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on Monetary Economics |
| By: | Hans Gersbach (CER-ETH Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework. |
| Keywords: | central banks, transparency, commitment, Federal Reserve, policy inclinations, signaling |
| JEL: | E58 D70 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:08-84&r=mon |
| By: | Aleksander Berentsen; Guido Menzio; Randall Wright |
| Abstract: | We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century. |
| JEL: | E24 E52 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13924&r=mon |
| By: | Giuseppe Marotta |
| Abstract: | This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. This results runs against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating to more recent periods these findings is suggested by the differences between the unharmonized and the new harmonized retail rates. |
| Keywords: | Interest rates; Monetary policy; European Monetary Union (EMU); Cointegration analysis; Taylor principle |
| JEL: | E43 E52 E58 F36 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:08031&r=mon |
| By: | Viktoria Hnatkovska; Amartya Lahiri; Carlos A. Vegh |
| Abstract: | What is the relationship between interest rates and the exchange rate? The empirical literature in this area has been inconclusive. We use an optimizing model of a small open economy to rationalize the mixed empirical findings. The model has three key margins. First, higher domestic interest rates raise the demand for deposits, and, hence, the money base. Second, firms need bank loans to finance the wage bill, which reduces output when domestic interest rates increase. Lastly, higher interest rates raise the government’s fiscal burden, and, therefore, can lead to higher expected inflation. While the first effect tends to appreciate the currency, the remaining two effects tend to depreciate it. We then conduct policy experiments using a calibrated version of the model and show the central result of the paper: the relationship between interest rates and the exchange rate is non-monotonic. In particular, the exchange rate response depends on the size of the interest rate increase and on the initial level of the interest rate. Moreover, we also show that the model can replicate the heterogeneous responses of the exchange rate to interest rate innovations in several developing economies. |
| JEL: | E52 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13925&r=mon |
| By: | Koivu, Tuuli (BOFIT) |
| Abstract: | Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak. |
| Keywords: | China; monetary policy |
| JEL: | E52 P24 |
| Date: | 2008–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_001&r=mon |
| By: | Berriel, Tiago; Sinigaglia, Daniel |
| Abstract: | This paper characterizes optimal fiscal and monetary policy in a new-keynesian model with sectorial heterogeneity in price stickiness. In particular, we (i) derive a purely quadratic welfare-based loss function from an approximation of the consumer's utility function and (ii) provide the optimal target rule for fiscal and monetary policy. Differently from the homogeneous case, the loss function includes sectorial inflation variances instead of aggregate inflation variance, with weights on the variance of sectorial inflation proportional to the degree of price stickiness. The optimal policy response to a sector-specific cost-push shock leads to movement in output gap, inflation and taxation in all sectors. Optimal taxes are more responsive to shocks in sectors with stickier prices. |
| Keywords: | optimal taxation; optimal monetary policy, heterogeneity in price-stickiness; |
| JEL: | E52 E63 |
| Date: | 2008–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8040&r=mon |
| By: | Andrea Ferrero; Mark Gertler; Lars E.O. Svensson |
| Abstract: | We explore the implications of current account adjustment for monetary policy within a simple two-country DSGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second is a "fast burn" where, owing to a sudden shift in expectations of relative growth rates, there is a rapid reversal of the home country's current account. We examine several different monetary policy regimes under each of these scenarios. Our principal finding is that the behavior of the domestic variables (for instance, output, inflation) is quite sensitive to the monetary regime, while the behavior of the international variables (for instance, the current account and the real exchange rate) is less so. Among different policy rules, domestic inflation targeting achieves the best stabilization outcome of aggregate variables. This result is robust to the presence of imperfect pass-through on import prices, although in this case stabilization of consumer price inflation performs similarly well. |
| JEL: | E0 F0 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13906&r=mon |
| By: | William R White |
| Abstract: | The remarkable stability of low domestic inflation in many countries requires explanation. In this paper, a number of competing hypotheses are evaluated on a stand-alone basis, and all are found to be inadequate. This includes the view that this outcome has been solely the result of more effective disinflationary monetary policies. However, a combination of these hypotheses (including a significant role for increased global competition) seems to provide a plausible explanation, not only for continuing low inflation, but also its coexistence with rapid growth and low real interest rates. Unfortunately, the analysis also leads to the conclusion that rising inflation, unwinding financial imbalances, or both, could easily follow the welcome stability seen to date. |
| Keywords: | inflation, monetary policy, globalisation, Phillips curve |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:250&r=mon |
| By: | Niall Ferguson; Moritz Schularick |
| Abstract: | This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors. |
| JEL: | F2 F33 F36 N10 N20 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13918&r=mon |
| By: | Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen |
| Abstract: | Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication -- mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy. |
| JEL: | E52 E58 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13932&r=mon |
| By: | Katrin Assenmacher-Wesche; Stefan Gerlach |
| Abstract: | This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited. |
| Keywords: | Asset prices, monetary policy, panel VAR |
| JEL: | C23 E52 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:361&r=mon |
| By: | John Bryant (Vocat International) |
| Abstract: | This paper develops further a thermodynamic model of a monetary system, first set out as part of a paper by the author, published in 2007, entitled A Thermodynamic Theory of Economics. The model is backed up by statistical analysis of data of the UK economy 1969-2006. The model sets out relationships between price, output volume, velocity of circulation, money supply and interest rates, and develops an equation to measure the rate of entropy loss from an economic system. |
| Keywords: | Monetary model, thermodynamics, economics, entropy, money, UK economy |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:voc:wpaper:ten32008&r=mon |
| By: | Menzie D. Chinn; Jeffrey A. Frankel |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13909&r=mon |
| By: | Joseph P. Daniels (Center for Global and Economic Studies, Marquette University); David D. VanHoose (Hanmaker School of Business, Baylor University) |
| Abstract: | Considerable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and realized inflation rates. In this paper, we utilize cross-country data to provide evidence of interacting effects between a greater extent of exchange-rate pass through and openness to international trade as factors that we find both contribute to lower inflation. The interplay between the inflation effects of pass through and openness suggest that both factors may influence the terms of the output-inflation trade-off. We develop a simple theoretical model showing how both pass through and openness can interact to influence the sacrifice ratio, and we empirically explore the nature of the interplay between the two variables as factors influencing the sacrifice ratio. Our results indicate that a greater extent of pass through depresses the sacrifice ratio and that once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, the degree of openness to international trade exerts an empirically ambiguous effect on the sacrifice ratio. |
| Keywords: | Pass Through, Openness, Sacrifice Ratio |
| JEL: | F40 F41 F43 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:0805&r=mon |
| By: | Wolfgang Lechthaler; Christian Merkl; Dennis Snower |
| Abstract: | It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. Under reasonable calibrations, the after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Our model is able to generate a hump-shaped response in output, if the monetary shock includes a moderate autoregressive component. This is another empirically well known feature, which the standard model is not able to replicate. |
| Keywords: | Monetary Persistence, Labor Market, Hiring and Firing Costs |
| JEL: | O4 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1409&r=mon |
| By: | Hasan, Zubair |
| Abstract: | Abstract. This paper deals with a still unresolved issue - credit creation and control- in an interest free banking system. The available literature on the subject is scanty, controversial and inconclusive. The paper holds that credit creation per se is not un-Islamic; the essential point is how credit is generated and used. It argues that credit creation cannot be banished; it is an imperative for frictionless adjustment of money supply to unavoidable fluctuations in its demand in modern economies. It seeks to correct the misunderstanding in the literature that banks create credit ex nihilo.Demand for money apart, fiscal policies and foreign exchange transaction erode the credit controlling power of the central banks. The paper blames major difficulties including those of credit creation and control on the evolution of Islamic banking on the same pattern as its mainstream counterpart and suggests some structural modifications. Finally, it finds the conventional weapons of credit control inefficacious for use in an interest free banking system and suggests the inclusion of a ratio of cash to bank advances among them. The paper has some important technical and policy implications. |
| Keywords: | Credit creation;demand for money;Base money; Credit control; Central bank |
| JEL: | E0 E51 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:8130&r=mon |
| By: | Ansgar Belke; Walter Orth |
| Abstract: | The belief that house prices are driven by specific regional and institutional variables and not at all by monetary conditions is so entrenched with some market participants and some commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. This paper investigates the relationship between global excess liquidity and asset prices on a global scale:How important is global liquidity? How are asset (especially house) prices and other important macro variables like consumer prices affected by global monetary conditions? This paper analyses the international transmission of monetary shocks with a special focus on the effects of a global monetary aggregate ("global liquidity") on consumer prices and different asset prices.We estimate a variety of VAR models for the global economy using aggregated data that represent the major OECD countries. The impulse responses show that a positive shock to global liquidity leads to permanent increases in the global GDP deflator and in the global house price index, while the latter reaction is even more distinctive. Moreover, we find that there are subsequent spillovers to consumer prices. In contrast, we are not able to find empirical evidence in favour of the hypothesis that the MSCIWorld index as a measure of stock prices significantly reacts to changes in global liquidity. |
| Keywords: | Global liquidity, inflation control, international spillovers, asset prices, VAR analysis |
| JEL: | E31 E52 F01 F42 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0037&r=mon |
| By: | Frait, Jan (Czech National Bank); Komárek, Luboš (Czech National Bank) |
| Abstract: | The paper aims to enrich the debate on the overvaluation/undervaluation of China yuan Renminbi (CNY) against USD and JPY by applying the concept of the Debt-Adjusted Real Exchange Rate (DARER). This approach is offering to monetary policy makers another indicator for more responsive management of this important economic variable. The general motivation for constructing DARER is the fact that long-term current account surplus (deficits) is linked with capital outflows (inflows), which often leads to real undervaluation (overvaluation) of domestic currency. DARER can signal to the authorities that the real exchange rate is becoming unsustainable in the medium term. Based on the DARER approach we also introduce three indicators of exchange rate misalignment. |
| Keywords: | Exchange rate ; current account ; misalignment ; China ; DARER |
| JEL: | E58 F31 F32 F37 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:850&r=mon |
| By: | Tiago Mata (ISEG, Technical University of Lisbon, Portugal) |
| Abstract: | In August 15, 1971, President Nixon announced the unilateral suspension of the convertibility of the dollar into gold, a foundation of the world monetary system since the Second World War. The media and economic experts were caught by surprise, neither could foresee the immediate consequences of the decision or what would be the architecture of the emerging international monetary system. From 1971 to 1973, the money markets and the value of the dollar became a news, an opinion, an editorial item in both the New York Times and the Wall Street Journal. I examine this record to question how was anxiety about the dollar resolved in media communication? Media narratives were not uniform between and within the two newspapers. What distinguished the Times and Journal's coverage was their diverse framing of the dollar as political, financial or economic object. I conclude that media uncertainty about the dollar was less an outcome of failing expert knowledge as it was a consequence of the dollar's multiple cultural significations. |
| Keywords: | Economic Journalism, dollar, Smithsonian, Nixon shock, media narratives |
| JEL: | A11 B29 F33 N20 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:270&r=mon |
| By: | Drumea, Cristina |
| Abstract: | The globalization of the economic activity is profoundly changing long established concepts, customs and ways of doing business all around the globe. One of those concepts is the currency. The globalization and the Internet, really two facets of the same phenomenon, people hugely removed in every way, can meet in the marketplace to exchange their wares. Which money should they use? Is the government issued currency fit for all the exchange purposes? This article will attempt to paint one more way in which the large corporations can act more like national governments. |
| Keywords: | alternative money; globalization; Government's policy; new fiat currencies |
| JEL: | D23 E31 E59 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7945&r=mon |
| By: | Di Bartolomeo Giovanni; Acocella Nicola; Hughes Hallett Andrew |
| Abstract: | The paper studies the relationship between equilibrium existence in LQ games and the classical theory of economic policy, generalizing some recent results. In particular, by focusing on system controllability instead of the controllability by one or some of the players, we find conditions for the existence of the Nash equilibrium that extend those required by the previous literature. The usefulness of our results is described by some examples in the field of international monetary and trade agreements. |
| JEL: | C72 E52 E61 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0040&r=mon |
| By: | Pasricha, Gurnain |
| Abstract: | This paper analyzes de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parity in the last 10 years. A price-based measure of de-facto integration provides crucial information for answering policy questions related to impact of capital openness and of effectiveness of controls. An Asymmetric Self Exciting Threshold Autoregressive model is used to estimate bands of speculative inaction. The estimated bands follow the pattern expected, and reveal a rational market in the sense that deviations from parity are self correcting. The paper uses information from the estimated models to construct a new index of de-facto integration. |
| Keywords: | Covered Interest Parity, Threshold Autoregression, Financial Integration, Integration Index, Emerging Markets |
| JEL: | G15 F31 F36 |
| Date: | 2008–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2257&r=mon |
| By: | Monzur Hossain (American Internationla University-Bangladesh(AIUB)) |
| Abstract: | This paper reviews the empirical literature on the choice of exchange rate regime. Prominent issues include: (i) the choice based on fundamentals, shocks, financial structure, and political ideology; (ii) the “bipolar view†or “hollowing out hypothesis†and its validity; (iii) regime choice in emerging economies, and (iv) the discrepancy between declared and actual regime, and its consequence on the analysis of currency regime choice. Although much has been learned in each approach, this survey highlights the areas of research in which our understanding of exchange rate regime transition is still incomplete. Observed data rejects the validity of the bipolar view. Moreover, it is seen that a substantial amount of countries diverge from their de jure regime without declaration, which needs to be taken into account for drawing a valid conclusion on the choice of a regime. From the survey it may be concluded that no empirical regularities regarding the choice of a currency regime have emerged yet. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:aiu:abewps:45&r=mon |
| By: | Marcio M. Janot; Márcio G. P. Garcia; Walter Novaes |
| Abstract: | "Third-generation currency crises models" argue that capital losses from exchange-rate depreciation propagate the crises to the productive sector. To test these models, we use a firm-level dataset that allows us to measure currency mismatches around the 2002 Brazilian currency crisis. We find that, between 2001 and 2003, firms that shortly before the crisis had large currency mismatches decreased their investment rates by 8.1 percentual points, relatively to other public firms. Moreover, we show that the currency depreciation implied large competitive gains for the exporters, and yet the investment of exporters with large currency mismatches fell by 12.5 percentual points, relatively to other exporters. The estimated falls in investment are economically very relevant, thereby corroborating the relevance of third generation models negative balance sheet effects. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:162&r=mon |