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

  1. The Case for Four Percent Inflation By Laurence Ball
  2. Monetary exchange rate model as a long-run phenomenon: evidence from Nigeria By Adawo, Monday A.; Effiong, Ekpeno L.
  3. The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions By Nicholas Apergis; Stephen M. Miller; Effrosyni Alevizopoulou
  4. Euroization and cyclical stabilization in Montenegro: an empirical analysis By Sokic, Alexandre; FABRIS, Nikola
  5. Inflation Targeting: Does It Improve Economic Performance? By Stephen M. Miller; WenShwo Fang; Ozkan Eren
  6. Regional Initiative in the Gulf Arab States: The Search for a Common Currency By Syed Abul, Basher
  7. Quantitative forward guidance and the predictability of monetary policy - A wavelet based jump detection approach - By Lars Winkelmann; ; ;
  8. Financial Globalization and Monetary Transmission By Simone Meier
  9. On the Stability of Euro Area Money Demand and its Implications for Monetary Policy By Matteo Barigozzi; Antonio Conti
  10. Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa? By Asongu, Simplice A
  11. The endless Eurozone crisis, where do we stand? A Classical-Kaleckian overview By Sergio Cesaratto
  12. The empirical (ir)relevance of the interest rate assumption for central bank forecasts By Knüppel, Malte; Schultefrankenfeld, Guido
  13. "Currency Concerns under Uncertainty: The Case of China" By Sunanda Sen
  14. "On the Franco-German Euro Contradiction and Ultimate Euro Battleground" By Jorg Bibow
  15. On financial risk and the safe haven characteristics of Swiss franc exchange rates By Christian Grisse; Thomas Nitschka
  16. Inflation, its Volatility and the Inflation-Growth Tradeoff in India By Raghbendra Jha; Varsha S. Kulkarni
  17. On the low-frequency relationship between public deficits and inflation By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  19. Nominal Shocks and Real Exchange Rates: Evidence from Two Centuries By William D. Craighead; Pao-Lin Tien
  20. Purchasing Power Parity between the UK and the Euro Area By Giorgio Canarella; Stephen M. Miller; Stephen K. Pollard
  21. Public debt and changing inflation targets By Krause, Michael U.; Moyen, Stéphane
  22. Comment on Relative Price Variability and Inflation in Reinganum's Consumer Search Model By David Fielding; Chris Hajzler
  23. Inflation Skewness and Price Indexation By Firouzi Naeim, Peyman; Rahimzadeh, golnoush
  24. The PPP Hypothesis Revisited: Evidence Using a Multivariate Long-Memory Model By Guglielmo Maria Caporale; Luis A. Gil-Alana; Yuliya Lovcha
  25. On the Linkages between Stock Prices and Exchange Rates: Evidence from the Banking Crisis of 2007-2010 By Guglielmo Maria Caporale; John Hunter; Faek Menla Ali
  26. Propagation Mechanisms in Inflation: Governance as key By Goyal, Ashima
  27. Credit Pro-cyclicality and Bank Balance Sheet in Colombia By Franz Alonso Hamann Salcedo; Rafael Hernández; Luisa Fernanda Silva Escobar; Fernando Tenjo Galarza
  28. Euro area CDS spreads in the crisis: The role of open market operations and contagion By Gerlach, Petra
  29. Export performance, invoice currency, and heterogeneous exchange rate pass-through By Richard Fabling; Lynda Sanderson
  30. China's role in global inflation dynamics By Eickmeier, Sandra; Kühnlenz, Markus

  1. By: Laurence Ball
    Abstract: Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.
    Date: 2013–04
  2. By: Adawo, Monday A.; Effiong, Ekpeno L.
    Abstract: How well does the monetary exchange rate model explain exchange rate behaviour in Nigeria? Using the Johansen -Juselius (1990) and Johansen (1991) cointegration technique, this paper examines the long-run validity of the monetary exchange rate model in Nigeria for the flexible exchange rate regime with quarterly data covering the period 1987 to 2008. We found a unique long-run relationship between the nominal exchange rate and the traditional monetary fundamentals (money supply, output and interest rate differentials). The estimated cointegrating coefficients are theoretically consistent with the monetary model and statistically significant exception of the output differential. In particular, this evidence supports strongly the validity of the monetary exchange rate model for Nigeria and also its relevance to modelling the naira-US dollar exchange rate movement.
    Keywords: Exchange rate; Monetary fundamentals; Monetary exchange rate model; Cointegration; Nigeria
    JEL: C22 C32 E4 F31 F41
    Date: 2013–02–05
  3. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Effrosyni Alevizopoulou (Department of Banking and Financial Management, University of Piraeus)
    Abstract: The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
    Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
    Date: 2012–04
  4. By: Sokic, Alexandre; FABRIS, Nikola
    Abstract: The aim of this paper is to evaluate the importance of the issue of the loss of an independent monetary policy in the case of officially euroized Montenegro. We examine the extent to which the monetary policy of the European Central Bank, which is set according to the economic conditions prevailing in the euro area, has contributed to the stabilisation of the business cycle of unilaterally euroized Montenegro. It is shown that under euroization the ECB monetary policy has been acyclical with respect to Montenegrin inflation and significantly countercyclical with respect to Montenegrin output growth. The comparative analysis with Serbia does not show that keeping an independent monetary policy would have improved the cyclical stabilisation in Montenegro. The pass-through from ECB policy rates to retail interest rates prevailing at commercial banks in Montenegro is shown to depend significantly on the macroeconomic and banking conditions prevailing in Montenegro.
    Keywords: euroisation, dollarization
    JEL: E3 E31 E5 E52
    Date: 2013–04–25
  5. By: Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); WenShwo Fang (Department of Economics, Feng Chia University); Ozkan Eren (Department of Economics, University of Nevada, Las Vegas)
    Abstract: The last two decades witnessed a dramatic transformation of how central banks operate. An increasing number of central banks now use inflation targeting as their monetary policy control mechanism. A series of papers attempt to measure the effectiveness of inflation targeting on economic performance. The basic challenge in such tests is that inflation targeting appeared during a time when inflation trended downward across nearly all countries – those that did and did not adopt inflation targeting. This paper reviews the existing methods used to test for the effectiveness of inflation targeting and compares the findings of these different methods for both developed and developing countries. In general, inflation targeting does not affect economic performance in developed countries but does exert a positive effect on economic performance in developing countries. We conclude that the effectiveness of inflation targeting policy garners little, or only transitory, support based on evidence from developed countries. Much more support exists for developing countries.
    Keywords: inflation targeting, difference in differences, fixed and random effects, treatment effects, developed and developing countries
    JEL: C52 E52 E58
    Date: 2012–12
  6. By: Syed Abul, Basher
    Abstract: While many commentators have been openly critical of China's currency policy on the basis of an undervalued renminbi, despite a similar surge in GCC's (Gulf Cooperation Council) balance of payment surpluses in the first decade of this century, the vast majority of the commentators have maintained a stony silence on the undervalued Gulf currencies. This underscores the geopolitics of currencies as a form of asymmetric warfare and the consequences of dollar, euro or renminbi diplomacy. This paper makes two main additions to the literature on Gulf monetary union. First, it emphasizes that the creation of a fiscal union is necessary for the Gulf monetary union to succeed. Second, it proposes some alternatives to pegging to the dollar, which would allow the GCC to absorb large swings in global commodity prices (oil, food) in the short to medium run. The proposed exchange rate regimes are not conditional on the formation of the Gulf monetary union, and can be implemented individually or collectively.
    Keywords: Fixed exchange rate; Currency basket; Fiscal union; Monetary union; Gulf Cooperation Council.
    JEL: E52 F36 F4
    Date: 2013–04–23
  7. By: Lars Winkelmann; ; ;
    Abstract: The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. This paper suggests a new approach to evaluate the impact of the guidance strategy on the predictability of monetary policy. Using the example of Norway, the empirical investigation is based on jump probabilities of interest rates on central bank announcement days before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.
    Keywords: Central bank communication, interest rate projections, semimartingales, Locally Stationary Wavelet processes, jump detection
    JEL: E58 C14 C58
    Date: 2013–04
  8. By: Simone Meier
    Abstract: This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration.
    Keywords: Monetary policy transmission, International financial integration
    JEL: E52 F41 F42 F47
    Date: 2013
  9. By: Matteo Barigozzi; Antonio Conti
    Abstract: We revisit the usefulness of long-run money demand equations for the European Central Bank. We first conduct a model evaluation exercise by means of a recent timeóvarying cointegration test. A stable relation for euro area M3 is not rejected by data only when accounting for both a speculative motive, represented by international financial markets, and a precautionary motive, proxied by changes in the unemployment rate. Second, relying on this finding, we propose and estimate a novel time-invariant specification for money demand which allows us (i) to build a leading indicator of stock market busts and (ii) to describe the anomalous behavior of M3 in the last decade. Excess liquidity matters for both financial and price stability.
    Keywords: money demand; timeóvarying cointegration; priceóearnings ratios; unemployment rate; monetary policy
    Date: 2013–04–23
  10. By: Asongu, Simplice A
    Abstract: This paper assesses the adjustment of inflation with financial dynamic fundamentals of money (financial depth), credit (financial activity) and efficiency. Three main findings are established. (1) There are significant long-run relationships between inflation and the fundamentals. (2) The error correction mechanism is stable in all specifications but in case of any disequilibrium, only financial depth is significant in adjusting inflation to the long-run relationship. (3) In the long-run, short-term adjustments in the ability of banks to transform money into credit do not matter in correcting inflation. This is most probably due to surplus liquidity issues. Policy implications are discussed.
    Keywords: Excess money; inflation; credit; Africa
    JEL: E31 E5 O55
    Date: 2012–09–18
  11. By: Sergio Cesaratto
    Abstract: It is not easy to untangle the logic that in the past led to creation of the European Monetary Union (EMU) and that is currently guiding the prevailing Eurozone (EZ) policies. Although lacking the right institutions, which can be seen as the ultimate root of its crisis, the ten years of the EMU could be celebrated in 2008 with some fanfare. The EMU even seemed a success, judged from the point of view of imbalanced growth of some peripheral countries that masked its deflationary stance. This imbalanced growth was the proximate cause of the EZ financial crisis. In the paper we shall review the main causes of the EZ financial crisis, interpreted as a balance of payments crisis; the role of the European payment system TARGET 2 in buffering its violent blast; the Classical-Kaleckian rationale of the German malevolent mercantilism; the inadequate EZ policy measures to respond to the crisis; possible alternative solutions. Unfortunately, rather than pushing towards the creation of a different set of European institutions, the prevailing crisis resolution philosophy resembles a late vindication of the original deflationary Euro-bias.
    Keywords: European Monetary Union, financial crisis, Germany, neo-mercantilism, balance of payment,capital flows, sudden stops, TARGET 2, OMT
    JEL: E11 E12 E42 E58 F32 F33 F34 F36 N24
    Date: 2013–02
  12. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically. --
    Keywords: Forecast Accuracy,Density Forecasts,Projections
    JEL: C12 C53
    Date: 2013
  13. By: Sunanda Sen
    Abstract: The recent declines in China's financial account balance ended the "twin surplus" era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China's financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a "two-way floating" RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China's economic relations vis-a-vis trading and financial partners, which include the United States. The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes's observation, in 1937, regarding uncertainty in markets: "About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."
    Keywords: China; Financial Balances; Official Reserves; Twin Surpluses; Rebalancing; Expectations; Internationalization; Managed Exchange Rate
    JEL: E31 E52 F42 O16 O53
    Date: 2013–03
  14. By: Jorg Bibow
    Abstract: Highlighting that France and Germany held largely contradicting hopes and aspirations for Europe's common currency, this paper analyzes how the resulting euro contradiction conditioned the ongoing euro crisis as well as current strategies to resolve it. While Germany generally prevailed in hammering out the design of the euro policy regime, the German authorities have failed to see the inconsistency in their policy endeavors: the creation of a model whose workability presupposes that others behave differently cannot be made to work by forcing everyone to behave like Germany. This fundamental misunderstanding has made Germany the main culprit in the euro crisis, but it has yet to face the full consequences of its actions. Germany had sought every protection against the much-dreaded euro "transfer union," but its own conduct has made that very outcome inevitable. Conversely, having been disappointed in its own hopes for the euro, France is now facing the prospect of a lost generation-a prospect, shared with other debtor nations in the union, that has undermined the Franco-German alliance and may soon turn it into the ultimate euro battleground.
    Keywords: Currency Union; Euro Policy Regime; Euro Crisis; Franco-German Partnership; Competitiveness; ECB Policies
    JEL: E02 E42 E58 E61 E65
    Date: 2013–04
  15. By: Christian Grisse; Thomas Nitschka
    Abstract: We analyse bilateral Swiss franc exchange rate returns in an asset pricing framework to evaluate the Swiss franc's safe haven characteristics. A "safe haven" currency is a currency that offers hedging value against global risk, both on average and in particular in crisis episodes. To explore these issues we estimate the relationship between exchange rate returns and risk factors in augmented UIP regressions, using recently developed econometric methods to account for the possibility that the regression coefficients may be changing over time. Our results highlight that in response to increases in global risk the Swiss franc appreciates against the euro as well as against typical carry trade investment currencies such as the Australian dollar, but depreciates against the US dollar, the Yen and the British pound. Thus, the Swiss franc exhibits safe-haven characteristics against many, but not all other currencies. We find statistically significant time variation in the relationship between Swiss franc returns and risk factors, with this link becoming stronger in times of stress.
    Keywords: Exchange rate, monetary policy, risk factors, safe haven, Swiss franc, uncovered interest rate parity
    JEL: E32 F44 G15
    Date: 2013
  16. By: Raghbendra Jha; Varsha S. Kulkarni
    Abstract: This paper amends the New Keynesian Phillips curve model to include inflation volatility. It provides results on the determinants of inflation volatility and expected inflation volatility for OLS and ARDL(1,1) models and for change in inflation volatility and change in expected inflation volatility using ECM models. Output gap affects change in expected inflation volatility alone (in the ECM model) and not in the other models. Major determinants of inflation volatility and expected inflation volatility are identified. To the best of our knowledge this is the first paper to augment the New Keynesian Phillips Curve to include inflation volatility.
    Keywords: Inflation, Inflation volatility, ARDL model, ECM model, Output gap, India
    JEL: E31 E32 E42 E44
    Date: 2013
  17. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    Abstract: We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying VAR model for U.S. data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid-1960s up to 1980. Our results suggest that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II. --
    Keywords: Time-Varying VAR,Inflation,Public Deficits
    JEL: E42 E58 E61
    Date: 2013
  18. By: Pippenger, John
    Abstract: Three puzzles are closely related to the forward-bias puzzle and the failure of uncovered interest parity: (1) UIP failure is greater for short than long maturities, (2) forward bias is larger between developed than between developing countries and (3) there is no systematic forward bias in commodity markets. A convincing explanation for these puzzles should also explain two other 'facts': (a) the time dependency of the forward bias and failure of UIP and (b) that UIP holds better under a gold standard than under flexible rates. A combination of covered interest parity and monetary policy provides the best available explanation.
    Keywords: Economics, exchange rates, interest rates, risk premia, rational expectations, gold standard, uncovered and covered interest parity, forward bias, forward arbitrage
    Date: 2013–04–17
  19. By: William D. Craighead (Department of Economics, Wesleyan University); Pao-Lin Tien (Department of Economics, Wesleyan University)
    Abstract: This paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from Britain and the United States. Shocks are identified with long-run restrictions. The long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate. The sample is split at 1913, which is the end of the classical gold standard period, the last of the monetary regimes of the 19th century. The earlier subsample (1795-1913) shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample (1914-2010). Counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy.
    Keywords: ector autoregression; monetary shocks, exchange rate movements, longrun identifying restrictions
    JEL: F31 F41 N10
    Date: 2013–04
  20. By: Giorgio Canarella (Department of Finance, University of Nevada, Las Vegas); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, California State University, Los Angeles)
    Abstract: We use the Johansen cointegration approach to assess the empirical validity of the purchasing power parity (PPP) between the UK and the Euro Area, which we represent by Germany, the largest of its members. We conduct the empirical analysis in the context of the global financial crisis that began in 2007 and find that it directly affects the cointegration space. We fail to validate the Johansen and Juselius (1992) original hypothesis that nonstationarity of the PPP associates with the nonstationarity of interest rate differentials to produce a stationary relation. On the other hand, we do not reject PPP. We find that PPP cointegrates with inflation differentials. We also find, contrary to conventional wisdom, that (i) equilibrium adjustment occurs between the German and UK inflation rates, while weak exogeneity exists for the German and UK interest rates and the PPP condition, and (ii) three common trends associated with the German interest rate, the UK interest rate, and the PPP condition “push” the system with the German interest rate and the PPP condition playing dominant roles.
    Keywords: Purchasing Power Parity, Euro Area, Cointegrated VAR.
    JEL: E31 E43 F31 F32
    Date: 2012–08
  21. By: Krause, Michael U.; Moyen, Stéphane
    Abstract: What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. --
    Keywords: public debt,learning,inflation target,callable perpetuity,debt maturity
    JEL: E31 E52 H63
    Date: 2013
  22. By: David Fielding (Department of Economics, University of Otago, New Zealand); Chris Hajzler (Department of Economics, University of Otago, New Zealand)
    Abstract: There is now a large empirical literature on the effect of the aggregate inflation rate on (i) the dispersion of prices across goods or locations (relative price variability, or RPV) and (ii) the dispersion of inflation rates across goods or locations (relative inflation variability, or RIV). In the early part of this literature, empirical modelling is explicitly based on theoretical macroeconomic models incorporating signal extraction problems. However, more recent empirical research is less directly connected to theory, and several authors report results that are inconsistent with signal extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. In this paper, we show that such a result is predicted by consumer search models in the style of Reinganum (1979). A proper understanding of the dynamics of price dispersion in 21st century economies will require a renewed interest in the theoretical foundations of empirical models.
    Keywords: Relative Price Variability; Inflation; Search models
    Date: 2013–03
  23. By: Firouzi Naeim, Peyman; Rahimzadeh, golnoush
    Abstract: One of the two price indexation schemes in the staggered price DSGE models is the indexation to the average inflation. In this essay we show that using average of inflation as index multiplier may lead to the deviation from the optimal price for intermediate good producer. Although there is no problem with this indexation method as far as the inflation distribution is symmetric, when we have a skewed inflation (as we have in the U.S. economy and most of the G7 countries) indexation to average inflation does not reflect the profit maximizer firm's decision making process. After showing the deficiencies of this method we introduce the Median of inflation distribution as a measure, explain it's advantage and support our claim by comparing the simulated inflation and the measure which is used for indexation purpose. Our results suggest that median of inflation distribution minimizes the forecast error in the Calvo price setting procedure of intermediate good producer
    Keywords: DSGE; Inflation Skewness; Non-Linearity; Calvo Pricing
    JEL: E30 E31 E37 E50 E52
    Date: 2013–04
  24. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Yuliya Lovcha
    Abstract: This paper examines the PPP hypothesis analysing the behaviour of the real exchange rates vis-à-vis the US dollar for four major currencies (namely, the Canadian dollar, the euro, the Japanese yen and the British pound). An innovative approach based on fractional integration in a multivariate context is applied to annual data from 1970 to 2011. Long memory is found to characterise the Canadian dollar, the British pound and the euro, but in all four cases the results are consistent with the relative version of PPP.
    Keywords: PPP, long memory, multivariate fractional integration
    JEL: C22 F31
    Date: 2013
  25. By: Guglielmo Maria Caporale; John Hunter; Faek Menla Ali
    Abstract: This study examines the nature of the linkages between stock market prices and exchange rates in six advanced economies, namely the US, the UK, Canada, Japan, the euro area, and Switzerland, using data on the banking crisis between 2007 and 2010. Bivariate GARCH-BEKK models are estimated producing evidence of unidirectional spillovers from stock returns to exchange rate changes in the US and the UK, in the opposite direction in Canada, and of bidirectional spillovers in the euro area and Switzerland. Furthermore, causality-in-variance from stock returns to exchange rates changes is found in Japan and in the opposite direction in the euro area and Switzerland, whilst there is evidence of bidirectional feedback in the US and Canada. These findings imply limited opportunities for investors to diversify their assets during this period.
    Keywords: Stock prices, exchange rates, causality-in-variance, cointegration
    JEL: F31 G15 C32
    Date: 2013
  26. By: Goyal, Ashima
    Abstract: Resurgence in Indian inflation since 2007 was associated with sharp food and oil price inflation. Propagation mechanisms that allow these relative prices to affect aggregate prices include governance failures, the effect of food prices on wages, exchange rates on costs and the response to cost shocks in firm price-setting. The paper analyzes these mechanisms. Supply shocks took the form of upward shifts of an aggregate supply elastic in the sense costs did not rise with output. First round effects have to be allowed since of asymmetric price adjustment. Estimations show it was multiple supply shocks rather than persistent second round price effects that caused inflation. Output remained below potential. In such a structure, the best policies are those that reduce average production costs. Policy induced demand tightening to anchor inflationary expectations and prevent a wage-price spiral that could shift up costs imposed a large output sacrifice. Policy contraction generally exceeded the fall in output. A large negative demand impulse over 2010-12 constrained growth more than inflation. The analysis provides a new understanding of how supply constraints affect the economy
    Keywords: inflation, propagation, aggregate supply, relative price shocks, governance
    JEL: E31 E52 E62 O23
    Date: 2012–06–01
  27. By: Franz Alonso Hamann Salcedo; Rafael Hernández; Luisa Fernanda Silva Escobar; Fernando Tenjo Galarza
    Abstract: The recent financial crisis has renewed the interest of economists, both at the theoretical and empirical level, in developing a better understanding of credit and its mechanisms. A rapidly growing strand of the literature views banks as facing funding restrictions that condition their borrowing to a risk-based capital constraint which, in turn, affects bank lending. This work explores the way banks in Colombia manage their balance sheet and sheds light into the dynamics of credit and leverage during the business cycle. Using a sample of monthly bank balance sheets for the period 1994-2012, we find not only that the Colombian banking sector is predominantly pro-cyclical, but also that the composition of bank liabilities provides important information to policy makers regarding the phase of the cycle of the economy. Shifts from low non-core liability ratios to higher ones during the upward phase of the leverage cycle could play the role of an early warning indicator of financial vulnerability. In addition, we find that bank heterogeneity matters and thus, an aggregate measure of bank leverage can mask successfully a fragile financial sector.
    Date: 2013–04–07
  28. By: Gerlach, Petra
    Abstract: This paper studies euro area CDS spreads during the financial crisis. We examine the impact of the crisis on both commercial banks and sovereigns, and focus on two questions. First, have the ECB's open market operations reduced market stress? It seems that large repo volumes, especially if credited to banks the same day, helped initially, and that the announcement of the Securities Market Programme also calmed markets. Asset purchase volumes do not seem to matter directly. Second, was there contagion among and between banks and sovereigns? We find evidence for both. Interestingly, sovereign CDS spreads appear immune after April 2010. We argue that this might reflect the ECB's efforts to stop contagion during the euro crisis.
    Date: 2013–02
  29. By: Richard Fabling; Lynda Sanderson (The Treasury)
    Abstract: Using comprehensive, shipment-level merchandise trade data, we examine the extent to which New Zealand exporters maintain stable New Zealand dollar prices by passing on exchange rate changes to foreign customers. We find that the extent to which firms absorb exchange rate fluctuations in the short run is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, when jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the New Zealand dollar, while others use either the importer or a third currency. In the short run, this translates into differences in exchange rate pass through because of price rigidity in the invoice currency. Differences across invoice currencies diminish, but do not disappear, over time as prices adjust to reflect bilateral exchange rate movements.
    Keywords: Exchange rate pass-through; Firm performance
    JEL: D21 F14 F31
    Date: 2013–02
  30. By: Eickmeier, Sandra; Kühnlenz, Markus
    Abstract: We apply a structural dynamic factor model to a large quarterly dataset covering 38 countries between 2002 and 2011 to analyze China's role in global inflation dynamics. We identify Chinese supply and demand shocks and examine their contributions to global price dynamics and the transmission mechanism. Our main findings are: (i) Chinese supply and demand shocks affect prices in other countries significantly. Demand shocks matter slightly more than supply shocks. Producer prices tend to be more strongly affected than consumer prices by Chinese shocks. The overall share of international inflation explained by Chinese shocks is notable (about 5 percent on average over all countries but not more than 13 percent in each region); (ii) Direct channels (via import and export prices) and indirect channels (via greater exposure to foreign competition and commodity prices) seem both to matter; (iii) Differences in trade (overall and with China) and in commodity exposure help explaining crosscountry differences in price responses. --
    Keywords: global inflation,China,international business cycles,structural dynamic factor model,sign restrictions
    JEL: F41 E31 C3
    Date: 2013

This nep-mon issue is ©2013 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.