nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒11‒12
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary policy under inflation targeting: lessons from industrial and emerging countries By Aliqoriev, Olimkhon; Khamidov, Khalilillo
  2. What Measures Chinese Monetary Policy? By Sun, Rongrong
  3. Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence By Giulia Ghiani; Max Gillman; Michal Kejak
  4. Death of a Reserve Currency By Quinn, Stephen F.; Roberds, William
  5. Welfare Effects of Price Targeting on Fixed Income Earners in Nigeria: A Framework for Analysis By ibrahim, waheed
  6. Analyzing the Taylor Rule with Wavelet Lenses By Luís Francisco Aguiar-Conraria; Manuel M. F. Martins; Maria Joana Soares
  7. The Bank Lending Channel in a Simple Macro Model - How to Extend the Taylor Rule? By Peter Spahn
  8. Financial shocks and optimal monetary policy rules By Verona, Fabio; Martins, Manuel M. F.; Drumond , Inês
  9. The Perils of Nominal Targets By Roc Armenter
  10. Revisiting the greenbook's relative forecasting performance By Paul Hubert
  11. Euro-dollar polarization and heterogeneity in exchange rate pass-throughs within the euro zone By Comunale, Mariarosaria
  12. Monetary Policy Shocks from the EU and US: Implications for Sub-Saharan Africa By Kronick, Jeremy
  13. Options Embedded in ECB Targeted Refinancing Operations. By J-P. Renne
  14. Cross-sectional evidence on the relation between monetary policy, macroeconomic conditions and low-frequency inflation uncertainty By Conrad, Christian; Hartmann, Matthias
  15. Dynamic Analysis of Exchange Rate Regimes: Policy Implications for Emerging Countries in Asia By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  16. Stability or Upheaval? The Currency Composition of International Reserves in the Long Run By Eichengreen, Barry; Livia, Chitu; Mehl, Arnaud
  17. Exit Strategies and Their Impact on the Euro Area – A Model Based View By Ansgar Belke
  18. The effects of unconventional monetary policy: what do central banks not include in their models? / Skutki niekonwencjonalnej polityki pieniê¿nej: czego banki centralne nie uwzglêdniaj¹w swoich modelach? By Andrzej Rzoñca; Piotr Ci¿kowicz
  19. The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks By Gospodinov, Nikolay; Jamali, Ibrahim
  20. The economic outlook and monetary policy By Plosser, Charles I.
  21. Financial shocks, loan loss provisions and macroeconomic stability By Roy Zilberman; William Tayler
  22. Doctrinal Determinants, Domestic and International of Federal Reserve Policy, 1914-1933 By Eichengreen, Barry
  23. The Chicago Tradition and Commercial Bank Seigniorage By Soldatos, Gerasimos T.; Varelas, Erotokritos
  24. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Ben Cheikh, Nidhaleddine; Rault, Christophe
  25. Fiscal and Monetary Policy Interactions in New Zealand By Wesselbaum, Dennis
  26. Inflation in New EU Member States: A Domestically or Externally Driven Phenomenon? By Tomislav Globan; Vladimir Arčabić; Petar Sorić
  27. The effects of intraday foreign exchange market operations in Latin America: results for Chile, Colombia, Mexico and Peru By Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón; Santiago García-Verdú; Miguel Zerecero; Marco Vega; Erick Lahura; Ramon Moreno
  28. Breaking the Curse of Kareken and Wallace with Private Information By Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller
  29. One size does not fit all. A non-linear analysis of European monetary transmission By Giulio Cifarelli; Giovanna Paladino
  30. Towards an integrated theory of value, capital and money By Cavalieri, Duccio
  31. Communicating uncertainty - a fan chart for HICP projections By Gatt, William
  32. On the Directional Accuracy of Inflation Forecasts:Evidence from South African Survey Data By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  33. The Zero Lower Bound and Parameter Bias in an Estimated DSGE Model By Yasuo Hirose; Atsushi Inoue

  1. By: Aliqoriev, Olimkhon; Khamidov, Khalilillo
    Abstract: This article focuses on inflation targeting (hereafter IT) as a superior monetary policy strategy for attaining price stability, and its theoretical framework, prerequisites to introduce. The article analyses benefits and costs of adoption of inflation targeting and also examines the IT experiences of some industrial and emerging markets. The growing body of empirical researches indicates that the adoption of IT is useful for countries that must enhance their credibility for the management of monetary policy. Personally, the authors suggest that Uzbekistan should also take IT into account seriously and further consider. In the long run, without prejudice to the goal of price stability countries can achieve other objective: high employment, economic growth, financial markets stability, interest rate stability, and stability in foreign exchange markets.
    Keywords: inflation targeting, monetary policy, price stability, central bank.
    JEL: E31 E52 E58
    Date: 2014–05–05
  2. By: Sun, Rongrong
    Abstract: This paper models the People’s Bank of China’s operating procedures in a two-stage vector autoregression model to search for a valid good policy indicator for Chinese monetary policy. The model disentangles endogenous components in changes in monetary policy that are driven either by demand for money or the liquidity management needs arising from foreign exchange purchases. There are four main findings. First, the PBC’s procedures appear to have changed over time, and hence no single indicator represents Chinese monetary policy well for the 2000-2013 time period. Second, its operating procedure is neither pure interest-rate targeting nor pure reserves targeting, but a mixture. Third, a set of indicators all contain information about the policy stance. It is hence preferred to use a composite measure to measure Chinese monetary policy. Finally, we construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with several existing measurement approaches suggests that the composite indices, rather than individual indicators, perform better in measuring Chinese monetary policy.
    Keywords: monetary policy, VAR, operating procedures, exogenous (endogenous) components
    JEL: E52 E58
    Date: 2014–08
  3. By: Giulia Ghiani (Politecnico di Milano); Max Gillman (Department of Economics, University of Missouri-St. Louis); Michal Kejak (CERGE-EI Prague)
    Abstract: The paper sets out theory and evidence for the equilibrium determination of the nominal interest rate. We test the cash-in-advance economy using US postwar data and find cointegration of the interest rate, inflation, unemployment and the money supply, using either M2 or M1 monetary aggregates, and the Federal Funds rate or the three month Treasury bill rate. Results are consistent both with a persistent monetary liquidity effect in the cointegrating vector coefficients and also a long run quantity theoretic relation. We identify three Markov-switching regimes similar to NBER contractions, expansions, and the "unconventional" period. Dropping money indicates model misspecification.
    Keywords: Euler equation, money supply, non-stationarity, cointegration, Markov-Switching VECM.
    JEL: C32 E40 E52
    Date: 2014–10
  4. By: Quinn, Stephen F. (Texas Christian University); Roberds, William (Federal Reserve Bank of Atlanta)
    Abstract: The Dutch bank florin was the dominant currency in Europe during much of the 17th and 18th centuries. The florin, a fiat money, was managed by an early central bank, the Bank of Amsterdam. Using a new reconstruction of the Bank of Amsterdam's balance sheet, we analyze the florin's loss of reserve currency status during the period 1781–92. The reconstruction shows that by 1784, accommodative policies rendered the Bank of Amsterdam "policy insolvent," meaning that its net worth would have been negative under continuation of its policy objectives. Policy insolvency coincided with the Bank of Amsterdam's loss of control over the value of its money.
    Keywords: central banks; reserve currency; policy insolvency
    JEL: E58 F33 N13
    Date: 2014–09–01
  5. By: ibrahim, waheed
    Abstract: The paper examines the welfare implications of price targeting from the perspective of when central bank has credibility of persistently achieving the target rates and when people have lost confidence on such credibility. In the former, it was observed that the principle of Pareto optimality holds while there will be welfare loss and social bliss denied in case of the later. The paper thus recommends a cautions monetary policy from the monetary targetters that will not affect the goal of ensuring maximum welfare and social justice in the society.
    Keywords: Central Bank, Target, Inflation, Monetary policy, Welfare
    JEL: D6 D63
    Date: 2013
  6. By: Luís Francisco Aguiar-Conraria (Universidade do Minho - NIPE); Manuel M. F. Martins (Cef.up and Faculty of Economics, University of Porto); Maria Joana Soares (Universidade do Minho)
    Abstract: This paper analyses the Taylor Rule in the U.S. 1960-2014 with new lenses: continuous time partial wavelets tools. We assess the co-movement between the policy interest rate and the macroeconomic variables in the Rule, inflation and the output gap, both jointly and independently, for each frequency and at each moment of time. Our results uncover some new stylized facts about U.S. monetary policy and add new insights to the record of U.S. monetary history since the early 1960s. Among other things we conclude that monetary policy has been successful in stabilizing inflation. However, its effectiveness varies both in time and frequencies. Monetary policy has lagged the output gap across most of the sample, but in recent times became more reactive. Volcker’s disinflation, and the conquest of credibility in 1979-1986, was achieved with no extra costs in terms of output.
    Keywords: Monetary Policy, Taylor Rule, Continuous Wavelet Transform, Partial Wavelet Coherency, Partial Phase-difference
    JEL: C49 E43 E52
    Date: 2014
  7. By: Peter Spahn
    Abstract: The growth and deepening of financial markets entailed the expectation that the bank lending channel of monetary policy transmission would lose its importance. The paper explains why, on the contrary, the banking sector has become a major locus of origination and amplification of macro-financial shocks. Mutual feedback mechanisms between the financial and the real sector are analysed and simulated by using a simple standard macro model with an integrated banking system. A comparison of the efficiency of various Taylor Rule extensions explores whether monetary stabilisation can be improved by additional interest rate reactions to asset prices, bank lending, bank leverage or the spread between the loan and the policy rate.
    Keywords: Monetary policy transmission, credit market, leverage targeting, risk-taking channel, asset market shocks
    JEL: E1 E5 G2
    Date: 2014–09
  8. By: Verona, Fabio (Bank of Finland Research); Martins, Manuel M. F. (University of Porto,); Drumond , Inês (Banco de Portugal)
    Abstract: We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing the macroeconomy following financial shocks. We use a DSGE model that comprises both a loan and a bond market, which best suits the contemporary structure of the U.S. financial system and allows for a wide set of financial shocks and transmission mechanisms. Overall, we find that targeting financial stability – in particular credit growth, but in some cases also financial spreads and asset prices – improves macroeconomic stabilization. The specific policy implications depend on the policy regime, and on the origin and the persistence of the financial shock.
    Keywords: financial shocks; optimal monetary policy; Taylor rules; DSGE models; bond market; loan market
    JEL: E32 E44 E52
    Date: 2014–07–25
  9. By: Roc Armenter (Federal Reserve Bank of Philadelphia)
    Abstract: A monetary authority can be committed to pursuing an inflation, price-level, or nominal output target yet systematically fail to achieve the specified goal. Constrained by the zero lower bound on the policy rate, the monetary authority is unable to implement its objectives when private-sector expectations stray from the target in the first place. Low-inflation expectations become self-fullling, resulting in an additional Markov equilibrium in which both nominal and real variables are typically below target. Introducing a stabilization goal for long-term nominal rates anchors private-sector expectations on a unique Markov equilibrium without fully compromising the policy responses to shocks.
    Date: 2014
  10. By: Paul Hubert (OFCE)
    Abstract: Since Romer and Romer (2000), a large literature has dealt with the relative forecasting performance of Greenbook macroeconomic forecasts of the Federal Reserve. This paper empirically reviews the existing results by comparing the different methods, data and samples used previously. The sample period is extended compared to previous studies and both real-time and final data are considered. We confirm that the Fed has a superior forecasting performance on inflation but not on output. In addition, we show that the longer the horizon, the more pronounced the advantage of Fed on inflation and that this superi- ority seems to decrease but remains prominent in the more recent period. The second objective of this paper is to underline the potential sources of this supe- riority. It appears that it may stem from better information rather than from a better model of the economy.
    Keywords: Monetary Policy; Greenbook; Forecasts
    JEL: E52 E58 E37
    Date: 2014–10
  11. By: Comunale, Mariarosaria
    Abstract: This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on inflation in the euro zone. We divide the euro zone members in two groups of countries: "core" (closely related to Germany) and "periphery", testing if the euro-US dollar exchange rate is still able to give a different impact on the groups ’ performance as in the past US dollar-deutschmark polarization phenomenon. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, testing for the asymmetry. Estimating the model with the first type of method, the exchange rate pass-through coefficient is always significant but the asymmetry between the groups is rejected. Using the common correlated effects mean group estimator we find that the coefficient is significantly negative only for core countries and the hypothesis of asymmetry is confirmed. Note that the significance disappears if we control for the first three years of EMU, but the coefficients for core and periphery have opposite sign in any case. Instead, other unobservable factors, representing global events or spillovers effects, play a relevant role in all the specifications. By using the nominal effective exchange rate instead, we found a significant coefficient in case of the whole EMU, while the elasticities for core and periphery are not statistically different from zero. Based on these results, we can conclude that the euro-US dollar is an important factor, but not the only key factor, in determining the asymmetry in inflation between core and periphery. The nominal effective exchange rate instead is a very important driver for the inflation only considering the whole euro zone. Therefore, the EMU seems to not have insulate enough some member countries from shocks coming from outside, as in the case of nominal exchange rate shocks.
    Keywords: Exchange Rate Pass-Through, Dynamic Panel Data, Inflation, Exchange Rates,European Monetary Union, Cross-sectional dependence
    JEL: C33 E31 F31 F36 F41
    Date: 2014–07
  12. By: Kronick, Jeremy
    Abstract: This paper addresses the debate in the literature on how developing countries are affected by foreign monetary policy shocks. I analyze how contractionary monetary policy shocks originating in different regions, specifically the Euro Area (“EUâ€) and United States (“USâ€), affect a set of rarely investigated sub-Saharan African (“SSAâ€) countries. Foreign monetary policy shocks are identified using changes in central bank futures rates, and are inserted into a domestic structural vector autoregression (“SVARâ€). Results differ depending on which of the EU or US shocks monetary policy and whether or not the recipient SSA country has a floating or fixed exchange rate regime. Specifically, floating exchange rate countries have a mostly negative GDP response following either shock due to a reliance on capital flows and external debt, and the implications these have for domestic interest rate responses. Fixed exchange rate countries have mixed GDP responses following the EU shock, as both trade and the effect of capital control usage on interest rates play an important role, while US shocks produce positive GDP responses as aid from the US dominates both trade and interest rates. The implications of these results for floating exchange rate countries is that diversification of foreign external debt and a reduction in reliance on international capital may be beneficial. For fixed exchange rate countries the implication is that capital controls can be a positive tool in the development process.
    Keywords: Monetary policy, international transmission of shocks, economic growth, sub-Saharan Africa
    JEL: E5 E6 F4 O1 O5
    Date: 2014–10–21
  13. By: J-P. Renne
    Abstract: In June 2014, the European Central Bank (ECB) announced the implementation of new refinancing operations aimed at supporting bank lending to the non-financial private sector. This paper exhibits and prices options embedded in these Targeted Longer-Term Refinancing Operations. In particular, it shows how these options participate to the incentive mechanisms at play in these operations. Quantitative results point to substantial gains –for participating banks– attached to the satisfaction of lending conditions defined by the scheme.
    Keywords: unconventional monetary policy, option pricing, TLTRO.
    JEL: E43 E52 E58
    Date: 2014
  14. By: Conrad, Christian; Hartmann, Matthias
    Abstract: We examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. The unobservable inflation uncertainty is quantified by means of the slowly evolving long-term variance component of inflation in the framework of the Spline-GARCH model (Engle and Rangel, 2008). For a cross-section of 13 developed economies, we find that long-term inflation uncertainty is high if central bank governors are perceived as less inflation-averse and if the conduct of monetary policy is ad-hoc rather than rule-based.
    Keywords: Inflation uncertainty; Central banking; Spline-GARCH.
    Date: 2014–10–21
  15. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large.
    Keywords: exchange rate regimes; basket-peg; floating regime; interest rate rules
    JEL: E42 F33 F41 F42
    Date: 2014–10–30
  16. By: Eichengreen, Barry (University of California, Berkeley); Livia, Chitu (European Central Bank and Paris School of Economics); Mehl, Arnaud (European Central Bank)
    Abstract: We analyze how the role of different national currencies as international reserves was affected by the shift from fixed to flexible exchange rates. We extend data on the currency composition of foreign reserves backward and forward to investigate whether there was a shift in the determinants of the currency composition of international reserves around the breakdown of Bretton Woods. We find that inertia and policy-credibility effects in international reserve currency choice have become stronger post-Bretton Woods, while network effects appear to have weakened. We show that negative policy interventions designed to discourage international use of a currency have been more effective than positive interventions to encourage its use. These findings speak to the prospects of currencies like the euro and the renminbi seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it.
    JEL: F30 N20
    Date: 2014–10–01
  17. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which, appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyse exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: federal funds rate, exit strategies, global spillovers, international policy coordination, sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–04
  18. By: Andrzej Rzoñca; Piotr Ci¿kowicz
    Abstract: In 2009, for the first time since the end of World War II, the world economy shrank. This resulted from the economic downturn in highly developed countries and surprised most economists. According to the IMF forecast published in spring 2008, GDP growth in these countries was expected to accelerate from 1.3% in 2008 to 3.8%. In fact, the growth rate was 0.1% in 2008 and minus 3.7% in 2009 (White, 2012). Another surprise was the subsequent poor performance rates reported by the major economies, i.e. the United States and the Eurozone. Five years after the acute phase of the global financial crisis their growth rates have not returned to pre-crisis levels. In a response to the outbreak of the global crisis, the main central banks, namely the Fed and the European Central Bank (ECB), resolved to take some unconventional actions: (i) reducing interest rates to close to zero, (ii) committing to keep interest rates that low for a long time, (iii) introducing quantitative easing on a large scale. In this paper, the authors attempt to aswer what were the costs of the unconventional monetary policy adopted by Fed and EBC, as well as what effects it had on restructuring process, uncertainty, and the use of credit.
    Keywords: Central Banks and Their Policies, Money Supply, Credit, Money multipliers, Mergers, Acquisitions, Restructuring, Corporate governance
    JEL: E51 E58 G34
    Date: 2014–09
  19. By: Gospodinov, Nikolay (Federal Reserve Bank of Atlanta); Jamali, Ibrahim (American University of Beirut)
    Abstract: In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility.
    Keywords: stock market volatility; federal funds futures; monetary policy; variance risk premium; vector autoregression; bivariate GARCH; leverage effect; volatility feedback effect
    JEL: C32 C58 E52 E58 G10 G12
    Date: 2014–08–01
  20. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Lehigh Valley Partnership and Lehigh Valley Economic Development Corporation. Allentown, PA. President Charles Plosser gives his views on the regional and national economy and discusses why he remains optimistic about the economic outlook. He also shares his thoughts about monetary policy and explains why he departed from the majority view at the July and September FOMC meetings.
    Keywords: Regional economy; Monetary policy; FOMC;
    Date: 2014–10–16
  21. By: Roy Zilberman; William Tayler
    Abstract: This paper studies the interactions between loan loss provisioning rules, business cycle fluctuations and monetary policy in a model with nominal price rigidities, a borrowing cost channel and endogenous risk of default. We show that an empirically relevant backward-looking provisioning rule induces financial accelerator mechanisms and results in financial, price and macroeconomic instability. Forward-looking provisioning systems, set to cover for expected losses over the whole business cycle, reduce significantly procyclicality in prices and output, and in addition moderate the (otherwise optimal) anti-inflationary response in the monetary policy rule. The optimal policy response to financial shocks calls for a combination of forward-looking provisions and a mildly credit augmented monetary policy rule.
    Keywords: Loan loss provisions, procyclicality, borrowing cost channel, Basel III, forward-looking provisions, monetary policy
    JEL: E32 E44 E52 E58 G28
    Date: 2014
  22. By: Eichengreen, Barry (University of California, Berkeley)
    Abstract: This paper describes the doctrinal foundations of Federal Reserve policy from the establishment of the institution through the early 1930s, focusing on the role of international factors in those doctrines and conceptions. International considerations were at most part of the constellation of factors shaping the Federal Reserve’s outlook and policies even in the high gold standard era that ended in 1933. However, neither was the influence of international factors absent, much less negligible. Nor were the Fed’s policies without consequences for the rest of the world. Having described the doctrinal foundations of Federal Reserve policy, I analyze how the doctrines in question influenced the central bank’s actions and shaped the impact of monetary policy on a number of key occasions, focusing in particular on episodes where the international economy and the rest of the world played an important role.
    JEL: E4 E5
    Date: 2014–10–01
  23. By: Soldatos, Gerasimos T.; Varelas, Erotokritos
    Abstract: Chicago rule is shown to be the unique optimal monetary policy rule from the viewpoint of an intergenerational welfare-maximizing social planner. But, in the absence of commercial banking, it really mandates the elimination of the public sector, because it involves the elimination of central bank seigniorage and hence, of the government spending based on this seigniorage, rendering subsequently tax finance incapable of sustaining alone such spending. In the presence of commercial banking, the government does have the option of benefiting from commercial bank seigniorage by borrowing it countercyclically as implied by Chicago rule, which is found to operate like a full-reserve requirement.
    Keywords: Chicago rule, Chicago plan, Seigniorage, Intergenerational modeling
    JEL: D9 E4 E5 H1 H6
    Date: 2014
  24. By: Ben Cheikh, Nidhaleddine; Rault, Christophe
    Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.
    Keywords: Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–05
  25. By: Wesselbaum, Dennis
    Abstract: This paper aims to characterize the interactions between fiscal and monetary and policy in New Zealand. We estimate a multivariate Markov-switching model and document frequent policy switches. We identify two regime: accommodative and non-accommodative monetary policy. In the non-accommodative regime, monetary policy does not respond to changes in government debt, while it does so in the accommodative regime. Further, we show that the underlying shocks are characterized by a fair amount of heteroscedasticity
    Keywords: Fiscal Theory of the Price Level, Markov-Switching, Monetaty and Fiscal Policy.
    JEL: C32 E43 E63
    Date: 2014–09–04
  26. By: Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb); Petar Sorić (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper analyzes the domestic and external inflation determinants for eight non-eurozone new EU member states (NMS). The empirical literature has been rather silent on the comparison of the relative importance of domestic vs. foreign inflation determinants. This paper aims to fill this gap and add to the literature by several methodological and empirical contributions. Empirical analysis is based on the structural vector autoregression (SVAR) model. It enables the authors to decompose inflation into its domestic and foreign component via historical decomposition analysis. Results indicate that foreign shocks are a major factor in explaining inflation dynamics in the medium run, while the short run inflation dynamics is mainly influenced by domestic shocks. Moreover, the importance of the foreign inflation component has had a rising trend in the pre-crisis period in all NMS, while the start of that trend mostly coincided with their accession to the EU. The global financial crisis seems to have decreased the importance of the foreign inflation component, although the results vary across countries. Since foreign shocks proved to be a very important determinant of inflation in NMS, the main policy implication of this study is the need to augment the classical Taylor rule with foreign factors in case of small open economies.
    Keywords: domestic and external inflation determinants, historical decomposition, inflation, new EU member states, consumer surveys
    JEL: C22 E31 E52 F41
    Date: 2014–10–23
  27. By: Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón; Santiago García-Verdú; Miguel Zerecero; Marco Vega; Erick Lahura; Ramon Moreno
    Abstract: This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile’s experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent. Classification JEL: E58, F31, G14.
    Date: 2014–10
  28. By: Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller
    Abstract: We study the endogenous choice to accept fiat objects as media of exchange and the implications for nominal exchange rate determination. We consider an economy with two currencies which can be used to settle any transactions. However, currencies can be counterfeited at a fixed cost and the decision to counterfeit is private information. This induces equilibrium liquidity constraints on the currencies in circulation. We show that the threat of counterfeiting can pin down the nominal exchange rate even when the currencies are perfect substitutes, thus breaking the Kareken-Wallace indeterminacy result. We also find that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rates. Finally, we show that the threat of counterfeiting can also help determine nominal exchange rates in a variety of different trading environments. These include a two-country setup with tradable and non-tradable goods sectors, and with an alternative timing of money injections.
    Keywords: Multiple Currencies, Counterfeiting Threat, Liquidity, Exchange Rates
    JEL: D82 D83 F4
    Date: 2014–10–10
  29. By: Giulio Cifarelli (Dipartimento di Scienze per l'Economia e l'Impresa); Giovanna Paladino
    Abstract: This paper investigates the interest rate pass-through in eight European countries analyzing their short-run and long-run monetary transmission mechanisms. We investigate the relationship between the Euribor and the long-run interest rate on loans to non-financial corporations and allow for a mark-up which can be affected by country specific funding conditions and/or stochastic structural breaks. We detect significant differences across countries. Cointegration between the Euribor and the long-term bank loan interest rates holds for Germany, France, and the Netherlands, where banks seem to apply a constant mark-up. In the remaining countries of the sample the long-run pass-through is directly affected by changes in banks’ cost of funding, due to shifts in the spread between domestic and German long-term government bond interest rates. The selection of the country specific ESTAR/LSTAR parameterization of the short-run dynamics detects a high degree of heterogeneity. The transition variables vary from the government bond spreads, in countries which were involved in the European debt crisis via sovereign bond market contagion, to the VXO index and to the Euribor monthly volatility.
    Keywords: Interest rate pass-through, Cointegration, ESTAR/LSTAR parameterization, EMU.
    JEL: E43 E52 F36 C32
    Date: 2014
  30. By: Cavalieri, Duccio
    Abstract: This is an analysis of the present state of the theory of capital. The paper contains a proposal to reformulate this theory in an ‘late-Marxian’ up-to-dated perspective. The central problem discussed is the integration of the theories of value and capital with those of money and finance. An augmented cost-of-production theory of value is advocated. Special attention is focused on the role of Marx’s ‘monetary expression of labour value’ (MEV), rediscovered and unduly modified by neo-Marxists with the purpose to make it compatible with Marx’s labour theory of value. JEL Codes: B12, D46, E11.
    Keywords: value; labour; capital; money; critical Marxism; MEV; MELT.; value;
    JEL: B12 D46 E11
    Date: 2014–08
  31. By: Gatt, William
    Abstract: A short article which motivates the use of a fan chart in the communication of forecasts, with special emphasis on inflation forecasts. A fan chart for Maltese HICP inflation projections is built, using the history of forecast errors.
    Keywords: Inflation, forecasts, fan chart
    JEL: C53 E31 E37
    Date: 2014–09
  32. By: Christian Pierdzioch (Helmut-Schmidt-University, Department of Economics, Holstenhofweg 85,P.O.B. 700822, 22008 Hamburg, Germany); Monique B. Reid (Stellenbosch University, Department of Economics, Private Bag X1, Matieland, South Africa, 7602.); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: We study the directional accuracy of South African survey data of short-term and longer-term inflation forecasts. Upon applying techniques developed for the study of relative operating characteristic (ROC) curves, we find evidence that forecasts contain information with respect to the subsequent direction of change of the inflation rate.
    Keywords: Inflation rate; Forecasting; Directional Accuracy
    JEL: C53 D82 E37
    Date: 2014–10
  33. By: Yasuo Hirose (Faculty of Economics, Keio University and Institute for Monetary and Economic Studies, Bank of Japan (; Atsushi Inoue (Department of Economics, Vanderbilt University (E-mail:
    Abstract: This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound (ZLB) constraint on the nominal interest rate. Our Monte Carlo experiments using a standard sticky-price DSGE model show that no significant bias is detected in parameter estimates and that the estimated impulse response functions are quite similar to the true ones. However, as the probability of hitting the ZLB increases, the parameter bias becomes larger and therefore leads to substantial differences between the estimated and true impulse responses. It is also demonstrated that the model missing the ZLB causes biased estimates of structural shocks even with the virtually unbiased parameters.
    Keywords: Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2014–10

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