Monetary policy and exchange rate interactions in a small open economy

This paper analyses the transmission mechanisms of monetary policy in a small open economy like Norway through structural VARs, paying particular attention to the interdependence between the monetary policy stance and exchange rate movements in the inflation-targeting period. Previous studies of the effects of monetary policy in open economies have typically found small or puzzling effects on the exchange rate; puzzles that may arise due to the recursive restrictions imposed on the contemporaneous interaction between monetary policy and the exchange rate. By instead imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, the interdependence increases considerably. In particular, following a contractionary monetary policy shock, the real exchange rate appreciates immediately and thereafter depreciates back to baseline. Furthermore, output and consumer price inflation fall gradually as expected; thereby also ruling out any price puzzle that has commonly been found in the literature. Results are compared and found to be consistent with among other the findings from an “event study” that focuses on immediate responses in asset prices following a surprise monetary policy decision.VAR, monetary policy, open economy, identification, event study

Monetary policy and the illusionary exchange rate puzzle

Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification

Monetary Policy and the Illusionary Exchange Rate Puzzle

Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts†to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification.

Forecasting inflation with an uncertain output gap

The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less revised in real time.Output gap, real time indicators, forecasting, Phillips curve

A stable demand for money despite financial crisis: The case of Venezuela

This paper investigates the demand for broad money in Venezuela, over a period of financial crisis and substantial exchange rate fluctuations. The analysis shows that there exist a long run relationship between real money, real income, inflation, the exchange rate and the domestic interest rate, that remains stable over major policy changes and large shocks. The long run properties emphasize that both inflation and exchange rate depreciations have negative effects on real money demand. The long run relationship is embedded in a dynamic equilibrium correction model with constant parameters

MEASURING THE EFFECTS OF GENERIC PRICE AND NON-PRICE PROMOTIONAL ACTIVITIES: THE CASE OF WASHINGTON APPLES

This paper develops a monthly domestic demand and supply equilibrium model for Washington apples that can be used to assess the effectiveness of price and non-price promotional activities. The econometric methodology employed takes into account market differences across the U.S. and is based on data pertaining to individual retail stores located throughout the U.S. The period of analysis is from September 1990 through August 2000 on a regional basis. A unique feature of the model is its explicit allowance for multiplier effects to exist between the level of print media (newspaper ad and flyers) expenditures provided by the Washington State Apple Commission (WAC) in support of apple demand and supplementary funds provided by retailers in support of apple promotion. In particular the model allows for the fact that Commission funds oftentimes represent only a relatively small fraction of the overall print media expenditures made in support of apple sales, and that Commission funds are often effectively only "pump priming" or serve as inducements for additional promotional activities by other entrepreneurs in the marketing chain. Also, the subset of promotional activities (print media and price reductions) provided by retailers is modeled in a dynamic fashion, whereby market conditions feedback affects the level of apple promotion provided by retailers. The overall model includes a set of retail demand equations, a set of retail-F.O.B. price linkage equations, a set of ad lines - WAC Ad buys linkage equations, and an aggregate industry supply function. Additional factors such as asymmetry in retail-F.O.B. price response, the effects of information technology in retail pricing, and the effects of the large crops and the Asian and the Mexican crises on domestic supply are all simultaneously considered. Results of this analysis indicate that, in the aggregate, price promotion is a significant factor positively impacting apple sales. Furthermore, price promotion elasticities were relatively high when compared to non-price promotional activities, leading to a conclusion that greater gains with respect to returns on promotional investment may occur when retail price reductions are pursued. Despite an increased domestic supply and the effects of the Mexican and the Asian crises, among the non-price promotional activities, results indicated that both non-trade (TV and Radio) and trade-related efforts (in store demonstrations, point of sale displays, promotional give-aways, and ad buys) have contributed to increased demand for Washington apples. Sensitivity analysis of trade and non-trade expenditures indicated that trade-related activities were more effective in increasing demand at current expenditure levels relative to non-trade activities. Promotional efforts in the form of billboards, food service expenditures, and other miscellaneous activities, which the industry also carried out during the historical period of analysis, did not have a measurable impact on demand in any of the regions. It was also found that WAC ad buy expenditures resulted in a multiplier effect on the total number of ad lines. While the direct effect of these Commission expenditures on demand would be relatively small without the supplementary efforts forthcoming from retailers, the fact that retailers multiplied the Commission's expenditures into a substantially larger promotional effort resulted in a significant positive effect on apple sales when viewing the promotion program as a whole. Key words: price and non price promotion, trade and non trade activitiesprice and non price promotion, trade and non trade activities, Marketing,

Oviductal and uterine leiomyomata in mares

This paper describes a case of a sessile uterine leiomyoma in a 17-year-old chronic infertile Selle Francais mare. The mass was removed by transendoscopic electrocoagulation. In the same period, 725 mares were screened for oviductal and uterine solid masses in a slaughterhouse survey. Two uterine masses and one oviductal mass were detected in three different mares. Histological and immunohistochemical examination revealed leiomyoma in the four masses. To the authors' knowledge, this is the first report of an oviductal leiomyoma in a mare

Identifying the interdependence between US monetary policy and the stock market

We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative properties of a monetary policy shock found in the established literature (CEE 1999). We find great interdependence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 percent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock increasing stock prices by one percent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks

Fundamental determinants of the long run real exchange rate: The case of Norway

Modelling the Norwegian exchange rate against a basket of currencies, we find a robust long-term link between the real exchange rate and real interest differential that is consistent with purchasing power parity (PPP) and uncovered interest parity (UIP). However, PPP alone is rejected. These findings are confirmed focusing on the Norwegian bilateral exchange rate with Germany and (possibly) Sweden, but rejected against the UK and the US. We argue that rejection of bilateral relationships may result from idiosyncratic shocks in the different countries that may be negligible when modelling against a basket of currencies

The ‘Dutch disease’ reexamined: Resource booms can benefit the wider economy

In the cases of Norway and Australia, there's evidence of productivity 'spillovers' between industries, write Hilde C. Bjørnland and Leif Anders Thorsru