nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒03‒08
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Is the European Central Bank Failing Its Price Stability Mandate? By Angel Ubide
  2. Modelling Inflation Shifts and Persistence in Tunisia: Perspective from an Evolutionary spectral approach By Zied Ftiti; Duc Khuong Nguyen; Khaled Guesmi; Frédéric Teulon
  3. Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes By Rajmund Mirdala
  4. Shocks to Bank Lending, Risk-Taking, Securitization, and Their Role for U.S. Business Cycle Fluctuations By Peersman, G.; Wagner, W.B.
  5. The Price Stability Under Inflation Targeting Regime : An Analysis With a New Intermediate Approach By Zied Ftiti; Walid Hichri
  6. Modelling Inflation Volatility By Eric Eisenstat; Rodney W. Strachan
  7. Fiscal and monetary policies in complex evolving economies By Mauro Napoletano; Andrea Roventini; Giovanni Dosi; Giorgio Fagiolo; Tania Treibich
  8. Monetary Policy and Value Judgments : Did we forget Myrdal’s legacy ? By Nicolas Barbaroux; Patrizia Michel Bellet
  9. Keynesian macroeconomics without the LM curve: IS-MP-IA model and Taylor rule applied to some CESEE economies By Josheski, Dushko
  10. Theories of financial crises: An overview By Detzer, Daniel; Herr, Hansjörg
  11. The economics of Bitcoin transaction fees By Nicolas Houy

  1. By: Angel Ubide (Peterson Institute for International Economics)
    Abstract: Inflation in the euro area is too low, and the European Central Bank (ECB) is at risk of missing its price stability mandate. With the market forecasting average inflation in the euro area over the next five years in the 1.25 to 1.5 percent range, the ECB must prepare to act forcefully to push inflation higher. The ECB should (1) update the definition of price stability as inflation at 2 percent over 2 to 3 years to eliminate the ambiguity over the inflation objective; (2) reduce risk premia in the yield curve via a program of quantitative easing, making clear that this is a monetary policy operation—and thus legal under the Maastricht Treaty; and (3) ease the quantitative credit shortages to small and medium enterprises (SMEs) via a well-designed lending program, offering long-term funds at the policy rate to banks who lend to SMEs. These actions would restore price stability and encourage sustainable growth.
    Date: 2014–02
  2. By: Zied Ftiti; Duc Khuong Nguyen; Khaled Guesmi; Frédéric Teulon
    Abstract: The main objective of this paper consists to study what we learned about the dynamic of Tunisian inflation rate in the last two decades. This question is overriding concern to monetary policy analysis because it gives us information’s on inflation forecasting. In other words, before given monetary policy recommendations to Tunisian policy makers, after the actual downward of economic indicators and the disarmed of monetary policy consequently of Arabic spring, it is consistent to learn and to know the main characteristics of inflation history in this country. In this work, we suggest studying the specifics of Tunisian inflation dynamic’s on two dimensions. Firstly, we think that is useful to learn the different Tunisian inflation experiences regimes. Then, we try to analysis the nature of Tunisian inflation rate response to shocks; we try to analysis the inflation persistence in order to determine the nature of economy response’s to different chocks. This is the first paper proposing this methodology to analyse monetary policy and there is the first one proposing a measure of inflation persistence. In this work, we contribute to empirical literature of inflation persistence by it proposing a new measure based on the theory of evolutionary co-spectral analysis proposed by Priestley and Tong (1973). The mains findings of this paper show a stable inflation regime around 5.5% in the last ten years. We prove that the Tunisia inflation had a higher degree of inertia which traduce it’s gradually response on shocks. Consequently, we suggest to policy makers to make institutional reforms to reduce inflation.
    Keywords: Inflation, Strcutural Break, Spectral Analysis, auto-spectral analysis, Bai Berron test, inflation persistence.
    JEL: C16 E52 E63
    Date: 2014–02–25
  3. By: Rajmund Mirdala
    Abstract: Responsiveness of exchange rates to external price shocks as well as their ability to serve as a traditional vehicle for a transmission of these shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. To provide more rigorous insight into the problem of exchange rate pass-through to the domestic prices in countries with different exchange rate arrangements we estimate models for two subsequent periods 2000-2007 and 2000-2012. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.
    Keywords: exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function
    JEL: C32 E31 F41
    Date: 2014–01–01
  4. By: Peersman, G.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: Shocks to bank lending, risk-taking and securitization activities that are orthogonal to real economy and monetary policy innovations account for more than 30 percent of U.S. output variation. The dynamic effects, however, depend on the type of shock. Expansionary securitization shocks lead to a permanent rise in real GDP and a fall in inflation. Bank lending and risktaking shocks, in contrast, have only a temporary effect on real GDP and tend to lead to a (moderate) rise in the price level. Furthermore, there is evidence for a strong search-for-yield effect on the side of investors in the transmission mechanism of monetary policy. These effects are estimated with a structural VAR model, where the shocks are identified using a model of bank risk-taking and securitization.
    Keywords: Bank lending;risk-taking;securitization;SVARs
    JEL: C32 E30 E44 E51 E52
    Date: 2014
  5. By: Zied Ftiti; Walid Hichri
    Abstract: This paper analyzes the relevance of the inflation targeting (IT) policy in achieving its primary goal of medium-term price stability. Contrary to previous studies, we propose, in this work, a new approach; an intermediate approach that consists in conducting a time-series analysis (employed in the literature under unilateral cases-absolute approach-) with a comparison of inflation performance of IT countries and those of non-IT countries (comparison made in literature under the relative approach). Empirically, we employ a frequency analysis based on evolutionary spectral theory of Priestley (1965-1996) in order to distinguish between different inflation horizons; short-run and the medium-run inflation rate. To check the stability of spectral density functions for inflation series for each country under studied frequencies, we apply a Bai and Perron (2003a, b) test. Our results show that after IT framework implementation, there is no break point in inflation series in short and medium terms. This result is not verified for non-IT countries. Therefore, IT is more relevant in achieving price stability and consequently more effective on inflation expectation anchoring than other monetary policies.
    Keywords: Inflation Targeting, Inflation Stability, Structural Change, Evolutionary Spectral Analysis, intermediate approach, pre-requisite.
    JEL: C40 E52 E63
    Date: 2014–02–25
  6. By: Eric Eisenstat; Rodney W. Strachan
    Abstract: This paper discusses estimation of US inflation volatility using time varying parameter models, in particular whether it should be modelled as a stationary or random walk stochastic process. Specifying inflation volatility as an unbounded process, as implied by the random walk, conflicts with priors beliefs, yet a stationary process cannot capture the low frequency behaviour commonly observed in estimates of volatility. We therefore propose an alternative model with a change-point process in the volatility that allows for switches between stationary models to capture changes in the level and dynamics over the past forty years. To accommodate the stationarity restriction, we develop a new representation that is equivalent to our model but is computationally more efficient. All models produce effectively identical estimates of volatility, but the change-point model provides more information on the level and persistence of volatility and the probabilities of changes. For example, we find a few well defined switches in the volatility process and, interestingly, these switches line up well with economic slowdowns or changes of the Federal Reserve Chair.
    Keywords: Inflation volatility, monetary policy, time varying parameter model, Bayesian estimation, Change-point model
    JEL: C11 C32 E52
    Date: 2014–02
  7. By: Mauro Napoletano (OFCE); Andrea Roventini (Department of economics); Giovanni Dosi (Laboratory of Economics and Management); Giorgio Fagiolo (Laboratory of Economics and Management (LEM)); Tania Treibich
    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 forms, 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 ination 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 G21 O4
    Date: 2014–02
  8. By: Nicolas Barbaroux (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France); Patrizia Michel Bellet (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France, Université Jean Monnet, Saint-Etienne, F-42000, France)
    Abstract: Myrdal’s works are usually analysed with a dual and separated point of view : on the one hand the methodological papers concerning the value problem and based on a strong non neutrality thesis ; on the other part the theoretical analysis concerning monetary theory and policy, with a Wicksellian filiation. In fact both the dimensions are strongly connected by a common way : the application of the Hägerström’s Swedish guillotine between is and ought, but also the construction of a bridge between economic science and political views on social engineering and economic policy. Myrdal wants to address this problem : how economic science can become politically relevant ? This paper analyses two stages of that unique project : the proposition of a "technology of economics" (1930), and the selection process for a "norm for monetary policy" (1939). It shows that Myrdal distorts an initial end and means scheme by proposing some intermediary concepts between positive and normative fields. From a theoretical and statistical framework and an explicit value judgment these concepts enable to elaborate an iterative tree of selection of a speci-c monetary policy. If the Myrdal’s project encounters difficulties in conciliating a non-cognitivist thesis with economic prescriptions and in proposing a tractable method, it remains an important benchmark for the analysis of the links between positive and normative views concerning monetary policy.
    Keywords: value judgment, monetary policy, positive analysis, normative analysis
    JEL: B20 E52 B40
    Date: 2014
  9. 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
    JEL: E52 F41
    Date: 2014
  10. By: Detzer, Daniel; Herr, Hansjörg
    Abstract: This paper analyses financial crises from a theoretical point of view. For this it reviews what different schools of economic thought have to say about financial crises. It examines first the approaches that regard financial crises as a disturbing factor of a generally stable real economy (Wicksell, Hayek, Schumpeter, Fisher, and the early Keynes). Thereafter, approaches, where the dichotomy between the monetary and the real sphere is lifted, are reviewed. Here in particular the later works of Keynes and the contributions of Minsky are of importance. Lastly, it is looked at the behavioural finance approaches. After having reviewed the different approaches, it is examined where those approaches have similarities and where they can be combined fruitfully. Based on this, we develop an own theoretical framework methodologically based on a Wicksellian cumulative process, however, overcoming the neoclassical dichotomy. The paper ends with some policy recommendations based on the developed theoretical framework. --
    Keywords: financial crisis,crisis theory,behavioral finance,Hayek,Keynes,Minsky,Schumpeter,Wicksell
    JEL: E12 E13 G01
    Date: 2014
  11. By: Nicolas Houy (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: We study the economics of Bitcoin transaction fees in a simple static partial equilibrium model with the specificity that the system security is directly linked to the total computational power of miners. We show that any situation with a fixed fee is equivalent to another situation with a limited block size. In both cases, we give the optimal value of the transaction fee or of the block size. We also show that making the block size a non binding constraint and, in the same time, letting the fee be fixed as the outcome of a decentralized competitive market cannot guarantee the very existence of Bitcoin in the long-term.
    Keywords: Bitcoin; transaction fee; mining; crypto-currency
    Date: 2014–02–24

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