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Book part
Publication date: 13 May 2019

Rosaria Rita Canale and Rajmund Mirdala

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…

Abstract

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

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Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence
Type: Book
ISBN: 978-1-78743-793-7

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Book part
Publication date: 1 July 2015

Mohamed Kadria and Mohamed Safouane Ben Aissa

This chapter attempts to analyze mainly the interactions between the implementation of inflation targeting (IT) policy and performance in the conduct of economic policies (fiscal…

Abstract

This chapter attempts to analyze mainly the interactions between the implementation of inflation targeting (IT) policy and performance in the conduct of economic policies (fiscal and exchange rate) in emerging countries. More precisely, empirical studies conducted in this chapter aim to apprehend the feedback effect of this strategy of monetary policy on the budget deficit and volatility of exchange rate performance. This said, we consider the institutional framework as endogenous to IT and analyze the response of authorities to the adoption of this monetary regime. To do this, the retained methodological path in this chapter is an empirical way, based on the econometrics of panel data. First, our contribution to the existing literature is to evaluate the time-varying treatment effect of IT’s adoption on the budget deficit of emerging inflation targeters, using the propensity score matching approach. Our empirical analysis, conducted on a sample of 34 economies (13 IT and 21 non-IT economies) for the period from 1990 to 2010, show a significant impact of IT on the reduction of budget deficit in emerging countries having adopted this monetary policy framework. Therefore, we can say that the emerging government can benefit ex post and gradually from a decline in their public deficits. Retaining the same econometric approach and sample, we tried secondly to empirically examine whether the adoption of IT in emerging inflation targeters has been effectively translated by an increase in the nominal effective exchange rate volatility compared to non-IT countries. Our results show that this effect is decreasing and that this volatility is becoming less important after the shift to this monetary regime. We might suggest that this indirect and occasional intervention in the foreign exchange market can be made by fear of inflation rather than by fear of floating hence in most emerging countries that have adopted the IT strategy. Finally, we can say that our conclusions corroborate the literature of disciplining effects of IT regime on fiscal policy performance as well as the two controversial effects of IT on the nominal effective exchange rate volatility.

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Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

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Book part
Publication date: 22 November 2012

Eiji Okano, Masataka Eguchi, Hiroshi Gunji and Tomomi Miyazaki

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing…

Abstract

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.

Details

DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments
Type: Book
ISBN: 978-1-78190-305-6

Keywords

Book part
Publication date: 26 April 2014

Panayiotis F. Diamandis, Anastassios A. Drakos and Georgios P. Kouretas

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate…

Abstract

Purpose

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012.

Design/methodology/approach

The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries.

Findings

We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes.

Practical implications

The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models.

Originality/value

The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

Keywords

Abstract

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Economics, Econometrics and the LINK: Essays in Honor of Lawrence R.Klein
Type: Book
ISBN: 978-0-44481-787-7

Book part
Publication date: 26 April 2014

Nikolaos Giannellis and Georgios P. Kouretas

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s international…

Abstract

Purpose

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s international competitiveness fluctuates in consistency with equilibrium.

Design/methodology/approach

The theoretical background of the paper relies on the Purchasing Power Parity (PPP) hypothesis, while the econometric methodology is mainly based on a nonlinear two-regime Threshold Autoregressive (TAR) unit root test.

Findings

The main finding is that China’s price competitiveness was not constantly following a disequilibrium process. The two-regime threshold model shows that PPP equilibrium was confirmed in periods of relatively high – compared to the estimated threshold – rate of real yuan appreciation. Moreover, it is implied that the fixed exchange rate regime cannot ensure external balance since it can neither establish equilibrium in the foreign exchange market, nor confirm that China’s international competitiveness adjustment follows an equilibrium process.

Practical implications

The results do not imply that China acts as a currency manipulator. However, a main policy implication of the paper is that China should continue appreciating the yuan to establish external balance.

Originality/value

This paper is the first which accounts for a nonlinear two-regime process toward a threshold, which is defined to be the rate of change in China’s international competitiveness. Consequently, the paper draws attention to the role of China’s international competiveness in accepting the PPP hypothesis.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

Keywords

Book part
Publication date: 1 January 2005

Simon Neaime

After investigating debt sustainability in Lebanon, this chapter examines the conduct of monetary policy during the last decade. The empirical section looks at the long-run…

Abstract

After investigating debt sustainability in Lebanon, this chapter examines the conduct of monetary policy during the last decade. The empirical section looks at the long-run relationship between the nominal exchange rate and the inflation rate by employing Johansen co-integration technique. The resulting coefficient estimates suggest that while the Lebanese monetary authority has succeeded in containing inflationary pressures by adopting a monetary policy rule targeting the nominal exchange rate, it should have adopted a real exchange rate targeting policy to dampen the effects of its current policy on interest rates, public debt and budget deficits, and the growth in gross domestic product.

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Money and Finance in the Middle East: Missed Oportunities or Future Prospects?
Type: Book
ISBN: 978-1-84950-347-1

Book part
Publication date: 4 April 2005

Viviana Fernández

In September 1999, the Central Bank of Chile eliminated the floating band for the nominal exchange rate, which operated since 1984, and established a free float. This lasted until…

Abstract

In September 1999, the Central Bank of Chile eliminated the floating band for the nominal exchange rate, which operated since 1984, and established a free float. This lasted until the burst of the last Argentinean economic crisis in July 2001. Since then, the Central Bank has smoothed out the exchange rate path by selling U.S. dollars and/or issuing U.S. dollar-denominated bonds. We examine the free float period by assessing whether the increase in exchange rate volatility was as sharp as expected. We show that volatility went up, but only slightly.

Details

Latin American Financial Markets: Developments in Financial Innovations
Type: Book
ISBN: 978-1-84950-315-0

Abstract

Details

Nonlinear Time Series Analysis of Business Cycles
Type: Book
ISBN: 978-0-44451-838-5

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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