nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒04‒29
seventeen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Optimized Taylor Rules for Disinflation When Agents are Learning By Cogley, Timothy; Matthes, Christian; Sbordone, Argia M.
  2. Drifts, Volatilities, and Impulse Responses Over the Last Century By Amir-Ahmadi, Pooyan; Matthes, Christian; Wang, Mu-Chun
  3. Indeterminacy and Learning: An Analysis of Monetary Policy in the Great Inflation By Lubik, Thomas A.; Matthes, Christian
  4. The role of monetary policy in the New Keynesian Model: Evidence from Vietnam By Van Hoang
  5. Global Implications of the Renminbi’s Ascendance By Eswar Prasad
  6. Sunspots and Inflation-indexed Bonds By Minwook KANG
  7. Institutional Quality and Inflation By Salahodjaev, Raufhon; Chepel, Sergey
  8. The euro and the geography of international debt flows By Hale, Galina; Obstfeld, Maurice
  9. A Micro Level Perspective of Euroization in Albania By Edlira Narazani
  10. Electronic currencies for purposive degrowth? By Claudio Vitari
  11. The Role of Offshore Financial Centers in the Process of Renminbi Internationalization By Yin-Wong Cheung
  12. Inflation Differentials among Czech Households By Pavel Hait; Petr Jansky
  13. Updating Behavior of Inflation Expectations: Evidence from Japanese Household Panel Data By Ueno, Yuko
  14. Causality and contagion in EMU sovereign debt markets By Marta Gómez-Puig; Simón Sosvilla-Rivero
  15. Payment Choice and the Future of Currency: Insights from Two Billion Retail Transactions By Wang, Zhu; Wolman, Alexander L.
  16. An update on EMU sovereign yield spread drivers in time of crisis: A panel data analysis By Marta Gómez-Puig; Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  17. Dollarization and the relationship between EMBI and fundamentals in Latin American countries By Lorena Mari del Cristo; Marta Gómez-Puig

  1. By: Cogley, Timothy (New York University); Matthes, Christian (Federal Reserve Bank of Richmond); Sbordone, Argia M. (Federal Reserve Bank of New York)
    Abstract: Highly volatile transition dynamics can emerge when a central bank disinflates while operating without full transparency. In our model, a central bank commits to a Taylor rule whose form is known but whose coefficient are not. Private agents learn about policy parameters via Bayesian updating. Under McCallum's (1999) timing protocol, temporarily explosive dynamics can arise, making the transition highly volatile. Locally-unstable dynamics emerge when there is substantial disagreement between actual and perceived feedback parameters. The central bank can achieve low average inflation, but its ability to adjust reaction coefficients is more limited.
    Keywords: Inflation; Monetary policy; Learning; Policy reforms; Transitions
    JEL: E31 E52
    Date: 2014–03–15
  2. By: Amir-Ahmadi, Pooyan (Goethe University Frankfurt); Matthes, Christian (Federal Reserve Bank of Richmond); Wang, Mu-Chun (University of Hamburg)
    Abstract: How much have the dynamics of U.S. time series and in particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "a lot" and "probably less than you think," respectively. We use vector autoregressions with time-varying parameters and stochastic volatility to tackle these questions. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term nominal interest rates) and the growth rate of money.
    Keywords: Bayesian VAR; Time variation; U.S. monetary policy
    JEL: C50 E31 N12
    Date: 2014–04–07
  3. By: Lubik, Thomas A. (Federal Reserve Bank of Richmond); Matthes, Christian (Federal Reserve Bank of Richmond)
    Abstract: We argue in this paper that the Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. We show, however, that the Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the U.S. economy and it was subject to data misperceptions. The real-time data flow at that time did not capture the true state of the economy, as large subsequent revisions showed. It is the combination of learning about the economy and, more importantly, the use of data riddled with measurement error that resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy in the economy.
    Keywords: Federal Reserve; Great Moderation; Bayesian Estimation; Least Squares Learning
    JEL: C11 C32 E52
    Date: 2014–01–31
  4. By: Van Hoang
    Abstract: This paper reproduces a version of the New Keynesian model developed by Ireland (2004) and then uses the Vietnamese data from January 1995 to December 2012 to estimate the model’s parameters. The empirical results show that before August 2000 when the Taylor rule was adopted more firmly, the monetary policy shock made considerable contributions to the fluctuations in key macroeconomic variables such as the short-term nominal interest rate, the output gap, inflation, and especially output growth. By contrast, the loose adoption of the Taylor rule in the period of post-August 2000 leads to a fact that the contributions of the monetary policy shock to the variations in such key macroeconomic variables become less substantial. Thus, one policy implication is that adopting firmly the Taylor rule could strengthen the role of the monetary policy in driving movements in the key macroeconomic variables, for instance, enhancing economic growth and stabilizing inflation.
    Keywords: New Keynesian model, Monetary Policy, Technology Shock, Cost-Push Shock, Preference Shock.
    JEL: E12 E32
    Date: 2014–02–01
  5. By: Eswar Prasad (Asian Development Bank Institute (ADBI))
    Abstract: This paper evaluates the prospects for the renminbi’s role as an international currency and the implications for global financial markets. Although the People’s Republic of China (PRC) does not have either an open capital account or a flexible exchange rate, the renminbi has attained considerable traction as an international currency on account of the PRC’s rising shares of global trade and gross domestic product. Through bilateral swaps that the People’s Bank of China has established with other countries’ central banks, the renminbi is also becoming more prominent in international finance. However, the renminbi is unlikely to become a major reserve currency in the absence of capital account convertibility, a flexible exchange rate, and better-developed financial markets. The renminbi’s rising prominence—if it is accompanied by significant economic reforms within the PRC—could add to the stability of Asian and global financial systems.
    Keywords: renminbi, Capital account liberalization, the people's bank of China, global financial markets, International currency
    JEL: F3 F4 E5
    Date: 2014–03
  6. By: Minwook KANG (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)
    Abstract: An economy with incomplete ?nancial markets, as described by Cass (1989), typically has in?ation volatility driven by sunspots. The purpose of this paper is to investigate how the introduction of in?ation- indexed bonds to the ?Cass?economy in?uences a monetary market, an indexed bond market, and welfare. The introduction of indexed bonds is considered a sunspot-stabilizing policy. However, this introduction unrealistically causes the complete shutdown of monetary markets. This problem can be avoided in this paper as incorporating proportional transaction costs in the indexed bond market. Specifically, I show that the monetary market can never shut down even with a very high level of in?ation volatility if the indexed bonds have transaction costs. In contrast, the indexed bond market can be inactive with a high value of transaction costs or low levels of in?ation volatility. This paper shows that the introduction of indexed bonds does not necessarily induce the economy to be Pareto improving. However, by allowing lump-sum tax-transfer plans that are implemented in period-0 money, the market with indexed bonds can be Pareto superior to the market without them. The conclusions derived from a single-good economy can be applied to a multi-good economy if all agents have an identical homothetic utility function.
    Keywords: In?ation-indexed bonds, Sunspots, In?ation volatility, Transaction costs, Consumer price index (CPI)
    Date: 2014–01
  7. By: Salahodjaev, Raufhon; Chepel, Sergey
    Abstract: The purpose of this paper is to empirically analyze the effects of the quality of institutions on inflation. Using panel data from 1991 to 2007, we find that increase in institutional development which is measured by the ratio of domestic credit to private sector to GDP has significant and sizeable effect on inflation. This paper finds that in countries with high inflation rates, financial sectors cannot resist current levels of inflation and banking system does not decrease inflation in the environment where private banks and financial companies have adapted to existing monetary environment.
    Keywords: Inflation; Credit; Institutions; Quality
    JEL: E51 E52
    Date: 2014–03–25
  8. By: Hale, Galina (Federal Reserve Bank of San Francisco); Obstfeld, Maurice (University of California Berkeley,)
    Abstract: Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery.
    Keywords: international debt; EMU; international banking; global imbalances; euro crisis
    JEL: F32 F34 F36
    Date: 2014–04–14
  9. By: Edlira Narazani
    Abstract: This research investigates what drives the euroization in Albania. By using survey data collected in one of the main Albanian cities, we find that factors like remittances, financial literacy, perception of high inflation and trust in financial system play an important role in the extent of euroization together with the experience of past events. Factors related to the future, such as the expectation on the exchange rate fluctuations, seem to not be correlated with the extent of euroization. As regards the current Eurozone crisis, its impact on euroization results to be mediated by the (mis)trust in EURO rather than local currency.
    Keywords: Euroization, currency substitution, survey data, eurozone crisis
    JEL: E41 E50 D14 C83
    Date: 2013–02
  10. By: Claudio Vitari (MTS - Management Technologique et Strategique - Grenoble École de Management (GEM))
    Abstract: By one hand, the nature of money influences the objects, the objectives and the methods of production and consumption. On the other hand, the distribution of money influences human behaviors, the supply and the demand of goods, and hence their prices. Today, the banking sector enjoys the privilege of creating around 95% of the money supply. Moreover, as bank money bears interest as a condition of its existence, it has long been argued that a systemic growth imperative is inherent to its design. The pursuit of the interrelated goals of ecological sustainability and social justice calls for changes to money-as-usual. This article focuses on degrowth as a novel paradigm that advances changes in money nature and distribution. We scrutinize electronic currencies, which may be defined as alternatives or complements to legal tender money that circulate in electronic forms. At the hearth of the electronic currencies, Information and Communication Technology has the potential for changing modern society. But does Information and Communication Technology shape our society for purposive degrowth? The article aims to explore to what extent electronic currencies can be considered as practical initiatives for advancing socially equitable and ecologically sustainable degrowth. A literature review is the method employed to bring a first preliminary answer to the research question. Our results show that electronic currencies can contribute at the individual level to support purchases and at the society level to support optimal allocation of resources. Nothing emerged, in literature, supporting the hypothesis that electronic currency could shape our society for purposive degrowth. Extension of the literature review and empirical study of electronic currencies in action will be the next research steps.
    Keywords: Electronic currencies; degrowth; money; work system framework; Information and Communication Technology.
    Date: 2014
  11. By: Yin-Wong Cheung (Asian Development Bank Institute (ADBI))
    Abstract: The People’s Republic of China (PRC) has been quite aggressive recently in promoting the international use of its currency, the renminbi. Historical experience suggests that an active offshore market is essential for a global currency. Indeed, anecdotal evidence affirms the role of offshore markets in pushing the renminbi currency to the world. One should not, however, overplay the contribution of offshore markets. While offshore markets offer the opportunities to experiment with the global use of the currency, the overseas acceptance of the renminbi is ultimately determined by both internal and external economic forces, and geopolitical factors. With its relatively small size, the offshore renminbi is not likely to pressure the PRC and alter its financial liberalization policy. A well-organized offshore renminbi market will complement the PRC’s renminbi internationalization policy, but it is not possible to raise the currency’s global status beyond the level justified by its economic and political attributes.
    Keywords: renminbi, International currency, renminbi internationalization, PRC, offshore markets
    JEL: F33
    Date: 2014–04
  12. By: Pavel Hait; Petr Jansky
    Abstract: Inflation rates have traditionally been measured by the annualized percentage change in the price level of a market basket of consumer goods and services purchased by households. The market basket represents the spending patterns of average household. However, households differ in their spending patterns and there are differences in the price changes of various goods and services. Therefore, different households experience different inflation rates. This paper finds that these differences have been significant in the Czech Republic during the period 1995-2010. Only around 60 % of households actually experienced an inflation rate that was similar to the national average. Furthermore, the higher the average inflation rate over time, the lower the percentage of households whose inflation rate was similar to that average. The main determiners of inflation were expenditures for housing and energy and, especially for low-income households and pensioners, expenditures on food and non-alcoholic drinks. In most years, pensioners and low-income households faced significantly higher inflation rates than the average rate for the whole population.
    Keywords: households; inflation; inflation differentials; relative prices;
    JEL: D12 H22 I31
    Date: 2014–02
  13. By: Ueno, Yuko
    Abstract: This study provides insights into the expectation-updating behavior of Japanese households with regard to future inflation. Households do not renew their information set in every period, but they do so at a greater frequency than that argued in the literature. A more volatile inflation rate leads to improved accuracy vis-à-vis expectations, given higher attention levels—although greater volatility does make it more difficult to form precise forecasts. Additionally, the estimation results involving inflation reflect variation in consumption basket by household attributes and are consistent; these results are clearer than those involving the consumer price index, thus indicating the possibility that households indeed face variations in inflation rate, depending on their characteristics.
    Keywords: Inflation, survey expectations, information stickiness, rational inattention, forecast error
    Date: 2014–02
  14. By: Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona); Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: This paper contributes to the literature by applying the Granger-causality approach and endogenous breakpoint test to offer an operational definition of contagion to examine European Economic and Monetary Union (EMU) countries public debt behaviour. A database of yields on 10-year government bonds issued by 11 EMU countries covering fourteen years of monetary union is used. The main results suggest that the 41 new causality patterns, which appeared for the first time in the crisis period, and the intensification of causality recorded in 70% of the cases, provide clear evidence of contagion in the aftermath of the current euro debt crisis.
    Keywords: Sovereign bond yields, Granger causality, contagion, Euro area
    Date: 2014–02
  15. By: Wang, Zhu (Federal Reserve Bank of Richmond); Wolman, Alexander L. (Federal Reserve Bank of Richmond)
    Abstract: This paper uses transaction-level data from a large discount chain together with zip-code-level explanatory variables to learn about consumer payment choices across size of transaction, location, and time. With three years of data from thousands of stores across the country, we identify important economic and demographic effects; weekly, monthly, and seasonal cycles in payments, as well as time trends and significant state-level variation that is not accounted for by the explanatory variables. We use the estimated model to forecast how the mix of consumer payments will evolve and to forecast future demand for currency. Our estimates based on this large retailer, together with forecasts for the explanatory variables, lead to a benchmark prediction that the cash share of retail sales will decline by 2.54 percentage points per year over the next several years.
    Keywords: Payment choice; Money demand; Consumer behavior
    JEL: D12 E41 G2
    Date: 2014–04–14
  16. By: Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona); 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: We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries. Besides, without exception, the marginal effects of sovereign spread drivers (specifically, the variables that measure global market sentiment) increased during the crisis compared to the pre-crisis period, especially in peripheral countries.
    Keywords: Sovereign bond spreads, panel data, eurozone
    Date: 2014–03
  17. By: Lorena Mari del Cristo (Department of Economic Theory, Universitat de Barcelona); Marta Gómez-Puig (Department of Economic Theory, Riskcenter-IREA, Universitat de Barcelona)
    Abstract: This paper presents empirical evidence on the interrelationship that exists between the evolution of the Emerging Markets Bonds Index (EMBI) and some macroeconomic variables in seven Latin American countries; two of them (Ecuador and Panama), full dollarized. We make use of a Cointegrated Vector framework to analyze the short run effects from 2001 to 2009. The results suggest that EMBI is more stable in dollarized countries and that its evolution influences economic activity in non-dollarized economies; suggesting that investors confidence might be higher in dollarized countries where real and financial economic evolution are less tied than in non-dollarized ones.
    Keywords: Dollarization, emerging markets, Latin American countries, Cointegrated VAR, EMBI, exchange rate regime
    Date: 2014–02

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