nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒11‒16
thirty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Bernd Hayo; Edith Neuenkirch
  2. Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication By Michael J. Lamla; Lena Dräger; Damjan Pfajfar
  3. Non-Standard Monetary Policy Measures – Magic Wand or Tiger by the Tail? By Ansgar Belke
  4. Surprising Similarities: Recent Monetary Regimes of Small Economies By Andrew K. Rose
  5. Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies. By Marc Pourroy
  6. Optimal State-dependent Monetary Policy Rules By Christian Baker; Richard W. Evans
  7. Determinacy and Indeterminacy in Monetary Policy Rules with Money By John Keating; Andrew Lee Smith
  8. Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model By Jakub Mateju
  9. The Phillips Curve and a Micro-foundation of Trend Inflation By Harashima, Taiji
  10. Modern Currency Wars : The United States versus Japan By Ronald McKinnon; Zhao Liu
  11. Does Monetary Policy Respond to Commodity Price Shocks? By Ano Sujithan, Kuhanathan; Koliai, Lyes; Avouyi-Dovi, Sanvi
  12. On the use of monetary and macroprudential policies for financial stability in emerging markets By F. Gulcin Ozkan; D. Filiz Unsal
  13. Forecasting the NOK/USD Exchange Rate with Machine Learning Techniques By Papadimitriou, Theophilos; Gogas, Periklis; Plakandaras, Vasilios
  14. Global effects of unorthodox monetary policies By Desmond Lachman
  15. "Modern Money Theory 101: A Reply to Critics" By Eric Tymoigne; L. Randall Wray
  16. Links between the trust in the ECB and its interest rate policy By Maciej Albinowski; Piotr Ciżkowicz; Andrzej Rzońca
  17. Macroprudential policy instruments and economic imbalances in the euro area By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  18. Monetary policy, bank capital and credit supply: a role for discouraged and informally rejected firms By Popov, Alexander
  19. Central bank refinancing, interbank markets and the hypothesis of liquidity hoarding: evidence from a euro-area banking system By Affinito, Massimiliano
  20. Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available By Wray , L. Randall; Fernandez Lommen, Yolanda
  21. Monetary Union, Banks and Financial Integration By Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
  22. Is quantity theory still alive? By Teles, Pedro; Uhlig, Harald
  23. Goodbye Inflation Targeting, Hello Fear of Floating? Latin America after the Global Financial Crisis* By Reinhart, Carmen
  24. How to defi ne the Consumer Perceived Price Index? The case of Poland By Aleksandra Hałka; Tomasz Łyziak
  25. Repo Runs By Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
  26. Finding a Connection Between Exchange Rates and Fundamentals, How Should We Model Revisions to Forecasting Strategies? By Peter H. Sullivan
  27. Monetary plurality in economic theory By Ould Ahmed, Pepita; Marques-Pereira, Jaime; Le Maux, Laurent; Desmedt, Ludovic; Blanc, Jerome; Théret, Bruno
  28. Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute By Claudia M. Buch; T. Körner; B. Weigert
  29. The Delayed Effects of Monetary Shocks in a Two-sector New Keynesian Model By Munechika Katayama; Kwang Hwan Kim
  30. Central Banking after the Crisis: Brave New World or Back to the Future?. By Emmanuel Carré; Jézabel Couppey-Soubeyran; Dominique Plihon; Marc Pourroy
  31. The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited By Lang, Michael
  32. Capital market inflation in emerging markets: The case of Brazil and South Korea By Bonizzi, Bruno

  1. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about mone-tary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens’ trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We con-clude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    Keywords: ECB, Economic knowledge, German public attitudes, Institutional trust
    JEL: D83 E52 E58
    Date: 2013
  2. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Lena Dräger (University of Hamburg, Germany); Damjan Pfajfar (University of Tilburg, Netherlands)
    Abstract: Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts. We check whether their expectations are in line with the Phillips Curve, the Taylor Rule and the Income Fisher Equation. We observe that 50% of the surveyed population have expectations consistent with the Income Fisher equation and the Taylor Rule, while 25% are in line with the Phillips Curve. However, only 6% of consumers form theory-consistent expectations with respect to all three concepts. For the Taylor Rule and the Phillips curve we observe a strong cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that the likelihood of having theory-consistent expectations with respect to the Phillips curve and the Taylor rule falls during recessions and with inflation higher than 2%. Moreover, consistency with respect to all three concepts is affected by changes in the communication policy of the Fed, where the strongest positive effect on consistency comes from the introduction of the official inflation target. Finally, we show that consumers with theory-consistent expectations have lower absolute inflation forecast errors and are closer to professionals' inflation forecasts.
    Keywords: Macroeconomic expectations, microdata, macroeconomic literacy, central bank communication, consumer forecast accuracy
    JEL: C25 D84 E31
    Date: 2013–11
  3. By: Ansgar Belke
    Abstract: This paper briefly assesses the effectiveness of the different non-standard monetary policy tools in the Euro Area. Its main focus is on the Outright Monetary Transactions (OMT) Programme which is praised by some as the ECB’s “magic wand”. Moreover, it discloses further possible unintended consequences of these measures in the current context of weak economic activity and subdued growth going forward. For this purpose, it investigates specific risks for price stability and asset price developments in the first main part of the paper. It is not a too remote issue that the Fed does have a “tiger by the tail”, as Hayek (2009) expressed it, i.e. that the bank will finally have to accept either a recession or inflation and that there is no choice in between. Furthermore, it checks on whether the OMT programme really does not impose costs onto the taxpayer. Finally, it comes up with some policy implications from differences in money and credit growth in different individual countries of the Euro Area. The second main part of the paper assesses which other tools the ECB could use in order to stimulate the economy in the Euro Area. It does so by delivering details on whether and how the effectiveness of the ECB’s policies can be improved through more transparency and “forward guidance”.
    Keywords: Central bank transparency; euro area; forward guidance; non-standard monetary policies; outright monetary transactions, quantitative easing; segmentation of credit markets
    JEL: E52 E58 F32
    Date: 2013–10
  4. By: Andrew K. Rose
    Abstract: In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath.
    JEL: E58 F33
    Date: 2013–11
  5. By: Marc Pourroy (Centre d'Economie de la Sorbonne)
    Abstract: Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of “indicator countries”, providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies.
    Keywords: Inflation-targeting, foreign exchange interventions, Gaussian mixture model.
    JEL: E31 E40 E58 F31
    Date: 2013–10
  6. By: Christian Baker (Department of Economics, Brigham Young University); Richard W. Evans (Department of Economics, Brigham Young University)
    Abstract: This paper defines a monetary equilibrium and computes an optimal nonlinear, full-information, state-dependent monetary policy rule to which the monetary authority commits at the beginning of time. This type of optimal monetary policy represents a combination of the flexibility of discretion with the time consistency of commitment. The economic environment is a closed-economy general equilibrium model of incomplete markets with monopolistic competition, producer price stickiness, and a transaction cost motive for holding money. We prove existence and uniqueness of the competitive equilibrium given a monetary policy rule and prove existence of the optimal rule. We show that the optimal state-dependent monetary policy rule satisfies the standard results of the discretionary policy literature in that it keeps inflation and nominal interest rates low (Friedman rule) and reduces inefficient variance in prices. Lastly, we compare the optimal monetary policy rule to a limited-information Taylor rule. We find that the Taylor rule, based on observable macroeconomic variables, is able to closely approximate the economic outcomes of the model under the optimal full-information rule.
    Keywords: Optimal monetary policy, Money supply rules, Time consistency, Nonlinear solution methods
    JEL: E52 E42 E31 C68
    Date: 2013–10
  7. By: John Keating (Department of Economics, The University of Kansas); Andrew Lee Smith (Department of Economics, The University of Kansas)
    Abstract: Does Friedman’s k-percent rule guarantee a unique equilibrium outcome? We show analytically the answer to this question is sensitive to the method of aggregation. Focusing on broad measures of money, we show that fixing the growth rate of the true monetary aggregate will generate a unique rational expectations equilibrium. Since the true monetary aggregate is parametric, we show this determinacy result extends to the non-parametric Divisia monetary aggregate growth rule. Interestingly, Friedman’s proposal to fix the growth rate of the broad simple-sum monetary aggregate is shown to result in indeterminacy stemming from this aggregate’s inaccuracy in tracking the true monetary aggregate. Determinacy regions of interest rate rules reacting to the growth rate of monetary aggregates are also discussed and a novel Taylor principle is shown to hold for such rules when the monetary aggregate is accurately measured. All of these results are presented in the framework of the canonical New-Keynesian model.
    Keywords: Friedman’s k-percent Rule, Determinacy, Monetary Aggregates, Taylor Rules
    JEL: C43 E31 E40 E44 E51 E52 E58 E60
    Date: 2013–10
  8. By: Jakub Mateju (CERGE-EI, Prague and Czech National Bank)
    Abstract: This paper analyzes both the cross-sectional and time variation in aggregate monetary policy transmission from nominal short term interest rates to price level. Using Bayesian TVP-VARs where the structural interest rate shocks are identi_ed by sign restrictions, we show that monetary policy transmission became stronger over the last decades. This applies both to developed and emerging economies. Monetary policy sacrifice ratios (the output costs of disination induced by monetary policy tightening) gradually decreased from their peak in the 1980's. Exploring the cross-country and time variation in panel regressions, we show that when a country adopted ination targeting regime, monetary transmission became stronger (by about 0.8 p.p. of price level response to 1 p.p. shock to the policy rate) and sacrifice ratios decreased. In periods of banking crises, the transmission from monetary policy interest rate shocks to prices is weaker (by about 1 p.p. of price level response to a 1 p.p. shock to the policy rate) and the related costs in output are higher. Further, countries with higher domestic credit to GDP have stronger transmission while countries with higher foreign debt seem to be less inuenced by domestic monetary policy.
    Keywords: monetary policy transmission, TVP-VAR, sign-restrictions
    JEL: E52 C54
    Date: 2013–11
  9. By: Harashima, Taiji
    Abstract: The hybrid New Keynesian Phillips curve has been criticized for lacking a micro-foundation. In this paper, an alternative purely forward-looking model of the Phillips curve is constructed on the basis of a micro-foundation of trend inflation. In addition, another source of output gaps other than frictions―a Nash equilibrium of a Pareto inefficient path―is considered. The model indicates that the role of frictions has been overestimated and that frictions are less important than previously have been thought. The conventional monetary policy of utilizing frictions cannot necessarily stabilize inflation. In contrast, the monetary policy of controlling the government’s preference is very effective. A problem is that the effects of both types of monetary policy are not distinguishable.
    Keywords: Trend inflation; inflation persistence; central bank independence; The New Keynesian Phillips curve; the fiscal theory of the price level
    JEL: E31 E58 E63
    Date: 2013–11–08
  10. By: Ronald McKinnon (Asian Development Bank Institute (ADBI)); Zhao Liu
    Abstract: In the currency wars of the 1920s and 1930s, various nations fell off the gold standard and in so doing experienced deep devaluations. But under the postwar dollar standard, the central position of the US was key to maintaining the peace, until the Bretton Woods system of fixed dollar exchange parities fell apart after the so-called “Nixon Shock†of 1971. Now, without much fear of retaliation, the US can initiate more limited currency warfare—as with American “Japan bashing†from the late 1970s to mid-1990s to appreciate the yen, or “China bashing†since 2002 to appreciate the renminbi. Japan succumbed to this bashing, and the yen appreciated too much in 1985, with the result that Japan fell into a zero-interest liquidity trap and economic stagnation for almost two decades. However, in 2013, through massive quantitative easing by the Bank of Japan (BOJ), the yen depreciated about 25% against the dollar, stoking fears of a return to Japan bashing by the US. However, this sharp depreciation simply restored the purchasing power parity of the yen with the dollar so it should even out in the long run. In the short run, we show that yen depreciation could adversely affect the smaller East Asian economies. Since 2008, quantitative easing by the BOJ has been similar to that carried out by the US Federal Reserve, the Bank of England, and the European Central Bank. So the BOJ can only be faulted as a currency belligerent if there is a further significant yen depreciation. Led by the US, now all mature industrial countries are addicted to near-zero interest liquidity traps in both the short and long terms. These ultra low interest rates are causing lasting damage to the countries’ financial systems, and to those of emerging markets, which naturally have higher interest rates. But exiting from the trap creates a risk of chaos in long-term bond markets and is proving surprisingly difficult.
    Keywords: Currency wars, US, Japan, the Bretton Woods system, dollar standard, a zero-interest liquidity trap, ultra low interest rate
    JEL: F31 F32
    Date: 2013–10
  11. By: Ano Sujithan, Kuhanathan; Koliai, Lyes; Avouyi-Dovi, Sanvi
    Abstract: Commodity prices, especially oil prices, peaked in the aftermath of the financial crisis of 2007 and they have remained highly volatile. All things being equal, the increase in commodity prices may induce a similar tendency of inflation and hence become a monetary policy issue. However, the impact of the changes of commodity prices on inflation is not clear. In this paper, by using Markov-switching models we show that there is an implicit impact of commodity markets on short-term interest rates for a set of heterogeneous countries (the U.S., the Euro area, Brazil, India, Russia and South Africa) over the period from January 1999 to August 2012. Besides, the VAR models reveal that short-term interest rates respond to commodity volatility shocks whatever the country. Moreover, the linkage between commodity markets and monetary policy instruments is stronger since the recent financial crisis.
    Keywords: Markov - switching; Commodity prices; VAR models; Monetary Policy;
    JEL: E43 E52 E58
    Date: 2013–06
  12. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: This paper explores optimal monetary and macroprudential policy rules in an open-economy with significant exposure to external borrowing in the face of a sudden reversal of capital inflows. We consider optimal Taylor-type interest rate rules, where the policy rate is set as a function of inflation, output, and credit growth; and a macroprudential instrument is set as a function of credit growth. We have two key results. First, we find that, in the presence of macroprudential measures, there are no significant welfare gains from monetary policy also reacting to credit growth above and beyond its response to inflation. Thus, from a welfare point of view it is better to delegate ’lean against the wind’ squarely to macroprudential policy. Second, the source of borrowing (domestic versus foreign) plays a crucial role in the choice of policy instrument in responding to credit market developments. When the source of borrowing is external, monetary policy responses required to stabilize financial markets would be unduly large. In contrast, macroprudential instrument can directly influence the cost of credit and ease the fiancial markets. Therefore, emerging economies where foreign borrowing is typically sizeable are likely to find macroprudential measures particularly effective in promoting financial stability.
    Keywords: Financial instability; monetary policy; macroprudential measures; emerging markets; and financial crises
    JEL: E5 F3 F4
    Date: 2013–11
  13. By: Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Plakandaras, Vasilios (Democritus University of Thrace, Department of Economics)
    Abstract: In this paper, we approximate the empirical findings of Papadamou and Markopoulos (2012) on the NOK/USD exchange rate under a Machine Learning (ML) framework. By applying Support Vector Regression (SVR) on a general monetary exchange rate model and a Dynamic Evolving Neuro-Fuzzy Inference System (DENFIS) to extract model structure, we test for the validity of popular monetary exchange rate models. We reach to mixed results since the coefficient sign of interest rate differential is in favor only with the model proposed by Bilson (1978), while the inflation rate differential coefficient sign is approximated by the model of Frankel (1979). By adopting various inflation expectation estimates, our SVR model fits actual data with a small Mean Absolute Percentage Error when an autoregressive approach excluding energy prices is adopted for inflation expectation. Overall, our empirical findings conclude that for a small open petroleum producing country such as Norway, fundamentals possess significant forecasting ability when used in exchange rate forecasting.
    Keywords: International Financial Markets; Foreign Exchange; Support Vector Regression; Monetary exchange rate models
    JEL: F30 F31 G15
    Date: 2013–11–07
  14. By: Desmond Lachman (American Enterprise Institute)
    Abstract: In the aftermath of the Great Recession, major central banks have scrambled to support economic recovery and to avoid deflation through highly accommodative and unorthodox monetary policy stances. Although relatively successful in the short term, these policies have given rise to incipient asset- and credit-market bubbles and to spillover effects on the emerging-market economies.
    Keywords: Monetary policy,Global economic outlook,central banks,AEI Economic Perspectives
    JEL: A E
    Date: 2013–11
  15. By: Eric Tymoigne; L. Randall Wray
    Abstract: One of the main contributions of Modern Money Theory (MMT) has been to explain why monetarily sovereign governments have a very flexible policy space that is unencumbered by hard financial constraints. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of many nations, MMT has provided institutional and theoretical insights about the inner workings of economies with monetarily sovereign and nonsovereign governments. MMT has also provided policy insights with respect to financial stability, price stability, and full employment. As one may expect, several authors have been quite critical of MMT. Critiques of MMT can be grouped into five categories: views about the origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT. This paper addresses the critiques raised using the circuit approach and national accounting identities, and by progressively adding additional economic sectors.
    Keywords: Modern Money Theory; Price Stability; Full Employment; Financial Stability; Money
    JEL: B5 E10 E11 E12 E31 E42 E58 E6 F41
    Date: 2013–11
  16. By: Maciej Albinowski (Warsaw School of Economics); Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics and Monetary Policy Council in Narodowy)
    Abstract: We contribute to the new, albeit fast-growing empirical literature on the determinants of trust in central banks. Like in most other studies we use panel data models based on the Eurobarometer survey on trust in the European Central Bank. Firstly, we confirm the main conclusion from previous studies that the trust in the ECB has suffered from the crisis’ outburst. Moreover, households perceive the ECB’s responsibility for the occurrence of the crisis to go beyond the responsibility of other institutions. This finding casts some doubt on the central bank’s ability to manage expectations in a country having been hit by a severe negative demand shock, while this ability is precondition of the central banks’ power to boost aggregate demand when its interest rates are at the zero lower bound. Secondly (and most importantly), in addition to previous studies, we examine the links between the trust in the ECB and its policy. Our main result is that when households have pessimistic expectations, aggressive cuts in interest rates have an adverse effect on their trust in central bank. This result is in accordance with the ‘lack-of-confidence shock’ hypothesis developed by Schmitt-Grohé and Uribe (2012) and go against the ‘fundamental shock’ hypothesis which would imply positive effects of aggressive cuts for trust in the ECB. These findings are robust to changes in the estimation method, the definition of the lack of confidence shock, control variables and countries under consideration. We also show that it cannot be easily rejected as spurious.
    Keywords: trust in central banks, zero lower bound, lack-of-confidence shock, Eurobarometer, panel data
    JEL: C23 E58 H12
    Date: 2013
  17. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: Since its creation the euro area suffered from imbalances between its core and peripheral members. This paper checks whether macroprudential policy tools - applied in a countercyclical fashion as known from the DSGE literature to the peripheral countries - could contribute to providing more macroeconomic stability in this region. To this end we build a two-economy macrofinancial DSGE model and simulate the effects of macroprudential tools under the assumption of asymmetric shocks hitting the core and the periphery. We find that a countercyclical application of macroprudential tools is able to partly make up for the loss of independent monetary policy in the periphery. Moreover, LTV policy seems more efficient than regulating capital adequacy ratios. However, for the policies to be effective, they must be set individually for each region. Area-wide policy is almost ineffective in this respect. JEL Classification: E32, E44, E58
    Keywords: DSGE with banking sector, euro-area imbalances, Macroprudential policy
    Date: 2013–09
  18. By: Popov, Alexander
    Abstract: This paper conducts the first empirical study of the bank balance sheet channel using data on discouraged and informally rejected firms in addition to information on the formal loan granting process. I take advantage of a unique survey data on the credit experience of firms in 8 economies that use the euro or are pegged to it over 2004-2007, and analyze the effect of monetary policy and the business cycle on bank lending and risk-taking. Identification rests on exploiting 1) the exogeneity of monetary policy to local business cycles, and 2) firm-level and bank-level data to separate the supply of credit from changes in the level and composition of credit demand. Consistent with previous studies, I find that lax monetary conditions increase bank credit in general and bank credit to ex-ante risky firms in particular, especially for banks with lower capital ratios. Importantly, I find that the results are considerably stronger when data on informal credit constraints are incorporated. JEL Classification: E32, E51, E52, F34, G21
    Keywords: bank capital, bank lending channel, business cycle, cross-border lending, monetary policy
    Date: 2013–09
  19. By: Affinito, Massimiliano
    Abstract: This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à-vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market. JEL Classification: G21, E52, C30
    Keywords: central bank refinancing, financial crisis, Interbank Market, liquidity
    Date: 2013–11
  20. By: Wray , L. Randall (Asian Development Bank); Fernandez Lommen, Yolanda (Asian Development Bank)
    Abstract: This paper examines the fiscal and monetary policy options available to the People’s Republic of China (PRC) as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance should be gradually relaxed so that local government and corporate budgets can be tightened. By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation.
    Keywords: fiscal and monetary policy options; sectoral balances approach; sovereign currency approach; middle-income trap; modern money theory
    JEL: E60 E61 E62 O23
    Date: 2013–10–15
  21. By: Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent
    Abstract: This paper analyzes a two-country model of money and banks to examine the conditions under which the creation of a monetary union between two countries is optimal. Is is shown that if agents resort to banks to adjust their monetary holdings through borrowing and if nobody can force them to repay their debts, it may be optimal for both countries to set up two different currencies, along with strictly positive conversion costs. A necessary condition for this is that credit market integration is limited. This arises even though both countries are perfectly identical.
    Keywords: Monetary union; credit; default; limited commitment;
    JEL: E42 G21
    Date: 2013–06
  22. By: Teles, Pedro; Uhlig, Harald
    Abstract: This paper investigates whether the quantity theory of money is still alive. We demonstrate three insights. First, for countries with low inflation, the raw relationship between average inflation and the growth rate of money is tenuous at best. Second, the fit markedly improves, when correcting for variation in output growth and the opportunity cost of money, using elasticities implied by theories of Baumol-Tobin and Miller-Orr. Finally, the sample after 1990 shows considerably less inflation variability, worsening the fit of a one-for-one relationship between money growth and inflation, and generates a fairly low elasticity of money demand. JEL Classification: E31, E41, E42, E50
    Keywords: inflation targeting, money demand, money demand elasticity, quantity theory
    Date: 2013–11
  23. By: Reinhart, Carmen
    Abstract: This paper focuses on some of the macroeconomic risks that lie ahead for Latin America. The discussion is informed by my work on crises and capital flows and their macroeconomic consequences. The trends and initial conditions that allowed the region to weather the global economic storm of 2008-2009 are discussed, as is the subsequent reversal of some of those benign trends. I review the historical patterns connecting large capital inflow surges, or “capital flow bonanzas,” with the likelihood of a variety of crises—banking, currency, external default and inflation. For Latin America, in particular, large capital flow bonanzas have seldom ended well. The implications for inflation of importing (via less than fully flexible exchange rates) the expansionary policy of the “North” are discussed.
    Keywords: capital inflows, appreciation, currency crises, banking crises, inflation, debt
    JEL: E3 E31 F3 F30 G01 N16 N26
    Date: 2013–04
  24. By: Aleksandra Hałka (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski)
    Abstract: Inflation perceived by consumers may differ from official statistics particularly due to different baskets of goods and services lay people and statisticians consider and by consumer loss aversion to price increases. Such effects, as suggested by the Prospect Theory, are confirmed in many empirical studies, showing that consumers are substantially influenced by prices of frequent purchases and that price increases are perceived more strongly than price decreases. Following those observations, particularly useful in interpreting a jump of inflation perception in some of the EMU economies after the euro introduction, an alternative price index, i.e. the Index of Perceived Inflation, was proposed by Brachinger (2006) and Brachinger (2008). The role of price changes of frequently bought goods and services in determining consumer opinions on price changes was also significant in Poland, especially after its accession to the EU. To assess whether this effect is of a systematic nature, in this paper we develop different indices of price changes of frequently bought goods and services in Poland, including the Index of Perceived Inflation. Then we evaluate these indices vs. CPI inflation in terms of their impact on consumer inflation perception, as proxied with survey data. The results suggest that Polish consumers observe a relatively wide range of goods and services and that both factors suggested by the Prospect Theory seem to influence their opinions on evolution of prices in the past. Having the measure of perceived inflation – i.e. the Consumer Perceived Price Index (CPPI) – that seems more adequate than current CPI inflation on the one hand and survey-based measures of perceived inflation scaled with respect to the trend of CPI inflation on the other hand, we use it as a scaling factor to derive a probability measure of consumer inflation expectations in Poland. Then we compare forecasting accuracy of this measure with respective results based on the measure of consumer inflation expectations quantified in a standard manner.
    Keywords: Inflation, inflation perceptions, inflation expectations, survey, consumers.
    JEL: D12 D84 E31
    Date: 2013
  25. By: Martin, Antoine; Skeie, David; von Thadden, Ernst-Ludwig
    Abstract: The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. The present paper develops a dynamic equilibrium model and analyzes under what conditions such instability can be a consequence of market-wide changes in expectations. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.
    Keywords: Investment banking; repurchase agreements; tri-party repo; bilateral repo; money market mutual funds; asset-backed commercial paper; bank runs.
    JEL: E44 E58 G24
    Date: 2013–11
  26. By: Peter H. Sullivan
    Abstract: In this paper I compare the performance of three approaches to modeling temporal instability of the relationship between the euro-dollar exchange rate and macroeconomic fundamentals. Each of the three approaches considered -- adaptive learning, Markov-switching and Imperfect Knowledge Economics (IKE) -- recognize that market participants revise forecasting strategies, at least intermittently, and, as a result, the relationship between the exchange rate and fundamentals is temporally unstable. The central question in the literature addressed by this paper is which of the three approaches to modeling revisions of market participants' forecasting strategies is most empirically relevant for understanding the connection between currency fluctuations and fundamentals? One of the objectives of comparing the out-of-sample forecasting of the three approaches to change is to test to what extent growth-of-knowledge considerations, as proposed by Frydman and Goldberg (2007, 2011), are empirically relevant for our understanding of currency fluctuations. I find that only the IKE model, developed from Sullivan (2013) is able to significantly outperform the random walk benchmark, suggesting that different sets of fundamentals matter during different time periods in ways that do not conform to an overarching probability law.
    JEL: F31 C58 E44 E47
    Date: 2013–11–10
  27. By: Ould Ahmed, Pepita; Marques-Pereira, Jaime; Le Maux, Laurent; Desmedt, Ludovic; Blanc, Jerome; Théret, Bruno
    Abstract: The objective of this article is to identify the monetary plurality in economic theory. We will try to throw light on the way in which theories are attracted towards both unicity and plurality, and more specifically by unification and diversification of money. It should also be noted, in this respect, that the economics of money has undergone considerable development since the 1970s. A survey of the diverse theories, whether mainstream or not, static or dynamic, holistic or individualistic, will reveal the surprising amount of attention devoted to the problem of monetary unicity and/or plurality. We base our presentation on two lines of thought: -The first of these lines concerns a situation of general equilibrium, as opposed to theories giving place to the forms of disequilibrium and regime-crises. The general equilibrium theories usually see money as a financial asset and assume that it is neutral at least over the long term; theories of the second type, on the contrary, see money as a necessary condition for the development of trade, acknowledging that it influences the system of relative prices and consequently the dynamics of production. Thus money is presumed to be totally neutral (“super-neutral”) in the New Classical Economics in the manner of Lucas (1972, 1995) and in the New Monetary Economics initiated by Black (1970) and Fama (1980). On the contrary, it is not neutral according to neo-Mengerian approaches and to those that are neo-Marxist, Chartalist and post-Keynesian. -The second line of thinking revolves round the relationship between economic theories and the question of the unicity or plurality of money as a norm to be established. This relationship is often linked to the role assigned by the various approaches to finance. For example, the macroeconomics of the New Classical Economics school, in dealing with monetary “friction” within general equilibrium theory, maintains an approach that is largely “unitary”, seeking to integrate it into its framework. In this respect it opposes the financial views of the New Monetary Economics, that are based on a pluralist notion of money, aiming moreover to ensure that it could be dispensed it with the world of reality. Similarly, neo-Mengerian economists, who are pluralist and see financing as the heart of the proper organisation of money, are opposed to the unitarian approaches of Marxist, Chartalist and post-Keynesian economists. Our survey of contemporary theories will give rise to a typology of the forms of monetary unicity and plurality, framing a new reading of monetary theories.
    Keywords: École néo-classique d'économie politique; Économie politique; Économie monétaire; Monnaie;
    JEL: G0
    Date: 2013–05
  28. By: Claudia M. Buch; T. Körner; B. Weigert
    Abstract: The agreement to establish a Single Supervisory Mechanism in Europe is a major step towards a Banking Union, consisting of centralized powers for the supervision of banks, the restructuring and resolution of distressed banks, and a common deposit insurance system. In this paper, we argue that the Banking Union is a necessary complement to the common currency and the Internal Market for capital. However, due care needs to be taken that steps towards a Banking Union are taken in the right sequence and that liability and control remain at the same level throughout. The following elements are important. First, establishing a Single Supervisory Mechanism under the roof of the ECB and within the framework of the current EU treaties does not ensure a sufficient degree of independence of supervision and monetary policy. Second, a European institution for the restructuring and resolution of banks should be established and equipped with sufficient powers. Third, a fiscal backstop for bank restructuring is needed. The ESM can play a role but additional fiscal burden sharing agreements are needed. Direct recapitalization of banks through the ESM should not be possible until legacy assets on banks’ balance sheets have been cleaned up. Fourth, introducing European-wide deposit insurance in the current situation would entail the mutualisation of legacy assets, thus contributing to moral hazard.
    Keywords: banking union, Europe, single supervisory mechanism, risk sharing
    JEL: E02 E42 G18
    Date: 2013–10
  29. By: Munechika Katayama; Kwang Hwan Kim
    Abstract: This paper studies a two-sector New Keynesian model that captures the hump-shaped response of non-durable and durable spending to a monetary shock when non-durable prices are sticky and durable goods are flexibly priced. Based on the estimated parameters, we show that habit formation and investment adjustment costs are not sucient to generate the gradual response of non-durable and durable spending in this setup. We find that nominal wage rigidity and non-separable preferences between consumption and labor are also necessary to delay the peak response of non-durable and durable spending in the estimated two-sector New Keynesian model.
    Keywords: Sticky Prices, Sticky Wages, Non-Separable Preferences, Two-sector New Keynesian Model
    JEL: E21 E30 E31 E32
  30. By: Emmanuel Carré (Centre d'Economie de Paris Nord); Jézabel Couppey-Soubeyran (Centre d'Economie de la Sorbonne); Dominique Plihon (Centre d'Economie de Paris Nord); Marc Pourroy (Centre d'Economie de la Sorbonne)
    Abstract: This paper provides a snapshot of the current state of central banking doctrine in the aftermath of the crisis, using data from a questionnaire produced in 2011 and sent to central bankers (from 13 countries plus the euro zone) and economists (31) for a report by the French Council of Economic Analysis to the Prime Minister. The results of our analysis of the replies to the questionnaire are twofold. First, we show that the financial crisis has led to some amendments of pre-crisis central banking. We highlight that respondents to the questionnaire agree on the general principle of a ‘broader’ view of central banking extended to financial stability. Nevertheless, central bankers and economists diverge or give inconsistent answers about the details of implementation of this ‘broader’ view. Therefore, the devil is once again in the details. We point out that because of central bankers' conservatism, a return to the status quo cannot be excluded.
    Keywords: Central banking, financial crisis, financial stability, macroprudential, financial supervision architecture.
    JEL: E44 E52 G01 G18
    Date: 2013–10
  31. By: Lang, Michael
    Abstract: This paper builds upon the model of Kaminsky and Reinhart (1999) and extends it to triplecrises. It applies a new visualisation approach combining elements of an event study analysis and a fan chart technique. This approach illustrates the deviation of fundamentals in the runup to balance-of-payments problems. The results suggest that both systemic banking crises and deteriorating government finances are highly significant leading indicators. Taking these indicators into account helps build a new early warning system for currency crises. The results are highly significant and robust. The out-of-sample forecasts demonstrate the strong predictive power of the model. --
    Keywords: currency crisis,financial sector vulnerability,early warning system
    JEL: F30 F31 F34 F41 G01
    Date: 2013
  32. By: Bonizzi, Bruno
    Abstract: This paper aims to investigate the dynamics of capital markets in emerging markets in a period of financial integration. It takes the case of Brazil and South Korea, two key emerging markets in the global economy, to assess the relationship between capital flows and equity prices. This is analysed through Jan Toporowski’s theory of “capital market inflation”, which explains the movements of equity prices in relation to the inflows of funds into the capital market. The main argument put forward is that the foreign capital inflows into the emerging equity markets have substantially concurred to create the excess liquidity that gives rise to a process of capital market inflation. This contributes both to extend Toporowski’s theory to the context of emerging financially open countries, and to give a new perspective to the debates over financial globalisation by proposing the theory of capital market inflation as a framework to understand the mechanics of capital flows to emerging markets. The empirical evidence available from Brazil and South Korea suggests that this is a consistent and instructive framework of analysis.
    Keywords: Finance, Capital Market, Asset Price, Capital Gain, Globalisation
    JEL: E12 O16
    Date: 2013–09

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