects of monetary policy shocks, Systematic monetary policy responses
    JEL: E52 E58
    Date: 2013–04
  7. By: Agnès Bénassy-Quéré (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Yeganeh Forouheshfar (Université Paris-Dauphine - 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
    Date: 2013–02
  8. By: Mariya Mileva
    Abstract: I build a dynamic stochastic general equilibrium model with search and matching frictions in the labor market and analyze the optimal monetary policy response to an outward shift in the Beveridge curve. The results cover several cases depending on the reason for the shift. If the shift is due to a fall in the efficiency of matching, then the optimal response of the central bank is to stabilize inflation. On the other hand, if the shift arises from an increase in the elasticity of employment matches with respect to vacancies, then the policy maker faces a trade off between stabilizing inflation and unemployment. The optimal policy response to the efficient labor market shock changes when real wages are sticky but remains unchanged when home and market goods are imperfect substitutes, compared to the case when they are not. When contrasted to a Taylor rule that targets inflation and output growth, the optimal monetary policy is more aggressive in pursuit of its objectives
    Keywords: Beveridge curve; Optimal monetary policy; Labor market; Search and matching
    JEL: E24 E32 E52 J68
    Date: 2013–03
  9. By: Zhongling Qi (Advanced Research Centers, Keio University)
    Abstract: Although it controls monetary policies, a central bank can occasionally experience a situation where its financial situation worsens and excessive liabilities occur. In such instances, the central bank may be unable to fulfill its policy objectives. This study focuses on the People's Bank of China (PBC), which is the central bank of China and possesses large foreign reserves, and investigates whether the costs it has incurred during its intervention in the foreign exchange market have contributed to its present financial situation. We then discuss future estimated PBC results. Against the background of an expanding international balance of payments surplus, the PBC continued intervention in the foreign exchange market to ensure Renminbi exchange rate stability. This intervention rapidly increased foreign reserves. This study examines the PBC balance sheet to estimate the costs of its foreign exchange market intervention after January 2002 using several assumptions. The results show that the losses experienced through its intervention policy are expansionary, and were 18.5% of its overseas assets by the end of 2011. Analyzing the factors affecting intervention costs individually, we see that exchange rate changes have a higher impact than interest rate fluctuations on intervention costs, and this effect can be identified at an earlier stage. The study concludes that the improvement of its financial situation, whilst still fulfilling its monetary policies, will be a significant challenge for the PBC.
    Date: 2013–03
  10. By: Michael T. Kiley
    Abstract: Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing. We propose a strategy to identify the comovement between interest rate and equity price movements induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available. A decline in long-term interest rates induced by monetary policy statements prior to 2009 is accompanied by a 6- to 9-percent increase in equity prices. This association is substantially attenuated in the period since the zero-lower bound has been binding - with a policy-induced 100 basis-point decline in 10-year Treasury yields associated with a 1½- to 3-percent increase in equity prices. Empirical analysis suggests this attenuation does not represent a change in responses to monetary-policy induced movements in interest rates, but reflects the importance of both short- and long-term interest rates.
    Date: 2013
  11. By: Felix, Ayadi; Marianne, Ojo
    Abstract: Even though the Congress and the Administration are responsible for determining fiscal policy measures, these measures impact the Fed Reserve's monetary policy decisons. The indirect effect of fiscal policy on the conduct of monetary policy through its influence on the overall economy and the economic outlook and the impact of federal tax and spending programs on the Fed Reserve' s key macroeconomic objectives - maximum employment and price stability, is notable in several situations and instances. Hence, how independent is the Fed Reserve really from government and fiscal policy influences? Could it not be said that the Government really has a dual role in fiscal and monetary policy setting?Would it really be in the interest of accountability to delegate more powers to an already relatively powerful Fed Reserve? Recent changes in the delegation of supervisory responsibilities in the UK, namely the transfer of bank supervision from the Financial Services Authority back to the Bank of England, and the resulting increased scope of the Bank of England's powers, would appear to suggest that in certain cases, regulatory bodies as well as central banks, should assume greater functions in certain capacities. Accordingly, jurisdiction specific cases have to be viewed individually and based on prevailing circumstances. Whilst it is argued by some, that a reduction in central bank autonomy by subjecting its actions and decisions to legislative procedures and approvals, could result in more serious problems which would aggravate the stability of the economy and financial system, consequences of lack of close collaboration, coordination and timely exchange of information between tripartite authorities such as the relationship which exists between the UK's Financial Services Authority, the Bank of England and the Treasury were witnessed during the Northern Rock Crisis. Hence it could be argued that the problem does not necessarily relate to a subjection of actions and decisions for approvals, but how well the authorities involved are able to communicate and coordinate information between them effectively. Subjecting actions and decisions of the central bank to other authorities could actually incorporate greater accountability and transparency into the supervisory and regulatory framework. Through an investigation of selected jurisdictions, this paper aims to contribute to the extant literature in investigating the relationship between central bank independence and price stability, as well as how such a relationship varies between different jurisdictions – even though it is widely argued that political and legislative interference is often contributory to price instability.
    Keywords: central banks; stability; regulation; financial crises; macro prudential; Basel III; systemic risk; supervision; liquidity; monetary policy
    JEL: E52 E58 E6 K2
    Date: 2013–03–30
  12. By: Ayadi, Felix; Ojo, Marianne
    Abstract: Through an investigation of selected jurisdictions, this paper aims to contribute to the extant literature in investigating the relationship between central bank independence and price stability, as well as how such a relationship varies between different jurisdictions – even though it is widely argued that political and legislative interference is often contributory to price instability. This paper employs times series data to study the dynamics of central bank independence. It also employs bivariate cointegration methodology to examine the long-term relationship between inflation index and the different measures of financial development.
    Keywords: inflation; price stability; central bank independence; monetary policy; financial stability
    JEL: E5 E52 E58 K2
    Date: 2013–03–31
  13. By: Ojo, Marianne; Ayadi, Felix
    Abstract: A sufficient and appropriate degree of central bank independence is widely acknowledged to be necessary for the goal of achieving price stability. However, despite the levels of independence claimed to be enjoyed by several central banks, recent events indicate shifts in focus of monetary policy objectives by various prominent central banks. The impact of political and government influences on central banks' monetary policies has been evidenced from the recent financial crisis – and in several jurisdictions. Many central banks have adjusted monetary policies having been influenced by political pressures which have built up as a result of the recent crises. However such lack of absolute independence (from political spheres) could prove symbiotic in the sense that, despite the need for a certain degree of independence from political interference, certain events which are capable of devastating consequences, namely, a drastic disruption of the system's financial stability, need to be responded to as quickly and promptly as possible. Is it possible for a central bank with absolute independence to operate effectively – particularly given the close links between many central banks and their Treasury in several countries? It may be inferred that central banks' crucial roles in establishing a macro prudential framework provide the key to bridging the gap between macro economic policy and the regulation of individual financial institutions. This however, on its own, is insufficient – close collaboration and effective information sharing between central banks and regulatory authorities is paramount.
    Keywords: central banks; stability; regulation; financial crises; macro prudential; Basel III; systemic risk; supervision; liquidity; monetary policy; inflation targeting
    JEL: E52 E58 E6 K2
    Date: 2013–04–02
  14. By: Muhammad Khan (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Mazen Kebewar (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans, University of Aleppo, Faculty of Economics - Department of Statistics and Management Information Systems); Nikolay Nenovsky (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties
    Keywords: Inflation, inflation uncertainty, real uncertainty, monetary regimes, Eastern Europe
    Date: 2013–03–25
  15. By: Michael T. Kiley
    Abstract: Monetary policy actions since 2008 have influenced long-term interest rates through forward guidance and quantitative easing - both "unconventional" strategies. We examine whether the effect of such actions on Treasury yields have passed through to private yields to a degree comparable to experience before 2008. In order to perform this examination, we propose a strategy to identify the comovement between Treasury yields and private yields induced by monetary policy when an observable representing policy changes, such as changes in the interbank rate, is not available, or when other systematic factors may be important. Our strategy implies that least squares regressions, even within an event window, can be misleading, and our empirical results find evidence for such misleading effects. Implementation of our instrumental variables strategy suggests that the movements in Treasury yields induced by monetary policy statements have passed through to private yields, but to a smaller degree than typical prior to the end of 2008. This may suggest that the effectiveness of unconventional policy actions in stimulating activity are attenuated relative to conventional policy actions.
    Date: 2013
  16. By: Colignatus, Thomas
    Abstract: The rules of the Eurozone cause the euro to function as the gold standard. The US economy performs better in some respects, partly because of the advantages of fiat money. The treaty on the EMU has to be adapted in order not to become dependent upon current ad hoc measures, with the loss of welfare over the years 2008-2013+. If Eurozone nations create their own national Economic Supreme Courts, then an optimal currency area can still come about without transfer to Brussels of national sovereignty on the budget. When consumers and agents can have deposits at a local branch of the European Central Bank, a system of deposit insurance has been established by itself. Advisable is a split-up between (1) the primary payment system with retail banks that are franchises of the ECB, (2) the secundary savings and loans banks, and (3) the tertiary investment banks. The shadow banking system must be redressed, with every financial transaction having an identified regulation. Conforming to an earlier proposal the ECB can create funds to redress debt. Notably, 400 billion euro can be created and invested in bank capital, and be directly neutralised by the capital requirement of 10.5%. Another 400 billion can be used to clean up the debt of Greece and Italy. Their participation in the Eurozone was a political decision and thus the Eurozone must bear the consequences. To satisfy the no-bailout-condition, Greece and Italy could create economic zones comparable to the lease of Hong Kong, where companies could invest and operate under international law for the next 40 years.
    Keywords: Economic stability; monetary policy; economic crisis; euro; European Central Bank; bank capital; risk free rate; fiscal policy; tax; external balance; Economic Supreme Court; optimal currency area; investment; investment banks; Banking Union
    JEL: E00 A10 P16
    Date: 2013–04–02
  17. By: Avouyi-Dovi, Sanvi; Idier, Julien
    Abstract: We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.
    Keywords: Monetary policy; Collateral; Liquidity; Volatility; French bond market;
    JEL: G10 C22 C53
    Date: 2012–02
  18. By: Tatiana Kirsanova; Stephanus le Roux
    Abstract: This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the UK. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intra-period leadership, we demonstrate that the past policy in the UK is better explained by optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers. We demonstrate that fiscal policy plays an important role in identifying the monetary policy regime.
    JEL: E52 E61 E63
    Date: 2013–03
  19. By: Julieta Caunedo; Riccardo DiCecio; Ivana Komunjer; Michael T. Owyang
    Abstract: We jointly test the rationality of the Federal Reserve’s Greenbook forecasts of infiation, unemployment, and output growth using a multivariate nonseparable asymmetric loss function. We find that the forecasts are rationalizable and exhibit directional asymmetry. The degree of asymmetry depends on the phase of the business cycle: The Greenbook forecasts of output growth are too pessimistic in recessions and too optimistic in expansions. The change in monetary policy that occured in the late 1970s has been attributed in the literature to the Fed coming to terms with the difficulties in predicting real variables. Our results offer an alternative explanation: A combination of different preferences over expansions and recessions and less frequent recessions in the latter part of the sample.
    Keywords: Forecasting ; Rational expectations (Economic theory)
    Date: 2013
  20. By: Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young
    Abstract: In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy tool kit (so called macro- prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, this paper shows that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls, as it can achieve unconstrained allocation.
    JEL: E52 F37 F41
    Date: 2013–03
  21. By: Sewon Hur; Illenin O. Kondo
    Abstract: Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a key role in reducing debt rollover crises ("sudden stops"), akin to the role of bank reserves in preventing bank runs. We find that a small, unexpected, and permanent increase in rollover risk accounts for the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of emerging economies to sudden stops ever since. Finally, we show that a policy of pooling reserves can substantially reduce the reserves needed by emerging economies.
    Date: 2013
  22. By: Jens H.E. Christensen; Glenn D. Rudebusch
    Abstract: Standard Gaussian term structure models have often been criticized for not ruling out negative nominal interest rates, but this flaw has been especially conspicuous with interest rates near zero in many countries. We provide a tractable means to estimate an alternative Gaussian shadow-rate dynamic term structure model that enforces the zero lower bound on bond yields. We illustrate this model by estimating one-, two-, and three-factor shadow-rate models on a sample of positive and near-zero Japanese bond yields. We find that the level of the shadow rate is sensitive to model fit and specification, including the number of factors employed.
    Keywords: Interest rates ; Econometric models
    Date: 2013
  23. By: HJORTSØ, Ida Maria
    Abstract: This thesis investigates the implications of imbalances within a monetary union. In the first chapter, I study how international financial frictions lead to international imbalances and affect optimal fiscal policy in a two-country, two-good DSGE model of a monetary union. I show that the presence of international imbalances affects the optimal conduct of cooperative fiscal policies when the traded goods are complements. Government expenditures optimally play a cross-country risk sharing role which is in conflict with the domestic stabilization role: optimal fiscal policy consists in setting government expenditures such as to reduce international imbalances at the expense of higher domestic inefficiencies. In the second chapter, I assess the implications of strategic fiscal policy interactions in a two-country DSGE model of a monetary union with nominal rigidities and international financial frictions. I show that the fiscal policy makers face an incentive to set fiscal policy such as to switch the terms of trade in their favour. This incentive results in a Nash equilibrium characterized by excessive inflation differentials as well as sub-optimally high current account imbalances within the monetary union. There are thus non-negligeable welfare losses associated with strategic fiscal policy making in a monetary union. The third chapter investigates empirically the degree of risk sharing in the European Economic and Monetary Union (EMU), using two different methods. The first measure relates to the capacity of consumption smoothing. This measure indicates that risk sharing is rather low and that the introduction of the common currency did not lead to higher intra-EMU risk sharing. The second measure is based on the welfare losses associated with deviations from full risk sharing. These welfare losses have fallen since the introduction of the common currency. However, this is mostly due to changes in macroeconomic risk - not to changes in risk sharing per se.
    Date: 2012
  24. By: Sinha, Pankaj; Kohli, Deepti
    Abstract: Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting its market movement. This study concerns with some of the usual macroeconomic variables which, in theory, are expected to affect the exchange rate between two countries. Indian Rupee is currently losing its value to the Dollar which could certainly be seen to affect the Indian economy adversely. This paper attempts to investigate the interactions between the foreign exchange and stock market in India as well as determine some of the economic factors which could have influenced the Indian rupee vis-à-vis the US Dollar over the period 1990-2011. This paper studies the effect of exchange rate on three market indices; BSE Sensex index, BSE IT sector index and BSE Oil & Gas sector index for the period January 2006 to March 2012. No significant interactions were found between foreign exchange rate [USD/INR] and stock returns. Economic variables like inflation differential, lending interest rates and current account deficit (as a percentage of GDP) are found to significantly affect the exchange rate [USD/INR]. This study also analyzes how the real GDP of India is currently behaving with respect to the exchange rate. It is found that they share a negative relationship which is highly statistically significant
    Keywords: current account deficit as a percentage of GDP, exchange rate, GDP, inflation differential, IT, lending interest rates, Oil & Gas, public debt, stock price index, Sensex
    JEL: E6 F31 F37
    Date: 2013–01–15
  25. By: Francesca Pancotto; Filippo Maria Pericoli; Marco Pistagnesi
    Abstract: We use a novel database of a panel of quarterly survey of exchange rates forecasts available on the Bloomberg platform, for the following .ve bilateral exchange rates: EUR/GBP, EUR/JPY, EUR/USD, GBP/USD and USD/JPY, for the timespan ranging from the third quarter 2006 up to the fourth quarter of 2011. We .nd that forecasters are on average irrational, failing to identify the true data generating process of bilateral exchange rates and generally overreacting to past observed information. Moreover, exploring individual performance, we can state that .nancial analysts irrationally do not look at their past forecast errors to improve the quality of their later forecasts
    Keywords: survey forecasts, exchange rates, overreaction;
    JEL: F31
    Date: 2013–03
  26. By: Nagayasu, Jun
    Abstract: This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes time-varying parameter methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the time of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP.
    Keywords: forward premium puzzle, risk premium, time-varying parameters, financial crises
    JEL: F31 F36
    Date: 2013–04
  27. By: Thomas I. Palley
    Abstract: This paper argues the euro zone crisis is the product of a toxic neoliberal economic policy cocktail. The mixing of that cocktail traces all the way back to the early 1980s when Europe embraced the neoliberal economic model that undermined the income and demand generation process via wage stagnation and widened income inequality. Stagnation was serially postponed by a number of developments, including the stimulus from German re-unification and the low interest rate convergence produced by creation of the euro. The latter prompted a ten year credit and asset price bubble that created fictitious prosperity. Postponing stagnation in this fashion has had costs because it worsened the ultimate stagnation by creating large build-ups of debt. Additionally, the creation of the euro ensconced a flawed monetary system that fosters public debt crisis and the political economy of fiscal austerity. Lastly, during this period of postponement, Germany sought to avoid stagnation via export-led growth based on wage repression. That has created an internal balance of payments problem within the euro zone that is a further impediment to resolving the crisis. There is a way out of the crisis. It requires replacing the neoliberal economic model with a structural Keynesian model; remaking the European Central Bank so that it acts as government banker; having Germany replace its export-led growth wage suppression model with a domestic demand-led growth model; and creating a pan-European model of wage and fiscal policy coordination that blocks race to the bottom tendencies within Europe. Countries, particularly Germany, can implement some of this agenda on their own. However, much of the agenda must be implemented collectively, which makes change enormously difficult. Moreover, the war of ideas in favor of such reforms has yet to be won. Consequently, both politics and the ruling intellectual climate make success unlikely and augur a troubled future.
    Keywords: Financial crisis, euro zone, neoliberalism
    JEL: E00 E24
    Date: 2013

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