194 research outputs found

    Not quite as advertised: Canada’s managed float in the 1950s and Bank of Canada intervention

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    Canada has perhaps the longest track record of adhering to a floating exchange rate regime, but it may well also have been the first country to adopt a managed float during the 1950s. In spite of criticisms levelled at the Canadian government’s decision to float the dollar, the remarkable feature of the behaviour of the exchange rate during the so-called float is the relative stability of the nominal exchange rate, and the small volatility in its movements. This article stresses the impact of foreign exchange intervention in limiting exchange rate appreciations and in moderating exchange rate volatility, using newly found, and heretofore unused, intervention data. Until now, all studies of Canada’s experience with the float have relied on official foreign exchange reserves data. A counterfactual experiment also suggests that nominal exchange rate levels, and variability, would have been different had there been no foreign exchange market intervention

    Financial Frictions and Credit Spreads

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    This paper uses the credit-friction model developed by Curdia and Woodford, in a series of papers, as the basis for attempting to mimic the behavior of credit spreads in moderate as well as crisis times. We are able to generate movements in representative credit spreads that are, at times, both sharp and volatile. We then study the impact of quantitative easing and credit easing. Credit easing is found to reduce spreads, unlike quantitative easing, which has opposite effects. The relative advantage of credit easing becomes even clearer when we allow borrowers to default on their loans. Since increases in default offset the beneficial effects of credit easing on spreads, the policy implication is that, in times of financial stress, the central bank should be aggressive when applying credit easing policies.Credit easing, credit spread, financial friction, quantitative easing.

    From Floating to Monetary Union: The Economic Distance between Exchange Rate Regimes

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    The successful start of Economic and Monetary Union in Europe has prompted more research into the issue of exchange rate regimes and if there were any lessons to be drawn from the European experiment for other regions in the world. We review the relevant issues from an Optimum Currency Area perspective. The focus on issues relating to the suitability of switching to a common currency based on notions of economic distance and the correlation of aggregate economic shocks. The empirical evidence presented in this paper shows that the cost of monetary union declined substantially in some target countries while it appears to have risen in others. This leads to some interesting policy implications also for the new EU members.

    How Monetary Policy is Made: Two Canadian Tales

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    This paper examines the policy rate recommendations of the Bank of Canada’s Governing Council (GC) and the C.D. Howe Institute’s Monetary Policy Council (MPC) since 2003. We find, first, that differences in the median recommendations between the MPC and the GC are persistent but small (i.e., 25 bps). The median MPC recommendation is based on a higher steady state real interest rate. However, the response of the MPC and the GC to output and inflation shocks are, for the most part, comparable. Second, we are also able to examine the individual recommendations for the MPC. Estimates of the determinants of consensus inside the MPC or disagreement with the GC yield some useful insights. For example, disagreements are more likely when rates are proposed to rise than at other times. Equally interesting is the finding that the Bank of Canada conditional commitment on the overnight rate in 2009‐10 has a relatively larger restricting impact on the MPC’s median recommendation than the GC’s target rate

    Inflation Dynamics: Expectations, Structural Breaks and Global Factors

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    There is no consensus over the importance of “global forces” on inflation. This study explores the role of structural breaks in the inflation process, and their timing, whether it is common across countries, and the extent to which ‘global forces’ are relevant. Three conclusions stand out. Global inflation impacts inflation in both AE and EME, but the impact is more heterogeneous than existing narratives have argued. One’s interpretation of global influences on domestic inflation differs, according to whether poorly performing economies in inflation terms are considered as opposed to the standard practice of examining mean inflation performance. A focus on observed inflation alone ignores that inflation expectations, including a global version of this variable, also plays a critical in inflation dynamics. Finally, there are significant spillovers in inflation between AE and EME, but these too are sensitive according to relative inflation performance. Some policy implications are also drawn

    Policy Words and Policy Deeds: The ECB and the Euro

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    This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognizes the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Time series estimates reveal that interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate-interest rate relationship is more apparent when the proxy for monetary policy is the euro area-US differential than when any other proxy for monetary policy is employed.Central bank communication, Eurodollar exchange rate

    The Bundesbank's Communications Strategy and Policy Conflicts with the Federal Government

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    In this paper we provide an estimate of the likelihood of conflict between the federal government and the Bundesbank for the 1989 – 1998 period. We rely on a novel proxy for the impact of public communication by Bundesbank officials on the probability of conflict, in addition to interest rate, exchange rate, money supply behavior, as well as electoral influences. The empirical evidence is consistent with the view that speeches by the Bundesbank President dealing with inflation and economic policy are a positive source of conflict in a probabilistic sense. Conflict was not a constant but flared up at times of economic stress and could be exacerbated by the "talking" of Bundesbank officials. --Deutsche Bundesbank,Conflict,Central Bank Communication,Political Factors

    Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

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    This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.Monetary policy reaction functions, Asset prices, Instruments, European Central Bank
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