Monetary Aggregates, Asset Prices and Real Outcomes

Paying close attention to money, credit, and asset prices shall improve the IWH's macroeconomic policy work, especially in terms of forecasting macroeconomic developments and risks, but also in terms of assessing the stance of monetary policy. To this end, it is necessary to understand the relationship between monetary and financial developments, on the one hand, and macroeconomic dynamics and stability, on the other hand. Money and credit are important determinants of the macroeconomic performance of a market economy. Research in this group contributes to the literature on quantitative macroeconomic models to be applied for forecasting and policy analysis that incorporate monetary and financial aspects.

Research Cluster
Macroeconomic Dynamics and Stability

Your contact

Professor Boreum Kwak, PhD
Professor Boreum Kwak, PhD
Mitglied - Department Macroeconomics
Send Message +49 345 7753-851

EXTERNAL FUNDING

01.2017 ‐ 12.2017

Effects of exchange rate changes on production and inflation

Deutsche Bundesbank

Professor Dr Oliver Holtemöller

Refereed Publications

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Reconciling Narrative Monetary Policy Disturbances with Structural VAR Model Shocks?

Martin Kliem Alexander Kriwoluzky

in: Economics Letters, No. 2, 2013

Abstract

Structural VAR studies disagree with narrative accounts about the history of monetary policy disturbances. We investigate whether employing the narrative monetary shocks as a proxy variable in a VAR model aligns both shock series. We find that it does not.

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Explosive Preisentwicklung und spekulative Blasen auf Rohstoffmärkten

Oliver Holtemöller

in: ORDO, No. 64, 2013

Abstract

This paper analyzes whether price developments on commodity markets support the hypothesis that commodity prices are subject to speculative behavior in certain time periods. This is an important research question within the ongoing debate on the regulation of commodity trading. It can be shown that commodity prices occasionally exhibit explosive behavior. In particular, this is found for raw industrials, but also for foodstuff. An important implication is that the reasons and the effects on consumers and investors of bubbles on commodity markets have to be investigated in greater detail. Additionally, the distributional effects of these findings should be analyzed in future research.

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The New EU Countries and Euro Adoption

Hubert Gabrisch Martina Kämpfe

in: Intereconomics, No. 3, 2013

Abstract

In the new member states of the EU which have not yet adopted the euro, previous adoption strategies have come under scrutiny. The spillovers and contagion from the global financial crisis revealed a new threat to the countries’ real convergence goal, namely considerable vulnerability to the transmission of financial instability to the real economy. This paper demonstrates the existence of extreme risks for real convergence and argues in favour of a new adoption strategy which does not announce a target date for the currency changeover and which allows for more flexible and countercyclical monetary, fiscal and wage policies.

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Money and Inflation: Consequences of the Recent Monetary Policy

Makram El-Shagi Sebastian Giesen

in: Journal of Policy Modeling, No. 4, 2013

Abstract

We use a multivariate state space framework to analyze the short run impact of money on prices in the United States. The key contribution of this approach is that it allows to identify the impact of money growth on inflation without having to model money demand explicitly. Using our results, that provide evidence for a substantial impact of money on prices in the US, we analyze the consequences of the Fed's response to the financial crisis. Our results indicate a raise of US inflation above 5% for more than a decade. Alternative exit strategies that we simulate cannot fully compensate for the monetary pressure without risking serious repercussions on the real economy. Further simulations of a double dip in the United States indicate that a repetition of the unusually expansive monetary policy – in addition to increased inflation – might cause growth losses exceeding the contemporary easing of the crisis.

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Has the Euro Increased International Price Elasticities?

Oliver Holtemöller Götz Zeddies

in: Empirica, No. 1, 2013

Abstract

The introduction of the Euro has been accompanied by the hope that international competition between EMU member states would increase due to higher price transparency. This paper contributes to the literature by analyzing price elasticities in international trade flows between Germany and France and between Germany and the United Kingdom before and after the introduction of the Euro. Using disaggregated Eurostat trade statistics, we adopt a heterogeneous dynamic panel framework for the estimation of price elasticities. We suggest a Kalman-filter approach to control for unobservable quality changes which otherwise would bias estimates of price elasticities. We divide the complete sample, which ranges from 1995 to 2008, into two sub-samples and show that price elasticities in trade between EMU members did not change substantially after the introduction of the Euro. Hence, we do not find evidence for an increase in international price competition resulting from EMU.

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Working Papers

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Monetary Policy in an Oil-dependent Economy in the Presence of Multiple Shocks

Andrej Drygalla

in: IWH Discussion Papers, No. 14, 2017

Abstract

Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place.

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Same, but Different: Testing Monetary Policy Shock Measures

Alexander Kriwoluzky Stephanie Ettmeier

in: IWH Discussion Papers, No. 9, 2017

Abstract

In this study, we test whether three popular measures for monetary policy, that is, Romer and Romer (2004), Barakchian and Crowe (2013), and Gertler and Karadi (2015), constitute suitable proxy variables for monetary policy shocks. To this end, we employ different test statistics used in the literature to detect weak proxy variables. We find that the measure derived by Gertler and Karadi (2015) is the most suitable in this regard.

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Do We Need New Modelling Approaches in Macroeconomics?

Claudia M. Buch Oliver Holtemöller

in: IWH Discussion Papers, No. 8, 2014

Abstract

The economic and financial crisis that emerged in 2008 also initiated an intense discussion on macroeconomic research and the role of economists in society. The debate focuses on three main issues. Firstly, it is argued that economists failed to predict the crisis and to design early warning systems. Secondly, it is claimed that economists use models of the macroeconomy which fail to integrate financial markets and which are inadequate to model large economic crises. Thirdly, the issue has been raised that economists invoke unrealistic assumptions concerning human behaviour by assuming that all agents are self-centred, rationally optimizing individuals. In this paper, we focus on the first two issues. Overall, our thrust is that the above statements are a caricature of modern economic theory and empirics. A rich field of research developed already before the crisis and picked up shortcomings of previous models.

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Efficiency in the UK Commercial Property Market: A Long-run Perspective

Steven Devaney Oliver Holtemöller R. Schulz

in: IWH Discussion Papers, No. 15, 2012

Abstract

Informationally efficient prices are a necessary requirement for optimal resource allocation in the real estate market. Prices are informationally efficient if they reflect buildings’ benefit to marginal buyers, thereby taking account of all available information on future market development. Prices that do not reflect available information may lead to over- or undersupply if developers react to these inefficient prices. In this study, we examine the efficiency of the UK commercial property market and the interaction between prices, construction costs, and new supply. We collated a unique data set covering the years 1920 onwards, which we employ in our study. First, we assess if real estate prices were in accordance with present values, thereby testing for informational efficiency. By comparing prices and estimated present values, we can measure informational inefficiency. Second, we assess if developers reacted correctly to price signals. Development (or the lack thereof) should be triggered by deviations between present values and cost; if prices do not reflect present values, then they should have no impact on development decisions.

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Monetary Policy in a World Where Money (Also) Matters

Makram El-Shagi Sebastian Giesen

in: IWH Discussion Papers, No. 6, 2012

Abstract

While the long-run relation between money and inflation as predicted by the quantity theory is well established, empirical studies of the short-run adjustment process have been inconclusive at best. The literature regarding the validity of the quantity theory within a given economy is mixed. Previous research has found support for quantity theory within a given economy by combining the P-Star, the structural VAR and the monetary aggregation literature. However, these models lack precise modelling of the short-run dynamics by ignoring interest rates as the main policy instrument. Contrarily, most New Keynesian approaches, while excellently modeling the short-run dynamics transmitted through interest rates, ignore the role of money and thus the potential mid-and long-run effects of monetary policy. We propose a parsimonious and fairly unrestrictive econometric model that allows a detailed look into the dynamics of a monetary policy shock by accounting for changes in economic equilibria, such as potential output and money demand, in a framework that allows for both monetarist and New Keynesian transmission mechanisms, while also considering the Barnett critique. While we confirm most New Keynesian findings concerning the short-run dynamics, we also find strong evidence for a substantial role of the quantity of money for price movements.

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