nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒09‒05
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Federal Reserve Policy and Bretton Woods By Bordo, Michael D.; Humpage, Owen F.
  2. Money Still Matters: How the Bank of Canada Might Better Monitor Inflation By Mati Dubrovinsky
  3. Stability and Eurozone membership: Should a small transition country join? By Timo Baas
  4. Impact of liquidity level on effectiveness of the monetary policy transmission of Bank Al Maghrib By Nicolas Moumni; Benaissa Nahhal
  5. Monetary policy and financial shocks in an empirical small open-economy DSGE model By Rudi Steinbach; Stan du Plessis; Ben Smit
  6. Pricing-to-Market and Optimal Interest Rate Policy By Cooke, Dudley
  7. Testing for Nonlinear Adjustment in the Portuguese Target Zone: Is there a Honeymoon Effect? By Joao Sousa Andrade; António Portugal Duarte; Adelaide Duarte
  8. An empirical analysis on the parallel foreign exchange market: The case of Vietnam By Duy Hung Bui
  9. The FRBNY Staff Underlying Inflation Gauge: UIG By Marlene Amstad; Simon Potter; Robert Rich
  10. Deposit Interest Rate Ceilings as Credit Supply Shifters: Bank Level Evidence on the Effects of Regulation Q By Koch, Christoffer
  11. An Estimated DSGE Model with a Deflation Steady State By Yasuo Hirose
  12. How Do Global Liquidity Phases Manifest Themselves in Asia? By Asian Development Bank (ADB); ; ;
  13. Is the Quantity Theory of Money Useful in Forecasting U.S. Inflation? By Markku Lanne; Jani Luoto; Henri Nyberg
  14. Why is Inflation Targeting Successful?: Analysis of Inflation Target Transparency By Bedri Kamil Onur Tas
  15. Monetary Policy and the Maginot Line (With Reference to Jonathan Swift, Neil Irwin, Shakespeare's Portia, Duck Hunting, the Virtues of Nuisance and Paul Volker) By Fisher, Richard W.
  16. House Prices, Capital Inflows and Macroprudential Policy By Maria Teresa Punzi; Caterina Mendicino
  17. Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy By Fabia Carvalho; Fabia A. de Carvalho; Silvio Michael de Azevedo Costa; Marcos Ribeiro de Castro
  18. Assessing the value of money – the base to upgrade the global monetary and finance system By Sailau Baizakov
  19. Frequent episoded of high inflation and real effects By Wojciech Charemza; Svetlana Makarova; Imran Shah
  20. Inflation persistence – a disaggregated approach By Agnieszka Leszczynska; Katarzyna Hertel
  21. Quantitative easing and bank lending: a panel data approach By Joyce, Michael; Spaltro, Marco
  22. Can interest rate spreads stabilize the euro area? By Jacek Kotłowski; Michał Brzoza-Brzezina; Kamil Wierus
  23. Public support for the single European currency, the euro, 1990 to 2011. Does the financial crisis matter? By Felicitas Nowak-Lehmann D.; Felix Roth (CEPS, Brussels); Lars Lonung (university of Lund, Sweden)
  24. Monetary Macroprudential Policy Mix under Financial Frictions Mechanism with DSGE Model By Fajar Oktiyanto; Harmanta; Nur M. Adhi Purwanto; Aditya Rachmanto
  25. What common factors are driving inflation in CEE countries? By Aleksandra Halka; Grzegorz Szafrański
  26. Testing the Liquidity Preference Hypothesis using Survey Forecasts By Jose Renato Haas Ornelas; Antonio Francisco de Almeida Silva Jr

  1. By: Bordo, Michael D. (Federal Reserve Bank of Cleveland); Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. The Federal Reserve could largely disregard international considerations because the U.S. Treasury instituted a number of stop-gap devices—the gold pool, the general agreement to borrow, capital restraints, sterilized foreign-exchange operations—to shore up the dollar and Bretton Woods. These, however, gave Federal Reserve policymakers the latitude to focus on domestic objectives and shifted responsibility for international developments to the Treasury. Removing the pressure of international considerations from Federal Reserve policy decisions made it easier for the Federal Reserve to pursue the inflationary policies of the late 1960s and 1970s that ultimately destroyed Bretton Woods. In the end, the Treasury’s stop-gap devices, which were intended to support Bretton Woods, contributed to its demise.
    Keywords: Bretton Woods; Federal Reserve; monetary policy; Taylor rule; U.S. Treasury
    JEL: F31 F33 N1
    Date: 2014–08–27
  2. By: Mati Dubrovinsky
    Abstract: The Bank of Canada (BoC) should carefully monitor the money supply to better predict inflation and track the effectiveness of its monetary policy, according to a new C.D. Howe Institute report. In “Money Still Matters: How the Bank of Canada Might Better Monitor Inflation,” author Mati Dubrovinsky suggests the BoC should also pay particular attention to the possibility that the public’s inflation expectations will shift below targeted inflation, and should be prepared to adjust policy if and when such a shift occurs.
    Keywords: Monetary Policy
    JEL: E51 E58
  3. By: Timo Baas
    Abstract: In the last years, Baltic countries joined or prepare to join the European Monetary Union. Accession comes in a time, were trading share between these countries and the Eurozone are declining. From a theoretical point of view, the optimality of currency unions depends on bilateral trade between it's members. In this paper it is shown that countries might benefit from a currency union as an alternative to fixed exchange rates. Using a DSGE model of a small country and a currency union, it is shown that membership in the union is beneficial to a fixed exchange rate system without a common monetary policy in terms of output and price stability. This result is robust even if trading shares decline significantly.In this paper we compare different monetary policy rules in a two-country open-economy DSGE model with Calvo price setting. Membership in the currency union is always beneficial in terms of macroeconomic stability. The benefits of joining a monetary union, however, are increasing with a declining share of foreign goods in the consumption basket of domestic households. The decision of Baltic countries to join the monetary union, therefore, is a second best solution in an environment were there is a fear of floating.
    Keywords: Baltic countries, General equilibrium modeling, EU enlargement
    Date: 2014–07–03
  4. By: Nicolas Moumni; Benaissa Nahhal
    Abstract: In the context of international financial crisis, this paper aims to analyze the impact of liquidity level on effectiveness of monetary policy transmission of the Moroccan central bank (Bank Al Maghrib, BAM). After a long period of liquidity excess, the Moroccan banking system through, since 2007, a liquidity shortage that forces BAM to inject a regular and massive quantity of liquidity. For example, 7-day advances bidding BAM rose from 3,5 billion dirhams in 2006 to 2,420 billion dirhams in 2012, an increase by 691 times. To evaluate the influence of liquidity level on effectiveness of the monetary policy transmission of Bank Al Maghrib, we estimate a simple VAR over the period 1998-2012 by distinguishing the period of liquidity excess and liquidity shortage.Our results show that in periods of liquidity excess the monetary policy transmission would be less effective, especially in the long term. Instead, a situation of liquidity shortage makes it more effective.
    Keywords: Morocco, Monetary issues, Macroeconometric modeling
    Date: 2014–07–03
  5. By: Rudi Steinbach; Stan du Plessis; Ben Smit
    Abstract: Determine the optimal response of a small open economy's central bank to financial shocks that lead to increases in credit spreads. Increasing credit spreads reduce the efficacy of monetary policy when the central bank is reducing the policy rate to accommodate a lowering in economic activity.Used a DSGE model that incorporates heterogeneous households and financial intermediaries. Financial shocks leads to an increase in non-performing loans, which in turn causes the financial intermediary to increase the spread over the policy rate at which it is willing to lend.The central bank should reduce the policy rate in response to rising credit spreads, however this response is more muted when compared to a closed economy facing a similar shock.
    Keywords: South Africa / Italy, Monetary issues, Macroeconometric modeling
    Date: 2014–07–03
  6. By: Cooke, Dudley (University of Exeter)
    Abstract: I study optimal interest rate policy in a small open economy with consumer search in the product market. When there are search frictions, firms price-to-market, with implications for the design of monetary policy. Country-specific shocks generate deviations from the law of one price for traded goods which monetary policy acts to stabilize by influencing firm markups. However, stabilizing law of one price deviations results in greater fluctuations in output.
    Keywords: interest rates; monetary policy; price
    JEL: E31 E52 F41
    Date: 2014–08–01
  7. By: Joao Sousa Andrade; António Portugal Duarte; Adelaide Duarte
    Abstract: Based on the Krugman (1991) model, the aim of this study is to analyse whether the adoption by Portugal of an exchange rate target zone regime in the context of the participation of the Portuguese escudo in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS), allowed the verification of the existence of a nonlinear S-shaped relationship between the exchange rate and its fundamental determinants. Indeed, it is essential for the Portuguese economy to achieve the conditions of stability, credibility and macroeconomic discipline, since without these it would be very difficult to adopt the European single currency. We tested three models ─ OLS, Auto-correlation by Maximum Likelihood, and GARCH (p, q). We also used LSTAR and ESTAR models to analyse the behaviour of the exchange rate. With this study we also support the idea that a target zone regime should be considered a feasible solution for ‘tomorrow’ for countries that ‘today’ can be forced to abandon the Euro Zone. This kind of option combines monetary policy autonomy with macroeconomic stability.
    Keywords: Portugal and Germany, Monetary issues, Macroeconometric modeling
    Date: 2013–06–21
  8. By: Duy Hung Bui
    Abstract: Vietnam is a developing country with a fixed exchange rate regime and the use of foreign currency is under control of the monetary authorities. Hence, like other developing countries, Vietnam also has the parallel exchange market that exists together with the official exchange market though, it is illegal. The existence of the parallel exchange market creates several complications to the State Bank of Vietnam in their attempts to manage the foreign exchange market and the exchange rate. Fluctuations in the parallel market rates affect both the level of international reserves, the position of the economy and portfolio decisions of the public. Therefore, a strong understanding of the parallel foreign exchange market will help the State bank of Vietnam have sound policies in the foreign exchange market. The monetary approach to the parallel foreign exchange market initially developed by Blejer (1978) and then further developed by Agénor (1991) is used. This approach focuses on the disequilibrium in the money market in explaining movements in output, price, the parallel market exchange rate, and change in net foreign assets An increase of money supply by 1% causes the exchange rate in the parallel market depreciated by 0.015%. A 1 per cent devaluation of the official exchange rate would bring about 1.33 per cent devaluation of the parallel market rate. These results bespeak the State Bank of Vietnam’s efforts to reduce the market premium seem to be not success and stimulating economic growth by money supply would lead to deprecation in both markets
    Keywords: Vietnam, Macroeconometric modeling, Monetary issues
    Date: 2014–07–03
  9. By: Marlene Amstad; Simon Potter; Robert Rich
    Abstract: Monetary policymakers and long-term investors would benefit greatly from a measure of underlying inflation that uses all relevant information, is available in real-time, and forecasts inflation better than traditional underlying inflation measures such as core inflation measures. This paper presents the "Federal Reserve Bank of New York (FRBNY) Staff Underlying Inflation Gauge (UIG)" for CPI and PCE. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. It also considers the specific and time-varying persistence of individual subcomponents of an inflation series. An attractive feature of the UIG is that it can be updated on a daily basis, which allows for a close monitoring of changes in underlying inflation. This capability can be very useful when large and sudden economic fluctuations occur, as at the end of 2008. In addition, the UIG displays greater forecast accuracy than traditional measures of core inflation.
    Keywords: Inflation, Dynamic Factor Models, Core Inflation, Monetary Policy, Forecasting
    Date: 2014–07
  10. By: Koch, Christoffer (Federal Reserve Bank of Dallas)
    Abstract: Shocks emanating from and propagating through the banking system have recently gained interest in the macroeconomics literature, yet they are not a feature unique to the 2008/09 financial crisis. Banking disintermediation shocks occured frequently during the Great Inflation era due to fixed deposit rate ceilings. I estimate the effect of deposit rate ceilings inscribed in Regulation Q on the transmission of federal funds rate changes to bank level credit growth using a historic bank level data set spanning half a century from 1959 to 2013 with about two million observations. Measures of the degree of bindingness of Regulation Q suggest that individual banks’ lending growth was smaller the more binding the legally fixed rate ceiling. Interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non-linear at the ceiling “kink” and significantly larger when rate ceilings were in place. At the bank level, short-term interest rates exceeding the legally fixed deposit rate ceilings identify bank loan supply shifts that disappeared with deposit rate deregulation and thus weakened the credit channel of monetary transmission since the early 1980s.
    Keywords: Monetary Transmission; Lending Channel; Regulation Q; Deregulation; Great Moderation
    JEL: E51 E52 E58 G18 G21
    Date: 2014–07–14
  11. By: Yasuo Hirose (Faculty of Economics, Keio University,)
    Abstract: Benhabib, Schmitt-Grohé, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to households' preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japan's business cycles is marginal and that macroeconomic stability during the period was a result of good luck.
    Keywords: Deflation, Zero interest rate, Japanese economy, Indeterminacy, Bayesian estimation
    JEL: E31 E32 E52
    Date: 2014–06
  12. By: Asian Development Bank (ADB); (Office of Regional Economic Integration, ADB); ;
    Abstract: Given the catastrophe in the world’s largest economy and the subsequent unprecedented ultra-easy money policies, policy makers around the world have to face a new environment. The resulting capital flows in emerging market economies were huge and volatile. These flows have been intermediated through the banking sector (Phase One), and through the capital market, especially the fast growing bond market (Phase Two). Benefits and risks arise with these flows. The risks came to the fore after some signs emerged that the quantitative-easing policy in the US may slow down or even reverse, causing a reversal of capital flows. The analysis in this monograph expands on the implications of such a trend for emerging Asia, where financial cycles are falling out of sync with business cycles, reducing the effectiveness of monetary policy and thereby requiring a separate macroprudential policy.
    Keywords: capital, liquidity, bond market, regional safety nets, macroprudential, phases of liquidity, capital flows, balance sheet, quantitative easing, QE tapering, procyclicality, non-core liabilities, money, money printing, money supply
    Date: 2013–08
  13. By: Markku Lanne (University of Helsinki and CREATES); Jani Luoto (University of Helsinki); Henri Nyberg (University of Helsinki)
    Abstract: We propose a new simple model incorporating the implication of the quantity theory of money that money growth and inflation should move one for one in the long run, and, hence, inflation should be predictable by money growth. The model fits postwar U.S. data well, and beats common univariate benchmark models in forecasting inflation. Moreover, this evidence is quite robust, and predictability is found also in the Great moderation period. The detected predictability of inflation by money growth lends support to the quantity theory.
    Keywords: Money growth, transfer function model, low-pass filter
    JEL: C22 E31 E40 E51
    Date: 2014–08–22
  14. By: Bedri Kamil Onur Tas
    Abstract: Although there are many studies that empirically investigate the impact of Inflation Targeting (IT) on several aspects of the economy, the mechanisms through which IT improves the economic conditions are not studied extensively. A theoretical study is needed to present the dynamics of IT and uncover the reasons behind the success of IT. In this paper, we theoretically investigate the mechanisms through which IT effects the expectations of the public and achieve desired levels of inflation, inflation uncertainty and credibility. The study considers two mechanisms through which IT achieves its goals: (1) improvement in the credibility of the Central Bank (CB) (2) improvement in the ability of the central bank to alter the expectations of the public. To analyze these mechanisms, we construct and solve a model of asymmetric information and learning between the CB and the public. The source of the asymmetric information is the time-varying inflation targets of the CB. This paper theoretically investigates the effect of IT on the information dynamics between the Central Bank (CB) and the public. The paper introduces time-varying implicit inflation targets of the CB as the potential source of asymmetric information. Then, the model shows that IT central banks attain the desired outcomes because IT eliminates the asymmetric information about the implicit inflation targets of the CB and the frictions caused by that asymmetric information. Following the empirical findings of Ireland (2007) and Leigh (2008), we construct a model of asymmetric information and learning where the CB has an implicit inflation target and that target is unknown to the public. The model features two agents, the Central Bank (CB) and a representative private-sector agent. The information structure is hierarchical since the CB is assumed to possess private information that the private-sector agent tries to deduce by observing the CB’s actions. Hierarchical information structure is modeled as in Townsend (1983). The information structure consists of two steps: • The CB determines its inflation target of time t and uses a simple Taylor rule to determine the interest rate. . The CB follows an AR(1) rule for the inflation target as in Gurkaynak et al. (2005). (This target is announced to the public in the inflation targeting case). • The representative private-sector agent observes the interest rate and the inflation target.(in the inflation targeting case) and revises her inflation and output expectations. To analyze these mechanisms, we construct and solve a model of asymmetric information and learning between the CB and the public. The source of the asymmetric information is the time-varying inflation targets of the CB. The model depends on unobserved-components modelling with state-space representations. The model is solved using the Kalman filtering algorithm. The results present that IT countries attain the desired outcomes because IT eliminates the asymmetric information and the frictions caused by that asymmetric information. As a result, we propose and theoretically show that in non-IT countries the private agents are uncertain about the implicit inflation target of the CB and they construct their expectations about the target by following the actions of the CB. That learning dynamics increases the uncertainty and the level of inflation significantly. IT eliminates that uncertainty about the inflation target since the target is announced and becomes public information. The announcement of a credible target anchors inflation expectations as empirically shown by Gurkaynak et al. (2010) and lower levels of inflation and inflation uncertainty are achieved as a result. There are three main results of this paper. First, inflation and output expectations of the public are significantly affected by the inflation target under the case of IT. In other words, we theoretically present the mechanism through which IT anchors inflation and output expectations. Second, in the discretionary CB case, the private sector agent uses a filtered estimate of the inflation target of the CB to form her expectations which increases the variance (stability) of inflation expectations of the public. Finally, credibility of the CB is significantly affected by the target under the IT case. The CB can improve its credibility by announcing a credible target.
    Keywords: Calibration with US parameters. , Monetary issues, Impact and scenario analysis
    Date: 2014–07–03
  15. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Abstract: Monetary Policy: Debate, Dissent and Discussion with Richard Fisher at the University of Southern California, Annenberg School for Communication and Journalism, Los Angeles, CA, July 16, 2014.
    Date: 2014–07–16
  16. By: Maria Teresa Punzi (Department of Economics, Vienna University of Economics and Business); Caterina Mendicino (Economics and Research Department, Bank of Portugal)
    Abstract: This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkages between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household debt. In this context, optimal policy features an interest-rate response to credit and a LTV ratio that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.
    Keywords: house prices, financial frictions, global imbalances, saving glut, dynamic loan-to value ratios, monetary policy, optimized simple rules
    JEL: C33 E51 F32 G21
    Date: 2014–08
  17. By: Fabia Carvalho; Fabia A. de Carvalho; Silvio Michael de Azevedo Costa; Marcos Ribeiro de Castro
    Abstract: This paper builds a DSGE model in which future wage assignments are introduced as collateral for risky consumer and housing loans, in addition to standard BGG-type loans to entrepreneurs. Banks face matter-of-fact constraints in funding and lending markets, have liquidity targets, and are subject to a number of macroprudential rules, such as reserve requirements, capital requirements, and regulation on housing loan concessions. The main determinants of actual bank lending spreads are mapped into the model through the introduction of taxes on banking activity, monopolistic competition in a segment of the bank's conglomerate, credit risk, and regulatory and operational costs. The bank operates in the open market, and that is key to the transmission channel of reserve requirements. The model is carefully tailored to Brazil and reproduces the baseline understanding of the transmission channel of monetary policy and of reserve requirements. Macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. DSGE modeling, with results analyzed trhough impulse responses. The first draft of the paper presents a calibration and IRFs. We plan to present in the conference a full-fledged estimated version of it, with variance decomposition analysis, historical decomposition of shocks, in addition to scenario studies. Preliminary results with the calibrated version of the model show that our modeling strategy is capable of reproducing the baseline understanding of the transmission channel of monetary policy and of reserve requirements. In addition, macroprudential regulation in the form of capital requirements has important implications for the dynamics of real variables. We also plan to study to effect of changes in risk weights in capital requirements, changes in the remuneration of reserve requirements, and also analyze the transmission of the last financial shock through the eyes of the model.
    Keywords: Brazil, Monetary issues, Optimization models
    Date: 2013–06–21
  18. By: Sailau Baizakov
    Abstract: The essence of money is its cost. And the value of money, by definition, is serving, above all, as the measurement for the price of goods and services. I.e. the essence of money is their ability to become a single scale for measurement of goods and services. This ability is due to the international consensus which has linked the price (value) of money to the quantity of goods and services which is exchanged for the currency units such as Tenge, Dollar, Ruble etc. The essence of money is its function to serve as the instrument of: - measurement of value, - goods circulation velocity, - saving wealth by private individuals and legal persons, - circulation as the world currency. Therefore, the purchasing power of money is defined within the frames of its functions. So, e.g., as the measurement of value money assess the prices of goods. Then supporting the process of goods mass circulation, the money itself engage in circulation. The circulation of goods and money flows may be faced with the gap which may cause the crises in economy. Therefore in economy management it is common to quarterly measure the difference between the nominal GDP and the real GDP. It is also assumed that the former is the result of the money circulation in nominal terms whereas the latter represents the results of goods circulation in the prices of the base period (in constant prices – translator’s note). The official statistics name this as the GDP deflator. It is accepted that the GDP deflator (or in other words the index of money inflation) – is the whip for the market economy and is therefore controlled by the government. The ability to use the money as payment tool may become the reason for the financial crises related to debt situations. The current crisis in EU countries is the financial crisis, crisis of external debts. The external debts depend not only on the amounts of debts but to some extent on purchasing power of trading partner currencies. From this it stems that in order to have the complete model of analysis in economic growth factors, it should consider not only the quantitative but also qualitative indicators of all three levels of economic cycle of money and goods: real sector, financial sector, and national economy as a whole (presumably comprising the government and external sectors – note by translator) See above See above
    Keywords: NA, Monetary issues, Monetary issues
    Date: 2013–06–21
  19. By: Wojciech Charemza; Svetlana Makarova; Imran Shah
    Abstract: The paper analyses inflationary real effects in situation where there are frequent episodes of high inflation. It is conjectured with the increase in high inflation, and when differences between the expected and output-neutral inflation become large, output stimulation through inflationary shocks is more effective than otherwise. It is shown that this conjecture is valid for most countries with high inflation episodes, where inflation is greater than 4.8% for at least 25% of quarterly observations. This leads to a simple policy prescription that anti-inflationary monetary decisions should be undertaken in periods where the expected inflation exceeds output-neutral. Vector autoregressive modelling, asymmetric impulse response analysis, inflationary real effects gauge (IREG) From the set of 45 countries 17 have been selected where there were marked episodes of high inflation. By the episodes of high inflation we mean the cases where 0.75 quantile of annual inflation is equal to at least 7.5%. For these countries IREG’s have been computed and asymmetric impulse responses of output to inflationary shocks evaluated separately for the periods where IREG is positive and negative. For countries selected there is a strong positive correlation between the differences in these cumulative impulse responses and the logarithm of the 0.75th quantile of inflation. In another words, we have shown that, if a country experiences periods of high inflation, it becomes relevant to pay attention to the differences between the expected and output-neutral inflation and make anti-inflationary decision in the periods where this difference is positive. The higher inflation becomes, the stronger is the conclusion above.
    Keywords: worldwide, 45 countries, emphasis on Indonesia, Malaysia and Pakistan, Monetary issues, Developing countries
    Date: 2013–06–21
  20. By: Agnieszka Leszczynska; Katarzyna Hertel
    Abstract: Inflation persistence and its role for efficient monetary policy has been given a lot of attention in empirical literature. The main contribution has been made by the Inflation Persistence Network, seeking to assess the level of persistence in the euro zone countries, the influence of the Monetary Union for the inflation persistence heterogeneity within countries and categories of products (see: Altissimo, Mojon, Zaffaroni, 2009). The research concerning New Member States started to appear later on and concentrates mostly on the comparison of the level of inflation persistence among NMS (or individual country analysis), eventually correlating it to the level of inflation (see eg. Franta, Saxa, Smidkova, 2010). Our contribution to the subject is the evaluation of persistence not only in the inflation aggregate in Poland, but also in the disaggregated components of Polish CPI in the aim of discerning sectors which contribute to the largest extent to persistence of headline inflation. We are also interested in assessing whether the adoption of direct inflation targeting in Poland (and the decrease in the targeted value of inflation) contributed to the decrease in persistence and, given the sustained high level of inflation in recent years in Poland, whether it was due to the local increase in the level of persistence (which could make the monetary policy reaction less effective) or to other factors, unrelated to the response of inflation to shocks. The measures of inflation persistence used in the exercise rely solely on time series methods (see: Marques, 2004, Pivetta, Reis, 2007 and Baillie, 1996) and are applied to Polish CPI and its 11 components (CPI ex. food and energy, food and non-alcoholic beverages, processed food, unprocessed food, energy, goods, services, CPI ex. administered prices, administered prices, administered energy, administered services, m-o-m, SA). We avoid structural methods such as New Keynesian Phillips Curve (Gali, Gertler, 1999), which, on one hand, provide information on the sources of persistence (intrinsic or inherited from the developments of economic activity), but on the other are highly dependent on estimating disaggregated output gap. In the first part of the research, to check if the inflation persistence in some sub-categories of CPI is not infinite, we conduct the unit root/stationarity tests. The results of the ADF/PP tests suggest that all of the series are stationary, but the KPSS test casts some uncertainty to those findings in the case of some series, leaving room for the fractional integration analysis, presented in the second part of the research. Meanwhile, still in the framework of linear univariate AR modelling, several persistence measures are calculated in the 9-year rolling windows for all of the series in the aim of assessing and comparing the inflation persistence level and dynamics in the defined sectors. The measures are as follows: sum of autoregressive coefficients, largest autoregressive root, half-life. In this context, the sectors with the highest persistence are core inflation and its components – goods and services as well as administered prices and processed food. There is also evidence of the decrease in persistence, the most apparent in the case of core inflation and its components as well as in the aggregate CPI. The only component where an increase in persistence can be observed are administered services. To check the robustness of the results above (the uncertain results of unit root/stationarity tests inter alia) and to verify the hypothesis that structural changes may have influence on the level of persistence in the context of changing monetary policy environment, the unit root test assuming a potential structural break has been carried on (Zivot-Andrews). The break date was defined endogenously, allowing us to confirm or reject our a priori statements about the possible impact of a shift in monetary policy strategy on the inflation developments. The significance of the break in mean was checked with the Chow stability test. The following results emerged: firstly, in average the level of persistence in the models with break in mean is lower than in models not accounting for the break. However, in case of some of the series the difference is negligible, especially in the second part of the sample. Secondly, in most cases the decrease in persistence is negligible. This is an argument confirming the hypothesis that higher level of inflation in the first part of the sample is contributing to artificially oversizing the persistence measured in the simple AR framework. The largest difference in comparison to the results without the break can be observed once again in the case of core inflation and its components (goods as well as services) and in administered prices. The highest level of persistence can now be stated in the processed food and administered services (in the second part of the sample), the lowest still in the energy sector (also in its administered component) and unprocessed food, which is a result often quoted in the literature (see eg. Bilke, 2005). The second part of the research refers to the discussion and to some empirical evidence (see Gadea, Mayoral, 2006) that inflation process may also be characterised by fractional integration. This assumption leads to a different set of persistence measures than the univariate AR analysis. Firstly, the value of integration (or “memory”) parameter bears information about the duration of a shock, its influence on the series level in the medium and long run and, as such, has been used in our research as one of persistence measures. Both Geweke-Porter-Hudak and local Whittle estimator have been used to evaluate the memory parameter. Secondly, the values of impulse-response function for 3 and 12 months, have been used to illustrate the differences between two alternative specifications and to compare different model specifications. The conclusions stemming from this analysis are the following: firstly, the estimates of the level of persistence confirm in general the results found in the univariate AR analysis. The highest medium and long term persistence can be observed in core inflation and its both components, as well as in the administered prices, the lowest – in the unprocessed food prices, food & beverages and energy (in the case of Whittle estimator). This finding confirms the usefulness of the core inflation aggregate (CPI ex. food and energy) as an inflation measure concentrating mostly on the most persistent CPI components (see eg. Walsh, 2011). Secondly, the rolling sample estimation showed that in case of almost all the series a decrease of level of integration parameter can be observed. However, its scale depends on the series and the estimator of d. The largest changes are detected in case of the overall CPI, CPI ex. administered prices and the prices of goods . The last step consisted of discriminating between the alternative specifications, AR including the break in mean and the fractional integration process, using appropriate statistical tests. In this purpose a test of I(d) vs. I(0) with structural breaks, proposed by Dolado, Gonzalo, Mayoral (2006), has been applied. In the case of series that did not display a statistically significant break in mean an appropriate version of the test above and the EFDF test (Dolado, Gonzalo, Mayoral, 2009) has been used to check whether the hypothesis of fractional integration is acceptable or not. It appears that fractional integration can be a better specification for the series of: CPI, food, energy, CPI ex. administered prices and administered services. Other series are better described as I(0) processes with break in mean (except from administered energy which seems to be an I(0) process) and as such can be modeled within the AR framework. See above See above
    Keywords: NA, Monetary issues, Monetary issues
    Date: 2013–06–21
  21. By: Joyce, Michael (Bank of England); Spaltro, Marco (Morgan Stanley Investment Management)
    Abstract: Studies of the Bank of England’s quantitative easing (QE) policy have tended to focus on its impact on financial markets and the broader macroeconomy. Less attention has been given to the effect on banks’ balance sheets and bank lending. In this paper we use a new non-publicly available panel data set of UK banks to address this question. Based on the historical bank-level relationship between deposits and bank lending, our analysis suggests that the first round of the Bank’s QE purchases during 2009-10 may have led to a small but statistically significant increase in bank lending growth. These effects appear more important for small rather than large banks. Our evidence also suggests that QE had weaker effects on lending because of low levels of bank capital.
    Keywords: Banking; quantitative easing; panel data
    JEL: E52 G21
    Date: 2014–08–22
  22. By: Jacek Kotłowski; Michał Brzoza-Brzezina; Kamil Wierus
    Abstract: Over the last few years significant spreads arose for both public and private debt between euro area countries. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable, positive spreads in peripheral countries could have decreased domestic demand thus preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future.Panel data analysis.Our results show that spreads between real interest rates of 1.5 to 5.8 percentage points would be necessary to reduce current account deficits in the four peripheral countries (Greece, Portugal, Ireland and Spain) to levels that would have stabilized these countries net foreign asset positions. The policy conclusion from this paper is that instead of fighting spreads accross the board, the ECB could accept their existence, provided that they behave in a relatively stable way and are close to the equilibrium levels that we calculate. Otherwise it cannot be excluded that the history of diverging current account balances, lost competitiveness and sharply rising spreads at the least desireable moment will repeat itself in a few years.
    Keywords: EA countries, Monetary issues, Microsimulation models
    Date: 2014–07–03
  23. By: Felicitas Nowak-Lehmann D.; Felix Roth (CEPS, Brussels); Lars Lonung (university of Lund, Sweden)
    Abstract: This paper analyses the evolution of public support for the single European currency, the euro, from 1990 to 2011, focusing on the most recent period of financial and sovereign debt crisis. Exploring a huge database of more than half a million observations covering the 12 original euro area member countries, we find that the ongoing crisis has only marginally reduced citizens’ support for the euro. To determine support for the euro we use two data sets: (1) panel data (bi-annual) to model the impact of the macroeconomic environment on the support for the euro (Dynamic Feasible Generalized Least Squares (DFGLS) estimation) and (2) household data to model the micoeconomic impact of the macro environment and its perception on the support for the euro (probit analysis). Our finding of a only marginally reduced citizens' support for the euro during the financial crisis is in stark contrast to a sharp fall in public trust in the European Central Bank. We conclude that the crisis – at least so far - has hardly dented popular support for the euro while the central bank supplying the single currency has lost sharply in public trust. Thus, the euro appears to have established a credibility of its own – separate from the institutional framework behind the euro.
    Keywords: Euro zone countries, Impact and scenario analysis, EU enlargement
    Date: 2013–06–21
  24. By: Fajar Oktiyanto; Harmanta; Nur M. Adhi Purwanto; Aditya Rachmanto
    Abstract: The experience from the recent global financial crisis on 2008/2009 showed that most macroeconomic instabilities came from the financial/banking sector. The condition of the financial system may affect monetary stability, through excessive pro-cyclicality in the financial system. Agung et al (2010) stated that pro-cyclicality level of financial sector in Indonesia is quite high. The evidence can be seen from the real credit which grew faster than GDP in the period of expansion, and vice versa. On the other hand, monetary policy may also affect the company's risk-taking behavior in financial markets, by affecting the company’s balance sheet as well as bank (credit portfolio, asset, etc.), which in turn will affect the stability of the financial system. Bernanke and Gertler (2001) stated that an aggressive monetary policy will not provide a significant advantage to regulate the movement of asset prices, due to the large volatility of financial variables. Hence, it is necessary to establish a combination of policy instruments to achieve price stability and financial stability. To formulate policies for price stability and financial market, we built a DSGE model that has the ability to simulate the effects of monetary and macroprudential policies in Indonesia. We incorporated a credit channel and financial intermediation mechanism in the model to capture pro-cyclicality in the financial sector, which will influence the dynamics of the business cycle, as suggested by Roger and Vleck (2011). The model is built on the basis of Gerali et al (2010) who have entered the banking sector with collateral constraint in the New Keynesian DSGE models a la Christiano et al (2005), and also adding a model of the financial accelerator approach a la Bernanke et al (1999) which has been modified by Zhang (2009). We used two approaches to model financial frictions in the financial sector: (i) collateral constraint, imposed on bank lending to households; and (ii) financial accelerator, imposed on lending to entrepreneurs. Collateral constraints mechanism in the household borrowing allows simulation of macroprudential policies such as the LTV ratio, which has been implemented in Indonesia for the last few years. On the other hand, the financial accelerator mechanism imposed on the entrepreneurs affected their decision to borrow from the bank to purchase their capital needs. The model that we developed is a small open economy DSGE model that has economic agents such as households (patient and impatient) conducting consumption, labor supply, savings to and borrowings from banks and paying taxes to the government. In addition there are entrepreneurs, intermediate good producers, capital good producers, housing producers and final good producers associated with the production of goods, the production of capital, as well as the final goods aggregator. This model also has a wide range of retailers, namely domestic retailers, importer retailers and exporter retailers that served to differentiate homogenous goods at no cost and sell them at a certain profit, with the opportunity to change the selling price following the usual mechanism from Calvo (1983). The condition of the financial system may affect monetary stability, through excessive pro-cyclicality in the financial system. The evidence can be seen from the real credit which grew faster than GDP in the period of expansion, and vice versa. On the other hand, monetary policy may also affect the company's risk-taking behavior in financial markets, by affecting the company’s balance sheet as well as bank (credit portfolio, asset, etc.), which in turn will affect the stability of the financial system. Hence, it is necessary to establish a combination of policy instruments to achieve price stability and financial stability. This model should describe the economic condition under monetary and macro prudential policy mix response if there are any shock happened. As the result, the model has detail treatment of banking sector according to Indonesia context. The transmission of macro-prudential policy shock is studied by analyzing the impulse responses to shock some variable, especially LTV. We find that macro-prudential policy plays an important role to dampen excessive economic and financial cycles in Indonesia. We also find that the results are better when macro-prudential instruments are exercised together with appropriate monetary policy responses. Therefore coordination between monetary policy and macro-prudential policy is critical In order to obtain optimum results in achieving macroeconomic stability and financial system stability.
    Keywords: Indonesia, General equilibrium modeling, Agent-based modeling
    Date: 2014–07–03
  25. By: Aleksandra Halka; Grzegorz Szafrański
    Abstract: The aim of the research is to find common driving forces in the inflation development across 10 emerging economies from the Central and Eastern Europe (CEE). As opposite to the previous research on this subject we are going to differentiate not only between regional and country specific common factors. We also believe that there are some common price movements across the particular sectors in the CEE countries. The common trends may stem from the fact that all the countries in the region have undergone the period of structural (market) reforms, foreign trade liberalization (especially with EU countries), productivity improvements and hyperinflation on the unprecedented scale. Afterwards, a common source of price determination across the region was the economic stabilization towards meeting Economic and Monetary Union (EMU) criteria of nominal and fiscal convergence. In the last decades we also observe a growing synchronization of the business cycle among these economies. We decompose product-level HICP indices into common aggregate (regional in terms of CEE countries), country, and sector specific components to study the co-movements in inflation rates across group of CEE countries in a systematic manner. To this end we apply a hierarchical factor model with an overlapping country-sector structure and estimate it with an iterative method of Beck, Hubrich and Marcellino (2011). Our findings are also closely related to the hypotheses on differences in the degree of volatility and persistence at the aggregate and disaggregate level (Bils and Klenov, 2004, Klenow and Kryvtsov, 2008, Boivin, Giannoni, and Mihov, 2009, Maćkowiak and Wiederholt, 2009).The research finds a considerable degree of price co-movements across countries and sec-tors. The more open economies the more vulnerable they are to external shocks coming from changes in commodity prices, exchange rates and other parts of financial global market. We find that all common factors explain about 36.5% of variance in product-level monthly price changes. Among them the most important are two aggregate (regional) factors that contribute to about half of the total variance explained (17%), less important are country (6.5%) and sector-specific (3%) components. The contribution of CEE regional component varies considerably between different countries and sectors. It is the most prominent determinant of inflation in Romania (explaining 55% of price variability), and the least important for Estonia (10%), the Czech Republic (8%) and Slovenia (6%). For the other countries the fraction of explained variance is between 13% (Poland) and 18% (Bul-garia). The regional CEE component explains from 11% of variance in food and non-durable sector to 24% in services on average being the most important price determinant in each of them. The first regional common factor may be associated with the disinflationary process explaining lowering of the inflation expectations that occurred in CEE countries, whereas the second regional factor reveals correlations with the global factors, especially commodity prices and euro area price development. As the sector specific factors are concerned, according to the expectations, prices of food and other non-durable goods (which mostly consist of energy goods) strongly depend on the commodity markets. Prices of services revel the highest correlation with the unemployment in the analyzed countries mirroring the impact of the business cycles on the prices in services., though it is not a strong one. Surprisingly there is hardly no influence of the changes in the global or domestic economic activity on the prices of durable and semi-durable goods. Probably it is due to the fact, these prices of these components are influenced by the globalization process, which leads to the price decreases regardless the phase of the business cycle.
    Keywords: Central and Eastern Europe (CEE) countries, Macroeconometric modeling, Monetary issues
    Date: 2014–07–03
  26. By: Jose Renato Haas Ornelas; Antonio Francisco de Almeida Silva Jr
    Abstract: We evaluate the Liquidity Preference Hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity
    Date: 2014–04

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