Search theory and applied economic research

In the summer of 2002, the Swiss National Bank (SNB) hosted the “SNB-Fed Cleveland Workshop on Monetary Economics”. Recent years have seen the development of the search-theoretic approach to monetary theory. It has established itself as an important strand of monetary theory in a very short space of time, although it has yet to exert a significant influence on the empirical models that are typically used for monetary policy analysis. This is why the conference organisers, David Altig (Federal Reserve Bank of Cleveland), Aleksander Berentsen (University of Basel) and Thomas Jordan (SNB) decided that the event should focus on linking search theory with applied economic research. This summary article first briefly examines the objectives and challenges of search theory before discussing briefly the conference papers.Search Theory; Monetary Policy; Applied Economic Research

Channels of monetary influence: a survey

Transmission mechanism (Monetary policy) ; Monetary theory

Currency Areas, Policy Domains, and the Institutionalization of Fixed Exchange Rates

Emerging-market countries are being urged to choose between freely floating exchange rates and firmly fixed rates supported by strong institutional arrangementsûcurrency boards, monetary unions, or formal dollarization. This paper assesses the benefits and costs of institutionalizing fixed rates by synthesizing and supplementing the theory of optimum currency areas (OCA theory). It shows that (1) OCA theory and related empirical work have been excessively influenced by the special case used originally by Robert Mundell, where exogenous shocks display mirror-image asymmetry; (2) OCA theory ignores a vital difference between the domains of monetary policy under a monetary union and other institutional arrangements; (3) because it neglects the way in which a monetary union reduces the debt-creating effects of fiscal stabilizers, OCA theory understates the strength of the case for combining a monetary union with a fiscal federation. The paper also criticizes recent work by Jeffrey Frankel and Andrew Rose in which they claim to show that monetary union reduces asymmetric shocks and thus makes monetary union less costly. The paper suggests that their results may reflect the effects of monetary union on the transmission of shocks rather than their incidence.Monetary unions, exchange rate regimes, policy domains

A sunspot-based theory of unconventional monetary policy

This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet. We construct a general equilibrium model where agents have rational expectations, and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank’s balance sheet affects equilibrium asset prices and economic activity. We prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is self-financing and leads to a Pareto efficient outcome

The monetary policy transmission mechanism?

Monetary theory ; Transmission mechanism (Monetary policy)

Exchange Rate Determination from Monetary Fundamentals: an Aggregation Theoretic Approach

We incorporate aggregation and index number theory into monetary models of exchange rate determination in a manner that is internally consistent with money market equilibrium. Divisia monetary aggregates and user-cost concepts are used for money supply and opportunity-cost variables in the monetary models. We estimate a flexible price monetary model, a sticky price monetary model, and the Hooper and Morton (1982) model for the US dollar/UK pound exchange rate. We compare forecast results using mean square error, direction of change, and Diebold-Mariano statistics. We find that models with Divisia indexes are better than the random walk assumption in explaining the exchange rate fluctuations. Our results are consistent with the relevant theory and the 'Barnett critique.'Exchange rate, forecasts, vector error correction, aggregation theory, index number theory, Divisia index number

Money: A Market Microstructure Approach

The current discussion about the future of the financial system draws heavily on a set of theories known as the ‘New Monetary Economics’. The New Monetary Economics predicts that deregulation and financial innovation will lead to a moneyless world. This paper uses a market microstructure approach to show that a common medium of exchange that serves as unit of account will remain a necessary instrument to reduce transaction costs. This finding is supported by empirical evidence from foreign exchange markets.New monetary economics, monetary separation, market microstructure theory, monetary theory, moneyless world, financial innovation

Monetary Policy and Distribution

monetary policy, monetary theory, Friedman rule, money neutrality

The Theory of Monetary Aggregation (book front matter)

This is the front matter from the book, William A. Barnett and Apostolos Serletis (eds.), The Theory of Monetary Aggregation, published in 2000 by Elsevier in its Contributions to Economic Anaysis mongraph series. The front matter includes the Table of Contents and the Introduction by Barnett and Serletis and the Preface by W. Erwin Diewert. The volume contains a unified collection and discussion of W. A. Barnett's most important published papers on financial aggregation theory and monetary economics.monetary aggregation, money demand, Divisia, Divisia monetary aggregates, index number theory, aggregation theory

The 2005 Summer Workshop on Money, Banking, and Payments: an overview

This PDP summarizes the papers presented at the 2005 Summer Workshop on Money, Banking, and Payments at the Cleveland Fed. Papers covered a wide variety of topics in monetary theory and policy, banking, and payments systems research. Topics ranged from optimal monetary policy, optimal bank contracts, the private supply of money, the coexistence of credit, money, and capital, the design of payment systems, and international currencies. Effort was made to calibrate models and bring them closer to the data. These contributions illustrate the progress made in the field of monetary theory.Monetary policy ; Monetary theory ; Banks and banking ; Payment systems