last updated: December 31, 2008

Published Papers

Maintaining Low Inflation: Money, Interest Rates, and Policy Stance

Journal of Monetary Economics, July 2007, vol. 54(5), pp. 1441-1471.

Available online at: http://www.ecb.int/pub/pdf/scpwps/ecbwp756.pdf

European Central Bank Working Paper Series no. 756, May 2007.

This paper presents a systematic empirical relationship between money and subsequent prices and output, using US, euro area and Swiss data since the 1960-70s. Monetary developments, unlike interest rate stance measures, are shown to provide qualitative and quantitative information on subsequent inflation. The usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short-term interest rates and real activity measures. The analysis sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening, and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates.
JEL classification: E52; E58; E41; E3
Keywords: Monetary policy; Monetary aggregates; Inflation; Output; Taylor rule; Equilibrium interest rate

Financial Market Participation and the Apparent Instability of Money Demand

Journal of Monetary Economics, September 2004, vol. 51(6), pp. 1297-1317.

Available online at: http://www.snb.ch/n/mmr/reference/working_paper_2004_01/source/working_paper_2004_01.n.pdf

Swiss National Bank Working Papers, 2004-1.

This paper uses multi-period cross-sectional data on financial assets holdings to shed light on the postwar stability of money demand in the United States. I first present a new measure of the evolution of financial market participation, by relating participation to the extensive margins of money demand, and quantify the influence of wealth on participation decisions. I then relate the increase in participation to the period of "missing money" and to the subsequent higher interest rate elasticity of monetary aggregates. The paper indicates that time series estimations of money demand relationships are inherently flawed and tend to inappropriately suggest instability.
JEL classification: E41; E44; G11
Keywords: Money Demand; Financial Market Participation; Cross-Sections

Working Papers

What Drives the Swiss Franc? Swiss National Bank Working Papers, 2008-14.

Available online at: http://www.snb.ch/n/mmr/reference/working_paper_2008_14/source/working_paper_2008_14.n.pdf

This paper analyzes the behavior of the Swiss franc (CHF) over the past 35 years. It relates the evolution of the CHF exchange rates to economic fundamentals like the relative competitiveness of the Swiss export sector, accumulated current accounts, interest rate differentials and oil prices. Some factors like the introduction of the euro, a relative increase in Swiss domestic productivity and higher oil prices seem to have modified the CHF behavior in the last decade, but more data will be needed to draw definitive conclusions. The paper relies on different data sources and assesses potential exchange rate determinants under different angles. Overall, measurement and econometric issues would make it difficult to determine a unique econometric specification or specific values for equilibrium exchange rates.
JEL classification: F31; F32
Keywords: Swiss franc; exchange rates; fundamentals

Money and the Great Disinflation. Swiss National Bank Working Papers, 2006-7.

Available online at: http://www.snb.ch/n/mmr/reference/working_paper_2006_07/source/working_paper_2006_07.n.pdf

Using U.S. and euro area data, this paper presents a significant and proportional relationship between money growth and subsequent inflation when accounting for equilibrium velocity movements due to inflation regimes changes. These movements, driven by money demand adjustments to low-frequency Fisherian interest rate variations, are derived from consistent U.S. and euro area money demand specifications - after contradictory coexisting results are explained. Not accounting for equilibrium velocity and interest rate movements biases cross-country and time series dynamic money growth / inflation estimated relationships, and leads to the non-proportional, non-significant, and reverse causality results found in studies that include the post-1980 period.
JEL classification: E52; E58; E41; E31
Keywords: Money growth; Inflation; Equilibrium velocity; Quantity theory; Money demand

Optimal Cyclical Monetary Policy: Does Steady-State Inflation Matter? Study Center Gerzensee Working Paper 03.07, 2003.

Available online at: http://www.szgerzensee.ch/fileadmin/Dateien_Anwender/Dokumente/working_papers/wp-0307.pdf

In general equilibrium models, optimal cyclical monetary policy is usually derived around an optimal steady-state inflation level, which in most cases is zero or equal to the negative of the real interest rate. This paper examines whether and how different steady-state inflation levels and other steady-state distortions affect the optimal monetary policy response to shocks. This issue is first discussed in general terms. Then, a simple example is presented, where optimal policy can be procyclical or countercyclical depending on the steady-state inflation level. This paper suggests that both issues of the choice of inflation target and optimal cyclical monetary policy should be addressed simultaneously, as steady-state distortions influence the optimal reaction of monetary policy to shocks. More generally, the paper shows that assumptions about steady-state distortions affect the derived optimal cyclical policy.

Work in Progress

Modeling Monetary Policy. (with Andreas Schabert)

Models currently used for monetary policy analysis equate the monetary policy interest rate instrument to the consumption Euler rate which is related to expected consumption growth and inflation, i.e. the two variables monetary policy is designed to control. This specification however fails badly on data: both rates are negatively correlated and the spread between these two rates co-moves negatively with the policy rate. We propose a more realistic model of monetary policy, consistent with these empirical co-movements, where the central bank affects nominal spending by influencing the value of assets which the private sector directly uses to obtain means of payment for consumption via open market operations. The liquidity premium of these assets, i.e. the spread between the Euler rate and their yield, varies according to how much the private sector values the transaction service they provide. In addition, our model implies a new monetary transmission mechanism and can be used to analyze the effects of changes in aggregate risk and liquidity shocks on money market interest rates and policy.

Monetary Policy Effects on Long-term Rates and Stock Prices. (with Angelo Ranaldo)

Swiss Inflation and Monetary Developments. (with Michel Peytrignet)

Discussions

Discussion on "Breaking the New Keynesian Dichotomy: Asset Market Segmentation and the Monetary Transmission Mechanism", by R. King and J. Thomas, International Research Forum on Monetary Policy: Fifth Conference, ECB, Frankfurt am Main, June 2008.

Discussion on "Money in Monetary Policy Design: ECB-Style Cross-Checking in the New Keynesian Model", by G. Beck and V. Wieland, Monetary Strategy: Old Issues and New Challenges, Deutsche Bundesbank, Frankfurt am Main, June 2007.

Discussion on "Money and Monetary Policy: The ECB Experience 1999-2006", by B. Fischer, M. Lenza, H. Pill, and L. Reichlin, AEA Annual Meetings, Chicago, January 2007. (available on request)