nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒10‒02
thirty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. How would monetary policy matter in the proposed African monetary unions? Evidence from output and prices By Asongu Simplice
  3. Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices By Asongu Simplice
  4. Monetary Policy Drivers of Bond and Equity Risks By John Y. Campbell; Carolin Pflueger; Luis M. Viceira
  5. New Empirics of monetary policy dynamics: evidence from the CFA franc zones By Asongu Simplice
  6. Optimal rules for central bank interest rates subject to zero lower bound By Singh, Ajay Pratap; Nikolaou, Michael
  7. Effects of US Monetary Policy Shocks During Financial Crises - A Threshold Vector Autoregression Approach By Jasmine Zheng
  8. An Early Warning System for Inflation in the Philippines Using Markov-Switching and Logistic Regression Models By Cruz , Christopher John; Mapa, Dennis
  9. Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa? By Asongu Simplice
  10. Shock from Graying: Is the Demographic Shift Weakening Monetary Policy Effectiveness By Patrick A. Imam
  11. Price-Level Targeting: an omelette that requires breaking some Inflation-Targeting eggs? By Luisa F. Acuña Roa; Julian A. Parra Polania
  12. The Role of Advertising Expenditure in Measuring Indonesia’s Money Demand Function By Hiew, Lee-Chea; Puah, Chin-Hong; Habibullah, Muzafar Shah
  13. Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients By Gonzalez-Astudillo, Manuel
  14. The impact of the sovereign debt crisis on bank lending rates in the euro area By Stefano Neri
  15. The Mechanism of Monetary Transmissions in Russia By Elena Leontyeva
  16. The role of banks in the transmission of monetary policy By Joe Peek; Eric S. Rosengren
  17. The Effects of Monetary Policy Shocks on a Panel of Stock Market Volatilities: A Factor-Augmented Bayesian VAR Approach By Fady Barsoum
  18. Puzzling over the Anatomy of Crises: Liquidity and the Veil of Finance By Guillermo Calvo
  19. Long-run interest rate convergence in Poland and the EMU By Łukasz Goczek; Dagmara Mycielska
  20. The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  21. Risk-taking and monetary policy before the crisis: The case of Germany By Iris Biefang-Frisancho Mariscal
  22. U.S. business cycles, monetary policy and the external finance premium By Enrique Martínez-García
  23. Money, Trust and Hierarchies: To the Question of the Maintenance of Confidence in the Complex Economic Institutions By Alexander Lasco
  24. Inflation and Output Comovement in the Euro Area: Love at Second Sight? By Michal Andrle; Jan Bruha; Serhat Solmaz
  25. Liquidity and credit risks in the UK’s financial crisis By Woon Wong; Iris Biefang-Frisancho Mariscal; Wanru Yao; Peter Howells
  26. European Banking Union By Fritz Breuss
  27. Escaping the Great Recession By Francesco Bianchi; Leonardo Melosi
  28. Gauging the Safehavenness of Currencies By Alfred Wong; Tom Fong
  29. Asset Trading and Monetary Policy in Production Economies By Guidon Fenig; Mariya Mileva; Luba Petersen
  30. Does Banque de France control inflation and unemployment? By Kitov, Ivan; KItov, Oleg
  31. Factors leading to inflation targeting - the impact of adoption By Samarina, Anna; Sturm, Jan-Egbert

  1. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: We analyze the effects of monetary policy on economic activity in the proposed African monetary unions. Findings broadly show that: (1) but for financial efficiency in the EAMZ, monetary policy variables affect output neither in the short-run nor in the long-term and; (2) with the exception of financial size that impacts inflation in the EAMZ in the short-term, monetary policy variables generally have no effect on prices in the short-run. The WAMZ may not use policy instruments to offset adverse shocks to output by pursuing either an expansionary or a contractionary policy, while the EAMZ can do with the ‘financial allocation efficiency’ instrument. Policy implications are discussed.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  2. By: Yuzo Honda (Kansai University)
    Abstract: The effectiveness of nontraditional monetary policy is controversial at least in Japan. Making use of data from the quantitative easing monetary policy period, this paper presents statistical evidence on the effectiveness of nontraditional monetary policy. We empirically demonstrate that quantitative easing monetary policy, adopted by the Bank of Japan for the period from March 2001 to March 2006, had a stimulating effect on investment and production at least through Tobin's q channel. We also provide a simple and operational model in which an injection of base money lowers the interest rate on bonds, reduces the required rate of returns from capital stocks, and depreciates the value of domestic currency.
    Keywords: V Quantitative Easing, Vector Autoregressions, Stocks, Tobin's q, Asset Markets JEL Classification Number: E51
    JEL: E51
    Date: 2013–09
  3. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  4. By: John Y. Campbell (Harvard University); Carolin Pflueger (University of British Columbia); Luis M. Viceira (Harvard Business School, Finance Unit)
    Abstract: The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to an increase in the persistence of monetary policy interacting with continued shocks to the central bank's inflation target. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.
    Date: 2013–09
  5. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: Purpose – A major lesson of the EMU crisis is that serious disequilibria in a monetary union result from arrangements not designed to be robust to a variety of shocks. With the specter of this crisis looming substantially and scarring existing monetary zones, the present study has complemented existing literature by analyzing the effects of monetary policy on economic activity (output and prices) in the CEMAC and UEMOA CFA franc zones. Design/methodology/approach – VARs within the frameworks of VECMs and Granger causality models are used to estimate the long-run and short-run effects respectively. Impulse response functions are further used to assess the tendencies of significant Granger causality findings. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run in the CFA zones (Broadly untrue). This invalidity is more pronounced in CEMAC (relative to all monetary policy variables) than in UEMOA (with regard to financial dynamics of activity and size). Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-run in the CFA zones. Firstly, the absence of co-integration among real output and the monetary policy variables in both zones confirm the long-term dimension of the hypothesis on the neutrality of money. The validity of its short-run dimension is more relevant in the UEMOA zone (with the exception of overall money supply) than in the CEMAC zone (in which only financial dynamics of ‘financial system efficiency’ and financial activity support the hypothesis). Practical Implications – (1) Compared to the CEMAC region, the UEMOA zone’s monetary authority has more policy instruments for offsetting output shocks but fewer instruments for the management of short-run inflation. (2) The CEMAC region is more inclined to non-traditional policy regimes while the UEMOA zone dances more to the tune of traditional discretionary monetary policy arrangements. A wide range of policy implications are discussed. Inter alia: implications for the long-run neutrality of money and business cycles; implications for credit expansions and inflationary tendencies; implications of the findings to the ongoing debate; country-specific implications and measures of fighting surplus liquidity. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect money supply), we have provided a significant contribution to the empirics of monetary policy. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries and monetary unions.
    Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa
    JEL: E51 E52 E58 E59 O55
    Date: 2013–01–14
  6. By: Singh, Ajay Pratap; Nikolaou, Michael
    Abstract: The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced rigorous derivations of explicit rules. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control (mpMPC) framework. Rules with or without inertia are included in the derivation. The proposed approach is illustrated through simulations on US economy data. A number of issues for future study are proposed. --
    Keywords: Taylor rule,zero lower bound,liquidity trap,model predictive control,multiparametric programming
    JEL: E52 C61
    Date: 2013
  7. By: Jasmine Zheng
    Abstract: This paper analyzes the impact and effectiveness of conventional monetary policy during periods of low and high financial stress in the US economy. Using data from 1973Q1 to 2008Q4, the analysis is conducted by estimating a Threshold Vector Autoregression (TVAR) model to capture switching between the low and high financial stress regimes implied by the theoretical literature. The empirical findings support regime-dependent effects of conventional US monetary policy. In particular, the output response to monetary policy shocks is larger during periods of high financial stress than in periods of low financial stress. The existence of a cost channel effect during periods of high financial stress imply a worsening of the short run output-inflation trade off during financial crises. When the sample period is extended to 2012Q4, there is evidence that expansionary monetary policy continues to be effective during periods of high financial stress when the prevailing interest rate is at the zero lower bound. By keeping interest rates and credit spreads low, expansionary monetary policy helps shift the US economy from high to low financial stress regimes. Large expansionary monetary policy shocks also increase the likelihood of moving the economy out of a high financial stress regime.
    Keywords: Monetary policy, uncertainty, threshold vector autoregression models
    JEL: F44 E44 E52
    Date: 2013–09
  8. By: Cruz , Christopher John; Mapa, Dennis
    Abstract: With the adoption of the Bangko Sentral ng Pilipinas (BSP) of the Inflation Targeting (IT) framework in 2002, average inflation went down in the past decade from historical average. However, the BSP’s inflation targets were breached several times since 2002. Against this backdrop, this paper develops an early warning system (EWS) model for predicting the occurrence of high inflation in the Philippines. Episodes of high and low inflation were identified using Markov-switching models. Using the outcomes of regime classification, logistic regression models are then estimated with the objective of quantifying the possibility of the occurrence of high inflation episodes. Empirical results show that the proposed EWS model has some potential as a complementary tool in the BSP’s monetary policy formulation based on the in-sample and out-of sample forecasting performance.
    Keywords: Inflation Targeting, Markov Switching Models, Early Warning System
    JEL: C5 C52 E37
    Date: 2013
  9. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: This paper assesses the adjustment of inflation with financial dynamic fundamentals of money (financial depth), credit (financial activity) and efficiency. Three main findings are established. (1) There are significant long-run relationships between inflation and the fundamentals. (2) The error correction mechanism is stable in all specifications but in case of any disequilibrium, only financial depth is significant in adjusting inflation to the long-run relationship. (3) In the long-run, short-term adjustments in the ability of banks to transform money into credit do not matter in correcting inflation. This is most probably due to surplus liquidity issues. Policy implications are discussed.
    Keywords: Excess money; inflation; credit; Africa
    JEL: E31 E51 O55
    Date: 2013–04–14
  10. By: Patrick A. Imam
    Abstract: Abstract Empirical evidence is mounting that, in advanced economies, changes in monetary policy have a more benign impact on the economy—given better anchored inflation expectations and inflation being less responsive to variation in unemployment—compared to the past. We examine another aspect that could explain this empirical finding, namely the demographic shift to an older society. The paper first clarifies potential transmission channels that could explain why monetary policy effectiveness may moderate in graying societies. It then uses Bayesian estimation techniques for the U.S., Canada, Japan, U.K., and Germany to confirm a weakening of monetary policy effectiveness over time with regards to unemployment and inflation. After proving the existence of a panel co-integration relationship between ageing and a weakening of monetary policy, the study uses dynamic panel OLS techniques to attribute this weakening of monetary policy effectiveness to demographic changes. The paper concludes with policy implications.
    Keywords: Monetary policy;United States;Canada;Japan;United Kingdom;Germany;Developed countries;Aging;Population;Economic models;Cross country analysis;Demographic shift, monetary transmission mechanism, life-cycle model
    Date: 2013–09–06
  11. By: Luisa F. Acuña Roa; Julian A. Parra Polania
    Abstract: This manuscript can be divided into two main parts. The first one, using a simple example by Minford (2004) and Hatcher (2011), gives the reader a basic introduction to understand the comparison between two monetary-policy regimes: Inflation Targeting (IT) and Price-Level Targeting (PLT). The second part, using a model with a New Keynesian Phillips curve and a loss function (both of which incorporate partial indexation to lagged inflation), finds that for standard values of underlying parameters (i) the social loss associated to macroeconomic volatility may decrease about 26% by switching from IT to PLT and (ii) only when the initial level of indexation to lagged inflation is higher than 60% then it is better not to switch to PLT.
    Keywords: Inflation targeting, price-level targeting, indexation, macroeconomic stability Classification JEL: E52, E58
    Date: 2013–09
  12. By: Hiew, Lee-Chea; Puah, Chin-Hong; Habibullah, Muzafar Shah
    Abstract: Using the consumer theory approach as suggested by Habibullah (2009), this study aims to shed new light on monetary authority by incorporating advertising expenditure, a variable that has been neglected in the past, into study of the money demand function in Indonesia. In addition, different measurements of monetary aggregates (simple-sum and Divisia money) have been used in the estimation to provide better insight into the selection of a suitable monetary policy variable for the case of Indonesia. Empirical findings from the error-correction model (ECM) indicate that the advertising expenditure variable has a significant impact on the demand for money. Furthermore, as compared to simple-sum money, the model that used Divisia monetary aggregates rendered more plausible estimation results in the estimation of money demand function.
    Keywords: Advertising Expenditure, Divisia Money, Money Demand
    JEL: C43 E41 M37
    Date: 2013
  13. By: Gonzalez-Astudillo, Manuel
    Abstract: In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime.
    Keywords: Time-varying policy rule coefficients, monetary and fiscal policy interactions, nonlinear state-space models
    JEL: C11 C32 E63
    Date: 2013–07–16
  14. By: Stefano Neri (Banca d'Italia)
    Abstract: Since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions, hindering the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households. This paper makes an empirical assessment of the impact of the tensions on bank lending rates in the main euro-area countries, concluding that they have had a significant impact on the cost of credit in the peripheral countries. A counterfactual exercise indicates that if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011. These results are robust to alternative measures of the cost of credit and econometric techniques.
    Keywords: sovereign debt crisis, bank lending rates, seemingly unrelated regression
    JEL: C32 E43 G21
    Date: 2013–06
  15. By: Elena Leontyeva (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: Monetary policy measures are widely used in various countries the world to influence economic conditions. However, the efficiency of the impact of monetary policy on macroeconomic performance varies in different countries. Understanding the characteristics of the transmission mechanism of monetary policy, that is, the process of the impact of policy on the behavior of economic agents, the end result of which is the change of the main macroeconomic indicators will consider the impact of actions of monetary authorities to the individual agents. In this work analyzed in detail the mechanism of monetary transmission. Look at specifics of the main transmission channels and identified factors that influence their effectiveness. This chapter is analyzes the characteristics of the channels of transmission mechanism in Russia in the first decade of the XXI century.
    Keywords: monetary transmission
    Date: 2013–05
  16. By: Joe Peek; Eric S. Rosengren
    Abstract: The transmission of monetary policy, especially in light of recent events, has received increased attention, especially with respect to the efficacy of the bank lending channel. This paper summarizes the issues associated with isolating the bank lending channel and determining the extent to which it is operational. Evidence on the effectiveness of the bank lending channel is presented, both in the United States and abroad. The paper then provides observations about the likely consequences for the effectiveness of the lending channel of the changes in the financial environment associated with the recent financial crisis.
    Keywords: Monetary policy ; Global financial crisis ; Banks and banking - Regulations
    Date: 2013
  17. By: Fady Barsoum (Department of Economics, University of Konstanz, Germany)
    Abstract: This paper investigates the response of stock market volatility to a monetary policy shock using a structural factor-augmented Bayesian vector autoregressive (FAVAR) model. We construct a monthly dataset of realized volatilities of the constituents of the S&P500 index and extract volatility factors from this dataset using a suitable dynamic factor model (DFM). The volatility factors are included in a structural FAVAR model where the dynamic response of stock market volatility to a monetary policy shock is analyzed. This approach does not only allow us to study the response of the aggregate market volatility but also the responses of all the volatilities of the single stocks and the different sectors included in the dataset. In general, the results show that the stock market returns decrease and the stock market volatility increases following a monetary policy tightening. Although the magnitude of the volatility response to monetary policy shocks varies between the different stocks and sectors, the dynamics of the response does not differ widely. Both the magnitude and dynamics of the volatility response depend on the sample period examined.
    Keywords: dynamic factor model, Bayesian estimation, factor-augmented vector autoregression, monetary policy, stock market volatility, long memory
    JEL: C32 C38 C58 E52
    Date: 2013–02–15
  18. By: Guillermo Calvo (Columbia University and NBER (E-mail:
    Abstract: The paper claims that conventional monetary theory obliterates the central role played by media of exchange in the workings and instability of capitalist economies; and that a significant part of the financial system depends on the resiliency of paper currency and liquid assets that have been built on top of it. The resilience of the resulting financial tree is questionable if regulators are not there to adequately trim its branches to keep it from toppling by its own weight or minor wind gusts. The issues raised in the paper are not entirely new but have been ignored in conventional theory. This is very strange because disregard for these key issues has lasted for more than half a century. Are we destined to keep on making the same mistake? The paper argues that a way to prevent that is to understand its roots, and traces them to the Keynes/Hicks tradition. In addition, the paper presents a narrative and some empirical evidence suggesting a key channel from Liquidity Crunch to Sudden Stop, which supports the view that liquidity/credit shocks have been a central factor in recent crises. In addition, the paper claims that liquidity considerations help to explain (a) why a credit boom may precede financial crisis, (b) why capital inflows grow in the run-up of balance-of-payments crises, and (c) why gross flows are pro-cyclical.
    Keywords: Financial Crises, Bubbles, Sudden Stop
    JEL: E32 E65 F32
    Date: 2013–09
  19. By: Łukasz Goczek (Faculty of Economic Sciences, University of Warsaw); Dagmara Mycielska (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The aim of the article is to examine the degree of the long-run interest rate convergence in the context of Poland's joining the EMU. In this perspective, it is frequently argued that the expectations of Poland's participation in the EMU should manifest themselves in long-run interest rate convergence. This should be visible in the long-run fall of interest rate risk premium in Poland. In contrast, the paper raises the question of the actual speed of such convergence and questions the existence of this phenomenon in Poland. Confirmation of the hypothesis concerning slow convergence in the risk premium 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 of an Uncovered Interest Rate Parity and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, interest rate convergence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013
  20. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur’s net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Connection, financial sector, real economy, monetary policy transmission mechanism
    JEL: G20 E44 E52
    Date: 2013
  21. By: Iris Biefang-Frisancho Mariscal (University of the West of England, Bristol)
    Abstract: We use impulse response functions to test for the effect of monetary policy on investors’ risk aversion in Germany. The latter is proxied by a variety of option based implied volatility indices. We estimate twenty-four models and find in all models that risk aversion responds to monetary policy. Furthermore, the business cycle varies mostly through changes in risk aversion and there is feedback from the business cycle to risk aversion, in that a fall in the price of risk has a positive effect on the business cycle. These responses indicate that accommodating monetary policy before the crisis may have increased risk appetite, which in turn has strengthened the business cycle with the latter feeding back into a further reduction in the price of risk.
  22. By: Enrique Martínez-García
    Abstract: I investigate a model of the U.S. economy with nominal rigidities and a financial accelerator mechanism à la Bernanke et al. (1999). I calculate total factor productivity and monetary policy deviations for the U.S. and quantitatively explore the ability of the model to account for the cyclical patterns of GDP (excluding government), investment, consumption, the share of hours worked, inflation and the quarterly interest rate spread between the Baa corporate bond yield and the 20-year Treasury bill rate during the Great Moderation. I show that the magnitude and cyclicality of the external finance premium depend nonlinearly on the degree of price stickiness (or lack thereof) in the Bernanke et al. (1999) model and on the specification of both the target Taylor (1993) rate for policy and the exogenous monetary shock process.> ; The strong countercyclicality of the external finance premium induces substitution away from consumption and into investment in periods where output grows above its long-run trend as the premium tends to fall below its steady state and financing investment becomes temporarily cheaper. The less frequently prices change in this environment, the more accentuated the fluctuations of the external finance premium are and the more dominant they become on the dynamics of investment, hours worked and output. However, these features—the countercyclicality and large volatility of the spread—are counterfactual and appear to be a key impediment limiting the ability of the model to account for the U.S. data over the Great Moderation period.
    Keywords: National security
    Date: 2013
  23. By: Alexander Lasco (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: Based on a number of monetary theories proposed as economists and sociologists (including credit theory of money and the concept of "Plurality of money"), this paper examines the mechanisms through which is created in the economy of individual institutional support confidence in money. The author shows that the individuals involved in economic exchanges, rely on the ordered hierarchy of institutions that support the trust, and that the diversity of this type hierarchy reflects many social contexts in which there are cash transactions. Moreover it is assumed that the transition to higher levels of these pyramidal structures due to the increase of liquidity (or security) monetary liabilities arising on the appropriate level of the hierarchy. Together with Nevertheless, despite all the attempts to create a sound institutional structures for protection of confidential relations of the individual agents to money, their work is coupled with serious difficulties, which include the lack of guarantor of the High Court, the problem of infinite regress and general uncontrollability of complex monetary systems. These obstacles entail immediate and profound effect, leading to the destruction of structures which designed to support confidence in all three of the above-mentioned areas (Liquidity, acceptability and stability of money), which are critically important for the implementation of the normal circulation of money.
    Keywords: money, trust, hierarchy
    Date: 2013–05
  24. By: Michal Andrle; Jan Bruha; Serhat Solmaz
    Abstract: This paper discusses comovement between inflation and output in the euro area. The strength of the comovement may not be apparent at first sight, but is clear at business cycle frequencies. Our results suggest that at business cycle frequency, the output and core inflation comovement is high and stable, and that inflation lags the cycle in output with roughly half of its variance. The strong relationship of output and inflation hints at the importance of demand shocks for the euro area business cycle.
    Date: 2013–09–11
  25. By: Woon Wong (University of the West of England, Bristol); Iris Biefang-Frisancho Mariscal (University of the West of England, Bristol); Wanru Yao (University of the West of England, Bristol); Peter Howells (University of the West of England, Bristol)
    Abstract: This paper investigates the relationship between credit risk and liquidity components in the interbank spread and how this relationship unfolded during the recent financial crisis. We find that prior to the central bank’s Bank of England’s intervention counterpart risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed after central bank started quantitative easing (QE). Using the accumulated value of asset purchases as a proxy for central bank’s liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, indirectly, credit risk.
    Keywords: interbank spreads, liquidity premia, credit risk, quantitative easing, financial crisis
  26. By: Fritz Breuss (WIFO)
    Abstract: The ongoing Euro crisis and the worse economic development in Europe than in the USA are grounded, not the least in the delayed implementation of reforms of the banking sector. Whereas the leaks in economic governance of EMU have been fixed the banking sector is still not stabilised, even five years after Lehman Brothers. From the grand solution of a "European Banking Union" (EBU) only the first pillar, the European Bank Supervision with the single supervisory mechanism (SSM) will come into effect in 2014. The other necessary steps – the single resolution mechanism (SRM) and the single deposit guarantee mechanism (SDM) – will follow later. Until the "Europeanisation" will take place the bank recovery and resolution will be managed nationally based on EU law. A first evaluation indicates that the potential benefits of solving bank problems via the resolution mechanism of a new EBU would be distributed unequally between the member countries of the EU/Euro area. Germany would be the biggest loser, Spain and the Netherlands the biggest winners. Of the non-euro countries, the UK and Sweden have the most to gain, but Poland would lose. The country-specific gains of EBU depend on the number and size of banks which are located in a country. It is, however, not yet clear whether the goal of macroeconomic stabilising of bank resolutions would be better achieved when executed via the SRM or with the ESM, both for the countries affected and for the Euro area as a whole.
    Keywords: Economic and Monetary Union Eurozone European integration Banking Union
    Date: 2013–09–19
  27. By: Francesco Bianchi; Leonardo Melosi
    Abstract: While high uncertainty is an inherent implication of the economy entering the zero lower bound, deflation is not, because agents are likely to be uncertain about the way policymakers will deal with the large stock of debt arising from a severe recession. We draw this conclusion based on a new-Keynesian model in which the monetary/fiscal policy mix can change over time and zero-lower-bound episodes are recurrent. Given that policymakers’ behavior is constrained at the zero lower bound, beliefs about the exit strategy play a key role. Announcing a period of austerity is detrimental in the short run, but it preserves macroeconomic stability in the long run. A large recession can be avoided by abandoning fiscal discipline, but this results in a sharp increase in macroeconomic instability once the economy is out of the recession. Contradictory announcements by the fiscal and monetary authorities can lead to high inflation and large output losses. The policy trade-off can be resolved by committing to inflate away only the portion of debt resulting from an unusually large recession.
    Keywords: Monetary and fiscal policy interaction, Markov-switching DSGE models, uncertainty, shock-specific policy rules, zero lower bound
    JEL: E31 E52 E62 E63 D83
    Date: 2013
  28. By: Alfred Wong (Hong Kong Monetary Authority); Tom Fong (Hong Kong Monetary Authority)
    Abstract: This study assesses the 'safehavenness' of a number of currencies with a view to providing a better understanding of how capital flows tend to react to sharp increases in global risk aversion during periods of financial crisis. It focuses on how currencies are perceived by dollar-based international investors or, more specifically, whether they are seen as safe-haven or risky currencies. To assess the 'safehavenness' of a currency, we use a measure of risk reversal, which is the price difference between a call and put option of a currency. This measures how disproportionately market participants are willing to pay to hedge against appreciation or depreciation of the currency. The relationship between the risk reversal of a currency and global risk aversion is estimated by means of both parametric and non-parametric regressions which allow us to capture the relationship in times of extreme adversity, i.e., tail risk. Our empirical results suggest that the Japanese yen and, to a lesser extent, the Hong Kong dollar are the only safe haven currencies under stressful conditions out of 34 currencies vis-a-vis the US dollar.
    Keywords: Safe Haven Currency, Risk Reversal, Quantile Regression, Mixture Vector Autoregressive Models, Tail Risk, Crash Risk
    Date: 2013–09
  29. By: Guidon Fenig (University of British Columbia); Mariya Mileva (Kiel Institute for the World Economy); Luba Petersen (Simon Fraser University)
    Abstract: In this paper we demonstrate how an experimental general equilibrium economy can be implemented in a laboratory setting in a simplified, time- and cost-efficient manner. We then introduce an asset market to study speculative behavior within a general equilibrium setting where subjects' objective is to maximize their utility from consumption and leisure. Subjects are endowed with units of an asset but are not obliged to participate in the asset market. Asset prices consistently grow above fundamental value and do not decline significantly with learning. Finally, we introduce a policy preventing subjects from borrowing to purchase assets. The borrowing constraint does not have any effect on the deviation of asset prices from fundamental value. Asset market activity has no significant effect on the real economy in either treatment, suggesting a limited role for monetary policy intervention.
    Keywords: Experimental macroeconomics, laboratory experiment, monetary policy, asset price bubbles, general equilibrium, production economy
    JEL: C61 D81
    Date: 2013–09
  30. By: Kitov, Ivan; KItov, Oleg
    Abstract: We re-estimate statistical properties and predictive power of a set of Phillips curves, which are expressed as linear and lagged relationships between the rates of inflation, unemployment, and change in labour force. For France, several relationships were estimated eight years ago. The change rate of labour force was used as a driving force of inflation and unemployment within the Phillips curve framework. Following the original problem formulation by Fisher and Phillips, the set of nested models starts with a simplistic version without autoregressive terms and one lagged term of explanatory variable. The lag is determined empirically together with all coefficients. The model is estimated using the Boundary Element Method (BEM) with the least squares method applied to the integral solutions of the differential equations. All models include one structural break might be associated with revisions to definitions and measurement procedures in the 1980s and 1990s as well as with the change in monetary policy in 1994-1995. For the GDP deflator, our original model provided a root mean squared forecast error (RMSFE) of 1.0% per year at a four-year horizon for the period between 1971 and 2004. The same RMSFE is estimated with eight new readings obtained since 2004. The rate of CPI inflation is predicted with RMSFE=1.5% per year. For the naive (no change) forecast, RMSFE at the same time horizon is 2.95% and 3.3% per year, respectively. Our model outperforms the naive one by a factor of 2 to 3. The relationships for inflation were successfully tested for cointegration. We have formally estimated several vector error correction (VEC) models for two measures of inflation. In the VAR representation, these VECMs are similar to the Phillips curves. At a four year horizon, the estimated VECMs provide significant statistical improvements on the results obtained by the BEM: RMSFE=0.8% per year for the GDP deflator and ~1.2% per year for CPI. For a two year horizon, the VECMs improve RMSFEs by a factor of 2, with the smallest RMSFE=0.5% per year for the GDP deflator. This study has validated the reliability and accuracy of the linear and lagged relationships between inflation, unemployment, and the change in labour force between 1970 and 2012.
    Keywords: monetary policy, inflation, unemployment, labour force, Phillips curve, measurement error, forecasting, cointegration, France
    JEL: C32 E31 E6 J21 J64
    Date: 2013–09–27
  31. By: Samarina, Anna; Sturm, Jan-Egbert (Groningen University)
    Abstract: This paper examines how the analysis of inflation targeting (IT) adoption is affected by the choice of the analyzed period. We test whether country characteristics influence the decision to apply IT differently before and after its adoption, using panel probit models for 60 countries over the period 1985-2008. Our findings suggest that there is a structural change after IT adoption, as the factors leading to adoption of IT differ significantly from those leading to its continuation. Thus, including the post-adoption period when estimating the factors of IT adoption leads to biased results when interested in the question as of why countries adopt IT.
    Date: 2013

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