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on Monetary Economics |
| By: | Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Hellström, Jörgen (Department of Economics); Landström, Mats (Department of Economics) |
| Abstract: | It is something of a puzzle that politicians around the world have chosen to give up power to independent central banks, thereby reducing their possibilities to fine-tune the economy. In this paper the determinants of central bank independence (CBI) reforms are studied using a new data set on the possible event of such reforms in 119 countries. According to the data, as much as 81 countries had implemented CBI-reforms during the study period. The results indicate, moreover, that policymakers are more likely to delegate power to independent central banks when the foreign debt is relatively high. In non-OECD countries, the likelihood of a CBI-reform also seems to increase when policymakers face a high probability of getting replaced. |
| Keywords: | Central bank independence; political economy |
| JEL: | E42 E58 E61 P16 |
| Date: | 2008–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:huiwps:0013&r=mon |
| By: | Tatjana Damjanovic; Vladislav Damjanovic; Charles Nolan |
| Abstract: | This paper establishes that one can generally obtain a purely quadratic approximation to the unconditional expectation of social welfare when the steady-state is distorted. A specific example is provided employing a canonical New Keynesian model. Unlike in the non-distorted steady state case, the approximate loss function is not defined simply over terms in inflation and output. Furthermore, optimal steady state inflation and the nominal interest rate are positive. |
| Keywords: | Unconditional expectations, Optimal monetary policy. |
| JEL: | E20 E32 F32 F41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:0804&r=mon |
| By: | Stefania D'Amico; Don H Kim; Min Wei |
| Abstract: | We examine the informational content of TIPS yields from the viewpoint of a general 3-factor no-arbitrage term structure model of inflation and interest rates. Our empirical results indicate that TIPS yields contained a "liquidity premium" that was until recently quite large (~1%). Key features of this premium are difficult to account for in a rational pricing framework, suggesting that TIPS may not have been priced efficiently in its early years. Besides the liquidity premium, a time-varying inflation risk premium complicates the interpretation of the TIPS breakeven inflation rate (the difference between the nominal and TIPS yields). Nonetheless, high-frequency variation in the TIPS breakeven rates is similar to the variation in inflation expectations implied by the model, lending support to the view that TIPS breakeven inflation rates are a useful proxy for inflation expectations. |
| Keywords: | term structure model, inflation expectation, inflation risk premium, SPF, Treasury Inflation-Protected Securities (TIPS) |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:248&r=mon |
| By: | Zsolt Darvas (Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest and Argenta ZRt.); György Szapáry (Central European University and former Deputy Governor of Magyar Nemzeti Bank) |
| Abstract: | The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic. |
| Keywords: | euro area enlargement, convergence, exchange rate, inflation, Maastricht |
| JEL: | E31 E52 E60 F30 |
| Date: | 2008–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:mkg:wpaper:0801&r=mon |
| By: | Robin Pope |
| Abstract: | Economists invoke Mundell (1961) in arguing for the general policy of  a flexible exchange rate regime as a means of restoring equilibria  after shocks. But there is a discrepancy between the intent of the  general policy and attempts at its implementation as identified by  specific changes in exchange rates.  When we assemble the set of  specific changes called for by distinct economists operating as  advocates for individual countries, these are uniformly in the form  of beggar-thy-neighbour advice – ie travesties of objectively  identifying disequilibria and a menace to international cooperation  and peace.  This paper traces the unintended travesties to problems  of complexity and uncertainty, problems that implicitly are assumed  absent in Mundell (1961) rendering the situation so simple that  equilibria are transparent.  The problems remained essentially  unaddressed when economists extended Mundell (1961) via expected  utility theory since this theory also ignores the impossibility of  maximising and the complexities of central bankers, private firms and  others in doing the evaluation stage in reaching decisions.  The  problems can be overcome by modelling within SKAT, the Stages of  Knowledge Ahead Theory.  This paper points to experimental evidence  in support of the view that under all sorts of disequilibrating  shocks, currency unions outperform flexible currencies by eliminating  the inefficiencies generated by exchange rate uncertainty. |
| Keywords: | optimal currency area; exchange rate regime; certainty effects; Â policy; beggar-thy-neighbour; SKAT the Stages of Knowledge Ahead Theory; complexity; equilibrium; small world; shocks; expenditure-switching shocks; supply-side shocks; demand shocks; experiment, safety, international competitiveness. |
| JEL: | D80 F31 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse1_2007&r=mon |
| By: | Andrew Hughes Hallet; Jan Libich; Petr Stehlik |
| Abstract: | The paper considers a simple model in which monetary and fi?scal policies are formally independent, but still interdependent - through their spillovers onto the macroeconomic targets to which they are not primarilly assigned. It shows that the average equilibrium levels of inflation, deficit, debt, and output depend on the two policies' (i) potency (elas- ticity of output with respect to the policy instruments); (ii) ambition (the level of their output target); and (iii) conservatism (inflation vs output volatility aversion). However, it is the relative degrees of these characteristics that matter, rather than the absolute degrees for each policy. Therefore, and as expected, coordination of monetary and ?fiscal policy is found to be superior to non-cooperative Nash behaviour for both policymakers. Interestingly though, it is coordination in terms of the policies' ambition, rather than conservatism, that is essential. That is a new result. Furthermore, ambition-coordination can be welfare improving even if the policymakers' objectives are idiosyncratic, and/or even their coordinated output targets differ from the socially optimal one. |
| JEL: | E61 E63 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-04&r=mon |
| By: | Robin Pope; Reinhard Selten; Sebastian Kube; Johannes Kaiser; Jürgen von Hagen |
| Abstract: | Opinion is divided on whether it is better to have a single world  money or variable exchange rates.  Pope, Selten and von Hagen (2003)  propose that fresh light would be shed via an analysis that allows  for seven complexity impacts on the exchange rate that are  underplayed (where not entirely absent) from current analyses: 1) the  role of official sector, including its central bank; 2) the numerous  official and private sector goals; 3) the disparate degrees of market  power of different sorts of private agents; 4) the documentation that  essentially all shocks to the exchange rate are generated by human  decisions; 5) the non-maximising heuristics that in the complex  economy agents use; 6) heterogenous beliefs.  This paper analyses a  closed form game theoretic solution of version 1 of a model that  combines impacts 1 to 4 with the conventional finance assumption that  all agents maximise their utility.  Impact 1) precludes private  agents being able to destabilise the exchange rate against the  cooperation of the central banks required by the game theoretic  solution.  Impact 4) excludes random events and other exogenous  shocks such as meteors falling from the sky.  The rational maximising  assumption in turn precludes all other sources of shocks and thus any  need for a variable exchange rate to equilibrate after shocks.  We  then modify version 1 of our model substituting for the maximising  assumption impacts 5 to 7, impacts that allow shocks from humans to  be consistently incorporated.  We do so by means of an experimental  investigation which indicates that central bankers less than fully  cooperate, leaving scope for private speculators to support their  preferred currency.  From the viewpoint of the game theoretic  equilibrium, the resultant exchange rate changes render equilibrium  unspecified.  A single world money avoids disruptive exchange rate  changes from less than fully cooperating central banks, exchange rate  changes caused by central bank conflicts and that cannot be  classified as equilibrating. |
| Keywords: | central bank; cooperation; conflict; exchange rate; experiment; market power; heuristics; heterogenous beliefs; personality; interpersonal dynamics; friendship; complex; destabilising speculators, irrational central bankers |
| JEL: | F31 F33 B40 B59 C79 C90 C91 C92 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse18_2007&r=mon |
| By: | van den Hauwe, Ludwig |
| Abstract: | Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge. |
| Keywords: | Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design; |
| JEL: | E32 E66 E58 E42 E31 G18 E52 D01 K39 |
| Date: | 2008–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7411&r=mon |
| By: | Morné Oosthuizen (Development Policy Research Unit, University of Cape Town) |
| Abstract: | Abstract: By monitoring the price changes experienced by some representative household, consumer price indices provide an important measure of changing purchasing power within a given economy. Group price indices offer one method of more accurately reflecting the inflation experiences of specific types of households, such as poor households, elderly households or households with children, for example. This study uses expenditure data from the 2000 Income and Expenditure Survey and price indices from Statistics South Africa to calculate inflation rates for expenditure deciles for the period 1998 to 2006. As a result, price indices and inflation rates calculated on the basis of these weights can not accurately reflect the rates of inflation experienced by what would be viewed as the ‘average’ household. |
| Keywords: | South Africa: consumer price index, Income distribution (South Africa), purchasing |
| JEL: | A1 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:ctw:wpaper:96105&r=mon |
| By: | Matić, Branko |
| Abstract: | The author researches a singular monetary situation connected with the common issue of commemorative coin age by two states: Ireland, an EU member state that belongs to the Euro-system, and Croatia, an EU membership candidate. Although they belong to two different monetary systems, the two countries created a precedent by issuing a common commemorative coin on the grounds of ahistoric artistic design. This undertaking is affirmation of Croatian coinage, artistic and numismatic activities. |
| Keywords: | money; monetary solutions;issuing profit; European union |
| JEL: | E42 E5 E44 F31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7416&r=mon |