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on Monetary Economics |
| By: | Stephen McKnight (El Colegio de México) |
| Abstract: | This paper analyses the necessary and sufficient conditions to ensure that interest rate policy does not introduce real indeterminacy and thus self-fulfilling fluctuations into open economies. A key feature of the model is the incorporation of capital and investment spending into the analysis. The conditions for real determinacy are examined for two measures of inflation that central banks' can target in open economies: domestic vs. consumer price inflation. In stark contrast to previous studies, in the presence of investment activity monetary policy that targets domestic price inflation is more susceptible to self-fulfilling fluctuations than monetary policy rules that target consumer price inflation. However, the problem of indeterminacy identified under domestic price inflation can be ameliorated provided the policy rule also responds to either the exchange rate or to output. |
| Keywords: | real indeterminacy, open economy monetary models, trade openness, interest rate rules |
| JEL: | E32 E43 E52 E58 F41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2011-02&r=mon |
| By: | Kerstin Gerling; Carlos Fernandez Valdovinos |
| Abstract: | Using a consistent dataset and methodology for all eight member countries of the West African Economic and Monetary Union (WAEMU) from 1994 to 2009, this paper provides evidence of the two major channels for real effects of inflation: inflation uncertainty and relative price variability. In line with theory and most evidence for advanced and emerging market economies, higher inflation increases inflation uncertainty and relative price variability in all WAEMU countries. However, the pattern, magnitude and timing of these two channels vary considerably by country. The findings raise several policy issues for future research. |
| Keywords: | Central banks , Cross country analysis , Economic models , Inflation , Inflation targeting , Monetary policy , Price elasticity , Prices , West Africa , West African Economic and Monetary Union , |
| Date: | 2011–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/59&r=mon |
| By: | Sascha S. Becker |
| Abstract: | Recent monetary search and Calvo-type models predict that the relationship between inflation and price dispersion is U-shaped, implying an optimal rate of inflation above zero. Moreover, monetary search models emphasize a critical dependence of the real effects of inflation on sellers’ market power, whereas Calvotype models suggest that the degree of price rigidity significantly affects the inflation - price dispersion nexus. Using a new set of highly disaggregated sectoral price data from a panel of European countries, this paper contributes to the literature by testing the empirical relevance of these two theoretical predictions. In line with monetary search theory, a U-shaped profile is found, provided that markups are sufficiently high, but the relationship breaks down under a more competitive environment. Contrarily, no evidence is found to support the contentions of Calvo-type models: U-shaped effects of inflation occur in product sectors with sticky as well as highly flexible prices. |
| Keywords: | Inflation, Relative price variability, Price level index, Euro-area, Market structure, Monetary search model, Dynamic panel data models |
| JEL: | C23 D40 E31 F15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2011-019&r=mon |
| By: | D'Agostino, Antonello; Surico, Paolo |
| Abstract: | We investigate inflation predictability in the United States across the monetary regimes of the XXth century. The forecasts based on money growth and output growth were significantly more accurate than the forecasts based on past inflation only during the regimes associated with neither a clear nominal anchor nor a credible commitment to fight inflation. These include the years from the outbreak of World War II in 1939 to the implementation of the Bretton Woods Agreements in 1951, and from Nixon's closure of the gold window in 1971 to the end of Volcker’s disinflation in 1983. |
| Keywords: | monetary regimes; Phillips curve; predictability; time-varying models |
| JEL: | E37 E42 E47 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8292&r=mon |
| By: | R. Anton Braun; Tomoyuki Nakajima |
| Abstract: | We consider an incomplete-markets economy with capital accumulation and endogenous labor supply. Individuals face countercyclical idiosyncratic labor and asset risk. We derive conditions under which the aggregate allocations and price system can be found by solving a representative agent problem. This result is applied to analyze the properties of an optimal monetary policy in a new Keynesian economy with uninsured countercyclical individual risk. The optimal monetary policy that emerges from our incomplete-markets economy is the same as the optimal monetary policy in a representative agent model with preference shocks. When price rigidity is the only friction, the optimal monetary policy calls for stabilizing the inflation rate at zero. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2011-04&r=mon |
| By: | Jouchi Nakajima (Institute for Monetary and Economic Studies, Bank of Japan (Currently in the Personnel and Corporate Affairs Department < studying at Duke University>, E-mail: jouchi.nakajima@stat.duke.edu)) |
| Abstract: | This paper attempts to explore monetary policy transmission under zero interest rates by explicitly incorporating the zero lower bound (ZLB) of nominal interest rates into the time-varying parameter structural vector autoregression model with stochastic volatility (TVP- VAR-ZLB). Nominal interest rates are modeled as a censored variable with Tobit-type non-linearity and incorporated into the TVP-VAR framework. For estimation, an efficient Markov chain Monte Carlo (MCMC) method is constructed in the context of Bayesian inference. The model is applied to the Japanese macroeconomic data including the periods of the zero interest rates policy and the quantitative easing policy. The empirical results show that a dynamic relationship between monetary policy and macroeconomic variables is well detected through changes in medium-term interest rates, and not policy interest rates under the ZLB, although other macroeconomic dynamics are reasonably traced without considering the ZLB in an explicit manner. |
| Keywords: | Monetary policy, Zero lower bound of nominal interest rates, Markov chain Monte Carlo, Time-varying parameter vector autoregression with stochastic volatility |
| JEL: | C11 C15 E44 E52 E58 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-08&r=mon |
| By: | Tidiane Kinda |
| Abstract: | This paper examines the determinants of inflation in Chad using quarterly data from 1983:Q1 to 2009:Q3. The analysis is based on a single-equation model, completed by a structural vector auto regression model to capture inflation persistence. The results show that the main determinants of inflation in Chad are rainfall, foreign prices, exchange rate movements, and public spending. The effects of rainfall shocks and changes in foreign prices on inflation persist during six quarters. Changes in public spending and the nominal exchange rate affect inflation during three and four quarters, respectively. |
| Keywords: | Chad , Consumer price indexes , Demand , Demand for money , Economic models , Government expenditures , Inflation , |
| Date: | 2011–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/57&r=mon |
| By: | Ulrich Bindseil (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Juliusz Jabłecki (National Bank of Poland and Faculty of Economic Sciences, Warsaw University.) |
| Abstract: | The banking system is modeled in a closed system of financial accounts, whereby the equilibrium volume of bank intermediation between households and corporates reflects structural parameters such as household preferences, comparative cost structures of heterogeneous banks, loan demand of corporates, and the difference between the borrowing rate and the deposit facility rate of the central bank. The model also allows understanding the link between this difference (the width of the central bank standing facilities corridor) and the stance of monetary policy, and how this link changes during a financial crisis. It is shown how the narrowing of the standing facilities corridor can make more accommodating the stance of monetary policy in a financial crisis. JEL Classification: E43, E44, G21. |
| Keywords: | bank intermediation, central bank operations, standing facilities, central bank crisis measures. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111312&r=mon |
| By: | Clausen, Andrew; Strub, Carlo |
| Abstract: | Classical models of money are typically based on a competitive market without capital or credit. They then impose exogenous timing structures, market participation constraints, or cash-in-advance constraints to make money essential. We present a simple model without credit where money arises from a fixed cost of production. This leads to a rich equilibrium structure. Agents avoid the fixed cost by taking vacations and the trade between workers and vacationers is supported by money. We show that agents acquire and spend money in cycles of finite length. Throughout such a "money cycle," agents decrease their consumption which we interpret as the hot potato effect of inflation. We give an example where money holdings do not decrease monotonically throughout the money cycle. Optimal monetary policy is given by the Friedman rule, which supports efficient equilibria. Thus, monetary policy provides an alternative to lotteries for smoothing out non-convexities. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2011:02&r=mon |
| By: | Guido Menzio; Shouyong Shi; Hongfei Sun |
| Abstract: | Dispersion of money balances among individuals is the basis for a range of policies but it has been abstracted from in monetary theory for tractability reasons. In this paper, we fill in this gap by constructing a tractable search model of money with a non-degenerate distribution of money holdings. We assume search to be directed in the sense that buyers know the terms of trade before visiting particular sellers. Directed search makes the monetary steady state block recursive in the sense that individuals\' policy functions, value functions and the market tightness function are all independent of the distribution of individuals over money balances, although the distribution affects the aggregate activity by itself. Block recursivity enables us to characterize the equilibrium analytically. By adapting lattice-theoretic techniques, we characterize individuals\' policy and value functions, and show that these functions satisfy the standard conditions of optimization. We prove that a unique monetary steady state exists. Moreover, we provide conditions under which the steady-state distribution of buyers over money balances is non-degenerate and analyze the properties of this distribution. |
| Keywords: | Money; Distribution; Search; Lattice-Theoretic |
| JEL: | E00 E4 C6 |
| Date: | 2011–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-425&r=mon |
| By: | Pascal Towbin; Sebastian Weber |
| Abstract: | A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high. |
| Keywords: | Currency pegs , Economic models , Exchange rate regimes , External debt , External shocks , Flexible exchange rates , Floating exchange rates , Imports , |
| Date: | 2011–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/42&r=mon |
| By: | Neville Francis; Eric Ghysels; Michael T. Owyang |
| Abstract: | With rare exception, studies of monetary policy tend to neglect the timing of the innovations to the monetary policy instrument. Models which do take timing seriously are often difficult to compare to standard VAR models of monetary policy because of the differences in the frequency that they use. We propose an alternative model using MIDAS regressions which nests both ideas: Accurate (daily) timing of innovations to the monetary policy instrument are embedded in a monthly frequency VAR to determine the macroeconomic effects of high frequency changes to policy. We find that taking into account the timing of the shocks is important and can alleviate some of the puzzles in standard monthly VARs [e.g., the price puzzle]. We find that policy shocks are most important to variables thought of as being heavily expectations-oriented and that, contrary to some VAR studies, the effects of FOMC shocks on real variables are small.> |
| Keywords: | Monetary policy ; Econometric models ; Prices |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2011-009&r=mon |
| By: | Matteo Barigozzi; Antonio M. Conti; Matteo Luciani |
| Abstract: | We study the effects of euro area common monetary policy by means of a structural dynamic factor model estimated on a large panel of euro area quarterly series. While we estimate a flat response of prices to a monetary policy shock, which we explain as aggregation of heterogeneous country-specific responses, we find no relevant asymmetries between countries in terms of output reaction. However, for both Spain and Italy, we find asymmetries in consumption, investment and unemployment. The introduction of the single currency in 1999 has helped reducing asymmetries in price responses but not in consumption and investment. |
| JEL: | C32 E41 E52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0441&r=mon |
| By: | Frankel, Jeffrey A. (Harvard University) |
| Abstract: | Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile's structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-015&r=mon |
| By: | Naohisa Hirakata (Deputy Director and Economist, Research and Statistics Department, Bank of Japan (E-mail: naohisa.hirakata@boj.or.jp)); Nao Sudo (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda boj.or.jp)) |
| Abstract: | We evaluate the implications of spread-adjusted Taylor rules and capital injection policies in response to adverse shocks to the economy, using a variant of the financial accelerator model. Our model comprises the two credit-constrained sectors that raise external finance under the credit market imperfection: financial intermediaries (FIs) and entrepreneurs. Using a model calibrated to the United States, we find that a spread-adjusted Taylor rule mitigates (amplifies) the impact of adverse shocks when the shock is accompanied by a widening (shrinking) of the corresponding spread. We formalize a capital injection policy as a positive (negative) amount of injection to either of the two sectors in response to an adverse shock (a favorable shock). In contrast to a spread-adjusted Taylor rule, a positive injection boosts the economy regardless of the type of shock. The capital injection to the FIs has a greater impact on the economy compared with that to the entrepreneurs. Although the welfare implication of these policies varies depending on the source of economic downturn, our result shows more support for adopting the spread-adjusted Taylor rules than capital injections. |
| Keywords: | Financial Accelerators, Spread-adjusted Taylor rule, Capital Injection |
| JEL: | E31 F52 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-10&r=mon |
| By: | Douglas Gale; Tanju Yorulmazer |
| Abstract: | Banks hold liquid and illiquid assets. An illiquid bank that receives a liquidity shock sells assets to liquid banks in exchange for cash. We characterize the constrained efficient allocation as the solution to a planner’s problem and show that the market equilibrium is constrained inefficient, with too little liquidity and inefficient hoarding. Our model features a precautionary as well as a speculative motive for hoarding liquidity, but the inefficiency of liquidity provision can be traced to the incompleteness of markets (due to private information) and the increased price volatility that results from trading assets for cash. |
| Keywords: | Bank liquidity ; Bank assets ; Interbank market |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:488&r=mon |
| By: | Nombulelo Duma |
| Abstract: | Over the past decade, Cambodia has become Asia’s most dollarized economy. In contrast, dollarization in neighboring Lao P.D.R., Mongolia, and Vietnam has been either declining or broadly stable. Somewhat paradoxically, growing dollarization in Cambodia has occurred against the backdrop of greater macroeconomic and political stability. The usual motive, currency substitution, does not appear to have been a factor. As the volume of dollars increased over the years, so has the volume of riel. A strong inward flow of dollars related to garments sector exports, tourism receipts, foreign direct investment, and aid, has benefitted the dollar based urban economy. The riel based rural economy has, however, lagged behind. Given international experience in de-dollarization, a carefully managed market based strategy, supported by a continued stable macroeconomic environment is essential for Cambodia’s de-dollarization. |
| Keywords: | Cambodia , Dollarization , Economic models , Monetary policy , Political economy , Reserves , |
| Date: | 2011–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/49&r=mon |
| By: | Sean Campbell; Daniel Covitz; William Nelson; Karen Pence |
| Abstract: | In response to the near collapse of US securitization markets in 2008, the Federal Reserve created the Term Asset-Backed Securities Loan Facility, which offered non-recourse loans to finance investors' purchases of certain highly rated asset-backed securities. We study the effects of this program and find that it lowered interest rate spreads for some categories of asset-backed securities but had little impact on the pricing of individual securities. These findings suggest that the program improved conditions in securitization markets but did not subsidize individual securities. We also find that the risk of loss to the US government was small. |
| Keywords: | Asset-backed financing ; Mortgage-backed securities ; Financial crises ; Term Asset-Backed Securities Loan Facility |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-16&r=mon |
| By: | Libo Wu (Center for Energy Economics ans Strategy Studies, Fudan University); Jing Li (Department of World Economy, School of Economics, Fudan University); ZhongXiang Zhang (East-West Center) |
| Abstract: | This paper aims to examine the impacts of oil-price shocks on China’s price levels. To that end, we develop a partial transmission input-output model that captures the uniqueness of the Chinese market. We hypothesize and simulate price control, market factors and technology substitution - the three main factors that restrict the functioning of a price pass-through mechanism during oil-price shocks. Using the models of both China and the U.S., we separate the impact of price control from those of other factors leading to China’s price stickiness under oil-price shocks. The results show a sharp contrast between China and the U.S., with price control in China significantly preventing oil-price shocks from spreading into its domestic inflation, especially in the short term. However, in order to strengthen the economy’s resilience to oil-price shocks, the paper suggests a gradual relaxing of price control in China. |
| JEL: | Q43 Q41 Q48 O13 O53 P22 E31 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:ewc:wpaper:wp115&r=mon |
| By: | Xiaoli Chen (Shandong University); Yin-Wong Cheung (University of California, Santa Cruz and Hong Kong Institute for Monetary Research) |
| Abstract: | The paper assesses the international status of the Chinese currency renminbi (RMB) by recounting and reviewing the recent polices China instituted to promote the use of the RMB in the global market. The evidence suggests that the RMB is gaining acceptance overseas. However, compared with the size of the Chinese economy, the current scale of the use of the RMB is quite small. The path to a fully fledged international RMB will be a distant goal. |
| Keywords: | RMB Internationalization, Off-Shore RMB Market, Cross-Border Trade Settlement, Panda Bonds |
| JEL: | F02 F31 F33 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:082011&r=mon |