The information content of money in forecasting euro area inflation

This article contributes to the debate on the role of money in monetary policy by analysing the information content of money in forecasting euro-area inflation. We compare the predictive performance within and among various classes of structural and empirical models in a consistent framework using Bayesian and other estimation techniques. We find that money contains relevant information for inflation in some model classes. Money-based New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models and Vector Autoregressions (VARs) incorporating money perform better than their cashless counterparts. But there are also indications that the contribution of money has its limits. The marginal contribution of money to forecasting accuracy is often small, money adds little to dynamic factor models, and it worsens forecasting accuracy of partial equilibrium models. Finally, nonmonetary models dominate monetary models in an all-out horserace.     

Wealth effects on money demand in the euro area

We investigate the determinants of money demand (M3) in the euro area, considering that this variable remains an important co-determinant of monetary policy making by the European Central Bank. Regressing the real stock of M3 on real GDP, interest rates and wealth variables (real housing and stock prices) within an error-correction framework provides evidence of positive wealth effects on money demand in the long run. Correcting for this wealth effect, money demand in the euro area has grown almost exactly in line with the official reference value of 4 1/2% per annum. This article builds on research that was conducted in preparation of the annual OECD Economic Survey of the euro area and reported in Boone et al. (2004). The authors thank their colleagues in the Economics Department and the European Central Bank and two anonymous referees for their valuable comments. The authors assume full responsibility for any remaining errors and omissions. The opinions expressed in this article do not necessarily represent those of the OECD or its member countries     

The transmission of euro area monetary policy to financially euroized countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one-third of all euro retail rates in euroized countries of central, eastern, and south-eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.     

The money demand and the loss of interest for the euro in Romania

We generalize a money demand micro-founded model to explain Romanians’ recent loss of interest for the euro. We show that the reason behind this loss of interest is a severe decline in the relative degree of the euro liquidity against that of the Romanian leu. Our empirical findings also suggest that the two currencies are rather complements than substitutes, providing thus evidence for a reduced level of monetary integration of Romania with the Euro area. These results put into question the interest for the euro adoption in the next period.     

Fiscal deficits,monetary reform and inflation stabilization in romania

Developing countries have witnessed an increase in foreign bank participation during the last decade. Using bank level data for the period 1991–2001, we examine the influence of foreign banks on the financing of small firms in Tanzania. Despite dominating the banking sector, results suggest that the financing of small firms by foreign banks is insignificant compared to domestic banks. Clearly, there is a need for a new approach to policy that will encourage significant foreign bank lending to small firms.     

Post-crisis business investment in the euro area and the role of monetary policy

ABSTRACT

Business investment in the euro area strongly declined during the Global Financial Crisis and the Sovereign Debt Crisis. It has not yet rebounded to its pre-crisis trend despite the very expansionary monetary policy measures of the ECB. We analyse the sluggish recovery in business investment in the euro area and the role of monetary policy in three steps. We investigate the main factors that have impeded business investment since the Global Financial Crisis. We empirically analyse how business investment has developed compared to typical patterns during other financial crises. Based on these results, we then discuss how effective monetary policy has been in stimulating business investment since the Global Financial Crisis. We conclude that business investment in the euro area has developed broadly in line with typical post-crisis patterns. Monetary policy significantly contributed to stabilize business investment at the beginning of the crises. In the aftermath of the crises, however, there seems to be little scope for monetary policy to further stimulate investment.     

Money velocity and asset prices in the euro area

Monetary growth in the euro area has exceeded its target since several years. At the same time, the money demand function seems to be increasingly unstable if more recent data are used. If the link between money balances and the macroeconomy is fragile, the rationale of monetary aggregates in the ECB strategy has to be doubted. In fact, a rise in the income elasticity after 2001 can be observed, and may reflect the exclusion of real and financial wealth in conventional specifications of money demand. This presumption is explored by means of a cointegration analysis. To separate income from wealth effects, the specification in terms of money velocity is preferred. Evidence for the presence of wealth in the long run relationship is provided. In particular, both stock and house prices have exerted a negative impact on velocity after 2001 and lead to almost identical equilibrium errors. The extended error correction model is stable over the entire sample period and survive a battery of specification tests.

Asymmetric monetary policy rules for the euro area and the US

We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above than below the central bank’s aim. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute optimal simple rules for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades.     

Long run money demand in the EU: Evidence for area-wide aggregates

Long-run properties of EU-wide money aggregates are analysed. For each of the three aggregates considered-Currency, M1 and M3H-it is possible to obtain cointegrating relationships with GDP and interest rates (long or short term market interest rates). Results are not improved when traditional aggregates, obtained by aggregating existing national aggregates, are extended by the inclusion of various measures of Cross-Border Holdings. Specific attention is also paid to aggregation issues and the relative performance of area-wide and national equations. The results show that aggregation bias is not a major problem and that the relatively good area-wide performance is largely a consequence of a statistical averaging effect.gf.gfagan.hg.eunet.deBoth authors are in the Stage Three Division of the Monetary, Economics and Statistics Department of the European Monetary Institute. The authors would like to thank colleagues at the EMI and participants at an EMI conference on EU money demand, held in 1995, for helpful comments and suggestions. Comments received from participants in the 1997 Econometric Society European Meeting and in the Workshop on Money Demand at Berlin Humboldt Universität in 1997 are also gratefully acknowledged. The final version benefited from comments by the editors and two anonymous referees. Opinions expressed in the paper are only those of the authors and do not necessarily represent the views of the EMI.     

Assessing monetary policy in the euro area: a factor-augmented VAR approach

In order to overcome the omitted information problem of small-scale Vector Autoregression (VAR) models, this study combines the VAR methodology with dynamic factor analysis and assesses the effects of monetary policy shocks in the euro area in the period during which there is a single monetary policy. Using the Factor-Augmented Vector Autoregressive (FAVAR) approach of Bernanke et al. (2005 Bernanke, B, Boivin, J and Eliasz, P. 2005. Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach. The Quarterly Journal of Economics, 120: 387–422. [Crossref], [Web of Science ®] , [Google Scholar]), we summarize the information contained in a large set of macroeconomic time series with a small number of estimated factors and use them as regressors in recursive VARs to evaluate the impact of the nonsystematic component of the European Central Bank's (ECB's) actions. Overall, our results suggest that the inclusion of factors in the VAR allows us to obtain a more coherent picture of the effects of monetary policy innovations, both by achieving responses easier to understand from the theoretical point of view and by increasing the precision of such responses. Moreover, this framework allows us to compute impulse-response functions for all the variables included in the panel, thereby providing a more complete depiction of the effects of policy disturbances. However, the extra information generated by the FAVAR also delivers some puzzling responses, in particular those relating to exchange rates.     

The velocity behavior and information content of Divisia monetary aggregates

Monetary aggregates are commonly sums, although summation quantity aggregation is disreputable. We compare summation versus Divisia aggregation of monetary assets. The velocity behavior and the information content of the Divisia index are superior to those of the summation index.     

The information content of monetary aggregates in the U.K.

This paper presents some results evaluating the information content of several monetary aggregates, formed as simple sums or as Divisia quantity indices. The former tend to dominate the latter; there is considerable support for the new, broader, official monetary aggregate PSL2.     

Measures of underlying inflation in the euro area: assessment and role for informing monetary policy

The paper evaluates the 24-month-ahead inflation forecasting performance of various indicators of underlying inflation and structural models. Measures derived using the generalized dynamic factor model (GDFM) overperform other measures over the monetary policy horizon and are leading indicators of headline inflation. Trimmed means, although weaker than GDFM indicators, have good forecasting performance, while indicators by permanent exclusion underperform but provide useful information about short-term dynamics. The forecasting performance of theoretically-founded models that relate monetary aggregates, the output gap, and inflation improves with the time horizon but generally falls short of that of the GDFM. A composite measure of underlying inflation, derived by averaging the statistical indicators and the model-based estimates, improves forecast accuracy by eliminating bias and offers valuable insight about the distribution of risks.     

全球流动性膨胀的历史和逻辑

当代的全球流动性膨胀根源于布雷顿森林体系崩溃后的国际货币体系安排,黄金非货币化为美国向世界提供大量美元敞开了大门,美国通过持续的经常项目逆差对外提供美元流动性.全球流动性膨胀可分为三个层次,美国增加一美元的对外债务,将导致世界扩张大致两到三倍的流动性.中国作为经常项目和资本项目的双顺差国,全球流动性的输入直接导致了人民币面临国际贬值、国内升值的双重压力.     

The enlargement of the euro area: differences in relative inflation

This paper investigates the structural determinants of relative inflation (i.e. the inflation of non‐tradables vs tradables) in the context of overall inflation differentials in the EU. The analysis is based on the Bergstrand theoretical model. This framework incorporates three alternative hypotheses of relative inflation (Harrod–Balassa–Samuelson, relative factors endowment, and demand effects). Due to the lack of reliable data on capital stocks only a curtailed version of the model is tested here empirically. The various specifications of the model are estimated for the majority of EU countries, using the Pedroni panel group mean FMOLS estimator. In general, relative labour productivity and demand factors turn out to be significant and correctly signed, though evidence in favour of the latter effect seems to be less robust. In addition, differences in the determination of relative prices between the new and old EU Member States are found. They seem to be consistent with theoretical considerations and the transition phenomenon. The estimation results are very sensitive to the definition of non‐tradables. The paper also discusses policy implications for overall inflation, stemming from relative price models. It questions the usefulness of relative inflation models for the analysis of overall inflation differentials and practical policy decisions.     

Examining asymmetries in the transmission of monetary policy in the euro area: Evidence from a mixed cross-section global VAR model

I estimate the transmission of a common euro area monetary policy shock across individual euro area economies. To do so, I develop a global VAR model in which all euro area economies are included individually while, at the same time, their common monetary policy is modelled as a function of euro area aggregate output growth and inflation. The results suggest that the transmission of monetary policy across euro area economies displays asymmetries, and that, in line with economic theory, these are driven by differences in economies׳ structural characteristics. In particular, euro area economies in which a higher share of aggregate output is accounted for by sectors servicing interest rate sensitive demand exhibit a stronger transmission of monetary policy to real activity. Similarly, even though the evidence is less conclusive, euro area economies which feature more real wage and/or fewer unemployment rigidities also appear to display a stronger transmission of monetary policy to real activity.     

The role of labor markets for euro area monetary policy

In this paper, we explore the role of labor markets for monetary policy in the euro area in a New Keynesian model in which labor markets are characterized by search and matching frictions. We first investigate to which extent a more flexible labor market would alter the business cycle behavior and the transmission of monetary policy. We find that while a lower degree of wage rigidity makes monetary policy more effective, i.e. a monetary policy shock transmits faster onto inflation, the importance of other labor market rigidities for the transmission of shocks is rather limited. Second, having estimated the model by Bayesian techniques we analyze to which extent labor market shocks, such as disturbances in the vacancy posting process, shocks to the separation rate and variations in bargaining power are important determinants of business cycle fluctuations. Our results point primarily towards disturbances in the bargaining process as a significant contributor to inflation and output fluctuations. In sum, the paper supports current central bank practice which appears to put considerable effort into monitoring euro area wage dynamics and which appears to treat some of the other labor market information as less important for monetary policy.     

A monetary vector error correction model of the Euro area and implications for monetary policy

In this paper, a vector error correction model for Euro area money, prices, output, long-term interest rate and short-term interest rate with three identified cointegration relations is specified. It is shown that Euro area money and prices can be considered as variables that are integrated of order two or I(2), that is, they have to be differenced twice to become stationary. Accordingly, the relation between money, prices and other macroeconomic variables is analyzed in an econometric framework which is suited for the analysis of I(2)-variables. Monetary policy implications are derived from the estimated system.First revision received: May 2002/Final revision received: May 2003I thank Helmut Lütkepohl, Jürgen Wolters, and two anonymous referees for helpful comments. Financial support from the Deutsche Forschungsgemeinschaft (SFB 373) is gratefully acknowledged.     

The effect of the market-based monetary policy transparency index on inflation and output variability

This paper examines empirically the effectiveness of the Federal Reserve’s policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011 Kia, A. 2011. “Developing a Market-based Monetary Policy Transparency Index: Evidence from the United States.” Economic Issues 16 (2): 53–79. [Google Scholar]) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve’s transparency (i.e. market participants consider the Federal Reserve’s actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank’s transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.     

The failure of the monetary model of exchange rate determination

In this article, we test three popular versions of the monetary model (flexible price, forward-looking and real interest differential models) for the OECD member countries by applying Johansen cointegration technique. Based on country-by-country analysis, we conclude that monetary models do not provide the expected results. We reveal several shortcomings of the models and examine the building blocks of the fundamental version. Although researchers always blame the deviations from purchasing power parity as the reason for the failure of the monetary model, our analysis indicates that invalidity of Keynesian money demand function is also responsible for unfavourable results.