Browsing by Subject "Monetary policy--Mathematical models."

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Open Access
Currency substitution in high inflation countries : an empirical analysis
(2001) Güney Yılmaz, Çiğdem
This study explores the importance of currency substitution phenomena, encountered mostly in high inflation countries rather than other countries. First, it investigates the causes and consequences of currency substitution. It then employs a measure of the currency substitution to estimate the elasticity of substitution between two currencies; national and foreign currencies in a money-in-the-utility framework. The utility function of representative agents includes consumption and money services separately and is linear in consumption. Money services are produced by combining domestic and foreign real balances in Constant Elasticity of Substitution production function. The presence of money services in the utility function is to indicate the transaction costs reducing properties of the two currencies. Ten high inflation countries are analyzed for the empirical measurements. Assumed as small, open economies each of these countries is compared to the rest of the world represented by the United States. The shares of domestic and foreign real balances, the discount factors, the shares of money services in the utility functions and the elasticities of substitution are directly estimated by Hansen’s Generalized Method of Moments procedure. The fact that inflation reduces the credibility of domestic currency leads to high elasticity of substitution between two currencies in the market of high inflation countries. In other words, the public is vulnerable to the changes in the relative prices while deciding their money allocations and currency substitution is of first-order importance in these countries.
Open Access
Panel cointegration analysis to exchange rate determination : monetary model versus Taylor rule model
(2009) Kutlu, Vesile
This thesis examines the validity of the monetary model and the Taylorrule model in determining exchange rates in the long run. The monetary model and the Taylor-rule model are tested using the US dollar exchange rates over 1980:01-2007:04 periods for 13 industrialized countries. Johansen Fisher Panel cointegration technique provides evidence that there exist a unique cointegration relationship between the nominal exchange rates and a set of fundamentals implied by the monetary model and the Taylor rule model. The cointegrating coefficient estimates for the monetary model and the Taylor rule model are found by using panel dynamic ordinary least square (DOLS) estimator. The estimation results show that the effects of the monetary and the Taylor rule fundamentals on exchange rates are not the same as what the theory suggests. Overall, the findings of this thesis imply that there is no support for the monetary model and there is little support for Taylor-rule model in explaining exchange rates.
Open Access
A supply side limited participation model of monetary transmission mechanism
(2001) Karaca, Zeynal
This thesis is a theoretical investigation of how money growth affects output, employment, consumption and real wages from a supply side channel. We analyze the effects of monetary shocks under deterministic and stochastic environments in a limited participation model with competitive and sticky wages. We find that anticipated money growth decreases output, employment, consumption, working capital and real wages, but increases profitability of the firms. Unanticipated money growth under sticky wages increases employment, output and consumption, decreases price and profits. The main contribution of this thesis to the literature is that when sticky nominal wages are included in a limited participation model with inelastic labor supply stylized business cycle facts can be obtained
Open Access
Welfare-based evalution of alternative loss functions for small open economies
(2009) Özhan, Galip Kemal
This master’s thesis compares outcomes of alternative loss functions to optimal monetary policy in small open economies as the degree of openness increases. The small open economy model that is laid out by Gali and Monacelli (2005) is taken as the baseline framework. Based on a second order Taylor approximation to the utility function, the optimal monetary policy is derived. Then, using the optimal policy as a benchmark, four alternative loss functions are evaluated. Among others, minimizing the variance of domestic inflation achieves the minimum loss and is equivalent to optimal policy. Minimization of CPI inflation variance gives higher losses compared to minimization of domestic inflation variance. Lastly, attributing positive weight to dampening exchange rate fluctuations increases welfare losses.