nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒11‒19
thirteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Central bank transparency and the volatility of exchange rates By Eichler, Stefan; Littke, Helge C. N.
  2. The Great Deception: The ‘Science’ of Monetary Policy and the Great Moderation Revisited By Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
  3. The Gold Pool (1961-1968) and the fall of the Bretton Woods system. Lessons for central bank cooperation. By Bordo, Michael D; Monnet, Eric; Naef, Alain
  4. Macroprudential policy and intra-group dynamics: The effects of reserve requirements in Brazil By Becker, Christian; Ossandon Busch, Matias; Tonzer, Lena
  5. The End of the Bretton Woods International Monetary System By Edwin M. Truman
  6. "Whatever it takes" to resolve the European sovereign debt crisis? Bond pricing regime switches and monetary policy effects By António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
  7. Nonlinear Exchange Rate Pass-Through to Domestic Prices in Ukraine By Oleksandr Fàrynà
  8. Financial Crises and Lending of Last Resort in Open Economies By Bocola, Luigi; Lorenzoni, Guido
  9. Euro Area Imbalances By Mark Mink; Jan Jacobs; Jakob de Haan
  10. Overcoming the Original Sin: Gains from Local Currency External Debt By Ricardo Sabbadini
  12. Dynamic Impact of Money Supply on Economic Growth in South Africa. An ARDL Approach By Dingela, Siyasanga; Khobai, Hlalefang
  13. Structure of Capital Flows and Exchange Rate: The Case of Croatia By Maja Bukovšak; Gorana Lukinić Čardić; Nina Ranilović

  1. By: Eichler, Stefan; Littke, Helge C. N.
    Abstract: We analyze the effect of monetary policy transparency on bilateral exchange rate volatility. We test the theoretical predictions of a stylized model using panel data for 62 currencies from 1998 to 2010. We find strong empirical evidence that an increase in the availability of information about monetary policy objectives decreases exchange rate volatility. Using interaction models, we find that this effect is more pronounced for countries with a lower flexibility of goods prices, a lower level of central bank conservatism, and a higher interest rate sensitivity of money demand.
    Keywords: central bank transparency,exchange rate volatility,panel model
    JEL: E58 F31
    Date: 2017
  2. By: Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
    Abstract: Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.
    Keywords: Great Moderation; monetary policy; inflation targeting; macroeconomic Stability; heterogeneous inflation expectations; satisficing evolutionary dynamics.
    JEL: B52 E12 E31 E32 E52 E58
    Date: 2017–10–31
  3. By: Bordo, Michael D; Monnet, Eric; Naef, Alain
    Abstract: The Gold Pool (1961-1968) was one of the most ambitious cases of central bank cooperation in history. Major central banks pooled interventions - sharing profits and losses- to stabilize the dollar price of gold. Why did it collapse? From at least 1964, the fate of the Pool was in fact tied to sterling, the first line of defense for the dollar. Sterling's unsuccessful devaluation in November 1967 spurred speculation and massive losses for the Pool. Contagion occurred because US policies were inflationary and insufficiently credible as well. The demise of the Pool provides a striking example of contagion between reserve currencies.
    Keywords: Bretton Woods; central bank cooperation; Gold Pool; international monetary system; reserve currencies; sterling crisis
    JEL: E42 F31 F33 N14
    Date: 2017–11
  4. By: Becker, Christian; Ossandon Busch, Matias; Tonzer, Lena
    Abstract: This paper examines whether intra-group dynamics matter for the transmission of macroprudential policy. Using novel bank-level data on the Brazilian banking system, we investigate the effect of reserve requirements targeting headquarter banks' deposit share on credit supply by their municipal bank branches. For identification purposes, we exploit that reserve requirements are adjusted following global economic cycles. Our results reveal a lending channel of reserve requirements for branches whose parent banks are more exposed to targeted deposits. Branch ownership and exposure to internal liquidity are central in explaining the results. Our findings reveal limitations in current macroprudential policy frameworks.
    Keywords: macroprudential regulation,financial intermediation,intra-group dynamics
    JEL: F30 G21 G28
    Date: 2017
  5. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: This paper examines two episodes of international economic policy coordination: the efforts to modify the Bretton Woods international monetary system in the 1960s and early 1970s and to reform the system after the closing of the US official gold window on August 15, 1971. The paper examines the diagnoses of the problem in each episode, the treatments applied, and the results in the short run and longer run. In the short run, both episodes were failures. The international monetary system that emerged in the mid-1970s, while less systemic than some would like, has nevertheless stood the test of time, although proposals for its reform continue to be discussed.
    Keywords: balance of payments, Bretton Woods, capital flows, Committee of Twenty, exchange rates, gold, International Monetary Fund, international monetary system, special drawing rights
    JEL: F30 F32 F33 F53
    Date: 2017–10
  6. By: António Afonso; Michael G. Arghyrou; María Dolores Gadea; Alexandros Kontonikas
    Abstract: This paper investigates the role of unconventional monetary policy as a source of time-variation in the relationship between sovereign bond yield spreads and their fundamental determinants. We use a two-step empirical approach.First, we apply a time-varying parameter panel modelling framework to determine shifts in the pricing regime characterising sovereign bond markets in the euro area over the period January 1999 to July 2016.Second, we estimate the impact of ECB policy interventions on the time-varying risk fact or sensitivities of spreads. Our results provide evidence of a new bond-pricing regime following the announcement of the Outright Monetary Transactions (OMT) programmein August 2012.This regime is characterised by a weakened link between spreads and fundamentals, but with higher spreads relative to the pre-crisis period and residual redenomination risk. We also find that unconventional monetary policy measures affect the pricing of sovereign risk not only directly, but also indirectly through changes in banking risk.Overall, the actions of the ECB have operated as catalysts for reversing the dynamics of the European sovereign debt crisis.
    Keywords: euro area, spreads, crisis, time-varying relationship, unconventional monetary policy
    JEL: E43 E44 F30 G01 G12
    Date: 2017–09
  7. By: Oleksandr Fàrynà (Monetary Policy and Economic Analysis Department, National Bank of Ukraine)
    Abstract: This paper aims to estimate the degree of exchange rate pass-through (ERPT) to domestic prices in Ukraine considering nonlinearities with respect to the size and direction of exchange rate movements, inflation environment, and business cycles. We use disaggregated consumer price data and employ a panel autoregressive distributed lag model including threshold parameters to account for nonlinearities in the ERPT mechanism. Estimation results suggest that the pass-through effect is higher from currency depreciation than in the case of appreciation for most price groups. We also find that price responsiveness to small, medium, and large exchange rate changes is nonlinear. In particular, we provide evidence that prices are sensitive to small changes, but the pass-through effect is insignificant if exchange rate movements are moderate. Furthermore, the degree of ERPT is higher in periods of extremely large depreciations, high inflationary environment, and economic slumps.
    Keywords: Exchange rate pass-through, inflation, Ukraine, nonlinear ERPT, Autoregressive Distributed Lag model
    JEL: E31 E52 E58 F31
    Date: 2016–12
  8. By: Bocola, Luigi (Federal Reserve Bank of Minneapolis); Lorenzoni, Guido (Northwestern University)
    Abstract: We study financial panics in a small open economy with floating exchange rates. In our model, bank runs trigger a decline in domestic wealth and a currency depreciation. Runs are more likely when banks have dollar debt. Dollar debt emerges endogenously in response to the precautionary motive of domestic savers: dollar savings provide insurance against crises; so when crises are possible it becomes relatively more expensive for banks to borrow in local currency, which gives them an incentive to issue dollar debt. This feedback between aggregate risk and savers’ behavior can generate multiple equilibria, with the bad equilibrium characterized by financial dollarization and the possibility of bank runs. A domestic lender of last resort can eliminate the bad equilibrium, but interventions need to be fiscally credible. Holding foreign currency reserves hedges the fiscal position of the government and enhances its credibility, thus improving financial stability.
    Keywords: Financial crises; Dollarization; Lending of last resort; Foreign reserves
    JEL: E44 F34 G11 G15
    Date: 2017–10–24
  9. By: Mark Mink; Jan Jacobs; Jakob de Haan
    Abstract: We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states.
    Keywords: euro area macroeconomic imbalances, common monetary policy, economic convergence, business cycle synchronization, euro crisis
    JEL: E30 O47
    Date: 2016
  10. By: Ricardo Sabbadini
    Abstract: Emerging markets increasingly rely on external debt denominated in local currency. In order to understand if this is a better situation than using US dollar denominated debt, I present a small open economy model with two sectors, and endogenous determination of both default risk and real exchange rate. Using a calibrated version of the model that replicates default frequency and debt level of emerging economies, I compare the two possibilities of debt denomination: local or foreign currency. I find that welfare gains from issuing debt in local currency derive from less frequent defaults, higher sustainable debt levels, and less volatile consumption and real exchange rates. However, even an economy issuing debt in local currency still faces counter-cyclical interest rate spread and real depreciations around default episodes.
    Keywords: external debt; sovereign default; debt denomination; real exchange rate.
    JEL: E43 F31 F34 F41
    Date: 2017–10–31
  11. By: Iskandar, Azwar
    Abstract: The objective of this study is to measure the persistence of inflation level in South Sulawesi. In addition, this study intends to find out the source of inflation persistence. The analysis of the regional inflation behavior developed in this paper is explored to commodities level. Using quarterly data from Bank Indonesia from 2006.I to 2015.III, this study was conducted to make estimation by applying Univariate Autoregressive (AR) Model. The empirical result indicates that the level of inflation persistence in South Sulawesi is relatively high. This result indicates that inflation requires a long time to return to its natural value after shocks. The high degree of inflation persistence reflected by the length of the time period required to absorb of 50% of shocks occurred before returning to its natural value i.e. 13 months. Using the estimation results of Partial Adjustment Model (PAM), it shows that high inflation persistence in South Sulawesi mainly caused by inflation rate of groups of prepared food as proxy of volatile foods group and housing, water, electrical, gas and fuel as proxy of administered price group. Moreover, the existence of TIPD in South Sulawesi as an effort to coordinate monetary and regional fiscal policy in order to control the regional inflation, proved has a negative effect on regional inflation in South Sulawesi.
    Keywords: persistensi, inflasi, sulsel
    JEL: E31
    Date: 2017–06–01
  12. By: Dingela, Siyasanga; Khobai, Hlalefang
    Abstract: ABSTRACT: This study investigates the dynamic impact of broad money supply (m3) on economic growth (GDP) per capita in South Africa using time-series data from 1980 to 2016. The study has employed the autoregressive distributed lag (ARDL)-bounds testing approach to cointegration and error correction model to investigate the impact of m3 on GDP per capita. The model is specified with four macroeconomics variables, namely, Gross Domestic Product (GDP) per capita, Broad money supply (M3), Interest rate (INT), Inflation rate (INF). The findings reveal that there is statistically significant positive relationship between money supply and economic growth both in short run and long run. The government of South Africa should maintain consistency and follow “the Taylor rule” to allow money supply to increase at a steady rate keeping pace with the economic growth. In respect to such rule will help South Africa Reserve Bank to avoid the inefficiencies that caused by execution of discretionary policy.
    Keywords: Keywords: Economic growth; Money supply; Inflation rate; Interest rate; Autoregressive Distributed Lag (ARDL).
    JEL: B22 C22 E51 E52 E58 O40
    Date: 2017–11–10
  13. By: Maja Bukovšak (The Croatian National Bank, Croatia); Gorana Lukinić Čardić (The Croatian National Bank, Croatia); Nina Ranilović (The Croatian National Bank, Croatia)
    Abstract: The paper analyses the impact of different types of capital flows to Croatia on the kuna exchange rate. SVAR models based on Cholesky decomposition with block exogeneity restrictions are estimated using different types of capital flows and the key finding is that the structure of capital flows matters for their impact on the exchange rate. On the one hand, debt capital inflows lead to kuna appreciation, irrespective of their maturity, while in terms of sectoral structure this is mostly due to corporate and government borrowing. On the other hand, equity capital flows seem to affect it in the opposite direction, which is in line with results from other empirical research. The opposite effects of debt and equity flows could stem from the differences in their relative orientations towards the tradable versus the non-tradable sector, with the latter being more prominent in debt flows. The paper also confirms that capital flows to the banking sector have no effect on the exchange rate, providing support to the intensive use of countercyclical macroprudential measures by the central bank. These findings are relevant for the design of monetary policy, especially in countries like Croatia where central bank uses the exchange rate of the kuna against the euro as the main tool for achieving its primary objective of price stability.
    Keywords: capital inflows, kuna exchange rate, SVAR with block exogeneity
    JEL: F32 F41 C51 C32
    Date: 2017–07

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