nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒06‒16
34 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Response to Foreign Aid in an Estimated DSGE Model of Malawi By Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
  2. Money Growth and Inflation: evidence from a Markov Switching Bayesian VAR By Gianni Amisano; Roberta Colavecchio
  3. Ready for euro? Empirical study of the actual monetary policy independence in Poland By Łukasz Goczek; Dagmara Mycielska
  4. Low interest rate policy and the use of reserve requirements in emerging markets By Hoffmann, Andreas; Loeffler, Axel
  5. The Monetary Theory of Kalecki and Minsky By Jan Toporowski
  6. On the Welfare Cost of Inflation: The Case of Pakistan By Mushtaq, Siffat; Rashid , Abdul; Qayyum , Abdul
  7. Do Agents Learn by Least Squares? The Evidence Provided by Changes in Monetary Policy By Sagarika Mishra
  8. The effectiveness of the non-standard policy measures during the financial crises: the experiences of the Federal Reserve and the European Central Bank By Seth B. Carpenter; Selva Demiralp; Jens Eisenschmidt
  9. Monetary Policy and Banking Supervision: Coordination instead of separation By Gros, Daniel; Beck, Thorsten
  10. Financial Globalization and Monetary Transmission By Meier, Simone
  11. A fractionally integrated approach to monetary policy and inflation dynamics By Lovcha, Yuliya; Pérez Laborda, Àlex
  12. Monetary Policy and Debt Deflation: Some Computational Experiments By Carl Chiarella; Corrado Di Guilmi
  13. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  14. Inflation Persistence or the Protracted Effects of Commodity Price Changes? By Wolfgang Pollan
  15. Quantitative easing, global economic crisis and market response By Hausken, Kjell; Ncube, Mthuli
  16. Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes By Laura Alfaro; Fabio Kanczuk
  17. The European Crisis in the Context of the History of Previous Financial Crises By Michael D. Bordo; Harold James
  18. Globalization and Monetary Policy: An Empirical Analysis By Arpita Chatterjee
  19. A Bright Future Can Be Ours! Macroeconomic Policy for Non-Euro-Zone Western Countries. By John Nevile; Peter Kriesler
  20. The euro as a proxy for the classical gold standard? Government debt financing and political commitment in historical perspective By Hoffmann, Andreas
  21. How Well Does "Core" Inflation Capture Permanent Price Changes? By Michael D. Bradley; Dennis W. Jansen; Tara M. Sinclair
  22. The Bank of England's forecasting platform: COMPASS, MAPS, EASE and the suite of models By Burgess, Stephen; Fernandez-Corugedo, Emilio; Groth, Charlotta; Harrison, Richard; Monti, Francesca; Theodoridis, Konstantinos; Waldron, Matt
  23. Monetary policy, the tax code, and the real effects of energy shocks By William T. Gavin; Benjamin D. Keen; Finn E. Kydland
  24. Inflation gifts and endogenous growth through learning-by-doing By Andrea Vaona
  25. The Enduring Popularity of the Euro throughout the Crisis By Roth, Felix; Jonung, Lars; Nowak-Lehmann D.,Felicitas
  26. On the Determinants of Exchange Rate Misalignments By Jamel Saadaoui; Jacques Mazier; Nabil Aflouk
  27. On the modeling of exchange rate: some evidence from Pakistan By Rashid , Abdul; Husain, Fazal
  28. Nonlinear relationship between permanent and transitory components of monetary aggregates and the economy By Richard G. Anderson; Barry Jones; Marcelle Chauvet
  29. Central Banks in Times of Crisis: The FED vs. the ECB By Gros, Daniel; Alcidi, Cinzia; Giovannini, Alessandro
  30. Does Uncovered Interest rate Parity Hold After All? By Omer, Muhammad; de Haan, Jakob; Scholtens, Bert
  31. Financial Instability, Uncertainty and Banks’ Lending Behaviour By Swamy, Vighneswara; S, Sreejesh
  32. The Future of the Currency Union By Frankel, Jeffrey
  33. A new governance for EMU and the economic policy framework By Schilirò, Daniele
  34. Optimal Monetary Provisions in Plural Form Franchise Systems; A Theoretical Model of Incentives with Two Risk-Averse Agents By Cintya Lanchimba

  1. By: Chance Mwabutwa, Manoel Bittencourt and Nicola Viegi
    Abstract: This paper estimates a Bayesian Dynamic Stochastic General Equilibrium (DSGE) model of Malawi and uses it to account for short-run monetary policy response to aid inflows between 1980 and 2010. In particular, the paper evaluates the existence of a “Dutch Disease†following an increase in foreign aid and examines the Reserve Bank of Malawi (RBM) reaction to aid inflows under different monetary policy rules. The paper finds strong evidence of “Taylor rule†like response of monetary policy to aid inflows. It also shows that a ‘Dutch Disease’ did not exist in Malawi because aid inflows were found to be associated with currency depreciation and not the expected real currency appreciation. There is also evidence of a low impact of a positive aid shock on currency depreciation and inflation when RBM engages in targeting monetary aggregates than when the authorities use the Taylor rule and incomplete sterilisation.
    Keywords: Taylor rule, DSGE model, Rule-of-Thumb, Spending, Absorption, Foreign exchange Rate
    JEL: C11 C13 E52 E62 F31 F35
    Date: 2013
  2. By: Gianni Amisano (DG Research, European Central Bank and University of Brescia, Italy); Roberta Colavecchio (Universitaet Hamburg (University of Hamburg))
    Abstract: We contribute to the empirical debate on the role of money in monetary policy by analysing the features of the relationship between money growth and inflation in a Bayesian Markov Switching framework for a set of four countries, the US, the UK, the Euro area and Japan, over an estimation period spanning from 1960 to 2012. We find that the relationship between money growth and inflation appears to be nonlinear, as our estimation results identify multiple inflation regimes displaying clear and diversified features; moreover, as part of the model's information set, money growth plays a determinant role in the allocation of regimes. We show that observing monetary developments does (slightly) improve the signal of entering a high inflation regime but the influence of money on such signal seems to be relevant mainly in the 70s and the early 80s, i.e. in periods featuring exceptionally high rates of inflation. Our evidence confi?rms that the relationship between money and inflation appears to be relatively weak during periods featuring low and stable inflation.
    Keywords: Money growth, infl?ation regimes, Markov Switching model, Bayesian inference
    JEL: C11 C53 E31
    Date: 2013–05
  3. By: Łukasz Goczek (Faculty of Economic Sciences); Dagmara Mycielska (Faculty of Economic Sciences)
    Abstract: The aim of the article is to examine the actual degree of Polish monetary policy independence in the context of joining the Eurozone. It is frequently argued that the main cost of the participation in the EMU, or in any other common currency area, is the loss of monetary policy independence. In contrast, the paper raises the question of the actual possibility of such a policy in a small open economy operating within highly liberalized capital flows and highly integrated financial markets like Poland. Confirmation of the hypothesis concerning incomplete actual monetary independence is essential to the analysis of costs of the Polish accession to the EMU. The main hypothesis of the article is verified using a Vector Error-Correction Mechanism model and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, monetary policy independence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013
  4. By: Hoffmann, Andreas; Loeffler, Axel
    Abstract: The paper attempts to shed light on the link between monetary policy in large economies with international currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012 we provide evidence that emerging markets tend to raise reserve requirements and repress financial markets to curb speculative capital inflows when interest rates in the major economies decline. Our finding suggests that the current low interest rate policies of the major economies may have collateral effects on emerging markets by triggering financially repressive policies. --
    Keywords: Reserve Requirements,Financial Repression,Emerging Markets
    JEL: E52 E58
    Date: 2013
  5. By: Jan Toporowski (Department of Economics, SOAS, University of London, UK)
    Abstract: The monetary theory of Kalecki and Minsky is usually placed within the Post-Keynesian tradition, deriving from the monetary analysis of John Maynard Keynes. The paper argues that Kalecki and Minsky shared a common inheritance in Swedish and German monetary theory, rather than the Marshallian tradition. Thus the monetary analysis of Kalecki and Minsky emphasises the endogeneity of money through capitalist reproduction, rather than through the mechanisms connecting central bank money to credit creation in the banking system. This provides the link between the monetary theory of Kalecki and Minsky and modern circuit theory.
    Keywords: Keynes, Kalecki, Minsky, Money
    JEL: B30 E12 E51
    Date: 2012–03
  6. By: Mushtaq, Siffat; Rashid , Abdul; Qayyum , Abdul
    Abstract: In this study we quantified the welfare cost of inflation from the estimated long-run money demand functions for Pakistan for the period 1960-2007 using cointegration approach. The empirical results show that all the monetary aggregates are negatively related to the interest rate. The welfare gain of moving from positive inflation to zero inflation is approximately same under both money demand specifications but the behavior of the two models is different towards low interest rates. Moving from zero inflation to zero nominal interest rate has substantial gain under log-log form compared to the semi-log function. Compensating variation approach for the semi-log model gives higher welfare loss figures compared to the Bailey’s approach due to the quadratic nature of nominal interest rate in the Lucas (2000) welfare measure. However, the two approaches yield approximately similar the welfare cost of inflation for the log-log specification.
    Keywords: Inflation, Welfare costs, Pakistan
    JEL: E3 E4 E41
    Date: 2013–01–15
  7. By: Sagarika Mishra (Deakin University)
    Abstract: Understanding how agents formulate their expectations about Fed behavior is critical for the design of monetary policy. In response to a lack of empirical support for a strict rationality assumption, monetary theorists have recently introduced learning by agents into their models. Although a learning assumption is now common, there is practically no empirical research on whether agents actually earn. In this paper we test if the forecast of the three month T-bill rate in the Survey of Professional Forecasters (SPF) is consistent with least squares learning when there are discrete shifts in monetary policy. Discrete shifts in policy introduce temporary biases into forecasts while agents process data and learn about the policy shift. We first derive the mean, variance and autocovariances of the forecast errors from a recursive least squares learning algorithm when there are breaks in the structure of the model. We then apply the Bai and Perrron (1998) test for structural change to a Taylor rule and a forecasting model for the three month T-bill rate in order to identify changes in monetary policy. Having identified the policy regimes, we then estimate the implied biases in the interest rate forecasts within each regime. We find that when the forecast errors from the SPF are corrected for the biases due to shifts in policy, the forecast are consistent with least squares learning.
    Keywords: Survey forecasts, Least Squares Learning
    JEL: D83 D84
  8. By: Seth B. Carpenter; Selva Demiralp; Jens Eisenschmidt
    Abstract: A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a "bank liquidity risk channel", operative in crisis environments, which complements the usual channels of transmission of monetary policy.
    Date: 2013
  9. By: Gros, Daniel; Beck, Thorsten
    Abstract: Following the June 2012 European Council decision to place the ‘Single Supervisory Mechanism’ (SSM) within the European Central Bank, the general presumption in the policy discussions has been that there should be ‘Chinese walls’ between the supervisory and monetary policy arms of the ECB. The current legislative proposal, in fact, is explicit on this account. On the contrary, however, this paper finds that there is no need to impose a strict separation between these two functions. The authors argue, in fact, that a strict separation of supervision and monetary policy is not even desirable during a financial crisis when the systemic stability of the financial system represents the biggest threat to a monetary policy that aims at price stability. In their view, the key problem hampering the ECB today is that it lacks detailed information on the state of health of the banking system, which is often highly confidential. Chinese walls would not solve this problem. Moreover, in light of the fact that the new, proposed Supervisory Board will be composed to a large extent of representatives of the same institutions that also dominate the Governing Council, the paper finds that it does not make sense to have Chinese walls between two boards with largely overlapping memberships. In addition, it recommends that some members of the Supervisory Boards should be “independents” in order to reduce the tendency of supervisors to unduly delay the recognition of losses.
    Date: 2012–12
  10. By: Meier, Simone
    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’ (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: 2013–06
  11. By: Lovcha, Yuliya; Pérez Laborda, Àlex
    Abstract: This paper relaxes the standard I(0) and I(1) assumptions typically stated in the monetary VAR literature by considering a richer framework that encompasses the previous two processes as well as other fractionally integrated possibilities. First, a timevarying multivariate spectrum is estimated for post WWII US data. Then, a structural fractionally integrated VAR (VARFIMA) is fitted to each of the resulting time dependent spectra. In this way, both the coefficients of the VAR and the innovation variances are allowed to evolve freely. The model is employed to analyze inflation persistence and to evaluate the stance of US monetary policy. Our findings indicate a strong decline in the innovation variances during the great disinflation, consistent with the view that the good performance of the economy during the 80’s and 90’s is in part a tale of good luck. However, we also find evidence of a decline in inflation persistence together with a stronger monetary response to inflation during the same period. This last result suggests that the Fed may still play a role in accounting for the observed differences in the US inflation history. Finally, we conclude that previous evidence against drifting coefficients could be an artifact of parameter restriction towards the stationary region. Keywords: monetary policy, inflation persistence, fractional integration, timevarying coefficients, VARFIMA. JEL Classification: E52, C32
    Keywords: Política monetària, Anàlisi de sèries temporals, Inflació, 338 - Situació econòmica. Política econòmica. Gestió, control i planificació de l'economia. Producció. Serveis. Turisme. Preus,
    Date: 2013
  12. By: Carl Chiarella (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Corrado Di Guilmi (Economics Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms? debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector.
    Keywords: Financial fragility; monetary policy; debt deflation; agent based modelling; complex dynamics
    JEL: E12 E31 E44
    Date: 2013–06–01
  13. By: Marcel Fratzscher; Marco Lo Duca; Roland Straub
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a procyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: Monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2013
  14. By: Wolfgang Pollan (WIFO)
    Abstract: This paper explores the question to what extent non-domestic factors provide an explanation of US inflation over the last three decades. Are lagged dependent variables – traditionally interpreted as proxies for inflation expectations – just proxies for oil and commodity prices? To answer this question a simple Phillips curve, which includes energy prices, is estimated for the USA. The results show that crude oil prices, which basically are world market prices, have exerted a strong influence on inflation, while the effects of domestic factors, such as the unemployment rate, have become weaker. These findings help to resolve a puzzle of recent years: given the sharp rise in unemployment, why has inflation not slowed down as much as predicted by the traditional Phillips curve analysis? Furthermore, the empirical results assign a much feebler role to expectations in the inflation process; if indeed inflation is a global phenomenon, the task of controlling inflation expectations by monetary policy may not be as crucial as implied by central banks statements pointing to the importance of anchoring inflation expectations. Are the actions of central banks nothing more than a sideshow?
    Keywords: Commodity prices, expectations, inflation, monetary policy, Phillips Curve
    Date: 2013–06–03
  15. By: Hausken, Kjell (UiS); Ncube, Mthuli
    Abstract: We develop a game theoretic model for the central banks profit and the markets profit dependent on quantitative easing (QE) or no quantitative easing (no QE), where the market responds by lowering interest rates, keeping interest rates unchanged, or raising interest rates. The model is compared with empirical data. We classify 69 QE events and 69 no QE counterfactuals for four central banks, i.e. 17 events for the Federal Reserve, 9 events for Bank of England, 32 events for Bank of Japan, and 11 events for the European Central Bank. The market response to the BoJ and ECB QE is almost exclusively to keep interest rates unchanged. Although this response is most common to the Federal Reserve QE (9 events), the market frequently responds as the Federal Reserve prefers, by lowering interest rates (7 events). For BoE the market response is evenly split across the three outcomes.
    Keywords: Central bank; quantitative easing; global economic crisis; market response
    JEL: C72 D72 D74
    Date: 2013–06–13
  16. By: Laura Alfaro; Fabio Kanczuk
    Abstract: Carry-trade activity and foreign participation in local-currency-bond markets in emerging countries have increased dramatically over the past decade. In light of these trends, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a “pseudo-flexible regime,” whereby a country accumulates reserves in conjunction with debt, to be the policy that most effectively stabilizes fluctuations under real external shocks for emerging nations.
    JEL: F31 F34
    Date: 2013–06
  17. By: Michael D. Bordo; Harold James
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    JEL: E00 N1
    Date: 2013–06
  18. By: Arpita Chatterjee (School of Economics, the University of New South Wales)
    Abstract: This paper studies the evolution of comovement in monetary policy of the G-7 countries during the period 1980-2009. I estimate a Taylor rule for each country and use the residuals from the Taylor rule to estimate a Bayesian dynamic latent factor model allowing for common and Europe speci?c components. I quantify the importance of the G-7 factor in explaining the residual of the Taylor rule, and show that the G-7 factor plays a very important role during the period of globalization (1988- 2003). I esimate the time path of the importance of the G-7 factor using rolling sub-samples, and show that both trade-openness and ?nancial integration increase comovement in monetary policy.
    JEL: F24 E52
    Date: 2013–08
  19. By: John Nevile (School of Economics, University of New South Wales); Peter Kriesler (School of Economics, University of New South Wales)
    Abstract: Radical changes in macroeconomic policy could produce a brighter future. The neoclassical myth that a free-market economy inevitably moves to an equilibrium position determined solely by supply-side factors must be rejected and replaced by the insight that the position of an economy in the longer-run is path-dependent. Fiscal policy in recessions should be biased towards increasing physical and human capital which will improve the productivity of an economy, raising living standards and hence taxable capacity, thus enabling future public debt to be reduced if this is desirable. Monetary policy should play a very minor role in aggregate demand policy, with interest rate settings largely used to help achieve long-term income distribution goals. All this is fundamental to Geoff Harcourt’s vision of macroeconomic policy and this paper spells out how this vision can be implemented in 2012 in Western countries not hamstrung by Euro-zone rules and regulations.
    Keywords: macroeconomic policy, cyclical fluctuations, money and interest, monetary policy, fiscal policy.
    JEL: E00 E52 E62
    Date: 2012–04
  20. By: Hoffmann, Andreas
    Abstract: [Introduction] In spite of the recent troubles in the euro area, Jesus Huerta de Soto (2012), a famous proponent of the gold standard, argues that the euro should be considered a 'second best to the gold standard' and is worth being preserved. From a classical liberal point of view, he sheds some light on the euros similarities with the gold standard and on some important advantages of the currency union over its alternative, flexible exchange rates in Europe. According to Huerta de Soto (2012), the main advantage of the introduction of the common currency is that - like when 'going on gold' - European governments have given up monetary nationalism. Like the gold standard, the euro limits state power as it prevents national central banks from manipulating exchange rates and inflating away government debt. Currently, he argues, the common currency - like previously the gold standard - forces important reforms and/or spending cuts upon the countries of the euro area that face severe debt and structural problems. In this respect, the euro should be seen as 'a proxy for the gold standard'. In this policy paper, I attempt to address some similarities and differences in the institutional framework of the classical gold standard (1880 - 1912) and the European Monetary Union (EMU) (1999 - ) that affect government debt financing and the way in which countries react to crisis. I argue that - in line with Huerta de Soto (2012) - giving up monetary nationalism and committing to the rules of either the gold standard or EMU initially restricted the scope of state action. Therefore, the euro - like previously the gold standard - provided some (fiscal) policy credibility. Fiscal policy credibility was the main determinant of capital market integration and low government borrowing costs in Europe under both systems. But in contrast to Huerta de Soto (2012), I shall emphasize that neither the gold standard, nor the euro itself force reforms and spending cuts upon countries that face crisis and debt problems. The political commitment to the monetary systems determines the willingness to reform or cut spending and therewith fiscal policy credibility in crisis periods: (...) --
    Date: 2013
  21. By: Michael D. Bradley (Institute for International Economic Policy, George Washington University); Dennis W. Jansen (Department of Economics, Texas A&M University); Tara M. Sinclair (Department of Economics/Institute for International Economic Policy, George Washington University)
    Abstract: Does excluding food and energy prices from the Consumer Price Index (CPI) produce a measure that captures permanent price changes? To examine this question we decompose CPI inflation and "core" inflation into their permanent and transitory components using a correlated unobserved components model. One of the key aspects of the correlated unobserved components model is that it allows shocks to the permanent component to potentially be more variable than shocks to the series itself, due to offsetting transitory shocks correlated with the permanent shocks. The stationarity of inflation may be time-varying, so we examine the performance of the core measure of inflation for periods during which it appears that inflation is I(1) and for periods during which it appears that inflation is I(0). For a period in which inflation appears to be I(1), we find that core inflation and the permanent component of overall inflation are closely related, although core inflation does have some drawbacks as a measure of permanent inflation. For a period in which inflation appears to be I(0), we decompose the core and overall price levels and find that the permanent component of core CPI is much more volatile than the actual core series and that core excludes volatile permanent shocks to the overall price level.
    Keywords: Consumer Price Index, Inflation, Unobserved Components, Food and Energy Prices
    JEL: C32 E31
    Date: 2013–04
  22. By: Burgess, Stephen (Bank of England); Fernandez-Corugedo, Emilio (International Monetary Fund); Groth, Charlotta (Zurich Insurance Group); Harrison, Richard (Bank of England); Monti, Francesca (Bank of England); Theodoridis, Konstantinos (Bank of England); Waldron, Matt (Bank of England)
    Abstract: This paper introduces the Bank of England's new forecasting platform and provides examples of how it can be applied to practical forecasting problems. The platform consists of four components: COMPASS, a structural central organising model; a suite of models, used to fill in the gaps in the economics of COMPASS and provide cross-checks on the forecast; MAPS, a macroeconomic modelling and projection toolkit; and EASE, a user interface. The platform has been in use since the end of 2011 in support of production of the projections produced for the Monetary Policy Committee’s quarterly Inflation Reports. In this paper we provide a full description of COMPASS, including discussion of its estimation and its properties. We also illustrate how the suite of models can be used to mitigate some of the trade-offs inherent in building a projection with a central organising model such as COMPASS, and discuss the role of the suite in addressing problems of model misspecification.
    Keywords: Forecasting; macro-modelling; misspecification
    JEL: E17 E20 E30 E40 E50
    Date: 2013–05–17
  23. By: William T. Gavin; Benjamin D. Keen; Finn E. Kydland
    Abstract: This paper develops a monetary model with taxes to account for the apparently asymmetric and time-varying effects of energy shocks on output and hours worked in post-World War II U.S. data. In our model, the real effects of an energy shock are amplified when the monetary authority responds to that shock by changing its inflation objective. Specifically, higher inflation raises households’ nominal capital gains taxes since those taxes are not indexed to inflation. The increase in taxes behaves as a negative wealth effect and generates an immediate decline in output, investment, and hours worked. The large drop in investment then causes a gradual but very persistent decline in the capital stock. That protracted decline in the capital stock is associated with an extended period of low productivity growth and high inflation. Those real effects from the increase in nominal capital gains taxes are magnified by the tax on nominal interest income, which is also not indexed to inflation. A prolonged period of higher inflation and lower productivity growth following a negative energy shock is consistent with the stagflation of the 1970s. The negative effects, however, subsided greatly after 1980 because the Volcker disinflation policy prevented the Fed from accommodating negative energy shocks with higher inflation.
    Keywords: Business cycles ; Fiscal policy
    Date: 2013
  24. By: Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We investigate the link between inflation, growth and unemployment nesting a model of fair wages into one of endogenous growth of learning by doing and assuming that firms protect wages' purchasing power against inflation in exchange of worker's effort. Unemployment decreases with higher inflation and real growth rates. These effects tends to vanish as inflation and growth increase. Depending on the assumptions on learning-by-doing mechanisms, the effect of inflation on growth can be either nil or positive, but tiny. The Appendix shows that the short run effects of a monetary shocks mirror the long-run effects of inflation.
    Keywords: efficiency wages, money growth, long-run Phillips curve, trend inflation
    JEL: E3 E2 E4 E5
    Date: 2013–05
  25. By: Roth, Felix; Jonung, Lars; Nowak-Lehmann D.,Felicitas
    Abstract: This paper analyses the evolution of public support for the euro from 1990 to 2011, using a popularity function approach, focusing on the most recent period of the financial and sovereign debt crisis. Exploring a huge database of close to half a million observations covering the 12 original euro area member countries, we find that the ongoing crisis has only marginally reduced citizens’ support for the euro – at least so far. This result is in stark contrast to the sharp fall in public trust in the European Central Bank. We conclude that the crisis has hardly dented popular support for the euro while the central bank supplying the single currency has lost sharply in public trust. Thus, the euro appears to have established a credibility of its own – separate from the institutional framework behind the euro.
    Date: 2011–12
  26. By: Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Nabil Aflouk (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: The literature on exchange rate misalignments (ERM) is very extensive as well as the literature on exchange rate determinants. To our knowledge, however, no study has analysed the determinants of exchange rate misalignments. With the increasing movements of capital flows observed since the climax of the crisis, the ERM are became a crucial issue for policy makers. For a large panel of emerging and industrialized countries and on the period 1982-2008, we identify, empirically, the main determinants of ERM obtained by a Fundamental Equilibrium Exchange Rate (FEER) approach. Our analysis put forward trade openness, financial openness and regional specialization as determinant variables of ERM.
    Keywords: Exchange rate misalignments; Trade openness; International specialization, Exchange rate regime, Financial liberalization
    Date: 2013–06–04
  27. By: Rashid , Abdul; Husain, Fazal
    Abstract: This paper tests the interconnected form of PPP and UIP while allowing the random component of exchange rate in the specification. We find a significant long-run association among exchange rates, price and interest rate differentials. Besides the PPP and UIP conditions, the previous period exchange rate plays an important role in explaining exchange rate variability. The coefficient of error correction term reveals substantial convergence towards long-run equilibrium. These findings are interesting because they explicate the dilemma of PPP and UIP and illustrate the significance of the joint modelling of these parity conditions in explaining the convergence towards equilibrium exchange rates.
    Keywords: purchasing power parity, uncovered interest rate parity, random walks, exchange rate regimes
    JEL: C53 F31
    Date: 2012–02–07
  28. By: Richard G. Anderson; Barry Jones; Marcelle Chauvet
    Abstract: This paper uses several methods to study the interrelationship among Divisia monetary aggregates, prices, and income, allowing for nonstationary, nonlinearities, asymmetries, and time-varying relationships among the series. We propose a multivariate regime switching unobserved components model to obtain transitory and permanent components for each series, allowing for potential recurrent and structural changes in their dynamics. Each component follows distinct two-state Markov processes representing low or high phases. Since the lead-lag relationship between the phases can vary over time, rather than preimposing a structure to their linkages, the proposed flexible framework enables us to study their specific lead-lag relationship over each one of their cycles and over each U.S. recession in the last 40 years. The decomposition of the series into permanent and transitory components reveals striking results. First, we find a strong nonlinear association between the components of money and prices – all low phases of the transitory component of prices were preceded by tight transitory and permanent money phases. We also find that most recessions were preceded by tight money phases (its cyclical and permanent components) and high transitory price phases (with the exception of the 2001 and 2009-2010 recessions). In addition, all recessions were associated with a decrease in transitory and permanent income.>
    Keywords: Debt ; Inflation (Finance) ; Banks and banking, Central
    Date: 2013
  29. By: Gros, Daniel; Alcidi, Cinzia; Giovannini, Alessandro
    Abstract: Different economic and financial structures require different crisis responses. Different crises also require different tools and resources. The first ‘stage’ of the financial crisis (2007-09) was similar on both sides of the Atlantic, and the response was also quite similar. The second stage of the crisis is unique to the euro area. Increasing financial disintegration within the region has forced the ECB to become the central counterparty for the entire cross-border banking market and to intervene in the sovereign bond market of some stressed countries. The actions undertaken by the European Central Bank (ECB), however, have not always represented the best response, in terms of effectiveness, consistency and transparency. This is especially true for the Securities Markets Programme (SMP): by de facto imposing its absolute seniority during the Greek PSI (private sector involvement), the ECB has probably killed its future effectiveness.
    Date: 2012–07
  30. By: Omer, Muhammad; de Haan, Jakob; Scholtens, Bert
    Abstract: This paper tests Uncovered Interest Rate Parity (UIP) using LIBOR rates for the major international currencies for the period January 2001 to December 2008. We find that UIP generally holds over a short-term horizon for individual and groups of currencies. Our results suggest that it is important to take the cross correlation between currencies into account. We also find that ‘state dependence’ plays an important role for currencies with a negative interest differential vis-à-vis the US. This ‘state dependence’ could also be instrumental in explaining exchange rate overshooting.
    Keywords: UIP, LIBOR, system SUR, System DGLS, System DOLS
    JEL: F31 G12 G15
    Date: 2013–06–01
  31. By: Swamy, Vighneswara; S, Sreejesh
    Abstract: Why do banks squeeze their lending activity? is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic by providing answers as to what causes the sluggish bank credit during the times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activity of the banks and on the contrary, inverse relationship with investment activity during the financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods.
    Keywords: Time-Series Models, Financial Markets, Interest Rates, Bank lending, Financial Crisis
    JEL: C22 D53 E43 E51 G21
    Date: 2012
  32. By: Frankel, Jeffrey (Harvard University)
    Abstract: This note attempts a concise yet comprehensive overview of the crisis still facing the eurozone, in the areas of competitiveness, fiscal policy, and banking. The euro's founding documents enshrined such principles as fiscal constraints, the "no bailout clause," and assignment to the ECB of the goal of low inflation to the exclusion of monetizing national debts. Those principles have been permanently compromised. On the one hand, German taxpayers cannot be expected to agree to bailouts of profligate euro members without end. On the other hand, if they were to insist on those founding principles, the euro would not survive. It is especially important to recognize that the (predictable) impact of fiscal austerity has been to reduce output in the periphery countries, not raise it, and thereby to raise debt/GDP ratios, not lower them. The leaders have finally taken some steps in the right direction over the last year: movement toward a banking union; more adjustment time for Greece, Portugal and Spain; and ECB bond purchases. But for the countries that are to remain in the euro, much adjustment still lies ahead: more debt-reduction (painful for the creditor North) and more internal devaluation (even more painful for the uncompetitive South). As to a long-run fiscal regime that addresses the now-exacerbated problem of moral hazard, the Fiscal Compact is not enough in itself. Two innovations favored by the author are the red-bonds/blue-bonds proposal and the delegation of forecasting to independent fiscal agencies.
    JEL: F41
    Date: 2013–05
  33. By: Schilirò, Daniele
    Abstract: The severe crisis affecting European Monetary Union has emphasized the prevailing interests of national governments and the lack of political leadership of European institutions, not to mention the failure of eurozone governance in terms of effective crisis management. The present work argues that the decisions taken in March 2011 by the European Council, namely the ‘Pact for the Euro’, to design the new governance of European Monetary Union (EMU), can be considered a necessary though insufficient step for European institutions in terms of credibility and legitimacy. By assessing the economic policy framework set up by the Pact for the Euro, this contribution underlines the need for appropriate institutions, and a stronger attitude of cooperation among Member States. It also stresses the need for transparency and a non-ambiguous solution to the debt crisis. The major message of this work is that Economic and Monetary Union must equip itself with the appropriate policy tools to manage and resolve the crisis, creating the conditions to improve the competitiveness of the peripheral countries of the eurozone and fostering growth. At the same time, however, eurozone member states and European institutions must demonstrate greater accountability and political coherence.
    Keywords: EMU; Pact for the Euro; European integration; European institutions; economic policies
    JEL: E63 F1 F15 F3 F36 O52
    Date: 2012–04
  34. By: Cintya Lanchimba (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure - Lyon)
    Abstract: Empirical studies show that most franchise chains use dual distribution - or a plural form franchise system - characterized by the coexistence of franchised units and company- owned retail units in the same distribution network. Therefore, this paper focuses on dual distribution and considers the di fferent contractual arrangements in this type of franchise system. The paper contributes to the theoretical eff orts at developing a model to study the optimal determination of the share parameters (commission and royalty rates) in a mixed system.
    Keywords: Dual distribution; royalty rate; commission rate; risk aversion; moral hazard
    Date: 2013–06–06

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