nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒08‒10
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Woodford's Approach to Robust Policy Analysis in a Linear-Quadratic Framework By Jianjun Miao; Hyosung Kwon
  2. Foreign Exchange Market Interventions and the $-¥ Exchange Rate in the Long-Run By Joscha Beckmann; Ansgar Belke; Michael Kühl
  3. "Debt Relief and the Fed's Money-creation Power" By William Greider
  4. What do Nominal Rigidities and Monetary Policy tell us about the Real Yield Curve? By Francisco Palomino; Alex Hsu
  5. Statistical Modeling of Monetary Policy and its Effects By Sims, Christopher A.
  6. Currency Crises During the Great Recession: Is This Time Different? By Tiziano Arduini; Giuseppe De Arcangelis; Carlo L. Del Bello
  7. "Unusual and Exigent: How the Fed Can Jump-start the Real Economy" By William Greider
  8. Coordination in the use of money By GUIMARAES, Bernardo; ARAUJO, Luis
  9. Current Account Adjustments and Real Exchange Rates in the European Transition Economies By Mirdala, Rajmund
  10. Exchange Rate Pass-through into German Import Prices – A Disaggregated Perspective By Joscha Beckmann; Ansgar Belke; Florian Verheyen
  11. A macroeconomic model of liquidity crises By Keiichiro Kobayashi; Tomoyuki Nakajima

  1. By: Jianjun Miao (Boston University); Hyosung Kwon (Boston University)
    Abstract: This paper extends Woodford's (2010) approach to the robustly monetary policy to a general linear quadratic framwork. We provide algorithms to solve for a time-invariant linear robustly optimal policy from a timeless perspective and for a time-invariant linear Markov perfect equilibrium under discretation. We apply our methods to two New Keynesian models of monetary policy: (i) a model with persistent cost-push shocks and (ii) a model with inflation persistence. We find that the robustly optimal commitment inflation is less responsive to a cost-push shock when the shock is more persistent and that the robustly optimal discretionary policy is more responsive to lagged inflation in the presence inflation inertia.
    Date: 2013
  2. By: Joscha Beckmann; Ansgar Belke; Michael Kühl
    Abstract: This paper tries to clarify the question of whether foreign exchange market interventions conducted by the Bank of Japan are important for the Dollar-Yen exchange rate in the long-run. Our strategy relies on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we put our focus on two new questions. Firstly, does the consideration of periods of massive interventions in the foreign exchange market help to uncover a potential long-run relationship between the exchange rate and its fundamentals? Secondly, do Forex interventions support the adjustment towards a long-run equilibrium value? Our overall results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated Forex interventions. Our results indicate that only coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a long-run perspective. This is a novel contribution to the literature.
    Keywords: Structural exchange rate models; cointegration; intervention analysis
    JEL: E44 F31 G12
    Date: 2013–07
  3. By: William Greider
    Abstract: Monetary policy is running out of gas. Six years ago, in the heat of crisis, the Federal Reserve's response was awesome. The Fed created trillions of dollars and flooded the system with easy money--enough to stabilize financial markets and rescue wounded banks. It brought short-term interest rates down to near zero and long-term mortgage rates to bargain-basement levels. It provided a huge backstop for the dysfunctional housing sector, buying $1.25 trillion in mortgage-backed securities, nearly one-fourth of the market. Flooding Wall Street with money saved the banks, but it didn't work for the real economy, where most Americans live and toil. And official Washington now appears to have opted for an unspoken policy of complacency. The Fed knows, even if politicians do not, the danger of sliding into a liquidity trap, which would utterly disarm its monetary tools. So the Fed wants Congress and the White House to borrow and spend more because, when the private sector is stalled and afraid to act, only the federal government can step in and provide the needed jump start. The country needs a stronger Fed--a central bank not afraid to use its awesome powers to help the real economy more directly. One of the ways it can do this is by revisiting--and extending--its bold ideas on debt relief. By harnessing the power of money creation, the Fed can help clear away the overhang of mortgage and student debt holding back the economic recovery. This policy note draws from articles originally published in "The Nation". Portions are republished with permission.
    Date: 2013–08
  4. By: Francisco Palomino (University of Michigan); Alex Hsu (Georgia Tech)
    Abstract: We study term and inflation risk premia in real and nominal bonds, respectively, in an equilibrium model calibrated to United States data. Nominal wage and price rigidities, and an interest-rate monetary policy rule characterize our model economy. Wage rigidities induce positive term and inflation risk premia for permanent productivity shocks: they generate high marginal utility, expected consumption growth, inflation, and bond yields, simultaneously. Policy and inflation-target shocks increase real and nominal yield variability, respectively. Real-nominal bond return correlations are increased by the rigidities. Stronger policy responses to output and inflation reduce real term premia and increase inflation risk premia.
    Date: 2013
  5. By: Sims, Christopher A. (Princeton University)
    Abstract: Nobel Prize lecture, 8 December 2011
    Keywords: Causation; Macroeconomics
    JEL: C32 E60
    Date: 2013–08–08
  6. By: Tiziano Arduini (Sapienza, University of Rome); Giuseppe De Arcangelis (Sapienza, University of Rome); Carlo L. Del Bello (Sapienza, University of Rome)
    Abstract: During the 2007-2009 financial crisis the foreign exchange market was characterized by large volatility and wide currency swings. In this paper we evaluate whether during the period of the Great Recession there has been a structural break in the relationship between fundamentals and exchange rates within an early-warning framework. This is done by extending the original data set by Kaminsky and Reinhart (1999) and including not only the most recent period, but also 17 new countries. Our analysis considers two variations of the original early-warning system. First, we propose two new methods to obtain the probability distribution of the early-warning indicator (conditional on the occurrence of a crisis) - one fully parametric and one based on a novel distribution-free semi-parametric approach. Second, we compare the original early-warning indicator with a core indicator that includes only "pseudo-nancial variables" (domestic credit/GDP, the real exchange rate, international reserves and the real interest-rate dierential) and we evaluate their performance not only for currency crises during the Great Recession, but also for the Asian Crisis. All tests make us conclude that "this time is different", i.e. early-warning systems based on traditional macroeconomic variables have not only failed to forecast currency crises during the Great Recession, but have also significantly worsened with respect to the period of the Asian crisis.
    Keywords: EarlyWarning Systems, Exchange Rates, Semi-parametric Methods.
    JEL: F31 F47 F30
  7. By: William Greider
    Abstract: Though it is not widely understood, the Federal Reserve has enormous untapped power to directly stimulate or influence the flows of lending and spending that generate jobs. Doing so would fulfill the Fed's often neglected "dual mandate": to strive for maximum employment as well as stable money. Fed technocrats often plead that legal or technical barriers won't allow them to do this, but their objections reflect an institutional bias that favors finance over industry, capital over labor. The central bank has abundant precedent from its own history for taking more direct actions to aid the economy. And it has ample legal authority to lend to all kinds of businesses that are not banks. This policy note was originally published, in slightly different form, as "Can the Federal Reserve Help Prevent a Second Recession?," "The Nation", November 26, 2012. Reprinted with permission.
    Date: 2013–08
  8. By: GUIMARAES, Bernardo; ARAUJO, Luis
    Abstract: Fundamental models of money, while explicit about the frictions that render money essential,are silent on how agents actually coordinate in its use. This paper studies this coordinationproblem, providing an endogenous map between the primitives of the environment and thebeliefs on the acceptability of money. We show that an increase in the frequency of trademeetings, besides its direct impact on payo¤s, facilitates coordination. In particular, for a largeenough frequency of trade meetings, agents always coordinate in the use of money.
    Date: 2013–08–02
  9. By: Mirdala, Rajmund
    Abstract: One of the key outcomes of open economy macroeconomics refers to a crucial importance of an investment-saving relation affecting a current account determination. However, despite a relative diversity in exchange rate regimes in European transition economies, there is still a substantial potential to analyze price effects of real exchange rate dynamics on current account adjustments. Rigorous investigation of relative changes in real exchange rates leading paths and associated adjustments in current accounts may reveal causal relationship between real exchange rate dynamics and international competitiveness in order to observe its redistributive effects. This purpose is even more significant provided that economic crisis has intensified cross-country expenditure shifting effects that still provide quite diverse and thus spurious effects on current account adjustments. In the paper we analyze main aspects of current account adjustments in European transition economies. Our main objective is to observe a relationship between real exchange rate dynamics and current account adjustments (in countries with different exchange rate arrangements). From estimated VAR model we calculate responses of the current account to the real exchange rate (REER calculated on CPI and ULC base) shock. To provide more rigorous insight into the problem of the current account adjustments according to real exchange rate dynamics we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2012.
    Keywords: current account adjustments, real exchange rate dynamics, economic growth, economic crisis, vector autoregression, impulse-response function
    JEL: C32 F32 F41
    Date: 2013–05
  10. By: Joscha Beckmann; Ansgar Belke; Florian Verheyen
    Abstract: This study analyzes the exchange rate pass-through into German import prices based on disaggregated data taken on a monthly basis between 1995 and 2012. Our main contribution is twofold: firstly, we employ various time-series techniques to analyze data for different product categories, and also cointegration techniques to carefully distinguish between shortrun and long-run pass-through coefficients. Secondly, in a panel data approach we estimate time-varying pass-through coefficients and explain their development with regard to various macroeconomic factors. Our results show that long-run pass-through is only partly observable and incomplete, while short-run passthrough shows a more unique character, although heterogeneity across product groups does exist. We are also able to identify several macroeconomic factors which determine changes in the degree of pass-through, which is especially relevant for policymakers.
    Keywords: Exchange rate pass-through; Germany; cointegration; time-varying coefficient model
    JEL: E31 F10 F14
    Date: 2013–07
  11. By: Keiichiro Kobayashi (Keio University); Tomoyuki Nakajima (Kyoto University)
    Abstract: We develop a simple macroeconomic model that captures key features of a liquidity crisis. During a crisis, the supply of short-term loans vanishes, the interest rate rises sharply, and the level of economic activity declines. A crisis may be caused either by self-fulfilling beliefs or by fundamental shocks. It occurs as a result of market failure due to debt overhang in short-term loans. The government's commitment to deposit guarantee reduces the likelihood of self-fulfilling crisis but increases that of fundamental crisis.
    Keywords: Debt overhang, liquidity, working capital, systemic crisis.
    JEL: E30 G01 G21
    Date: 2013–08

This nep-mon issue is ©2013 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.