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

  1. Capital Controls, Global Liquidity Traps and the International Policy Trilemma By Michael B. Devereux; James Yetman
  2. "The Problem of Excess Reserves, Then and Now" By Walker F. Todd
  3. Monetary policy decisions by the world's central banks using real-time data By Klaus Schmidt-Hebbel; Francisco Muñoz
  4. Complexity and monetary policy By Orphanides, Athanasios; Wieland, Volker
  5. A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Wich Policymakers Exploit the Risk Premium for Stabilization Purposes By Guillermo Escudé
  6. A descriptive analysis of the balance sheet and monetary policy of De Nederlandsche Bank: 1900-1998 and beyond By Christiaan Pattipeilohy
  7. Exchange Rate Predictability and a Monetary Model with Time-varying Cointegration Coefficients By Cheolbeom Park; Sookyung Park
  8. A new paradigm for monetary policy? By Issing, Otmar
  9. How to move the exchange rate if you must: the diverse practice of foreign exchange intervention by central banks and a proposal for doing it better By Basu, Kaushik; Varoudakis, Aristomene
  10. Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe By Khan, Muhammad; Kebewar, Mazen; Nenovsky, Nikolay
  11. Monetary theory and monetary policy: Reflections on the development over the last 150 years By Issing, Otmar; Wieland, Volker
  12. Was there a "Greenspan conundrum" in the Euro Area ? By Gildas Lamé
  13. The Price Puzzle: Fact or Artefact? By Philip Arestis; Michail Karoglou; Kostas Mouratidis
  14. Central banks: Paradise lost By Issing, Otmar
  15. Inflation targeting and product market deregulation By Moretti, Laura
  16. Inflation in Poland under state-dependent pricing By Pawel Baranowski; Mariusz Gorajski; Maciej Malaczewski; Grzegorz Szafranski
  17. Robust Stability of Monetary Policy Rules under Adaptive Learning By Eric Gaus
  18. Central Bank Intervention and Exchange Rate Volatility: Evidence from Japan Using Realized Volatility By Ai-ru (Meg) Cheng; Kuntal Das; Takeshi Shimatani
  19. To the problem of turbulence in quantitative easing transmission channels and transactions network channels at quantitative easing policy implementation by central banks By Dimitri O. Ledenyov; Viktor O. Ledenyov
  20. Assessing Indicators of Currency Crisis in Ethiopia: Signals Approach By Megersa, kelbesa; Cassimon, Danny

  1. By: Michael B. Devereux; James Yetman
    Abstract: The 'International Policy Trilemma' refers to the constraint on independent monetary policy that is forced on a country which remains open to international financial markets and simultaneously pursues an exchange rate target. This paper shows that, in a global economy with open financial markets, the problem of the zero bound introduces a new dimension to the international policy trilemma. International financial market openness may render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a 'liquidity trap' in one country are propagated through financial markets to other countries. But monetary policy effectiveness may be restored by the imposition of capital controls, which inhibit the transmission of these shocks across countries. We derive an optimal monetary policy response to a global liquidity trap in the presence of capital controls. We further show that, even though capital controls may facilitate effective monetary policy, except in the case where monetary policy is further constrained (beyond the zero lower bound constraint), capital controls are not desirable in welfare terms.
    JEL: F3 F32 F33
    Date: 2013–05
  2. By: Walker F. Todd
    Abstract: This working paper looks at excess reserves in historical context and analyzes whether they constitute a monetary policy problem for the Federal Reserve System (the "Fed") or a potential-ly inflationary problem for the rest of us. Generally, this analysis shows that both absolute and relative sizes of excess reserves are a big problem for the Fed as well as the general public because of their inflationary potential. However, like all contingencies, the timing and extent of the damage that reserve-driven inflation might cause are uncertain. It is even possible today to find articles in both scholarly circles and the popular press arguing either that the inflationary blow-off might never happen or that an increasing tendency toward prolonged deflation is the more probable outcome.
    Keywords: Excess Reserves; Federal Reserve; Fed; European Central Bank; ECB; Quantitative Easing; Monetary Stimulus
    JEL: E51 E52 E58
    Date: 2013–05
  3. By: Klaus Schmidt-Hebbel; Francisco Muñoz
    Abstract: This paper contributes to the empirical understanding of monetary policy in five dimensions. First, specifiying a generalized Taylor equation that nests backward and forward-looking inflation and activity variables in setting policy rates. Second, using real-time data. Third, estimating the model on a world panel of monthly 1994-2011 data for 28 advanced and emerging economies. Fourth, using alternative panel data estimators to test for robustness. Fifth, testing for differences in monetary policy over time and across country groups. The findings are very supportive of the nested model and generally show that the Taylor principle is satisfied by the world's central banks.
    Keywords: monetary policy, Taylor rule, Taylor principle, heterogeneous panels
    JEL: E50 E52 E58
    Date: 2012
  4. By: Orphanides, Athanasios; Wieland, Volker
    Abstract: The complexity resulting from intertwined uncertainties regarding model misspecification and mismeasurement of the state of the economy defines the monetary policy landscape. Using the euro area as laboratory this paper explores the design of robust policy guides aiming to maintain stability in the economy while recognizing this complexity. We document substantial output gap mismeasurement and make use of a new model data base to capture the evolution of model specification. A simple interest rate rule is employed to interpret ECB policy since 1999. An evaluation of alternative policy rules across 11 models of the euro area confirms the fragility of policy analysis optimized for any specific model and shows the merits of model averaging in policy design. Interestingly, a simple difference rule with the same coefficients on inflation and output growth as the one used to interpret ECB policy is quite robust as long as it responds to current outcomes of these variables. --
    Keywords: Financial Crisis,Complexity,Monetary Policy,Model Uncertainty,Robust Simple Rules,ECB
    JEL: E50 E52 E58
    Date: 2012
  5. By: Guillermo Escudé (Central Bank of Argentina)
    Abstract: This paper builds a DSGE model for a SOE in which the central bank systematically intervenes both the domestic currency bond and the FX markets using two policy rules: a Taylor-type rule and a second rule in which the operational target is the rate of nominal currency depreciation. For this, the instruments used by the central bank (bonds and international reserves) must be included in the model, as well as the institutional arrangements that determine the total amount of resources the central bank can use. The "corner" regimes in which only one of the policy rules is used are particular cases of the model. The model is calibrated and implemented in Dynare for 1) simple policy rules, 2) optimal simple policy rules, and 3) optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences (styles). The results show that the losses are systematically lower when both policy rules are used simultaneously, and much lower for the usual preferences (in which only inflation and/or output stabilization matter). It is shown that this result is basically due to the central bank´s enhanced ability, when it uses the two policy rules, to influence capital flows through the effects of its actions on the endogenous risk premium in the (risk-adjusted) interest parity equation.
    Keywords: DSGE models, exchange rate policy, optimal policy, Small Open Economy
    JEL: E58 F41 O24
    Date: 2013–03
  6. By: Christiaan Pattipeilohy
    Abstract: This paper investigates developments in the balance sheet and monetary policy of De Nederlandsche Bank in the period 1900-1998. We find that – given the institutional framework which is applicable - the composition of DNB’s balance sheet is to a large extent endogenous to monetary and financial-economic conditions. Historically, the Bank’s implementation of monetary policy was geared primarily towards the market for foreign exchange and the Dutch banking sector. However, it has not been uncommon for the Bank to also hold a portfolio of government bonds for monetary policy purposes. Our analysis suggests that monetary policy, its instruments and intermediate targets should not be viewed as fixed and unalterable concepts. Changing conditions and relations within the economy may warrant or even require innovations in the monetary policymakers’ toolbox. Clear communication is important to manage expectations on what can and cannot be expected from conventional and (previously) less conventional monetary policy measures.
    Date: 2013–05
  7. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Sookyung Park (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: Many studies have pointed out that the underlying relations and functions for the monetary model (e.g. the PPP relation, the money demand function, monetary policy rule, etc.) have undergone parameter instabilities and that the relation between exchange rates and macro fundamentals are unstable due to the shift in the economic models in foreign exchange traders¡¯ views or the scapegoat effect in Bacchetta and van Wincoop (2009). Facing this, we consider a monetary model with time-varying cointegration coefficients in order to understand exchange rate movements. We provide statistical evidence against the standard monetary model with constant cointegration coefficients but find favorable evidence for the time-varying cointegration relationship between exchange rates and monetary fundamentals. Furthermore, we demonstrate that deviations between the exchange rate and fundamentals from the time-varying cointegration relation have strong predictive power for future changes in exchange rates through in-sample analysis, out-of-sample analysis, and directional accuracy tests.
    Keywords: Exchange rate, Monetary model, Predictability, Time-varying cointegration
    JEL: F31 F47
    Date: 2013
  8. By: Issing, Otmar
    Abstract: --
    Date: 2013
  9. By: Basu, Kaushik; Varoudakis, Aristomene
    Abstract: The paper is about the art of exchange rate management by central banks. It begins by reviewing the diversity of objectives and practices of central bank intervention in the foreign exchange market. Central banks typically exercise discretion in determining when and to what extent to intervene. Some central banks use publicly declared rules of intervention, with the aim of increasing visibility and strengthening the signaling channel of policy. There is tentative evidence that the volatility of foreign exchange reserves is comparatively lower in emerging market economies where central banks follow some form of rules-based foreign exchange intervention. The paper goes on to argue that when the foreign exchange market includes some large strategic participants, the central bank can achieve superior outcomes if intervention takes the form of a rule, or"schedule,"indicating commitments to buying and selling different quantities of foreign currency conditional on the exchange rate. Exchange rate management and reserve management can then be treated as two independent objectives by the central bank. In line with the stylized facts reviewed, this would enable a central bank to pursue exchange rate objectives with minimum reserve changes, or achieve reserve targets with minimum impact on the exchange rate.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Stabilization,Economic Theory&Research
    Date: 2013–05–01
  10. By: Khan, Muhammad; Kebewar, Mazen; Nenovsky, Nikolay
    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
    JEL: C22 C51 C52 E0
    Date: 2013–03
  11. By: Issing, Otmar; Wieland, Volker
    Abstract: In this paper, we provide some reflections on the development of monetary theory and monetary policy over the last 150 years. Rather than presenting an encompassing overview, which would be overambitious, we simply concentrate on a few selected aspects that we view as milestones in the development of this subject. We also try to illustrate some of the interactions with the political and financial system, academic discussion and the views and actions of central banks. --
    Date: 2012
  12. By: Gildas Lamé (INSEE - CREST)
    Abstract: This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use a Near-Cointegrated VAR-like approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone’s sovereign yield curve. I then look for notable episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum". At least three "conundra" episodes can be singled out in the Eurozone between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena.
    Keywords: Affine term structure models, Unspanned macro risks, Monetary policy, Expectation Hypothesis, Term Premium, Macroeconomy
    JEL: C51 E43 E44 E47 E52 G12
    Date: 2013–03
  13. By: Philip Arestis (Department of Land Economics, University of Cambridge); Michail Karoglou (Aston Business School, Aston University); Kostas Mouratidis (Department of Economics, The University of Sheffield)
    Abstract: A conventional finding of recursive structural VAR (SVAR) analyses is the price puzzle namely the positive relationship between interest rates and inflation. We employ a Markov regime-switching structural VAR (MRS-SVAR) to investigate whether the price puzzle is present at regimes where there is violation of the Taylor principle. Our results suggest that the price puzzle is a regime-dependent phenomenon driven by passive monetary policy and Choleski identifying restrictions.
    Keywords: monetary policy; price puzzle; Markov regime-switching; structural VAR
    JEL: C32 C34 C51 E50 E52 E58
    Date: 2013
  14. By: Issing, Otmar
    Abstract: --
    JEL: E44 E52 E58
    Date: 2012
  15. By: Moretti, Laura
    Abstract: I evaluate the effect of inflation targeting on inflation and how it interacts with product market deregulation during the disinflationary process in the 1990s. Using a sample of 21 OECD countries, I show that, after controlling for product market deregulation, the effect of inflation targeting is quantitatively important and statistically significant. Moreover, product market deregulation also matters in particular in countries that adopted an inflation targeting regime. I propose a New Keynesian Phillips curve with an explicit role for market deregulation to rationalize the empirical evidence. --
    Keywords: Inflation Targeting,Product Market Deregulation,Difference in Difference
    JEL: E31 E58 E65 L51
    Date: 2012
  16. By: Pawel Baranowski; Mariusz Gorajski; Maciej Malaczewski; Grzegorz Szafranski (Department of Econometrics, Institute of Econometrics, Faculty of Economics and Sociology, University of Lodz)
    Abstract: We analyse the short-term dynamics of Polish economy with a prominent state-dependent pricing mechanism of Dotsey, King and Wolman (1999). We compare macroeconomic evidence of price rigidity in a small-scale DSGE model with a state-dependent Phillips curve (SDPC) derived by Bakhshi, Khan and Rudolf (2007) to a benchmark model including hybrid New-Keynesian Phillips Curve (NHPC) of Gali and Gertler (1999). To analyse monetary policy transmission mechanism we estimate both models with Bayesian techniques and focus on the comparison of distribution of price vintages, a degree of price stickiness, values of parameters in Phillips curve equations, and impulse responses to macroeconomic shocks. The estimated state-dependent pricing model generates a median duration of prices about 4 quarters compared to 8 quarters in a time-dependent model. In the state-dependent pricing model it takes more time to dampen inflation dynamics after a monetary policy relative to a time-dependent counterpart. The menu cost model is also able to identify higher variance of technology shocks, and higher persistence in preference shocks, while the dynamics of the impulse responses in time- and state-dependent pricing models are hard to distinguish.
    Keywords: state-dependent pricing, inflation, menu costs, monetary policy, Polish economy
    JEL: E31
    Date: 2013–04
  17. By: Eric Gaus (Ursinus College)
    Abstract: Recent research has explored how minor changes in expectation formation can change the stability properties of a model (Duffy and Xiao 2007, Evans and Honkapoja 2009). This paper builds on this research by examining an economy subject to a variety of monetary policy rules under an endogenous learning algorithm proposed by Marcet and Nicolini (2003). The results indicate that operational versions of optimal discretionary rules are not ``robustly stable'' as in Evans and Honkapoja (2009). In addition commitment rules are not robust to minor changes in expectational structure and parameter values.
    Keywords: Learning, Rational Expectations, Monetary Policy Rules
    JEL: E52 D83
    Date: 2012–07–12
  18. By: Ai-ru (Meg) Cheng; Kuntal Das (University of Canterbury); Takeshi Shimatani
    Abstract: This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard (2004, 2006), we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period.
    Keywords: Foreign exchange intervention, Realized volatility, Simultaneous equations, Tobit model
    JEL: C34 E58 F31 F33
    Date: 2013–05–16
  19. By: Dimitri O. Ledenyov; Viktor O. Ledenyov
    Abstract: In agreement with the recent research findings in the econophysics, we propose that the nonlinear dynamic chaos can be generated by the turbulent capital flows in both the quantitative easing transmission channels and the transaction networks channels, when there are the laminar turbulent capital flows transitions in the financial system. We demonstrate that the capital flows in both the quantitative easing transmission channels and the transaction networks channels in the financial system can be accurately characterized by the Reynolds numbers. We explain that the transition to the nonlinear dynamic chaos regime can be realized through the cascade of the Landau, Hopf bifurcations in the turbulent capital flows in both the quantitative easing transmission channels and the transaction networks channels in the financial system. We completed the computer modeling, using both the Nonlinear Dynamic Stochastic General Equilibrium Theory (NDSGET) and the Hydrodynamics Theory (HT), to accurately characterize the US economy in the conditions of the QE policy implementation by the US Federal Reserve. We found that the ability of the US financial system to adjust to the different levels of liquidity depends on the nonlinearities appearance in the QE transmission channels, and is limited by the laminar turbulent capital flows transitions in the QE transmission channels and the transaction networks channels in the US financial system. The proposed computer model allows us to make the accurate forecasts of the US economy performance in the cases, when there are the different levels of liquidity in the US financial system.
    Date: 2013–05
  20. By: Megersa, kelbesa; Cassimon, Danny
    Abstract: Currency crises, generally defined as rapid depreciation of a local currency or loss of foreign exchange reserves, are common incidents in modern monetary systems. Due to their repeated occurrence and severity, they have earned wide coverage by both theoretical and empirical literature. However, unlike advanced and emerging economies, currency crises in low-income countries have not received due attention. This paper uses the signals approach developed by Kaminsky et al. (1998) and assesses currency crisis in Ethiopia over the time frame January 1970 to December 2008. Using the Exchange Market Pressure Index (EMPI), we identify three currency crisis episodes, Oct. 1992 - Sep. 1993; Mar. – Jul. 1999 and Oct. – Dec. 2008. This timing shows the importance of both local and international dynamics in determining currency crises. The crisis periods coincide with the liberalization following the fall of Ethiopian socialism, the Ethio-Eritrean border conflict, and the zenith of the global financial crisis, respectively. More macro-economic indicators picked up the first crisis in a 24 month signalling window, compared to the latter two. Three categories of indicators were used: current account, capital account and domestic financial sector. None of the capital account indicators were significant based on the noise-to-signal ratio rule. One possible explanation for this might be the weak integration of the Ethiopian economy with global capital markets.
    Keywords: Currency crisis, financial crisis, early warning systems, signals approach, Ethiopia
    JEL: E5 E6 G2 O1 O11
    Date: 2013–05–22

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