Paul Mizen

Trade Credit, Bank Lending and Monetary Policy Transmission

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion. In our model we introduce trade credit as an additional source of funding. We predict that when monetary policy tightens there will be a reduction in market and bank lending, and an increase in trade credit. This is confirmed with an empirical investigation of 16,000 manufacturing firms.

Relative Price Variability and Inflation in Europe

The relationship between inflation and the relative variability of prices has been the subject of careful investigation in the United States using data for product groups at the city level. Yet in Europe, where the relationship could have profound effects on the viability of monetary integration, no attempt has been made to study the relationship. This paper fills the gap by examining data disaggregated to the commodity level across 10 EU countries. Evidence is found for logistic smooth transitions in the relative price variability measures within countries and within product groups. When this deterministic component isremoved, the stochastic element is not persistent and does not always have the positive relationship with inflation commonly found in US city data.

Mean Reversion of Real Exchange Rates in High-Inflation Countries

We test for mean reversion in real exchange rates using data from five countries, four of which have experienced episodes of high inflation. Using monthly data for Argentina, Brazil, Chile, Colombia, and Israel, we find that a stochastic unit root model is typically appropriate (Brazil is the exception). Kalman filter estimates of the stochastic unit roots show sharp deviations from unity associated with high inflation episodes. This suggests that stochastic unit root models are a more appropriate way to model mean reversion in real exchange rates for high inflation countries than models with fixed rates of mean reversion.

Evaluating the Empirical Evidence for Currency Substitution: A Case Study of the Demand for Sterling in Europe

Currency substitution has important implications for the cost of European monetary union--if it is significant it will help to reduce costs of convergence to a single currency. This paper informs the policy debate by testing for its existence on a consistent European database making use of cointegration methods. The results demonstrate that, in the two types of models tested, there is no clear evidence of currency substitution in either the short or the long run and that, therefore, currency substitution between sterling and EC currencies cannot be relied upon as a mechanism or an aid to reduce the costs of monetary convergence. Copyright 1994 by Royal Economic Society.

Understanding the disinflations in Australia, Canada and New Zealand using evidence from smooth transition analysis

Abstract This paper investigates the disinflation experiences of three countries, Australia, Canada and New Zealand. Unlike previous approaches which have sought to use institutional data to pre-determine the causes, speed and duration of the transitions to low inflation regimes this paper allows price data itself to determine the speed and timing of the reforms using smooth transition analysis. The results show that the process of transition is related to two factors: central bank independence and the general slowdown in economic activity which occurred during the early 1990s in all OECD countries. Other reforms to the labor market and fiscal policy were less influential.

INFLATION TARGETING: WHAT CAN THE ECB LEARN FROM THE RECENT EXPERIENCE OF THE BANK OF ENGLAND?'

The establishment of the European Central Bank (ECB) presents a rare opportunity to define the operations of a central bank with no prior track record. Before the ECB specifies an, as yet undefined, operational target this paper asks what might be learnt from the recent experience of inflation targeting at the Bank of England. We consider whether there should be single or multiple targets and which, if any, of the existing inflation measures should be used. If inflation is targeted then a forecast of its value becomes the intermediate variable. This raises both the issue of transparency and the issue of providing a compensating supply of information material necessary to fill the gap, but too much ‘openness’ can also be problematic. The ECB must be accountable and the contracting approach may be useful, but being seen to ‘say’ and ‘do’ the same thing is ultimately of the most importance.

How Do Anticipated Changes to Short-Term Market Rates Influence Banks' Retail Interest Rates? Evidence from the Four Major Euro Area Economies

In this paper we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates - a level, slope, curvature model and a principal components model - before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.

CREDIBILITY AND DISINFLATION IN THE EUROPEAN MONETARY SYSTEM

Analysis of interest differentials in the European Monetary System has suggested a widespread lack or credibility of the Exchange Rate Mechanism (ERM) in the sense that in most countries the implicit expected rate of devaluation was significant and not far short of inflation differentials vis-a-vis the deutschmark. The authors present and test a model in which prices reflect expectations of exchange rate behavior. The results provide mixed evidence that price-setting in countries that participated in the ERM was influenced by the exchange rate discipline. Copyright 1997 by Royal Economic Society.

Seigniorage revenue, deficits and self-fulfilling currency crises

Abstract This paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis. The government has an informational advantage and can decide when it is optimal to invoke an ‘escape clause’, i.e. to drop the peg and float. Speculators must guess when the crisis will happen, based on their assessment of the probability of collapse, and this makes pegged exchange rate equilibria unstable.

Modeling the demand for money in the industrial and commercial companies sector in the United Kingdom

Abstract It has been a common assumption that modeling of the sectors should proceed along the same lines as the modeling of aggregate demand for money: This paper questions the wisdom of that assumption for the U.K. company sector. The results are markedly different from the aggregate results reported in Mizen (1992). The paper strongly suggests that modeling of the company sector should be conducted as a separate exercise, and that failure to do so could result in misunderstandings over the effect of changes in policy instruments.