nep-mon New Economics Papers
on All new papers
Issue of 2014‒09‒08
seventeen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Targeting in Colombia, 2002-2012 By Miguel Urrutia; Franz Hamann; Marc Hofstetter
  2. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Martín González-Rozada; Martín Sola
  3. The Federal Reserve Engages the World (1970-2000): An Insider’s Narrative of the Transition to Managed Floating and Financial Turbulence By Edwin M. Truman
  4. Central Bank Liquidity Management and “Unconventional” Monetary Policies By Javier García-Cicco; Enrique Kawamura
  5. Evolution of Monetary Policy in the US: The Role of Asset Prices By Beatrice D. Simo-Kengne; Stephen M. Miller; Rangan Gupta
  6. Inflation Targeting in Latin America By Adolfo Barajas; Roberto Steiner; Leonardo Villar; Cesar Pabon
  7. How to stabilize inflation without damaging employment: Strenghtening the power of unions By Amélie BARBIER-GAUCHARD; Francesco De PALMA; Giuseppe DIANA
  8. A Time-Varying Approach of the US Welfare Cost of Inflation By Stephen M. Miller; Luis Filipe Martins; Rangan Gupta
  9. "The Euro Treasury Plan" By Jorg Bibow
  10. Endogenous Fluctuations in an Endogenous Growth Model with Ination Targeting By Rangan Gupta; Lardo Stander
  11. The inflation Targeting effect on the inflation series: A New Analysis Approach of evolutionary spectral analysis By Zied Ftiti; Essahbi Essaadi
  12. Deposit dollarization in Myanmar By Kubo, Koji
  13. Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models By Carlos Viana de Carvalho; Fernanda Feitosa Necchio
  14. Financial Integration among ASEAN+3 Countries: Evidence from Exchange Rates By Lee, Chin; M., Azali
  15. The critics of modern money theory (MMT) are right By Thomas I. Palley
  16. Deriving the New Quantity Equation: An Approach for a Closed and an Open Economy By Welfens, Paul J. J.
  17. Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models By Carlos Viana de Carvalho; Felipe Schwartzman

  1. By: Miguel Urrutia; Franz Hamann; Marc Hofstetter
    Abstract: After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. This paper examines the experience of the Colombian Central Bank over the last decade, a period of consolidation and innovation of its IT strategy. The paper studies the increasing number of instruments used by the CB, including systematic foreign exchange interventions, announcements, and, sporadically, macro-prudential policies, capital controls, and changes in reserve requirements, among others. The study also examines some political economy dimensions that help explain the behavior of the CB during this period. To guide the discussion, a small-scale open-economy policy model is estimated.
    JEL: E02 E32 E42 E43 E52 E58 E61 F31 F33 F42
    Date: 2014–02
  2. By: Martín González-Rozada; Martín Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions, this paper evaluates the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of monetary policy. It is found that reserve requirements can be used to achieve the Central Bank’s inflation objectives. The use of this instrument, however, produces a real appreciation of the Uruguayan peso. When the Central Bank uses the monetary policy rate as an instrument, the effect of an increase in reserve requirements is to contribute to reducing the negative impact on consumption, investment and output. Nevertheless, the quantitative results in terms of inflation reduction are rather poor. The policy rate becomes more effective in reducing inflation when the reserve requirement instrument is solely directed at achieving financial stability. The paper’s main policy conclusion is that a well-targeted non- conventional policy instrument can help to effectively control inflation.
    JEL: C61 C68 E52 E58
    Date: 2014–02
  3. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve’s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
    Keywords: Federal Reserve, Federal Open Market Committee, inflation, macroeconomic policies, monetary policy, external balance, exchange rates, exchange market intervention, financial crises, third world debt crises, Mexican crisis, Asian financial crises
    JEL: F3 F31 F32 F33 F34 E4 E42 F5 F52 F53
    Date: 2014–08
  4. By: Javier García-Cicco; Enrique Kawamura
    Abstract: This paper presents a small open economy model to analyze the role of central bank liquidity management in implementing “unconventional” monetary policies within an inflation targeting framework. In particular, the paper explicitly models the facilities that the central bank uses to manage liquidity in the economy, which creates a role for the central bank balance sheet in equilibrium. This permits the analysis of two “unconventional” policies: sterilized exchange-rate interventions and expanding the list of eligible collaterals accepted at the liquidity facilities operated by the central bank. These policies have been recently implemented by several central banks: the former as a way to counteract persistent appreciations in the domestic currency, and the latter as a response to the recent global financial crisis in 2008. As a case study, the paper provides a detailed account of the Chilean experience with these alternative tools, as well as a quantitative evaluation of the effects of some of these policies.
    JEL: E52 E58
    Date: 2014–02
  5. By: Beatrice D. Simo-Kengne; Stephen M. Miller; Rangan Gupta
    Abstract: This paper investigates whether changes in monetary transmission mechanism respond to variations in asset prices. We distinguish between bull and bear markets and employ a TVP- VAR approach with stochastic volatility to assess the evolution of the monetary policy in relation to housing and stock prices. We measure the relative importance of housing and stock prices in the conduct of monetary policy and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that monetary policy responds more strongly to asset prices during bull regimes. While the bigger monetary effect of stock price shocks occurs prior to the 1970s, monetary policy appears to respond more strongly to housing price than stock price shocks after the 1970s. Similarly, contractionary monetary policy exerts a larger effect on both asset categories during bull markets. Particularly, larger negative responses of house prices to monetary policy shocks occur after the 1980s, corresponding to the bull regime in the housing market. Conversely, the stock-price effect of monetary policy shocks dominates before the 1980s, where stock-market booms achieved more importance.
    Keywords: Monetary policy, house prices, stock prices, TVP-VAR
    JEL: C32 E52 G10
    Date: 2014–08–29
  6. By: Adolfo Barajas; Roberto Steiner; Leonardo Villar; Cesar Pabon
    Abstract: Estimation of conventional Taylor rules for Brazil, Chile, Colombia and Peru shows that central banks increase their repo rate in response to increases in the output gap and, except in Peru, to deviations of inflation expectations from target. Using a Markov-Switching methodology, it is found that, in the presence of external shocks, Chile, Colombia and Peru temporarily abandoned their conventional reaction function. The Taylor Rule is expanded and variables are included related to exchange rate misalignments and to domestic credit developments; limited evidence is found that countries have used some form of integrated inflation targeting. There is strong evidence that intervention in F/X markets is determined by exchange rate misalignments rather than by exchange rate volatility and that most countries seem particularly concerned with a strong currency. Central banks appear to have pursued an inflation objective using a standard Taylor rule and an exchange rate objective through interventions in the F/X market.
    JEL: E31 E52 E61
    Date: 2014–01
  7. By: Amélie BARBIER-GAUCHARD; Francesco De PALMA; Giuseppe DIANA (LaRGE Research Center, Université de Strasbourg)
    Abstract: The aim of this paper is to assess the impact of union bargaining power on inflation and employment in a case of efficiency bargaining, in a context of a strategic game between Central Bank and social partners.
    Keywords: monetary policy, employment, inflation, union bargaining power, efficiency bargaining
    JEL: E24 E52 E58 J52
    Date: 2014
  8. By: Stephen M. Miller; Luis Filipe Martins; Rangan Gupta
    Abstract: Money demand specifications exhibits instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible timevarying cointegration methodology to estimate the money demand function. We find evidence that the time-varying cointegration estimation provides a better fit of the actual data than a timeinvariant estimation and that the throughout unitary income elasticity only exists for the log-log form over the entire sample period. Our estimate of the welfare cost of inflation for a 10-percent inflation rate lies in the range of 0.025 to 0.75 percent of GDP and averages 0.27 percent. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. Finally, the interest elasticity of money demand shows substantial variability over our sample period.
    Keywords: Money Demand Function, Welfare cost of inflation, Time-varying cointegration
    JEL: C32 E52 G10
    Date: 2014–08–29
  9. By: Jorg Bibow
    Abstract: Contrary to German chancellor Angela Merkel's recent claim, the euro crisis is not nearly over but remains unresolved, leaving the eurozone extraordinarily vulnerable to renewed stresses. In fact, as the reforms agreed to so far have failed to turn the flawed and dysfunctional euro regime into a viable one, the current calm in financial markets is deceiving, and unlikely to last. The euro regime's essential flaw and ultimate source of vulnerability is the decoupling of central bank and treasury institutions in the euro currency union. In this public policy brief, Research Associate Jorg Bibow proposes a Euro Treasury scheme to properly fix the regime and resolve the euro crisis. The Euro Treasury would establish the treasury-central bank axis of power that exists at the center of control in sovereign states. Since the eurozone is not actually a sovereign state, the proposed treasury is specifically designed not to be a transfer union; no mutualization of existing national public debts is involved either. The Euro Treasury would be the means to pool future eurozone public investment spending, funded by proper eurozone treasury securities, and benefits and contributions would be shared across the currency union based on members' GDP shares. The Euro Treasury would not only heal the euro's potentially fatal birth defects but also provide the needed stimulus to end the crisis in the eurozone.
    Date: 2014–08
  10. By: Rangan Gupta; Lardo Stander
    Abstract: This paper develops a monetary endogenous growth overlapping generations model characterized by production lags - specically lagged capital inputs - and an in ation targeting monetary authority, and analyses the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government ex- penditure on infrastructure, complementing the lagged private capital input. Following the extant literature, money is introduced by impos- ing a cash reserve requirement on an otherwise competitive banking sector. Given this framework, we show that multiple equilibria emerge along dierent growth paths, with the low-growth (high-growth) equi- librium being unstable (stable) and locally determinate (locally inde- terminate). In addition, we show that convergent or divergent endoge- nous uctuations and even topological chaos could emerge around the high-growth equilibrium in the growth path where the monetary au- thority follows a high in ation targeting regime. Conversely, when the monetary authority follows a low in ation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium.
    Keywords: endogenous uctuations, in ation targeting, chaos, production lags, indeterminacy.
    JEL: C62 E32 O42
    Date: 2014–08–29
  11. By: Zied Ftiti; Essahbi Essaadi
    Abstract: In this work, we study the inflation targeting effect on the inflation dynamics in the case of four industrial countries. Our objective is to check whether the inflation targeting policy (ITP) has a significant impact on the change of the inflation path. We use a non-parametric approach that doesn’t require any previous modelling. This is the evolutionary spectral analysis, as defined by Priestley
    Keywords: Inflation Targeting, Spectral Analysis and Structural Change.
    JEL: C16 E52 E63
    Date: 2014–08–29
  12. By: Kubo, Koji
    Abstract: Myanmar has peculiar conditions of deposit dollarization that were shaped by administrative controls. On the one hand, restrictive controls encouraged the accumulation of foreign currency deposits (FCD). On the other hand, foreign currency loans (FCL) were not practiced officially; therefore, FCD was not utilized for credit. Given the adverse effects and persistence of dollarization in other dollarized economies and the recent recovery of local currency deposits in Myanmar, this paper opts for the prohibition of FCL and offers policy measures for de-dollarization.
    Keywords: Myanmar, Foreign exchange, Monetary policy, dollarization, Foreign currency deposits, Foreign currency loans
    JEL: E41 F31 O53
    Date: 2014–08
  13. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); Fernanda Feitosa Necchio (Federal Reserve Bank of San Francisco)
    Date: 2014–07
  14. By: Lee, Chin; M., Azali
    Abstract: As the economies of Asian have moved towards closer economic ties in recent years, the establishment of regional exchange rate arrangement has become an important regional policy concern. A study by the Asian Development Bank forecast that Asian will be the world's largest economy by 2050. Hence, it is not reasonable for Asian to continuously depend on US dollar. Asian must have its own currency and must responsible for its own financial stability. Regional cooperation (including integration) is critical for Asia’s march toward prosperity and facing vulnerabilities to global shocks. Financial integration in ASEAN+3 is assessed in this paper by examining the time-series stochastic behaviour and cointegration in a set of eight ASEAN+3 currencies. The findings imply that not all of the ASEAN+3 countries are financial integrated during the recent float. This finding provided weak support upon formation of regional monetary and exchange rate arrangement in Asia.
    Keywords: Financial Integration, Exchange Rate, Convergence, Cointegration, Granger-causality, Asian
    JEL: F31 F33 F36
    Date: 2013
  15. By: Thomas I. Palley
    Abstract: Eric Tymoigne and Randall Wray's (T&W, 2013) defense of MMT leaves the MMT emperor even more naked than before (excuse the Yogi Berra-ism). The criticism of MMT is not that it has produced nothing new. The criticism is that MMT is a mix of old and new, the old is correct and well understood, while the new is substantially wrong. Among many failings, T&W fail to provide an explanation of how MMT generates full employment with price stability; lack a credible theory of inflation; and fail to justify the claim that the natural rate of interest is zero. MMT currently has appeal because it is a policy polemic for depressed times. That makes for good politics but, unfortunately, MMT's policy claims are based on unsubstantiated economics.
    Keywords: modern money theory, money financed budget deficits, fiscal policy
    JEL: E00 E02 E10 E12 E24 E40 E58 E62 E63
    Date: 2014
  16. By: Welfens, Paul J. J. (University of Wuppertal)
    Abstract: This theoretical contribution shows a simple way in which the quantity equation can be derived as a long-term equilibrium solution for the case of a closed economy and an open economy, respectively. It is shown first for the case of a closed economy which parameters stand behind "velocity" and that indeed there are arguments why velocity should be constant over time – assuming a specific parameter set of the goods market. It is noteworthy that the quantity equation can be derived both in a demand-side context and in a long run supply-side approach. Moreover, a new derivation is presented for the case of an open economy and it is shown that trade as well as foreign direct investment should be expected to have an influence on the price level and the inflation rate, respectively. Finally, the analysis suggests that financial market activities should have an impact on the price level.
    Keywords: macroeconomics, open economy, quantity equation, monetary policy, tax policy
    JEL: E00 F41 E50 E52 H20
    Date: 2014–08
  17. By: Carlos Viana de Carvalho (Department of Economics PUC-Rio); Felipe Schwartzman (Federal Reserve Bank of Richmond)
    Abstract: For a given frequency of price changes, the real eects of a monetary shock are smaller ifadjusting rms are disproportionately likely to have last set their prices before the shock. Thistype of selection for the age of prices provides a complete characterization of the nature ofpricing frictions in time-dependent sticky-price models. In particular: 1) The Taylor (1979)model exhibits maximal selection for older prices, whereas the Calvo (1983) model exhibitsno selection, so that real eects are smaller in the former than in the latter; 2) Selection isweaker and real eects of monetary shocks are larger if the hazard function of price adjustmentis less strongly increasing; 3) Selection is weaker and real eects are larger if there is sectoralheterogeneity in price stickiness; 4) Selection is weaker and real eects are larger if the durationsof price spells are more variable.
    Date: 2014–07

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