nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒03‒01
fourteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Macroprudential Policies in a Global Perspective By Olivier Jeanne
  2. Interest Rate Determination in China: Past, Present, and Future By Dong He; Honglin Wang; Xiangrong Yu
  3. Excerpts from a conversation about Longhorns, longnecks and liquidity: the economy and the course of monetary policy By Fisher, Richard W.
  4. Are Consumer Expectations Theory-Consistent? The Role of Macroeconomic Determinants and Central Bank Communication By Lena Dräger; Michael J. Lamla; Damjan Pfajfar
  5. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  6. Keynesian macroeconomics without the LM curve: IS-MP-IA model and Taylor rule applied to some CESEE economies By Josheski , Dushko
  7. Disequilibrium, reproduction and money: a Classical approach By Carlo Benetti; Christian Bidard; Edith Klimovsky; Antoine Rebeyrol
  8. Early Public Banks By Roberds, William; Velde, Francois R.
  9. Fiscal and Monetary Policies in Complex Evolving Economies By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini; Tania Treibich
  10. Exchange-rate regimes and economic growth: An empirical evaluation By Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  11. Lucas Paradox and Allocation Puzzle - Is the euro area different? By Sabine Herrmann; Joern Kleinert
  12. Framing Banking Union in the Euro Area: Some empirical evidence By Valiante, Diego
  13. The Logic of Value and the Value of Logic By Kakarot-Handtke, Egmont
  14. It will cost you nothing to "kill" a Proof-of-Stake crypto-currency By Nicolas Houy

  1. By: Olivier Jeanne (Johns Hopkins University, Peterson Institute for International Economics, NBER and CEPR (E-mail:
    Abstract: This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons.
    Keywords: Macroprudential Policy, Capital Flows, Capital Controls, International Reserves, International Coordination, Liquidity Trap
    JEL: F36 F41 F42
    Date: 2014–02
  2. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Honglin Wang (Hong Kong Institute for Monetary Research); Xiangrong Yu (Hong Kong Institute for Monetary Research)
    Abstract: How should we think about the determination of interest rates in China after interest rate liberalisation? Would effective deposit rates, lending rates and bond yields move higher or lower? We argue that interest rates in a liberalised environment would need to be anchored by the conduct of monetary policy. If monetary policy is to achieve the objective of price and output (or employment) stabilisation, the policy rate should be set close to China's equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate in China. Based on these we argue that interest rates on large deposits in the banking system and short-term money market rates would likely to move higher following interest rate liberalisation. The effect on effective lending rates is somewhat ambiguous as the contestability of the banking sector and the competition in bond markets are likely to increase after interest rate liberalisation. We leave the determination of the curvature of the yield curve to future research.
    Keywords: Interest Rate, Monetary Policy, Economic Reform, Chinese Economy, The People¡¦s Bank of China (PBC)
    JEL: E43 E52 O53 P24
    Date: 2014–02
  3. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Date: 2014–02–21
  4. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Michael J. Lamla (University of Essex and ETH Zurich); Damjan Pfajfar (EBC, CentER, University of Tilburg)
    Abstract: Using the microdata of the Michigan Survey of Consumers, we evaluate whether U.S. consumers form macroeconomic expectations consistent with different economic concepts, namely 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, 46% consistent with the Taylor rule and 34% 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 cyclical pattern. For all three concepts we find significant differences across demographic groups. Evaluating determinants of consistency, we provide evidence that consumers are less consistent with the Phillips curve and the Taylor rule 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, 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: 2014–01
  5. By: Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
    Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.
    Keywords: Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods.
    JEL: C53 E52 F31 F37 G17
    Date: 2014–02
  6. By: Josheski , Dushko
    Abstract: Applying IS-MP-IA model and the Taylor rule, this study finds that for selected CESEE economies (Albania, Bosnia and Herzegovina, Macedonia and Serbia), lower expected inflation rate, real exchange rate appreciation, a lower world interest rate which is calculated like a federal funds rate minus inflation in US, and more world output would help to increase output of the selected economies in the sample. A lower ratio of government consumption spending to GDP would also increase the output of the selected economies. Hence, fiscal prudence is needed, and the conventional approach of real depreciation to stimulate exports and raise real output does not apply to the selected CESEE economies. When private household consumption is in the model the coefficient on government spending to nominal GDP is insignificant implying that Ricardian equivalence does hold for the selected countries. These results are robust because they are controlled in the period of four decades from 1969 to 2013. Study uses 4 decadal dummies that control for each decade.
    Keywords: IS-MP-IA, Taylor Rule, Inflation targeting, monetary policy function, government spending to nominal GDP, world interest rates
    JEL: E52 F41
    Date: 2014–02
  7. By: Carlo Benetti; Christian Bidard; Edith Klimovsky; Antoine Rebeyrol
    Abstract: We consider a bisector reproduction model in which money is introduced as a pure means of exchange issued by a bank at the producers' requests. Each capitalist aims at maximising accumulation in his own sector. Their plans are based on available quantities and expected prices. Effective prices are determined by a market-clearing mechanism. Temporary disequilibria occur in both physical and monetary terms. The settlement of the monetary balances is operated by means of a transfer of capital goods. Final allocations and effective productions are thus determined. The dynamics of the economy are those of a sequence of temporary disequilibria and let appear several possibilities (local or global stability, cycles) depending on the values of the parameters.
    Keywords: Classical Reproduction, Monetary prices, Disequilibrium, Growth, Cycle
    JEL: E11 E30 E32 O41
    Date: 2014
  8. By: Roberds, William (Federal Reserve Bank of Atlanta); Velde, Francois R. (Federal Reserve Bank of Chicago)
    Abstract: Publicly owned or commissioned banks were common in Europe from the fifteenth century. This survey argues that while the early public banks were characterized by great experimentation in their design, a common goal was to create a liquid and reliable monetary asset in environments where such assets were rare or unavailable. The success of these banks was however never guaranteed, and even well-run banks could become unstable over time as their success made them susceptible to fiscal exploitation. The popularization of bearer notes in the eighteenth century broadened the user base for the public banks’ money but was also accompanied by increased fiscal abuse. Wartime demands of the Napoleonic Era resulted in the reorganization or dissolution of many early public banks. A prominent exception was the Bank of England, whose adept management of a fiscally backed money provided a foundation for the development of central banks as they exist today.
    Keywords: Central banks; exchanges bank; public banks
    JEL: E58 N13
    Date: 2014–02–11
  9. By: Giovanni Dosi (Scuola Superiore Sant'Anna, Pisa (Italy)); Giorgio Fagiolo (Scuola Superiore Sant'Anna, Pisa (Italy)); Mauro Napoletano (OFCE and SKEMA Business School, Sophia-Antipolis (France); Scuola Superiore Sant'Anna, Pisa (Italy)); Andrea Roventini (University of Verona (Italy); Scuola Superiore Sant'Anna, Pisa (Italy); OFCE and SKEMA Business School, Sophia-Antipolis (France)); Tania Treibich (Maastricht University (the Netherlands); GREDEG CNRS and University of Nice Sophia Antipolis (France))
    Abstract: In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a Central Bank and a Government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead, "discipline-guided" fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the Eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Keywords: agent-based model, fiscal policy, monetary policy, banking crises, income inequality, austerity policies, disequilibrium dynamics
    JEL: C63 E32 E6 E52 G01 G21 O4
    Date: 2014–02
  10. By: Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: Based on a dataset of 123 economies, this paper empirically investigates the relation between exchange-rate regimes and economic growth. We find that growth performance is best under intermediate exchange rate regimes, while the smallest growth rates are associated with flexible exchange rates. Nevertheless, this conclusion is tempered when we analyze the countries by income level: even though countries that adopt intermediate exchange-rate regimes are characterized by higher economic growth, the higher the level of income, less difference in growth performance across exchange rate regimes.
    Keywords: Exchange rate regime; economic growth
    JEL: E42 F31
    Date: 2014–01
  11. By: Sabine Herrmann (Deutsche Bundesbank); Joern Kleinert (University of Graz)
    Abstract: This paper examines the Lucas Paradox and the Allocation Puzzle of international capital flows referring to a panel data set of EMU countries and major industrialized and emerging economies. Overall, the results do not provide evidence in favour of the Lucas Paradox and the Allocation Puzzle. Rather, in line with neoclassical expectations, net capital flows are allocated according to income and growth differentials. The “downhill” flow of capital from rich to poor economies was particularly pronounced in intra-euro area capital flows and after the introduction of the common currency. If we control for the fact that the assumptions of the neoclassical model are not perfectly given in emerging markets, the Lucas Paradox and the Allocation Puzzle can be dismissed for these countries too. However, in periods of financial stress, the neoclassical behaviour of financial flows is to some extent dampened.
    Date: 2014–01
  12. By: Valiante, Diego
    Abstract: Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids.
    Date: 2014–02
  13. By: Kakarot-Handtke, Egmont
    Abstract: Jevons composed his value theory of nonenties. These creatures are elusive. Subsequent formal refinements did not eliminate the fundamental flaw but made it only harder to detect. A vacuous formal structure is one that cannot be interpreted in some domain. For want of any correspondence in the monetary economy, Jevons’s approach could not produce viable results. Roughly speaking, Jevons made value dependent on subjective factors. This paper gives a rigorous formal proof that value is determined by objective conditions. Within the structural-axiomatic framework there is no formal spare room for the major behavioral nonentities utility, optimization, rational expectations, and equilibrium.
    Keywords: new framework of concepts; structure-centric; axiom set; entity; nonentity; principles; exchange value; allocation; Jevonian interlude
    JEL: B59 D01 D61
    Date: 2014–02–22
  14. By: Nicolas Houy (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: It is a widely spread belief that crypto-currencies implementing a proof of stake transaction validation system are less vulnerable to a 51% attack than crypto-currencies implementing a proof of work transaction validation system. In this article, we show that it is not the case and that, in fact, if the attacker’s motivation is large enough (and this is common knowledge), he will succeed in his attack at no cost.
    Keywords: Bitcoin, protocol, proof of work, proof of stake, 51% attack
    JEL: G23 Z00
    Date: 2014

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