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on Monetary Economics |
| By: | Matteo Barigozzi (London School of Economics and Political Science); Antonio M. Conti (Bank of Italy); Matteo Luciani (European Center for Advanced Research in Economics and Statistics, Université libre de Bruxelles) |
| Abstract: | We investigate the possible existence of asymmetries among Euro Area countriesÂ’ reactions to the European Central Bank monetary policy. Our analysis is based on a Structural Dynamic Factor model estimated on a large panel of Euro Area quarterly variables. Although the introduction of the euro has changed the monetary transmission mechanism in the individual countries towards a more homogeneous response, we nevertheless find that differences remain between Northern and Southern Europe in terms of prices and unemployment. These results are the consequence of country specific structures, not of European Central Bank policies. |
| Keywords: | monetary policy transmission, asymmetric effects, European Monetary Union, Structural Dynamic Factor model |
| JEL: | C32 E32 E52 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_923_13&r=mon |
| By: | Stan du Plessis (Department of Economics, University of Stellenbosch); Malan Rietveld (Department of Economics, University of Stellenbosch) |
| Abstract: | In the wake of the international financial crisis nominal income targeting has received renewed attention from a number of leading macroeconomists as alternative to inflation targeting. The case for nominal income targeting has been built on both positive and negative arguments. The negative case relates to perceived inadequacies of inflation targeting, including: the presumed lack of robustness of inflation targeting to aggregate supply shocks, inadequate concern with financial stability, as well as concerns with the accountability of inflation targeting central banks. The positive case for nominal income targeting is that it will better suit current macroeconomic circumstances and policy needs, without sacrificing the gains made by inflation targeting. A thorough evaluation of these arguments is presented in this paper with the conclusion that the case for nominal income targeting is weak compared with the way in which inflation targeting has been implemented internationally. |
| Keywords: | Nominal income target, inflation target, monetary policy |
| JEL: | E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers188&r=mon |
| By: | Leonardo Gambacorta (Bank for International Settlements); Federico M. Signoretti (Bank of Italy) |
| Abstract: | The global financial crisis has reaffirmed the importance of financial factors for macroeconomic fluctuations. Recent work has shown how the conventional pre-crisis prescription that monetary policy should pay no attention to financial variables over and above their effects on inflation may no longer be valid in models that consider frictions in financial intermediation (Cúrdia and Woodford, 2009). This paper analyzes whether Taylor rules augmented with asset prices and credit can improve upon a standard rule in terms of macroeconomic stabilization in a DSGE with both a firms' balance-sheet channel and a bank-lending channel and in which the spread between lending and policy rates endogenously depends on banks' leverage. The main result is that, even in a model in which financial stability does not represent a distinctive policy objective, leaning-against-the-wind policies are desirable in the case of supply-side shocks whenever the central bank is concerned with output stabilization, while both strict inflation targeting and a standard rule are less effective. The gains are amplified if the economy is characterized by high private sector indebtedness. |
| Keywords: | DSGE, monetary policy, asset prices, credit channel, Taylor rule, leaning-against-the-wind |
| JEL: | E30 E44 E50 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_921_13&r=mon |
| By: | Pierre-Richard Agénor; Luiz A. Pereira da Silva |
| Abstract: | This paper discusses recent experiences with inflation targeting (IT), the challenges that it faces since the global financial crisis, and ways to address them. The discussion is conducted from the perspective of upper middle-income countries (MICs). As background for the analysis, the second part provides a review of financial systems in MICs (with a focus on the role of bank credit), the extent to which exposure to capital flows affect economic stability in these countries, and the link between excessive credit growth and financial crises. The third and fourth parts review the main features and evidence on the performance of IT regimes in MICs. The fifth part discusses a number of challenges that IT faces, including fiscal dominance, fear or floating, imperfect credibility, and with respect to an explicit financial stability objective assigned to monetary policy. The issue of complementarity between macroprudential regulation and monetary policy, in the context of an "integrated" IT (or IIT) regime, is taken up next. The nature of monetary policy rules in an IIT regime, and their practical implementation, is also discussed. Our analysis suggests that there are robust arguments to support the view that in an IIT regime monetary policy should react in a state contingent fashion to a credit gap measure---and possibly to the real exchange rate---to address the time-series dimension of systemic risk. However, monetary policy and macroprudential policy are largely complementary instruments. They must be calibrated jointly, in the context of macroeconomic models that account for the type of credit market imperfections observed in MICs and for the fact that macroprudential regimes may affect in substantial ways the monetary transmission mechanism. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:185&r=mon |
| By: | Ngoc-Sang Pham (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap. |
| Keywords: | Monetary economy, liquidity constraint, collateralized asset, infinite horizon, liquidity trap. |
| JEL: | D52 E5 C62 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:13055&r=mon |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | Harry Johnson’s 1971 ideas about the factors affecting the success of the Keynesian Revolution and the Monetarist Counter-revolution are summarised and extended to the analysis of the Rational Expectations - New Classical (RE-NC) Revolution. It is then argued that, whereas Monetarism brought about a revival of the quantity theory of money from the limbo into which Keynesianism had pushed it, RE-NC modelling was responsible for that theory’s most recent disappearance. This happened despite the fact that, initially, RE-NC economics appeared to be a mainly technical extension and refinement of Monetarism, rather than a radically new economic doctrine. Some implications of this story for todays’ macroeconomics are briefly discussed. |
| Keywords: | Keynesianism, Monetarism, Rational expectations New Classical economics Quantity Theory; Money; Velocity; Monetary policy; Inflation; Unemployment; Business cycle; Phillips curve |
| JEL: | B21 E31 E41 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20134&r=mon |
| By: | nnamdi, Kelechi; ifionu, Ebele |
| Abstract: | This research paper examines exchange rate volatility over time (1970-2012) using the Generalized Autoregressive Conditional Heteroscedasticity (AR GARCH) model of the Maximum Likelihood techniques. Our AR GARCH result showed that lagged (last year) exchange rate is significantly responsible for the dynamics of Naira/ Dollar exchange rate in Nigeria. Most glaring is that our ARCH and GARCH parameters indicate that exchange rate volatility shocks are rather persistent in Nigeria. We also find that exchange rate uncertainty has a direct relationship with current exchange rate in Nigeria. Further, the Granger causality test conducted shows that the direction of causality is more powerful and significant from exchange rate uncertainty to actual exchange rate in Nigeria. Thus the paper suggests a proper management of exchange rate, to forestall costly distortions in the Nigerian economy. |
| Keywords: | GARCH Models, Financial Econometrics, Foreign Exchange rate, Monetary Policy |
| JEL: | C58 F31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48316&r=mon |
| By: | Hiroshi Nakaota (Faculty of Social Relations, Kyoto Bunkyo University); Yuichi Fukuta (Graduate School of Economics, Osaka University) |
| Abstract: | Many studies have observed the leading indicator property of the term spread (LIPTS), which indicates that the term spread\the difference between long- and short-term interest rates\has information on future economic conditions. We examine whether this property is related to monetary policy or not by using Japanese monthly data with consideration for structural changes. Results of structural change tests show that the term spread has predictive ability for the future economic activity from 1982:4 to 1997:8. Decomposing the term spread into three parts; one is explained by past monetary policy shocks, another is explained by expected future call rates and the other is the remaining part, we find that all three parts are significantly related to the future economic growth rate. Hence, we find that the monetary policy plays an important role for the LIPTS. |
| Keywords: | leading indicator property of the term spread (LIPTS), term spread, future economic activity, monetary policy |
| JEL: | E32 E43 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1309r&r=mon |
| By: | Gilberto Tadeu Lima; Jaylson Jair da Silveira |
| Abstract: | We provide evolutionary game-theoretic microfoundations to a dynamic complete nominal adjustment in response to a monetary shock. To this end, we develop an approach based on a new analytical notion to which we refer as boundedly rational inattentiveness. We investigate the behavior of the price level in an context in which a firm can either pay a cost to update its information set and establish the optimal price (Nash strategy) or freely use information from the previous period and establish a lagged optimal price (bounded rationality strategy). We devise an evolutionary micro-dynamics that, by interacting to the dynamics of the aggregate variables, determines the co-evolution of the distribution of information-updating strategies in the population of firms and the extent of the nominal adjustment of the general price level to a monetary shock. Although the bounded rationality strategy is the only survivor in the long-run evolutionary equilibrium, money is nonetheless neutral. The evolutionary learning dynamics takes the information-updating process to an equilibrium configuration in which, despite all firms play the bounded rationality strategy, the corresponding price level is the symmetric Nash equilibrium price. |
| Keywords: | bounded rationality; evolutionary dynamics; monetary neutrality |
| JEL: | E31 C73 D83 |
| Date: | 2013–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon3&r=mon |
| By: | Albinowski, Maciej; Ciżkowicz, Piotr; Rzońca, Andrzej |
| Abstract: | We contribute to the new, albeit fast-growing empirical literature on the determinants of trust in central banks. Like in most other studies we use panel data models based on the Eurobarometer survey on trust in the European Central Bank. Firstly, we confirm the main conclusion from previous studies that the trust in the ECB has suffered from the crisis’ outburst. Moreover, households perceive the ECB’s responsibility for the occurrence of the crisis to go beyond the responsibility of other institutions. This finding casts some doubt on the central bank’s ability to manage expectations in a country having been hit by a severe negative demand shock, while this ability is precondition of the central banks’ power to boost aggregate demand when its interest rates are at the zero lower bound. Secondly (and most importantly), in addition to previous studies, we examine the links between the trust in the ECB and its policy. Our main result is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and go against the ‘fundamental shock’ hypothesis which would imply positive effects of aggressive cuts for trust in the ECB. These findings are robust to changes in the estimation method, the definition of the lack of confidence shock, control variables and countries under consideration. We also show that it cannot be easily rejected as spurious |
| Keywords: | trust in central banks, zero lower bound, lack-of-confidence shock, Eurobarometer, panel data |
| JEL: | C23 E58 H12 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48242&r=mon |
| By: | Pinar Yesin (Swiss National Bank) |
| Abstract: | Foreign currency loans to the unhedged non-banking sector are remarkably prevalent in Europe and create a significant exchange-rate-induced credit risk to European banking sectors. In particular, Swiss franc (CHF)-denominated loans, popular in Eastern European countries, could trigger simultaneous bank failures if depreciation of the domestic currencies prevents borrowers from servicing the loans. Foreign currency loans thus pose a systemic risk from a “common market shock” perspective. The author uses a novel dataset of foreign-currency loans from 17 countries for 2007-11 (collected by the Swiss National Bank) and builds on the method suggested by Ranciere, Tornell, and Vamvakidis (2010) to quantify this systemic risk. The author finds that systemic risk is substantial in the non-euro area, while it is relatively low in the euro area. However, CHF-denominated loans are not the underlying source of the high systemic risk: Loans denominated in other foreign currencies (probably to a large extent in euros) contribute significantly more to the systemic risk in the non-euro area than CHF-denominated loans. Furthermore, systemic risk shows high persistence and low volatility during the sample period. The author also finds that banks in Europe have continuously held more foreign-currency-denominated assets than liabilities, indicating their awareness of the exchange-rate-induced credit risk they face. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1306&r=mon |
| By: | Stephen Hall; George Hondroyiannis; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas |
| Abstract: | Empirical tests of purchasing power parity (PPP) are implicitly based on the conditions of symmetry and proportionality of the price coefficients. We investigate a separate condition, which we term homogeneity. Specifically, while there may be factors that drive a wedge between prices and exchange rates, when these factors are held constant we would expect a change in exchange rates to be associated with a proportional, or homogeneous, change in prices. To test for the existence of homogeneity in prices, we conduct two experiments. First, we apply a time-varying-coefficient procedure to nine euro-area countries as well as the euro area as a whole during the (monthly) sample period, 1999: M1 to 2011:M3. Second we apply the same procedure to the same group of countries, plus Canada, Japan and Mexico, over the longer period, 1957:M4 to 2011:M3. We find that averages of the price coefficients, corrected for specification biases, are uniformly homogeneous in the long run, providing strong support for PPP. |
| Keywords: | Purchasing power parity, symmetry, proportionality, homogeneity, generalized cointegration, time-varying coefficients. |
| JEL: | C32 F31 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:13/13&r=mon |