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311. Do Fundamentals Explain the International Impact of U.S. Interest Rates? Evidence at the Firm Level

Author:
John Ammer, Clara Vega, and Jon Wongswan
Publication Date:
10-2008
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper analyzes the impact of U.S. monetary policy announcement surprises on U.S. and foreign firm-level equity prices. We find that U.S. monetary policy has important influences on foreign equity prices on average, but with considerable variation across firms. We have found that this differing response reflects a range of factors, including the extent of a foreign firm's exposure to U.S. demand, its dependence on external financing, the behavior of interest rates in its home country, and its sensitivity to portfolio adjustment by U.S. investors. The cross-firm variation in the response is correlated with the firm’s CAPM beta; but it cannot fully explain this variation. More generally, we see these results as shedding some additional light on the nature and extent of the monetary and financial linkages between the United States and the rest of the world. In particular, since we are able to explain differences across foreign firms’ responses through established theories of monetary transmission, our results are consistent with the surprisingly large average foreign response to U.S. rates reflecting fundamentals, rather than an across-the-board behavioral over-reaction.
Topic:
Monetary Policy, Investment, Interest Rates, and Credit
Political Geography:
United States and North America

312. A Note on Mundell-Fleming and Developing Countries

Author:
John Weeks
Publication Date:
03-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper inspects the statement found in macroeconomic text books that under a flexible exchange rate regime with perfectly elastic capital flows monetary policy is effective and fiscal policy is not. The logical validity of the statement requires that the domestic price level effect of devaluation be ignored. The price level effect is noted in some textbooks, but not analysed. When it is subjected to a rigorous analysis, the interaction between exchange rate changes and domestic price level changes render the standard statement false. The logically correct statement would be, under a flexible exchange rate regime with perfectly elastic capital flows the effectiveness of monetary policy depends on the values of the import share and the sum of the trade elasticities. Monetary policy will be more effective than fiscal policy if and only if the sum of the trade elasticities exceeds the import share. Inspection of data from developing countries indicates a low effectiveness of monetary policy under flexible exchange rates. In the more general case of less than perfectly elastic capital flows the conditions for monetary policy to be more effective than fiscal policy are even more restrictive. Use of empirical evidence on trade shares and interest rate differentials suggest that for most countries fiscal policy would prove more effective than monetary policy under a flexible exchange rate regime. In any case, the general theoretical assertion that monetary policy is more effective is incorrect.
Topic:
Monetary Policy, Developing World, Capital Flows, Macroeconomics, and Fiscal Policy
Political Geography:
Global Focus

313. Niebyl, Money and Development

Author:
Daniela Tavasci, Jan Toporowski, and Radha Upadhyaya
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper examines Karl Niebyl’s critique of monetary theory against the typology of equilibrium, reflective and critical theories of money. It argues that despite fundamental criticisms of monetary theory, his analysis of money in capitalist development is essentially a reflective one. The paper goes on to show how the development of the capitalist firm in the twentieth century may give a more critical, disequilibrium, role to money and finance. The introduction presents a categorisation of theories of money. The second section shows the reflective nature of Niebyl’s theory of money comparing it to more recent disequilibrium or critical theories. As Niebyl’s work focuses to the changing function of money with the emergence of industrial capitalism, the next section deals with possible lessons for understanding money in a context of capitalist development. The fourth section reflects on Niebyl’s considerations on methodology.
Topic:
Development, Monetary Policy, Capitalism, and Industrialization
Political Geography:
Global Focus

314. Macroeconomic Determinants of Exchange Rate Pass-Through in India

Author:
Ramkishen S. Rajan and Amit Ghosh
Publication Date:
04-2007
Content Type:
Working Paper
Institution:
Department of Economics and Business, Colorado College
Abstract:
This paper examines the evolution of exchange rate pass-through (ERPT) into India's consumer price index (CPI) at the aggregate level over the period 1980Q1-2006Q4. It also investigates whether the extent of exchange rate pass-through is impacted by common macro fundamentals such as inflation and exchange rate volatility. Finally, the paper also tests for possible asymmetries of ERPT during periods of depreciation versus appreciation.
Topic:
Economics, Markets, and Monetary Policy
Political Geography:
South Asia and India

315. Why has Swedish Inflation been Persistently Low?

Author:
Felix Hufner
Publication Date:
06-2007
Content Type:
Working Paper
Institution:
The Organisation for Economic Co-operation and Development
Abstract:
Average inflation in Sweden has been one of the lowest among European countries since the mid- 1990s. Three supply-side factors help to explain this phenomenon, all related in some sense to increased global integration. First, a shift towards imports from low-cost producing countries has resulted in falling import prices. Second, deregulation and increased product market competition with foreign companies entering the market has led to price falls in some sectors, notably in retailing. Third, wage growth has lagged productivity and kept unit labour costs down. This paper reviews these factors and analyzes the policy options for the central bank.
Topic:
Economics, Labor Issues, Monetary Policy, and Inflation
Political Geography:
Europe, Sweden, and Scandinavia

316. Finding the Money: Informal Credit Practices in Rural Afghanistan

Author:
Floortje Klijin and Adam Pain
Publication Date:
06-2007
Content Type:
Research Paper
Institution:
Afghanistan Research and Evaluation Unit (AREU)
Abstract:
It is widely believed that there is a strong demand for credit in Afghanistan and that much of this demand is unmet, justifying a major programme in microcredit provision. But there is very little understanding of the extent and the workings of informal credit systems, particularly outside opium poppy growing areas. Is there such an absence of credit available to poor rural households as is assumed? Do microfinance and informal credit respond to the same needs? Is informal credit simply the same thing as formal credit, except that it takes place outside formal institutions? And if there is more informal credit available than is believed, what does this mean for the development and role of formal credit systems? These key questions informed a detailed anthropological study of informal credit practices in three contrasting villages in Herat, Ghor and Kapisa. Drawing from a detailed presentation of eight households case studies, and amplified with addition case material, a number of key conclusions can be drawn from the findings.
Topic:
Development, Economics, Monetary Policy, Microcredit, Rural, Money, Demand, and Credit
Political Geography:
Afghanistan and South Asia

317. Fed Uncertainty Means Market Uncertainty

Author:
John H. Makin
Publication Date:
05-2006
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. The new Federal Reserve chairman, Ben Bernanke, is making what cynics would call a serious mistake: he is being honest with the markets. The Fed is uncertain about the future path of U.S. growth and inflation. The most basic tenet of the theory of economic policy is that in circumstances of elevated uncertainty, policymakers should do less. Therefore, in his April 27 testimony to the Joint Economic Committee of Congress, Bernanke suggested that the Fed might start doing less: Even if in the Committees judgment the risks to its objectives are not entirely balanced, at some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook [emphasis added]. After its May 10 meeting, the Feds Open Market Committee reinforced the message of more uncertainty about the direction of the economy, saying: The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information [emphasis added]. Chairman Bernanke and virtually all of his colleagues on the Open Market Committee have made it clear, most forcefully in their May 10 statement, that they view the Federal Reserves most important mandated objective as one of maintaining low and stable inflation. A glance at any long-run chart of U.S. growth and inflation data clearly demonstrates the basis for this view. Since the early 1980s, when inflation was reduced and held to low and stable levels, U.S. economic performance has improved markedly. Growth has been higher and steadier; productivity growth picked up especially after 1995 and has remained higher ever since. Virtually all macroeconomic data have stabilized in a way that has reduced the duration and severity of recessions, so that the last recession (in 2001) was barely detectable. The Great Moderation is an often-used term that describes policymakers pride and satisfaction with the beneficial results of bringing down inflation and holding it at low levels.
Topic:
Economics, Government, Markets, and Monetary Policy
Political Geography:
United States

318. New Keynesian, Open-Economy Models and Their Implications for Monetary Policy

Author:
Brian M. Doyle and David Bowman
Publication Date:
03-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The considerable amount of research in recent years on New Keynesian, open-economy models -- models with nominal price rigidities and intertemporally maximizing agents -- has yielded fresh insights for what Alan Blinder has called the “dark art” of making monetary policy. The literature has made its greatest contributions in understanding the transmission of shocks across countries, exchange rate pass-through and the effects of different pricing rules, and how these impact optimal monetary policy rules and international policy coordination. While the literature has by no means solved the great mysteries of open-economy macroeconomics, it has laid out a framework where we can ask normative questions of monetary policy, such as how much a central bank should react to movements in the exchange rate. However, monetary policy remains an empirical endeavour, and would be helped by further work which empirically estimates or calibrates these new models.
Topic:
International Relations, Development, Economics, International Trade and Finance, and Monetary Policy