nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒05‒05
seventeen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary policy delegation and equilibrium coordination By Andrew P. Blake; Tatiana Kirsanova; Tony Yates
  2. The Effects of Additional Monetary Tightening on Exchange Rates By Ermişoğlu, Ergun; Akçelik, Yasin; Oduncu, Arif; Taşkın, Temel
  3. The Influence of Oil and Gas Revenues on Russia’s Monetary and Credit Policy By Alexei Kudrin
  4. Central Banking in Making during the Post-crisis World and the Policy-Mix of the Central Bank of the Republic of Turkey By Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
  5. Should Central Bank respond to the Changes in the Loan to Collateral Value Ratio and in the House Prices? By Tatiana Damjanovic; Sarunas Girdenas
  6. Monetary Policy Cooperation - Policy Prescriptions from New Open Economy Macroeconomics By Ippei Fujiwara
  7. The inflation-output trade-off revisited By Gauti Eggertsson; Marc P. Giannoni
  8. Trejos-Wright with a 2-unit bound: existence and stability of monetary steady states By Huang, Pidong; Igarashi, Yoske
  9. Why Ten $1's Are Not Treated as a $10 By Huang, Pidong; Igarashi, Yoske
  10. State-controlled Banks and the Effectiveness of Monetary Policy By Randall Morck; M. Deniz Yavuz; Bernard Yeung
  11. Robustness of Stability to cost of carrying money in a Matching Model of Money By Huang, Pidong
  12. (Un)anticipated monetary policy in a DSGE model with a shadow banking system By Verona , Fabio; Martins, Manuel M. F.; Drumond , Inês
  13. Monetary Shocks with Observation and menu Costs By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  14. Banking and the Macroeconomy in China: A Banking Crisis Deferred? By Le, Vo Phuong Mai; Matthews, Kent; Meenagh, David; Minford, Patrick; Xiao, Zhigui
  15. Exchange Control and SADC Regional Integration By Ellyne, Mark; Chater, Rachel
  16. Balancing the European Monetary Union - an Impact Analysis on the Return of National Currencies By Anke Mönnig
  17. A comment on: 'Efficient propagation of shocks and the optimal return on money' By Huang, Pidong

  1. By: Andrew P. Blake; Tatiana Kirsanova; Tony Yates
    Abstract: This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.
    Keywords: Time Consistency, Discretion, Multiple Equilibria, Policy Delegation
    JEL: E31 E52 E58 E61 C61
    Date: 2013–04
  2. By: Ermişoğlu, Ergun; Akçelik, Yasin; Oduncu, Arif; Taşkın, Temel
    Abstract: Since the global financial crisis, Central Banks have used various policy tools to sustain financial stability besides price stability. Additional Monetary Tightening is one of these tools that the Central Bank of the Republic of Turkey used in 2011-2012. The effects of this tool on the exchange rate are the main theme of this paper. Our analysis indicates that additional monetary tightening has a significant role in reducing volatility in the exchange rate. It is also shown that during the days of additional tightening Turkish Lira appreciated against the emerging market currencies.
    Keywords: Additional Monetary Tightening, Turkish Lira, Exchange Rates, Central Bank of the Republic of Turkey’s New Policy Mix, GARCH
    JEL: C12 C58 E52 E58
    Date: 2013–02
  3. By: Alexei Kudrin (Gaidar Institute for Economic Policy)
    Abstract: This article examines the problems of implementing monetary and credit policy when there is significant flow of currency revenues from the export of raw materials. It argues that, given a strong balance of payments, the Central Bank has to accept either a strengthening of the rouble or inflation. Only the RF Government has the power to prevent an appreciation of the currency whilst at the same time controlling inflation. This dual task can be achieved by saving, when external economic conditions are favourable, a share of the revenues from oil and gas in reserve funds. Such a policy can create the foundations for macroeconomic stability and a favourable investment climate.
    Keywords: monetary and credit policy, oil and gas dependency “Dutch disease”, reserve fund, inflation
    JEL: E52 E58 E61
    Date: 2013
  4. By: Akcelik, Yasin; Aysan, Ahmet Faruk; Oduncu, Arif
    Abstract: After the global crisis, one of the most important lessons learned for the Central Banks has appeared to be the vital importance of financial stability along with the price stability. Hence, finding solutions to how to incorporate the financial stability objective in the implementation of the monetary policy without diluting the price-stability objective has started to be heavily discussed by the academics and policy makers. Accordingly, it has started to be debated that using only short-term interest rates as the main policy tool may not be enough to maintain the price stability and the financial stability at the same time. Interest rates that provide price stability and financial stability can be different and this necessitates the central banks to use multiple policy tools. In view of this, the Central Bank of the Republic of Turkey adopted a new monetary policy framework called the new policy mix in which multiple tools are employed to achieve multiple objectives. In this framework, required reserves ratios, weekly repo rates, interest rate corridor, funding strategy and other macro prudential tools are jointly used as complementary tools for the credit, interest rate and liquidity policies to achieve the price and the financial stability objectives concurrently. This new monetary policy adopted in Turkey also provides an interesting case study to assess how a country came up with novel policies to account for its country specific characteristics.
    Keywords: Central banking, Policy-mix, Global financial crisis, Financial Stability
    JEL: E44 E52 E58
    Date: 2013–04
  5. By: Tatiana Damjanovic (Department of Economics, University of Exeter); Sarunas Girdenas (Department of Economics, University of Exeter)
    Abstract: We study optimal policy in a New Keynesian model at zero bound interest rate where households use cash alongside with house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall we observe decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or in the loan to collateral value ratio. We also find that optimal monetary policy generates large and more persistent fall in the money multiplier in response to drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, money supply, money multiplier, loan to value ratio, collateral constraint, house prices, zero bound interest rate.
    JEL: E44 E51 E52 E58
    Date: 2013
  6. By: Ippei Fujiwara
    Date: 2013–04
  7. By: Gauti Eggertsson; Marc P. Giannoni
    Abstract: A rich literature from the 1970s shows that as inflation expectations become more and more ingrained, monetary policy loses its stimulative effect. In the extreme, with perfectly anticipated inflation, there is no trade-off between inflation and output. A recent literature on the interest-rate zero lower bound, however, suggests there may be some benefits from anticipated inflation when the economy is in a liquidity trap. In this paper, we reconcile these two views by showing that while it is true that, at positive interest rates, the greater the anticipated inflation the less stimulative are the effects, the opposite holds true at the zero bound. Indeed, at the zero bound, the more the public anticipates inflation, the greater is the expansionary effect of inflation on output. This leads us to revisit the trade-off between inflation and output and to show how radically it changes in the face of demand shocks large enough to bring the economy into a liquidity trap. Instead of vanishing once inflation becomes anticipated, the trade-off between inflation and output increases substantially and may become arbitrarily large. In such cases, raising the inflation target in a liquidity trap can be very stimulative.
    Keywords: Inflation (Finance) ; Interest rates ; Liquidity (Economics) ; Supply and demand
    Date: 2013
  8. By: Huang, Pidong; Igarashi, Yoske
    Abstract: We investigate in details a Trejos-Wright random matching model of money with a consumer take-it-or-leave-it offer and the individual money holding set {0,1,2}. First we show generic existence of three kinds of steady states: (1) pure-strategy full-support steady states, (2) mixed-strategy full-support steady states, and (3) non-full-support steady states, and then we show relations between them. Finally we provide stability analyses. It is shown that (1) and (2) are locally stable, (1) being also determinate. (3) is shown to be unstable.
    Keywords: random matching model; monetary steady state; local stability; determinacy; instability; Zhu (2003).
    JEL: E00
    Date: 2013–04–16
  9. By: Huang, Pidong; Igarashi, Yoske
    Abstract: We study the stability of monetary steady states in a random matching model of money where money is indivisible, the bound on individual money holding is finite, and the trading protocol is buyer take-it-or-leave-it offers. The class of steady states we study have a non-full-support money-holding distribution and are constructed from the steady states of Zhu (2003). We show that no equilibrium path converges to such steady states if the initial distribution has a different support.
    Keywords: random matching model; monetary steady state;
    JEL: E00
    Date: 2013–04–30
  10. By: Randall Morck; M. Deniz Yavuz; Bernard Yeung
    Abstract: We find lending by state controlled banks to be significantly more associated with monetary policy than is lending by private sector banks. At the country-level, we further find monetary policy to be significantly closely linked to aggregate loan growth and aggregate fixed capital investment growth in countries whose large banks are more predominantly state controlled. These differences are more pronounced during monetary expansions amid slow GDP growth periods. Other factors, such as small bank size and the presence of a controlling shareholder in a private sector bank also correlate with more lending sensitivity to monetary policy.
    JEL: E5 G1 G21 G28 G3 O16 P5
    Date: 2013–04
  11. By: Huang, Pidong
    Abstract: This paper studies stability of monetary steady states in a Trejos-Wright random matching model of money with money holding set {0,1,2} and cost of carrying money. There kinds of steady states exist generically: pure-strategy full-support steady states, mixed-strategy full-support steady state, and non-full-support steady state. Stability analysis shows that full-support steady states are stable and determinate generically and that non-full-support steady state is stable and indeterminate if there is a small positive carrying cost.
    Keywords: random matching model; monetary steady state; instability; determinacy; Zhu (2003).
    JEL: E00
    Date: 2013–04–18
  12. By: Verona , Fabio (Bank of Finland Research); Martins, Manuel M. F. (University of Porto, Faculty of Economics and CEF:UP); Drumond , Inês (University of Porto, Faculty of Economics and CEF:UP, and DG-ECFIN, European Commission)
    Abstract: Motivated by the U.S. events of the 2000s, we address whether a too low for too long interest rate policy may generate a boom-bust cycle. We simulate anticipated and unanticipated monetary policies in state-of-the-art DSGE models and in a model with bond financing via a shadow banking system, in which the bond spread is calibrated for normal and optimistic times. Our results suggest that the U.S. boom-bust was caused by the combination of (i) interest rates that were too low for too long, (ii) excessive optimism and (iii) a failure of agents to anticipate the extent of the abnormally favourable conditions.
    Keywords: DSGE model; shadow banking system; too low for too long; boom-bust
    JEL: E32 E44 E52 G24
    Date: 2013–04–11
  13. By: Fernando Alvarez (University of Chicago and NBER); Francesco Lippi (University of Sassari and EIEF); Luigi Paciello (EIEF)
    Abstract: We compute the impulse response of output to an aggregate monetary shock in a general equilibrium when firms set prices subject to a costly observation of the state and a menu cost. We study how the aggregate effects of a monetary shock depend on the relative size of these costs. We find that empirically reasonable observations costs increase the impact and the persistence of the output response to monetary shocks compared to models with menu cost only, flattening the shape of the impulse response function. Moreover we show that if the shocks are not large the results are independent of the assumption of whether firms know the realization of the monetary shock on impact.
    Date: 2013
  14. By: Le, Vo Phuong Mai (Cardiff Business School); Matthews, Kent (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Xiao, Zhigui
    Abstract: The downturn in the world economy following the global banking crisis has left the Chinese economy relatively unscathed. This paper develops a model of the Chinese economy using a DSGE framework with a banking sector to shed light on this episode. It differs from other applications in the use of indirect inference procedure to test the ?tted model. The model finds that the main shocks hitting China in the crisis were international and that domestic banking shocks were unimportant. However, directed bank lending and direct government spending was used to supplement monetary policy to aggressively offset shocks to demand. The model finds that government expenditure feedback reduces the frequency of a business cycle crisis but that any feedback effect on investment creates excess capacity and instability in output.
    Keywords: DSGE model; Financial Frictions; China; Crises; Indirect Inference
    JEL: E3 E44 E52 C1
    Date: 2013–04
  15. By: Ellyne, Mark; Chater, Rachel
    Abstract: This paper addresses the issue of foreign exchange and capital controls in the context of the Southern African Development Community’s goal of regional integration. It reviews the theory and evidence surrounding current and capital account liberalisation and argues that there is a lack of sufficiently refined de jure measures of capital account openness. A new index for measuring exchange control restrictiveness is created based on data from the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) for the 15 SADC member states. It identifies substantial variation in the exchange control regulations across SADC countries that other existing, more indices fail to account for. The new index illustrates the considerable range of variation of exchange restrictiveness within SADC, as well as illustrating SADC’s relative exchange restrictiveness compared with other countries, inside and outside of Africa. The new index also correlates with several measures of financial development, certain balance of payment items, and some measures of institutional development, which makes it a useful measure for SADC integration. The paper highlights the challenges for SADC monetary union in the sphere of exchange control.
    Keywords: Exchange controls, SADC, capital controls, regional integration
    JEL: F15 F55
    Date: 2013–03–30
  16. By: Anke Mönnig (GWS - Institute of Economic Structures Research)
    Abstract: The current state budget crisis in the EU and the numerous futile efforts to solve the problem has brought back the fraction of people that argument in favour of an exit strategy of Germany from the European monetary union (EMU) or even the break-up of the EMU in total. This paper investigates for the case of Germany, whether or not a return to a new deutsche mark would be beneficial. It applies the macro-econometric input-output model INFORGE for this analysis, as it is able to quantify direct and indirect effects on inter-industrial level as well as on the demand and supply sides of the economy. Above that, INFORGE considers sectoral effects which are extremely important for the evaluation of this impact analysis. The quantitative results of the computed projection shows, that a return to a national currency would lower Germany's growth path mainly due to the expected appreciation of the new currency. A second scenario, which assumes a worsening of the crisis within the remaining EMU would intensify the negative implications for Germany. Although the results should be considered with respect to their strong assumptions, consensuses among economists exist that these assumptions might be initiated in case of an EMU break-up. Hence, in the case of Germany, the effort of doing everything to foster the future existing of the monetary union is of utmost importance.
    Keywords: European Monetary Union, projection, impact analysis
    JEL: E2 E5 F4
    Date: 2012
  17. By: Huang, Pidong
    Abstract: Lotteries are introduced into Cavalcanti and Erosa (2008) [2], a version of Trejos and Wright (1995) [4] with aggregate shocks. Lotteries improve welfare and eliminate the two notable features of the optimum with deterministic trades: over-production and history-dependence. Moreover, the optimum can be supported by buyer take-it-or-leave-it offers.
    Keywords: Random matching model of money; Aggregate shock; Optimal allocation; History-dependence; Lottery
    JEL: E30
    Date: 2012–01–04

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.