nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒05‒11
nine papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Estimating Money Demand Function by a Smooth Transition Regression Model: An Evidence for Turkey By Sahin, Afsin
  2. A simple empirical measure of central banks' conservatism By Levieuge, Grégory; Lucotte, Yannick
  3. Central bank transparency with the cost channel. By Meixing Dai; Qiao Zhang
  4. Pledgability and Liquidity By Randall Wright; Vaidyanathan (Venky) Venkateswaran
  5. On the Role of Financial Depth in Determining the Asymmetric Impact of Monetary Policy By Mustafa Caglayan; Ozge Kandemir Kocaaslan; Kostas Mouratidis
  6. Misspecification, Identification or Measurement? Another Look at the Price Puzzle By Shuyun May Li; Roshan Perera; Kalvinder Shields
  7. Business cycle and monetary policy analysis with market rigidities and financial frictions By Miguel Casares; Luca Deidda; Jose E. Galdon-Sanchez
  8. Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment. By Olivier Damette
  9. Intebank liquidity crunch and the firm credit crunch: Evidence from the 2007-2009 crisis By Rajkamal Iyer; Samuel Da-Rocha-Lopes; José-Luis Peydró; Antoinette Schoar

  1. By: Sahin, Afsin
    Abstract: The money supply process is assumed to be fixed in economic literature or at least there is a central bank trying to control the liquidity in the economy. On the other hand, the demand side is more volatile and more uncertain. This situation hinders the homogenous and symmetric information assumptions of the monetary models. The amount of money demanded is a dynamic process and changes depending on the transition variable in concern. The money demand increases in the boom periods of the economy but may diminish in the recessions gradually. Therefore the money demand function indicates an asymmetric behavior and nonlinearity. This paper estimates the money demand function by including the inflation uncertainty, that is assumed to be a transition variable for a small-open economy, Turkey by using the monthly data spanning from January, 1990 to May, 2012. The parameters of the money demand function are estimated by the Smooth Transition Regression (STR) models. While modelling the nonlinearity, an appropriate logistic function is determined. The dependent variables that are used to estimate the money function are gold, interest rate, inflation uncertainty, share prices, exchange rate and income. The inflation uncertainty data is gathered from the conditional variances of a specified EGARCH model. The results of the paper have several policy implications for the monetary authorities. First, the behavior of the money demand and its determinants are crucial at the times of adopting the inflation targeting regime. The stability of money demand is also related to the stability of inflation. So the results of the paper may be beneficial for the policy makers and monetary authorities during their decision making process.
    Keywords: Money Demand; Inflation Uncertainty; Smooth Transition Regression; Nonlinearity.
    JEL: C58 E41 E51
    Date: 2013–04–29
  2. By: Levieuge, Grégory; Lucotte, Yannick
    Abstract: In this paper we suggest a simple empirical and model-independent measure of Central Banks' Conservatism, based on the Taylor curve. This new indicator can easily be extended in time and space, whatever the underlying monetary regime of the considered countries. We demonstrate that it evolves in accordance with the monetary experiences of 32 OECD member countries from 1980, and is largely equivalent to the model-based measure provided by Krause & Méndez [Southern Economic Journal, 2005]. We finally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of Central Banks.
    Keywords: Central Banks' preferences; Conservatism; Taylor curve; Taylor rule
    JEL: E43 E58 E52 E47
    Date: 2012–04–28
  3. By: Meixing Dai; Qiao Zhang
    Abstract: Using a New Keynesian model with the cost channel, characterized by distortions due to monopolistic competition and the firms’ need to pre-finance their production, we show that central bank transparency affects the economy not only through the effects of inflation shocks but also of demand shocks. The economy is affected by opacity in the same way, but with smaller amplitude, in the case of demand shocks than in the case of inflation shocks except when the latter have a significantly lower variance. Generally, imperfect transparency could discipline the price-setting behavior of firms by reducing the average reaction of inflation to inflation and demand shocks and hence the volatility of inflation while increasing these of the output gap, and more so when these shocks are highly persistent. It could thus significantly improve social welfare if the society assigns a very low weight to output-gap stabilization. The presence of the cost channel reinforces significantly the effects of opacity on the responses of endogenous variables and their volatility to inflation shocks.
    Keywords: Cost channel, central bank transparency, distortions, disciplining effect of imperfect transparency.
    JEL: E52 E58
    Date: 2013
  4. By: Randall Wright (U Wisconsin); Vaidyanathan (Venky) Venkateswaran (Penn State University)
    Abstract: This paper models the role of assets in facilitating intertemporal exchange: because limited commitment precludes unsecured credit, buyers need to pledge assets as collateral. We develop a general equilibrium model where assets differ in terms of pledgability, and put it to work in applications to finance and macroeconomics. The framework nests standard growth and asset pricing models as special cases. We can price at currency as well as real assets, and analyze how monetary policy affects interest rates, generalizing Fishers approach. We also deliver a Tobin effect of inflation on capital accumulation. We study liquidity differentials along both extensive and intensive margins, making pledgability endogenous, while determining the terms of trade in a general way that captures standard pricing mechanisms as special cases.
    Date: 2012
  5. By: Mustafa Caglayan (School of Management and Languages, Heriot-Watt University, UK); Ozge Kandemir Kocaaslan (Department of Economics, Hacettepe University, Ankara, Turkey); Kostas Mouratidis (Department of Economics, University of Sheffield, UK)
    Abstract: This paper examines the asymmetric impact of monetary policy shocks on real output growth considering the role of financial depth. We carry out our examination using quarterly US data over 1980:q1-2011:q4 and implement an instrumental variables Markov regime switching methodology to account for the endogeneity between monetary policy and output growth. Our investigation shows that the impact of monetary policy shocks on output growth is stronger during recessions than expansions. More interestingly, we show that financial depth dampens the real effects of monetary policy shocks. We show that the results are robust to several alternative financial depth measures.
    Keywords: Output growth; asymmetric effects; monetary policy; financial depth; Markov switching; instrumental variables
    JEL: E32 E52
    Date: 2013
  6. By: Shuyun May Li; Roshan Perera; Kalvinder Shields
    Abstract: This paper re-examines the VAR analysis of the price puzzle with regard to the issues of measurement, identification and misspecification. In an empirical analysis conducted for the US economy, we consider alternative measures of economic activity and inflation, alternative assumptions to identify the monetary policy shock and various VAR specifications making use of contemporaneous and forward looking variables. All three issues are found to be important for the resolution of the price puzzle and a robust preferred specification is proposed.
    Keywords: Price puzzle;Monetary policy;Output gap;Expectations
    JEL: E52 E31 C32
    Date: 2013
  7. By: Miguel Casares (Departamento de Economía-UPNA); Luca Deidda (Università di Sassari. Italia); Jose E. Galdon-Sanchez (Departamento de Economía-UPNA)
    Abstract: We describe a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive CES loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (banking real rigidities). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.
    Keywords: financial accelerator, nominal rigidities, real rigidities donations
    JEL: E32 E44
    Date: 2013
  8. By: Olivier Damette
    Abstract: From Olsen Financial Studies data on the Euro-Dollar currency pair (2008-2010), we conduct a time-series analysis to explain the role of trading volume on exchange rate volatility (Mixture Distribution Hypothesis), taking into account non-linearity. We find evidence that the MDH holds in turbulent periods, during which spreads and volume trading are high. When spreads and the volume are high, the relationship between trading volume and volatility tends to increase. Linking this result with the Tobin tax debate implies that a Tobin tax would be effective for curbing speculation and reducing exchange rate volatility, even in turbulent periods. This paper provides the first empirical corroboration of this proposition and seems to confirm some previous theoretical papers in the vein of Tobin. All in all, two main results emerged. First, the abundant literature on the MDH, but exclusively based on linear econometrics, should take into account non-linearities. Second, the effect of a Tobin tax on volatility would be slightly context-dependent and always negative. A Tobin tax would have been stabilizing and effective in the 2008 crisis when spreads, volume and volatility were very high.
    Keywords: Tobin Tax, exchange rate volatility, STR models, non-linearity, Mixture Distribution Hypothesis.
    JEL: E44 F31 C22
    Date: 2013
  9. By: Rajkamal Iyer; Samuel Da-Rocha-Lopes; José-Luis Peydró; Antoinette Schoar
    Abstract: We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit crunch is stronger for less solvent banks. Finally, there are no overall positive effects of central bank liquidity, but higher hoarding of liquidity.
    Keywords: Credit crunch; banking crisis; interbank markets; access to credit; flight to quality; lender of last resort; liquidity hoarding.
    JEL: G01 G21 G28 G32
    Date: 2013–04

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