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on Monetary Economics |
| By: | Balfoussia, Hiona; Brissimis, Sophocles; Delis, Manthos D |
| Abstract: | The three-equation New-Keynesian model advocated by Woodford (2003) as a self-contained system on which to base monetary policy analysis is shown to be inconsistent in the sense that its long-run static equilibrium solution implies that the interest rate is determined from two of the system’s equations, while the price level is left undetermined. The inconsistency is remedied by replacing the Taylor rule with a standard money demand equation. The modified system is seen to possess the key properties of monetarist theory for the long run, i.e. monetary neutrality with respect to real output and the real interest rate and proportionality between money and prices. Both the modified and the original New-Keynesian models are estimated on US data and their dynamic properties are examined by impulse response analysis. Our research suggests that the economic and monetary analysis of the European Central Bank could be unified into a single framework. |
| Keywords: | Monetary theory; Central banking; New-Keynesian model; Impulse response analysis |
| JEL: | E58 E52 E40 E47 |
| Date: | 2011–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32236&r=mon |
| By: | Gaël Giraud (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, ESCP-Europe - Campus de Paris); Nguenamadji Orntangar (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | This paper provides a new framework for monetary macro-policy, where the Central Bank potentially intervenes both on short-term and long-term loans markets, and can do this alternatively by manipulating interest rates or money supply. Following Bonnisseau and Orntangar (2010) and Giraud and Tsomokos (2010), we develop a discrete-time out-of-equilibrium dynamics with real trades, performed by myopic heterogeneous households in a cash-in-advance economy with several goods. Positive value and non-neutrality of fiat money are shown to be compatible with a local quantity theory of money. Every monetary policy induces a globally unique trade path, both for real and nominal variables.Thus, monetary policy and myopia suffice to pin down the absolute level of prices. However, a minimal money growth rate is exhibited, which depends upon the level of households' long-term debt and current gains-to-trade. Below this growth rate, the economy falls into a local liquidity trap ; above it, the economy eventually converges towards a Pareto-optimal rest-point while inflation raises in an unbounded fashion. As a consequence, a literal application of Taylor's rule leads the economy to a local liquidity trap. These findings provide insight into recent non-conventional monetary policies led by Central Banks. |
| Keywords: | Central Bank, gains to trade, Taylor rule, myopia, liquidity trap. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00609824&r=mon |
| By: | Matteo Fragetta (University of Salerno); Giovanni Melina (University of Surrey) |
| Abstract: | This paper applies graphical modelling theory to recover identifying restrictions for the analysis of monetary policy shocks in a VAR of the US economy. Results are in line with the view that only high-frequency data should be assumed to be in the information set of the monetary authority when the interest rate decision is taken. |
| Keywords: | Monetary policy; SVAR; Graphical modelling |
| JEL: | E43 E52 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0811&r=mon |
| By: | Menno Middeldorp |
| Abstract: | Over the last two decades, the Federal Open Market Committee (FOMC), the rate-setting body of the United States Federal Reserve System, has become increasingly communicative and transparent. According to policymakers, one of the goals of this shift has been to improve monetary policy predictability. Previous academic research has found that the FOMC has indeed become more predictable. Here, I contribute to the literature in two ways. First, instead of simply looking at predictability before and after the Fed's communication reforms in the 1990s, I identify three distinct periods of reform and measure their separate contributions. Second, I correct the interest rate forecasts embedded in fed funds futures contracts for risk premiums, in order to obtain a less biased measure of predictability. My results suggest that the communication reforms of the early 1990s and the 'guidance' provided from 2003 significantly improved predictability, while the release of the FOMC's policy bias in 1999 had no measurable impact. Finally, I find that FOMC speeches and testimonies significantly lower short-term forecasting errors. |
| Keywords: | central bank communication, central bank transparency, futures pricing, financial market efficiency |
| JEL: | D83 E58 G13 G14 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1113&r=mon |
| By: | Menno Middeldorp |
| Abstract: | Central banks worldwide have become more transparent. An important reason is that democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Most empirical studies support this view. However, there are three reasons why more research is needed. First, some (mostly theoretical) work suggests that transparency has an adverse effect on predictability. Second, empirical studies have mostly focused on average predictability before and after specific reforms in a small set of advanced economies. Third, less is known about the effect on interest rate volatility. To extend the literature, I use the Dincer and Eichengreen (2007) transparency index for twenty-four economies of varying income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility. |
| Keywords: | Central bank communication, interest rate forecasts, central bank transparency, financial market efficiency |
| JEL: | D83 E47 E58 G14 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:1112&r=mon |
| By: | Marek Rusnák (CERGE-EI); Tomáš Havránek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | The short-run increase in prices following an unexpected tightening of monetary policy represents a frequently reported puzzle. Yet the puzzle is easy to explain away when all published models are quantitatively reviewed. We collect and examine about 1,000 point estimates of impulse responses from 70 articles using vector autoregressive models to study monetary transmission in various countries. We find some evidence of publication selection against the price puzzle in the literature, but our results also suggest that the reported puzzle is mostly caused by model misspecifications. Finally, the long-run response of prices to monetary policy shocks depends on the characteristics of the economy. |
| Keywords: | Monetary policy transmission; Price puzzle; Meta-analysis; Publication selection bias |
| JEL: | E52 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_24&r=mon |
| By: | John Cotter (University College Dublin) |
| Abstract: | This paper empirically analyses risk in the Euro relative to other currencies. Comparisons are made between a sub period encompassing the final transitional stage to full monetary union with a sub period prior to this. Stability in the face of speculative attack is examined using Extreme Value Theory to obtain estimates of tail exchange rate changes. The findings are encouraging. The Euro’s common risk measures do not deviate substantially from other currencies. Also, the Euro is stable in the face of speculative pressure. For example, the findings consistently show the Euro being less risky than the Yen, and having similar inherent risk to the Deutsche Mark, the currency that it is essentially replacing. |
| Keywords: | Extreme Value Theory; Tail Behaviour; GARCH; The Euro |
| JEL: | G15 F31 |
| Date: | 2011–07–21 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:200417&r=mon |
| By: | Gabriele Galati; Peter Heemeijer; Richhild Moessner |
| Abstract: | We provide new insights on the formation of inflation expectations - in particular at a time of great financial and economic turmoil - by evaluating results from a survey conducted from July 2009 through July 2010. Participants in this survey answered a weekly questionnaire about their short-, medium- and long-term inflation expectations. Participants received common information sets with data relevant to euro area inflation. Our analysis of survey responses reveals several interesting results. First, our evidence is consistent with long-term expectations having remained well anchored to the ECB's definition of price stability, which acted as a focal point for long-term expectations. Second, the turmoil in euro area bond markets triggered by the Greek fiscal crisis influenced short- and medium-term inflation expectations but had only a very small impact on long-term expectations. By contrast, longterm expectations did not react to developments of the euro area wide fiscal burden. Third, participants changed their expectations fairly frequently. The longer the horizon, the less frequent but larger these changes were. Fourth, expectations exhibit a large degree of timevariant non-normality. Fifth, inflation expectations appear fairly homogenous across groups of agents at the shorter horizon but less so at the medium- and long-term horizons. |
| Keywords: | inflation expectations, monetary policy, crisis |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:349&r=mon |
| By: | Nicoletta Batini (University of Surrey and IMF); Paul Levine (University of Surrey); Emanuela Lotti (University of Southampton and University of Surrey); Bo Yang (University of Surrey) |
| Abstract: | How does informality in emerging economies affect the conduct of monetary policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit constraints in financing investment and is less visible in terms of observed output. We compare outcomes under welfare-optimal monetary policy, discretion and welfare-optimized interest-rate Taylor rules building the model in stages; first with no frictions in these two markets, then with frictions in only the formal labour market and finally with frictions on both credit markets and the formal labour market. Our main conclusions are first, labour and financial market frictions, the latter assumed to be stronger in the informal sector, cause the time-inconsistency problem to worsen. The importance of commitment therefore in- creases in economies characterized by a large informal sector with the features we have highlighted. Simple implementable optimized rules that respond only to observed aggregate inflation and formal-sector output can be significantly worse in welfare terms than their optimal counterpart, but are still far better than discretion. Simple rules that respond, if possible, to the risk premium in the formal sector result in a significant welfare improvement. |
| Keywords: | Informal economy, emerging economies, labour market, credit market, tax policy, interest rate rules |
| JEL: | J65 E24 E26 E32 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0711&r=mon |
| By: | Zsolt Darvas (Bruegel, Institute of Economics - Hungarian Academy of Sciences); Valentina Kostyleva (OECD Public Governance and Territorial Development Directorate) |
| Abstract: | This paper studies the role of fiscal and monetary institutions in macroeconomic stability and budgetary control in central, eastern and south-eastern European countries (CESEE) in comparison with other OECD countries. CESEE countries tend to grow faster and have more volatile output than non-CESEE OECD countries, which has implications for macroeconomic management: better fiscal and monetary institutions are needed to avoid pro-cyclical policies. The paper develops a Budgetary Discipline Index to assess whether good fiscal institutions underpin good fiscal outcomes. Even though most CESEE countries have low scores, the debt/GDP ratios declined before the crisis. This was largely the consequence of a very favourable relationship between the economic growth rate and the interest rate, but such a favourable relationship is not expected in the future. Econometric estimations confirm that better monetary institutions reduce macroeconomic volatility and that countries with better budgetary procedures have better fiscal outcomes. All these factors call for improved monetary institutions, stronger fiscal rules and better budgetary procedures in CESEE countries. |
| Keywords: | CESEE countries; Budgetary Discipline Index; budget process; fiscal institutions; budgetary institutions; monetary institutions; macroeconomic stability; econometric analysis; budgetary procedures; fiscal outcomes; fiscal rules. |
| JEL: | E32 E50 H11 H60 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1127&r=mon |
| By: | Balasubramaniam, Vimal (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy) |
| Abstract: | The rise of China in the world economy and in international trade has raised the possibility of a rise of the Yuan as an international currency, particularly after the Chinese authorities have undertaken policy initiatives such as Yuan settlement and Yuan swap lines. In this paper, we measure one dimension of Yuan internationalisation: the role of the Yuan in the exchange rate arrangements of other economies. While the magnitudes are small, our findings show that as many as 34 currencies in the world have been sensitive to movements in the Yuan. This suggests that the Yuan potentially has a significant role to play in global exchange rate arrangements. Contrary to popular belief, however, we find a limited role of the Yuan among Asian. economies. |
| Keywords: | Renminbi ; Yuan ; Exchange rate regime ; Internationalisation ; East Asia |
| JEL: | F31 F33 |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/89&r=mon |
| By: | Martin Hellwig (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | This lecture discusses the 2010 crisis of the European Monetary Union and draws some lessons for reform. Crisis resolution has been difficult because the sovereign debt crisis of countries like Greece and Portugal has come together with real-estate and banking crises in countries like Ireland and Spain and bank vulnerability in countries like Germany and France. Failure to disentangle and resolve the different crises prevents a satisfactory approach to the long-term reform of governance of sovereign borrowing and banking. Any such reform must find a substitute for the discipline that exchange rate mechanisms impose on sovereign borrowers and their lenders when the currency is national. Any mechanism for imposing discipline on sovereign borrowers and their lenders must be designed so that enforcement is credible even in a crisis. Recommendations for reform include (i) an inclusion of sovereign exposure from too-big-to-fail concerns in banking in monitoring of fiscal stance, (ii) independence of bank supervisors from their respective political authorities, and (iii) a strengthening of the powers of the European Supervisory Authorities over the national supervisors. |
| Keywords: | European Monetary Union, sovereign debt crisis, bank supervision |
| JEL: | G28 F53 F33 F36 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2011_12&r=mon |
| By: | Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies (currently Research and Statistics Department), Bank of Japan (E-mail: nao.sudou@boj.or.jp)) |
| Abstract: | A notable feature of the Japanese economy following the banking crisis of the late 1990s is the drastic decline in the velocity of money and the consequent decline in the price level. Based on the inventory model of money demand a la Alvarez, Atkeson, and Edmond (2009), we explore how macroeconomic shocks affect the velocity. Households in the model are subject to a multiple-period cash-in-advance constraint in which the portion of the payment in cash, which we call the liquidity requirement, varies according to the credit service supply in the economy. Extracting various shocks underlying the velocity variations from 1990 to 2010, we find that an increase in the liquidity requirement is the key driver of the decline in velocity. Particularly important is the channel stemming from householdsf expectations about the future liquidity requirement. During the Japanese banking crisis and the global financial crisis, credit service is disrupted and households expect the disruption to last long. Since they demand additional money for a higher liquidity requirement for current and future transactions, the velocity and the price level decrease, even though the growth rate of money stock then exceeds that of consumption. |
| Keywords: | Velocity of Money, Liquidity Requirement, Financial Crises |
| JEL: | E4 E5 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-16&r=mon |
| By: | Schilirò, Daniele |
| Abstract: | The severe crisis that affected the European Monetary Union has emphasized the prevailing interests of national governments and a lack of political leadership of the European institution , while the governance of the euro area has been incapable of an effective crisis management. The present work argues that the decisions taken in March 2011 by the European Council, named the ‘Pact for the Euro’, to design a new governance of the EMU, can be considered a fairly significant step for the European institutions in terms of credibility and legitimacy. This contribution, evaluating the economic policy framework set by the Pact for the Euro, underlines the need for appropriate institutions and a stronger attitude to cooperate among the Member States. It also stresses the need for transparency and a non ambiguous solution of the debt crisis. The major message of this work is that Economic and Monetary Union must equip itself with appropriate policy tools to manage and resolve the crisis, creating the condition to improve the competitiveness of the peripheral countries of the euro area and fostering growth. But, at the same time, Member States of the euro area and European institutions must demonstrate greater accountability and political coherence. |
| Keywords: | EMU; European integration; crisis management; Pact for the euro |
| JEL: | F15 F33 O52 E61 E60 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32235&r=mon |
| By: | Filipe Silva (Faculdade de Economia, Universidade de Coimbra GEMF–Grupo de Estudos Monetários e Financeiros); Carlos Carreira (Faculdade de Economia, Universidade de Coimbra GEMF–Grupo de Estudos Monetários e Financeiros) |
| Abstract: | Financial constraints are a key determinant that hinders firms' ability to export. This paper analyses the nexus between these constraints and firms' engagement in international trade, as well as it explores the impact of the European monetary integration process upon firms' financial constraints. Therefore, we estimate cash to cash-flow sensitivities for different periods (1996-2000 and 2001-2004) and different groups of firms, according to their exporting and importing activity. Our results indicate that, depending on their international openness, the European monetary integration seems to have generally helped reducing the degree of financial constraints faced by Portuguese firms. Additionally, our findings suggest that, rather than unconstrained firms self-selecting into exporting, firms' constraints were reduced after they started exporting. |
| Keywords: | Financial constraints; Exports; European financial integration; Firm-level studies; Portugal |
| JEL: | D92 F14 F36 G32 L00 L2 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0039&r=mon |