nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒06‒24
fifteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Constrained Discretion and Central Bank Transparency By Francesco Bianchi; Leonardo Melosi
  2. Is the Eurozone not a monetary union, but an extraordinary exchange rate union? By Sauer, Beate; Sell, Friedrich L.
  3. Central bank cooperation during the great recession By Francesco Papadia
  4. Federal Reserve Communication and Media Coverage By Matthias Neuenkirch
  5. On the performance of Monetary Policy Committees By Etienne Farvaque; Piotr Stanek; Stephane Vigeant
  6. Foreign exchange intervention and expectation in emerging economies By Ken Miyajima
  7. Do Policy-Related Shocks Affect Real Exchange Rates of Asian Developing Countries? By Taya Dumrongrittikul; Heather M. Anderson
  8. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Nidhaleddine Ben Cheikh
  9. Bank Lending, Risk Taking, and the Transmission of Monetary Policy: New Evidence for Colombia By Ruth Reyes Nidia; José Eduardo Gómez; Jair Ojeda Joya
  10. Does domestic output gap matter for inflation in a small open economy? By Aleksandra Hałka; Jacek Kotłowski
  11. Sectoral Interactions and Monetary Policy Under Costly Price Adjustments By Kevin X.D. Huang; Jonathan Willis
  12. The Effects of Exchange Rates on Employment in Canada By Huang, Haifang; Pang, Ke; Tang, Yao
  13. The Kiel policy package to address the crisis in the euro area By Snower, Dennis J.; Boysen-Hogrefe, Jens; Gern, Klaus-Jürgen; Klodt, Henning; Kooths, Stefan; Laaser, Claus-Friedrich; Reicher, Christopher; van Roye, Björn; Scheide, Joachim; Schrader, Klaus
  14. Banking, Liquidity and Bank Runs in an Infinite-Horizon Economy By Mark Gertler; Nobuhiro Kiyotaki
  15. Inflation Dynamics and Time-Varying Volatility: New Evidence and an Ss Interpretation By Joseph S. Vavra

  1. By: Francesco Bianchi; Leonardo Melosi
    Abstract: We develop a theoretical framework to quantitatively assess the general equilibrium effects and welfare implications of central bank reputation and transparency. Monetary policy alternates between periods of active inflation stabilization and periods during which the emphasis on inflation stabilization is reduced. When the central bank only engages in short deviations from active monetary policy, inflation expectations remain anchored and the model captures the monetary approach described as constrained discretion. However, if the central bank deviates for a prolonged period of time, agents gradually become pessimistic about future monetary policy, the disanchoring of inflation expectations occurs, and uncertainty rises. Reputation determines the speed with which agents' pessimism accelerates once the central bank starts deviating. When the model is …fitted to U.S. data, we find that the Federal Reserve can accommodate contractionary technology shocks for up to …five years before inflation expectations take off. Increasing transparency would improve welfare by anchoring agents' expectations. Gains from transparency are even more sizeable for countries whose central banks have weak reputation.
    Keywords: Bayesian learning, reputation, uncertainty, inflation expectations, Markov-switching models, impulse response
    JEL: E52 D83 C11
    Date: 2013
  2. By: Sauer, Beate; Sell, Friedrich L.
    Abstract: The Target imbalances within the Eurozone can be interpreted as a sign of a missing balance of payments adjustment mechanism for the member countries. As the Eurozone lacks a fiscal union, in economic theory it is more an exchange rate union or a system of fixed exchange rates than a monetary union. In the latter, there would not be any national balances of payments, but only one for the whole Eurozone. This paper will show why the Target System is a crucial indicator for the Eurozone not being a monetary union, but an exchange rate union and why countries holding Target liabilities against the European System of Central Banks can be compared to a reserve currency country, e.g. like the US during the Bretton-Woods-System. --
    Keywords: Target Imbalances,Balance of Payments Crisis,Balance of Payments Adjustment Mechanism,Eurozone,Fixed Exchange Rates,Fiscal Union
    JEL: E40 E41 E42 E50 E52
    Date: 2013
  3. By: Francesco Papadia
    Abstract: During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability. In comments appended to this Policy Contribution, Edwin Truman, Senior Fellow, Peterson Institute for International Economics, concludes in favour of making the swap network permanent, while William Dudley, President of the Federal Reserve Bank of New York, stresses the importance of central banks around the world being able to coordinate closely so that there can be a viable, credible backstop on a global basis.
    Date: 2013–06
  4. By: Matthias Neuenkirch (University of Aachen)
    Abstract: In this paper, we explore the determinants of media coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward-looking communications made in the period May 1999 - May 2004. We find, first, that there is a higher likelihood of media coverage for monetary policy reports and speeches by Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of media coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, media coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his chairmanship.
    Keywords: Central Bank Communication, Federal Open Market Committee, Federal Reserve, Media Coverage, Monetary Policy.
    JEL: D83 E52 E58
    Date: 2013
  5. By: Etienne Farvaque (EDEHN-Université du Havre & Skema Business School, Lille (France)); Piotr Stanek (Cracow University of Economics); Stephane Vigeant (Equippe – Universités de Lille & IESEG School of Management, Lille (France))
    Abstract: This paper examines the influence of the biographical experience of monetary policy committee members on their performance in managing inflation and output volatility. Our sample covers major OECD countries in the 1999 to 2010 period. Using data envelopment analysis, we study the efficiency of monetary policy committees. Then, we look at the determinants of these performances. The results in particular show that (i) a larger number of governors is more efficient, except in crisis time, (ii) a policymakers' background influence the performance, with a positive role for committee members issued from academia, central banks and the financial sector. It is also shown that some committees have reduced the inefficiency created by the crisis more rapidly than others.
    Keywords: Central banking, Committees, DEA, Economic volatility, Governance
    JEL: D20 D78 E31 E52 E58 E65
    Date: 2013
  6. By: Ken Miyajima
    Abstract: Using monthly data for four selected emerging economies, sterilised central bank foreign exchange intervention is found to have little systematic influence on the near-term nominal exchange rate expectations in the direction intended by the central banks. In other words, central bank dollar purchases to stem exchange rate appreciation or related exchange rate volatility are not associated with an adjustment of the near-term exchange rate forecasts in the direction of depreciation, and vice versa. This suggests intervention may not change the nearterm exchange rate expectations. Moreover, intervention may have had unintended effects in the sense that it can lead to undesired volatility in the exchange rate, which is consistent with previous studies.
    Keywords: exchange rate expectation, foreign exchange intervention
    Date: 2013–06
  7. By: Taya Dumrongrittikul; Heather M. Anderson
    Abstract: This paper examines real exchange rate responses to shocks in exchange rate determinants and monetary policy for eight Asian developing countries. The analysis is based on a panel pseudo-Bayesian structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are short-lived. Real exchange rate responses to unexpected monetary tightening are consistent with the Dornbusch overshooting hypothesis and long-run neutrality of monetary policy. The evidence suggests that trade liberalization provides an effective device for driving exchange rate movements.
    Keywords: Real exchange rates, exchange rate determination, vector error correction model, monetary policy shock, sign restrictions, penalty function
    Date: 2013
  8. By: Nidhaleddine Ben Cheikh
    Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.
    Keywords: Exchange Rate Pass-Through, Inflation, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–06
  9. By: Ruth Reyes Nidia; José Eduardo Gómez; Jair Ojeda Joya
    Abstract: We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics.
    Date: 2013–06–16
  10. By: Aleksandra Hałka (National Bank of Poland, Economic Institute); Jacek Kotłowski (National Bank of Poland, Warsaw School of Economics)
    Abstract: In the paper we have investigated to what extent the behaviour of CPI inflation depends on changes in domestic economic activity in Polish economy which is usually described as a small open economy. We conducted a disaggregated analysis using price indices at the COICOP 4-digit level. We specified a small open economy Phillips curve for individual price indices. Additionally we investigated the exchange rate pass through at COICOP group levels. We found that more than 50 per cent of the categories react to the output gap. According to our expectations the categories which are mostly linked to the output gap are services but also non-durable goods. We identified that only small share of prices of durable and semi-durable goods react to domestic demand which can be explained to some extent by globalization process. We also found that more than one third of the price indices respond to exchange rate movements and/or foreign inflation. The impact of exchange rate is most substantial for durable and semi-durable goods which are to large extent perceived as tradable goods. Finally we aggregated the price indices for items sensitive to domestic economic activity and formed an index which, taking into account uncertainty and substantial lags in calculating output gap, may be used as an alternative measure of domestic inflationary pressure.
    Keywords: Inflation, monetary policy, Phillips curve, dissagregated price indices, output gap, exchange rate pass-through
    JEL: C53 E31 E37 E52
    Date: 2013
  11. By: Kevin X.D. Huang (Vanderbilt University); Jonathan Willis (Federal Reserve Bank of Kansas City)
    Abstract: This paper presents a state-dependent pricing model with a two-stage chain-of-production structure and serially correlated, idiosyncratic price adjustment cost process in each sector. The model can explain much of the observed volatility and persistence of inflation and output, and nonlinearity and asymmetry in the responses of prices and quantities to monetary shocks. We derive analytical solutions in a static version of the model to illustrate the main results and to gain insights. We solve the dynamic model using a modified nonlinear solution method that features indirect inference and self-validating inflation forecasts as key components.
    Date: 2012
  12. By: Huang, Haifang (University of Alberta, Department of Economics); Pang, Ke (Department of Economics, Wilfred Laurier University); Tang, Yao (Department of Economics, Bowdoin College)
    Abstract: Under the flexible exchange rate regime, the Canadian economy is constantly affected by fluctuations in exchange rates. This paper focuses on employment in Canada. We find that appreciations of the Canadian dollar have significant effects on employment in manufacturing industries; such effects are mostly associated with the export-weighted exchange rate and not the import-weighted exchange rate. The export-weighted exchange rate elasticity of employment is -0.52. However, we also find that exchange rate fluctuations have little impact on Canada’s nonmanufacturing employment. Because the manufacturing sector accounts for only about 10% of the employment in Canada, the overall employment effect of exchange rates is small. In addition, we assess the potential employment impact of a boom in the global commodity market, which often leads to appreciations of the Canadian dollar. We find that a 12.21% increase in commodity prices (one standard deviation in the 1994-2007 data) reduces Canada’s manufacturing employment by 0.98%, less than 0.1% of the total industrial employment.
    Keywords: exchange rate; employment in Canada
    JEL: F16 F31 J23
    Date: 2013–06–01
  13. By: Snower, Dennis J.; Boysen-Hogrefe, Jens; Gern, Klaus-Jürgen; Klodt, Henning; Kooths, Stefan; Laaser, Claus-Friedrich; Reicher, Christopher; van Roye, Björn; Scheide, Joachim; Schrader, Klaus
    Abstract: The European Union at the crossroads - Thirteen years after its foundation, the European Monetary Union (EMU) is facing the greatest challenge of its history thus far. High unemployment in a number of member countries, the need for substantial consolidation of the budgets of numerous governments, and distressed banks are symptoms of economic misalignments and economic policy failure that threaten not only economic prosperity in Europe, but the European project as a whole. A series of interrelated fiscal and financial crises in the euro area have provoked a series of extraordinary policy measures. Some of these measures have undermined the fiscal sovereignty of affected countries, and they have circumvented market mechanisms. As social cohesion is called into question in various debtor countries, there is a danger that policy makers cannot or will not solve the existing problems in a way consistent with both monetary stability and the current political integration. In the absence of a comprehensive European financial policy regime, the Eurosystem's ability to maintain both price stability and financial stability is threatening to become undermined (see Box 1). Possible outcomes include the chaotic dissolution of the EMU, with unpredictable economic and social consequences. The purpose of this Policy Brief is to outline a set of mechanisms to ensure economic, financial, social and political stability. --
    Date: 2013
  14. By: Mark Gertler; Nobuhiro Kiyotaki
    Abstract: We develop a variation of the macroeconomic model with banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates counter-cyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenously determined liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    JEL: E44
    Date: 2013–06
  15. By: Joseph S. Vavra
    Abstract: Is monetary policy less effective at increasing real output during periods of high volatility than during normal times? In this paper, I argue that greater volatility leads to an increase in aggregate price flexibility so that nominal stimulus mostly generates inflation rather than output growth. To do this, I construct price-setting models with "volatility shocks" and show these models match new facts in CPI micro data that standard price-setting models miss. I then show that these models imply output responds less to nominal stimulus during times of high volatility. Furthermore, since volatility is countercyclical, this implies that nominal stimulus has smaller real effects during downturns. For example, the estimated output response to additional nominal stimulus in September 1995, a time of low volatility, is 55 percent larger than the response in October 2001, a time of high volatility.
    JEL: D8 E10 E30 E31 E50
    Date: 2013–06

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