nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒12‒20
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Do Central Banks Respond to Exchange Rate Movements? A Markow-Switching Structural Investigation By Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
  2. The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases By Vincent Sterk; Silvana Tenreyro
  3. Friedman and Divisia Monetary Measures By william, barnett
  4. Money Targeting in a Modern Forecasting and Policy Analysis System: an Application to Kenya By Michal Andrle; Andrew Berg; Enrico Berkes; Rafael A Portillo; Jan Vlcek; R. Armando Morales
  5. Foreign Exchange Interventions in Peru By Rossini, Renzo; Quispe, Zenón; Serrano, Enrique
  6. Current account adjustment in EU countries: Does euro-area membership make a difference? By Herrmann, Sabine; Jochem, Axel
  7. REER Imbalances and Macroeconomic Adjustments in the Proposed West African Monetary Union By Asongu Simplice
  8. Measuring Inflation Persistence in Brazil Using a Multivariate Model By Vicente da Gama Machado; Marcelo Savino Portugal
  9. Exchange rate dynamics revisited By Jorge Braga de Macedo; Urho Lempinen
  10. How Macroeconomic Imbalances Interact? Evidence from a Panel VAR Analysis By Blaise Gnimassoun; Valérie Mignon
  11. Supply tightening or lack of demand? An analysis of credit developments during the Lehman Brothers and the sovereign debt crises By Paolo Del Giovane; Andrea Nobili; Federico Maria Signoretti
  12. Real financial market exchange rates and capital flows By Gelman, Maria; Jochem, Axel; Reitz, Stefan
  13. Model of currency integration involving the Republic of Belarus (in Russian) By Anastasiya Luzgina
  14. Rethinking What Survey Data has to Say about the Role of Risk and Irrationality in Currency Markets By Josh Stillwagon
  15. Mitgliedschaft der mittel- und osteuropäischen Länder in der Währungsunion: Risiken und Chancen By Nagy, Katalin; Ferkelt, Balázs
  16. Sovereign risk, monetary policy and fiscal multipliers: a structural model-based assessment By Alberto Locarno; Alessandro Notarpietro; Massimiliano Pisani
  17. Aggregate Uncertainty and the Supply of Credit By Fabian Valencia
  18. Prospects of economic and monetary integration of the CIS Member States By Anastasiya Luzgina

  1. By: Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
    Abstract: Do central banks respond to exchange rate movements? According to Lubik and Schorfheide (2007) who estimate structural general equilibrium models with monetary policy rules, the answer is "Yes, some do". However, their analysis is based on a sample with multiple regime changes, which may bias the results. We revisit their original question using a Markov switching set up which explicitly al- lows for parameter changes. Fitting the data from four small open economies to the model, we find that the size of policy responses, and the volatility of struc- tural shocks, have not stayed constant during the sample period (1982-2011). In particular, central banks in Sweden and the UK switched from a high response to the exchange rate in the 1980s and early 1990s, to a low response some time after in flation targeting was implemented. Canada also observed a regime change, but the decline in the exchange rate response was small relative to the increase in the response to in flation and output. Norway, on the other hand, did not observe a shift in the policy response over time, as the central bank has stayed in a regime of high exchange rate response prior and post implementing in flation targeting.
    Keywords: Monetary policy, exchange rates, inflation targeting, markov switching, small open economy
    JEL: C68 E52 F41
    Date: 2013–12
  2. By: Vincent Sterk; Silvana Tenreyro
    Abstract: A large literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to frontload their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    JEL: E1 E31 E32 E52 E58
    Date: 2013–12
  3. By: william, barnett
    Abstract: This paper explores the relationship between Milton Friedman’s work and the work on Divisia monetary aggregation, originated by William A. Barnett. The paradoxes associated with Milton Friedman’s work are largely resolved by replacing the official simple-sum monetary aggregates with monetary aggregates consistent with economic index number theory, such as Divisia monetary aggregates. Demand function stability becomes no more of a problem for money than for any other good or service. Money becomes relevant to monetary policy in all macroeconomic traditions, including New Keynesian economics, real business cycle theory, and monetarist economomics. Research and data on Divisia monetary aggregates are available for over 40 countries throughout the world from the online library within the Center for Financial Stability’s (CFS) program, Advances in Monetary and Financial Measurement. This paper supports adopting the standards of monetary data competency advocated by the CFS and the International Monetary Fund (2008, pp. 183-184).
    Keywords: Divisia monetary aggregates, demand for money, monetarism, index number theory
    JEL: E4 E41 E44 E5 E51 E52 E58 Y1
    Date: 2013–12–16
  4. By: Michal Andrle; Andrew Berg; Enrico Berkes; Rafael A Portillo; Jan Vlcek; R. Armando Morales
    Abstract: We extend the framework in Andrle and others (2013) to incorporate an explicit role for money targets and target misses in the analysis of monetary policy in low-income countries (LICs), with an application to Kenya. We provide a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. Our framework acknowledges that ex-post adherence to targets is in itself an objective of policy in LICs; here we provide a novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc). In the case of Kenya, we find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex-post target adherence, the greater the macroeconomic volatility. Our findings highlight the benefits of a model-based approach to monetary policy analysis in LICs, including in countries with money-targeting frameworks.
    Keywords: Monetary policy;Kenya;Interest rates;Inflation targeting;Monetary aggregates;Demand for money;Low-income developing countries;Economic models;Monetary Policy, Money Targeting, Forecasting, Kenya, Low-Income Countries
    Date: 2013–11–25
  5. By: Rossini, Renzo (Banco Central de Reserva del Perú); Quispe, Zenón (Banco Central de Reserva del Perú); Serrano, Enrique (Banco Central de Reserva del Perú)
    Abstract: The unprecedented monetary expansion implemented by central banks in developed economies during recent years has induced an extraordinary flow of funds to emerging economies and supported high commodity prices. This has created upward pressures on the value of local currencies and a further expansion of available funds and lending. This situation gave rise to concerns about a posible misalignment of the real exchange rate relative to its equilibrium level, especially because it can be deemed a temporary response to the current phase of the cycle in developed economies, but with a potentially lasting negative impact on the tradable sector of the economy. In Peru, the response to this situation has been an intensification of sterilized intervention in the foreign exchange market and the use of reserve requirements on local banks foreign currency liabilities, reinforcing macro-financial stability in an economy with a partially dollarized financial system. Both instruments have contributed significantly to reducing excessive exchange rate volatility, building up an international reserve buffer, and ensuring a normal flow of bank credit.
    Keywords: Monetary policy, central banking, foreign exchange intervention, reserve requirements
    JEL: E52 E58 F31
    Date: 2013–12
  6. By: Herrmann, Sabine; Jochem, Axel
    Abstract: The paper evaluates current account dynamics in countries with different exchange rate regimes within the EU. In this, the empirical analysis explicitly differentiates between countries with a flexible and a fixed exchange rate regime and members of a monetary union. In addition, we model the adjustment process of external disequilibria by referring to the flexibility of exchange rates and interest rates. The sample covers annual data for 27 EU countries from 1994 to 2011. The estimation is based on a simple autoregressive model and comes to the conclusion that current account adjustment is significantly hampered in countries that are members of a monetary union. This holds particularly in comparison with floating exchange rate regimes owing to lower exchange rate flexibility. However, the persistence of current account balances in member countries of a monetary union is also more pronounced than in fixed-rate regimes due to less flexible interest rates as a result of the single monetary policy. --
    Keywords: Balance of Payments,European Monetary Union,Exchange Rate Regime,Current Account Adjustment,Financial Crisis
    JEL: E52 F32 F33 F34
    Date: 2013
  7. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: With the spectre of the Euro crisis hunting embryonic monetary unions, we use a dynamic model of a small open economy to analyze REERs imbalances and examine whether the movements in the aggregate real exchange rates are consistent with the underlying macroeconomic fundamentals in the proposed West African Monetary Union (WAMU). Using both country-oriented and WAMU panel-based specifications, we show that the long-run behavior of the REERs can be explained by fluctuations in the terms of trade, productivity, investment, debt and openness. While there is still significant evidence of cross-country differences in the relationship between underlying macroeconomic fundamentals and corresponding REERs, the embryonic WAMU has a stable error correction mechanism with four of the five cointegration relations having signs that are consistent with the predictions from economic theory. Policy implications are discussed and the conclusions of the analysis are a valuable contribution to the scholarly and policy debate over whether the creation of a sustainable monetary union should precede convergence in macroeconomic fundamentals that determine REER adjustments.
    Keywords: Exchange rate; Macroeconomic impact; Proposed WAMU
    JEL: F31 F33 F42 O55
    Date: 2013–09
  8. By: Vicente da Gama Machado; Marcelo Savino Portugal
    Abstract: We estimate inflation persistence in Brazil in a multivariate framework of unobserved components, accounting for the following sources affecting inflation persistence: Deviations of expectations from the actual policy target; persistence of the factors driving inflation; and the usual intrinsic measure of persistence, evaluated through lagged inflation terms. Data on inflation, output and interest rates are decomposed into unobserved components. To simplify the estimation of a great number of unknown variables, we employ Bayesian analysis. Our results indicate that expectations-based persistence matters considerably for inflation persistence in Brazil
    Date: 2013–11
  9. By: Jorge Braga de Macedo; Urho Lempinen
    Abstract: Many monetary and fiscal policy decision makers and economists hold the view that exchange rates are volatile even though nominal exchange rates vary less than many other financial market prices and yields. This paper seeks an explanation for this puzzle by contrasting exchange rate dynamics in a general equilibrium model to those presented in Dornbusch (1976) and Kouri (1978). Kouri introduced the "acceleration hypothesis'', according to which the rate of currency depreciation is given by the ratio of the current account deficit to the sum of holdings of foreign assets by domestic agents and holdings of domestic assets by foreign agents. In this paper, we derive the "generalized acceleration hypothesis'', assuming price flexibility but imperfect substitutability of assets. A Kouri type gradual adjustment of the current account induces stickiness in portfolio adjustments and exchange rate adjustment. Uncertainty in the model arises from monetary policy and supply side shocks. Due to general equilibrium constraints on wealth and investment behavior, the speed of adjustment is defined by the sum of speculative (expectations sensitive) demand for foreign (domestic) assets by domestic (foreign) agents, deducted by the stock of domestic assets traded out by domestic residents. The adjustment speed is then higher and the market correction mechanism through the current account stronger. The model developed in this paper includes the three key channels of external adjustment of an economy: the capital account or portfolio allocation channel as applied by Kouri (and also by Dornbusch, although under perfect substitutability of assets), the current account channel as applied by Kouri and the asset valuation channel as applied in Gourinchas & Rey (2007). In a linearized testing environment, we study three different cases of exchange rate dynamics. Sampling 10 000 continuous time paths of Monte Carlo simulations for 30 years, and using the 90% variation range as the metric, the Dornbusch formulation yields a 200% variation range about the mean, reduced to 100% in the Kouri case and to 20% in the general equilibrium case.
    JEL: F31 F32
    Date: 2013–12
  10. By: Blaise Gnimassoun; Valérie Mignon
    Abstract: This paper aims at investigating the interactions between three key macroeconomic imbalances, namely Global imbalances,current-account discrepancies (external imbalances), output gaps (internal imbalances), and exchange-rate misalignments. To this end, we rely on the estimation of a panel VAR model for a sample of 22 industrialized countries over the 1980-2011 period. Our findings show that macroeconomic imbalances strongly interact through a causal relationship. We evidence that if current-account disequilibria threaten the stability of the global economy, their origin can be found in internal imbalances and exchange-rate misalignments: positive output-gap shocks as well as currency overvaluation deepen current-account deficits. In addition, while variations in external imbalances mainly result from exchange-rate misalignments in the euro area, they are mostly explained by output gaps for non-eurozone members.
    Keywords: Global imbalances;current account;output gap;exchange-rate misalignments;panel VAR
    JEL: F32 F31 C33
    Date: 2013–12
  11. By: Paolo Del Giovane (Bank of Italy); Andrea Nobili (Bank of Italy); Federico Maria Signoretti (Bank of Italy)
    Abstract: We estimate a structural econometric model for the credit market in Italy, using bank-level information and the responses of Italian banks to the euro-area Bank Lending Survey to identify demand and supply, focusing on the recent financial crisis. The main results are the following. First, while in normal circumstances the functioning of the Italian credit market is consistent with a standard imperfect-competition model, during phases of high tension there are credit-rationing phenomena. Second, supply restrictions have a relevant impact on lending, both when they are due to banks’ balance-sheet constraints and when they are the effect of greater perceived borrower riskiness. Third, to a large extent the tightening during the sovereign debt crisis reflected the common shock of the widening sovereign spread, not idiosyncratic bank funding problems. Fourth, the role of supply was stronger during the sovereign than the global financial crisis, mainly due to greater banks’ funding difficulties. In a counterfactual exercise we estimate that in the second quarter of 2012 interest rates were more than 2 percentage points higher and the stock of loans more than 8 percent lower than would have been the case without the tightening of lending standards in the course of the entire crisis.
    Keywords: credit rationing, supply tightening, financial crisis, sovereign debt crisis
    JEL: E30 E32 E51
    Date: 2013–11
  12. By: Gelman, Maria; Jochem, Axel; Reitz, Stefan
    Abstract: Foreign exchange rates and capital movements are expected to be closely related to each other as international capital markets become more and more integrated. To account for this fact we construct an index of real effective exchange rates as a weighted average of cross-country asset price ratios. The empirical analysis reveals that a country's real financial effective exchange rate is cointegrated with net foreign holdings of its assets. Comparing the empirical performance of the new index with a standard effective exchange rate deflated by goods prices we find that only the former exhibits an influence on the international flow of capital. --
    Keywords: Real Effective Exchange Rate,Capital Flows,Financial Markets
    JEL: F31 G15 E58
    Date: 2013
  13. By: Anastasiya Luzgina (Belarusian Economic Research and Outreach Center (BEROC))
    Abstract: The paper presents a model of foreign exchange integration in the post-Soviet countries. The author considers the possibility of introducing a supranational unit of account in the most economically integrated countries in the medium term, namely Belarus, Kazakhstan and Russia.
    Keywords: Belarus, CIS, currency integration, unit of account
    Date: 2013–08
  14. By: Josh Stillwagon (Department of Economics, Trinity College)
    Abstract: A number of studies have used survey data on traders' exchange rate forecasts to examine the role of risk and non-REH forecasting in accounting for excess returns in currency markets. This work re-examines those results using an alternative estimation technique, the Cointegrated VAR, which allows for better examination of non-stationarity in a multivariate framework. The results demonstrate the importance of focusing on the persistence of deviations from any found relationships. Consistent with some later studies, clear evidence of a time-varying risk premium is found, and REH is rejected for all three exchange rate samples examined (BP/USD, DM/USD, and JY/USD). The results strongly draw into question though the interpretation that this represents obvious irrationality. The relationship between the forecast error and interest rate differential is found to be non-stationary at very high significance levels, implying that the correlations are spurious and unstable over time, and individuals are not, in fact, mis-forecasting in a fixed manner relative to interest rates.
    Keywords: Excess returns puzzle, survey data, risk premium, non-stationarity, irrationality
    JEL: F31 G02 G14 G15
    Date: 2013–12
  15. By: Nagy, Katalin; Ferkelt, Balázs
    Abstract: -- The future of ecnomic and monetary integration in the European Union is of outstanding importance for the Central- and East-European Member States of the European Union. Three of the Central- and East-European countries have already joined the Euro Area and their experiences show that only those countries are successful in adapting a common currency and a common monetary policy where the economy is competitive, where macro-economic imbalances are under control and where the institutional system provides for avoiding the creation of bubbles and for preserving international competiveness. For non-Euro Area Central- and East-European countries there are a lot of pro- and contra arguments concerning the adaption of the euro. The fiscal and institutional crisis of the Euro Area will make these countries more careful in passing the necessary decisions. The fullfilling of the Maastricht criteria itself will not be enough for a succesful participation in the common currency area.
    Keywords: Währungsunion,Euroraum,MOEL,Fiskalpolitik
    Date: 2013
  16. By: Alberto Locarno (Banca d’Italia); Alessandro Notarpietro; Massimiliano Pisani (Bank of Italy)
    Abstract: This paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least five years) and there is full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government spending multiplier is much lower. Finally, in all cases tax multipliers are lower than government consumption multipliers.
    Keywords: Fiscal multiplier, monetary policy, zero lower bound, sovereign risk.
    JEL: E32 E52 E62
    Date: 2013–11
  17. By: Fabian Valencia
    Abstract: Recent studies show that uncertainty shocks have quantitatively important effects on the real economy. This paper examines one particular channel at work: the supply of credit. It presents a model in which a bank, even if managed by risk-neutral shareholders and subject to limited liability, can exhibit self-insurance, and thus loan supply contracts when uncertainty increases. This prediction is tested with the universe of U.S. commercial banks over the period 1984-2010. Identification of credit supply is achieved by looking at the differential response of banks according to their level of capitalization. Consistent with the theoretical predictions, increases in uncertainty reduce the supply of credit, more so for banks with lower levels of capitalization. These results are weaker for large banks, and are robust to controlling for the lending and capital channels of monetary policy, to different measures of uncertainty, and to breaking the dataset in subsamples. Quantitatively, uncertainty shocks are almost as important as monetary policy ones with regards to the effects on the supply of credit.
    Keywords: External shocks;United States;Commercial banks;Bank credit;Supply;Business cycles;Monetary policy;Economic models;Credit Cycles, Credit Crunch, Uncertainty, Self-insurance
    Date: 2013–12–02
  18. By: Anastasiya Luzgina (Belarusian Economic Research and Outreach Center (BEROC))
    Abstract: The paper lists reasons for participation of the Republic of Belarus in economic integration in the territory of the Former Soviet Union. The author looks at the prospects of convergence in economic and monetary spheres of the CIS member states.
    Keywords: Belarus, CIS, economic integration, convergence analysis, monetary integration
    Date: 2013–07

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