nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒12‒29
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. International Monetary Coordination and the Great Deviation By John B. Taylor
  2. On the Directional Accuracy of Inflation Forecasts: Evidence from South African Survey Data By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  3. Central Bank Minutes By Kedan, Danielle; Stuart, Rebecca
  4. The joint services of money and credit By Barnett, William A.
  5. Saving the Euro: self-fulfilling crisis and the ‘Draghi Put’ By Miller, Marcus; Zhang, Lei
  6. Optimal monetary policy in a new Keynesian model with animal spirits and financial markets By Lengnick, Matthias; Wohltmann, Hans-Werner
  7. Balance of payments or monetary sovereignty? In search of the EMU’s original sin – a reply to Lavoie By Sergio Cesaratto
  8. Loss Aversion and the Asymmetric Transmission of Monetary Policy By Gaffeo, Edoardo; Petrella, Ivan; Pfajfar, Damjan; Santoro, Emiliano
  9. Inflation, debt and the zero lower bound By Stefano Neri; Alessandro Notarpietro
  10. Examining the volatility of exchange rate: Does monetary policy matter? By Lim, Shu Yi; Sek, Siok Kun
  11. A Dynamic Quantitative Macroeconomic Model of Bank Runs By Elena Mattana; Ettore Panetti
  12. The Effect of the Federal Reserve’s Tapering Announcements on Emerging Markets By Vikram Rai1; Lena Suchanek
  13. Analysis of aggregated inflation expectations based on the ECB SPF survey By Oinonen, Sami; Paloviita, Maritta
  14. Dynamic term structure models: The best way to enforce the zero lower bound By Martin M. Andreasen; Andrew Meldrum
  15. Market Perceptions of US and European Policy Actions Around the Subprime Crisis By Theoharry Grammatikos; Thorsten Lehnert; Yoichi Otsubo
  16. Forecasting the South African Inflation Rate: On Asymmetric Loss and Forecast Rationality By Christian Pierdzioch; Monique B. Reid; Rangan Gupta
  17. Quantification and characteristics of household inflation expectations in Switzerland By Rina Rosenblatt-Wisch; Rolf Scheufele
  18. Simple Rules for Financial Stability By John B. Taylor
  19. Estimates of Fundamental Equilibrium Exchange Rates, November 2014 By William R. Cline
  20. Monetary Policy in Times of Financial Stress. By Kontonikas, Alexandros; Nolan, Charles; Zekaite, Zivile
  21. Replica Core Equivalence Theorem: An Extension of Debreu-Scarf Limit Theorem to Double Infinity Monetary Economies By Ken Urai; Hiromi Murakami
  22. The Financial and Macroeconomic Effects of OMT Announcements By Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
  23. The Impact of U.S. Monetary Policy Normalization on Capital Flows to Emerging-Market Economies By Tatjana Dahlhaus; Garima Vasishtha
  24. A New Approach to Construct Core Inflation By Sartaj Rasool Rather; S. Raja Sethu Durai; M. Ramachandran
  25. Is there any causality between inflation and FDI in an ‘inflation targeting’ regime? Evidence from South Africa By Valli, Mohammed; Masih, Mansur
  26. Integrating Uncertainty and Monetary Policy-Making: A Practitioner’s Perspective By Stephen S. Poloz
  27. The Nexus between Inflation and Inflation Uncertainty via Wavelet Approach: Some Lessons from Egyptian Case By Jamal BOUOIYOUR; Refk SELMI
  28. Quantitative Easing and the Liquidity Channel of Monetary Policy By Lucas Herrenbrueck
  29. The Role of Card Acceptance in the Transaction Demand for Money By Huynh, Kim P.; Schmidt-Dengler, Philipp; Stix, Helmut
  30. Does money matter in the euro area? Evidence from a new Divisia index By Zsolt Darvas
  31. Regímenes Monetarios y Volatilidad del Tipo de Cambio Real: El Caso Peruano, 1995–2012 By Rodolfo Cermeño; Julio Mamani-Palacios
  32. Assessing the effect of monetary policy on economic growth in franc zone By Douanla Tayo, Lionel
  33. The Bank of England Credit Conditions Survey By Bell, Venetia; Pugh, Alice

  1. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: Research in the early 1980s found that the gains from international coordination of monetary policy were quantitatively small compared to simply getting domestic policy right. That prediction turned out to be a pretty good description of monetary policy in the 1980s, 1990s, and until recently. Because this balanced international picture has largely disappeared, the 1980s view about monetary policy coordination needs to be reexamined. The source of the problem is not that the models or the theory are wrong. Rather there was a deviation from the rule-like monetary policies that worked well in the 1980s and 1990s, and this deviation helped break down the international monetary balance. There were similar deviations at many central banks, an apparent spillover culminating in a global great deviation. The purpose of this paper is to examine the possible causes and consequences of these spillovers, and to show that uncoordinated responses of central banks to the deviations can create an amplification mechanism which might be overcome by some form of policy coordination.
    Date: 2013–01
  2. 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: 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
  3. By: Kedan, Danielle (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: This Letter compiles information on central bank minutes from a number of sources. First, we look at the academic literature which suggests that central bank minutes can provide additional information above other forms of communication. Second, we make use of a comprehensive set of information on 120 central banks assembled by Dincer and Eichengreen (2014) to examine which central banks publish accounts and how this has evolved over time. Finally, we collate material on the minutes of 24 central banks, summarising their format and main features across four dimensions: length, timeliness, attribution (subdivided into general discussion and voting) and dissent. We find that although only a relatively small proportion of central banks publish minutes, there is a wide diversity in the economies that these banks operate in, and in the characteristics of the minutes that they publish.
    Date: 2014–11
  4. By: Barnett, William A.
    Abstract: While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. In the transmission mechanism of central bank policy, these results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit. We do not explore those deeper issues in this paper, which focuses on measurement.
    Keywords: credit cards, money, credit, aggregation theory, index number theory, Divisia index, risk, asset pricing.
    JEL: C43 E01 E3 E40 E41 E51 E52 E58
    Date: 2014–12–01
  5. By: Miller, Marcus; Zhang, Lei
    Abstract: European markets for sovereign bonds have been prone to panic as investors fly to safety whenever they think others will. Calvo (1988) had warned of the possibility of multiple equilibria in bond markets; and argued for official action to limit interest rate rises so as rule out a self-fulfilling default equilibrium. Until recently, however, it appeared that the ECB was not able to act as necessary. But in August 2012, the ECB announced a policy of Outright Monetary Transactions which promised intervention to put a ceiling on rates for sovereigns willing to accept further fiscal stringency; and we use Calvo’s framework to illustrate how this policy of a ‘put’ for sovereigns can work. In addition to unilateral action by the ECB, some have proposed the consolidation of sovereign debt into Eurobonds backed by a supranational agency. Specifically, we propose the creation of a Special Purpose Vehicle (SPV) which issues Eurobonds and holds both plain vanilla sovereign debt and newly created state-contingent bonds. This offers, we believe, a desirable complement to the ‘Draghi put’.
    Keywords: Creditor panic; debt consolidation; sovereign illiquidity and insolvency
    JEL: F34 F42
    Date: 2014–05
  6. By: Lengnick, Matthias; Wohltmann, Hans-Werner
    Abstract: This paper relates to the literature on macro-finance-interaction models. We modify the boundedly rational New Keynesian model of De Grauwe (2010a) using a completely microfounded IS equation, and combine it with the agent-based financial market model of Westerhoff (2008). For this purpose we derive four interactive channels between the financial and real sector where two channels are strictly microfounded. We analyze the impact of the different channels on economic stability and derive optimal (simple) monetary policy rules. We find that coefficients of optimal simple Taylor rules do not significantly change if financial market stabilization becomes part of the central bank's objective function. Additionally, we show that rule-based, backward-looking monetary policy creates huge instabilities if expectations are boundedly rational.
    Keywords: agent-based financial markets,New Keynesian macroeconomics,microfoundation,optimal monetary policy,unconventional monetary policy
    JEL: E5 G02
    Date: 2014
  7. By: Sergio Cesaratto (University of Siena)
    Abstract: In a recent paper Marc Lavoie (2014) has criticized my interpretation of the Eurozone (EZ) crisis as a balance of payments crisis (BoP view for short). He rather identified the original sin “in the setup and self-imposed constraint of the European Central Bank”. This is defined here as the monetary sovereignty view. This view belongs to a more general view that see the source of the EZ troubles in its imperfect institutional design. According to the (prevailing) BoP view, supported with different shades by a variety of economists from the conservative Sinn to the progressive Frenkel, the original sin is in the current account (CA) imbalances brought about by the abandonment of exchange rate adjustments and in the inducement to peripheral countries to get indebted with core countries. An increasing number of economists would add the German neo-mercantilist policies as an aggravating factor. While the BoP crisis appears as a fact, a better institutional design would perhaps have avoided the worse aspects of the current crisis and permitted a more effective action by the ECB. Leaving aside the political unfeasibility of a more progressive institutional set up, it is doubtful that this would fix the structural unbalances exacerbated by the euro. Be this as it may, one can, of course, blame the flawed institutional set up and the lack an ultimate action by the ECB as the culprit of the crisis, as Lavoie seems to argue. Yet, since this institutional set up is not there, the EZ crisis manifests itself as a balance of payment crisis.
    Keywords: Socialist Marxian Sraffian, Central banks and their policies, Current account adjustment, International lending and debt problems, Macroeconomics issues of monetary unions.
    JEL: B51 E58 F32 F34
    Date: 2014–12
  8. By: Gaffeo, Edoardo; Petrella, Ivan; Pfajfar, Damjan; Santoro, Emiliano
    Abstract: There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households’ utility depends on consumption deviations from a reference level below which loss aversion is displayed. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and inflation. Contractions face the Central Bank with higher responsiveness of output to interest rate changes, as well as a flatter aggregate supply schedule.
    Keywords: asymmetry; business cycle; monetary policy; prospect theory
    JEL: D03 D11 E32 E42 E52
    Date: 2014–08
  9. By: Stefano Neri (Banca d'Italia); Alessandro Notarpietro (Banca d'Italia)
    Abstract: This paper analyses the macroeconomic effects of a protracted period of low and falling inflation rates when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates and the private sector is indebted in nominal terms (debt-deflation channel). In this scenario, even cost-push shocks that in normal circumstances would reduce inflation and stimulate output are found to have contractionary effects on economic activity, especially when the interplay of ZLB and debt deflation is considered.
    Keywords: zero lower bound, monetary policy, disinflation, debt-deflation channel.
    JEL: E21 E31 E37 E52
    Date: 2014–10
  10. By: Lim, Shu Yi; Sek, Siok Kun
    Abstract: We conduct empirical analysis on examining the changes in exchange rate volatility under two monetary policy regimes, i.e. the pre- and post- inflation targeting (IT) regimes. In addition, we also investigate if the monetary decisions can have impacts on the volatility of exchange rate. The study is focused in four Asian countries that experienced drastic in the switch of monetary policy from the rigid exchange rate to flexible exchange rate and inflation targeting after the Asian financial crisis of 1997. The exponential generalized autoregressive conditional heteroskedasticity model is applied and our results show that exchange rate is more persistent and volatile in the pre-IT period as compared to post-IT period. The exchange rate persistency is higher in the long-run but the persistency is low in the short run. We fail to find evidence to show that the adoption of flexible exchange rate and inflation targeting lead to greater volatility in exchange rate. The monetary decisions can have impacts on the volatility of exchange rate but the impacts vary across countries.
    Keywords: exchange rate volatility; monetary policy; shock persistency
    JEL: E6 E66
    Date: 2014–07
  11. By: Elena Mattana; Ettore Panetti
    Abstract: We study the macroeconomic effects of bank runs in a neoclassical growth model with a fully microfounded banking system. In every period, the banks provide insurance against idiosyncratic liquidity shocks, but the possibility of sunspot-driven bank runs distorts the equilibrium allocation. In the quantitative exercise, we find that the banks, for low values of the probability of the sunspot, choose a contract that is not run-proof, and satisfy an “equal service constraint” if the run is realized. In equilibrium, a shock to the probability of a bank run leads to a drop in GDP of between 0.001 and 5.6 percentage points.
    JEL: E21 E44 G01 G20
    Date: 2014
  12. By: Vikram Rai1; Lena Suchanek
    Abstract: The Federal Reserve’s quantitative easing (QE) program has been accompanied by a flow of funds into emerging-market economies (EMEs) in search of higher returns. When Federal Reserve officials first mentioned an eventual slowdown and end of purchases under the central bank’s QE program in May and June 2013, foreign investors started to withdraw some of these funds, leading to capital outflows, a drop in EME currencies and stock markets, and a rise in bond yields. Using an event-study approach, this paper estimates the impact of “Fed tapering” on EME financial markets and capital flows for 19 EMEs. Results suggest that EMEs with strong fundamentals (e.g., stronger growth and current account position, lower debt, and higher growth in business confidence and productivity), saw more favourable responses to Fed communications on tapering. Capital account openness initially played a role as well, but diminished in importance in subsequent tapering announcements.
    Keywords: International financial markets; Transmission of monetary policy; International topics
    JEL: C33 E58 F32 G14
    Date: 2014
  13. By: Oinonen, Sami (Bank of Finland Research); Paloviita, Maritta (Bank of Finland Research)
    Abstract: This paper examines aggregated inflation expectations based on the ECB Survey of Professional Forecasters (ECB SPF). We analyse possible impacts of changing panel composition on short and long term point forecasts and forecast uncertainties using approach, which is based on a set of sub-panels of fixed composition. Our results indicate that the unbalanced panel data do not cause systematic distortions to aggregated survey information. However, micro level analysis of expectations would also be useful, especially in times of wide disagreement across forecasters and high levels of inflation uncertainty.
    Keywords: survey data; expectations; changing panel composition
    JEL: C53 E31 E37
    Date: 2014–12–01
  14. By: Martin M. Andreasen (Aarhus University and CREATES); Andrew Meldrum (Bank of England)
    Abstract: This paper studies whether dynamic term structure models for US nominal bond yields should enforce the zero lower bound by a quadratic policy rate or a shadow rate specification. We address the question by estimating quadratic term structure models (QTSMs) and shadow rate models with at most four pricing factors using the sequential regression approach. Our findings suggest that the two models largely provide the same in-sample .t, but loadings from ordinary and risk-adjusted Campbell-Shiller regressions are generally best matched by the shadow rate models. We also find that the shadow rate models perform better than the QTSMs when forecasting bond yields out of sample.
    Keywords: Bias-adjustment, Forecasting study, Quadratic term structure models, Shadow rate models, The sequential regression approach
    JEL: C10 C50 G12
    Date: 2014–11–26
  15. By: Theoharry Grammatikos (University of Luxembourg (E-mail: theoharry.; Thorsten Lehnert (University of Luxembourg (E-mail:; Yoichi Otsubo (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper explores the impacts of key policy actions by US and European authorities on stock returns of systemically important banks in Europe and US around the subprime crisis. We find that the US policy announcements had a stronger impact on the European and US banking industry than the European policy announcements. In particular, the announcements of monetary policies by the US authorities were accompanied by higher abnormal returns compared to related announcements of European authorities. We also find that the policy announcements, regardless of which side of the Atlantic the news arrived from, has increased the return volatility during the crisis. We further analyze the reactions of implied volatility. The findings suggest that the currency swaps had a non-negligible effect in reducing future uncertainty.
    Keywords: Event study, Policy announcement, Subprime crisis
    JEL: G01 G14 G18 G21 G28
    Date: 2014–11
  16. By: Christian Pierdzioch (Helmut-Schmidt-University, Department of Economics, Holstenhofweg, 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: 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 poolthe 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: 2014–11
  17. By: Rina Rosenblatt-Wisch; Rolf Scheufele
    Abstract: Inflation expectations are a key variable in conducting monetary policy. However, these expectations are generally unobservable and only certain proxy variables exist, such as surveys on inflation expectations. This paper offers guidance on the appropriate quantification of household inflation expectations in the Swiss Consumer Survey, where answers are qualitative in nature. We apply and evaluate different variants of the probability approach and the regression approach; we demonstrate that models which include answers on perceived inflation and allow for time-varying response thresholds yield the best results; and we show why the originally proposed approach of Fluri and Spörndli (1987) has resulted in heavily biased inflation expectations since the mid-1990s. Furthermore, we discuss some of the key features of Swiss household inflation expectations, i.e. the fact that there has been a shift in expectation formation since 2000 (expectations are better anchored and less adaptive, and there is lower disagreement of expectations). We suggest that this may be linked to the Swiss National Bank's adjustment of its monetary policy framework around this time. In addition, we outline how expectation formation in Switzerland is in line with the sticky information model, where information disseminates slowly from professional forecasters to households.
    Keywords: Inflation expectations, quantification of qualitative surveys, credibility, expectation formation, sticky information
    JEL: C22 C82 E31 E50
    Date: 2014
  18. By: John B. Taylor (Department of Economics, Stanford University)
    Abstract: Thank you for the opportunity to speak at this conference on financial stability. I would like to use the opportunity to discuss three interrelated proposals to bolster and maintain financial stability. The first would reform the rules of bankruptcy to handle large financial institutions with a minimum of disruption. The second would put aside any plans for temporary countercyclical capital buffers and focus macro-prudential policy simply on setting permanent and appropriate capital and subordinated debt ratios. The third would start to move back to a more rules-based monetary policy. Taken together these proposals would constitute a sound overall strategy to improve financial and economic stability.
    Date: 2013–04
  19. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: This semiannual review finds that most of the major international currencies, including the US dollar, euro, Japanese yen, UK pound sterling, and Chinese renminbi, remain close to their fundamental equilibrium exchange rates (FEERs). The new estimates find this result despite numerous significant exchange rate movements associated with increased volatility in international financial markets at the beginning of the fourth quarter of 2014, and despite a major reduction in the price of oil. The principal cases of exchange rate misalignment continue to be the undervalued currencies of Singapore, Taiwan, and to a lesser extent Sweden and Switzerland, and the overvalued currencies of Turkey, New Zealand, South Africa, and to a lesser extent Australia and Brazil. Even so, the medium-term current account deficit for the United States is already at the outer limit in the FEERs methodology (3 percent of GDP), and if the combination of intensified quantitative easing in Japan and the euro area with the end to quantitative easing in the United States were to cause sizable further appreciation of the dollar, an excessive US imbalance could begin to emerge.
    Date: 2014–11
  20. By: Kontonikas, Alexandros; Nolan, Charles; Zekaite, Zivile
    Abstract: Some studies argue that the Fed reacts to financial market developments. Using data covering the period 1985:Q1 - 2008:Q4 and employing an augmented Taylor rule specification, we re-examine that conjecture. We find that evidence in favour of such a reaction is largely driven by the Fed’s behaviour during the 2007-2008 financial crisis.
    Keywords: Monetary Policy, Taylor Rule, Financial Crisis,
    Date: 2014
  21. By: Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (Graduate School of Economics, Osaka University)
    Abstract: An overlapping generations model with the double infinity of commodities and agents is the most fundamental framework to introduce outside money into a static economic model. In this model, competitive equilibria may not necessarily be Pareto-optimal. Although Samuelson (1958) emphasized the role of fiat money as a certain kind of social contract, we cannot characterize it as a cooperative game-theoretic solution like a core. In this paper, we obtained a finite replica core characterization of monetary equilibria. Preferences are not necessarily assumed to be ordered.
    Keywords: Monetary Equilibrium, Overlapping Generations Model, Core Equivalence, Replica Econ-omy, Non-Orderd Preference
    JEL: C71 D51 E00
    Date: 2014–11
  22. By: Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT) announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMT announcements decreased the Italian and Spanish 2-year government bond yields by about 2 percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. These results are used to calibrate a scenario in a multi-country model describing the macrofinancial linkages in France, Germany, Italy, and Spain. The scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany.
    Keywords: event study; multi-country vector autoregressive model; news; Outright Monetary Transactions
    JEL: C54 E47 E58
    Date: 2014–06
  23. By: Tatjana Dahlhaus; Garima Vasishtha
    Abstract: The Federal Reserve’s path for withdrawal of monetary stimulus and eventually increasing interest rates could have substantial repercussions for capital flows to emerging-market economies (EMEs). This paper examines the potential impact of U.S. monetary policy normalization on portfolio flows to major EMEs by using a vector autoregressive model that explicitly accounts for market expectations of future monetary policy. The “policy normalization shock” is defined as a shock that increases both the yield spread of U.S. long-term bonds and monetary policy expectations while leaving the policy rate per se unchanged. Results indicate that the impact of this shock on portfolio flows as a share of GDP is expected to be economically small. The estimated impact is closely in line with that seen during the end-May to August 2013 episode in response to a comparable rise in the yield spread of U.S. long-term bonds. However, as the events during the summer of 2013 have shown, relatively small changes in portfolio flows can be associated with significant financial turmoil in EMEs. Further, there is also a strong association between the countries that are identified by our model as being the most affected and the ones that saw greater outflows of portfolio capital over May to September 2013.
    Keywords: International topics; Transmission of monetary policy
    JEL: C32 E52 F33 F42
    Date: 2014
  24. By: Sartaj Rasool Rather (Madras School of Economics); S. Raja Sethu Durai (Department of Economics, Pondicherry University, Puducherry); M. Ramachandran (Department of Economics, Pondicherry University, Puducherry)
    Abstract: We propose a new methodology to construct core inflation which is, unlike other conventional methods, not based on ad hoc elimination/trimming of prices. The underlying inflation derived from our method is found to be a powerful leading indicator of headline inflation while other conventional measures do not seem to reflect such fundamental property of core inflation.
    Keywords: Core inflation, Skewness, Leading indicator
    JEL: C43 E31 E52
    Date: 2014–09
  25. By: Valli, Mohammed; Masih, Mansur
    Abstract: This paper attempts to examine whether a long-run theoretical relationship does indeed exist between the level of inflation in South Africa and the amount of FDI eventually received by the country. It also attempts to provide insight into the purported macroeconomic benefits of the policy of ‘inflation targeting’, by ascertaining whether any causality exists between stable inflation levels and improved FDI inflows from a South African perspective. Utilising annual data ranging from 1970 to 2012, we employ time series techniques to answer our research objectives. Our results indicate that there is a long-run inverse relationship between the level of inflation and FDI inflow in South Africa, implying that a rise in the level of inflation would have a negative impact on the amount of FDI received by South Africa. Furthermore, the paper successfully demonstrates that a degree of causality does exist between stable inflation levels and improved FDI inflows from a South African perspective, suggesting that the policy change that occurred with the adoption of ‘inflation targeting’ by the South African authorities did have a significant impact on the average level of FDI inflow to the country. Consequently, one of the implications of our findings is that the policy of ‘inflation targeting’, if well-implemented, actively managed and consistently applied, could represent a vital organ of the policy toolkit available to governmental authorities and policymakers in South Africa and indeed all developing countries, in their bid to enhance the inflow of FDI to their respective countries.
    Keywords: inflation; foreign direct investment (FDI); South Africa; timeseries techniques
    JEL: C22 C58 E44 G15
    Date: 2014–08–24
  26. By: Stephen S. Poloz
    Abstract: This paper discusses how central banking is evolving in light of recent experience, with particular emphasis on the incorporation of uncertainty into policy decision-making. The sort of post-crisis uncertainty that central banks are dealing with today is more profound than that which is typically subjected to rigorous analysis and does not lend itself easily to formal modelling. As a practical matter, the policy-maker is dependent on macro models to develop a coherent monetary policy plan, and this burden of coherence means that fundamental uncertainty must be incorporated explicitly into the policy formulation process. As suggested here, doing so transforms policy formulation from an exercise in reverse engineering to one of risk management, one consequence of which is to inject a little more realism about uncertainty into the policy narrative, while trusting markets to wrestle with the data flow and deliver two-way trading. The evolution is likely to be a long one - researchers are encouraged to keep focusing on developing a practical understanding of how the economy works, one that admits that rules around economic behaviour are not cast in stone, but are almost certainly subject to variation through time and events.
    Keywords: Economic models; Financial stability; Monetary policy framework; Uncertainty and monetary policy
    JEL: C50 E37 E5 E61
    Date: 2014
  27. By: Jamal BOUOIYOUR; Refk SELMI
    Abstract: The Nexus between Inflation and Inflation Uncertainty via Wavelet Approach: Some Lessons from Egyptian Case
    Date: 2014–10
  28. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: Currently, we have only a limited understanding of how central bank purchases of illiquid assets (“quantitative easing”) affect long-term interest rates, borrowing costs, and the real economy. Since the historical record of quantitative easing is sparse, theoretical work is needed to guide both empirical research and policy work. For this purpose, I construct a parsimonious and very flexible general equilibrium model of asset liquidity. In the model, households are heterogeneous in their asset portfolios and demand for liquidity, asset trade is subject to frictions, and prices are flexible. I find that purchases of illiquid assets can reduce yields across the board and stimulate investment. However, I also find that this is not a given. A temporary program of quantitative easing can cause a “hangover” of elevated yields and depressed investment after it has ended. When assets are already scarce, further purchases can crowd out the private flow of funds and cause high real yields and deflation, resembling a liquidity trap.
    Keywords: Monetary theory, asset liquidity, search frictions, quantitative easing, liquidity trap
    JEL: E31 E40 E50 G12
    Date: 2014–12–06
  29. By: Huynh, Kim P.; Schmidt-Dengler, Philipp; Stix, Helmut
    Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.
    Keywords: counterfactual distributions; endogenous switching regression; inventory models of money
    JEL: C35 C83 E41
    Date: 2014–10
  30. By: Zsolt Darvas (Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and and Bruegel and Corvinus University of Budapest)
    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
  31. By: Rodolfo Cermeño (Division of Economics, CIDE); Julio Mamani-Palacios
    Abstract: This paper evaluates empirically the volatility of real exchange rate in Peru under two regimes of monetary policy: the Monetary Targeting Regime, MTR, (1995:11–2001:12) and the Inflation Targeting Regime, ITR, (2002:01–2012:12). We estimate a small-scale macroeconomic model along the lines of the Dynamic Stochastic General Equilibrium (DSGE) models, under a New-Keynesian approach. We find strong evidence that volatility of real exchange rate differs substantially across regimes which is consistent with the theoretical results of Gali y Monacelli (2005) and also with the empirical results of Lastrapes (1989). Specifically, we find that the transition from the MTR to ITR has been accompanied by a substantial reduction of real Exchange rate volatility.
    Keywords: volatility, real Exchange rate, monetary policy in Peru, monetary regimes, DSGE models
    JEL: E52 E58
    Date: 2013–10
  32. By: Douanla Tayo, Lionel
    Abstract: This study aims at assessing the effect of monetary policy on economic growth for the fourteen countries of the Franc zone over the period 1985-2012 using a dynamic panel model. The system estimator of the generalized method of moments has allowed us to demonstrate a significant and negative effect of domestic credit provided by banking sector on economic growth. The analysis reveals that money supply has significant positive effect on economic growth, while total reserves and inflation have a negative effect. However the negative effect of domestic credit provided by banking sector can be reversed through allocation of funds to those projects for which the social returns are the highest and through allocation of funds to productive local industries.
    Keywords: Domestic credit, real GDP, dynamic panel, GMM
    JEL: E5
    Date: 2014–11–25
  33. By: Bell, Venetia (Bank of England); Pugh, Alice (Bank of England)
    Abstract: This paper contains the first detailed empirical examination of the information content of the Bank of England Credit Conditions Survey (CCS). The CCS asks a wide selection of questions of UK lenders relating to all aspects of bank credit provision. We examine the association between the survey responses and comparable official quantitative rates and lending growth data, and the extent to which the survey responses can help us to predict changes in those variables one quarter ahead. We find that many of the survey responses – especially those for household lending – are significantly associated with movements in the quantitative data. Similarly to the findings of equivalent surveys in the United States and euro area, we find that a subset of banks’ survey expectations of credit conditions provide a statistically significant guide for predicting changes in credit spreads and lending growth one quarter ahead.
    Keywords: bank lending survey; credit conditions survey; credit growth; credit spreads
    JEL: C23 E43 E51 E52
    Date: 2014–11–21

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