nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒07‒25
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Towards a New Keynesian theory of the price level By Barrdear, John
  2. Optimal Monetary Interventions in Credit Markets By Tai-Wei Hu; Luis Araujo
  3. Bringing Financial Stability into Monetary Policy* By Leeper, Eric M.; Nason, James M.
  4. What are the International Channels Through Which a US Policy Shock is Transmitted to The World Economies? Evidence from a Time Varying FAVAR By Anastasios Evgenidis; Costas Siriopoulos
  5. Why is inflation so low in the euro area? By Antonio M. Conti; Stefano Neri; Andrea Nobili
  6. The South African Economic Response to Monetary Policy Uncertainty By Mehmet Balcilar; Rangan Gupta; Charl Jooste
  7. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
  8. Small DSGE Model with Financial Frictions By Melesse Wondemhunegn Ezezew
  9. Empirical Approaches to the Post-Keynesian Theory of Demand for Money: An Error Correction Model of Bangladesh By Kundu, Nobinkhor; Mollah, Muhammad Musharuf Hossain
  10. Testing information diffusion in the decentralized unsecured market for euro funds By Edoardo Rainone
  11. A Model of the Twin Ds: Optimal Default and Devaluation By Na, Seunghoon; Schmitt-Grohé, Stephanie; Uribe, Martín; Yue, Vivian
  12. Forecaster heterogeneity, surprises and financial markets By Marcello Pericoli; Giovanni Veronese
  13. The role of monetary policy in macroeconomic volatility of ASEAN-4 countries against oil price shock over time By Razmi, Fatemeh; Mohamed, Azali; Chin, Lee; Habibullah, Muzafar Shah
  14. Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity By Constantino Hevia; Juan Pablo Nicolini
  15. Tales of transition paths: Policy uncertainty and random walks By Hollmayr, Josef; Matthes, Christian
  16. Global liquidity and external bond issuance in emerging markets and developing economies By Feyen,Erik H.B.; Ghosh,Swati R.; Kibuuka,Katie; Farazi,Subika
  17. Subjective Currency Risk Premia and Deviations from Moving Averages By Steve Furnagiev; Josh Stillwagon
  18. One bank problem in the federal funds market By Traian A. Pirvu; Elena Cristina Canepa
  19. A Quasi-Bounded Model for Swiss Franc's One-Sided Target Zone During 2011-2015 By C. H. Hui; C. F. Lo; T. Fong
  20. Optimal Monetary and Fiscal Policy in a New Keynesian Model with a Dutch Disease: The Case of Complete Markets By Constantino Hevia; Pablo Andrés Neumeyer; Juan Pablo Nicolini
  21. EMU 2.0 Drawing Lessons From the Crisis - a New Framework For Stability and Growth By Theodoros S. Papaspyrou
  22. Comparison of Static and Dynamic Analyses on Exchange Rate Regimes in East Asia By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  23. International financial market integration, asset compositions, and the falling exchange rate pass-through By Buzaushina, Almira; Enders, Zeno; Hoffmann, Mathias

  1. By: Barrdear, John (Bank of England)
    Abstract: Modifying the standard New-Keynesian model to replace firms' full information and sticky prices with flexible prices and dispersed information, and imposing mild and plausible restrictions on the monetary authority's decision rule, produces the striking results that (i) there exists a unique and globally stable steady-state rate of inflation, despite the possibility of a lower bound on nominal interest rates; and (ii) in the vicinity of steady-state, the price level is determinate (and not just the rate of inflation), despite the central bank targeting inflation. The specification of firms' signal extraction problem under dispersed information removes the need to make use of Blanchard-Kahn conditions to solve the model,thereby removing the need to adhere to the Taylor principle and consequently circumventing the critique of Cochrane (2011). The model admits a determinate, stable solution with no role for sunspot shocks when the monetary authority responds by less than one-for-one to changes in expected inflation,including under an interest rate peg. An extension to include incomplete information on the part of the central bank permits the consideration of (rational) errors of judgement on the part of policymakers and provides a theoretical basis for inertial policymaking without interest rate smoothing, in support of Rudebusch (2002, 2006.
    Keywords: New-Keynesian; indeterminacy; dispersed information; FTPL; Blanchard-Kahn; Taylor rules; Taylor principle.
    JEL: D82 D84 E31 E52
    Date: 2015–07–10
  2. By: Tai-Wei Hu (MEDS); Luis Araujo (Michigan State University)
    Abstract: In an environment based on Lagos and Wright (2005) but with two rounds of pairwise meetings, we introduce imperfect monitoring that resembles operations of unsecured loans. We characterize the set of implementable allocations satisfying individual rationality and pairwise core in bilateral meetings. We introduce a class of expansionary monetary policies that use the seignorage revenue to purchase privately issued debts that resemble unconventional monetary policies. We show that under the optimal trading mechanism, both money and debt circulate in the economy and the optimal inflation rate is positive, except for very high discount factors under which money alone achieves the first-best. Our model captures the view that unconventional monetary policy encourages lending while it may create inflation.
    Date: 2015
  3. By: Leeper, Eric M. (Indiana University and NBER); Nason, James M. (zNorth Carolina State University and CAMA)
    Abstract: This paper arms central bank policy makers with ways to think about interactions between financial stability and monetary policy. We frame the issue of whether to integrate financial stability into monetary policy operating rules by appealing to the observation that in actual economies financial markets are incomplete. Incomplete markets create financial market frictions that prevent economic agents from perfectly sharing risk; in the absence of frictions, financial (in)stability would be of no concern. Overcoming these frictions to improve risk sharing across economic agents is, in our view, the intent of policies geared toward ensuring financial stability. There are many definitions of financial stability. Although the definitions share the notion that financial stability becomes an issue for policy makers when a breakdown in risk-sharing arrangements in financial markets has a negative effect on real economic activity, we give several examples that show this notion is too general for thinking about the role monetary policy might have in smoothing shocks to financial stability. Examples include statistical models that seek to separate “good” from “bad” changes in private-sector debt ag- gregates, new Keynesian policy prescriptions grounded in neo-Wicksellian natural rate rules, and a historical episode involving the 1920s Federal Reserve. These examples raise a cautionary flag for policy attempts to control the growth and the composition of debt that financial markets produce. We conclude with some advice for revising central banks’Monetary Policy Reports.
    Keywords: Financial frictions; incomplete markets; crises; new Keynesian; natural rate; monetary transmission mechanism
    JEL: E30 E40 E50 E60 G20 N12
    Date: 2015–07–01
  4. By: Anastasios Evgenidis (University of Patras); Costas Siriopoulos (Zayed University)
    Abstract: In this paper, we examine the international transmission of US monetary policy shocks across euro area and Asian countries by using a FAVAR model. We first examine all possible channels through which a policy shock is transmitted to each country. In general the transmission of the shock hides considerable heterogeneity across the countries. We find that the trade balance is important in explaining GDP spillover effects in the case of Singapore. Wealth effects along with the world interest rate channel explain the negative propagation of the US shock to the GDP of Hong Kong, the Philippines and Singapore. The exchange rate channel can explain the positive spillover effects on GDP in Korea and Japan. For the euro area, an endogenous response of the euro area monetary authority is observed. The wealth effect through the role of effective exchange rates seems adequate to describe the transmission of the shock to European countries. For Germany and Italy the decline in lending and spending reveal the importance of the balance sheet channel in the shock transmission. Second, we investigate to what extent the transmission mechanism has changed over time. For the 2007 financial crisis, our results indicate that the majority of the countries in both regions witness an increase in the size of the shock to real activity, inflation and credit variables in the post crisis period.
    Keywords: Monetary Policy; International Transmission Mechanism; FAVAR; Bayesian Statistics; Time Varying Parameters
    JEL: C38 E52 F41
    Date: 2015–01
  5. By: Antonio M. Conti (Bank of Italy); Stefano Neri (Bank of Italy); Andrea Nobili (Bank of Italy)
    Abstract: Inflation in the euro area has been falling steadily since early 2013 and at the end of 2014 turned negative. Part of the decline has been due to oil prices, but the weakness of aggregate demand has also played a significant role. This paper uses a VAR model to quantify the contribution of oil supply, aggregate demand and monetary policy shocks (identified by means of sign restrictions) on inflation in the euro area. The analysis suggests that in the last two years inflation has been driven down by all three factors, as the effective lower bound to policy rates has prevented the European Central Bank from reducing the short-term rates to support economic activity and align inflation with the definition of price stability. Remarkably, the joint contribution of monetary and demand shocks is at least as important as that of oil price developments to the deviation of inflation from its baseline. Country-by-country analysis shows that both aggregate demand and oil supply shocks have driven inflation down everywhere, albeit with varying intensity. The findings stand confirmed after a series of robustness checks.
    Keywords: oil supply, monetary policy, inflation, VAR models, Bayesian methods
    JEL: C32 E31 E32 E52
    Date: 2015–07
  6. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey and Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the evolution of monetary policy uncertainty and its impact on the South African economy. We show that volatility is high and constant using a stochastic volatility model in a sign-restricted VAR setup. Stochastic volatility is model driven and there is an endogenous economic response to uncertainty. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. We study the transmission mechanism of uncertainty for South Africa using a nonlinear DSGE model. The model is calibrated based on the existing literature while the persistence and size of uncertainty is taken from the empirical VAR. The DSGE model shows that the size of the uncertainty shock matters - high uncertainty can lead to a severe contraction in output, inflation and interest rates.
    Keywords: Uncertainty, nonlinear DSGE, stochastic volatility
    JEL: C10 E52
    Date: 2015–07
  7. By: Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.
    Keywords: dynamic stochastic general equilibrium models, financial frictions, monetary policy, reserve requirements, inflation targeting, non-conventional policy instruments
    JEL: E52 E58
    Date: 2014–01
  8. By: Melesse Wondemhunegn Ezezew (Department of Economics, University Of Venice Cà Foscari)
    Abstract: In the last few years, macroeconomic modelling has emphasised the role of credit market frictions in magnifying and transmitting nominal and real disturbances and their implication for macro-prudential policy design. In this paper, we construct a modest New Keynesian general equilibrium model with active banking sector. In this set-up, the financial sector interacts with the real side of the economy via firm balance sheet and bank capital conditions and their impact on investment and production decisions. We rely on the financial accelerator mechanism due to Bernanke et al. (1999) and combine it with a bank capital channel as demonstrated by Aguiar and Drumond (2007). We calibrate the resulting model from the perspective of a low income economy reflecting the existence of relatively high investment adjustment cost, strong fiscal dominance, and underdeveloped financial and capital markets where the central bank uses money growth in stabilizing the national economy. Then we examine the impulse response of selected endogenous variables to shocks stemming from the fiscal authority, the monetary policy process, and technological progress. The findings are broadly consistent with previous studies that demonstrated stronger role for credit market imperfections in amplifying and propagating monetary policy shocks. Moreover, we also compare the trajectory of the model economy under alternative monetary policy instruments. The results suggest that the model with money growth rule generates higher volatility in output and inflation than the one with interest rate rule.
    Keywords: Firm net worth, bank equity, monetary policy transmission, macro-prudential regulation, business cycle
    JEL: E32 E44 E50 C68
    Date: 2015
  9. By: Kundu, Nobinkhor; Mollah, Muhammad Musharuf Hossain
    Abstract: The demand for money is crucial important tool of monetary policy to deal with the macroeconomic problems and to prescribe appropriate policy of the economy. This paper investigates to empirically explore the long-run equilibrium for demand for real money balance as well as short-run dynamics in the context of monetary policy in Bangladesh. Using time-series annual data for the period 1981 to 2012 and applying the methods of cointegration and error-correction, the study find a single cointegrating equation showing long-run stable relationship between demand for money and explanatory variables in the model. The study also finds convergence of short-run dynamics towards statistically significant long-run equilibrium and concludes that the results have important implications for the conduct of monetary policy in Bangladesh.
    Keywords: Demand for Money, Cointegration, Bangladesh
    JEL: C22 C52 E41
    Date: 2014–08–12
  10. By: Edoardo Rainone (Bank of Italy)
    Abstract: Average rates in the decentralized unsecured market for euro funds, like the EONIA for the overnight maturity, are fundamental indicators of the smooth transmission of the signal rate by the central bank. Public information plays an important role in this context, as key interest rates are set by the central bank and average market rates are published daily, constituting common knowledge. Nevertheless, according to the theoretical literature on over-the-counter markets, private information may have an important role in a decentralized market. The diffusion of private information can generate prices that depend on the decentralized market structure. This is the first paper to use an ad hoc (network) version of the spatial autoregressive model to assess the presence of this mechanism. I propose a simple methodology to test whether the joint distribution of rates depends on the interbank network structure and to estimate information diffusion strength. The method is applied to a unique dataset collecting unsecured interbank loans and characteristics of banks operating in European central bank money. A wide time span including sovereign debt crises in the euro area is considered. I find that information diffusion played a greater role during periods dominated by strong uncertainty.
    Keywords: interbank markets, money, trading networks, payment systems, information aggregation, spatial autoregressive models, bilateral trading
    JEL: E52 E40 C21 G21 D40
    Date: 2015–07
  11. By: Na, Seunghoon; Schmitt-Grohé, Stephanie; Uribe, Martín; Yue, Vivian
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy in a small open economy with limited enforcement of debt contracts and downward nominal wage rigidity. Under optimal policy, default occurs during contractions and is accompanied by large devaluations. The latter inflate away real wages thereby avoiding massive unemployment. Thus, the Twin Ds phenomenon emerges endogenously as the optimal outcome. By contrast, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed-exchange-rate economies are shown to have stronger default incentives and therefore support less external debt than economies with optimally floating rates.
    Keywords: capital controls; currency pegs; downward nominal wage rigidity; exchange rates; optimal monetary policy; sovereign default
    JEL: E43 E52 F31 F34 F41
    Date: 2015–07
  12. By: Marcello Pericoli (Bank of Italy); Giovanni Veronese (Bank of Italy)
    Abstract: We analyze the impact of US macroeconomic surprises and forecaster heterogeneity on the USD/EUR exchange rate and US and German long-term interest rates from 1999 to 2014. We show how a direct proxy of macroeconomic disagreement, given by the heterogeneity of beliefs among forecasters regarding the upcoming macroeconomic release, matters to explain the daily and intra-day movements. Surprises impact more strongly long-term yields and the exchange rate when forecaster heterogeneity is smaller. This result, holds for the main US macroeconomic surprises and is robust to the frequency of the data used in the estimation. However the sensitivity changes with the sample. To this end, we show how estimating the same regressions in a pre-crisis period, a crisis period, and an unconventional monetary policy period there is evidence of time variation in the responses: unconventional monetary policies attenuated the response of the exchange rate to US\ macroeconomic news, while no major change occurred for long-term interest rates in the US and in the euro area. The disagreement regimes remain relevant in determining an asymmetric response of these asset prices. Our finding underscores the importance of considering beliefs heterogeneity to describe the behavior of asset prices even at high frequency.
    Keywords: surprises, forecaster heterogeneity, foreign exchange, long-term interest rates, unconventional monetary policy
    JEL: E44 E52 F31 G14
    Date: 2015–07
  13. By: Razmi, Fatemeh; Mohamed, Azali; Chin, Lee; Habibullah, Muzafar Shah
    Abstract: This paper examines the impact of oil price, as a cause of economic crisis, and monetary policy through the four known channels of monetary transmission mechanism (interest rate, exchange rate, domestic credit, and stock price). Using a structural vector autoregression model based on monthly data from 2002 to 2013 for Association of Southeast Asian Nations-4 countries, oil price and monetary transmission channels are compared pre- and post-crisis. The result indicates oil price remains an important factor in explaining price volatility, even though oil price has a weaker effect compared to a stronger effect of monetary transmission mechanism on prices. Stock price for Malaysia and domestic credit for the three others can affect the prices against oil price shock. Unlike prices, the output of all countries except Thailand is more affected by oil price post-crisis compared to pre-crisis. Different monetary transmission tools affecting industrial production are compared for the four countries.
    Keywords: monetary transmission, global financial crisis, oil price shock
    JEL: E52 Q43
    Date: 2015–07
  14. By: Constantino Hevia; Juan Pablo Nicolini
    Abstract: We study a model of a small open economy that specializes in the production of com- modities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consump- tion, as long as there is a signi?cant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally de?ned in the paper - that resembles a "dirty ?oating" regime can approximate the optimal policy remarkably well.
    Date: 2015–06
  15. By: Hollmayr, Josef; Matthes, Christian
    Abstract: What happens when fiscal and/or monetary policy changes systematically? We construct a DSGE model in which agents have to estimate fiscal and monetary policy rules and assess how uncertainty surrounding the conduct of policymakers influences transition paths after policy changes. We find that policy changes of the magnitude often considered in the literature can lead private agents to hold substantially different views about the nature of equilibrium than would be predicted by a full information analysis. In particular, random walk-like behavior can be observed for a large number of periods in equilibrium, even though the models we use admit stationary dynamics under full-information rational expectations.
    Keywords: DSGE,Monetary-Fiscal Policy Interaction,Learning
    JEL: E32 D83 E62
    Date: 2015
  16. By: Feyen,Erik H.B.; Ghosh,Swati R.; Kibuuka,Katie; Farazi,Subika
    Abstract: Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve?s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.
    Keywords: Deposit Insurance,Debt Markets,Banks&Banking Reform,Emerging Markets,Currencies and Exchange Rates
    Date: 2015–07–13
  17. By: Steve Furnagiev; Josh Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper examines the empirical performance of an alternative model of the currency risk premium. The model predicts that the premium on foreign exchange will depend positively on the gap between the exchange rate and its benchmark value. In this paper, we relate the benchmark not to relative prices but to a moving average process in accord with technical analysis. The model is tested against a novel data set of traders' exchange rate forecasts, from 1986:08 to 2013:09, to measure the subjective, ex ante premium. This eliminates the need for a joint hypothesis of rational expectations and enables more direct focus on risk behavior. Using the Cointegrated VAR (CVAR), strong support is found for this hypothesis, as the exchange rate's deviation from a one-year moving average is significant at the 1% level and forms a stationary cointegrating relationship with the premium for the four USD exchange rates examined (against the Swiss franc, Japanese yen, British pound, and Canadian dollar).
    Keywords: Exchange rates; risk premia; survey data; IKE gap model; moving average; CVAR
    JEL: F31
    Date: 2015–07
  18. By: Traian A. Pirvu; Elena Cristina Canepa
    Abstract: The model of this paper gives a convenient strategy that a bank in the federal funds market can use in order to maximize its profit in a contemporaneous reserve requirement (CRR) regime. The reserve requirements are determined by the demand deposit process, modelled as a Brownian motion with drift. We propose a new model in which the cumulative funds purchases and sales are discounted at possible different rates. We formulate and solve the problem of finding the bank's optimal strategy. The model can be extended to involve the bank's asset size and we obtain that, under some conditions, the optimal upper barrier for fund sales is a linear function of the asset size. As a consequence, the bank net purchase amount is linear in the asset size.
    Date: 2015–07
  19. By: C. H. Hui (Hong Kong Monetary Authority); C. F. Lo (The Chinese University of Hong Kong); T. Fong (Hong Kong Monetary Authority)
    Abstract: On 6 September 2011, a ceiling on the value of the Swiss franc was imposed, at CHF 1.2 per euro. With the continuous weakness of the euro area economy, this exchange rate limit was abandoned on 15 January 2015. This paper proposes a quasi-bounded process for the Swiss franc exchange rate dynamics under a one-sided target zone during this period, in which the exchange rate can breach the strong-side limit under a restricted condition of the relationship between the parameters of the drift term and stochastic part of the process. The empirical results using market data during 6 September 2011 ¡V 14 January 2015 with a rolling one-year window suggest that this model can describe the dynamics of the Swiss franc under a one-sided target zone, where the drifting force is an increasing function of foreign reserves. While the exchange rate was bounded below the strong-side limit during most of the time, as indicated by its dynamics, the condition for breaching the limit was met in November 2014 using only information until that point, i.e., about two months before abandoning the limit.
    Keywords: Exchange Rate Target Zone, Swiss Franc, Quasi-Bounded Process
    JEL: F31 G13
    Date: 2015–07
  20. By: Constantino Hevia; Pablo Andrés Neumeyer; Juan Pablo Nicolini
    Abstract: We analyze optimal policy in New Keynesian model of a small open economy with access to complete asset markets and Dutch Disease periods, in which terms of trade shocks reallocate resources away from the manufacturing sector. Following the policy debate, we introduce an externality in the manufacturing sector that makes the Dutch disease periods inefficient. We show theoretically that if the government has access to standard taxes that can be made time and state dependent, the optimal monetary policy implies complete price stability. The optimal intervention to deal with the externality in manufacturing is a subsidy. We next assume that taxes do not respond to temporary shocks and study monetary policy as the sole stabilization instrument. Using a calibrated version of the model we show that the externality and the lack of other policy instruments do not justify sizeable departures from price stability.
    Date: 2013–08
  21. By: Theodoros S. Papaspyrou (Bank of Greece)
    Abstract: This paper, drawing on the lessons from the sovereign debt crisis, tries to give answers to some key questions: Was the strategy and specific actions to cope with the crisis appropriate? Was the priority given to preserving financial stability justified? Are stability and growth objectives possible in EMU? What is the scope for national economic policy in the new policy framework? It emerges from the analysis that, after some initial weaknesses in policy action, decisive initiatives by EU authorities, supported by significant progress to strengthen further economic and financial governance and reduce macroeconomic imbalances succeeded in preserving the stability and integrity of the euro area. While the priority given by the EU policy action to financial stability was fully justified, it is also clear that robust economic growth is essential for durable financial stability and overall welfare. Policies enhancing both stability and growth are possible in EMU and some of them have started being implemented while others are at an advanced stage of development. There is ample scope for national economic policies which, if well-designed and properly implemented, will enhance the growth potential of member countries. However, legacy problems such as the excessive government debt burden in some countries must be resolved
    Keywords: Economic governance in EMU; the sovereign debt crisis; adjustment in a monetary union; European economic and financial integration; financial stability and growth; national economic policy in EMU
    JEL: E42 E44 E52 E61 F32 F33 F41
    Date: 2015–03
  22. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper compares three methods of analyzing exchange rate regimes in East Asia: static analysis, conventional dynamic analysis, and dynamic transition analysis. First we provide quantitative results that both estimated parameters for Thailand and time intervals are applied symmetrically across the three approaches. Our comparable simulation results illustrate how these three analyses are mutually related. Comparisons across the three methods demonstrate limitations of the static and conventional dynamic analyses where exchange rate regimes remain unchanged over the analysis horizon. Moreover, we emphasize three advantages of the dynamic transition analysis over the static and conventional dynamic analyses in that shifts from the current regime to alternative regimes are contrasted with a benchmark case of maintaining the current regime over the analysis horizon.
    Keywords: exchange rate regimes; dynamic transition analysis; capital account management; exchange rate stability
    JEL: F33 F41 F42
    Date: 2015–07–13
  23. By: Buzaushina, Almira; Enders, Zeno; Hoffmann, Mathias
    Abstract: This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more localcurrency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.
    Keywords: exchange rate pass-through,financial integration,portfolio home bias,international price setting
    JEL: F41 F36 F31
    Date: 2015

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