Optimal Monetary Policy and Asset Price Misalignments

This paper analyses the relationship between monetary policy and asset prices in the context of optimal policy rules. The transmission mechanism is represented by a linearized rational expectations model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset prices are allowed to deviate from their intrinsic value since they may be positively affected by past price changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments from their fundamentals should be included in the optimal interest rate reaction function

Has monetary policy reacted to asset price movements? Evidence from the UK

This paper examines the relationship between monetary policy and asset prices in the context of empirical policy rules. We begin our analysis by establishing the forecasting ability of house and stock price changes with respect to future aggregate demand. We then report estimates of monetary policy reaction functions for the United Kingdom over the period 1992-2003. We find that UK policymakers appear to take into account the effect of asset price inflation when setting interest rates with a higher weight being assigned to property market fluctuations. Asset inflationaugmented rules describe more accurately actual policy, and the results are robust to modelling the effect of the Bank of England independence

Inflation Persistance and Credibility in Turkey During the Nineties

This study assesses the credibility of disinflation programs in Turkey during the nineties, where several programs of reform took place. We investigate the credibility of these policies building on a previous research made by Agenor and Taylor (1993). The model is based on two assumptions: (i) inflation is a serially correlated process; (ii) the definition of a proxy that is able to measure the degree of credibility of a programme. The empirical results show that there was a sharp loss of credibility at the end of the 1991 and at the beginning of the 1994 and during the Asian crisis. The Program that the Central Bank implemented after the crisis was able to increase the level of credibility of the CBRT policies. Loss of credibility is registered during the end of the 1995, while various political events took place and during the 1997 following the world economic conditions and the outflow of capitals

The role and nature of market sentiment in the 1992 ERM crisis.

This paper attempts to explain the importance of the role of the speculators in determining the 1992 ERM crisis, and the effects that the policy of maintaining external parity had on internal growth. We focus on a different way through which expectations are formed about the macroeconomic fundamentals independently of the behaviour of the monetary policy. In the present model, agents’ rational beliefs do not emerge from arbitrary circumstances but only when the value of the exchange rate, kept under control by the central bank, did not correspond to the expected value and to the current wide-spread beliefs in the market

Short-run and long-run determinants of the price of gold

In 1833 the price of gold was $20.65 per ounce, about$415 in 2005 terms, while in 2005 the actual price of gold was $445 - a very small change in the real price of gold over a period of one hundred and seventy two years. Despite this apparent constancy in real terms over the long run, it is also true that, outside of periods when the gold price was fixed through various iterations of the gold standard, it has fluctuated significantly in the shorter term, sometimes for years at a time. Can these two apparently contradictory realities be reconciled? And can one be sure that the long run positive relationship between gold and inflation has persisted beyond the era of Bretton Woods? Indeed, is there any credence to the claim that gold can be used as a long-run hedge against inflation? The results reported in this paper provide some answers to these questions that are so central to the gold market and its many participants around the world. We also address the inflation hedging properties of gold in the currencies of the major gold-consuming countries outside of the USA, taking into account both the domestic exchange rate relative to the dollar and domestic consumer price index movements. Real gold prices denominated in the home currency of investors outside of the USA also deviate in the short-run from their home country inflation hedge price and there is also a long-run tendency for gold prices to revert to the long-run hedge price. The major gold consuming countries outside of the USA, that is, India, China, Turkey, Saudi Arabia and Indonesia were rational to purchase gold in that it proved more than adequate as an inflation hedge. For these countries the actual USA dollar gold price between 1976 and 2005 far exceeded the dollar gold price required to provide an inflation hedge after taking account of exchange rates between the US dollar and the home country and the home country consumer price index movements

Monetary Policy Shocks and Stock Returns: Evidence from the British Market

This paper examines the impact of anticipated and unanticipated monetary policy announcements, of the Bank of England’s Monetary Policy Committee on UK sectoral stock returns. The monetary policy shock is generated from the change in the three-month sterling LIBOR futures contract. Using a panel GMM estimator we find that both the expected and unexpected components of monetary changes are significant, but that only the surprise term is significant when we control for the impact of the sectors financial position

Does education improve financial outcomes? Quasi-experimental evidence from Britain

This paper uses two compulsory schooling reforms in Britain (1947 and 1972) to study the relationship between education and financial behaviours. Employing a regression discontinuity design to analyse nationally representative data from the UK, we find limited evidence that one extra year of schooling led to systematically different financial behaviours. One exception is the promotion of more positive saving behaviours amongst females affected by the 1947 reform. We argue that, despite clear positive spill-overs of educational reforms, desirable financial behaviours require specific and targeted education policies and we point to the growing research in this field to support this conclusion

A critique of full reserve banking

Proposals for full reserve banking have been put forward as a radical way of preventing further financial crises. They rest on the argument that crises are caused by excessive money supply growth brought about by inadequately controlled bank credit creation. Our aim is to provide a critique of the theoretical assumptions underlying the plans for full reserve banking. In particular some of the plans rely on the view that the money supply is a key causal variable and that it is feasible for central banks to identify and enforce an optimal quantity. Second, the plans all rely on an unsupported confidence in the efficiency of financial markets outside the centrally controlled banking system. Third, by removing profit-making opportunities from banks, the proposals may unduly tip the balance further in favour of shadow banking. Finally, as the case of 95% liquidity requirements on Kaupthing, Singer and Friedlander in the wake of the Great Financial Crash shows that modern financial engineering makes such policy-making difficult to execute. A Minskyan analysis rather emphasises the inherent instability of the financial system such that it is subject to systemic crises and the indeterminacy of demand for liquidity, while also emphasising the contribution prudent banking can make to financing economic activity and providing a safe money asset. While a return to a traditional separation of retail banking (regulated and supported by the central bank) from investment banking (regulated differently but not supported) would contribute to financial stability, it is argued that the full reserve banking proposals go too far

Very High Cycle Corrosion Fatigue Study of the Collapsed Polcevera Bridge, Italy

A possible scenario is proposed to put into evidence how the combined effect of fatigue at very high number of cycles and corrosion could have been responsible for the failure of one of the strands and the subsequent collapse of the so-called balanced system of the Polcevera Bridge designed by Morandi. The analysis accounts for an actual estimation of the heavy-lorry traffic and load spectrum, as well as for the European Standards prescription for the fatigue damage accumulation assessment. In addition, the effective construction phases of the viaduct are considered. The structural analysis is carried out by means of analytical models, in order to simplify the structure complexity without prejudice to the description of the most relevant aspects of the structural behavior. The main purpose is to warn the scientific community and the public administrations that the combined effects of low-amplitude fatigue and corrosion can be dangerously underestimated, and that the existing assets of 20th century bridges deserve special attention in this respect

Household portfolios and monetary policy

We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to low risk assets, in line with “reaching for yield” behaviour. Our findings are based on analysis of US household level panel data using two measures of monetary policy shifts over the period 1999-2007. We also show that the impact of monetary policy changes is stronger for active investors. In addition, our hurdle model estimates reveal that monetary shocks strongly affect the decision to hold high risk assets, but not the decision to hold low risk assets. Finally, our results highlight the role of self-reported risk attitudes as well as that of mortgage-holder status in affecting the response of household portfolios to monetary policy changes