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on Monetary Economics |
| By: | Mehrotra, Aaron (BOFIT); Koivu, Tuuli (BOFIT); Nuutilainen, Riikka (BOFIT) |
| Abstract: | This paper evaluates the usefulness of a McCallum monetary policy rule based on money supply for maintaining price stability in mainland China. We examine whether excess money relative to rulebased values provides information that improves the forecasting of price developments. The results suggest that our monetary variable helps in predicting both consumer and corporate goods price inflation, but the results for consumer prices depend on the forecasting period. Nevertheless, growth of the Chinese monetary base has tracked the McCallum rule quite closely. Moreover, results using a structural vector autoregression suggest that our measure of excess money supply could be used to identify monetary policy shocks in the Chinese economy. |
| Keywords: | McCallum rule; monetary policy; China |
| JEL: | E31 E52 |
| Date: | 2008–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_015&r=mon |
| By: | Martin Cihák; Katerina SmÃdková; Ales Bulir |
| Abstract: | The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity. |
| Keywords: | European Central Bank , Monetary policy , Central bank policy , External shocks , |
| Date: | 2008–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/252&r=mon |
| By: | Dino Martellato (University Of Venice Cà Foscari) |
| Abstract: | In this paper I discuss various notions and aspects of integration and macroeconomic convergence, namely economic and monetary integration; real and nominal convergence. The EU has offered a great deal of information about the relation between all these types of integration and macroeconomic convergence. The EU has assumed that monetary integration is a precondition of deep economic integration and it has also assumed that the criteria to be adopted to converge to its own brand of economic and monetary union (EMU) are basically the same needed within the monetary union itself. Judging from the evidence of the first ten years of EMU, the actual relationship between real growth and inflation has turned out to be far from clear; and the paper provides a comparison between statistical evidence and the diverging predictions offered by two standard macroeconomic models. |
| Keywords: | Inflation, stability, euro zone |
| JEL: | E12 E41 E52 E63 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2008_34&r=mon |
| By: | Alan S. Blinder (Princeton University) |
| Abstract: | Central banks, which used to be so secretive, are communicating more and more these days about their monetary policy. This development has proceeded hand in glove with a burgeoning new scholarly literature on the subject. The empirical evidence, reviewed selectively here, suggests that communication can move financial markets, enhance the predictability of monetary policy decisions, and perhaps even help central banks achieve their goals. A number of theoretical drawbacks to greater communication are also reviewed here. None seems very important in practice. That said, no consensus has yet emerged regarding what constitutes “optimal” communication strategy—either in quantity or nature. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1048&r=mon |
| By: | Alan S. Blinder (Princeton University); Michael Ehrmann (European Central Bank); Marcel Fratzscher (European Central Bank); Jakob De Haan (University of Groningen and CESifo); David-Jan Jansen (De Nederlandsche Bank) |
| 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. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1038&r=mon |
| By: | Alan S. Blinder (Princeton University) |
| Abstract: | I was Vice Chairman of the Federal Reserve Board while I was preparing my Marshall Lectures for delivery at Cambridge in 1995. So I asked the Board staff to research what had been written about making monetary policy by committees—as opposed to by individuals. Although they were (and remain) a knowledgeable and thorough bunch, they unearthed almost nothing. So when I delivered the Robbins Lectures at the London School of Economics the following year,1 this is what I concluded on the subject: My own hunch is that, on balance, the additional monetary policy inertia imparted by group decisionmaking provides a net benefit to society… But my main point is simpler: My experience as a member of the FOMC left me with a strong feeling that the theoretical fiction that monetary policy is made by a single individual maximizing a well-defined preference function misses something important. In my view, monetary theorists should start paying some attention to the nature of decisionmaking by committee, which is rarely mentioned in the academic literature. (Blinder (1998), p. 22) I made reference in that lecture to only one paper on the subject, Faust’s (1996) clever model of the seemingly-odd construction of the FOMC, though I should have cited Waller’s (1992) earlier work as well. (Mea culpa.) My point is that, up to then, there had been hardly any research on committee decisionmaking. Fortunately, that is no longer the case. By the time of my three Okun lectures at Yale in 2002 (Blinder (2004)), the subject merited a whole lecture, including references to about ten papers on the subject—and I missed some. (Mea culpa again.) The literature has continued to grow since then, including seven papers at a Netherlands Central Bank conference in 2005 and eleven papers at a Bank of Norway conference last year. The study of central banking by committee thus appears to be a growth industry, albeit a small one. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:1051&r=mon |
| By: | Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents first the estimation of a two-country DSGE model for the euro area and the rest-of-the-world including relevant oil-price channels. We then investigate the optimal resolution of the policy tradeoffs emanating from oil-price disturbances. Our simulations show that the inflationary forces related to the use of oil as an intermediate good seem to require specific policy actions in the optimal allocation. However, the direct effects of oil prices should be allowed to exert their mechanical influence on CPI inflation and wage dynamics through the indexation schemes. We also illustrate that any fine-tuning strategy which tries to counteract the direct effects of oil-price changes in headline inflation would prove counter-productive both in terms to stabilization of underlying inflation and by causing unnecessary volatility in the macroeconomic landscape. Finally, it appears that perfect foresight on future oil price developments allows a more rapid absorption of the steady state decline in purchasing power and real national income in the optimal allocation. Through the various expectation channels, economic agents facilitate the necessary adjustments and optimal monetary policy can still tolerate the direct effects of oil price changes on CPI inflation as well as some degree of underlying inflationary pressures in the view of easing partly the burden of downward real wage shifts. Our monetary policy prescriptions have been derived in a modeling framework where oil-price fluctuations are essentially exogenous to policy actions and where expectations are formed under the rational expectations paradigm. Notably, the extension of such conclusions to imperfect knowledge and weak central bank credibility configurations remain challenging fields for further research. JEL Classification: E4, E5, F4. |
| Keywords: | Oil prices, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080962&r=mon |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Economic and Monetary Union (EMU) has transformed Europe and has created an integrated pan-European economy. Much research has focused on understanding this integration process and what benefits and costs it entails. This paper identifies a political economy channel of EMU as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas, such as monetary policy and fiscal policy. The paper shows that EMU has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area. Equally importantly, economies with a weaker track record in terms of economic and institutional quality exhibited a significantly higher sensitivity to domestic political shocks before EMU, but not thereafter. While this may entail that EMU has brought benefits to countries with a weaker economic and institutional stability by insulating them from adverse political developments at home, a potential drawback is that it may provide weaker market discipline for domestic political stability. JEL Classification: F31; F33; G14. |
| Keywords: | EMU, political economy, political news, monetary policy, fiscal policy, stock markets, transmission. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080956&r=mon |
| By: | Fabio Milani (Department of Economics, University of California-Irvine) |
| Abstract: | This paper employs a structural model to estimate whether global output gap has become an important determinant of U.S. inflation dynamics. The results provide support for the relevance of global slack as a determinant of U.S. inflation after 1985. The role of domestic output gap, instead, seems to have diminished over time. |
| Keywords: | Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation |
| JEL: | E31 E50 E52 E58 F41 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:080910&r=mon |
| By: | Maurizio Michael Habib (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jan Stráský (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper discusses the choice of an optimal external anchor for oil exporting economies, using optimum currency area criteria and simulations of a simple model of a small open economy pegging to a basket of two currencies. Oil exporting countries - in particular those of the Gulf Cooperation Council - satisfy a number of key optimum currency area criteria to adopt a peg. However, direction of trade and synchronisation of business cycle of oil exporters suggest that there is no single "ideal" external anchor among the major international currencies. Model simulations - parameterised for an oil exporting economy - indicate that a currency basket is generally preferable to a single currency peg, especially when some weight is placed by the policy maker on output stabilisation. Only when inflation becomes the only policy objective and external trade is mostly conducted in one currency that a peg to a single currency becomes optimal. JEL Classification: F31, C30, C51, C61, O24. |
| Keywords: | oil exporting countries, exchange rate regimes, basket, model simulation. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080958&r=mon |
| By: | Campbell Leith; Ioana Moldovan; Raffaele Rossi |
| Abstract: | While consumption habits have been utilised as a means of generating a humpshaped output response to monetary policy shocks in sticky-price New Keynesian economies, there is relatively little analysis of the impact of habits (particularly, external habits) on optimal policy. In this paper we consider the implications of external habits for optimal monetary policy, when those habits either exist at the level of the aggregate basket of consumption goods (‘superficial’ habits) or at the level of individual goods (‘deep’ habits: see Ravn, Schmitt-Grohe, and Uribe (2006)). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases. Furthermore, the endogenous mark-up behaviour, which emerges when habits are deep, can also significantly affect the optimal policy response to shocks, as well as dramatically affecting the stabilising properties of standard simple rules. |
| Keywords: | consumption habits, nominal inertia, optimal monetary policy |
| JEL: | E30 E61 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2008_30&r=mon |
| By: | Giorgia Albertin |
| Abstract: | This paper provides a general equilibrium analysis of the trade effects of the formation of a currency union, and of its subsequent enlargement to include an economically dissimilar country. Furthermore, it investigates how economic dissimilarities among countries affect the magnitude of the trade effects fostered by a common currency. We show that sharing a common currency enhances the volume of bilateral trade among countries. However, the more economically dissimilar is an accession country, compared to the original members of a currency union, the smaller are the gains in trade that would follow the enlargement of a currency union. |
| Keywords: | Monetary unions , Trade integration , International trade , Trade models , |
| Date: | 2008–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/249&r=mon |
| By: | Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy) |
| Abstract: | This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time- periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. We also find homogeneity of views, where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees. |
| Keywords: | Currency regime ; Currency exposure of firms ; Moral hazard ; One-way bets on exchange rates |
| JEL: | F31 G32 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:50&r=mon |
| By: | Martin Cihák; Plamen Iossifov; Amar Shanghavi |
| Abstract: | We examine the interest rate elasticity of housing prices, advancingthe empirical literature in two directions. First, we take a commonly used cross-country panel dataset and evaluate the housing price equation using a consistent estimator in the presence of endogenous explanatory variables and a lagged dependent variable. Second, we carry-out a novel analysis of determinants of residential housing prices in a cross-section of countries. Our results show that the short-term interest rate, and hence monetary policy, has a sizable impact on residential housing prices. |
| Keywords: | Housing prices , Real estate prices , Interest rate policy , Economic models , |
| Date: | 2008–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/247&r=mon |
| By: | Jumah, Adusei (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria); Kunst, Robert M. (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria, and Department of Economics, University of Vienna, Vienna, Austria) |
| Abstract: | Motivated by economic-theory concepts—the Fisher hypothesis and the theory of the term structure—we consider a small set of simple bivariate closed-loop time-series models for the prediction of price inflation and of long- and short-term interest rates. The set includes vector autoregressions (VAR) in levels and in differences, a cointegrated VAR, and a non-linear VAR with threshold cointegration based on data from Germany, Japan, UK, and the U.S. Following a traditional comparative evaluation of predictive accuracy, we subject all structures to a mutual validation using parametric bootstrapping. Ultimately, we utilize the recently developed technique of Mallows model averaging to explore the potential of improving upon the predictions through combinations. While the simulations confirm the traded wisdom that VARs in differences optimize one-step prediction and that error correction helps at larger horizons, the model-averaging experiments point at problems in allotting an adequate penalty for the complexity of candidate models. |
| Keywords: | Threshold cointegration, Parametric bootstrap, Model averaging |
| JEL: | C32 C52 E43 E47 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:231&r=mon |
| By: | Rodrigo O. Valdes |
| Abstract: | This chapter revisits the sudden stop in capital flows episode experienced by Chile in 1998. It documents the macroeconomic environment, the macro framework in place, and the shocks that hit it. The chapter examines the policy reaction to the shocks, evaluating its most likely consequences and analyzing key policy constraints faced at the time. Finally, it describes how the economy adjusted and compares the Chilean episode with a few other recent sudden stop cases. |
| Keywords: | Sudden Stop, Chile, Capital Flows, Adjustment |
| JEL: | E58 E63 F32 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:2016&r=mon |
| By: | Kares, Alexei (BOFIT); Schoors , Koen (BOFIT); Lanine, Gleb (BOFIT) |
| Abstract: | We suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter. |
| Keywords: | interbank market stability; contagion; liquidity channel; lender of last resort; Russia |
| JEL: | C80 G21 |
| Date: | 2008–11–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_019&r=mon |
| By: | Julien Reynaud (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Julien Vauday (Campus Université Paris 1. CES . 106-112 Boulevard de l'Hôpital. 75647 Paris cedex 13, France.) |
| Abstract: | There is growing awareness that the distribution of IMF facilities may not be influenced only by the economic needs of the borrowers. This paper focuses on the fact that the IMF may favour geopolitically important countries in the distribution of IMF loans, differentiating between concessional and nonconcessional facilities. To carry out the empirical analysis, we construct a new database that compiles proxies for geopolitical importance for 107 IMF countries over 1990–2003, focusing on emerging and developing economies. We use a factor analysis to capture the common underlying characteristic of countries' geopolitical importance as well as a potential analysis since we also want to account for the geographical situation of the loan recipients. While controlling for economic and political determinants, our results show that geopolitical factors influence notably lending decisions when loans are nonconcessional, whereas results are less robust and in opposite direction for concessional loans. This study provides empirical support to the view that geopolitical considerations are an important factor in shaping IMF lending decisions, potentially affecting the institution's effectiveness and credibility. JEL Classification: F33, H77, O19. |
| Keywords: | factor analysis, geopolitics, International Monetary Fund, potential analysis. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080965&r=mon |
| By: | Eliza, Nor; M., Azali; Law, Siong-Hook; Lee, Chin |
| Abstract: | The ASEAN-5 economies were observed to increase their demand for international reserves after the 1997 Asian financial crisis. This was coincided with their consistent current account surplus during the same period. Thus, this study attempts to investigate the existence of long-run relationship between reserve demand and current account for the period of 1997-2005. The Autoregressive Distributed Lag (ARDL) bounds test approach as proposed by Pesaran, Shin, and Smith (2001) was employed, and the empirical results revealed that current account surplus leads to the rise in the demand for international reserves in Indonesia, Malaysia, and Singapore. |
| Keywords: | Bound Test; ARDL Approach; International Reserves; ASEAN-5 |
| JEL: | F3 C22 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11735&r=mon |