Abstract: The aim of this paper is to study cross-sectional differences in banks interest rates. It adds to the existing literature in two ways. First, it analyzes in a systematic way both micro and macroeconomic factors that influence the price setting behavior of banks. Second, by using banks' prices (rather than quantities) it provides an alternative way to disentangle loan supply from loan demand shift in the bank lending channel' literature. The results, derived from a sample of Italian banks, suggest that heterogeneity in the banking rates pass-through exists only in the short run. Consistently with the literature for Italy, interest rates on shortterm lending of liquid and well-capitalized banks react less to a monetary policy shock. Also banks with a high proportion of long-term lending tend to change their prices less. Heterogeneity in the pass-through on the interest rate on current accounts depends mainly on banks' liability structure. Bank's size is never relevant.

Abstract: Africa is working toward the goal of creating a common currency that would serve as a symbol of African unity. The advantages of a common currency include lower transaction costs, increased stability, and greater insulation of central banks from pressures to provide monetary financing. Disadvantages relate to asymmetries among countries, especially in their terms of trade and in the degree of fiscal discipline. More disciplined countries will not want to form a union with countries whose excessive spending puts upward pressure on the central bank's monetary expansion. In The Monetary Geography of Africa , Paul Masson and Catherine Pattillo review the history of monetary arrangements on the continent and analyze the current situation and prospects for further integration. They apply lessons from both experience and theory that lead to a number of conclusions. To begin with, West Africa faces a major problem because Nigeria has both asymmetric terms of trade --it is a large oil exporter while its potential partners are oil importers --and most important, large fiscal imbalances. Secondly, a monetary union among all eastern or southern African countries seems infeasible at this stage, since a number of countries suffer from the effects of civil conflicts and drought and are far from achieving the macroeconomic stability of South Africa. Lastly, the plan by Kenya, Tanzania, and Uganda to create a common currency seems to be generally compatible with other initiatives that could contribute to greater regional solidarity. However, economic gains would likely favor Kenya, which, unlike the other two countries, has substantial exports to its neighbors, and this may constrain the political will needed to proceed. A more promising strategy for monetary integration would be to build on existing monetary unions --the CFA franc zone in western and central Africa and the Common Monetary Area in southern Africa. Masson and Pattillo argue that the goal of a creating a single African currency is probably beyond reach. Economic realities suggest that grand new projects for African monetary unions are unlikely to be successful. More important for Africa's economic well-being will be to attack the more fundamental problems of corruption and governance.

Abstract: This paper analyses whether the effects of the monetary policy of the European Central Bank (ECB) may be different across Euro area countries. First, the limitations in the current empirical literature are highlighted. The paper then suggests how to deal with these limitations and provides new empirical evidence on the effects of a common monetary policy shock across individual member countries. Surprisingly, very similar output effects are found across countries.

Abstract: During the 1990s a number of African central banks succeeded in bringing inflation to relatively low levels while maintaining a market-determined exchange rate. These central banks were generally reluctant to fully subordinate exchange rate targets to monetary targets, however, particularly in the face of large external shocks. We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows, giving rise to tradeoffs reminiscent of the literature on private capital inflows in emerging markets. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach.

Abstract: This paper argues that the existence of bank networks is important for banks' reactions to monetary policy. For the example of Germany, it is found that small banks access the interbank market indirectly through the large head institutions of their respective network organizations. The interbank flows within these networks allow smaller banks to manage their funds in a fashion that helps them in keeping their loan portfolio with nonbanks relatively unaffected after a monetary contraction. This implies that tests for a bank-lending channel in countries with comparable bank networks should not rely on a size criterion only, and explains why several recent contributions have found a prominent role for banks' liquidity positions. (JEL: C32, E52, G21)

Abstract: Since the early 1990s, an increasing number of countries have adopted explicit inflation targets as the defining principle that should guide the conduct of monetary policy. This development is often credited with having brought about substantial reductions in both the level and variability of inflation in the inflation-targeting countries, and is sometimes argued to have improved the stability of the real economy as well. 1 Inflation-forecast targeting, as a systematic decision procedure for the conduct of monetary policy, was developed at central banks like the Reserve Bank of New Zealand, the Bank of Canada, the Bank of England, and the Bank of Sweden on a trial-and-error basis, with little guidance from the academic literature on monetary policy rules. But the growing popularity of inflation targeting has more recently led to an active literature that seeks to assess the desirability of such an approach from the standpoint of theoretical monetary economics. This literature finds that an optimal policy regime—one that could have been designed on a priori grounds to achieve the highest possible degree of social welfare—might well be implemented through procedures that share important features of the inflation-forecast targeting that is currently practiced at central banks like those just mentioned. At the same time, the normative literature finds that one ought, in principle, to be able to do better through appropriate refinement of the practices developed at these banks. Here I survey some of the most important conclusions of this literature. I shall begin by reviewing some of the respects in which inflation targeting as

Abstract: History and analysis of European monetary integration and related economic, financial, monetary, and international political issues: an accesible guide. This history and analysis of the euro and the European Central Bank traces the process of European monetary integration from its beginnings as a utopian vision in the aftermath of World War II through the establishment of a single currency managed by a central bank. Tommaso Padoa-Schioppa, a central banker who has been involved in the making of European monetary unification since 1979, offers an accessible guide to the euro and the European Central Bank for scholars, students, and the general reader, discussing the related economic, financial, monetary, and international political issues. In the process he also provides an overview of central banking in general and the multiple activities of a central bank; as the case of the European Central Bank illustrates, central banking involves not only monetary analysis and policy but much else, including banknote printing and handling, market operations, payment systems, bank supervision, and coordinating with other public institutions.Padoa-Schioppa begins with the historical background of European monetary integration, starting with the 1957 Treaty of Rome, which lay the foundation for the Common Market, and covering the 1992 Maastricht Treaty, the development of an anchor currency, and the "euroskepticism" of the U.K. Subsequent chapters are devoted to economic policy, monetary policy, the euro as unifier in the financial system, the payment system, the euro as an international actor outside "euroland," and the challenges ahead for the still relatively young project of European monetary integration.

Abstract: Recent empirical evidence based on micro-data pannels indicates the importance of banks’ balance sheets for the monetary transmission mechanism. This paper builds a dynamic general equilibrium model to analyse the macroeconomic consequences of changes in the cost of bank capital, and thus the cost of bank credit. The model includes the interaction between the supply side (banking sector) and the demand side (corporate sector) of the credit market. The analysis suggests that bank capital channels may be an important part of the monetary transmission mechanism, particularly when there are large, direct shocks to banks’ balance sheets. Such shocks could occur when there are structural changes of one sort or another that affect the banking system. The impulse responses are likely to be magnified due to the interaction between the supply and the demand side of the credit market.

Abstract: Bank equity is exogenous in the standard deposit-and-loan-expansion multiplier model, so that model is inappropriate for analyzing the interaction between monetary and bank regulatory policies. This paper examines the effect of a binding capital requirement on the loan expansion process. We evaluate how the conflict between the monetary and regulatory authorities evolves when bank equity adjusts to a binding capital requirement. We find that capital requirements are not innocuous for monetary policy. Nevertheless, the monetary authority can assert control over the loan expansion process in the long run, although multiplier values will differ considerably from those in the standard multiplier model.

Abstract: The paper reviews the recent conduct of monetary policy and the central bank's rule-based behavior in Russia. Using different policy rules, we test whether the central bank in Russia reacts to changes in inflation, output gap and the exchange rate in a consistent and predictable manner. Our results indicate that during the period of 1993-2002 the Bank of Russia has used monetary aggregates as a main policy instrument in conducting monetary policy.

Abstract: The success of European monetary integration -- called by the editors of this CESifo volume "one of the most far-reaching, real world experiments in monetary policy to date" -- is not assured. Policy makers have been forced to deal with challenges posed by formulating a uniform monetary policy for countries with asymmetric business cycles and economies in different stages of development as well as with the fiscal and financial implications of a unified currency.The contributors to European Monetary Integration, all prominent economists and scholars, combine theoretical analysis and policy recommendation in their examination of these difficulties. In the first three chapters they consider issues raised by asymmetry problems, including imperfect labor and goods markets, the problem of monetary policy objectives when "one size does not fit all," and the possibility of a bias toward smaller countries in the "one country, one vote" constitutional structure of the European Central Bank. In the last three chapters, they discuss fiscal concerns, including the distribution of seignorage revenues and the interaction of European Central Bank monetary policies and asset price dynamics.

Abstract: During the 1990s a number of African central banks succeeded in bringing inflation to relatively low levels while maintaining a market-determined exchange rate. These central banks were generally reluctant to fully subordinate exchange rate targets to monetary targets, however, particularly in the face of large external shocks. We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows, giving rise to tradeoffs reminiscent of the literature on private capital inflows in emerging markets. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach.

Abstract: This paper explains to what extent excess reserves are and should be relevant today in the implementation of monetary policy, focusing on the specific case of the operational framework of the Eurosystem. In particular, this paper studies the impact that changes to the operational framework for monetary policy implementation have on the level and volatility of excess reserves. A 'transaction costs' model that replicates the rather specific intra-reserve maintenance period pattern of excess reserves in the euro area is developed. Simulation results presented not only show that excess reserves may increase considerably under some changes to the operational framework, but also that their volatility and hence unpredictability could.

Abstract: This paper estimates a forward-looking monetary policy reaction function of the Central Bank of the Republic of Turkey by considering the period from 1990:01 to 2000:10. When the spread between the interbank rate and depreciation rate of the local currency is taken as a policy tool, the empirical evidence suggests that the Turkish Central Bank responds to its foreign exchange reserves, output and M2 growth not the forward, current or lagged inflation. Copyright © 2003 John Wiley & Sons, Ltd.

Abstract: This article employs the VAR model to estimate the impacts of government debt, monetary policy, exchange rates, and other selected macroeconomic variables on real GDP in Brazil. Using the money market rate as a policy tool, the impulse response function indicates that in the long run, a shock to the real money market rate, external debt, or domestic debt has a negative impact on output and that a shock to budget deficit, currency depreciation, or stock market performance has a positive effect on output. Variance decomposition of output shows that the lagged output is the most influential variable and can explain up to 69.98% of the variation in real output in Brazil. External debt is the second most important variable and can explain up to 33.34% of output fluctuations. Up to 22.24% of output variance is attributable to the real interest rate. When real monetary base is considered as a monetary tool, the response of output to government deficit is negative, and the stock market can explain more output variance. Hence, the selection of different monetary policy instruments may yield different empirical results for some of the impulse-response relationships.

Abstract: Demand for money is an important macroeconomic relationship. Its stability has implications for the choice of monetary policy targets. This paper estimates demand for narrow money in Fiji and evaluates its robustness and stability. It is found that there is a well determined stable demand for money in Fiji, for three decades, from 1971 to 2002 and its dynamics are adequately captured by the cointegration and error- correction models. Income and interest rate elasticities are found to be significant.

Abstract: We evaluate the Friedman-Schwartz hypothesis that a more accommodative monetary policy could have greatly reduced the severity of the Great Depression. To do this, we first estimate a dynamic, general equilibrium model using data from the 1920s and 1930s. Although the model includes eight shocks, the story it tells about the Great Depression turns out to be a simple and familiar one. The contraction phase was primarily a consequence of a shock that induced a shift away from privately intermediated liabilities, such as demand deposits and liabilities that resemble equity, and towards currency. The slowness of the recovery from the Depression was due to a shock that increased the market power of workers. We identify a monetary base rule which responds only to the money demand shocks in the model. We solve the model with this counterfactual monetary policy rule. We then simulate the dynamic response of this model to all the estimated shocks. Based on the model analysis, we conclude that if the counterfactual policy rule had been in place in the 1930s, the Great Depression would have been relatively mild.

Abstract: This paper discusses monetarist objections to the IS-LM model. We explore the views of two principal spokesmen for monetarism: Milton Friedman and the team of Karl Brunner and Allan Meltzer. Friedman did not explicitly state the reasons he generally chose not to use the IS-LM model in rejecting Keynesian views on the demand function for money, the role of autonomous expenditures in cyclical fluctuations, the potency of fiscal policy as against monetary policy, etc. He presented statistical findings, historical evidence, and econometric results to support his alternative analysis of macroeconomics, but his critics were unconvinced. In 1970, in an effort to use his critics' common language, he set up a model with explicit terms for IS-LM to encompass both the quantity theory and the income-expenditure theory. Friedman attributed the failure of this effort to the fact that he was a Marshallian, his opponents Walrasians. Brunner and Meltzer's objections to IS-LM were explicit. They found it too spare, so they elaborated it by adding a credit market, disaggregating the asset market by specifying three assets: base money, government debt, and real capital. They set up a model with financial institutions and utilized it to study the effects of a variety of policies. In brief, summarizing the views of both Friedman and Brunner and Meltzer, monetarists dislike the IS-LM framework because it limits monetary influence too narrowly, essentially to the interest elasticity of money demand, and defines investment in an excessively narrow fashion, and even that is not explicit.

Abstract: Currency is one of the most important of social and economic institutions. Evidently, the interrelation between monetary and economic power and stability is reciprocal. A strong and stable economy facilitates the achievement and maintenance of monetary stability; conversely, monetary stability contributes to the smooth operation of markets and transactions, and promotes savings, investment and economic growth. This paper describes the evolution of the Greek monetary system. Both international monetary developments and domestic fiscal disturbances often caused by the frequent military conflicts determined domestic monetary developments in Greece. In periods of smooth and efficient functioning of the economy, the monetary system did not face any problems. But whenever substantial economic disturbances occurred, mainly of a fiscal nature, the monetary system suffered adverse consequences, resulting in monetary destabilization, which, in turn, caused economic instability.

Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.

Abstract: This paper reviews the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations. We do this by introducing money in the heterogeneous-agent real economy of Kiyotaki and Moore (1997). Money enters in a cash-in-advance constraint and money supply is managed via open-market operations. We find that a monetary shock generates persistent movements in aggregate output, the amplitude of which depends upon whether or not debt contracts are indexed. If only nominal contracts are traded, money shocks can trigger large output fluctuations. In this case a money expansion triggers a boom, whereas money contractions generate recessions. In contrast, if contracts are indexed then amplification is not only smaller; it can also generate the reverse results. When the possibility of default and renegotiation is considered, the model can generate asymmetric business cycles with recessions milder than booms. Finally, monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation. (JEL: E32, E43, E44, E52)

Abstract: Electronic money (e-money), as a network good, could become an important form of currency in the future. Such a development could affect monetary policy effectiveness. If an increased use of e-money substantially limits the demand for central bank reserves, this limitation would require changes in the central bank operational target and a closer coordination of monetary and fiscal policies. Also, the optimal size of monetary unions would be different. However, the current level of e-money use does not seem to pose a threat to the stability of the financial system. Thus, central banks can successfully implement the objectives of monetary policy.

Abstract: This paper examines monetary policy in Albania during the transition period. Various channels through which monetary policy can affect prices and output are identified and their relative importance is assessed. Estimates from a vector autoregression model (VAR) of key macroeconomic variables demonstrate the weak link between money supply and inflation up to mid-2000. However, the move during 2000 from direct to indirect instruments of monetary control has been associated with greater predictability of the transmission link from money supply to inflation. The paper concludes that a move to formal inflation targeting could help promote the transparency and credibility of monetary policy, but that such a move should be introduced only when the country is ready for it.

Abstract: On Sunday September 14, 2003, voters in Sweden went to the polls to answer the question: "Do you think that Sweden should introduce the euro as its official currency?" Three options existed: Yes, No, and a blank ballot The voters decided whether to maintain the domestic currency, the krona, which was introduced as the official currency unit in 1873, when Sweden adopted the gold standard, or to replace it with the euro, the currency of 12 of the then 15 member states of the European Union, that came into physical existence in January 2002 The Swedish referendum dealt with a clear-cut choice involving both the currency and the exchange rate regime--a choice different from that facing the voters in any previous referendum in Europe The No-option implied that Sweden should maintain its domestic currency based on a floating exchange rate combined with inflation targeting by the Riksbank, the Swedish central bank The Riksbank, which gained independence from the executive authority in the 1990s, announced, at its own initiative, in January 1993, a policy regime of inflation targeting The bank set a target of a 2 percent annual rate of inflation within a band of plus or minus 1 percentage point to be valid from January 1995 The Yes-alternative implied that Sweden would be a member of the eurosystem by replacing the krona with the euro, at the earliest in 2005-2006 The policy of the European Central Bank would replace the national inflation targeting by the Riksbank Other countries have held referendums on the Maastricht Treaty and on membership in the EU However, in these cases the adoption of the new currency, the euro, was one of a larger set of issues on which the voters had to decide upon The Danish euro referendum in September 2000 is an exception In Denmark the choice was between adopting the euro or maintaining the fixed exchange rate between the euro and the Danish krone within ERM 2 From a monetary policy point of view, the Danish referendum did not represent much of a real choice Although the Danish No-vote meant that the domestic currency unit was maintained, Denmark still behaves after the referendum as if it were a member of the euro area The Swedish referendum is thus different from any previous euro-related referendum in the sense that the two alternatives facing the voters represented two distinctly different exchange rate regimes: either a free float or a monetary union The referendum was the culmination of a long public debate in which the pros and cons of monetary unification and of a national currency were thoroughly analyzed--although Sweden had no choice but to join according to the EU Treaty Two government investigations, one published in 1996 and the other in 2002, preceded the referendum, as well as a stream of books, pamphlets, and articles, and a heated public debate in the media and all over Sweden The Swedish economics profession took a most active part in the exchange of views, reflecting the tradition of strong involvement of economists in public debate (1) Foreign economists were involved as well (2) Their articles were translated and they were interviewed in the media Issues such as the theory of optimum currency areas, central bank independence, the proper balance between monetary and fiscal policies, and the Stability and Growth Pact of the EU became familiar to many voters In short, the standard textbook arguments for and against membership in a monetary union were part of the messages of the two camps--although given different weights and combined and blended with noneconomic arguments in the campaign To a researcher in monetary economics the Swedish referendum represents a unique opportunity to examine determinants of the voters' perceptions of the benefits and costs of two monetary regimes: a regime based on a domestic currency with a freely floating exchange rate versus a regime founded on membership in a monetary union with a freely floating exchange rate toward the rest of the world …

Abstract: Summary: It is often maintained that currency boards (CBs) and gold standards (GSs) are alike in that they are stringent monetary rules, the two basic features of which are high credibility of monetary authorities and the existence of automatic adjustment (non discretionary) mechanism. This article includes a comparative analysis of these two types of regimes both from the perspective of the sources and mechanisms of generating confidence and credibility, and the elements of operation of the automatic adjustment mechanism. Confidence under the GS is endogenously driven, whereas it is exogenously determined under the CB. CB is a much more asymmetric regime than GS (the adjustment is much to the detriment of peripheral countries) although asymmetry is a typical feature of any monetary regime. The lack of credibility is typical for peripheral countries and cannot be overcome completely even by “hard” monetary regimes.