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on Monetary Economics |
| By: | Guenter W. Beck (Goethe University Frankfurt, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany.); Volker Wieland (Goethe University Frankfurt, Mertonstrasse 17, D-60325 Frankfurt am Main, Germany.) |
| Abstract: | Research with Keynesian-style models has emphasized the importance of the output gap for policies aimed at controlling inflation while declaring monetary aggregates largely irrelevant. Critics, however, have argued that these models need to be modified to account for observed money growth and inflation trends, and that monetary trends may serve as a useful cross-check for monetary policy. We identify an important source of monetary trends in form of persistent central bank misperceptions regarding potential output. Simulations with historical output gap estimates indicate that such misperceptions may induce persistent errors in monetary policy and sustained trends in money growth and inflation. If interest rate prescriptions derived from Keynesian-style models are augmented with a cross-check against money-based estimates of trend inflation, inflation control is improved substantially. JEL Classification: E32, E41, E43, E52, E58. |
| Keywords: | Taylor rules, money, quantity theory, output gap uncertainty, monetary policy under uncertainty. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080967&r=mon |
| By: | Jagjit S. Chadha |
| Abstract: | We develop simple diagrams that can be used by undergraduates to understand interest rate setting by policy- makers. We combine an inflation target, Fisher equation, policy reaction function and short and long run aggregate supply analysis to give a depiction of the policy problem. We illustrate the appropriate response by the policy maker to each of a positive shock to demand, a negative supply shock and dislodged inflation expectations. We also illustrate the problems of a zero bound for policy rates within this framework and consider the role of an interest rate rule in offsetting money market perturbations. Some key readings are introduced. |
| Keywords: | Interest rate setting; monetary policy; zero-bound; money markets |
| JEL: | E42 E52 E58 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0815&r=mon |
| By: | Fernando Alvarez; Andrew Atkeson; Chris Edmond |
| Abstract: | We examine the responses of prices and inflation to monetary shocks in an inventory-theoretic model of money demand. We show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households' money inventories leads to a partially offsetting endogenous reduction in velocity. We also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate. In a quantitative example, we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match U.S. households' holdings of M2. |
| Keywords: | Demand for money ; Inflation (Finance) ; Prices |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:417&r=mon |
| By: | Jagjit S. Chadha; Luisa Corrado; Qi Sun |
| Abstract: | In the canonical monetary policy model, money is endogenous to the optimal path for interest rates, output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation. |
| Keywords: | Money; Prices; Bayesian; VAR Identification; Sign Restrictions |
| JEL: | E32 F32 F41 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0817&r=mon |
| By: | Chadha, J.S.; Corrado, L.; Sun, Q. |
| Abstract: | In the canonical monetary policy model, money is endogenous to the optimal path for interest rates and output. But when liquidity provision by banks dominates the demand for transactions money from the real economy, money is likely to contain information for future output and inflation because of its impact on financial spreads. And so we decompose broad money into primitive demand and supply shocks. We find that supply shocks have dominated the time series in both the UK and the US in the short to medium term. We further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation. |
| Keywords: | Money, Prices, Bayesian VAR Identi.cation, Sign Restrictions. |
| JEL: | E32 F32 F41 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0855&r=mon |
| By: | Damjan Pfajfar (Tilburg University); Emiliano Santoro (Department of Economics, University of Copenhagen) |
| Abstract: | This note deals with the stability properties of an economy where the central bank is concerned with stock market developments. We introduce a Taylor rule reacting to stock price growth rates along with inflation and output gap in a New-Keynesian setup. We explore the performance of this rule from the vantage of equilibrium uniqueness. We show that this reaction function is isomorphic to a rule with an interest rate smoothing term, whose magnitude increases in the degree of aggressiveness towards asset prices growth. As shown by Bullard and Mitra (2007, Determinacy, learnability, and monetary policy inertia, Journal of Money, Credit and Banking 39, 1177-1212) this feature of monetary policy inertia can help at alleviating problems of indeterminacy. |
| Keywords: | monetary policy; asset prices; rational expectation equilibrium uniqueness |
| JEL: | E31 E32 E52 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0830&r=mon |
| By: | Vasco J. Gabriel (Department of Economics, University of Surrey and Universidade do Minho - NIPE); Paul Levine (Department of Economics, University of Surrey); Christopher Spencer (Department of Economics, Loughborough University) |
| Abstract: | We estimate an alternative type of monetary policy rule, termed Calvo rule, according to which the central bank is assumed to target a discounted infinite sum of future expected inflation. Compared to conventional inflation forecast-based rules, which are typically of the Taylor-type with discrete forward looking horizons, this class of rule is less prone to the problem of indeterminacy. Parameter estimates obtained from GMM estimation provide support for Calvo-type rules, suggesting that the Federal Reserve targeted a mean forward horizon of between 4 and 8 quarters. |
| Keywords: | Calvo-type interest rules, Inflation Forecast Based rules, GMM, indeterminacy. |
| JEL: | C22 E58 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:09/2008&r=mon |
| By: | Gregor Bäuerle (University of Bern); Tobias Menz (University of Bern and Study Center Gerzensee) |
| Abstract: | We study the transmission of monetary shocks and monetary policy with a behavioral model, corrected for potential misspecification using the DSGE-VAR framework elaborated by DelNegro and Schorfheide (2004). In particular, we investigate if the central bank should react to movements in the nominal exchange rate. We contribute to the empirical literature as we use Swiss data, which is very rarely used in that context. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0803&r=mon |
| By: | Evan F. Koenig |
| Abstract: | John Taylor and David Romer champion an approach to teaching undergraduate macroeconomics that dispenses with the LM half of the IS-LM model and replaces it with a rule for setting the interest rate as a function of inflation and the output gap?i.e., a Taylor rule. But> the IS curve is problematic, too. It is consistent with the permanent-income hypothesis only when the interest rate that enters the IS equation is a long-term rate?not the short-term rate controlled by the monetary authority. This article shows how the Taylor-Romer framework can be readily modified to eliminate this maturity mismatch. The modified model is a dynamic system in output and inflation, with a unique stable path that behaves very much like Taylor and Romer?s aggregate demand (AD) schedule. Many?but not all?of the original Taylor-Romer model?s predictions carry over to the new framework. It helps bridge the gap between the Taylor-Romer analysis and the more sophisticated models taught in graduate-level courses. |
| Keywords: | Economics - Study and teaching ; Taylor's rule ; Interest rates ; Macroeconomics ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0813&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 SGE 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. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-26&r=mon |
| By: | Yiting Li; Guillaume Rocheteau |
| Abstract: | We study counterfeiting of currency in a search–theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility to counterfeit ?at money can affect its value, velocity, output and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trades in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society’s welfare, but the latter policy does not always decrease counterfeiting. |
| Keywords: | Counterfeits and counterfeiting |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0809&r=mon |
| By: | Leon W. Berkelmans |
| Abstract: | This paper examines the role of multiple aggregate shocks in monetary models with imperfect information. Because agents can draw mistaken inferences about which shock has occurred, the existence of multiple aggregate shocks profoundly influences macroeconomic dynamics. In particular, after a contractionary monetary shock these models can generate an initial increase in inflation (the "price puzzle") and a delayed disinflation (a "hump"). A conservative numerical illustration exhibits these patterns. In addition, the model shows that increased price flexibility is potentially destabilizing. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-58&r=mon |
| By: | William Barnett (Department of Economics, The University of Kansas); Marcelle Chauvet (University of California at Riverside) |
| Abstract: | The current financial crisis followed the “great moderation,” according to which some commentators and economists believed that the world’s central banks had gotten so good at countercyclical policy that the business cycle volatility had declined to low levels. As more and more economists and media people became convinced that the risk of recessions had moderated, lenders and investors became willing to increase their leverage and risk-taking activities. Mortgage lenders, insurance companies, investment banking firms, and home buyers increasingly engaged in activities that would have been considered unreasonably risky, prior to the great moderation that was viewed as having lowered systemic risk. It is the position of this paper that the great moderation did not reflect improved monetary policy, and the perceptions that systemic risk had decreased and that the business cycle had ended were based on other phenomena, such as improved technology and communications. Contributing to the misperceptions about monetary policy solutions was low quality data provided by central banks. Since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” have produced decades of misunderstandings in economic research and policy, and contributed to the widely held views about decreased systemic risk. While better data, based correctly on index number theory and aggregation theory, now exist, the usual official central bank data are not based on that better approach. While aggregation-theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation-theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. Dual to the aggregation-theoretic monetary aggregates are the aggregation-theoretic user-cost and interest rate aggregates, which similarly are not in official use by central banks. The failure to use aggregation-theoretic quantity, user-cost price, and interest-rate index numbers as official data by central banks often is connected with the misstatement that expenditure share weights move in a predictable manner, when interest rates change. In fact the direction in which a share will change when an interest rate changes depends upon whether or not the price elasticity of demand is greater than or less than -1. No other area of economics has been so seriously damaged by data unrelated to valid index-number and aggregation theory. We provide evidence supporting the view that misperceptions based upon poor data were responsible for excess risk taking by financial firms and borrowers, and by regulators at central banks. We also provide evidence indicating the poor data may have induced the Federal Reserve to underestimate the rate of growth of monetary services and hence to have fed the bubbles with excess liquidity unintentionally. We also provide evidence indicating that a similar misperception produced an excessively contractionary policy that finally burst the bubble. Many commentators have been quick to blame insolvent financial firms for their “greed” and their presumed self-destructive, reckless risk taking. Perhaps some of those commentators should look more carefully at their own role in propagating the misperceptions that induced those firms to be willing to take such risks. While there are many considerations relevant to the misguided actions of private firms, individuals, and central banks during the period leading up to the current financial crisis, there is one common thread associated with all of them: misperceptions induced by poor data disconnected from the relevant economic aggregation theory. |
| Keywords: | Measurement error, monetary aggregation, Divisia index, aggregation, monetary policy, index number theory, financial crisis, great moderation, Federal Reserve. |
| JEL: | E40 E52 E58 C43 E32 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:200814&r=mon |
| By: | Morten L. Bech; Enghin Atalay |
| Abstract: | The recent turmoil in global financial markets underscores the importance of the federal funds market as a means of distributing liquidity throughout the financial system and a tool for implementing monetary policy. In this paper, we explore the network topology of the federal funds market. We find that the network is sparse, exhibits the small-world phenomenon, and is disassortative. In addition, reciprocity loans track the federal funds rate, and centrality measures are useful predictors of the interest rate of a loan. |
| Keywords: | Federal funds market (United States) ; Liquidity (Economics) ; Monetary policy ; Federal funds rate |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:354&r=mon |
| By: | Paul Gomme (Department of Economics, Concordia University) |
| Abstract: | In macroeconomics, life-cycle models are typically used to address exclusively life-cycle issues. This paper shows that modeling the life-cycle may be important when addressing public policy issues, in this case the welfare costs of inflation. In the representative agent model, the optimal inflation rate is characterized by the Friedman rule: deflate at the real interest rate. In the corresponding life-cycle model, the optimal inflation rate is quite high: for the benchmark calibration, it is around 95% per annum. Much of the paper is concerned with understanding this result. Briefly, in the life-cycle model there are distributional consequences of injecting money via lump-sum transfers. The net effect is to transfer income from old, rich agents to young, poor ones. These transfers twist the age-utility profile in a way that agents find desirable from a lifetime utility point of view. A second issue concerns how to assess the costs of inflation in a life-cycle model. Metrics that are equivalent in the representative agent model can give very different answers in a life-cycle model. |
| Keywords: | monetary policy, inflation, welfare costs, life-cycle model |
| JEL: | E52 E31 E32 D58 D91 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:08001&r=mon |
| By: | Tatom, John |
| Abstract: | The continuing foreclosure crisis worsened in October 2008. The Federal Reserve (Fed) continued the aggressive expansion of new private credit that it began in mid-September and it created three new credit facilities to add to the plethora of other facilities created since the financial crisis component of the foreclosure crisis began in August 2007. These new facilities are aimed at stabilizing the commercial paper (CP) market, most recently adversely affected by the failure of Lehman Brothers and the failures of several money market mutual funds (MMMF). From mid-September to the end of October, the Fed more than doubled its total assets, largely by expanding its private sector lending. Perhaps the most significant question to emerge over the past two months is whether the Fed has an exit strategy to pull all of this new financial asset creation out after it succeeds in stemming deflation and before it kick starts the economy into a major inflation problem. |
| Keywords: | commercial paper; monetary policy; financial crisis |
| JEL: | E58 G28 G21 |
| Date: | 2008–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11803&r=mon |
| By: | Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alessandro Notarpietro (Università Bocconi, Via Sarfatti 25, I-20136 Milano, Italy.) |
| Abstract: | We estimate a two-country Dynamic Stochastic General Equilibrium model for the US and the euro area including relevant housing market features and examine the monetary policy implications of housing-related disturbances. In particular, we derive the optimal monetary policy cooperation consistent with the structural specification of the model. Our estimation results reinforce the existing evidence on the role of housing and mortgage markets for the US and provide new evidence on the importance of the collateral channel in the euro area. Moreover, we document the various implications of credit frictions for the propagation of macroeconomic disturbances and the conduct of monetary policy. We find that allowing for some degree of monetary policy response to fluctuations in the price of residential goods improves the empirical fit of the model and is consistent with the main features of optimal monetary policy response to housing-related shocks. JEL Classification: E4, E5, F4. |
| Keywords: | Housing, credit frictions, optimal monetary policy, new open economy macroeconomics, Bayesian estimation. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080972&r=mon |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations. JEL Classification: E58, F30, F31, F36, G15. |
| Keywords: | communication, exchange rate regime, reserves, euro, dollar, emerging economies. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080973&r=mon |
| By: | Martin Cincibuch; Tomas Holub; Jaromir Hurnik |
| Abstract: | This paper discusses the issue of central bank losses, developing a framework for assessing the ability of a central bank to keep its balance sheet sustainable without having to default on its policy objectives. Compared to the earlier literature, it analyses in more depth the consequences of economic convergence for the evolution of the central bank’s balance sheet and the important role played in this process by the risk premium and equilibrium real exchange rate appreciation. A combination of a closed-form comparative-static analysis and numerical solutions of the future evolution of the central bank’s own capital is used. Applying the framework to the Czech National Bank’s case, the paper concludes that the CNB should be able to repay its accumulated loss in about 15 years without any transfer from public budgets. |
| Keywords: | Balance sheet, central bank, economic convergence, monetary policy, real appreciation, risk premium, seigniorage, transition. |
| JEL: | E52 E58 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2008/3&r=mon |
| By: | Ali Choudhary (University of Surrey and State Bank of Pakistan); Adnan Haider (State Bank of Pakistan) |
| Abstract: | We assess the power of artificial neural network models as forecasting tools for monthly inflation rates for 28 OECD countries. For short out-of-sample forecasting horizons, we find that, on average, for 45% of the countries the ANN models were a superior predictor while the AR1 model performed better for 21%. Furthermore, arithmetic combinations of several ANN models can also serve as a credible tool for forecasting inflation. |
| Keywords: | Artificial Neural Networks; Forecasting; Inflation |
| JEL: | C51 C52 C53 E31 E37 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0808&r=mon |
| By: | Marco Bonomo; Carlos Carvalho |
| Abstract: | The real effects of an imperfectly credible disinflation depend critically on the extent of price rigidity. Therefore, the study of how policymakers' credibility affects the outcome of an announced disinflation should include an analysis of the determinants of the frequency of price adjustments. In this paper, we examine how credibility affects the outcome of a disinflation in a model with endogenous time-dependent pricing rules. Both the initial degree of price rigidity, calculated optimally, and, more notably, changes in the duration of price spells during disinflation play an important role in explaining the effects of imperfect credibility. We initially consider the costs of disinflation when the degree of credibility is fixed, and then allow agents to use Bayes' rule to update beliefs about the "type" of monetary authority that they face. In both cases, the interaction between the endogeneity of time-dependent rules and imperfect credibility increases the output costs of disinflation. The pattern of the output response is more realistic in the case with learning. |
| Keywords: | Inflation (Finance) ; Pricing ; Monetary policy ; Price levels |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:355&r=mon |
| By: | Stefania D'Amico; Athanasios Orphanides |
| Abstract: | Using the probabilistic responses from the Survey of Professional Forecasters, we study the evolution of uncertainty and disagreement associated with inflation forecasts in the United States since 1968. We compare and contrast alternative measures summarizing the distributions of mean forecasts and forecast uncertainty across individuals at an approximate one-year-ahead horizon. In light of the heterogeneity in individual uncertainty reflected in the survey responses, we provide quarterly estimates for both average uncertainty and disagreement regarding uncertainty. We propose direct estimation of parametric distributions characterizing the uncertainty across individuals in a manner that mitigates errors associated with rounding and approximation of responses when individual uncertainty is small. Our results indicate that higher average expected inflation is associated with both higher average inflation uncertainty and greater disagreement about the inflation outlook. Disagreement about the mean forecast, however, may be a weak proxy for forecast uncertainty. We also examine the relationship of these measures with the term premia embedded in the term-structure of interest rates. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-56&r=mon |
| By: | Angela Redish; Warren E. Weber |
| Abstract: | Contemporaries, and economic historians, have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that adding small coins to an economy with only large coins is welfare improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare improving. |
| Keywords: | Coinage |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:416&r=mon |
| By: | M., Azali; R.C., Royfaizal; C., Lee |
| Abstract: | Members of Asian countries have been thinking about using others’ currencies instead of U.S. Dollar for regional trade. Hence, there is a strong case to study the Japanese Yen as an alternative hard currency in this region for trade transaction. This paper investigates the long-run co-integration to determine the possibility and feasibility to use Yen as a future vehicle currency in the Asian region namely Malaysia, Singapore, Thailand, Indonesia, the Philippines, China, Korea and India by examining their daily exchange rate movements denominated in Yen. Empirical evidence shows that four out of eight countries namely Malaysia, the Philippines, Singapore and Korea are the countries that support our hypothesis. |
| Keywords: | Exchange Rate; Cointegration; Granger-causality; Asian |
| JEL: | F31 F33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11891&r=mon |
| By: | Smith, Reginald |
| Abstract: | Currency logistics is becoming a field of increasing interest and importance both in government and academic circles. In this paper, a basic description of China's nationwide logistics network for the Renminbi is discussed and analyzed. In addition to its basic structure, its key problems such as production costs, inventory levels, and transportation and storage security are discussed. |
| Keywords: | currency; logistics; China; money supply |
| JEL: | E42 E58 |
| Date: | 2008–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11842&r=mon |
| By: | Elmar Mertens (Study Center Gerzensee and University of Lausanne); |
| Abstract: | Optimal monetary policy becomes tricky when the central bank has better information than the public: Policy does not only affect economic fundamentals, but also people’s beliefs. For a general class of widely studied DSGE models, this paper derives the optimal discretionary policy under hidden information. Illustrated with a simple New Keynesian model, the introduction of hidden information has striking effects on discretionary policies: Policy losses are better under hidden information than under full transparency. Looking at Markov-perfect policies excludes reputational mechanisms via history dependent strategies. Under full transparency, discretion policies are then myopic, since a current policymaker cannot influence future decisions. But imperfect information adds public beliefs as a distinct, endogenous state variable. Managing beliefs connects the actions of policymakers such that they realize the inflationary consequences of expansionary policies. The optimal policy shares similarities with those from commitment models. Additionally, disinflations are pursued more vigorously the larger the credibility problems from hidden information. Optimal policy also responds to belief shocks, which shift public perceptions about fundamentals even when those fundamentals are unchanged. |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0802&r=mon |
| By: | Jian Wang; Jason J. Wu |
| Abstract: | This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold. First, we find that in general, Taylor rule models generate tighter forecast intervals than the random walk, given that their intervals cover out-of-sample exchange rate realizations equally well. This result is more pronounced at longer horizons. Our results suggest a connection between exchange rates and economic fundamentals: economic variables contain information useful in forecasting the distributions of exchange rates. The benchmark Taylor rule model is also found to perform betterthan the monetary and PPP models. Second, the inference framework proposed in this paper for forecast-interval evaluation, can be applied in a broader context, such as inflation forecasting, not just to the models and interval forecasting methods used in this paper. |
| Keywords: | Foreign exchange ; Forecasting ; Taylor's rule ; Econometric models - Evaluation |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:22&r=mon |
| By: | Morten L. Bech; James T. E. Chapman; Rod Garratt |
| Abstract: | Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks. |
| Keywords: | Banks and banking, Central ; Banks and banking ; Liquidity (Economics) ; Electronic funds transfers |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:356&r=mon |