nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒03‒15
forty papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation targeting and Quantitative Tightening: Effects of Reserve Requirements in Peru By Armas, Adrián; Castillo, Paul; Vega, Marco
  2. Accommodative Monetary Policy and Macroprudential Safeguards By Evans, Charles L.
  3. Measuring the Impact of Exchange Rate Movements on Domestic Prices: A Cointegrated VAR Analysis By Nidhaleddine Ben Cheikh; Waël Louhichi
  4. Managing Short-Term Capital Flows in New Central Banking: Unconventional Monetary Policy Framework in Turkey By Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
  5. A Theory of the Intergenerational Dynamics of Inflation Beliefs and Monetary Institutions By Etienne Farvaque; Alexander Mihailov
  6. The determinants of inflation differentials in the euro area By Moretti, Laura
  7. "Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States" By Eric Tymoigne
  8. Monetary Policy and Heterogeneous Inflation Expectations in South Africa By Alain Kabundi, Eric Schaling and Modeste Some
  9. Issues for Renminbi Internationalization : An Overview By Barry Eichengreen; Masahiro Kawai
  10. Exiting from QE By Fumio Hayashi; Junko Koeda
  11. European Central Bank accountability: how the monetary dialogue could be improved By Grégory Claeys; Mark Hallerberg; Olga Tschekassin
  12. Forward guidance with an escape clause: When half a promise is better than a full one By Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
  13. Capital controls as an instrument of monetary policy By Davis, Scott; Presno, Ignacio
  14. A Post-Crisis Reading of the 'Role of Monetary Policy' By Stan Du Plessis
  16. Interest Rate Corridor, Liquidity Management and the Overnight Spread By Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
  17. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  18. The theory of money supply: a case study By Taylor, Leon
  19. Determinants of the Trilemma Policy Combination By Hiro Ito; Masahiro Kawai
  21. Policy Duration Effects, Quantitative Monetary Easing Policy, and Economic Growth: Evidence from Japanese Time Series Data By Masafumi Kozuka
  22. Communication challenges By Plosser, Charles I.
  23. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  25. Regional Settlement Infrastructure and Currency Internationalization : The Case of Asia and the Renminbi By Changyong Rhee; Lea Sumulong
  26. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'baye
  27. An Empirical Test of Money Demand in Thailand from 1993 to 2012 By Jiranyakul, Komain; Opiela, Timothy
  28. Forecasting the intraday market price of money By Andrea Monticini; Francesco Ravazzolo
  29. Reserve requirements in the brave new macroprudential world By Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
  30. How Far Can Renminbi Internationalization Go? By Yu Yongding
  31. New CNB measures to stimulate credit growth: problems and solutions By Vidakovic, Neven; Zbašnik, Dušan
  32. The demand for currency in Malta By Grech, Aaron George
  33. Is There Really a Renminbi Bloc in Asia? By Kawai, Masahiro; Pontines, Victor
  34. Monetary Policy and Value Judgments : Did we forget Myrdal's legacy ? By Nicolas Barbaroux; Michel Bellet
  36. Central bank independence, policies and reforms: addressing political and economic linkages By Marianne, Ojo
  37. Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy By Federico Etro; Lorenza Rossi
  38. Will History Repeat Itself? Lessons for the Yuan By Benjamin J. Cohen
  39. The role of the Central Bank in the Economic Slow-down in Russia. By BLINOV, Sergey
  40. Predicting Exchange Rates Out of Sample: Can Economic Fundamentals Beat the Random Walk? By Jiahan Li; Ilias Tsiakas; Wei Wang

  1. By: Armas, Adrián (Banco Central de Reserva del Perú); Castillo, Paul (Banco Central de Reserva del Perú); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: This paper provides an overview of the Reserve Requirements measures undertaken by the Central Bank of Peru. We provide a rationale for the use of these instruments as well as empirical evidence on their effectiveness. In general, the results show that a reserve requirement tightening has the desired effects on interest rates and credit levels both at banks and smaller financial institutions (cajas municipales).
    Keywords: Non-conventional monetary policy, Inflation Targeting, Reserve requirements.
    JEL: E51 E52 E58 G21
    Date: 2014–02
  2. By: Evans, Charles L. (Federal Reserve Bank of Chicago)
    Abstract: A speech delivered on February 4, 2014, at the Detroit Economic Club in Detroit, MI.
    Keywords: Monetary policy; inflation; macroprudential
    Date: 2014–02–04
  3. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper measures the pass-through of exchange rate changes into domestic inflation within a cointegrated VAR (CVAR) framework. This issue is of particular interest for the euro area (EA) as Member Sates cede their national currencies and no longer have options of using monetary policy to respond to local conditions. In fact, a common exchange rate shock, in the absence of a national monetary policy, may have differential impact on EA countries, leading notably to possible divergence in inflation levels. Using quarterly data for 12 EA covering 1980:1 to 2010:4, we report a large degree of heterogeneity in the rates of pass-through across our sample, especially, between "peripheral" and "core" EA economies. For instance, prices rise by 84% in Portugal following one percent depreciation of exchange rate, while for the German economy the extent of pass-through is not exceeding 0.20%. This outcome would have important implications for the general risk perceived by foreign firms and investors regarding the inflationary environment within each EA country.
    Keywords: Exchange Rate, Domestic prices, Cointegration, Euro area
    JEL: C32 E31 F31
    Date: 2014–03
  4. By: Ahmet Faruk Aysan; Salih Fendoglu; Mustafa Kilinc
    Abstract: During the global financial crisis of 2008-2009, both advanced and emerging countries have implemented significant easing policies on monetary and fiscal fronts. Yet, the recovery, especially in advanced countries, was not as quick or strong as expected. These quantitative easing policies, coupled with weak recovery and restricted fiscal positions, have created not only abundant but also excessively volatile global liquidity conditions, leading to short-term and excessively volatile capital flows to emerging markets. To contain potential risks due to such flows, emerging countries have augmented their existing policy frameworks. Central Bank of the Republic of Turkey (CBRT), for example, has introduced two new policy tools in its new monetary policy framework: the asymmetric interest rate corridor and the reserve option mechanism. From a capital flows perspective, the interest rate corridor helps smooth fluctuations in supply of foreign funds, whereas the reserve option mechanism helps contain movements in demand for foreign funds. Both policies have been actively used by the CBRT and appeared to be effective in containing financial stability risks stemming from excessively volatile capital flows.
    Keywords: Capital flows, macroprudential policies, central banking
    JEL: E44 E52 E58
    Date: 2014
  5. By: Etienne Farvaque (Université du Havre, Faculté des A¤aires Internationales); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: We develop a stochastic overlapping-generations model with endogenously evolving heterogeneous beliefs on the degree of inflation protection to be provided by markets versus the monetary authority. It incorporates adaptive learning from inflation history and imperfect empathy in the cultural transmission of beliefs. Analytical results on endogenous inflation beliefs and socially-optimal inflation are derived first in a within-generation voting equilibrium that defines a particular degree of inflation aversion of a society's monetary institution. Then further theoretical and simulation analysis of the intergenerational dynamics of inflation and inflation beliefs provides insights into the long-run evolution of population types and social institutions, exploring the interactions of three central forces: the persistence of inflation, the degree of inflation aversion of the central bank and the recurrent irregular cycles of agent type proportions and subsequent majority switches. Our main contribution consists in showing how the endogenous transmission of inflation beliefs and monetary institutions in a stochastic economic environment can be understood as a process of intergenerational learning from history combined with a political economy mechanism that amends legislation and a socialization process that transmits experienced knowledge.
    Keywords: evolving beliefs, in?ation aversion, adaptive learning, voting equilibrium, cultural transmission, monetary institutions
    JEL: D72 D83 E31 E58 H41 J10
    Date: 2014–03–01
  6. By: Moretti, Laura
    Abstract: Inflation differentials in the euro area have been persistent since the adoption of the single currency. This paper analyzes the impact of product and labor market regulation on inflation in a sample of 11 countries. The results show that, after the adoption of the euro, product market deregulation has a relevant and significant effect on the level of inflation, while higher labor market regulation increases the responsiveness of inflation to the output gap. --
    Keywords: Labor Market Deregulation,Product Market Deregulation,EMU,Inflation Rate
    JEL: E31 E58 E65 L51
    Date: 2014
  7. By: Eric Tymoigne
    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 unconstrained by hard financial limits. Not only can they issue their own currency to pay public debt denominated in their own currency, but they can also easily bypass any self-imposed constraint on budgetary operations. Through a detailed analysis of the institutions and practices surrounding the fiscal and monetary operations of the treasury and central bank of the United States, the eurozone, and Australia, MMT has provided institutional and theoretical insights into the inner workings of economies with monetarily sovereign and nonsovereign governments. The paper shows that the previous theoretical conclusions of MMT can be illustrated by providing further evidence of the interconnectedness of the treasury and the central bank in the United States.
    Keywords: Modern Money Theory; Monetary Policy; Fiscal Policy
    JEL: E02 E42 E52 E62
    Date: 2014–03
  8. By: Alain Kabundi, Eric Schaling and Modeste Some
    Abstract: This paper examines the relationship between in‡ation and in‡ation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate in‡ation expectations of individual agents as the weighted average of lagged in‡ation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged in‡ation and the opposite is true for analysts. The results reveal that the SARB has succesfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to ccommodate private agents' expectations.
    Keywords: Monetary policy, Inflation Targeing, Heterogeneous Inflation Expectations, Expectations Trap
    JEL: C51 E52 E58
    Date: 2014
  9. By: Barry Eichengreen (Asian Development Bank Institute (ADBI)); Masahiro Kawai
    Abstract: The growing weight of the People’s Republic of China (PRC) in the world economy, measured by gross domestic product (GDP) and trade volume, has intensified debate on the potential international role of its currency—the renminbi (RMB). This paper provides an overview of RMB internationalization issues. Reviewing the current state of RMB internationalization, the paper finds that much progress has been made on RMB settlements for trade involving the PRC and on RMB-denominated bond issuance in Hong Kong, China, but that RMB internationalization is still limited due to capital account controls. The paper argues that a high degree of RMB internationalization requires significant capital account liberalization—supported by financial market liberalization including market-determined interest rates, and by effective financial regulation and supervision—which in turn would call for greater exchange rate flexibility so that the People’s Bank of China (PBOC) can enjoy monetary policy autonomy. This, however, would pose a challenge for PRC authorities as hasty capital account liberalization could expose PRC financial markets to the risk of crisis. The paper also emphasizes the importance of institutional reforms—such as making the PBOC independent from political processes, improving the judicial system to implement rule of law, raising transparency and accountability of policy making, and democratizing the political regime—to make the RMB a truly international reserve currency. Finally, the paper explores the implications of RMB internationalization for the international monetary system.
    Keywords: renminbi (RMB), internationalization, PRC, China, capital account internationalization, financial market liberalization, monetary policy autonomy
    JEL: F31 F32 F33 F41
    Date: 2014–01
  10. By: Fumio Hayashi; Junko Koeda
    Abstract: We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. There are two regimes, one of which is QE (quantitative easing). The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response and counter-factual analyses yield two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE can be expansionary.
    JEL: E52
    Date: 2014–02
  11. By: Grégory Claeys; Mark Hallerberg; Olga Tschekassin
    Abstract: According to the European Union Treaties, the European Central Bank (ECB) is accountable to the European Parliament. In practice, this accountability takes mainly the form of a quarterly Monetary Dialogue between the president of the ECB and the European Parliament Economic and Monetary Affairs committee. We assess the impact of the Monetary Dialogue. We describe the ECBâ??s accountability practices, compare them to those of other major central banks and provide an assessment of the dialogue in the last five years. The Monetary Dialogue could be improved and we make recommendations on this. We also consider what role the Monetary Dialogue could play in the current context of the ECBâ??s evolving role. We discuss in particular forward guidance and quantitative easing. We review the main features and the way in which those policies have been implemented by other central banks. We then suggest the appropriate role for the Monetary Dialogue in relation to each of those policies. We conclude with some observations on the function of the Monetary Dialogue after the establishment of a banking union in Europe
    Date: 2014–03
  12. By: Maria Lucia Florez-Jimenez; Julian A. Parra-Polania
    Abstract: We incorporate an escape clause into a model with forward guidance and find that such clause is welfare improving as it allows the monetary authority to avoid cases in which the cost of reduced flexibility is too high. The escape clause provides the central bank with another instrument (additional to the promised policy rate), the announced threshold. Under zero-lower-bound episodes, such threshold is a more suitable instrument to respond to an increase in the size of the recessionary shock. However, in extreme cases (i.e. when the shock is enormous), the optimal response is to make an unconditional promise and further reduce the promised rate.
    Keywords: Forward guidance, escape clause, zero lower bound, central bank communication Classification JEL: E47, E52, E58
    Date: 2014–03
  13. By: Davis, Scott (Federal Reserve Bank of Dallas); Presno, Ignacio (Federal Reserve Bank of Dallas)
    Abstract: Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.
    JEL: E32 E52 F32 F41
    Date: 2014–02–01
  14. By: Stan Du Plessis
    Abstract: In 1967 Milton Friedman delivered “The Role of Monetary Policy’ as his presidential address to the American Economic Association (AEA). In its published version – Friedman (1968) – it has become, arguably, the most influential paper in modern monetary economics and was recently included in the AEA’s list of the twenty most influential papers published in the first century of the American Economic Review. But the influence of Friedman’s address is based on an interpretation that seriously distorts the content of his main argument. His emphasis on (i) the inadequacy of interest rate policy and (ii) the primacy of financial stability among the positive goals of monetary policy have been ignored or neglected. While balance sheet policies have become ‘unconventional’ in the modern consensus, these policies held a central position in Friedman’s work. I support this argument with a textual analysis of Friedman’s address, read in the light of his preceding scholarship on monetary policy. This reinterpretation is relevant in a world where the balance sheets of central banks have returned to centre stage as has the priority for financial stability.
    Keywords: Milton Friedman, Monetary policy, interest rate policy, balance sheet policies, Financial Stability
    JEL: B22 E52 E58
    Date: 2014
    Date: 2014
  16. By: Hande Kucuk; Pinar Ozlu; Anil Talasli; Deren Unalmis; Canan Yuksel
    Abstract: Recently, massive global liquidity has compelled many emerging market economies to change their monetary policy frameworks in order to address the financial stability challenges posed by volatile capital flows. In this respect, as of the second half of 2010, the Central Bank of the Republic of Turkey (CBRT) has developed additional policy instruments to support the adoption of financial stability as a complementary objective to price stability. Liquidity management has actively been used in conjunction with a wide interest rate corridor to smooth excessive volatility in shortterm capital inflows. As a result, the spread between the Borsa Istanbul overnight repo interest rate and the CBRT average funding rate (overnight spread) has become wider and more volatile. We analyze the determinants of the overnight spread using data from both the traditional and the new monetary policy episodes and empirically document that this spread has recently been influenced by various factors which are directly or closely related to the liquidity policy of the CBRT.
    Keywords: Overnight interest rate; liquidity policy; monetary policy; operational framework
    JEL: E43 E52 C22
    Date: 2014
  17. By: Joseph P. Byrne (Department of Economics, Heriot-Watt University, UK); Dimitris Korobilis (Department of Economics, Adam Smith Business School, University of Glasgow, UK); Pinho J. Ribeiro (Department of Economics, Adam Smith Business School, University of Glasgow, UK)
    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 arameters (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
  18. By: Taylor, Leon
    Abstract: The theory of money supply is less developed than that of money demand, largely because 19th-century economists believed that money was unimportant and because they viewed the central bank as either an appendage to the economy or as a welfare-maximizing black box. The paper reviews each of these beliefs in turn.
    Keywords: money supply, history of economic thought, central bank
    JEL: B19 B22
    Date: 2014–03–06
  19. By: Hiro Ito (Asian Development Bank Institute (ADBI)); Masahiro Kawai
    Abstract: We present a theoretical framework for policy making based on the “impossible trinity†or the “trilemma†hypothesis. A simple optimization model shows that placing more weight in terms of preference for each of the three open macroeconomic policies—exchange rate stability, financial market openness, and monetary policy independence—contributes to a higher level of achievement in that particular policy. We then develop the first empirical framework in the literature to investigate the joint determination of the triad open macroeconomic policies based on the trilemma hypothesis. Specifically, we estimate the three policy indexes under the trilemma constraint that they must add up to a constant. By applying the seemingly unrelated regression (SUR) estimation method and employing other robustness checks, we demonstrate that simple economic and structural fundamentals determine the trilemma policy combinations. Last, we examine how deviations from the “optimal†trilemma policy combinations evolve around the time of a financial crisis. Policy combinations seem to violate the trilemma constraint when a currency, banking, or debt crisis breaks out. These findings suggest that deviations from the trilemma hypothesis would create policy stress, which would have to manifest itself in a crisis unless policy makers adjust the policy combination in a way consistent with the trilemma constraint.
    Keywords: impossible trinity, trilemma hypothesis, exchange rate stability, financial market openness, monetary policy independence, trilemma policy combination, trilemma constraint
    JEL: F15 F21 F31 F36 F41 O24
    Date: 2014–01
    Date: 2014
  21. By: Masafumi Kozuka (Faculty of Policy Studies, University of Marketing and Distribution Sciences)
    Abstract: In this paper, we examine the influences of policy duration effects and quantitative monetary easing policy (QMEP) brought into effect by Bank of Japan from 2001-2006 on economic growth toward future periods. We employed a simple equation with the term spread explaining economic growth and obtained the following results. The positive effects of the term spread on economic growth over the subsequent 21 and 24 months decreased in 2001. And the estimated coefficients on term spread are negative and significant after the shift in both cases. Then, we conclude that the QMEP and policy duration effects in 2000s worked on economic growth in Japan to some extent.
    Keywords: term spread, zero interest rate policy, quantitative easing policy, policy duration effects, economic growth
    JEL: E44 E52 G10
    Date: 2014–03
  22. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: 2014 U.S. Monetary Policy Forum, Initiative on Global Markets, The University of Chicago, Booth School of Business, February 28, 2014, New York, NY President Charles I. Plosser discusses his views on the FOMC's forward guidance, which seeks to inform the public about the future path of monetary policy. He discusses why the FOMC should revamp its forward guidance as the unemployment rate nears the 6.5 percent rate threshold.
    Keywords: Federal funds rate; Federal Open Market Committee (FOMC); Monetary policy;
    Date: 2014–02–28
  23. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: President Charles Plosser offers his views on growth, unemployment, and inflation expectations. He also discusses why the Fed faces a communications challenge with the economy so close to the unemployment threshold of 6.5 percent. He then explains why he favors the Fed providing more information to indicate how monetary policy will evolve as economic conditions change. Read the speech.
    Keywords: Monetary policy; Economy; Economic conditions;
    Date: 2014–03–06
    Date: 2014
  25. By: Changyong Rhee (Asian Development Bank Institute (ADBI)); Lea Sumulong
    Abstract: The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.
    Keywords: global financial system, global financial crisis, Currency Internationalization, Asia, Remminbi, financial infrastructure, caputal account liberalization
    JEL: F33 F34 F42
    Date: 2014–02
  26. By: Ummad Mazhar (Shaheed Zulkar Ali Bhutto Institute of Science and Technology, 90-100 Clifton, Block 5, Karachi, Pakistan); Cheick Kader M'baye (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.
    Keywords: Forecasts transparency, monetary policy transparency, central banking, in flation volatility, output volatility
    JEL: E58 E63 C33 C36
    Date: 2014
  27. By: Jiranyakul, Komain; Opiela, Timothy
    Abstract: The present study uses the most recent time series data obtained from the Bank of Thailand during the first quarter of 1993 and the fourth quarter of 2012 to investigate the long-run relationship between M1, M2, and M3 money demands and the two determinants (real GDP and interest rate). We use the model specification of Stock and Watson (1993) and Ball (2001). Our estimation techniques include Johansen cointegration test and the dynamic ordinary least squares (DOLS). We find that the DOLS procedure is not applicable for our data set. However, our results from Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand, real GDP and interest rate. In the short run, only a change in real GDP affects M1 money holding. The instability of M1 money demand function makes it difficult for monetary authority to pursuit meaningful conducts of monetary policy.
    Keywords: Money Demand, Real Income, Interest Rate, Cointegration, Dynamic OLS
    JEL: C2 C22 E41
    Date: 2014–03
  28. By: Andrea Monticini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Francesco Ravazzolo (Norges Bank and BI Norwegian Business School)
    Abstract: Central banks' operations and eciency arguments would suggest that the intraday interest rate should be set to zero. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. Long memory approaches or a combination of them to account for model uncertainty outperform random walk, autoregressive and moving average benchmarks in terms of point and density forecasting. The relative accuracy is higher when the full distribution is predicted. We also document that such statistical accuracy can provide economic gains in investment strategies based on lending in the intraday market.
    Keywords: interbank market, intraday interest rate, forecasting, density forecasting, policy tools.
    JEL: C22 C53 E4 E5
    Date: 2014–02
  29. By: Cordella, Tito; Federico, Pablo; Vegh, Carlos; Vuletin, Guillermo
    Abstract: Using a new, large data set on quarterly reserve requirements for the period 1970-2011, this paper provides new evidence on the use of reserve requirements as a countercyclical macroprudential tool in developing countries. The appeal of reserve requirements lies in the pro-cyclical behavior of the exchange rate over the business cycle in developing countries. This enormously complicates the use of interest rates as a countercyclical instrument (because of its effect on the exchange rate) and calls for a second instrument. The paper suggests that conflicts may arise between the microprudential and macroprudential policy stances.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Banks&Banking Reform
    Date: 2014–02–01
  30. By: Yu Yongding (Asian Development Bank Institute (ADBI))
    Abstract: Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that while a contributing factor is the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements, exchange rate arbitrage and interest rate arbitrage matter also. Profits from arbitrages are the major driving forces of, but do not constitute a sustainable basis for, internationalization. A fundamental constraint for renminbi internationalization is the PRC’s capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order. Macroeconomic stability has to be achieved; the high ratio of financial leverage should be reduced; a rational and flexible interest rate structure must be created; and risk management capacity across industries should be established. Most importantly, the PRC must make the renminbi exchange rate flexible to reflect demand for and supply of foreign exchange in the market. The renminbi can and will become a major international currency eventually, but the road to internationalization is bound to be long and bumpy.
    Keywords: renminbi internationalization, renminbi trade settlement scheme, renminbi trade settlement, exchange rate and interest rate arbitrage
    JEL: F31 F33
    Date: 2014–02
  31. By: Vidakovic, Neven; Zbašnik, Dušan
    Abstract: The paper analyses the new measure implemented by Croatian national bank (CNB). The measure is a decrease in the reserve requirement, but the actual release of funds is contingent on increase in lending to firms. This new measure is significant because for the first time in Croatia there is a measure whose purpose is to affect specifically credit policy of the banks. Although this new measure has good intentions it does not solve the problem of why highly liquid banking system in Croatia is not willing to increase lending. The reason for lack of credit growth lies in two separate problems. The first problem is the willingness of banks to have more credit risk and the second problem is the way monetary policy is conducted in Croatia.
    Keywords: conduct of monetary policy, banks, credit
    JEL: E51 E58 G21
    Date: 2014–02
  32. By: Grech, Aaron George
    Abstract: This article studies the demand for one particular component of the money stock, currency, in Malta in the light of the existing theoretical and empirical framework. In particular, it argues that the commonly applied analytical framework needs to be tweaked slightly for it to better explain the reasons underpinning the relatively high currency demand in Malta compared with other euro area countries.
    Keywords: money demand, currency, Malta
    JEL: E41 E44
    Date: 2014–02
  33. By: Kawai, Masahiro (Asian Development Bank Institute); Pontines, Victor (Asian Development Bank Institute)
    Abstract: This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the currency baskets of East Asian economies. It systematically demonstrates that existing techniques to address the problem of severe multicollinearity in estimations of the Frankel¬–Wei regression model, with the movements in both the RMB and the US dollar included on the right-hand side of the equation, remain limited in providing stable and robust results. The paper proposes a simple modification of the Frankel–Wei regression model to estimate the RMB weight in an economy’s currency basket. Using this new approach, findings show there is not yet an RMB bloc in East Asia, contrary to claims made by some recent studies, with the US dollar continuing to be the dominant anchor currency in the region. The RMB has taken on some importance in the currency baskets of many East Asian economies in recent years and this appears to have occurred at the expense of the yen. In short, despite the rising importance of the RMB, it has not eclipsed the US dollar as the dominant anchor currency in East Asia.
    Keywords: RMB; renminbi bloc; Frankel–Wei regression model; anchor currency; East Asia; currency baskets
    JEL: F15 F31 F36 F41 O24
    Date: 2014–03–07
  34. By: Nicolas Barbaroux (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); Michel Bellet (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: 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
    Date: 2014–02–26
    Date: 2014
  36. By: Marianne, Ojo
    Abstract: Whilst economic, political linkages and relationships constitute the theme of this paper, the paper also attempts to address why central bank independence still lacks certain vital attributes which embody adequate governance and accountability mechanisms - which are necessary if better results in relation to longer term economic and political objectives, in particular, are to be achieved. From this perspective, the growing importance of the shift to a focus on distinguishing between micro and macro prudential regulation is illustrated. The need for such distinction is not just evidenced through the creation of agencies responsible for such affairs within particular jurisdictions which are considered in this paper, but also through the increased realisation and need for greater focus on decision making responsibilities which are to be assigned to political and economic entities at supra national levels. Financial stability, it appears, has more to do with a mere focus on longer term objectives. Financial stability is also concerned with the ability to sustain long term policy objectives whilst being flexible enough to respond effectively to short term unpredictabilities.
    Keywords: inflation targeting; monetary policies; central banks; fiscal policies; accountability; governance arrangements; momentum effects
    JEL: E2 E5 G2 K2
    Date: 2014–03–07
  37. By: Federico Etro (Department of Economics, University of Venice Ca' Foscari); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We reconsider the New-Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing and Bertrand competition, we obtain a modified New-Keynesian Phillips Curve with a lower slope. This reduces the level of nominal rigidities needed to obtain the estimated response of inflation to real marginal costs and to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, obtained through the linear quadratic approach, becomes less aggressive. Notably, the welfare gains from commitment decrease in more concentrated markets in reaction to inflationary shocks.
    Keywords: New Keynesian Phillips Curve, Real rigidities, Sticky prices, Optimal monetary policy, Infl?ation, Endogenous entry
    JEL: E3 E4 E5
    Date: 2014–03
  38. By: Benjamin J. Cohen (Asian Development Bank Institute (ADBI))
    Abstract: For many observers, internationalization is the yuan’s manifest destiny—an irresistible 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, 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. Much can be learned from their stories—first, about what may drive the internationalization of a currency, and second, about what may ultimately set a limit to the process. The main message of the analysis is that the challenge of internationalization is formidable, involving demanding conditions. Can Beijing sustain its record of price stability and effective policy management? Can the country succeed in shifting its industrial and trade structure toward exports of more advanced differentiated products? Can the yuan’s convertibility be broadened? Can domestic financial markets be adequately developed? Can the country’s political institutions be trusted? Can geopolitical tensions be avoided? Contrary to predictions of the yuan’s “inevitable†rise, success in all these respects is by no means guaranteed.
    Keywords: Internationalization of yuan, China, PRC, internationalization of a currency
    JEL: F31 F33 F41
    Date: 2014–01
  39. By: BLINOV, Sergey
    Abstract: This paper is looking into the causes of the GDP decline in Russia during 2008-2009 and the slow-down of the GDP growth during 2012-2013. The impact of the money supply on the GDP is discussed. Analogies are drawn with the crises in the USA: the Great Depression during 1929-1933 and the 2008-2009 crisis. Possible measures necessary for growth in Russia are investigated.
    Keywords: money supply, Great Depression, recession, central bank
    JEL: E41 E44 E51 E58 E65 G01 H12 N12 N14
    Date: 2014–03–04
  40. By: Jiahan Li (University of Notre Dame, USA); Ilias Tsiakas (University of Guelph, Canada); Wei Wang (Fifth Third Bank, USA)
    Abstract: This paper shows that economic fundamentals can generate reliable out-of-sample forecasts for exchange rates when prediction is based on a "kitchen-sink" regression that incorporates multiple predictors. The key to establishing predictability is estimating the kitchen-sink regression with the elastic-net shrinkage method, which improves performance by reducing the effect of less informative predictors in out-of-sample forecasting. Using statistical and economic measures of predictability, we show that our approach outperforms alternative models, including the random walk, individual exchange rate models, a kitchen-sink regression estimated with ordinary least squares, standard forecast combinations and popular ad-hoc strategies such as momentum and the 1/N strategy.
    Keywords: Exchange Rates; Out-of-Sample Forecasting; Elastic Net; Combined Forecasts
    JEL: F31 F37 G11 G15 G17
    Date: 2014–02

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