The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt,Institutions, and Financial Openness*

This paper empirically examines the effect of monetary policy on exchange rates during currency crises. We find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short‐term debt; (ii) is more credible and therefore more effective in countries with high‐quality institutions; (iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature.     

Revisiting EMU's Stability Pact: A Pragmatic Way Forward

The Stability and Growth Pact is under fire. Some countriesare meeting major problems in sticking to the rules. Proposalsto reform the Pact or ditch it altogether abound. The allegedweaknesses of the Pact tend to reflect trade-offs typical ofsupra-national arrangements. This aspect has to be factoredin when considering reforms of the current fiscal rules: thereis no miracle solution. EMU without rules would be an interestingexperiment, but a risky policy option. Given the existing degreeof political integration in EMU, internal adjustment ratherthan attempting to redesign the rules from scratch appears amore suitable way forward. Redefining the medium-term budgetarytarget, improving transparency, tackling the pro-cyclical fiscalbias in good times, moving towards non-partisan applicationof the rules, and improving transparency in the data can achieveboth stronger discipline and higher flexibility.     

The quantity approach to financial integration: The Feldstein-Horioka criterion revisited

This paper applies the Feldstein-Horioka criterion, that is, the role of savings-investment correlations, to assess the degree of financial integration in the European Community. We establish a link between the Feldstein-Horioka criterion and three other criteria for financial integration: the covered, uncovered, and real interest parity condition. Subsequently, we evaluate the Feldstein-Horioka criterion for financial integration on the basis of its underlying assumptions. The paper performs both cross-section and time-series analyses of savings-investment correlations. The time-series analysis relies on the concept of cointegration. Our major finding is that the Feldstein-Horioka criterion—contrary to what is usually found in world financial markets—is able to explain an increasing degree of financial integration in the European Community.Symbols S gross national savings - I gross domestic investment - C total private and government final consumption expenditure - M import of goods and services - X export of goods and services - Y gross domestic product - CA current account of the balance of payments - GNP gross national product - NCT net current transfers from the rest of the world - NFI net factor income from the rest of the world - FCF gross fixed capital formation - ST increase in stocks - S_p gross national savings by the private sector - S_g gross national savings by the public sector - I_p gross domestic investment by the private sector - I_g gross domestic investment by the government sector - corrected for a nonzero value of the statistical discrepancy     

Daily Bundesbank and Federal Reserve Interventions

This paper reports on the results of an empirical investigation into the objectives of daily foreign exchange market intervention by the Deutsche Bundesbank and the Federal Reserve System in the U.S. dollar-Deutsche Mark market. Tobit analysis is implemented to estimate the intervention reaction functions consistently. It is found that an increase in the conditional variance in daily exchange rate returns derived from a GARCH model estimated in the paper, led the Bundesbank and the Federal Reserve to increase the volume of intervention, both in case of dollar-sales and purchases on account of their leaning against the wind policy.We are grateful to the Deutsche Bundesbank, Hauptabteilung Ausland for kindly providing, on a confidential base, the daily data on the official interventions of the Bundesbank and the Federal Reserve, the latter only to the extent that they affected the net foreign position of the Bundesbank. Also, we want to thank Theo Nijman and two anonymous referees for helpful comments on an earlier draft of this paper. Opinions and errors are our own responsibility.     

Benchmarking of Corporate Social Responsibility: Methodological Problems and Robustness

This paper investigates the possibilities and problems of benchmarking Corporate Social Responsibility (CSR). After a methodological analysis of the advantages and problems of benchmarking, we develop a benchmark method that includes economic, social and environmental aspects as well as national and international aspects of CSR. The overall benchmark is based on a weighted average of these aspects. The weights are based on the opinions of companies and NGO's. Using different methods of weighting, we find that the outcome of the benchmark is rather robust for a sample of more than 50 large Dutch companies.     

Central Bank Independence: An Update of Theory and Evidence

This paper reviews recent research on central bank independence (CBI). After we have distinguished between independence and conservativeness, research in which the inflationary bias is endogenised is reviewed. Finally, the various challenges that have been raised against previous empirical findings on CBI are discussed. We conclude that the negative relationship between CBI and inflation is quite robust.     

The trade off between central bank independence and conservativeness

This paper introduces a parameter for central bank independencein a monetary policy game with a conservative central bankerIt tries to explain the optimal degree of central bank independenceand conservativeness by four economic and political determinants,both theoretically and empirically There appears to be a tradeoff between central bank independence and conservativeness.Then, by comparing the optimal degree of conservativeness andindependence with the actual degree of independence, we wantto identify the optimal degree of conservativeness for 12 memberstates of the European Union.     

Efficiency of capital taxation in an open economy: tax competition versus tax exportation

Tax competition and tax exportation have contrary implications for the efficiency of capital taxation. We provide a simple condition for the dominance of either force, which depends on the mobility of foreign investment. We use this condition to evaluate the relative importance of both forces in the US and in the EU. This paper has benefitted substantially from the comments of the editor, Jay Wilson, and three anonymous referees.     

On a Reformed Stability and Growth Pact

In March 2005, the Council of Economics and Finance Ministers (Ecofin) presented its own suggestions for a possible Stability and Growth Pact (SGP) reform in a Report to the European Council. The Council Report divides its proposals into three parts, namely improving governance, strengthening the preventive arm and improving the implementation of the Excessive Deficit Procedure (EDP). The present paper contains a critical analysis of the ideas contained in the Report, accompanied by comparisons of the suggestions with earlier proposals for reform in the literature and the Commission Communication of September 2004.

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*Professor of European Financial Economics and Jean Monnet Professor of European Financial and Monetary Integration, CentER, Tilburg University, The Netherlands; Research Fellow, CEPR, London, UK; Member of the Panel of Experts of the Committee on Economic and Monetary Affairs of the European Parliament to which the article was first presented as a Briefing Paper in May 2005.     

Small is beautiful but large is not to be belittled: reply

We appreciate that the Italian central bank has been able to provide the requested information for our comparison of the research output of European central banks. Based on this information, the ranking of the Italian central bank improves considerably. Still, many small central banks have a better research performance than the Banca d'Italia and, after recomputation, our previous conclusion that “small is beautiful” is not compromised.