nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒01‒24
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Ghana, South Africa and the WAEMU By Fadia Al Hajj; Gilles Dufrénot,; Kimiko Sugimoto; Romain Wolf
  2. Recent developments in monetary policy implementation By Potter, Simon M.
  3. The perils of nominal targets By Armenter, Roc
  4. Observations on the Centennial of the Federal Reserve System The Philadelphia Fed Policy Forum: "The History of Central Banking in the United States," December 6, 2013 By Plosser, Charles I.
  5. Comparing U.S. and European Market Volatility Responses to Interest Rate Policy Announcements By Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
  6. Real Output and Prices Adjustments Under Different Exchange Rate Regimes By Rajmund Mirdala
  7. A Note on Differential Asymmetric Effects of Money Supply and Policy Rate Shocks in India By Khundrakpam, Jeevan Kumar
  8. Tapering Talk: The Impact of Expectations of Reduced Federal Reserve Security Purchases on Emerging Markets By Eichengreen, Barry; Gupta, Poonam
  9. Debt Dynamics and Monetary Policy: A Note By Laséen, Stefan; Strid, Ingvar
  10. Shocks, gaps, and monetary policy, Korea-America Economic Association, January 4, 2014, Philadelphia, PA By Plosser, Charles I.
  11. The Conservativeness of the Central Bank when Institutional Quality is Poor By Ferré Carracedo, Montserrat; García Fortuny, Judit; Manzano, Carolina
  12. Addressing Currency Manipulation Through Trade Agreements By C. Fred Bergsten
  13. Market Set-Up in Advance of Federal Reserve Policy Decisions By Dick van Dijk; Robin L. Lumsdaine; Michel van der Wel
  14. Will History Repeat Itself? Lessons for the Yuan By Cohen, Benjamin J.
  15. Uncertainty and Episodes of Extreme Capital Flows in the Euro Area By Torsten Schmidt; Lina Zwick
  16. The Cost of Collateralized Borrowing in the Colombian Money Market: Does Connectedness Matter? By Constanza Martínez; Carlos León
  17. Romania, Poland. Two Countries, One Wish: Joining the Eurozone By Soproni, Luminita; Marcut, Mirela
  18. The Financial and Macroeconomic Effects of the OMT Announcements By Carlo Altavilla; Domenico Giannone; Michele Lenza

  1. By: Fadia Al Hajj; Gilles Dufrénot,; Kimiko Sugimoto; Romain Wolf
    Abstract: The aim of this paper is to examine the monetary policy actions through which the central banks in the Sub-Saharan African countries have searched to eliminate the negative impacts of the shocks facing their economies. We compare two types of monetary policy regimes: a currency board regime (in the CFA zone countries) and an inflation targeting policy regime (in Ghana and South Africa). We compare the properties of both policies when the central banks respond to three negative shocks hitting the economies: a recessionary demand shock, a supply shock increasing inflation and a negative fiscal shock. We propose an FPAS model (forecasting and monetary policy analysis system) that extends the usual FPAS models used in the literature to evaluate the impact of several policies in response to different types of exogenous shocks. We find that both policies are inappropriate to help the economies exiting from the effects of negative demand shocks (the adjustment relies mainly on fiscal policy), both are essential when negative shocks to primary balance occur (fiscal policy aggravates the negative effects of the shocks), while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.
    Keywords: inflation target, currency board, African countries
    JEL: E52 F41 Q33
    Date: 2013–11–15
  2. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks before the Money Marketeers of New York University, New York City
    Keywords: the Desk; dual mandate; primary dealers; counterparties; IOER; reverse repos; interest on excess reserves; System Open Market Account (SOMA)
    JEL: E44 E52 E58
    Date: 2013–12–02
  3. By: Armenter, Roc (Federal Reserve Bank of Philadelphia)
    Abstract: A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goals. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray away from the target in the first place. Low-inflation expectations become self-fulfilling, leading to multiple Markov equilibria. Private-sector expectations are anchored on a unique Markov equilibrium if the monetary authority is given a strong stabilization goal for the policy rate. However, policy-rate stabilization may not improve welfare as the resulting policy is severely distorted.
    Keywords: Nominal targets; Monetary authority; Markov equilibria
    Date: 2013–12–10
  4. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, The Philadelphia Fed Policy Forum, "The History of Central Banking in the United States," Philadelphia, PA
    Keywords: Centennial
    Date: 2013–12–06
  5. By: Krieger , Kevin; Mauck, Nathan; Vasquez, Joseph
    Abstract: We examine the response of U.S. (VIX) and German (VDAX) implied volatility indices to the announcement of interest rate policy decisions by the Federal Open Market Committee (FOMC) and the European Central Bank (ECB). We confirm prior findings that VIX declines on FOMC meetings days. We present new findings that indicate that VDAX declines on FOMC meeting days, but is not related to ECB meeting days. VIX is unrelated to ECB meeting days. Taken collectively, our results indicate a prominent position for the FOMC in determining uncertainty levels both domestically and abroad relative to no relation between uncertainty levels and the ECB. JEL
    Keywords: FOMC, ECB, VIX, VDAX, Monetary policy, Volatility spillover
    JEL: E44 E52 E58 F3 G20 G21 G28
    Date: 2014–01–14
  6. By: Rajmund Mirdala
    Abstract: Exchange rate regimes evolution in the European transition economies refers to one of the most crucial policy decision in the beginning of the 1990s employed during the initial stages of the transition process. During the period of last two decades we may identify some crucial milestones in the exchange rate regimes evolution in the European transition economies. due to existing diversity in exchange rate arrangements in the European transition economies in the pre-ERM2 period there seems to be two big groups of countries - “peggers” (Bulgaria, Estonia, Latvia, Lithuania) and “floaters” (Czech republic, Hungary, Poland, Romania, Slovak republic, Slovenia). Despite the fact, there seems to be no real prospective alternative to euro adoption for the European transition economies, we emphasize disputable effects of sacrificing monetary sovereignty in the view of positive effects of exchange rate volatility and exchange rate based adjustments in the country experiencing sudden shifts in the business cycle. In the paper we analyze effects of the real exchange rate volatility on real output and inflation in ten European transition economies. From estimated VAR model (recursive Cholesky decomposition is employed to identify structural shocks) we compute impulse-response functions to analyze responses of real output and inflation to negative real exchange rate shocks. Results of estimated model are discussed from a prospective of the fixed versus flexible exchange rate dilemma. To provide more rigorous insight into the problem of the exchange rate regime suitability we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2011.
    Keywords: exchange rate volatility, economic growth, economic crisis, vector autoregression, variance decomposition, impulse-response function
    JEL: C32 F32 F41
    Date: 2013–11–15
  7. By: Khundrakpam, Jeevan Kumar
    Abstract: The paper attempts to analyse the asymmetric effects of money supply and policy rate shocks in India using quarterly data from 1996-97Q1 to 2011-12Q4. It finds that both the shocks impact real output growth and inflation in the short-run, but have a differential impact among components of aggregate demand. An unanticipated hike/cut in policy rate has a symmetric impact of reducing/increasing GDP growth arising due to a corresponding symmetric impact on investment growth only. In contrast, an unanticipated increase/decrease in money supply has an asymmetric impact– only an unanticipated increase in money supply increases private consumption growth and GDP growth, while there is no impact on the other components aggregate demand. An unanticipated hike/reduction in policy rate leads to a symmetric decline/rise in inflation. An unanticipated change in money supply leads to higher inflation, but a similar decrease in it has no significant impact on inflation.
    Keywords: Monetary Policy, Asymmetry, Inflation, Policy Rate
    JEL: C32 C51 E31 E51
    Date: 2013–11
  8. By: Eichengreen, Barry; Gupta, Poonam
    Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected differently. We use data for exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. We find that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals did not provide insulation. An important determinant of the differential impact was the size of the country’s financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves and equity prices. We interpret this as investors being able to better rebalance their portfolios when the target country has a relatively large and liquid financial market.
    Keywords: Emerging Markets, Tapering, Quantitative Easing
    JEL: F3 F32 F42
    Date: 2014–01–19
  9. By: Laséen, Stefan (Monetary Policy Department, Central Bank of Sweden); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: "Leaning against the wind" – a tighter monetary policy than necessary for stabilizing inflation around the inflation target and unemployment around a long-run sustainable rate – has been justified as a way of reducing household indebtedness. In a recent paper Lars Svensson claims that this policy is counterproductive, since a higher policy rate actually leads to an increase (and not a decrease) in real debt and the debt-to-GDP ratio. In this note we offer some comments and extensions to Svensson´s analysis. In particular, we take Svensson´s debt model to the data and show that it provides an incomplete account of short term debt dynamics. Further, the overall analysis of the effects of monetary policy on debt rests on the rather strong assumption that debt is independent of the policy rate, conditional on housing prices. The policy responses advocated by Svensson can therefore be questioned. More importantly, our exercises with a modified model of debt dynamics enables further understanding of how different assumptions affect the assessment of the effects of monetary policy on debt.
    Keywords: House prices; Mortgage Debt; Monetary policy; Bayesian Estimation; Structural VAR
    JEL: C32 E21 E31 E32 E44 E52 R21 R31
    Date: 2013–12–01
  10. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia KAEA-Maekyung Forum, Korea-America Economic Association, January 4, 2014, Philadelphia, PA President Charles Plosser discusses how some key features of the recent recession and recovery have influenced his views on monetary policymaking. He again advocates that we should think in terms of robust policies that yield good economic outcomes across a variety of models and frameworks.
    Keywords: Shocks; Gaps; Economic models
    Date: 2014–01–04
  11. By: Ferré Carracedo, Montserrat; García Fortuny, Judit; Manzano, Carolina
    Abstract: We propose an extension of Alesina and Tabellini 's model (1987) to include corruption, which is understood as the presence of weak institutions collecting revenue through formal tax channels. This paper analyses how conservative should an independent central bank be when the institutional quality is poor. When there are no political distortions, we show that the central bank has to be more conservative than the government, except with complete corruption. In this particular case, the central bank should be as conservative as the government. Further, we obtain that the relationship between the optimal relative degree of conservativeness of the central bank and the degree of corruption is affected by supply shocks. Concretely, when these shocks are not important, the central bank should be less conservative if the degree of corruption increases. However, this result may not hold when the shocks are relevant. JEL classi fication: D6, D73, E52, E58, E62, E63. Keywords: Central Bank Conservativeness; Corruption; Fiscal Policy; Monetary Policy; Seigniorage.
    Keywords: Economia del benestar, Corrupció, Bancs centrals, Política monetària, Política fiscal, 336 - Finances. Banca. Moneda. Borsa,
    Date: 2013
  12. By: C. Fred Bergsten (Peterson Institute for International Economics)
    Abstract: Currency manipulation—governments of foreign countries intervening to suppress the value of their currencies to lower the prices of their exports and increase the prices of their imports—has vexed the United States for many years. Because most of the intervention takes place in US dollars, the dollar has been pushed to systemically overvalued levels. The US current account deficit has averaged $200 billion to $500 billion per year higher as a result of the manipulation. Several other countries, including the weak euro area economies, emerging-market countries such as Brazil and India, and many small and poor countries, have also suffered the ill effects of currency manipulation. In light of large and widespread trade effects, Bergsten calls for addressing the issue through trade agreements, especially when the International Monetary Fund and other institutions have failed to resolve it for so long. He recommends adding a currency chapter in the Trans-Pacific Partnership (TPP), which is currently under negotiation and could be the earliest trade agreement to come before Congress for approval. Including clear obligations to avoid currency manipulation in the TPP and other future trade agreements, along with an effective dispute settlement mechanism and sanctions against violators, would very likely deter future manipulation.
    Date: 2014–01
  13. By: Dick van Dijk; Robin L. Lumsdaine; Michel van der Wel
    Abstract: This paper considers the uncertainty associated with upcoming Federal Open Market Committee (FOMC) announcements and the extent to which the market begins to set up for such announcements well before they actually occur. We demonstrate that markets set up well in advance of known announcement days; as a result, there is often less uncertainty in the period immediately preceding an FOMC announcement, despite greater volume of activity, as the market has already incorporated anticipated signals. We consider the relative importance of both macro announcements and central bank officials’ speeches and congressional testimony in shaping market expectations. We find substantial evidence of anticipatory effects; these results are particularly relevant as the Fed develops its communication strategy to achieve an orderly exit from its program of quantitative easing.
    JEL: E43 E44 E58 G18
    Date: 2014–01
  14. By: Cohen, Benjamin J. (Asian Development Bank Institute)
    Abstract: For many observers, internationalization is the yuan’s manifest destiny and a by-product of the remarkable economic success of the People’s Republic of China (PRC). But is such confidence warranted? Recent history has seen the emergence of other currencies that were also expected, at least for a while, to attain wide, growing cross-border use. These included the deutsche mark (DM), the Japanese yen, and the euro (successor to the DM). Yet in the end, their internationalization reached an upper limit, short of expectations. Will history repeat itself? Or will the yuan prove exceptional, as the currency that finally managed to keep ascending where others faltered? The aim of this paper is to see what lessons may be drawn from these earlier experiences for the anticipated internationalization of the yuan.
    Keywords: yuan; deutsche mark; japanese yen; euro; internationalization
    JEL: F31 F33 F41
    Date: 2014–01–17
  15. By: Torsten Schmidt; Lina Zwick
    Abstract: During the Euro Area crisis huge changes in international capital flows occurred associated with a high level of economic uncertainty. While it is evident that both factors are able to trigger or amplify economic shocks posing a threat for economic activity it is a natural question whether they are related. The aim of this paper is to analyse the link between different measures of uncertainty and episodes of extreme capital flows for the core Euro Area countries using gross capital flows. We find that country-specific risk factors seem to play a more important role than global risk factors. Moreover, country-specific uncertainty seems to be more relevant for foreign direct investors.
    Keywords: Capital flows; uncertainty; Euro Area crisis; sudden stops; retrenchment
    JEL: F32 F21 G01
    Date: 2013–12
  16. By: Constanza Martínez; Carlos León
    Abstract: Under the view that the market is a weighted and directed network (Barabási, 2003), this document is a first attempt to model the Colombian money market within a spatial econometrics framework. By estimating two standard spatial econometric models, we study the cost of collateralized borrowing (i.e. sell/buy backs) among Colombian financial institutions, and its relationship with the effects induced by traditional variables (leverage, size and borrowing levels), and by spatial variables resulting from observed linkages among financial institutions. The model that best fits the data is the Spatial Durbin Model, whose main findings indicate that (i) traditional variables are of low explanatory power by themselves; (ii) there exists a significant spatial dependence with regard to the cost of collateralized borrowing; (iii) the inclusion of spatial lags of the same traditional factors results in a model able to explain the existence of borrowing spreads that vary across financial institutions despite the collateralized nature of sell/buy backs; (iv) direct and spill-over effects from the spatially lagged value of financial leverage are the most significant for determining the cost of collateralized borrowing. Results are valuable since making connectedness an explanatory variable breaks with the traditional (reductionist) understanding of financial markets, which concurs with the current interest in the macro-prudential perspective of financial stability.
    Keywords: Money market, interbank, collateral, collateralized borrowing, spatial econometrics. Classification JEL: C31, G21, G32
    Date: 2014–01
  17. By: Soproni, Luminita; Marcut, Mirela
    Abstract: The paper aims to present the efforts of the two Member States of the European Union regarding the criteria for accession in the „select club” of the Eurozone, in the current economic environment, which is characterized by uncertainty and profound turbulences. The study has pointed out that, even though the economic policies of the Romanian and Polish governments have generally implied similar measures in order to comply with the convergence criteria, the visions of the two governments are different. In short, Romania’s exaggerated optimism, fuelled by the electoral “needs”, (the only country in a hurry to enter the Eurozone), and not backed by the economic reality, is in a stark contrast with Poland’s reserved attitude (taking into consideration the fact that the Poland has the highest rate of economic growth in Europe), which expresses the wish to join the Eurozone only after the national economy’s problems as well as the Eurozone’s troubles have been resolved.
    Keywords: Romania, Poland, convergence criteria, Eurozone, Economic and Monetary Union, economic crisis
    JEL: E01 E5 E58 F43 F5
    Date: 2013
  18. By: Carlo Altavilla (European Central Bank and CSEF); Domenico Giannone (Université Libre de Bruxelles and ECARES); Michele Lenza (European Central Bank, Université Libre de Bruxelles and ECARES)
    Abstract: This paper evaluates the effects of the 2012 announcements of the ECB’s Outright Monetary Transactions (OMT) programme. Using high frequency data, we find that the OMT announcements decreased the Italian and Spanish two years government bond yields by about two percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. The results are robust to controlling for all other relevant macroeconomic and financial news released at the time of the announcements. These outcomes are used to calibrate scenarios in a multi-country model describing the macro-financial linkages in France, Germany, Italy and Spain. The scenario analysis suggests that the reduction in bond yields due to the OMT announcements will be associated to a significant increase in real activity, credit and prices in Italy and Spain.
    Keywords: Outright monetary transactions, event study, news, multi-country vector autoregressive model
    JEL: E47 E58 C54
    Date: 2014–01–14

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