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on Monetary Economics |
| By: | Bjørnland, Hilde C. (Dept. of Economics, University of Oslo) |
| Abstract: | This paper analyses the transmission mechanisms of monetary policy in a small open economy like Norway through structural VARs, paying particular attention to the interdependence between the monetary policy stance and exchange rate movements in the inflation-targeting period. Previous studies of the effects of monetary policy in open economies have typically found small or puzzling effects on the exchange rate; puzzles that may arise due to the recursive restrictions imposed on the contemporaneous interaction between monetary policy and the exchange rate. By instead imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, the interdependence increases considerably. In particular, following a contractionary monetary policy shock, the real exchange rate appreciates immediately and thereafter depreciates back to baseline. Furthermore, output and consumer price inflation fall gradually as expected; thereby also ruling out any price puzzle that has commonly been found in the literature. Results are compared and found to be consistent with among other the findings from an “event study” that focuses on immediate responses in asset prices following a surprise monetary policy decision. |
| Keywords: | VAR; monetary policy; open economy; identification; event study. |
| JEL: | C32 E52 F31 F41 |
| Date: | 2005–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_031&r=mon |
| By: | Adam S. Posen (Institute for International Economics) |
| Abstract: | Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system’s structure and stability—in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source. |
| Keywords: | bubbles, asset prices, monetary policy, central banks |
| JEL: | E44 G18 E52 E58 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp06-1&r=mon |
| By: | Flandreau, Marc |
| Abstract: | This paper examines the historical record of the Austro-Hungarian monetary union, focusing on its bargaining dimension. As a result of the 1867 Compromise, Austria and Hungary shared a common currency, although they were fiscally sovereign and independent entities. By using repeated threats to quit, Hungary succeeded in obtaining more than proportional control and forcing the common central bank into a policy that was very favourable to it. Using insights from public economics, this paper explains the reasons for this outcome. Because Hungary would have been able to secure quite good conditions for itself had it broken apart, Austria had to provide its counterpart with incentives to stay on board. I conclude that the eventual split of Hungary after WWI was therefore not written on the wall in 1914, since the Austro-Hungarian monetary union was quite profitable to Hungarians. |
| Keywords: | free riding; market integration; monetary union; secession |
| JEL: | F31 N32 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5397&r=mon |
| By: | Enzo Weber |
| Abstract: | This paper addresses the question of the British state of convergence towards the Euro area, compared to the USA. Economically, the analysis is based on dependences in the money and capital markets, namely the uncovered interest parity (UIP) and the expectation hypothesis of the term structure (EHT). The econometric procedure consists of backward recursive calculations carried out in a cointegration framework. As the evidence for the single parities remains unconvincing, UIP and EHT are combined in a common model. Generally, the results are in favour of a growing British integration into the European Currency Union. |
| Keywords: | Nominal Convergence, Cointegration, UIP, Term Structure, Euro Area |
| JEL: | E43 E44 C32 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-005&r=mon |
| By: | Eiji Ogawa; Junko Shimizu |
| Abstract: | The monetary authorities in East Asian countries have been strengthening their regional monetary cooperation since the Asian Currency Crisis in 1997. In this paper, we propose a deviation measurement for coordinated exchange rate policies in East Asia to enhance the monetary authorities' surveillance process for their regional monetary cooperation. We calculate the AMU as a weighted average of East Asian currencies following the method used to calculate the European Currency Unit (ECU) and the AMU Deviation Indicators, which how the degree of deviation from the hypothetical benchmark rate for each of the East Asian currencies in terms of the AMU. Furthermore, we investigate the relationships between the AMU and its Deviation Indicators and the effective exchange rates of each East Asian currency. As a result, we found the strong relationships between the AMU or the AMU Deviation Indicators and the effective exchange rates except for some currencies. These results indicate that the AMU Deviation Indicators have positive relationship with their effective exchange rates. Accordingly, we should monitor both the AMU and the AMU Deviation Indicator for the monetary authorities' surveillance in order to stabilize effective exchange rate in terms of trader partners'currencies. |
| JEL: | F31 F33 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d05-131&r=mon |
| By: | James M. Nason (Federal Reserve Bank of Atlanta); Gregor W. Smith (Queen's University) |
| Abstract: | Phillips curves are central to discussions of inflation dynamics and monetary policy. New Keynesian Phillips curves describe how past inflation, expected future inflation, and a measure of real marginal cost or an output gap drive the current inflation rate. This paper studies the (potential) weak identification of these curves under GMM and traces this syndrome to a lack of persistence in either exogenous variables or shocks. We employ analytic methods to understand the identification problem in several statistical environments: under strict exogeneity, in a vector autoregression, and in the canonical three-equation, New Keynesian model. Given U.S., U.K., and Canadian data, we revisit the empirical evidence and construct tests and confidence intervals based on exact and pivotal Anderson-Rubin statistics that are robust to weak identification. These tests find little evidence of forward-looking inflation dynamics. |
| Keywords: | Phillips curve, Keynesian, identification, inflation |
| JEL: | E31 C32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1026&r=mon |
| By: | Giancarlo Corsetti |
| Abstract: | Models of stabilization in open economy traditionally emphasize the role of exchange rates as a substitute for nominal price flexibility in fostering relative price adjustment. This view has been recently criticized on the ground that, to the extent that prices are sticky in local currency, the exchange rate does not play the stabilizing role envisioned by the received wisdom. An important question is whether, for this very reason, stabilization policies should limit exchange rate movements, or even eliminate them altogether. In this paper, I re-assess this issue by extending the Corsetti and Pesenti (2001) model to allow for home bias in consumption, so that I can exploit the advantages of closed-form solutions. While this extension leaves most properties of the model unaffected, home bias implies that the real exchange rate in an efficient equilibrium is not constant, but fluctuates with the terms of trade. The weight that monetary authorities optimally place on stabilizing domestic marginal costs is increasing in Home bias. With asymmetric shocks, fixed exchange rates are incompatible with efficient monetary rules. Yet, the adverse welfare consequences of exchange rate movements constrain the optimal intensity of monetary responses to domestic shocks. Openness matters: the larger the import content of consumption, the lower the exchange rate volatility implied by optimal stabilization rules. |
| Keywords: | optimal monetary policy, nominal rigidities, exchange rate pass-through, exchange rate regimes, international cooperation |
| JEL: | E31 E52 F42 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2005/21&r=mon |
| By: | Júlia Lendvai (University of Namur, Economics Department.) |
| Abstract: | This paper estimates traditional and New Phillips curves for Hungary over the sample period 1995Q1 to 2004Q1. It presents the first structural Phillips curve estimations for a New EU Member State economy. We find that Hungarian inflation dynamics can be reasonably well described by a standard New Hybrid Phillips curve and by its open economy extension specifying imported goods as intermediate production goods. Our estimation results indicate that Hungarian inflation is significantly more inertial than Euro area inflation. Hungarian inflation inertia appears to be the result of pervasive backward looking price setting behaviour, while prices seem to be reset more frequently than in the Euro area. At the same time, Hungarian inflation dynamics is comparable to that of countries characterized by a relatively high average inflation rate. |
| Keywords: | New Keynesian Phillips curve, Inflation dynamics, Open economy. |
| JEL: | E31 E32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/46&r=mon |
| By: | James Foreman-Peck (Cardiff Business School) |
| Abstract: | This paper examines whether the states brought together in the Italian monetary union of the nineteenth century constituted an optimum monetary area, either before or after unification. Interest rate shocks indicate close relations between states in northern Italy but negative correlations between the North and the South before unification, suggesting some advantages of continued Southern monetary independence. The proportion of Southern Italian trade with the North was small, in contrast to intra- Northern trade, and therefore monetary independence imposed a light burden. Changes in the wheat market indicate that the South and North after unification (though not probably because of it) increasingly specialised according to their comparative advantages. Coupled with differences in economic behaviour of the Southern economy, this meant that monetary policies appropriate for the North were less so for the South. In the face of agricultural shocks originating in the New World and in France, the South would have gained from depreciating its exchange rate against the North or against the non-Italian world. As it was, nineteenth century Italian monetary union did not create the conditions for its own success, contrary to the findings of Frankel and Rose (1998) for the later twentieth century. |
| Date: | 2006–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:113&r=mon |
| By: | Gianni Amisano; Marco Tronzano |
| Abstract: | This paper extends Svensson (1994) ?simplest test?of in?ation target credibility inside a Bayesian econometric framework. We apply this approach to the initial years of the Eurosystem and obtain various estimates of ECB?s monetary policy credibility. Overall, our empirical evidence is robust to alternative prior assumptions, and suggests that the strategy followed by the ECB was successful in building a satisfactory degree of reputation. However, we ?nd some signi?cant credibility reversals concerning both anti-in?ationary and anti-de?ationary credibility. These reversals, in turn, are closely related to the evolution of the cyclical macroeconomic conditions in the Euro area. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0512&r=mon |
| By: | Marc Hofstetter |
| Abstract: | Why is that the achievements of some disinflations from low and moderate peaks are longlived, whereas in others the gains in the inflationary front dissipate quickly? Based on an index of the sustainability of disinflations proposed in the paper, various competing explanations of what determines sustainability are tested. Three factors, potentially at the top of the list of many researchers, are shown to be insignificant: oil shocks, fiscal policy and inflation targeting. Nevertheless, other important features such as the exchange rate regime, achieving a low inflation rate during the disinflation and food price shocks are shown to be important variables driving the sustainability records. |
| Date: | 2005–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:001049:002385&r=mon |
| By: | Florin Ovidiu Bilbiie (Nuffield College, New Road, OX1 1NF, Oxford, United Kingdom.); André Meier (International Monetary Fund, 700 19th Street NW, Washington, DC 20431, USA.); Gernot J. Müller (Goethe University Frankfurt, Department of Economics, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany) |
| Abstract: | Using vector autoregressions on U.S. time series for 1957-1979 and 1983-2004, we find government spending shocks to have stronger e¤ects on output, consumption, and wages in the earlier sample. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Speci?cally, we estimate the structural parameters of the model for both samples by matching impulse responses. Model-based counterfactual experiments suggest that increased asset market participation accounts for some of the changes in fiscal transmission. However, the key quantitative factor appears to be the more active monetary policy of the Volcker-Greenspan period. |
| Keywords: | Government Spending; Asset Market Participation; Fiscal Policy; Monetary Policy; DSGE; Vector Autoregression; Minimum Distance Estimation |
| JEL: | E21 E62 E63 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060582&r=mon |
| By: | Giancarlo Corsetti; Paolo Pesenti |
| Abstract: | This paper provides an introduction to the recent literature on macroeconomic stabilization in closed and open economies. We present a stylized theoretical framework, and illustrate its main properties with the help of an intuitive graphical apparatus. Among the issues we discuss: optimal monetary policy and the welfare gains from macroeconomic stabilization; international transmission of real and monetary shocks and the role of exchange rate pass-through; the design of optimal exchange rate regimes and monetary coordination among interdependent economies.Classification-JEL: E31, E52, F42 |
| Keywords: | optimal monetary policy, nominal rigidities, exchange rate pass-through, international cooperation |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2005/26&r=mon |
| By: | Juthathip Jongwanich |
| Abstract: | This paper examines the roles of pegged exchange rate regime and capital account opening inducing persistent RER appreciation in the lead-up to the 1997 currency crisis in Thailand. The three-sector (primary, manufacturing, and nontradable) economy-wide model is constructed and policy simulation experiments are undertaken. Key findings are imposing capital control under a pegged exchange rate regime would have averted the persistent internal RER appreciation and boom in nontradable sector. However, it would not have averted persistent external RER appreciation. Exports and output would have eventually declined because of the capital shortage. A freely floating regime only with a high developmental level of foreign exchange and financial markets would have been able to avert both persistent internal and external RERs appreciation. The export and output would have eventually increased. However, this regime would have generated fluctuations in domestic prices and output. The managed floating regime (combined with inflation targeting) would have helped reduce such adverse effects while retaining the benefit from exchange rate flexibility. In a context where the foreign exchange and financial markets are not well developed, capital control measures could be beneficial to ensure smooth functioning of a managed floating regime. |
| Keywords: | Exchange rate regime, Capital account, and Real exchange rate |
| JEL: | O11 F32 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2006-01&r=mon |