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on Monetary Economics |
| By: | Matthias Neuenkirch (University of Marburg) |
| Abstract: | In this paper, we study the role central bank communication plays in the monetary policy transmission mechanism. We employ the Swiss Economic Institute’s Monetary Policy Communicator to measure the future stance of the European Central Bank’s monetary policy. Our results indicate that, first, communication influences prices and output. Second, communication partly crowds out the effects of the short-term interest rate as the latter’s influence is lower and its implementation lag increases compared to a benchmark model without central bank communication. Future work on monetary policy transmission should incorporate both a short-term interest rate and a communication indicator. |
| Keywords: | Central Bank Communication, European Central Bank, Monetary Policy Shocks, Monetary Policy Transmission, Vector Autoregression |
| JEL: | E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201143&r=mon |
| By: | Parag Waknis (University of Connecticut and University of Massachusetts Dartmouth) |
| Abstract: | In this paper, we use a dual currency Lagos-Wright model to explore the nature of optimal monetary policy under currency competition using different timing protocols. The central banks are utility maximizing players. To characterize equilibrium with reputation, we model the centralized market sub period of the Lagos-Wright economy as an infinitely repeated game between the two Leviathan central banks (long run players) and a continuum of competitive agents (short run players). Concentrating on Markov strategies in such a game shows that the Markov perfect equilibrium features highest inflation tax. However, allowing for reputation concerns improves the inflation outcome. Such a game typically features multiple equilibriums but the competition between the banks allows the use of renegotiation proof-ness as an equilibrium selection mechanism. Accordingly, equilibrium featuring the lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is more likely in the case of Leviathan currency competition than in the single Leviathan bank case. |
| Keywords: | Monetary policy, currency competition, Leviathan, inflation tax, money search |
| JEL: | E52 E61 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-21&r=mon |
| By: | Kuttner, Kenneth (Monetary Policy Committee Unit, Bank of England); Posen, Adam (Monetary Policy Committee Unit, Bank of England) |
| Abstract: | This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecasters' predictions at successive forecast horizons, to gauge the perceived flexibility of the central bank's response to macroeconomic shocks. Based on this criterion, these is no evidence to suggest that the Bank of England's inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve. |
| Keywords: | Inflation targeting; inflation expectations; monetary policy |
| JEL: | E42 E58 E65 |
| Date: | 2011–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:mpc:wpaper:0034&r=mon |
| By: | Bask, Mikael (Department of Economics) |
| Abstract: | We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporaneous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning. |
| Keywords: | Determinacy; Foreign Exchange; Interest Rate Inertia; Least Squares Learning; Monetary Policy; Taylor Rule |
| JEL: | E52 F31 |
| Date: | 2011–10–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2011_016&r=mon |
| By: | Parag Waknis (University of Connecticut and University of Massachusetts Dartmouth) |
| Abstract: | This paper studies the nature of optimal monetary policy under a Leviathan monetary authority in a microfounded model of money based on ?. Such a monetary authority is a reality whenever and wherever fiscal policy is a primary driver of the monetary policy. Under no commitment, we characterize and solve for a Markov perfect equilibrium as well as for equilibrium with reputation concerns. For the Markov equilibrium, a generalized Euler equation is derived to characterize optimal policy that trades off the current benefit of increasing consumption against the reduced ability to do so in the future. Under reputation equilibrium, centralized market interaction is modeled as an infinitely repeated game of perfect monitoring, between a Leviathan monetary authority (a large player) and the economic agents (small players). Such a game has multiple equilibriums but the large-small player dynamics pins down the equilibrium set of payoffs and features less than maximum inflation tax. Depending on howwe interpret the Leviathan central bank, the factors determining the realized equilibrium differ. Higher fiscal profligacy of the underlying political authority leads to a higher monetary growth rate and inflation tax, while existence of threat of competition in case of a private money supplier or threat of external aggression in case of a self interested sovereign leads to a lower one. The realized equilibrium monetary growth rate and the associated inflation tax is thus, affected by the intensity of context contingent factors. Concentrating only on Markov strategies in this repeated game shows that the Markov perfect equilibrium features maximum inflation tax. |
| Keywords: | Endogenous monetary policy, Leviathan, central bank, inflation tax, money search |
| JEL: | E52 E61 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2011-20&r=mon |
| By: | Delatte, Anne-Laure (BOFIT); Fouquau, Julien (BOFIT); Holz, Carsten A. (BOFIT) |
| Abstract: | We examine the transition process from a centrally planned to a market-based monetary system in China, with the objective of giving a functional form to the transition in money demand. Applying the cointegrating Time-Varying Smooth Transition Regression model proposed by Choi and Saikkonen (2004) on a constructed dataset spanning the period from 1984 to 2010, and using a seasonal unit-root test developed by Hylleberg et al. (1990), our findings invalidate much of the earlier literature. Our examination of disaggregate as well as aggregate money balances yields the following findings. (1) Households have an infinite demand for money at prevailing interest rates. <p> (2) Enterprises have gradually gained decision-making authority over their deposits. <p> (3) Money is a complement rather than a substitute to capital and this has become more prominent over the period. <p> (4) The credit plan has ceased to be a significant driver of money holdings after 1997. <p> (5) In the aggregate monetary sphere, the deposit interest rate has gained only a minor role as a monetary instrument, and only since 2000. |
| Keywords: | money demand; cointegrating time-varying smooth transition regression model; seasonal unit-root test; Chinese economy |
| JEL: | C51 E41 O11 P24 P52 |
| Date: | 2011–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2011_027&r=mon |
| By: | Svatopluk Kapounek (Department of Finance, FBE MENDELU in Brno) |
| Abstract: | The author focuses on the current problems of the common monetary policy implementation in the Eurozone in context of output stabilization function. The author focuses on the money demand function stability and its estimation. The stable money demand function ensures that the money supply would have predictable impact on the macroeconomic variables such as inflation and real economic growth. The instability is described by Poskeynesianś assumptions of money endogeneity. Although central banks may have certain control over the money supply, they cannot fix the stock of money in a country. According to the Postkeynesianś assumptions, the enterprises do not need ex ante stock of savings in order to carry out investment decisions. The causality is directed from economic activity to money demand. Interaction between the money demand and supply is arranged by multiplier effect of deposits. |
| Keywords: | monetary transmission mechanism, money endogeneity, European integration process, Post- Keynesian economics |
| JEL: | E5 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:men:wpaper:12_2011&r=mon |
| By: | Park, Yung Chul (Asian Development Bank Institute); Song, Chi-Young (Asian Development Bank Institute) |
| Abstract: | The purpose of this paper is to reexamine the exchange rate policy of the Republic of Korea, and its role in promoting financial and monetary cooperation in East Asia in the wake of the 2008 global financial crisis. The Republic of Korea would not actively participate in any discussion of establishing a regional monetary and exchange rate arrangement as it is expected to maintain a weakly managed floating regime. The People’s Republic of China (PRC) has been fostering the yuan as an international currency, which will lay the groundwork for forming a yuan area among the PRC; the Association of Southeast Asian Nations (ASEAN); Hong Kong, the PRC; and Taipei,China. Japan has shown less interest in assuming a greater role in East Asia’s economic integration due to deflation, a strong yen, slow growth, and political instability. Japan would not eschew free floating. These recent developments demand a new modality of monetary cooperation among the Republic of Korea, Japan, and the PRC. Otherwise, ASEAN+3 will lose its rationale for steering regional economic integration in East Asia. |
| Keywords: | exchange rate policy; republic of korea; financial monetary cooperation; east asia; global financial crisis; regional economic integration |
| JEL: | F30 F40 |
| Date: | 2011–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0314&r=mon |
| By: | Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola |
| Abstract: | Recent developments in macroeconomics resurrect the view that welfare costs of inflation arise because the latter acts as a tax on money balances. Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. Bringing these seemingly unrelated aspects together in a stylized general equilibrium model, we find a disciplining effect of a positive inflation target on the wage markup and identify a long-term trade-off between inflation and output. This has important policy implications, ranging from the opportunity of revising the target in response to shocks, to the possibility of exploiting inflation as a tool to increase tax revenues via its employment- enhancing effect. |
| Keywords: | trend inflation, long-run Phillips curve, inflation targeting, real money balances |
| JEL: | E52 E58 E24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0081&r=mon |
| By: | Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola |
| Abstract: | Empirical contributions show that wage re-negotiations take place while expiring contracts are still in place. This is captured by assuming that nominal wages are pre-determined. As a consequence, wage setters act as Stackelberg leaders, whereas in the typical New Keynesian model the wage-setting rule implies that they play a Nash game. We present a DSGE New Keynesian model with pre-determined wages and money entering the representative household's utility function and show how these assumptions are sufficient to identify an inverse relationship between the inflation target and the wage markup (and thus employment) both in the short and the long run. This is due to the complementary effects that wage claims and the inflation target have on money holdings. Model estimates suggest that a moderate long-run inflation rate generates non-negligible output gains. |
| Keywords: | E52, E58, J51, E24 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0079&r=mon |
| By: | Mark A. Carlson; Jonathan D. Rose |
| Abstract: | This paper examines the mechanism through which banking sector distress affects the availability of credit. We use the experience of the United States during the Great Depression, a period of intense bank distress, to conduct our analysis. We utilize previously neglected data from a 1934 survey conducted by the Federal Reserve System of both banks and Chambers of Commerce regarding the availability of credit, and examine which aspects of the banking system collapse affected credit availability as indicated by the survey. A number of scholars have posited different ways that bank distress constrained credit availability and impacted economic activity during the 1930s; however, the empirical evidence regarding these channels is modest. In this study, we find that bank failures had the most dominant impact, but there is also some evidence for the importance of funding constraints from deposit outflows and of protracted deposit liquidation. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2011-38&r=mon |