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on Monetary Economics |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A |
| Abstract: | This paper examines the influence of monetary shocks in China on the U.S. economy over 1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through effects in demand for imports, particularly that of commodities. China’s growth influences world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. China’s monetary expansion is also associated with significant decreases in the trade weighted value of the U.S. dollar that is due to the operation of a pegged currency. China manages the exchange rate and has extensive capital controls in place. In terms of the Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a managed exchange rate permit China to pursue an independent monetary policy with consequences for the U.S. |
| Keywords: | International monetary transmission, China’s monetary aggregates |
| JEL: | E0 E4 E41 F4 F41 |
| Date: | 2013–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46961&r=mon |
| By: | Jagjit S. Chadha; Luisa Corrado; Sean Holly |
| Abstract: | Prior to the financial crisis mainstream monetary policy practice had become disconnected from money. We outline the basic rationale for this development using a simple model of money and credit in which we explore the conditions under which money matters directly for the conduct of policy. Then, drawing on Goodfriend and McCallum's (2007) DSGE model, we examine the circumstances under which money becomes more closely linked to inflation. We find that money matters when the variance of the supply of lending dominates productivity and the velocity of money demand. This is because amplifying the role of loans supply leads to an expansion in aggregate demand, via a compression of the external finance premium, which is inflationary. We consider a number of alternative monetary policy rules, and find that a rule which exploits the joint information from money and the external finance premium performs best. |
| Keywords: | money; DSGE; policy rules; external finance premium |
| JEL: | E31 E40 E51 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1306&r=mon |
| By: | Tiziana Assenza (Catholic University of Milan); Peter Heemeijer (University of Amsterdam, and ABN AMRO); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam) |
| Abstract: | The way in which individual expectations shape aggregate macroeconomic variables is crucial for the transmission and effectiveness of monetary policy. We study the individual expectations formation process and the interaction with monetary policy, within a standard New Keynesian model, by means of laboratory experiments with human subjects. Three aggregate outcomes are observed: convergence to some equilibrium level, persistent oscillatory behavior and oscillatory convergence. We fit a heterogeneous expectations model with a performance-based evolutionary selection among heterogeneous forecasting heuristics to the experimental data. A simple heterogeneous expectations switching model fits individual learning as well as aggregate macro behavior and outperforms homogeneous expectations benchmarks. Moreover, in accordance to theoretical results in the literature on monetary policy, we find that an interest rate rule that reacts more than point for point to inflation has some stabilizing effects on inflation in our experimental economies, although convergence can be slow in presence of evolutionary learning. |
| Keywords: | Experiments, New Keynesian Macro Model, Monetary Policy, Expectations, Heterogeneity |
| JEL: | C91 C92 D84 E52 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013016&r=mon |
| By: | Riccardo De Bonis (Bank of Italy) |
| Abstract: | This paper summarizes the results attained by the Eurosystem in harmonizing the statistics used for the conduct of monetary policy. Since the creation of the euro area, in January 1999, significant progress has been made in the harmonization of data on banks’ balance sheets, central banks and money market funds; on interest rates on deposits and loans; on non-bank financial intermediaries, especially mutual funds and financial vehicle corporations engaged in securitization; and on financial accounts. The paper also outlines the debate on statistical information gaps that came to the fore after the 2007-08 financial crisis. |
| Keywords: | banks, money, credit, interest rates, financial accounts, statistics and the financial crisis |
| JEL: | G21 G23 C8 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_145_13&r=mon |
| By: | Simone Meier |
| Abstract: | This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford’s (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:145&r=mon |
| By: | Keyra Primus |
| Abstract: | This paper examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:183&r=mon |
| By: | Petreski, Marjan |
| Abstract: | The objective of this paper is to assess if inflation targeting post-communist economies performed better, in terms of output growth, during the crisis than their non-inflation targeting counterparts. The paper also puts the issue in the context of the preconditions of inflation targeters to adopt this regime. 26 post-communist economies of Central and Eastern Europe and the Commonwealth of Independent States are analyzed during the ongoing economic crisis. Results suggest that inflation targeters of those countries performed worse than non-inflation targeters. The growth decline in inflation targeters post-communist economies has been estimated to be deeper by about four percentage points than that in non-inflation targeters. The study finds very limited role of the preconditions for growth decline. Only the lower amount of monetary financing of the budget may have contributed in inflation-targeting countries to have gone through the crisis better. |
| Keywords: | inflation targeting, pre-conditions for adoption, post-communist economies |
| JEL: | E42 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47018&r=mon |
| By: | Volha Audzei |
| Abstract: | Investor sentiment proved to be an important factor during the recent financial and current euro crises. At the same time many existing general equilibrium models do not account for agents' expectations, market volatility, or over-pessimism of investors' forecasts. In this paper we incorporate into the DSGE model a financial sector populated by a continuum of banks with heterogeneous forecasts. We simulate the model with expectational shocks calibrated by the values observed during the financial crisis. Our results suggest that expectational shocks alone could generate a recession of a magnitude comparable to the recent crisis. We then conduct a simple exercise to mimic the credit support policy of a central bank. The results indicate that without influencing agents' expectations, the liquidity provision alone reduces the magnitude of the recession, but neither stops it nor shortens its duration. One reason for low ec ciency of the policy in our model is that banks hoard the liquidity provided by a central bank. |
| Keywords: | financial intermediation; expectations; DSGE; liquidity provision; |
| JEL: | E22 E32 G01 G18 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp477&r=mon |
| By: | Mirdala, Rajmund |
| Abstract: | Exchange rate regimes evolution in the European transition economies refers to one of the most crucial policy decision in the beginning of the 1990s employed during the initial stages of the transition process. During the period of last two decades we may identify some crucial milestones in the exchange rate regimes evolution in the European transition economies. due to existing diversity in exchange rate arrangements in the European transition economies in the pre-ERM2 period there seems to be two big groups of countries - “peggers” (Bulgaria, Estonia, Latvia, Lithuania) and “floaters” (Czech republic, Hungary, Poland, Romania, Slovak republic, Slovenia). Despite the fact, there seems to be no real prospective alternative to euro adoption for the European transition economies, we emphasize disputable effects of sacrificing monetary sovereignty in the view of positive effects of exchange rate volatility and exchange rate based adjustments in the country experiencing sudden shifts in the business cycle. In the chapter we analyze effects of the real exchange rate volatility on real output and inflation in ten European transition economies. From estimated VAR model (recursive Cholesky decomposition is employed to identify structural shocks) we compute impulse-response functions to analyze responses of real output and inflation to negative real exchange rate shocks. Results of estimated model are discussed from a prospective of the fixed versus flexible exchange rate dilemma. To provide more rigorous insight into the problem of the exchange rate regime suitability we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2011. |
| Keywords: | exchange rate volatility, economic growth, economic crisis, vector autoregression, variance decomposition, impulse-response function |
| JEL: | C32 F32 F41 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46879&r=mon |
| By: | Michael D. Bordo; Angela Redish |
| Abstract: | The international gold standard of the late nineteenth century has been described as a system of ‘spontaneous order’, capturing the idea that its architects at the time were fashioning domestic monetary systems which created a system of fixed exchange rates almost as a by-product. In contrast the framers of the Bretton Woods System were intentional in building an international monetary system and so it is by advocates of designing an international monetary order. In this paper we examine the transition from spontaneous order circa 1850 to designed system and then back towards spontaneous order in the late twentieth century, arguing that it is an evolution with multiple stops and starts, and that the threads that underlie the general tendency through these hesitations are the interplay between monetary and fiscal factors and the evolution of the financial system. This transformation is embedded within deep evolving political fundamentals including the rise of democracy, nationalism, fascism and communism and two world wars. |
| JEL: | E00 N1 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19026&r=mon |
| By: | Matteo Cacciatore; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation. |
| JEL: | E24 E32 E52 F41 J64 L51 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19025&r=mon |
| By: | Adriana Cornea (University of Exeter); Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam) |
| Abstract: | In this paper we develop and estimate a behavioral model of inflation dynamics with monopolistic competition, staggered price setting and heterogeneous firms. In our stylized framework there are two groups of price setters, fundamentalists and naive. Fundamentalists are forward-looking in the sense that they believe in a present-value relationship between inflation and real marginal costs, while naive are backward-looking, using the simplest rule of thumb, naive expectations, to forecast future inflation. Agents are allowed to switch between these different forecasting strategies conditional on their recent relative forecasting performance. The estimation results support behavioral heterogeneity and the evolutionary switching mechanism. We show that there is substantial time variation in the weights of forward-looking and backward-looking behavior. Although on average the majority of firms use the simple backward-looking rule, the market has phases in which it is dominated by either the fundamentalists or the naive agents. |
| Keywords: | Inflation, Phillips Curve, Heterogeneous Expectations, Evolutionary Selection |
| JEL: | E31 E52 C22 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013015&r=mon |
| By: | Konov, Joshua Ioji / JK |
| Abstract: | Monetary Policies of expanding liquidity through bottom low interest rate; stimulus packages, quantitative easing, etc should be transmissible to the entire market (i.e. economy) for best performance. However, current markets (i.e. economies) do not posses enough market security to provide the transmissionability to reach adequate market development (i.e. economic growth). This paper theoreticizes that by mitigating of 1) the shady business practices of 2) vague personal corporate liability and 3) contract laws, 4) vague insurance and bonding laws, 5) inadequate 1) intellectual property laws, 2) environmental protection and 3) consumer protection laws, etc market marginalization in fact will enhance the market security, and improve the transmissionability and the effectiveness of the monetary policies to boost market development (i.e. economic growth). |
| Keywords: | monetary policies,transmissionability,economy,macroeconomicsmglonalization,market economics |
| JEL: | A2 E17 P4 |
| Date: | 2013–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46950&r=mon |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows. |
| JEL: | F32 F34 F36 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19038&r=mon |