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on Monetary Economics |
| By: | Konstantin Kholodilin (DIW Berlin, Germany); Alberto Montagnoli (University of Stirling, Stirling, UK); Oreste Napolitano (Parthenope University of Naples, Napoli, Italy); Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | This paper analyzes the response of the European stock markets to the monetary policy shocks by the European Central Bank using the heteroskedasticity based approach of Rigobon (2003). We find that monetary policy tightening has a heterogeneous impact on the Euro Area sectors on the day the monetary policy is publicly announced. Furthermore, we provide statistical evidence against the use of the popular event study approach when assessing the impact of monetary policy shocks on the stock market as the maintained assumptions can be rejected for the aggregate stock market and for most of the sectoral stock market indexes. |
| Keywords: | Monetary policy, Stock markets, ECB |
| JEL: | E44 E47 E52 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-213&r=mon |
| By: | Sargent, Thomas (New York University); Surico, Paolo (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | To detect the quantity theory of money, we follow Lucas (1980) by looking at scatter plots of filtered time series of inflation and money growth rates and interest rates and money growth rates. Like Whiteman (1984), we relate those scatter plots to sums of two-sided distributed lag coefficients constructed from fixed-coefficient and time-varying VARs for US data from 1900-2005. We interpret outcomes in terms of population values of those sums of coefficients implied by two DSGE models. The DSGE models make the sums of coefficients depend on the monetary policy rule via cross-equation restrictions of a type that Lucas (1972) and Sargent (1971) emphasised in the context of testing the natural unemployment rate hypothesis. When the US data are extended beyond Lucas's 1955-75 period, the scatter plots mutate in ways that we attribute to prevailing monetary policy rules. |
| Keywords: | Quantity theory; policy regimes; time-varying VAR |
| JEL: | E40 E42 E51 E52 N10 |
| Date: | 2008–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0026&r=mon |
| By: | Deming Luo (Department of Economics, Carleton University); Stephen Ferris (Department of Economics, Carleton University) |
| Abstract: | The paper addresses whether or not the exchange rate or some other dimension of the external side of the economy should form an integral part of the monetary rule for a small open economy (SOE) in which the central bank faces data deficiencies. Under a number of information scenarios, the model’s simulations suggest that some reflection of the external environment facing the SOE—either the real exchange rate gap and/or the law of one price gap—is needed to improve monetary policy performance. When the money rule includes both interest rate smoothing and the real exchange rate (or law of one price gap), the relative welfare gain from their inclusion increases as the monetary authorities loses access to more current and reliable information. |
| Keywords: | New Keynesian small open economy model, exchange rate pass through, optimal simple money rules, stochastic general equilibrium model. |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:08-03&r=mon |
| By: | Gabriele Galati; Steven Poelhekke; Chen Zhou |
| Abstract: | Survey evidence indicates that inflation expectations increased after HICP inflation rose markedly in the course of 2007 and the first half of 2008, underpinning a general view that inflation expectations may have become unanchored from the ECB's target. However, until now there has been no formal test of whether this has in fact been the case. We fill this gap by testing the reaction of financial market-based measures of long-term expectations inflation expectations to news about inflation and other macroeconomic variables in the main euro area economies. If long-term inflation expectations are anchored, they should not react to the arrival of news. We find evidence that long-term inflation expectations have started to drift away from the ECB's anchor in the course of 2007.  |
| Keywords: | ECB; euro-area inflation and inflation compensation; anchors for expectations; news announcements.  |
| JEL: | E44 E52 E58 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:191&r=mon |
| By: | Olga Aslanidi |
| Abstract: | This paper provides new evidence for dollarization in Georgia during the period from 1996 to 2007 using implications of dynamic money-in-utility-function models. Partial effects of foreign and domestic inflation, exchange rate, and foreign and domestic currency deposits’ interest rates on dollarization are considered. The US dollar is a strong substitute for domestic currency and has a significant share in producing domestic liquidity services. The actual dollarization in Georgia is persistent and larger than partial effects models predict. |
| Keywords: | Dollarization, Georgia, Money-in-utility-function |
| JEL: | C51 E41 F31 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp366&r=mon |
| By: | Patricia Alvarez-Plata; Alicia Garcia-Herrero |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp842&r=mon |
| By: | Piffaretti, Nadia F. |
| Abstract: | As we witness profound changes in the global economy, and as it becomes apparent that the so-called “Revived Bretton Woods System” may be nothing more than a temporary non sustainable financing of the US structural internal imbalance, favored by the global role of the dollar, which has increased the overall vulnerability of the global financial architecture, it’s worth revisiting the origins of the Bretton Woods conference, and pointing out the relevance for today’s framework of Keynes’ original 1942 plan for an International Clearing Union. In this note we explore the main characteristics of Keynes’ original plan, by revisiting his original writings between 1940 and 1944, and we outline its relevance to the current debate on the international financial architecture, We’ll argue that reforms of the international financial architecture should include anchoring the international monetary system on a sounder institutional ground. |
| Keywords: | International Financial Architecture; Bretton Woods Institutions; Keynes Plan; International Currency; Global Imbalances |
| JEL: | E12 E58 F02 N20 E50 E00 E44 F33 |
| Date: | 2008–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12165&r=mon |
| By: | Balázs Égert; Ronald MacDonald |
| Abstract: | This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe (CEE). Our results indicate that the strength of the exchange rate pass-through substantially declined over time mainly due to a fall in inflation rates and to some extent due to the so-called composition effect. The asset price channel is weak and is likely to remain weak because of shallow stock and private bond markets and because of low stock and bond holdings of domestic household. House prices may become an exception with higher levels mortgage lending and with high owner occupancy ratios. While the credit channel could be a powerful channel of monetary transmission - as new funds raised on capital markets are close to zero in CEE - it is actually not, as both commercial banks and non-financial corporations can escape domestic monetary conditions by borrowing from their foreign mother companies. The moderately good news is, however, that those banks and firms are influenced by monetary policy in the euro area because their parent institutions are themselves subjected to the credit channel in the euro area. <P>Canaux de transmission de la politique monétaire dans les PECO: une revue de la littérature <BR>Ce papier vise à synthétiser la littérature empirique portant sur le mécanisme de transmission monétaire, et tout particulièrement dans les pays d’Europe centrale et orientale (PECO). Cette étude montre que l’effet du taux de change sur l’inflation a diminué au cours du temps principalement en raison de la baisse des taux d’inflation, mais aussi dans une certaine mesure suite à un effet dit de composition. Le canal des prix d’actifs est faible et le restera probablement en raison des marchés d’actions et de titres obligataires privés peu développés, mais aussi à cause d’un faible taux de détention d’actifs financiers par les ménages. En revanche, avec l’accroissement du nombre de prêts immobiliers et de ménages propriétaires de leur appartements, les prix immobiliers peuvent jouer un rôle plus important à l’avenir. Même si le canal du crédit devrait être un des canaux de transmission les plus puissants, sachant que le financement externe sur les marchés est quasiment nul dans les PECO, tel n’est pas le cas pour autant. La raison en est que les banques commerciales mais aussi les entreprises peuvent échapper aux conditions monétaires nationales par le biais de financements obtenus auprès de leurs maisons mères implantées à l’étranger. La nouvelle quelque peu encourageante est que les entreprises mères sont elles-mêmes contraintes par la politique monétaire de la zone euro, exportant ainsi les effets du canal du crédit dans les PECO. |
| Keywords: | monetary transmission mechanism, asset prices, Central Europe, interest rate, credit channel, canal du crédit |
| JEL: | E31 E51 E58 F31 O11 P20 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:654-en&r=mon |
| By: | Hernando Matallana |
| Abstract: | Marx carried out the first full inquiry on the economics of the all-comprising circulation process of capital, first in Grundrisse in the late 1850s, and later in Capital and Theories of Surplus Value in the 1860s and the 1870s. Two substantial aspects are at the center of Marx’s analysis: (a) the monetary determination of the social process of production and circulation of capital, i.e. the fact that money-capital is a social relation determining the interaction of agents in the monetary production economy alias capitalism; and (b) the notion of the economic circuit as the key economic category for the understanding of the monetary logic of the principle of effective demand. These aspects are also at the center of Keynes’s and Kalecki’s foundation of the theory of the monetary production economy. |
| Date: | 2008–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:005196&r=mon |
| By: | Yakov Ben-Haim; Maria Demertzis |
| Abstract: | In situations of relative calm and certainty, policy makers have confidence in the mechanisms at work and feel capable of attaining precise and ambitious results. As the environment becomes less and less certain, policy makers are confronted with the fact that there is a trade-off between the quality of a certain outcome and the confidence (robustness) with which it can be attained. Added to that, in the presence of Knightian uncertainty, confidence itself can no longer be represented in probabilistic terms (because probabilities are unknown). We adopt the technique of Info-Gap Robust Satisficing to first define confidence under Knightian uncertainty, and second quantify the trade-off between quality and robustness explicitly.We apply this to a standard monetary policy example and provide Central Banks with a framework to rank policies in a way that will allow them to pick the one that either maximizes confidence given an acceptable level of performance, or alternatively, optimizes performance for a given level of confidence.&nbsp; |
| Keywords: | Knightian Uncertainty; Satisficing; Bounded Rationality; Minmax |
| JEL: | D81 E52 E58 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:192&r=mon |
| By: | J. Stephen Ferris (Department of Economics, Carleton University); Hossein Kavand (Faculty of Economics, University of Tehran, Tehran, Iran) |
| Date: | 2008–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:08-05&r=mon |
| By: | Roman Frydman (New York University); Michael D. Goldberg (University of New Hampshire); Søren Johansen (Department of Economics, University of Copenhagen); Katarina Juselius (Department of Economics, University of Copenhagen) |
| Abstract: | Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "Purchasing Power Parity puzzle". In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis". We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates. |
| Keywords: | PPP puzzle; long swings; imperfect knowledge; rational expectations hypothesis |
| JEL: | F31 F41 G15 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0831&r=mon |
| By: | Stavarek, Daniel |
| Abstract: | This paper estimates the exchange market pressure (EMP) in four Central European countries (Czech Republic, Hungary, Poland, Slovakia) over the period 1993-2006. Therefore, it is one of very few studies focused on this region and the very first paper applying concurrently model-dependent as well as model-independent approach to the EMP estimation on these countries. The results obtained suggest that the approaches lead to inconsistent findings. They often differ in identification of the principal development trends as well as magnitude and direction of the pressure. The paper provides evidence that a shift in the exchange rate regime towards the quasi-fixed ERM II should not stimulate EMP to grow. However, it is highly probable that some episodes of the excessive EMP will make the fulfillment of the exchange rate stability criterion more difficult in all countries analyzed. |
| Keywords: | Exchange Market Pressure; Model-dependent Approach; Model-independent Approach; European Union; Euro-candidate Countries |
| JEL: | C32 E42 F31 F36 |
| Date: | 2008–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12079&r=mon |
| By: | Maximilian J. B. Hall (Dept of Economics, Loughborough University) |
| Abstract: | On 8 October 2008 the UK Government announced a far-reaching plan to restore financial stability, protect depositors and re-invigorate the flow of credit to businesses and individuals in the UK. The £400 billion bailout plan embraced three elements: a massive expansion in emergency liquidity support from the Bank of England; recapitalisation of UK banks and building societies using taxpayers' money; and the provision of a Government guarantee of new short- and medium-term debt issuance made by UK-incorporated banks and building societies. This action proved necessary in the wake of continuing and substantial weaknesses in many banks' share prices despite the temporary ban on short-selling imposed by the Financial Services Authority. It followed two revisions to domestic deposit protection arrangements, and the adoption of a piecemeal approach to failure resolution which saw the eventual nationalisation of Northern Rock in February 2008, the nationalisation of Bradford and Bingley in September 2008 and the brokering of takeover rescues of Alliance and Leicester and HBOS by Banco Santander and Lloyds TSB respectively in July and September 2008, and of the Cheshire and Derbyshire Building Societies by the Nationwide Building Society in September 2008. This metamorphosis in approach to failure resolution by the UK authorities in response to the sub-prime crisis and the credit crunch – nationalisation by default to (part) nationalisation as the preferred course of action - is duly analysed in this article, as well as their proposals for banking reforms which still have to be agreed by Parliament. |
| Keywords: | UK banks; banking regulation and supervision; failure resolution; central banking; deposit protection. |
| JEL: | E53 E58 G21 G28 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2008_14&r=mon |