Jesús Manuel García-Iglesias

How the European Central Bank decided its early monetary policy

The main goal of this paper is to detect the mechanisms that should rationally stimulate the decision making-policies of the European Central Bank (ECB). This is carried out under the framework of theoretical principles of interest rate rules. Firstly, we deduce a set of logically advisable guidelines for the strategy actually developed by this central bank. Then we contrast a wide set of hypotheses with reference to those variables the ECB takes into account on deciding its monetary policy, with a flexible treatment regarding the number of months of advance or delay in the explanatory variables. The results lead us to the conclusion that the ECB, besides adopting a smooth strategy, especially bears in mind the expected core inflation rate, with a reaction coefficient adjusted to that initially proposed by Taylor. The economic growth rate, though it has a significant positive coefficient, matters relatively little and is backward looking. Finally, we evaluate up to what point the behaviour of the ECB is assimilative to an inflation targeting framework, solving this question affirmatively.

¿Son asimétricas las reacciones de política monetaria de un banco central? El caso del BCE

Una gran parte de los bancos centrales adopta sus decisiones conforme a determinados objetivos,fundamentalmente de inflacion y crecimiento economico. La pregunta que nos hacemos es sison igual de intensas las reacciones de esos institutos centrales cuando las desviaciones respectoa los objetivos senalados son positivas, en comparacion con el caso en que sean negativas, osi, por el contrario, las reacciones son asimetricas. Para responder a esta cuestion, con base enlos planteamientos taylorianos de la funcion de reaccion de politica monetaria, analizamos lasposibles causas de comportamientos asimetricos y establecemos una metodologia para determinarsi las decisiones de un banco central han sido asimetricas, o no. Empiricamente, analizamosel caso del Banco Central Europeo (BCE), para concluir que en el caso de este no es posibleafirmar que haya reaccionado asimetricamente en el periodo1999-2008.

Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime

The main determinants of monetary policy in Mexico are analysed using conventional reaction functions to evaluate the gradual implementation of inflation targeting (IT) to achieve low and stable rates of inflation. In particular, we look at how the evolution of the inflation, growth and movements in exchange rates have conditioned the decisions of monetary policy taken by the central bank in Mexico for the period 1996 to 2010. Our results show in a systematic way that exchange-rate variations played a major role until 2000 (disinflation period) when IT was explicitly adopted and growth and inflation became the predominant variables with this new monetary regime. We conclude that IT in Mexico has effectively contributed to gain a nominal anchor for monetary policy.

The role of the enhanced carry to risk on currency policy: the Mexican Peso

ABSTRACT One of the most common measures of carry trade attractiveness is the carry-to-risk ratio. On analysing the speculative activity, this ratio presents two issues: First, emerging market currencies could merit a legitimate risk premium in a carry trade strategy due to the sovereign risks involved. In order to correct the measure, we include the credit risk in the measure using credit default swaps. Second, we gather more information about potential volatility asymmetries including a directional speculation indicator known as the risk reversal. We prove that the enhanced measure for the Mexican peso (MXN) is well represented by an ARIMA model with appropriate features since 2009. Due to the output of the analysis, we deduce that the Bank of Mexico might use this measure or a similar indicator, not only to understand the attractiveness of the carry trade strategy but to curb destabilizing carry trade activities. The case is compelling for the Mexican peso due to its dual role as emerging market currency and full convertible currency. We conclude that this institution may effectively manage the enhanced carry-to-risk measures in order to achieve financial stability and proper exchange credibility, and recognize its potential utility for other central banks.