nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒08‒31
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Limits of monetary policy autonomy and exchange rate flexibility by East Asian central banks By Loeffler, Axel; Schnabl, Gunther; Schobert, Franziska
  2. Announcements of Interest Rate Forecasts: Do Policymakers Stick to Them? By Mirkov, Nikola; Natvik, Gisle James
  3. Price indexation, habit formation, and the Generalized Taylor Principle By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  4. Optimal Monetary Policy in an Open Economy under Asset Market Segmentation By Rajesh Singh
  5. Not all international monetary shocks are alike for the Japanese economy By Vespignania, Joaquin L.; Ratti, Ronald A.
  6. Time-Consistency Problem and the Behavior of US Inflation from 1970 to 2008 By Nima Nonejad
  7. A Note on Money and the Conduct of Monetary Policy By Jagjit S. Chadha; Luisa Corrado; Sean Holly
  8. Credit Growth Volatility By Oduncu, Arif; Ermişoğlu, Ergun; Polat, Tandogan
  9. ECB monetary policy surprises: identification through cojumps in interest rates By Lars winkelmann; Markus Bibinger; Tobias Linzert;
  10. The Great Recession and the Two Dimensions of European Central Bank Credibility By Timo Henckel; Gordon Menzies; Daniel J. Zizzo
  11. A Monetary Theory with Non-degenerate Distributions By Guido Menzio; Shouyong Shi; Hongfei Sun
  12. A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies By Ehsan U. Choudhri; Lawrence L. Schembri
  13. Non-uniform wage-staggering: European evidence and monetary policy implications By Juillard, Michel; Le Bihan, Herve; Millard, Stephen
  14. The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations By Lise Clain-Chamosset-Yvrard; Thomas Seegmuller
  15. Monetary policy and financial stability in the long run By Jin Cao; Loran Chollete
  16. Evolution of Monetary Policy in the US: The Role of Asset Prices By Beatrice D. Simo-Kengne; Stephen M. Miller; Rangan Gupta
  17. On the welfare properties of fractional reserve banking By Daniel Sanches
  18. The MENA Region - an Optimal Currency Area? Evaluating its Stability by Taylor-Rule derived Stress Tests By Mouchera Karara
  19. Monetary policy in the liquidity trap and after: A reassessment of quantitative easing and critique of the Federal Reserve’s proposed exit strategy By Thomas I. Palley
  20. Asset Price Bubbles and Monetary Policy By Abdullah Yavas
  21. Troubling taper talk from central banks By John H. Makin
  22. Announcements of ECB Unconventional Programs: Implications for the Sovereign Risk of Italy By Matteo Falagiarda; Stefan Reitz
  23. The effect of capital controls and prudential FX measures on options-implied exchange rate stability By Marius del Giudice Rodriguez; Thomas Wu
  24. Sources of fluctuations in parallel exchange rates and policy reform in Myanmar By Kubo, Koji
  25. A New Assessment of the Chinese RMB Exchange Rate By Zhang, Zhibai; Chen, Langnan
  26. Currency wars and the paradox of global thrift By John H. Makin
  27. The Microstructure of Exchange Rate Management: FX Intervention and Capital Controls in Brazil By Calebe de Roure; Steven Furnagiev; Stefan Reitz
  28. The long-run relationship between the Japanese credit and money multipliers By Mototsugu Fukushige
  29. The Fed can't save the stock market again By John H. Makin
  30. The viability of an economic and monetary union in Africa with a unified currency: evidence from the African economies' reactions to the international income, price and monetary shocks By Giscard Assoumou Ella
  31. Which continuous-time model is most appropriate for exchange rates? By Deniz Erdemlioglu; Sébastien Laurent; Christopher J. Neely

  1. By: Loeffler, Axel; Schnabl, Gunther; Schobert, Franziska
    Abstract: Given low interest rates in the large industrial countries and buoyant capital inflows into the emerging markets East Asian central banks have accumulated large stocks of foreign reserves. As the resulting easing of monetary conditions has become a threat to domestic price and financial stability, the East Asian central banks have embarked on substantial sterilization operations to absorb what we call surplus liquidity from the domestic banking systems. This has brought the East Asian central banks into debtor positions versus the domestic banking systems. We show based on a central bank loss function that given buoyant capital inflows and exchange rate stabilization the absorption of surplus liquidity leads either to financial repression, or rising inflation or both. Assuming that a debtor central bank moved towards a freely floating exchange rate to gain monetary policy independence, we show that monetary policy independence is undermined by sterilization costs and revaluation losses on foreign reserves. --
    Keywords: Debtor Central Banks,Monetary Policy Autonomy,Sterilization,Exchange Rate Regime,East Asia
    JEL: E52 E58 F31
    Date: 2013
  2. By: Mirkov, Nikola; Natvik, Gisle James
    Abstract: If central banks value the ex-post accuracy of their forecasts, previously announced interest rate paths might affect the current policy rate. We explore whether this “forecast adherence” has influenced the monetary policies of the Reserve Bank of New Zealand and the Norges Bank, the two central banks with the longest history of publishing interest rate paths. We derive and estimate a policy rule for a central bank that is reluctant to deviate from its forecasts. The rule can nest a variety of interest rate rules. We find that policymakers appear to be constrained by their most recently announced forecasts.
    Keywords: Interest rates, forecasts, Taylor rule, adherence.
    JEL: E43 E52 E58
    Date: 2013–04
  3. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We prove that the Generalized Taylor Principle, under which the nominal interest rate reacts more than one-for-one to inflation in the long run, is a necessary and (under some extra mild restrictions on parameters) sufficient condition for determinacy in a sticky price model with positive steady-state inflation, interest rate smoothing in monetary policy, partial dynamic price indexation, and habit formation in consumption.
    Keywords: Price levels ; Monetary policy ; Banks and banking, Central
    Date: 2013
  4. By: Rajesh Singh (Iowa State University)
    Abstract: This paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule. We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules. One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates. Crucially, we find that fixed exchange rates are almost never optimal. On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation.
    Date: 2013
  5. By: Vespignania, Joaquin L. (School of Economics and Finance, University of Tasmania); Ratti, Ronald A. (School of Business, University of Western Sydney)
    Abstract: It is found that over 1999:1-2012:12 China’s monetary expansion influences Japan through the effect of China’s growth on world commodity prices, increased demand for imports, and exchange rate policy. China’s monetary expansion is associated with significant increases in Japan’s industrial production, exports and inflation, and decreases in the trade-weighted yen. In contrast, U.S. monetary expansion results in contraction in Japan’s industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models are estimated. Results are robust to various contemporaneous restrictions for the effect of international monetary variables, the interaction of foreign and domestic variables and to factor augmented VAR to identify monetary shocks
    Keywords: International Monetary shocks, Japanese economy, Oil/commodity prices, SVEC models
    JEL: E52 F41 F42 Q43
    Date: 2013–08–05
  6. By: Nima Nonejad (Aarhus University and CREATES)
    Abstract: The restrictions implied by the theory of time-consistent monetary policy are imposed on empirical data. Model estimation is conducted using Bayesian Markov chain Monte Carlo techniques. We are able to identify two major regimes regarding the policy of the Federal Reserve from 1970 to 2008. Results show that the Federal Reserve places more weight on inflation stabilization throughout the bigger part of the 1980s and 1990s while on the other hand the Federal Reserve is pursuing a policy of placing more weight on its goals for unemployment reduction in the 1970s and from 2003 to 2008.
    Keywords: Time-consistency, Monetary policy, Gibbs sampling
    JEL: C11 C22 C51 E42 E52
    Date: 2013–08–13
  7. By: Jagjit S. Chadha; Luisa Corrado; Sean Holly
    Abstract: Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum’s (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best.
    Keywords: money, DSGE, policy rules, external finance premium
    JEL: E31 E40 E51
    Date: 2013–08–28
  8. By: Oduncu, Arif; Ermişoğlu, Ergun; Polat, Tandogan
    Abstract: The Central Bank of the Republic of Turkey has started to implement its new policy mix since late 2010. In this new approach expectations, credit growth and reel exchange rate are monitored closely as key indicators for financial stability on top of price stability. The effect of this new monetary policy framework on the volatility of credit growth is the main theme of this note. To the best of our knowledge, we are the first to analyze the impact of new policy mix on the credit growth volatility. It is shown that there is a significant decrease in the volatility of credit growth after the introduction of new policy framework at late 2010. Therefore, it can be said that this new monetary policy framework contributes to financial stability in Turkey by lessening the credit growth volatility.
    Keywords: Volatility, Credit growth, Central banking, CBRT’s new policy mix, Financial Stability
    JEL: C22 E52 E58
    Date: 2013–08
  9. By: Lars winkelmann; Markus Bibinger; Tobias Linzert;
    Abstract: This paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements. Based on cojumps in intraday tick-data of a short and long term interest rate, we develop a day-wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise. The new test is applied to 133 policy announcements of the European Central Bank (ECB) in the period from 2001-2012. Our main findings indicate a good predictability of ECB policy decisions and remarkably stable perceptions about the ECB’s policy preferences.
    Keywords: Central bank communication; yield curve; spectral cojump estimator; high frequency tick-data
    JEL: E58 C14 C58
    Date: 2013–08
  10. By: Timo Henckel (Centre for Applied Macroeconomic Analysis, Australian National University); Gordon Menzies (Economics Discipline Group, University of Technology, Sydney); Daniel J. Zizzo (School of Economics and CBESS, University of East Anglia)
    Abstract: A puzzle from the Great Recession is an apparent mismatch between a fall in the persistence of European inflation rates, and the increased variability of expert forecasts of inflation. We explain this puzzle and show how country specific beliefs about inflation are still quite close to the European Central Bank target of 2% (what we call official target credibility) but the degree of anchoring to this target has gone down, implying an erosion of what we call anchoring credibility. A decline in anchoring credibility can explain increased forecast variance independently of any changes in inflation persistence, contrary to standard time series models.
    Keywords: Central bank credibility; excess volatility; euro; inferential expectations; inflation
    JEL: C51 D84 E31 E52
    Date: 2013–08–01
  11. By: Guido Menzio; Shouyong Shi; Hongfei Sun
    Abstract: We construct and analyze a tractable search model of money with a non-degenerate distribution of money holdings. Analytical tractability comes from modeling decentralized exchange as directed search, which makes the monetary steady state block recursive. By adapting lattice-theoretic techniques, we characterize individuals' policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists and provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate. Moreover, we analyze the properties of this distribution.
    Keywords: Money; Distribution; Search; Lattice-Theoretic.
    JEL: E00 E4 C6
    Date: 2013–08–17
  12. By: Ehsan U. Choudhri (Carleton University, Canada); Lawrence L. Schembri (Bank of Canada, Canada)
    Abstract: The paper examines the experience of Canada and the United States in the run-up to the two biggest financial crises in global history, in the 1920s and 2000s, and the roles of their monetary and financial stability policies. Comparing the Canadian and the U.S. experiences over the two periods is instructive because Canadian monetary policy was somewhat more conservative than U.S. monetary policy and there were important institutional differences in the two periods: Canada did not have a central bank in the 1920’s and followed different financial stability policies in the 2000’s. We present evidence that suggests two conclusions. Firstly, a more moderate Canadian monetary policy in the two booms affected Canada’s relative macroeconomic performance during the booms; in particular, the extent of the economic expansion was less. Secondly, this difference, however, by itself, does not explain why Canada fared better in the recent crisis, but not in the Great Depression. Indeed, the comparative evidence suggests that it was the difference in the effectiveness of financial stability policies, primarily financial regulation supervision with respect to banks and housing finance, that explains the better Canadian performance during the recent crisis. In contrast, in the 1920s, both countries lacked the financial policies to control excess credit growth and both suffered as a consequence. In addition, both countries made policy mistakes in aftermath of the stock market crash and credit collapses; in particular, Canada pursued inflexible interest and exchange rate policies that aggravated the economic downturn.
    Date: 2013–08
  13. By: Juillard, Michel (Banque de France); Le Bihan, Herve (Banque de France); Millard, Stephen (Bank of England)
    Abstract: In many countries, wage changes tend to be clustered in the beginning of the year, with wages being set for fixed durations of typically one year. This has been, in particular, documented in recent years for European countries using microeconomic data. Motivated by this evidence we build a model of uneven wage staggering, embedded in a standard DSGE model of the euro area, and investigate the monetary policy consequences of non-synchronised wage-setting. The model has the potential to generate responses to monetary policy shocks that differ according to the timing of the shock. Using a realistic calibration of the seasonality in wage-setting, based on a wide survey of European firms, the quantitative difference across quarters turns out however to be moderate. Relatedly, we obtain that the optimal monetary policy rule does not vary much across quarters.
    Keywords: Wage-setting; wage-staggering; wage synchronisation; monetary policy shocks; optimal simple monetary policy rules
    JEL: E27 E52
    Date: 2013–08–16
  14. By: Lise Clain-Chamosset-Yvrard (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM)); Thomas Seegmuller (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales [EHESS] - Ecole Centrale Marseille (ECM))
    Abstract: We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state.
    Keywords: indeterminacy; rational bubble; cash-in-advance constraint; collateral; progressive taxation; monetary policy
    Date: 2013–08
  15. By: Jin Cao (Norges Bank (Central Bank of Norway), CESifo, Germany); Loran Chollete (UiS Business School, Norway)
    Abstract: Most theoretical central bank models use short horizons and focus on a single tradeoff. However, in reality, central banks play complex, long-horizon games and face more than one tradeoff. We account for these issues in a simple infinite-horizon game with a novel tradeoff: higher rates deter financial imbalances, but lower rates reduce the likelihood ofinsolvency. We term these factors discipline and stability effects, respectively. The centralbank's welfare decreases with dependence between real and financial shocks, so it may reduce costs with correlation-indexed securities. In our model, independent central banks cannot in general attain both low inflation and financial stability.
    Keywords: Central Bank, Correlation-indexed security, Discipline effect, Stability effect
    JEL: E50 G28
    Date: 2013–08–22
  16. By: Beatrice D. Simo-Kengne (Department of Economics, University of Pretoria); Stephen M. Miller (College of Business, University of Las Vegas, Nevada); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: This paper investigates whether changes in monetary transmission mechanism respond to variations in asset prices. We distinguish between bull and bear markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the monetary policy in relation to housing and stock prices. We measure the relative importance of housing and stock prices in the conduct of monetary policy and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that monetary policy responds more strongly to asset prices during bull regimes. While the bigger monetary effect of stock price shocks occurs prior to the 1970s, monetary policy appears to respond more strongly to housing price than stock price shocks after the 1970s. Similarly, contractionary monetary policy exerts a larger effect on both asset categories during bull markets. Particularly, larger negative responses of house prices to monetary policy shocks occur after the 1980s, corresponding to the bull regime in the housing market. Conversely, the stock-price effect of monetary policy shocks dominates before the 1980s, where stock-market booms achieved more importance.
    Keywords: Monetary policy, house prices, stock prices, TVP-VAR
    JEL: C32 E52 G10
    Date: 2013–08
  17. By: Daniel Sanches
    Abstract: Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with fractional reserve banking, such as the risk of insolvency for each bank. The goal of this paper is to show that a specific form of private bank coalition (a joint-liability arrangement) allows the members of the banking system to engage in fractional reserve banking in such a way that the solvency of each member bank is completely guaranteed. Under this arrangement, I show that a lower reserve ratio usually translates into a higher exchange value of bank liabilities, benefitting the consumers who use them as a means of payment.
    Keywords: Banks and banking ; Interbank market
    Date: 2013
  18. By: Mouchera Karara (Faculty of Management Technology, The German University in Cairo)
    Abstract: The introduction of the European currency union and the EURO as common currency was an unprecedented experiment in monetary history. Not surprisingly, it has attracted a lot of attention to the concept of monetary unions, and it has the potential to be a role model for other parts of the world. This paper aims at identifying potential currency unions in the MENA region. To assess their sustainability, the optimal interest rates of the members of each potential union is estimated and used to calculate a stress level index. The sample used in this study consists of eleven countries where Taylor rates were calculated using data from 1998 to 2008. The stress test results provide a clear result: Two monetary sub-unions, namely the Saudi Arabia - Kuwait union and the Mashreq union (Jordan, Lebanon, Syria, and Palestine), are found to have relatively low stress levels and high benefits from a common currency. In contrast, a large MENA union would suffer from very high stress levels and only modest advantages of a common currency.
    Keywords: Monetary union, MENA, Mashreq, GCC, stress analysis, economic integration, potential unions, interest rates
    JEL: F15 E42 O53
    Date: 2013–07
  19. By: Thomas I. Palley
    Abstract: This paper provides a novel analysis of quantitative easing (QE) that focuses on its implicit fiscal dimension. The first segment examines the theory of the liquidity trap and introduces a distinction between a "weak" and "strong" liquidity trap. The second segment analyzes the impact of QE under conditions of a weak and strong liquidity trap. In a weak liquidity trap QE is expansionary but subject to diminishing returns. As QE involves purchasing assets from the public, it transfers the income streams associated with those assets to the fiscal authority. This transfer generates a form of fiscal drag that can theoretically eventually render QE contractionary. In an open economy, exchange rate effects of QE also need to be taken account of and those tend to be expansionary. The third segment explores how to exit QE. The current suggestion of raising the policy interest rate and paying interest on reserves to check inflationary pressures is contradicted because paying interest constitutes an implicit tax cut. Instead, the paper suggests adopting a system of asset based reserve requirements. Requiring banks to hold increased reserves would permanently deactivate liquidity created by QE without recourse to interest payments and the implicit tax cut they represent.
    Keywords: quantitative easing, fiscal drag, interest on reserves, exit strategy, asset based reserve requirements
    JEL: E43 E44 E50 E52 E58
    Date: 2013
  20. By: Abdullah Yavas (University of Wisconsin - Madison and Hong Kong Institute for Monetary Research)
    Abstract: The purpose of this paper is to discuss if and how monetary policy should react to an asset price bubble. The challenge with targeting an asset price bubble is that such bubbles are very difficult to identify and measure. Furthermore, any attempt to burst an asset price bubble is likely to face a great deal of criticism and resistance from politicians and the public. The main argument of the paper is that it is practically very difficult to target an asset price level or react to changes in asset prices. Instead, the paper proposes an alternative instrument where the monetary policy and regulatory authorities target credit growth. Credit growth is easy to define, less likely to face resistance from the public and politicians, and is closely linked with (serves as a good proxy for) asset prices. More importantly, an asset price bubble will cause much more economic damage if the asset purchases involved leverage. Thus, targeting credit growth is a more realistic and more effective tool to contain asset price bubbles, to minimize the economic impact of such bubbles, and to maintain financial stability. The paper discusses how targeting credit growth can be incorporated into the Taylor rule, and adds that, in addition to the policy interest rate, central banks can use reserve requirement ratios to contain credit growth. It is noted the effectiveness of monetary policy can be strengthened significantly with the help of appropriate regulations and macro-prudential measures.
    Date: 2013–07
  21. By: John H. Makin (American Enterprise Institute)
    Abstract: Central banks all over the world ought to leave well enough alone rather than raising already-elevated uncertainty with talk of phasing down (“tapering,” in US parlance) quantitative easing.
    Keywords: FOMC,Federal Reserve Chairman Ben Bernanke,federal reserve,economic recession,Economic policy outlook,economic outlook ,central banks,austerity measures
    JEL: A E
    Date: 2013–06
  22. By: Matteo Falagiarda; Stefan Reitz
    Abstract: This paper studies the effects of ECB communications about unconventional monetary policy operations on the perceived sovereign risk of Italy over the last five years. More than fifty events concerning non-standard operations are identified and classified with respect to the specific ECB program. The empirical results are derived from both an event-study analysis and a GARCH framework, which uses Italian long-term bond futures to disentangle expected from unexpected policy actions. We find that the ECB announcements about unconventional monetary policies substantially reduced Italian long-term government bond yield spread relative to German counterparts. Particularly, among the different types of measures, news about the Securities Markets Programme and the Outright Monetary Transactions are found to be effective in affecting the perceived sovereign risk of Italy
    Keywords: central bank communications, unconventional monetary policy, European sovereign debt crisis, event-study, GARCH models
    JEL: E43 E52 E58 G01 G12
    Date: 2013–08
  23. By: Marius del Giudice Rodriguez; Thomas Wu
    Abstract: Has the recent wave of capital controls and prudential foreign exchange (FX) measures been effective in promoting exchange rate stability? We tackle this question by studying a panel of 25 countries/currencies from July 1, 2009, to June 30, 2011. We calculate daily measures of exchange rate volatility, absolute crash risk, and tail risk implied in currency option prices, and we construct indices of capital controls and prudential FX measures taking into account the exact date when policy changes are implemented. Using a difference-in-differences approach, we find evidence that (i) tightening controls on non-residents suppresses daily exchange rate fluctuations at the cost of increasing the frequency of outliers, (ii) easing controls on residents truly improves exchange rate stability over all dimensions, and (iii) tightening prudential FX measures not specific to derivative markets reduces absolute crash risk and tail risk, with no effect on volatility.
    Keywords: Foreign exchange
    Date: 2013
  24. By: Kubo, Koji
    Abstract: Myanmar maintained a multiple exchange rate system, and the parallel market exchange rate was left untamed. In the last two decades, the Myanmar kyat exchange rate of the parallel market has exhibited the sharpest fluctuations among Southeast Asian currencies in real terms. Since the move to a managed float regime in April 2012, the question arises of whether exchange rate policies will be effective in stabilizing the real exchange rate. This paper investigates the sources of fluctuations in the real effective exchange rate using Blanchard and Quah’s (1989) structural vector autoregression model. As nominal shocks can be created by exchange rate policies, a persistent impact of a nominal shock implies more room for exchange rate policies. Decomposition of the fluctuations into nominal and real shocks indicates that the impact of nominal shocks is small and quickly diminishes, implying that complementary sterilization is necessary for effective foreign exchange market interventions.
    Keywords: Myanmar, Foreign exchange, Real and nominal effective exchange rates, Structural VAR
    JEL: F31 F41 O53
    Date: 2013–02
  25. By: Zhang, Zhibai; Chen, Langnan
    Abstract: The ratio, Penn effect and behavioral equilibrium exchange rate (BEER) are used to assess the level of the bilateral real exchange rate (RER) of the Chinese RMB against the US dollar in 1980–2012. The statistical indexes and economic meaning indicate that the findings from the BEER and ratio model are more reasonable. Based on the two models, the RMB was overvalued by 10–20% in 2011–2012. Given the already overvalued currency and the not-ideal economic situation of China, such a fast RER appreciation of 6.6–6.7% per year as it was in 2005–2012 is not sustainable. Further, corresponding policy proposals are given.
    Keywords: Chinese RMB, Misalignment, Ratio model, Penn effect, Behavioral equilibrium exchange rate
    JEL: F31
    Date: 2013–08–26
  26. By: John H. Makin (American Enterprise Institute)
    Abstract: The majority of G20 countries have collectively pursued easy-money-tighter-fiscal policy to stimulate their economies, but this has led to weak currencies. To stimulate growth and avoid a currency war, G20 governments and central banks should reform tax systems and moderate the growth of government retirement and health benefits while employing quantitative easing as needed to avoid deflation.
    Keywords: Japanese economy,G20 summit,Fiscal austerity,economic outlook ,currency,central banks,FOMC,QE
    JEL: A F
    Date: 2013–02
  27. By: Calebe de Roure; Steven Furnagiev; Stefan Reitz
    Abstract: This paper uses a microstructure approach to analyze the effectiveness of capital controls introduced in Brazil to counter an appreciation of the Real. Based on a rich data set from the Brazilian foreign exchange market, we estimate a reduced-form VAR to characterize the interaction of the central bank, financial and commercial customers in times of regulatory policy measures. Controlling for regular FX interventions we find that capital controls change market participants' behavior. Referring to thesource of order flow, we find no evidence that the appreciation of the Real is driven by financial customers’ activity. Instead, commercial customers seem to be a primary driver of the Real within our model. To the extent that capital controls influence commercial customers' order flow, this is the likely channel policy makers use to respond to a perceived loss of international competitiveness
    Keywords: Foreign Exchange,Sterilized Intervention, Macroprudential Policies, Market Microstructure
    JEL: F31 E58 G14 G15
    Date: 2013–08
  28. By: Mototsugu Fukushige (Graduate School of Economics, Osaka University)
    Abstract: The standard argument is that while money creation and credit creation have different channels, they provide the same theoretical size of multipliers. However, there is usually some difference in practice. Consequently, in this paper we investigate the long-run relationship between the credit and money multipliers in Japan.
    Keywords: Money Supply, Money Stock, Money Multiplier, Credit Multiplier
    JEL: E51 E41 E42
    Date: 2013–08
  29. By: John H. Makin (American Enterprise Institute)
    Abstract: The US economy might be headed for another midyear “swoon,” and after three doses of easy money from the Fed, it is unclear whether another round of quantitative easing would help produce the sort of robust growth policymakers and consumers seek.
    Keywords: quantitative easing,federal reserve,economic outlook ,FOMC,U.S. Stock Market
    JEL: A E
    Date: 2013–05
  30. By: Giscard Assoumou Ella (LEAD - Laboratoire d'Économie Appliquée au Développement - Université Sud Toulon Var)
    Abstract: The purpose of this paper is to provide a framework to analyze the feasibility of an economic and monetary union in Africa with a common currency. In this context, the present study has two objectives. The first one is to analyze the impacts of the international income, price and monetary shocks on real GDP, household consumption and consumer prices index in 17 African countries using a SVAR model for the period 1970-2007. The research methodology adopted in this study suggests that 16 countries are exposed to the international income shock, nine to the international price shock and 10 to the international monetary shock. A decrease in real OECD GDP has a negative impact on real GDP, household consumption and consumer prices index, and inversely in the case of an increase. A decrease in current Federal funds effective rate has a positive effect on those variables, and inversely. World price of oil impacts essentially African oil producers, with a decrease affecting negatively their economies and an increase positively. The second one is to compare African economies' orthogonal impulse response functions to those international shocks. It can be observed that the functions tend to be similar in the cases of the real GDP and household consumption's reactions, and more or less similar in the case of the consumer prices index responses. This analysis emphasizes that the possibility of creating an economic union in Africa with a common currency does exist.
    Keywords: African economies, international income, price and monetary shocks, SVAR model
    Date: 2013–05–26
  31. By: Deniz Erdemlioglu; Sébastien Laurent; Christopher J. Neely
    Abstract: This paper attempts to realistically model the underlying exchange rate data generating process. We ask what types of diffusion or jump features are most appropriate. The most plausible model for 1-minute data features Brownian motion and Poisson jumps but not infinite activity jumps. Modeling periodic volatility is necessary to accurately identify the frequency of jump occurrences and their locations. We propose a two-stage method to capture the effects of these periodic volatility patterns. Simulations show that microstructure noise does not significantly impair the statistical tests for jumps and diffusion behavior.>
    Keywords: Foreign exchange ; Time-series analysis
    Date: 2013

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.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.