nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒12‒24
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Galí, Jordi; Gambetti, Luca
  2. Does money matter in the euro area? Evidence from a new Divisia index By Zsolt Darvas
  3. Optimal monetary policy rules and house prices: the role of financial frictions By Alessandro Notarpietro; Stefano Siviero
  4. "Minsky, Monetary Policy, and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies" By Srinivas Yanamandra
  5. Conventional and Unconventional Votes: A Tale of Three Monetary Policy Committees By Christopher Spencer
  6. After Unconventional Monetary Policy By John B. Taylor
  7. Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan By Rahooja, Sabbah; Ali, Asif; Ahmed, Jameel; Hussain, Fayyaz; Rifat, Rizwana
  8. Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints By Araujo, Aloisio; Schommer, Susan; Woodford, Michael
  9. When the Taylor principle is insufficient - A benchmark for the fiscal theory of the price level in a monetary union By Maren Brede; ; ;
  10. Lending Standards, Credit Booms and Monetary Policy By Elena Afanasyeva; Jochen Güntner
  11. Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov-switching Estimation Exploiting Monetary-Fiscal Policy Interdependence By Gonzalez-Astudillo, Manuel
  12. Should central banks provide reserves via repos or outright bond purchases? By Miles, David; Schanz, Jochen
  13. The provision of global liquidity: The global reserve system By Ocampo, Jose Antonio
  14. Intertemporal discoordination in the 100 percent reserve banking system By Romain Baeriswyl
  15. A longer-term view of the U.S. economy and monetary policy By Plosser, Charles I.
  16. Transparency and Deliberation within the FOMC: a Computational Linguistics Approach By Hansen, Stephen; McMahon, Michael; Prat, Andrea
  17. Does Low Inflation Justify a Zero Policy Rate? By Bullard, James B.
  18. Assessing the macroeconomic effects of LTROS. By C. Cahn; J. Matheron; J-G. Sahuc
  19. Monetary and macroprudential policy with multi-period loans By Paolo Gelain; Marcin Kolasa; Michał Brzoza-Brzezina
  20. Macro coordination: Forward Guidance as ‘cheap talk’? By Miller, Marcus; Zhang, Lei
  21. Bayesian Combination for Inflation Forecasts: The Effects of a Prior Based on Central Banks’ Estimates By Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
  22. On the influence of institutional design on monetary policy making By Raes, L.B.D.
  23. Fiscal Theory of Price Level By Daly, Hounaida; Smida, Mounir
  24. A Volatility and Persistence-Based Core Inflation By Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
  25. Capital Controls and Recovery from the Financial Crisis of the 1930s By Mitchener, Kris; Wandschneider, Kirsten
  26. Financial crisis and monetary policy By Karatas, B.
  27. European integration and the incompatibility of national varieties of capitalism problems with institutional divergence in a monetary union By Johnston, Alison; Regan, Aidan
  28. Market Sentiment and Exchange Rate Directional Forecasting By Vasilios Plakandaras; Theophilos Papadimitriou; Periklis Gogas; Konstantinos Diamantaras
  29. Macroeconomic linkages between monetary policy and the term structure of interest rates By Howard Kung
  30. Forecasting the South African Inflation Rate: On Asymmetric Loss and Forecast Rationality By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  31. How Fiscal Policy Affects the Price Level: Britain’s First Experience with Paper Money. By P.Antipa

  1. By: Galí, Jordi; Gambetti, Luca
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which stock prices end up increasing persistently in response to an exogenous tightening of monetary policy, even though they experience a small decline in the short run. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    Keywords: asset price booms; financial stability; inflation targeting; leaning against the wind policies
    JEL: E52 G12
    Date: 2014–07
  2. By: Zsolt Darvas
    Abstract: Standard simple-sum monetary aggregates, like M3, sum up monetary assets that are imperfect substitutes and provide different transaction and investment services. Divisia monetary aggregates, originated from Barnett (1980), are derived from economic aggregation and index number theory and aim to aggregate the money components by considering their transaction service. No Divisia monetary aggregates are published for the euro area, in contrast to the United Kingdom and United States. We derive and make available a dataset on euro-area Divisia money aggregates for January 2001 – September 2014 using monthly data. We plan to update the dataset in the future. Using structural vector-autoregressions (SVAR), we find that Divisia aggregates have a significant impact on output about 1.5 years after a shock and tend also to have an impact on prices and interest rates. The latter result suggests that the European Central Bank reacted to developments in monetary aggregates. Divisia aggregates reacted negatively to unexpected increases in the interest rates. None of these results are significant when we use simple-sum measures of money. Our findings for the euro area complement the evidence from US data that Divisia monetary aggregates are useful in assessing the impacts of monetary policy and that they work better in SVAR models than simple-sum measures of money.
    Keywords: Divisia index, financial crisis, monetary aggregation, monetary policy, structural VAR
    JEL: C32 C43 C82 E51 E58
    Date: 2014–11–15
  3. By: Alessandro Notarpietro (Bank of Italy); Stefano Siviero (Bank of Italy)
    Abstract: We probe the scope for reacting to house prices in simple and implementable monetary policy rules, using a New Keynesian model with a housing sector and financial frictions on the household side. We show that the social welfare maximizing monetary policy rule features a reaction to house price variations, when the latter are generated by housing demand or financial shocks. The sign and size of the reaction crucially depend on the degree of financial frictions in the economy. When the share of constrained agents is relatively small, the optimal reaction is negative, implying that the central bank must move the policy rate in the opposite direction with respect to house prices. However, when the economy is characterized by a sufficiently high average loan-to-value ratio, then it becomes optimal to counter house price increases by raising the policy rate.
    Keywords: Optimal simple interest rate rules; Housing; Credit frictions.
    JEL: E20 E44 E52
    Date: 2014–10
  4. By: Srinivas Yanamandra
    Abstract: This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003-04 to 2013-14). The paper uses Hyman P. Minsky's financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky. It further reviews the extensions to the Minskyan hypothesis in the areas of setting fiscal policy, managing cross-border capital flows, and developing financial institutional infrastructure. The lessons learned from the interplay of policy choices in these areas and their impact on monetary policymaking at the RBI are presented.
    Keywords: Financial Crisis; Central Bank; Monetary Policy; Bank Regulation; Fiscal Policy; Exchange Rate Policy; Financial Institution Infrastructure
    JEL: E58 G01 G28
    Date: 2014–11
  5. By: Christopher Spencer (School of Business and Economics, Loughborough University)
    Abstract: Following the 2008 global financial crisis, short-term interest rates in a number of major economies reached the effective zero-lower bound (ZLB), joining Japan, which has experienced prolonged deflation and virtually zero interest-rates since 1998. In such a low policy interest-rate environment, members of monetary policy committees no longer vote solely on the level of the policy-rate, but measures which are commonly described as being `unconventional'. Focussing on the experience of the United States FOMC, the Bank of Japan's Policy Board, and the Bank of England's MPC, the drivers of dissent voting behavior under conventional and unconventional monetary policy regimes are modeled. Among our findings, we show that relative to conventional policy regimes, committee members voting in unconventional regimes who are (i) directly appointed by the government, and (ii) appointed in periods during which left-wing governments are in power, are more likely to dissent on the side of monetary ease. Put another way, the decision to dissent is partially governed by whether the monetary policy regime is a conventional or an unconventional one.
    Keywords: quantitative easing, conventional and unconventional monetary policy regimes, dissent voting, monetary policy committees, panel data, career characteristics.
    JEL: O11 O33 O47 L52 C22
    Date: 2014–12
  6. By: John B. Taylor
    Abstract: This testimony before the Joint Economic Committee of the United States Congress shows the unintended consequence of the Federal Reserve's unconventional monetary policy. It suggests returning to a rules-based policy in order to promote stable prices, economic growth, and job creation.
    Date: 2014–03
  7. By: Rahooja, Sabbah; Ali, Asif; Ahmed, Jameel; Hussain, Fayyaz; Rifat, Rizwana
    Abstract: We investigate, using vector autoregressions (VAR) and Panel Data Analysis, the role of banks in monetary policy transmission in Pakistan. Empirical evidence suggests that the 'bank lending channel' is at work at the aggregate level. Loans, deposits and government securities all reduce after a shock to the monetary policy. When we examine bank heterogeneity in terms of size, liquidity and capitalization, the results are mixed. Size is found to be a relevant characteristic. Capitalization, measured by excess capital, is also somewhat effective. Thus, small sized and capital constrained banks respond more to monetary policy signals. Liquidity and the traditional measure of capital, on the other hand, are found to be weaker characteristics. Moreover, the results suggest that the market for loans has a stationary size distribution (no monopolistic tendencies) in Pakistan.
    Keywords: Monetary Policy Transmission, Bank Lending
    JEL: C32 C33 E52 G21
    Date: 2014–12–09
  8. By: Araujo, Aloisio; Schommer, Susan; Woodford, Michael
    Abstract: We consider the effects of central-bank purchases of a risky asset, financed by issuing riskless nominal liabilities (reserves), as an additional dimension of policy alongside “conventional” monetary policy (central-bank control of the riskless nominal interest rate), in a general-equilibrium model of asset pricing and risk sharing with endogenous collateral constraints of the kind proposed by Geanakoplos (1997). When sufficient collateral exists for collateral constraints not to bind for any agents, we show that central-bank asset purchases have no effects on either real or nominal variables, despite the differing risk characteristics of the assets purchased and the ones issued to finance these purchases. At the same time, the existence of collateral constraints allows our model to capture the common view that large enough central-bank purchases would eventually have to effect asset prices. But even when central-bank purchases raise the price of the asset, owing to binding collateral constraints, the effects need not be the ones commonly assumed. We show that under some circumstances, central-bank purchases relax financial constraints, increase aggregate demand, and may even achieve a Pareto improvement; but in other cases, they may tighten financial constraints, reduce aggregate demand, and lower welfare. The latter case is almost certainly the one that arises if central-bank purchases are sufficiently large.
    JEL: D53 E52 E58
    Date: 2014–05
  9. By: Maren Brede; ; ;
    Abstract: This paper derives restrictions on monetary and fiscal policies for determinate equilibria in a two-country monetary union with autarkic members. It finds that a central bank following the Taylor principle may not be sufficient for determinacy unless accompanied by one 'active' fiscal authority in the sense of Leeper (1991). Alternatively, both fiscal authorities can be 'active' while the central bank abandons the Taylor principle. The two determinate equilibria have significantly different implications for the transmission of fiscal and monetary shocks and for the fiscal theory of the price level in a monetary union.
    Keywords: Fiscal theory, monetary union, policy coordination, indeterminacy
    JEL: E31 E52 E62 E63
    Date: 2014–11
  10. By: Elena Afanasyeva; Jochen Güntner
    Abstract: This paper investigates the risk channel of monetary policy on the asset side of banks' balance sheets. We use a factoraugmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed it in a New Keynesian dynamic stochastic general equilibrium (DSGE) model, and show that - consistent with our empirical findings - an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers.
    Keywords: Bank lending standards, Credit supply, Monetary policy, Risk channel
    JEL: E44 E52
    Date: 2014–10
  11. By: Gonzalez-Astudillo, Manuel (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, I propose an econometric technique to estimate a Markov-switching Taylor rule subject to the zero lower bound of interest rates. I show that incorporating a Tobit-like specification allows to obtain consistent estimators. More importantly, I show that linking the switching of the Taylor rule coefficients to the switching of the coefficients of an auxiliary uncensored Markov-switching regression improves the identification of an otherwise unidentifiable prevalent monetary regime. To illustrate the proposed estimation technique, I use U.S. quarterly data spanning 1960:1-2013:4. The chosen auxiliary Markov-switching regression is a fiscal policy rule where federal revenues react to debt and the output gap. Results show that there is evidence of policy co-movements with debt-stabilizing fiscal policy more likely accompanying active monetary policy, and vice versa.
    Keywords: Markov-switching coefficients; zero lower bound; monetary-fiscal policy interactions
    JEL: C34 E52 E63
    Date: 2014–09–19
  12. By: Miles, David; Schanz, Jochen
    Abstract: In the wake of the financial crisis banks are likely to wish to hold far more highly liquid assets than before. Some of those liquid assets are likely to be held in the form of reserves at the central bank. We ask whether the central bank should provide these reserves by purchasing nominal, fixed-rate government bonds outright, or by repo-ing them in for a limited period. The key difference between these options is that with repos, the private sector retains the price risk associated with bonds, whereas this risk rests with the central bank if it purchases these bonds outright. There is a significant, practical policy issue for central banks here: should those central banks (most notably the Fed and the Bank of England) who built up a large stock of bonds during the QE operations, which were financed by creating reserves for commercial banks, expect to sell those bonds in due course or continue to hold a high proportion of them for a long period since the demand for reserves will be permanently higher? We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. We find that the composition of the central bank's assets should depend on how fiscal policy is conducted; but in general it has only a small impact on welfare.
    Keywords: Central bank balance sheet; Liquidity provision
    JEL: E52 E58
    Date: 2014–11
  13. By: Ocampo, Jose Antonio
    Abstract: This paper analyses three major problems of the current international monetary system: the asymmetric-adjustment problem, dependence on the monetary policy of the main reserve-issuing country, and the large demand for self-insurance by developing countrie
    Keywords: global currencies, special drawing rights, International Monetary Fund
    Date: 2014
  14. By: Romain Baeriswyl (Swiss National Bank)
    Abstract: The 100%-Money Plan advocated by Fisher (1936) has a Misesian avor as it aims at mitigating intertemporal discoordination by reducing (i) the discrepancy between investment and voluntary savings, and (ii) the manipulation of interest rates by monetary injections. Recent proposals to adopt the 100 percent reserve banking system, such as the Chicago Plan Revisited by Benes and Kumhof (2013) or the Limited Purpose Banking by Kotlikoff (2010), take, however, a fundamentally different attitude towards the role of the central bank in the credit market and ignore that intertemporal discoordination arises independently from whether the credit expansion is financed by the creation of outside or inside money. These plans allow the central bank to inject outside money into the credit market and to effectively lower interest rates in negative territory in order to overcome the limit that the liquidity trap sets to credit expansion in the fractional reserve system. Although such an attempt may succeed in stimulating the economy in the short run, it exacerbates intertemporal discoordination and weakens economic stability in the long run.
    Date: 2014–12
  15. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Charlotte Economics Club, Charlotte, NC President Charles Plosser gives his views on the U.S. economy and discusses why it is important to take a longer-term view of economic data. He also discusses why he is advocating for the Fed to publish a Monetary Policy Report with an assessment of the likely near-term path of policy rates, in conjunction with its economic forecast.
    Keywords: Economic conditions; Monetary policy; Manufacturing activity; Recovery
    Date: 2014–12–03
  16. By: Hansen, Stephen; McMahon, Michael; Prat, Andrea
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: career concerns; deliberation; FOMC; monetary policy; transparency
    JEL: D78 E52 E58
    Date: 2014–05
  17. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: November 14, 2014. Presentation. "Does Low Inflation Justify a Zero Policy Rate?" St. Louis Regional Chamber Financial Forum, St. Louis.
    Date: 2014–11–26
  18. By: C. Cahn; J. Matheron; J-G. Sahuc
    Abstract: In response to the 2008-2009 crisis, faced with distressed financial intermediaries, the ECB embarked in long-term refinancing operations (LTROs). Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections can have large macroeconomic effects, with multipliers up to 0.5. However, the latter depend in an important way on how standard monetary policy is adjusted in conjunction with these non-standard measures. We find that the effects are larger when the separation principle is breached, that is to say when we force monetary policy not to react to the stimulative effects of LTROs.
    Keywords: Financial frictions, unconventional monetary policy, long-term refinancing operations, DSGE model.
    JEL: E32 E58
    Date: 2014
  19. By: Paolo Gelain (Norges Bank); Marcin Kolasa (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications -- variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and occasionally binding collateral constraint -- to an otherwise standard DSGE model with housing and financial intermediaries. In line with the literature, we find that monetary policy is less effective when contracts are multi-period, but only under fixed rate mortgages or when borrowers cannot be forced to accelerate repayment of their loans. Moreover, the probability that the collateral constraint becomes slack depends on loan maturity only for fixed rate mortgages while the probability that the non-negativity constraint becomes binding grows with loan maturity regardless of the contract type. As a result, muti-period loans not only weaken monetary and macroprudential policy, but also introduce asymmetry into their transmission.
    Date: 2014
  20. By: Miller, Marcus; Zhang, Lei
    Abstract: In the context of revived output growth and business confidence in the UK, we analyse forward guidance as a ‘coordination device’, indicating that monetary accommodation will be available for a welcome and long-awaited shift out of prolonged recession. As David Miles has emphasised, however, the existence of multiple equilibria is a necessary condition for costless and non-binding messages – so-called “cheap talk” – to act in this way. By way of microfoundations, we appeal to Peter Diamond’s classic model of search, where the positive externalities offered by ‘thick’ markets can generate different equilibrium levels of production. What of the objection that “cheap talk” by the MPC may be used deliberately to mislead the Private Sector in order to assist the MPC achieve its objectives? We show that this is not true for symmetric inflation targeting, where ‘cheap talk’ selects the Pareto dominant equilibrium. (This contrasts with the case where high inflation is penalised, but not below target inflation).
    Keywords: cheap-talk; coordination problems; equilibrium selection; monetary policy; multiple equilibria
    JEL: C72 E31 E52 E58
    Date: 2014–05
  21. By: Luis F. Melo Velandia; Rubén A. Loaiza Maya; Mauricio Villamizar-Villegas
    Abstract: Typically, central banks use a variety of individual models (or a combination of models) when forecasting inflation rates. Most of these require excessive amounts of data, time, and computational power; all of which are scarce when monetary authorities meet to decide over policy interventions. In this paper we use a rolling Bayesian combination technique that considers inflation estimates by the staff of the Central Bank of Colombia during 2002-2011 as prior information. Our results show that: 1) the accuracy of individual models is improved by using a Bayesian shrinkage methodology, and 2) priors consisting of staff's estimates outperform all other priors that comprise equal or zero-vector weights. Consequently, our model provides readily available forecasts that exceed all individual models in terms of forecasting accuracy at every evaluated horizon. Classification JEL: C22, C53, C11, E31.
    Date: 2014–11
  22. By: Raes, L.B.D. (Tilburg University, School of Economics and Management)
    Abstract: This thesis consists of a collection of essays on monetary policy making. These essays focus on institutional aspects which impact monetary policy making. Two chapters focus on analyzing voting records of central banks. A method is proposed to use the observed votes to infer the preferences of central bank committee members. These preferences characterize nearly fully the voting behavior. Subsequently these preferences are analyzed to learn about differences between certain groups of committee members. The practical relevance of this is that it allows us to think about how we should design these committees. For example, we show that some voters who are internally appointed tend to have preferences close to each other. If diversity of opinions in a board is deemed important, then this finding suggests that the number of internally appointed members should be limited. This methodology is applied to a variety of central bank committees. Each committee is a different case study and allows us to focus on another aspect. A third chapter presents an analysis of a phenomenon known as the bond yield conundrum. This term refers to the remarkable behavior of long-term U.S. interest rates in the period 2004-2005. To study this we set up a so-called macro-finance model which combines features of modern asset pricing models with empirical macroeconomic methods. Our results are somewhat disheartening in the sense that we are not fully able to explain the behavior. The final chapter gauges the impact of central bank communication on the stock market. Central bank communication is hot nowadays. The Federal Reserve as well as the European Central Bank organize press conferences on a regular basis. These press conferences are one form of communication which is followed closely by financial market participants. In this chapter we set up an event study to analyze the impact of the FOMC communication on the S&P 500. Our results suggest that central bank communication does move the stock market but does so in a nonlinear fashion. The impact depends on the business cycle as well as on the type of stock and industry. Combined, these essays allow the reader to understand some of the intricacies of central bank policy.
    Date: 2014
  23. By: Daly, Hounaida; Smida, Mounir
    Abstract: Lack of coordination between the monetary and fiscal authorities will result in inferior overall economic performance. This paper studies the interactions between monetary and fiscal policies and its effect on the economic performance by using al cointegration tests in the case of Euro Area. This paper examines the causal relationship between output gap, public debt, budget deficit, interest rate and inflation rate, and the impact of monetary policy on public debt management, in Euro Area from 1999Q1 to 2013Q4. The evidence supports the idea that the monetary policy is more stabilizing in its influence on the economic activity than the budget policy. The particular stance of monetary policy affects the capacity of the government to finance the budget deficit by changing the cost of debt service and limiting or expanding the available sources of financing. The result does not let hear strong political coordination in Euro Area, a weak policy stance in one policy area burdens the other area and is unsustainable in the long term.
    Keywords: Monetary policy, Fiscal policy, Euro Area, Policy mix, Public debt, budget deficit.
    JEL: E5 E58 E6 E62 H3
    Date: 2014–11–18
  24. By: Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
    Abstract: Intuitively core inflation is understood as a measure of inflation where noisy price movements are avoided. This is typically achieved by either excluding or downplaying the importance of the most volatile items. However, some of those items show high persistence, and one certainly does not want to disregard persistent price changes. The non equivalence between volatility and (the lack of) persistence implies that when one excludes volatile items relevant information is likely to be discarded. Therefore we propose a new type of core inflation measure, one that takes simultaneously into account both volatility and persistence. The evidence shows that such measures far outperform those based on either volatility or persistence
    Date: 2014–11
  25. By: Mitchener, Kris; Wandschneider, Kirsten
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in-differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    Keywords: capital controls; financial crises; Great Depression; interwar gold standard
    JEL: E44 E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  26. By: Karatas, B. (Tilburg University, School of Economics and Management)
    Abstract: Written in the midst of the Global Financial Crisis, the goal of this dissertation is to investigate causes of financial crises in general in order to provide empirical evidence of the driving forces of various crises types. Specifically, this thesis analyses the most common types of financial crises in detail: currency, banking and sovereign debt crises. There are two major parts in this thesis: The first part contains the empirical study on the effect of tight monetary policy on the exchange rate in the aftermath of a currency crisis. The second part contains two empirical chapters on the interrelations between currency, banking, and sovereign debt crises. The first study of the second part focuses on the analysis of the twin – banking and currency – crises and whether these crises types contribute to the likelihood of each other. The second study of this part is the analysis of the likelihood of sovereign debt crises and triple – currency, banking and sovereign debt – crises, and an assessment on which crises types provide information of the likelihood of others. In general, this dissertation has important conclusions and policy implications not only for the academia, but also for the policy makers in understanding the causes, relations and the effects of the policy actions on financial crises.
    Date: 2014
  27. By: Johnston, Alison; Regan, Aidan
    Abstract: Recent literature on the European debt crisis emphasizes that rising external trade and lending imbalances between the European Monetary Union's (EMU) Northern and Southern member states served as a crucial determinant behind speculative divergence between these two regions. However, these gaping external imbalances only emerged with the launch of the single currency. In this paper, we examine how three different currency regimes - monetary union, fixed exchange rate, and flexible exchange rates - influence the mutual co-existence of export-led growth models (which predominate in the Eurozone's crisis-spared Northern economies) and domestic demand-led growth models (which predominate in the Eurozone's crisis-prone Southern economies). We hypothesize that external imbalances between these two growth models did not emerge prior to EMU because of the presence of two adjustment mechanisms in the real exchange rate: the nominal exchange rate (in soft currency regimes) and the promotion of inflation convergence by national central banks (in hard currency regimes). European monetary integration removed these two readjustment mechanisms, leading to a persistent divergence in the real exchange rate and ultimately to external imbalances between Europe's diverse models of capitalism.
    Abstract: In der neueren Literatur zur europäischen Schuldenkrise wird betont, dass die zunehmenden Ungleichgewichte im Leistungs- und Kapitalverkehr zwischen den nördlichen und südlichen Mitgliedstaaten der Eurozone ein entscheidender Faktor für den stark unterschiedlichen Spekulationsdruck der Investoren auf diese Regionen waren. Jedoch traten diese massiven außenwirtschaftlichen Ungleichgewichte erst mit der Einführung der Gemeinschaftswährung auf. Das Discussion Paper untersucht, wie der Kontext des Währungsregimes - unterschieden werden die Währungsunion, das feste und das flexible Wechselkursregime - das Zusammenwirken der exportgetriebenen Wachstumsmodelle (vorherrschend im von der Krise vergleichsweise wenig betroffenen Norden Europas) und der binnenorientierten Wachstumsmodelle (vorherrschend im von der Krise vergleichsweise stark betroffenen Süden Europas) beeinflusst hat. Dabei wird die Hypothese aufgestellt, dass vor dem Inkrafttreten der Europäischen Währungsunion keine außenwirtschaftlichen Ungleichgewichte zwischen diesen Wachstumsmodellen auftraten, da es zwei Mechanismen zur Anpassung des realen Wechselkurses gab: die nominale Abwertung (genutzt vor allem von Weichwährungsländern) und die von den nationalen Zentralbanken herbeigeführte Inflationskonvergenz (in Hartwährungsländern). Mit der europäischen Währungsintegration wurden diese beiden Mechanismen außer Kraft gesetzt, was eine anhaltende Divergenz der realen Wechselkurse und schließlich außenwirtschaftliche Ungleichgewichte zwischen den verschiedenen Kapitalismusmodellen in Europa zur Folge hatte.
    Date: 2014
  28. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Centre for Economic Analysis, Italy); Konstantinos Diamantaras (Department of Information Technology, TEI of Thessaloniki, Greece)
    Abstract: The microstructural approach to the exchange rate market claims that order flows on a currency can accurately reflect the short-run dynamics its exchange rate. In this paper, instead of focusing on order flows analysis we employ an alternative microstructural approach: we focus on investors' sentiment on a given exchange rate as a possible predictor of its future evolution. As a proxy of investors' sentiment we use StockTwits posts, a message board dedicated to finance. Within StockTwits investors are asked to explicitly state their market expectations. We collect daily data on the nominal exchange rate of four currencies against the U.S. dollar and the extracted market sentiment for the year 2013. Employing econometric and machine learning methodologies we develop models that forecast in out-of-sample exercise the future direction of the four exchange rates. Our empirical findings reject the Efficient Market Hypothesis even in its weak form for all four exchange rates. Overall, we find evidence that investors' sentiment as expressed in public message boards can be an additional source of information regarding the future directional movement of the exchange rates to the ones proposed by economic theory.
    Date: 2014–11
  29. By: Howard Kung (University of British Columbia)
    Abstract: This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.
    Date: 2014
  30. By: Christian Pierdzioch (Department of Economics, Helmut-Schmidt-University); Monique B. Reid (Department of Economics, University of Stellenbosch); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: Using forecasts of the inflation rate in South Africa, we study the rationality of forecasts and the shape of forecasters’ loss function. When we study micro-level data of individual forecasts, we find mixed evidence of an asymmetric loss function, suggesting that inflation forecasters are heterogeneous with respect to the shape of their loss function. We also find strong evidence that inflation forecasts are in line with forecast rationality. When we pool the data, and study sectoral inflation forecasts of financial analysts, trade unions, and the business sector, we find evidence for asymmetry in the loss function, and against forecast rationality. Upon comparing the micro-level results with those for pooled and sectoral data, we conclude that forecast rationality should be assessed based on micro-level data, and that freer access to this data would allow more rigorous analysis and discussion of the information content of the surveys.
    Keywords: inflation rate, forecasting, loss function, rationality
    JEL: C53 D82 E37
    Date: 2014
  31. By: P.Antipa
    Abstract: Between 1797 and 1821, Britain suspended the gold standard in order to finance the Napoleonic Wars. This measure was accompanied by large scale debt accumulation and inflation: After Napoleon’s final defeat at Waterloo in 1815, the debt to GDP ratio had climbed to 226%; the price level exceeded its 1797 level by 22.3%. Under these circumstances and given that institutional settings allowed excluding the possibility of strategic default, I will show that expectations of how debt would be stabilized in the future shaped the observed evolution of the price level. Thus, my contribution establishes the importance of fiscal determinants of the price level.
    Keywords: Debt monetization, sovereign debt, inflation, structural breaks.
    JEL: N13 N23 N43 C22
    Date: 2014

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