Monetary Economics in Globalised Financial Markets

by Belke, Ansgar; Polleit, Thorsten

• ISBN13: 9783540710028
• ISBN10: 3540710027
• Format: Hardcover
• Copyright: 2009-05-01
• Publisher: Springer Verlag

Summary

This book integrates the fundamentals of monetary theory, monetary policy theory and financial market theory, providing an accessible and comprehensive introduction to the many-sided interrelations between these fields of research. It provides the reader with the intellectual groundwork indispensable for understanding the workings and interactions of today's globalised financial markets. The topics addressed in this book include, inter alia, alternative money supply regimes, money demand functions, monetary policy transmission, monetary policy effectiveness and the natural rate of unemployment, monetary political business cycles, and monetary policy strategies. Basic valuation models for stocks, and bonds and asset price linkages across currency areas are covered as well. Illustrated by carefully chosen examples and supported by extensive data analyses, this book is highly recommended to readers who seek an in-depth and up-to-date integrated overview about the ever-expanding theoretical and quantitative fields of monetary and financial economics.

Table of Contents

Money and Credit Supply	p. 1
Money Definition, Functions, Kinds and Origin	p. 1
Definition and Functions	p. 1
Kinds of Money	p. 6
Origin of Money	p. 8
From the Gold to the Paper Money Standard	p. 11
The Gold Standard	p. 11
Gold Standard and the Price Level	p. 14
Trade, Gold Movements, Prices and Income	p. 14
Pros and Cons of the Gold Standard	p. 16
The End of the Gold Standard	p. 18
Money and Credit Creation	p. 19
Base Money Supply	p. 19
Central Bank Balance Sheet	p. 22
The US Federal Reserve	p. 23
The Eurosystem	p. 27
Credit and Money Creation	p. 29
Multiple Credit and Money Creation	p. 30
The Tinbergen Approach to the Money Multiplier	p. 34
Open Market Operations	p. 38
A Closer Look at the Demand for Base Money	p. 45
Supply of and Demand for Base Money	p. 49
Impact of Short- on Long-Term Rates	p. 53
Exogenous Versus Endogenous Money Supply	p. 55
Money Aggregates	p. 58
International Definitions of Money Aggregates	p. 58
Digression: Divisia Monetary Aggregates	p. 66
Impact of Portfolio Shifts on Money	p. 71
Autonomous Bank Refinancing	p. 71
Bank Refinancing Via Selling Assets	p. 72
Disintermediation	p. 73
Inversion of the Yield Curve	p. 74
A Look at "Global Liquidity"	p. 76
Calculating a Global Liquidity Aggregate	p. 77
The Effects of Cross-Border Selling of National Currency on National Monetary Aggregates	p. 79
Digression: Key Facts About Major Central Banks	p. 80
References	p. 87
Money and Credit Demand	p. 91
Classical Demand for Money Theory	p. 91
The Cambridge Approach	p. 92
The Role of Wealth in the Transaction Approach	p. 93
Keynesian Money Demand Theory	p. 96
Explaining the Trend of Income Velocity of Money	p. 101
Some Empirically Testable Money Demand Hypotheses	p. 101
Portfolio Oriented Money Demand Theory	p. 104
Monetarist Money Demand	p. 104
Post-Keynesian Money Demand Theory	p. 106
Digression: Income Velocities of US Monetary Aggregates	p. 115
Money-in-the-Utility Function and Cash-In-Advance Models of Money Demand	p. 119
Money-in-the-Utility Function of Money Demand	p. 119
Cash-in-Advance Models of Money Demand	p. 120
Estimating Money Demand Functions for the US and the Euro Area	p. 122
Money Demand in the US	p. 122
Euro Area Money Demand 1980-Q1 to 2001-Q4	p. 130
Euro Area Money Demand 1980-Q1 to 2006-Q1	p. 135
Credit Demand	p. 139
References	p. 146
Interest Rate Theories	p. 151
Introductory Remarks	p. 151
The Austrian Theory of the Interest Rate	p. 153
The Neo-Classical Theory of the Interest Rate	p. 160
The Intertemporal Budget Constraint	p. 160
The Intertemporal Production Frontier (IPPF)	p. 162
Determining the Market Interest Rate	p. 164
Sum of the Parts: the Neo-Classical Interest Rate	p. 169
Knut Wicksell's Theory of the Interest Rate	p. 172
Wicksell's Loanable Funds Theory	p. 172
The Concept of the Real Neutral Interest Rate	p. 176
Estimating the Natural Real Interest Rate	p. 180
The Keynesian Liquidity Preference Theory	p. 185
Nominal Versus Real Interest Rates	p. 187
Credit Spreads	p. 189
References	p. 192
Financial Market Asset Pricing	p. 195
Prices, Returns and Distributions	p. 195
Prices and Returns	p. 195
Joint, Marginal, Conditional and Unconditional Distributions	p. 198
Stylised Facts for International Asset Price Linkages	p. 205
Latest Developments	p. 205
Descriptive Statistics and Some Tests	p. 209
Measuring International Asset Return Linkages	p. 213
Digression: Price Earnings Ratios and Future Stock Market Performance	p. 233
Rational Expectations and the Efficient Market Hypothesis	p. 237
Formalising the EMH	p. 241
Orthogonality Property	p. 241
Random Walk	p. 242
No Abnormal Returns	p. 243
Market Relevant Information	p. 244
Bond Valuation - Basic Valuation Concepts	p. 246
Prices, Yields and the RVF	p. 246
Theories of the Term Structure of Interest Rates	p. 263
Digression: The Information Content of the US Term Spread for Future Economic Activity	p. 267
The Term Structure Spread and Future Short-Term Rate Changes	p. 274
Stock Valuation	p. 278
Discounted Cash Flow Under EMH-RE	p. 278
Dividend Yields, Expected Returns and the Campbell-Shiller Model	p. 289
Capital Asset Pricing Model (CAPM)	p. 302
Portfolio Selection Theory	p. 302
Model of the Capital Market Line (CML)	p. 305
Two-Fund Separation Theorem	p. 306
The Capital Asset Pricing Model	p. 306
Estimating the Beta-Factor	p. 309
Liquidity Provision - A Theoretical Framework	p. 312
The Financial System as a Private Provider of Liquidity	p. 313
Financial Fragility and Cash-in-the-Market Pricing	p. 315
Contagion	p. 316
Asymmetric Information	p. 317
References	p. 318
Causes, Costs and Benefits of Sound Money	p. 325
The Objective of Price Stability	p. 325
The Index Regime - Measuring Price Stability	p. 326
Headline Versus Core Indices	p. 327
Predictive Power of Core Inflation	p. 329
Role of Core Inflation in Monetary Policy	p. 330
International Definitions of Price Stability	p. 333
Inflation Versus Price Level Objective	p. 338
Price Level Stability and Positive Supply-Side Shocks	p. 341
Inflation Versus Price Level Targeting in a Simple Phillips Curve Model	p. 342
A Brief Look at Inflation History	p. 347
Causes of Inflation	p. 348
Monetary Inflation Theory	p. 349
Non-Monetary Inflation Theory	p. 368
Fiscal Theory of the Price Level	p. 374
Costs and Benefits of Inflation	p. 381
Costs of Inflation	p. 381
Benefits of Inflation - The Phillips Curve	p. 389
A Path-Dependent Long-Run Phillips Curve - The Case of Hysteresis	p. 400
Monetary Policy and the Phillips Curve	p. 421
"Optimal" Inflation	p. 431
Deflation	p. 434
Demand and Supply Shocks and Deflation	p. 438
Debt-Deflation Theories	p. 442
Asset Price Inflation	p. 449
From "Bubbles" to Asset Price Inflation	p. 449
Keeping Track of Asset Price Inflation	p. 453
References	p. 466
Theory of Monetary Policy	p. 479
Uncertainty in Monetary Policy Making	p. 479
Model Uncertainty	p. 481
Data Uncertainty	p. 483
The Debate About "Rules Versus Discretion"	p. 486
Arguments in Favour of Monetary Policy Discretion	p. 487
Arguments in Favour of Rules	p. 487
The Time Inconsistency Problem	p. 488
Time Inconsistency in a Two-Period Model	p. 490
Time Inconsistency in a Multi-Period Model	p. 493
Alternative Solutions to Inflation Bias	p. 496
Conflicting Views on the Relation Between the Degree of Monetary Policy Autonomy and Structural Reforms	p. 499
A Benchmark Model	p. 503
Results from the Benchmark Model I: Credible Commitment to a Strict Monetary Policy Rule	p. 505
Autonomy Results from the Benchmark Model II: Discretion and Time Inconsistency of Optimal Monetary Policy	p. 506
Welfare Comparisons of Different Monetary Policy Regimes	p. 508
Putting the Model into Perspective: Conditions for More Reforms Under a Discretionary Regime	p. 509
Conditions Favoring More Reforms Under a Rule-Based Regime	p. 510
Extension to the Open Economy Case	p. 511
Institutions for Safeguarding Price Stability	p. 524
The Way Towards Central Bank Independence	p. 525
Dimensions of Central Bank Independence	p. 528
Measuring Independence	p. 529
Empirical Evidence	p. 530
The Relation Between Fiscal and Monetary Policy	p. 531
The Government's Single-Period Budget Constraint	p. 532
Seigniorage and the Budget Constraint	p. 533
Inflation and the Single-Period Budget Constraint	p. 534
The Limits to Seignorage Deficit Financing	p. 535
The Intertemporal Budget Constraint	p. 536
The Government Debt Dynamics	p. 540
Extension of the Analysis	p. 541
Consolidation Efforts	p. 543
When Does It Become a "Ponzi Game"?	p. 545
Digression: The Allocation of Power in the Enlarged ECB Governing Council	p. 545
References	p. 572
Transmission Mechanisms	p. 581
The Effects of Changes in Money Supply	p. 581
Interest Rate Channel	p. 584
Asset Price Channel	p. 587
Credit Channel	p. 597
Credit Rationing	p. 599
Digression: The Financial Crisis of 2007/2008 - Overview and Policy Lessons	p. 606
Exchange Rate Channel	p. 621
Theory of Crisis: The Austrian Theory of the Business Cycle	p. 623
The Vector-Autoregressive (VAR) Model - A Benchmark for Analysing Transmission Mechanisms	p. 624
Overview on VAR Models	p. 625
Technicalities of the VAR Model	p. 626
Imposing Restrictions	p. 627
Impulse Response Functions	p. 628
A Simple VAR Model for the US	p. 630
Digression: Global Liquidity and the Dynamic Pattern of Price Adjustment: A VAR Analysis for OECD Countries	p. 633
Monetary Policy and the "Zero Bound" to Nominal Interest Rates	p. 651
Alternative Channels for Monetary Policy	p. 653
References	p. 660
Monetary Policy Strategies	p. 667
Strategy Requirements	p. 667
On the Monetary Policy Strategy	p. 667
Intermediate Variable	p. 669
A Model for Intermediate Targeting	p. 670
Monetary Targeting (MT)	p. 675
Money Growth Targets	p. 676
The Income Velocity of Money	p. 679
Inflation Indicators - Measures of Excess Liquidity	p. 680
The Price Gap	p. 681
The Real Money Gap	p. 685
The Nominal Money Gap	p. 685
The Monetary Overhang	p. 686
Comparisons of the Measures of Excess Liquidity	p. 686
The Difference Between the Nominal Money Gap and the Monetary Overhang	p. 687
The Difference Between the Nominal Money Gap and the Real Money Gap	p. 688
Inflation Targeting (IT)	p. 696
The Role of the Inflation Forecast Under IT	p. 699
A Critical Review of the Inflation Forecasting Exercises	p. 707
Nominal Income Targeting (NIT)	p. 710
Positive Demand Side Shock	p. 711
Negative Demand Side Shock	p. 711
Positive Supply Side Shock	p. 712
Negative Supply Side Shock	p. 712
A Critical Review of NIT	p. 713
Comparing NIT with MT	p. 715
The Taylor Rule	p. 716
A Taylor Rule for the Swedish Riksbank	p. 720
The Measurement Problems of the Taylor Rule	p. 723
Does the Taylor Rule Qualify as a Policy Strategy?	p. 727
Comparing the Taylor Rule with MT	p. 729
The McCallum Rule	p. 731
Calculating the McCallum Rule	p. 732
Illustrations of the Basic McCallum Equation	p. 733
Extensions of the McCallum Rule	p. 735
Final Remarks	p. 737
Interest Rate Targeting	p. 738
Monetary Policy and the Neutral Real Interest Rate	p. 738
Poole's Analysis of Interest Rate Targeting Versus Monetary Targeting	p. 739
Poole's Analysis in the Context of Stochastic Shocks	p. 741
The Monetary Conditions Index (MCI)	p. 746
Digression: How the ECB and the US Fed Set Interest Rates	p. 749
References	p. 787
Index	p. 797
Table of Contents provided by Ingram. All Rights Reserved.