nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒03‒27
seventeen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Zero Lower Bound: Implications for Modelling the Interest Rate By Joshua C.C. Chan; Rodney Strachan
  2. THE MONETARY STABILITY AFTER THE FINANCIAL CRISIS* By Diana Raluca Diaconescu; Hortensia Paula Botezatu
  3. Escaping Expectations-Driven Liquidity Traps: Experimental Evidence By Luba Petersen; Jasmina Arifovic
  4. Effectiveness of Monetary Policy In Economies in Democratic Transition: Evidence from Tunisia By Guizani, Brahim
  5. Monetary Policy Responses to Foreign Financial Market Shocks: Application of a Modified Open-Economy Taylor Rule By Parinaz Ezzati
  6. Forecast Combination, Non-linear Dynamics, and the Macroeconomy By Christopher Gibbs
  7. An Analysis of Bitcoin By Max Kubat
  8. Price Level Stabilization: Hayek and New Keynesians By Pavel Potuzak
  9. A Way Out of the Euro Crisis: Fiscal Transfers Are Indispensable for Sustainability in a Union with Heterogeneous Members By Harashima, Taiji
  10. Interest Rate Expectations in a Model Using Leading Indicators By Miroslav Klucik
  11. Do Precious Metal Prices Help in Forecasting South African Inflation? By Mehmet Balcilar; Nico Katzke; Rangan Gupta
  12. Exchange Rate Dynamics and Forecast Errors about Persistently Trending Fundamentals By Josh R. Stillwagon
  13. Fisher Effect in Austria Causality Approach By Sami Taban; Tayfur Bayat; Ferit Önder
  14. Money: The art of keeping it By Shaliza Azreen Mohd Zulkifli
  16. Macroeconomic imbalances and institutional reforms in the EMU By Stefan Ederer
  17. Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving By Vipin Arora; Rod Tyers; Ying Zhang

  1. By: Joshua C.C. Chan (Research School of Economics, and Centre for Applied Macroeconomic Analysis, Australian National University); Rodney Strachan (School of Economics, and Centre for Applied Macroeconomic Analysis, University of Queensland; The Rimini Centre for Economic Analysis, Italy)
    Abstract: The time-varying parameter vector autoregressive (TVP-VAR) model has been used to successfully model interest rates and other variables. As many short interest rates are now near their zero lower bound (ZLB), a feature not included in the standard TVP-VAR specification, this model is no longer appropriate. However, there remain good reasons to include short interest rates in macro models, such as to study the effect of a credit shock. We propose a TVP-VAR that accounts for the ZLB and study algorithms for computing this model that are less computationally burdensome than others yet handle many states well. To illustrate the proposed approach, we investigate the effect of the zero lower bound of interest rate on transmission of a monetary shock.
    Date: 2014–12
  2. By: Diana Raluca Diaconescu (West University of Timisoara, Faculty of Economics and Businesses Administration); Hortensia Paula Botezatu (West University of Timisoara, Faculty of Economics and Businesses Administration)
    Abstract: Great inflation observed during the period 1965-1984 is the event final monetary (monetary climate the event) in the twentieth century (Meltzer, 2005). Three types of explanations have been developed - all highlighting the importance of monetary policy:• Defects in the institutional and governance at origin sitting temporal incoherence (Barro – Gordon model);• Monetary policy errors committed in an unconscious: it would have been too lax, or because the authorities have overestimated potential output growth (Orphanides, 2003) or because there has been insufficient attention to anchor expected inflation (Clarida , Gali and Gertler, 1999); However, combined with a sharp drop in productivity undoubtedly led to accelerating inflation persistence (Collard and Dallas, 2007);• Monetary policy errors committed in a conscious, namely the adoption by the authorities of a non-monetary approach to inflation; this is the result of an analysis of the experience of the United Kingdom and the United States (Nelson, 2005; DiCecio and Nelson, 2009).Inflation dynamics has seen a change in the early eighties, with the change that had profound monetary policy. After the Volcker experience, central bank reaction to inflation shocks became more aggressive. In this context, central banks have not hesitated to increase real interest rates to prevent triggering an inflationary spiral and the emergence of second round effects. For example, a sudden drop in inflation in the United States in the early eighties could be explained by EDF aggressive response to inflation shocks combined with lesser technological shocks (Carlström, and Paustian Fuerst, 2009).
    Keywords: Monetary stability, financial stability, supervision, macro prudential policies
    JEL: E52 E50 E49
    Date: 2014–10
  3. By: Luba Petersen (Simon Fraser University); Jasmina Arifovic (Simon Fraser University)
    Abstract: Can monetary or fiscal policy stabilize expectations in a liquidity trap? We study expectation formation near the zero lower bound using a learning-to-forecast laboratory experiment. Monetary policy targets inflation around a constant or state-dependent target. Subjects’ expectations significantly over-react to stochastic aggregate demand shocks and historical information leading many economies to experience severe deflationary traps. Neither quantitative nor qualitative communication of inflation targets reduce the duration or severity of economic crises. A stronger initial recovery of fundamentals or supplementary anticipated fiscal stimulus stabilizes expectations and increases the speed of macroeconomic recovery.
    Keywords: experimental macroeconomics, monetary policy, expectations, zero lower bound, learning to forecast, communication
    JEL: C92 E2 E52 D50 D91
    Date: 2015–03–14
  4. By: Guizani, Brahim
    Abstract: This paper aims to contribute to the meager literature on monetary policy effectiveness in Tunisia especially after the revolution of January 2011; a period during which the country entered a delicate democratization transition. On the basis of a monthly data of several macroeconomic variables during the period from 2000 through 2013 a Vector Error Correction (VEC) model is estimated. The VEC-generated impulse response functions show that the monetary policy stance, as measured by the short-term interest rate, has become increasingly more effective on real output and prices during the post-revolution period; i.e., (2011 – 2013) than the previous period; i.e., (2000 – 2010). The variance decomposition analysis not only confirms these findings but also it points out an increasing role to the real output in price variation during the political transitional period. This might be attributed to the increasing volatile environment that characterized this period, which perturbed the aggregate supply and exacerbated the aggregate demand. Another no less important finding uncovered by the model is the amplification and acceleration of the exchange rate pass-through during the transitional period with respect the pre-revolution period.
    Keywords: monetary policy, Vector Error Correction Model, impulse response function, variance decomposition, Exchange rate Pass-Through.
    JEL: E52 E58
    Date: 2015–03–20
  5. By: Parinaz Ezzati (Business School, University of Western Australia)
    Abstract: With world economies facing increasing financial liberalization and financial crisis, the question raised is whether and how monetary authorities in various economies have responded to foreign financial shocks? In this paper, the focus of the question is directed at Iran, which will be examined through a modified open-economy Taylor Rule that considers foreign financial shocks from Saudi Arabia and Kuwait, representing the Middle East, and the U.S., Germany, and Japan, representing the rest of the world. Results suggest that although Iran’s monetary policy does not fit the Taylor Rule, it has responded to some foreign financial level and volatility shocks over the period of study, 1997-2013. Findings in this paper, following earlier findings in Ezzati (2013a) and (2013b), indicate that Iran’s monetary policy has not been completely based on economic changes and macroeconomic influences, but has been based more on controversial political concerns.
    Date: 2014
  6. By: Christopher Gibbs (School of Economics, UNSW Business School, UNSW)
    Abstract: This paper introduces the concept of a Forecast Combination Equilibrium to model boundedly rational agents who combine a menu of different forecasts using insights from the forecasting literature to mimic the behavior of actual forecasters. The equilibrium concept is consistent with rational expectations under certain conditions, while also permitting multiple, distinct, self-fulfilling equilibria, many of which are stable under least squares learning. The equilibrium concept is applied to a simple Lucas-type monetary model where agents engage in constant gain learning. The combination of multiple equilibria and learning is sufficient to replicate some key features of in ation data, such as time-varying volatility and periodic bouts of high in ation or deflation in a model that experiences only i.i.d. random shocks.
    Keywords: Forecast Combination, Adaptive Learning, Expectations, Dynamic Predictor Selection, Inflation, Forecast Combination Puzzle
    JEL: E17 E31 C52 C53
    Date: 2015–02
  7. By: Max Kubat (University of Economics, Prague)
    Abstract: In spite of the fact that a lot of virtual currencies have been created in recent years, bitcoin is the best known from all of them and regularly reported in the news. Currency without identified creator is appreciated by its user for non-centralized running, without any chance of governments to influence the money supply. The advantages of bitcoin, such as very quick payments worldwide, stop of inflations caused by governments trying to solve their own problems or high level of transactions privacy are widely mentioned. The aim of the article is not to describe the technical issue of bitcoin and explain how this system works, because it has been widely explained in other articles. The aim is focusing on economic aspects of bitcoin, the technical aspects are mentioned only if necessary. For accomplishing the aim the article is split in three parts. The first part is dedicated to answering the question “What is bitcoin?â€. It examines whether bitcoin complies with theoretical, empirical and law definition of money. The law definition of money compliance is done for Czech, German and EU law in general, but attitudes of US and Chinese governments are also mentioned. According to the findings, bitcoin cannot be easily considered as money. The second part is focused on monetary aspects of bitcoin. It analyses the question, “What would mean for an economy to accept bitcoin as legal tender?â€. In the case of single economy the money supply would be completely out of control of government and due to easy way of bitcoin transferring, money supply could be increased and decreased quickly. In the case of global economy, deflation and its impacts would be inevitable. The third part concentrates on bitcoin banking. No possibility of bitcoin lending does not mean the end of banking industry, but would probably lead to a significant change in how it works.
    Keywords: Bitcoin; definition of money; money supply, banking
    JEL: E41 E42
    Date: 2014–10
  8. By: Pavel Potuzak (University of Economics, Prague)
    Abstract: The doctrine of price level stabilization is one of the most important building blocks in modern macroeconomics. In 1920s and 1930s, Friedrich August von Hayek presented a theory that challenged this monetary-policy regime. Hayek stressed that attempts to stabilize the price level in the situation of a growing natural output might cause serious injection effects leading the economy to a boom-bust cycle. This article compares the Hayek theory with the New Keynesian doctrines. A simple graphical model is used to elucidate differences between the two theories. It is suggested that a declining price level might be a normal response of the price system in the expanding economy because the New Keynesian arguments stressing price rigidities may be of lower significance when the deflation in prices is caused by technological progress.
    Keywords: Price level stabilization, business cycle, natural rate of interest
    JEL: E42 B25 B53
    Date: 2014–12
  9. By: Harashima, Taiji
    Abstract: This paper theoretically examines a way out of the euro crisis based on a model of inflation acceleration and differentials. The conclusion is that, unless more advantaged states (e.g., Germany) systematically transfer a necessary amount of money to less advantaged states (e.g., Greece) in every period, the euro area cannot necessarily reach equilibrium where all heterogeneous states achieve optimality. In this case, fiscal transfers are not a tool of risk-sharing or a buffer against asymmetric shocks; rather, they are indispensable for escaping from indefinite disparity acceleration within a union consisting of heterogeneous member states. Such fiscal transfers should not be viewed as alms for the less advantaged states but as a right these states should justly assert. The model indicates that the lack of a fiscal transfer mechanism inevitably generates inflation differentials and huge current account imbalances among member states. As a result, although relatively more advantaged member states obtain “extra” benefits from the euro, less advantaged member states eventually lose most of their capital ownership and their economies are devastated.
    Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal transfer; Time preference
    JEL: E31 E58 E63 F33 N14 O52
    Date: 2015–04–02
  10. By: Miroslav Klucik (VSB – Technical University Ostrava, Faculty of Economics)
    Abstract: The basic assumption on which leading indicators are built is the common movement of macroeconomic variables representing the aggregate business cycle, giving information on turning points for different macroeconomic variables over time. Indicators passing through the turning points with few months lead prior to aggregate macroeconomic variables are thus used as a prognostic tool. Basic principles of the lead can be supported by a simple model of short-term equilibrium of a representative firm in a dynamic environment according to decisions about production depending on expectations. The model incorporates the formation of expectations in a market environment by propagation of sentiment between heterogeneous agents with limited rationality. When incorporating expectations about the real interest rate, seen as a so-called prime mover according to the OECD classification of leading indicators, it is possible to track the impact of signals of monetary policy authorities on propagation of waves of optimism and pessimism on the market. The monetary policy authority may cause herd behaviour, while the more far the expectations are set from the actual policy applied, the more difficulties experience firms when returning to the equilibrium. The sentiment simulations imply the use of the model for business cycle short-term forecasting by using alternative assumptions about future expectations of firms. This way new foundation are set for a different type of model using leading indicators meeting the criticism of measurement without theory by Koopmans from 1947, and for using the model to assess the impact of economic policies.
    Keywords: leading indicators, heterogenous agents, expectations, monetary policy
    JEL: E32 D21 D84
    Date: 2014–12
  11. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Nico Katzke (Department of Economics, University of Stellenbosch); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: In this paper we test whether the key metals prices of gold and platinum significantly improve inflation forecasts for the South African economy. We also test whether controlling for conditional correlations in a dynamic setup, using bivariate Bayesian-Dynamic Conditional Correlation (B-DCC) models, improves inflation forecasts. To achieve this we compare out-of-sample forecast estimates of the B-DCC model to Random Walk, Autoregressive and Bayesian VAR models. We find that for both the BVAR and BDCC models, improving point forecasts of the Autoregressive model of inflation remains an elusive exercise. This, we argue, is of less importance relative to the more informative density forecasts. For this we find improved forecasts of inflation for the B-DCC models at all forecasting horizons tested. We thus conclude that including metals price series as inputs to inflation models leads to improved density forecasts, while controlling for the dynamic relationship between the included price series and inflation similarly leads to significantly improved density forecasts.
    Keywords: Bayesian VAR, Dynamic Conditional Correlation, Density forecasting, Random Walk, Autoregressive model
    JEL: C11 C15 E17
    Date: 2015
  12. By: Josh R. Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper offers and tests a unique explanation for the exchange rate determination puzzle. It is not that exchange rates are unrelated to fundamentals, but rather when fundamentals undergo persistent changes it becomes important to measure their effect in terms of how they change relative to what was expected. This result is demonstrated with a simple present discounted value model of the exchange rate and then tested for four USD exchange rates using interest rate forecast data from nearly 50 major banks. Using the polynomially cointegrated VAR, or I(2) CVAR, the interest rate forecast errors are found to have a large and statistically significant impact on the exchange rate even independent of the level and change in the relative interest rate (with t-values in the double digits for all four samples). Further, this effect is greater in the samples with stronger evidence of persistent changes in the interest rate differential.
    Keywords: Exchange Rates, Determination Puzzle, Survey Data, Forecast Errors, I(2) Cointegration
    JEL: F31 G12 G15
    Date: 2015–02
  13. By: Sami Taban (Osmangazi University); Tayfur Bayat (İnönü University); Ferit Önder (KahramanmaraÅŸ Sütçü İmam University)
    Abstract: In this study, we aim to investigate relationship between interest rate and consumer price index in Austria by using quarterly data belonging 1990:Q1 to 2013:Q4.period in the context of Fisher (1930) hypothesis. We employ linear unit root test and causality tests. according to linear Granger causality test, there is no causal relationship between the variables in Austria. So the time domain causality analyses imply that Fisher’s hypothesis is not valid in Austria. Forth, frequency domain causality test results imply bi-directional causality while the Fisher effect is valid in the short run. Also the causality runs from inflation rate to interest rate in the long run. At the end of analysis, results imply that Fisher effect is not validity for Austria in this period.
    Keywords: Fisher Effect, Interest Rate, Inflation Rate, Causality
    JEL: C22 E43 E58
    Date: 2014–07
  14. By: Shaliza Azreen Mohd Zulkifli (Universiti Teknologi MARA)
    Abstract: In 2010, government of Malaysia strived to bring the country to be a high income, inclusive and sustainable nation by year 2020 through its New Economic Model (NEM) introduced in its Economic Transformation Programme (ETP). However this would also hint a sign rising price in many things, hence a higher living cost. Then in 2012 budget, the government announced a salary increment between 7 to 13% to the public sector employees. The citizens for once hope to be able to have a higher purchasing power but this was not the case. Adding to a series of existing events like oil price shock and global financial crisis, Malaysia incurred a new electricity tariff, subsidies cut and the skyrocket housing price. Even with the salary increment, it still does not help to ease out the rising living cost. Having said that, the amount of money to hold will also be affected and the ability to survive in this economy is questionable. Therefore this study attempts to i) determine the long run effect of real income, credit card and interest rate on demand for money in Malaysia, ii) examine the causal relationship between real money demand and chosen independent variables for the period of 2005Q1 to 2013Q4. By using multivariate framework, this study employs money demand function with Gross Domestic Product (GDP), credit card and interest rate as independent variables. Results show that there is a long run relationship between real money balance with GDP, credit card and interest rate. It is also found that relationship between real money balances and GDP is bi-directional.
    Keywords: demand,credit card,real money balance, average lending rate
    Date: 2014–12
  15. By: MUFUTAU AYINLA ABDUL-YAKEEN (Kwara State University, Malete); Nasir Mukhtar GATAWA (Usmanu Danfodiyo University, Sokoto)
    Abstract: This study obtained Exchange Rate of Nigerian Naira (ERN) to currencies of twenty-one countries selected from major economic blocs on quarterly basis between 1998 and 2014. Least Square method extracts ERN to United States Dollar (USD) as dependent variable. Comparing ERN to USD with other Foreign Exchange (FE) using Augmented Dickey-Fuller (ADF) test shows only Ghanaian Cedi (GHC) being stationary at levels while others were at first difference. Co-integration test exposes that ERN to USD has long term relationship with ERN to all FE tested. Granger causality test shows that ERN to USD caused changes in ERN to sixteen of the currencies while other currencies behaved otherwise. Conclusively, USD is the Vehicle Currency while EURO is the best currency to store Nigerian Assets for their parameters are positive and significant at 1%; co-integrated at 10%; and ERN to EUR unilaterally cause changes in ERN to USD. Nigerians are encouraged to deposit more in EURO, but convert their deposits to USD for foreign transactions. The study confirms some of the criticisms meted on the results of regression analysis of time series data but discovered that only OLS and Trend analysis can give specific answers and recommends their employment if specific answers are needed.
    Keywords: Assets, Currencies, Hard Currency, Trade Partners, and Vehicle Currency
    JEL: A10
    Date: 2014–10
  16. By: Stefan Ederer
    Abstract: The paper summarises the channels and mechanisms which lead to the emergence of macroeconomic imbalances in the EMU before, in and after the crisis of 2008/09. It focuses on the role of the specific institutional setting of the EMU in these developments and outlines the key reforms which are necessary to eliminate the imbalances and prevent them from re-emerging.
    Keywords: EMU, macroeconomic imbalances, European economic policy
    JEL: E02 E52 E62 F32 F33 F42
    Date: 2015–03
  17. By: Vipin Arora (United States Energy Information Administration, Washington DC); Rod Tyers (Business School, University of Western Australia); Ying Zhang (Business School, University of Western Australia)
    Abstract: East Asian, and primarily Chinese and Japanese, excess saving has been comparatively large and controversial since the 1980s. That it has contributed to the decline in the global “natural” rate of interest is consistent with Bernanke’s much debated “savings glut” hypothesis for the decade after 1998, empirical explorations of which have proved unconvincing. In this paper it is argued that the comparatively integrated global market for long bonds is suggestive of trends in the “world” natural rate and that the longer term evidence supports a leading role for Asia’s contribution to the expansion of ex ante global saving in explaining the declining trend in real long yields. Evidence is presented that trends in US 10 year bond yields are indeed representative of those in the “world” natural rate. The relationship between these yields and excess saving in China and Japan is then explored using a VECM that accounts for US monetary policy. The results support a negative long term relationship between 10-year yields and the current account surpluses of China and Japan. Projections using the same model then suggest that a feasible range of future pathways for those current accounts could cause the path of long rates to deviate by 330 basis points over the next decade.
    Date: 2014

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