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on Monetary Economics |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main.) |
| Abstract: | This paper attempts at characterising South Korean monetary policy in the period of explicit inflation targeting started in 1999. We explain Korean interest rates in relation to an estimated macro-model, assuming that monetary policy is set optimally. This allows us to obtain the central bank’s parameters in the policy objective function. During the IT regime, the data support that the Bank of Korea pursued optimal policy geared towards achieving price stability, with the degree of interest rate smoothing being estimated to be considerable. In addition, the central bank loss function is estimated to include negligible weights on output and exchange rate variability. JEL Classification: E52, E58, E61. |
| Keywords: | inflation targeting, optimal monetary policy, small open economies, South Korea. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901004&r=mon |
| By: | D.M. Nachane (Indira Gandhi Institute of Development Research); Amlendu Kumar Dubey (Indira Gandhi Institute of Development Research) |
| Abstract: | The recent de-emphasizing of the role of "money" in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating, pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transactions costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals. |
| Keywords: | money, inflation, cointegration, causality, decomposition, band spectra, wavelets |
| JEL: | C32 E51 E52 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2008-022&r=mon |
| By: | Konstantins Benkovskis |
| Abstract: | The goal of this paper is to explore the role of the banking sector in transmission of the Bank of Latvia's monetary policy and to check the existence of the bank lending channel in Latvia. For empirical investigation of the bank lending channel in Latvia, we use the approach that builds on the standard panel regression. The evidence on the bank lending channel is obtained by estimating a bank loan function that takes into account not only the monetary policy indicator and macroeconomic variables, but also bank-specific differences in the lending reaction to monetary policy actions. Empirical analysis shows that some banks in Latvia have statistically significant negative reaction to a domestic monetary shock; however, the weighted average reaction of the total lats loan growth is not statistically significant. A domestic monetary shock has only a distribution effect and affects banks that are small, domestically owned and have lower liquidity or capitalisation. The bank lending channel is limited only for the supply of lats loans, which dramatically reduces the importance of this channel. |
| Keywords: | monetary policy transmission, bank lending channel |
| JEL: | C23 E52 G21 |
| Date: | 2008–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:200801&r=mon |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | The paper gives a simplified version of a typical dynamic stochastic open economy general equilibrium models used to analyze optimal monetary policy. Then it outlines the chief modifications when dualism in labour and in consumption is introduced to adapt the model to a small open emerging market such as India. The implications of specific labour markets, and the structure of Indian inflation and its measurement are examined. Simulations give the welfare effects of different types of inflation targeting. Flexible CPI inflation targeting (CIT) without lags works best, especially if the economy is more open. But volatile terms of trade make the supply curve even steeper than in a small open economy despite specific labour markets and higher labour supply elasticity. Exchange rate intervention limits the volatility of the terms of trade and improves outcomes, making the supply curve flatter. As long as such intervention is required, domestic inflation targeting (DIT) continues to be more robust and effective. The welfare losses from the lags in CPI, which prevent the implementation of CIT, are low as long as the dualistic structure dominates. As the economy becomes more open, however, the loss from not being able to use CIT rises. The lags in CPI therefore need to be reduced, making its future use possible. |
| Keywords: | small open emerging market, optimal monetary policy, dualistic labour markets, inflation, measurement lags, specific labour markets |
| JEL: | E52 F41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2008-010&r=mon |
| By: | Andrés González (Banco de la República, Bogotá and CREATES, University of Aarhus, Denmark); Kirstin Hubrich (European Central Bank, Frankfurt am Main and CREATES, University of Aarhus, Denmark); Timo Teräsvirta (CREATES, University of Aarhus, Denmark) |
| Abstract: | In this work, we make use of the shifting-mean autoregressive model which is a flexible univariate nonstationary model. It is suitable for describing characteristic features in inflation series as well as for medium-term forecasting. With this model we decompose the inflation process into a slowly moving nonstationary component and dynamic short-run fluctuations around it. We fit the model to the monthly euro area, UK and US inflation series. An important feature of our model is that it provides a way of combining the information in the sample and the a priori information about the quantity to be forecast to form a single inflation forecast. We show, both theoretically and by simulations, how this is done by using the penalised likelihood in the estimation of model parameters. In forecasting inflation, the central bank inflation target, if it exists, is a natural example of such prior information. We further illustrate the application of our method by an ex post forecasting experiment for euro area and UK inflation. We find that that taking the exogenous information into account does im- prove the forecast accuracy compared to that of a linear autoregressive benchmark model. |
| Keywords: | Nonlinear forecast, nonlinear model, nonlinear trend, penalised likelihood, structural shift, time-varying parameter |
| JEL: | C22 C52 C53 E31 E47 |
| Date: | 2009–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-03&r=mon |
| By: | Juan Carlos Cuestas; Estefanía Mourelle |
| Abstract: | In this paper we aim at testing the inflation persistence hypothesis as well as modelling (using logistic smooth transition autoregressive, LSTAR, models) the long run behaviour of inflation rates in a pool of African countries. In order to do so, we rely on unit root tests applied to nonlinear models, i.e. Kapetanios et al. (2003). The results point to the non-persistence of inflation hypothesis for most of the countries. In addition, the estimated models are stable in the sense that the variable tends to remain in the regime (low inflation or high inflation) once reached and changes between regimes are only achieved after a shock. |
| Keywords: | Inflation, Persistence, Unit Roots, Nonlinearities. |
| JEL: | C32 E31 F15 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2009/2&r=mon |
| By: | Zsolt Darvas (Institute of Economics - Hungarian Academy of Sciences); Gyorgy Szapary (Central European University) |
| Abstract: | The paper discusses the risks and challenges faced by the new members on the road to the euro and the strategies for and timing of euro adoption. We investigate the real-nominal convergence nexus from the perspective of euro area entry. We argue that the initial level of economic development as measured by per capita income and the speed of real convergence have a bearing on the strategies to follow and on the timing of entry into euro area. This is because the lower is the per capita income, the larger is the price level gap to close and the greater is the danger of credit booms and overheating. We argue that inflation targeting with floating rates is better suited than hard pegs to manage the price level catching-up process. We suggest a modification in the Maastricht inflation criterion which as currently defined has lost its economic logic. |
| Keywords: | euro area, convergence, exchange rate, inflation |
| JEL: | E31 E52 E60 F30 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:0824&r=mon |
| By: | Christian Dreger; Jürgen Wolters |
| Abstract: | The appropriate design of monetary policy in integrated financial markets is one of the most challenging areas for central banks. One hot topic is whether the rise in liquidity in recent years has contributed to the formation of price bubbles in asset markets. If strong linkages exist, the inclusion of asset prices in the monetary policy rule can eventually limit speculative runs and negative effects on the real economy in the future. We explore the impacts of liquidity shocks on real share and house prices and the influence of wealth prices on liquidity. VAR models are specified for the US and the euro area. To control for international spillovers, global VARs are also considered. Differences in the results can provide a measure on the impact of financial market integration. The specifications point to some impact of liquidity shocks on house prices, while asset prices are not affected. |
| Keywords: | Liquidity shocks, asset prices, GVAR analysis, monetary policy |
| JEL: | E44 G10 C32 C52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp860&r=mon |
| By: | Tierney, Heather L.R. |
| Abstract: | Using parametric and nonparametric methods, inflation persistence is examined through the relationship between exclusions-from-core inflation and total inflation for two sample periods and in five in-sample forecast horizons ranging from one quarter to three years over fifty vintages of real-time data in two measures of inflation: personal consumption expenditure and the consumer price index. Unbiasedness is examined at the aggregate and local levels. A local nonparametric hypothesis test for unbiasedness is developed and proposed for testing the local conditional nonparametric regression estimates, which can be vastly different from the aggregated nonparametric model. This paper finds that the nonparametric model outperforms the parametric model for both data samples and for all five in-sample forecast horizons. |
| Keywords: | Real-Time Data; Local Estimation; Nonparametrics; Inflation Persistence; Monetary Policy |
| JEL: | C14 E52 E40 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13383&r=mon |
| By: | Cândida Ferreira |
| Abstract: | This paper confirms the importance of the financial systems behaviour conditions to the credit channel of monetary policy in the entire European Union (EU). It uses panel fixedeffect estimations and quarterly data for 26 EU countries for the period from Q1 1999 to Q3 2006 in an adaptation of the Bernanke and Blinder (1988) model. The findings also reveal the high degree of foreign dependence and indebtedness of the EU banking institutions and their similar reactions to the macroeconomic and the monetary policy environments. |
| Keywords: | European integration; bank credit; monetary policy transmission; panel estimates. |
| JEL: | E4 E5 G2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp82009&r=mon |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | An optimizing model of a small open emerging market economy (SOEME) with dualistic labour markets and two types of consumers, is used to derive the natural interest rate, terms of trade and potential output. Shocks are classified into generic types that affect the natural interest rates. Since parameters depend on features of the labour market and on consumption inequality, the natural rates and the impact of shocks differ from those in a mature small open economy. Subsistence consumption is found to have the largest effect on the natural rates. It reduces the interest rate, raises natural output and the terms of trade. Technology and infrastructure backwardness reduce natural output. The implications for monetary policy are derived. The effect of managed exchange rates combined with different types of inflation targeting is examined through simulations. Endogenous terms of trade make the supply curve steeper in a SOEME, so partial stickiness of the real exchange rate can be beneficial. In general, domestic inflation targeting, with some weight on the output gap, delivers lower volatility. Output response is higher and volatility lower with fixed terms of trade, demonstrating the flatter supply curve. CPI inflation targeting also does well when terms of trade are credibly fixed. |
| Keywords: | small open emerging market, optimal monetary policy, dualistic labour markets, natural interest rates, terms of trade, natural output |
| JEL: | E52 F41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2008-014&r=mon |
| By: | Ricardo Reis |
| Abstract: | This paper presents a dynamic stochastic general-equilibrium model with a single friction in all markets: sticky information. In this economy, agents are inattentive because of costs of acquiring, absorbing and processing information, so that the actions of consumers, workers and firms are slow to incorporate news. This paper presents the details of how an economy with pervasive inattentiveness functions, and develops a set of algorithms that solve the model quickly. It then applies these to estimate the model using data for the United States post-1986 and for the Euro-area post-1993, and to conduct counterfactual policy experiments. The end result is a laboratory that is rich enough to account for the dynamics of at least five macroeconomic series (inflation, output, hours, interest rates, and wages), and which can be used to inform applied monetary policy. |
| JEL: | E10 E30 E5 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14732&r=mon |
| By: | Balogun, Emmanuel Dele |
| Abstract: | This paper examines the determinants of output growth differentials from set convergence criteria in a panel of West African Monetary Zone (WAMZ) states. Drawing largely from micro-founded models, rooted in New Keynesian traditions, the study shows that widespread divergence of output growth rates of participating countries from ideal benchmarks calls to question the ability of independent monetary and exchange rates policy as instruments of national/regional macroeconomic stabilization, the preconditions for unionization. Using a stylized 5-country model of WAMZ area, the differences in national output growth/demand is analyzed in the light of country specific shocks or differences in the monetary transmission mechanisms. The main results show that business cycles (output shocks) stabilization around a desired target was not attained. Over the sample period, the un-weighted average regional GDP growth rates were very slow, vary widely among the countries and responded very poorly to independent monetary policy stance. The strong output growth rates divergence among these countries suggest a reconsideration of output convergence as pre-condition for unionization. |
| Keywords: | Growth rates differentials; Output convergence; exchange rate; WAMZ members; and panel data |
| JEL: | E32 C33 F33 |
| Date: | 2009–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13416&r=mon |
| By: | Cândida Ferreira |
| Abstract: | Using pooled panel OLS estimations and dynamic Arellano-Bond GMM estimations with quarterly data for 26 EU countries for the period from Q1 1999 to Q3 2006 this paper confirms the high degree of integration between the EU financial systems, as well as the importance of bank performance conditions to the credit-lending channel of monetary policy in the EU. Furthermore, it demonstrates not only the quite high degree of openness of the financial markets but also their indebtedness and the dependence of the EU banking institutions on the financial resources of other countries. |
| Keywords: | European integration; bank credit; monetary policy transmission; panel estimates. |
| JEL: | E4 E5 G2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp72009&r=mon |
| By: | Michael P. Dooley; David Folkerts-Landau; Peter M. Garber |
| Abstract: | In this paper we argue that net capital inflows to the United States did not cause the financial crisis that now engulfs the world economy. A crisis caused by such flows has been widely predicted but that crisis has not occurred. Indeed, the international monetary system still operates in the way described by the Bretton Woods II framework and is likely to continue to do so. Failure to properly identify the causes of the current crisis risks a rise in protectionism that could intensify and prolong the decline in economic activity around the world. |
| JEL: | F02 F32 F33 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14731&r=mon |
| By: | Eliana González; Luis F. Melo; Viviana Monroy; Brayan Rojas |
| Abstract: | ABSTRACT. We use a dynamic factor model proposed by Stock and Watson [1998, 1999, 2002a,b] to forecast Colombian inflation. The model includes 92 monthly series observed over the period 1999:01-2008:06. The results show that for short-run horizons, factor model forecasts significantly outperformed the auto-regressive benchmark model in terms of the root mean squared forecast error statistic. |
| Date: | 2009–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005273&r=mon |