Selden's model of inflation: A reexamination

Selden has presented a model which appears to offer strong support for a monetary explanation of inflation. Using bivariate regression to relate percentage changes in quarterly prices to percentage changes in M1 in previous quarters, he finds values of R² from 0.70 to 0.88 and t-statistics of 12 or more when using data for the U.S., Canada, Belgium, and the Netherlands. Unfortunately, the unreported DW statistics for the regressions range from 0.30 to 0.46. Reestimated with a correction for autocorrelation, the t-statistics collapse, values of rho are almost unity, and there is little evidence to support a monetary explanation of inflation.     

The changing international transmission of U.S. monetary policy shocks: Is there evidence of contagion effect on OECD countries

We study the changing international transmission of U.S. monetary policy shocks to 14 OECD countries over the period 1981Q1–2010Q4. The U.S. monetary policy shock is defined as unexpected change in Effective Federal Funds Rate (FFR). We use a time varying parameter factor augmented VAR approach (TVP-FAVAR) to study the EFFR shocks together with a large data set of 265, major financial, macroeconomic and trade variables for U.S., Canada, France, Germany, Italy, UK, Japan, Australia, Spain, Norway, Sweden, Switzerland, Finland and New Zealand. Our main findings are as follows. First, negative U.S. monetary policy shocks have considerable negative impact on GDP growth in the U.S., Canada, Japan and Sweden while most of the other member countries benefits. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. We also detect a more depressed GDP over medium term in the U.S., Canada, Japan, Australia, Norway and Sweden over the recent global financial crisis. Third, the size of U.S. monetary policy shocks during financial turmoil periods were unusual than normal periods and varies overtime. The financial crisis (2008–2009) is evidenced by decline in residential investment in the U.S. and propagation of this shock to Canada, Germany, Japan, Switzerland and New Zealand over the recent period. U.S. monetary policy shocks reduce share prices in most of the OECD countries; this impact is more pronounced over the turmoil period. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.     

货币中介目标的国际比较*——基于DAG SVAR模型

学术界围绕最优货币中介目标的选择,在利率、简单加总货币量、迪维西亚货币量之间争论不休。本文基于DAG SVAR模型,分别对美国、欧元区、英国的银行间隔夜拆借利率R、简单加总货币量M2、迪维西亚货币量D2对物价P、产出Y影响的相对重要性进行实证比较。结果发现,在美国,M2对Y的影响最大,R对P的影响最大;在欧元区,D2对Y的影响最大,M2对P的影响最大;在英国,M2对Y和P的影响都最大。总的来说,若货币最终目标是经济增长,则美国、英国的最优中介目标是简单加总货币量,欧元区的最优中介目标是迪维西亚货币量;若货币最终目标是物价稳定,则美国的最优中介目标是利率,欧元区、英国的最优中介目标是简单加总货币量。由此可见,对于不同的经济体或者不同的货币最终目标,最优中介目标的选择可能有所不同。本文的研究结论在一定程度上是对“利率普遍优于货币量,迪维西亚货币量普遍优于简单加总货币量”学术共识的反向补充。     

Money growth,uncertainty and macroeconomic activity: a multivariate GARCH analysis

The impact uncertainty has on money growth has received much attention in recent years and is an issue of critical importance to central banks, particularly for those, such as the European Central Bank (ECB), which place a strong emphasis on monetary analysis in monetary policy formulation. Some recent papers examining this issue use ad hoc estimates and measure variability rather than uncertainty. We employ a multivariate GARCH model, which measures uncertainty by the conditional variance of the data series, to investigate whether macroeconomic uncertainty and monetary uncertainty Granger-cause changes in real money. The estimated model also allows us to investigate how monetary uncertainty impacts economic activity. We find that macroeconomic uncertainty impacts positively on US real M2 growth over a two-year horizon but that monetary uncertainty does not cause changes in real M2. Instead, our results indicate that real money growth causes monetary uncertainty. Monetary uncertainty is found to have a negative effect on real economic activity and on macroeconomic uncertainty. We conclude by discussing the implications of these results and the methodological approach used for institutions such as the ECB that give monetary analysis a prominent role in their monetary policy strategy.     

Not all international monetary shocks are alike for the Japanese economy

This paper examines the influence of monetary aggregates shocks in the U.S., China and the Euro area on Japan. China's monetary expansion has significant effects on Japan's economy that are quite different from those of the U.S. and Euro area. In line with the implications of the Mundell–Fleming model when there are capital controls in place, Chinese monetary expansion is found to primarily affect Japan through trade. The income absorption effect of China's monetary expansion is substantial for Japan. China's monetary expansion results in significant increases in Japan's industrial production, exports and inflation, and decreases in the trade-weighted yen. After 24 months, monetary shocks in China forecast 20% of the variation in Japan's real trade balance. In contrast, U.S. monetary expansion results in contraction in Japan's industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models and a factor-augmented model are estimated to establish robustness of results.     

Monetary Policy Regime Shifts and Uncovered Interest Parity Revisited: The Euro–US Dollar Exchange Rate

ABSTRACT

To explore possible sources of the well-documented uncovered interest parity (UIP) violation in the foreign exchange market, this paper scrutinizes structural changes in monetary reactions to inflationary pressure in the conventional approaches to nominal exchange rate and examines how this small but important change has an effect on the empirical implications of the UIP condition. In addition to some salient features found in the euro exchange rate, by introducing occasional monetary policy regime shifts into an otherwise standard open-economy dynamic general equilibrium model, we found some important findings that potentially help better understand exchange rate dynamics. During the entire sample period, 1999:M1–2014:M8, exchange rate disconnect puzzle still exists. However, sub-sample analysis suggests that relatively passive monetary reaction implying less frequent intervention by monetary authority tends to be more consistent with the UIP relation. Simulation results support the empirical regularities.     

Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-switching vector autoregressive model

This paper examines asymmetries in the impact of monetary policy on the middle segment of the South African housing market from 1966:M2 to 2011:M12. We use Markov-switching vector autoregressive (MS-VAR) model in which parameters change according to the phase of the housing cycle. The results suggest that monetary policy is not neutral as house price growth decreases substantially with a contractionary monetary policy. We find that the impact of monetary policy is larger in bear regime than in bull regime; indicating the role of information asymmetry in reinforcing the financial constraint of economic agents. As expected, monetary policy reaction to a positive house price shock is found to be stronger in the bull regime. This suggests that the central bank reacts more in bull regime in order to prevent potential crisis related to the subsequent bust in house prices bubbles which are more prominent in bull markets. These results substantiate important asymmetries in the dynamics of house prices in relation to monetary policy, vindicating the advantages of generating regime dependent impulse response functions.     

Money,Interest Rate and Foreign Exchange Rate As Indicator Variables Of Monetary Policy

Since monetary policy operations affect the ultimate targets such as real income and prices with considerable time lags, this papers attempts to identify the indicator variable of monetary policy in Korea by using autoregression tests, variance docompositions of VAR forecasts and cointegration analyses. The results show that in Korea unlike the U.S., a broad concept of money, interest rate and foreign exchange rate, taken together, could serve as the indicator variables. In particular, M3, But not M2 nor MCT, is significantly related to real income both in the short-run and in the long-run. Such a finding rejects the practice of controlling either M2 or MCT which the Korean monetary authority had exercised before implementing the recent IMF financial-reform program. [E5]     

Monetary targeting in the Netherlands: an application of co-integration tests

There are two criteria to choose an intermediate variable for monetary targeting. First, the money demand function needs to be stable and second, the monetary authorities should be able to control the target variable given the available instruments. In this paper we examine whether M1 and M2 in the Netherlands fulfil the first requirement, i.e. we investigate whether a stable relationship exists between these monetary variables and key macroeconomic variables. Co-integration techniques are used which are very well suited for this purpose. Monetary policy in the Netherlands has been directed towards the growth rate of broad money (M2). The present findings do not suport the choice of M2 as an intermediate target for monetary policy in the Netherlands. A stable long-term relationship between M2 and real NNP and Long-and short-term interest rates does not exist. The results for M1 are considerbly better, though not favourable at all scores. The estimated moeny demand function for M1 is a good indicator for monetary policy, since the Dutch central bank probably cannot control the growth rate of M1.     

Have budget deficits and money growth caused changes in interest rates and exchange rates in Canada?

This paper examines empirically the causal impact of monetary and fiscal policy on exchange rates and interest rates in Canada using a six-by-six vector autoregressive (VAR) model with variable lag structure. The results suggest that changes in the base money and budget deficits have no direct causal effects on exchange rates, a finding consistent with the monetary explanation that exchange rates follow a random walk. Also consistent with the Ricardian equivalence hypothesis, the results reveal no direct effect of budget deficits on interest rates, casting doubts on the crowding-out phenomenon for Canada. In contrast, changes in the base money unidirectionally cause changes in interest rates, implying some support for using interest rates as a key intermediate policy target for the Canadian monetary authorities.     

The evolution of inflation expectations in Canada and the US

We model inflation forecasts as monotonically diverging from an estimated long‐run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster‐level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989–1998 to 2.2% for 2004–2013. By contrast, it has remained close to 2% since the mid‐1990 for Canadian forecasts. Second, the variance of estimates of the long‐run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada's adoption of inflation targets. And third, forecasters in Canada look much more alike than those in the US in terms of the weight that they place on the anchor. One explanation for these results is that an explicit inflation‐targeting regime (Canada) provides for less uncertainty about future monetary policy actions than a monetary policy regime where there was no explicit numerical inflation target (the US before 2012) to anchor expectations.     

The effect of relative monetary surprises on spot exchange rates

This paper examines the hypothetical relationship between US and Canadian monetary surprises and the behaviour of US-Canadian spot exchange rates. Past studies have found that positive US monetary surprises were correlated with an appreciating US dollar in foreign exchange markets.

In this paper, it is argued that monetary surprises in the US must be measured relative to foreign monetary innovation (rather than in the conventional absolute sense) when examining their impact on exchange markets. Rational investors consider expected returns and risk differentials in the US and local markets jointly in determining whether to be net buyers or sellers of US dollars. The monetary actions of both the Fed and the Central Bank operating in the local (foreign) economy will be considered in the foreign exchange market. Because of the close synchronization between the weekly money supply announcements in Canada and the US, it is possible to examine whether the relative or absolute US monetary surprise is more significant in the foreign exchange market. The empirical findings provide considerable support for the relative over the absolute measure of US monetary innovations. With monetary innovations measured in relative terms, the empirical results provide support for the policy reaction over the inflation expectation hypothesis.     

On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?

Usually, a monetary union is not considered feasible between countries if the correlations of shocks are positive but weak. This may not be so if the country with the larger output gap converges to full-employment equilibrium faster than the country with the smaller gap. We argue that common monetary policy can be destabilizing when countries' responses to non-monetary shocks are perfectly symmetric with a correlation of 1 but exhibit differing investment sensitivities to the real interest rate. We use Canada, Mexico and the United States to test the feasibility of a monetary union by documenting whether: 1) gross investments in Canada and Mexico are equally responsive to the real fund rate, and 2) Canada and Mexico's output growth and inflation respond differently to US monetary policy shocks and oil price shocks. This approach implicitly dictates whether the shocks themselves are symmetric or asymmetric. Using quarterly data and SVAR methodology, we conducted two layers of analysis. We estimated SVARs for the periods 1970–2008, 1970–1990 and 1991–2008 to find that a monetary union is feasible between Canada and the US for the first two sample periods. For Canada and Mexico, we find similar responses of output growth to US monetary policy shocks. We conducted further robustness tests by estimating two identified VARs with common US variables and oil prices for Canada and Mexico to assess commonality in responses to shocks with the US. These results affirm that a monetary union is also feasible between Canada and the US.     

Nonlinearity and time-variation in the monetary model of exchange rates

In this paper we analyze the existence of nonlinear relationships between macroeconomic fundamentals and exchange rates for some major industrialized countries using an error correction model with time-varying parameters for the post Bretton Woods period. We find that inflation rate differentials with respect to the US inflation rate are the driving forces for the nonlinear relationships in the monetary model for exchange rates for the data from Germany, the UK, Canada, France and Italy. In addition to the variables in the traditional monetary model, also the relative interest rates are relevant in determining exchange rate changes only when the inflation differentials are either very large or very small. In contrast to previous studies we find significant long-run effects in the error correction representation of the monetary model for exchange rates when the nonlinear dynamics is taken into account in the analysis.     

Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada

The objective of this study is to identify monetary policy reactions in a nonlinear, structural vector autoregression (VAR) framework, with regime-switching contemporaneous policy responses in a small open economy. The key finding is that monetary policy in Canada responds contemporaneously to disturbances in the real exchange rate, as well as the output gap and inflation. The Bank of Canada is found to have much larger responses to exchange rate fluctuations during volatile periods than more stable periods. However, the Bank is found statistically to have a relatively linear reaction function with symmetric responses to output and inflation shocks across interest rate regimes. The estimates for the contemporaneous responses to the output gap in both regimes are found to be virtually identical to the 0.5 weights in the original Taylor rule for the United States, while the responses to inflation surprises are slightly smaller. Overall, the Bank of Canada is found to have operated within the range of optimal responses suggested by small-scale structural models in the normative literature on monetary policy rules.     

A decomposition of the predictive content of the term structure for output growth in Canada

The purpose of this study is to identify the underlying economic disturbances that drive the predictive content of the term structure for future output growth and those that may distort its information content. The study uses a structural vector autoregressive (VAR) model of a small and open economy for Canada that takes into account its relationship with financial markets in the USA and that Canada is a relatively large exporter of commodities. The model is used to decompose the sources of the variation of the slope of the yield curve and the correlation between the term spread and output growth. Monetary policy disturbances in both Canada and the USA, as well as short-term interest rates, are found to trigger excessive volatility in short-term rates and the term spread that do not contribute to the predictive content of the term spread for future output growth at horizons relevant for monetary policy analysis. However, innovations in output growth, inflation and other macroeconomic variables do not distort the forecast power of the term spread. Unlike the evidence for the USA, disturbances in nominal long-term yields are found to contribute about the same amount to the predictive content of the term spread as unexpected movements in monetary policy.     

The evolution of the monetary policy regimes in the U.S.

The existing literature on U.S. monetary policy provides no sense of a consensus regarding the existence of a monetary policy regime. This article explores the evolution of U.S. monetary policy regimes via the development of a Markov-switching model predicated on narrative and statistical evidence of a monetary policy regime. We identified five regimes for the period spanning 1956:I?C2005:IV and they roughly corresponded to the Chairman term of the Federal Reserve, except for the Greenspan era. More importantly, we demonstrate that the conflicting results regarding the response to inflation for the pre-Volcker period in the existing literature is not attributable to the different data but due to different samples, and also provided an insight regarding the Great Inflation??namely, that the near non-response to inflation in the early 1960s appears to have constituted the initial seed of the Great Inflation. We also find via analysis of the Markov-switching model for the U.S. real interest rate, that the regime changes in the real interest rate follow the regime changes in monetary policy within 2?years and that the evolution of real interest rate regimes provides a good explanation for the conflicting results regarding the dynamics of real interest rate.     

Do central banks respond to exchange rate movements? Some new evidence from structural estimation

This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand, and the United Kingdom. We develop and estimate a structural general equilibrium model, in which monetary policy is represented as a simple rule and exchange rate pass‐through is incomplete due to the presence of local currency pricing and distribution services. We find that the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of England have not adjusted interest rates in response to exchange rate movements since the adoption of inflation targeting, while our model selection results for Australia are less clear.     

The Well–Being of Young Canadian Children in International Perspective: A Functionings Approach

The goal of this paper is to compare the well–being of young children in Canada, Norway and the United States using Sen's (1992) "functionings" perspective. We compare children cross–nationally in terms of ten "functionings" (low birth–weight; asthma; accidents; activity limitation; trouble concentrating; disobedience at school; bullying; anxiety; lying; hyperactivity). If we compare young children in Canada and the U.S. in terms of their functionings, there is not a clear ranking overall. Canadian children are better off for four of nine comparable outcomes; U.S. children are better off for two outcomes; Canadian and U.S. children are statistically indistinguishable for three outcomes. If we compare child functionings in Canada or the U.S. with those experienced in Norway, it is clear that Norwegian children fare better. There is not a single case in which children in either Canada or the U.S. have better outcomes than Norwegian children.     

Business cycles and economic crisis in Greece (1960–2011): A long run equilibrium analysis in the Eurozone

Empirical studies find that fluctuations in output and other macroeconomic aggregates are positively related across countries. Economic theory focuses on two main explanations: common shocks and common transmission mechanisms. In this paper, we conduct an empirical analysis of the international influences, specifically from the U.S. and E.U. on the Greek business-cycle. First, we provide an in-depth analysis of the Greek economy, summarizing crucial aspects and trends by means of relevant econometric techniques such as business cycles extraction and periodization based on filtering, spectral analysis and causality tests. Next, we assess the long-run equilibriums of the Greek economy with the rest of the E.U. countries and the U.S. economy by means of a Vector Error Correction model. Our results imply a significant shift in the long-run equilibriums of the Greek economy towards increasing convergence rates with the U.S. economy after the implementation of the common monetary policy and increasing convergence rates towards the peripheral countries of the E.M.U. Also, the Greek GDP fluctuations are found to be caused, to a certain extent, by the EMU and US fluctuations, implying a transmission mechanism of business cycles from the EMU and the US to the Greek economy.