nep-cba New Economics Papers
on Central Banking
Issue of 2013‒09‒13
eighteen papers chosen by
Maria Semenova
Higher School of Economics

  1. FOMC forecasts as a focal point for private expectations By Paul Hubert
  2. Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts By Yuki Teranishi
  3. Trust and Financial Crisis Experiences By Carin van der Cruijsen; Jakob de Haan; David-Jan Jansen
  4. Modeling the impact of forecast-based regime switches on macroeconomic time series By Bel, K.; Paap, R.
  5. Estimating the Preferences of Central Bankers: An Analysis of Four Voting Records By Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D.
  6. The macroeconomics of trend inflation By Guido Ascari; Argia M. Sbordone
  7. The International Financial Crisis and China's Foreign Exchange Reserve Management By Wang, Yongzhong; Freeman, Duncan
  8. Fixed versus Variable Rate Debt Contracts and Optimal Monetary Policy By Tatiana Kirsanova; Jack Rogers
  9. A Macroeconometric Assessment of Minsky’s Financial Instability Hypothesis By Matthew Greenwood-Nimmo; Artur Tarassow
  10. Controlled dismantlement of the Eurozone: A proposal for a New European Monetary System and a new role for the European Central Bank By Stefan Kawalec; Ernest Pytlarczyk
  11. A Growth Perspective on Foreign Reserve Accumulation. By Cheng, G.
  12. International Monetary Transmission to the Euro Area: Evidence from the US, Japan and China By Vespignania, Joaquin L.; Ratti, Ronald A.
  13. Liquidity Effects of Central Banks' Asset Purchase Programs By Mahmoudi, Babak
  14. Measuring the effect of the zero lower bound on yields and exchange rates By Eric T. Swanson; John C. Williams
  15. Chinese Monetary Expansion and the US Economy By Vespignania, Joaquin L.; Ratti, Ronald A.
  16. On the impact of the global financial crisis on the euro area By Ligthart, Jenny; He, Xiaoli; Jacobs, Jan; Kuper, Gerard
  17. Do Exchange Rates Affect Inflation? Evidence from Emerging Market Economies By Baki Demirel; Baris Alpaslan; Emre Guneser Bozdag
  18. Monetary Transmission to UK Retail Mortgage Rates before and after August 2007 By Jack R. Rogers

  1. By: Paul Hubert (Ofce sciences-po)
    Abstract: We explore empirically the theoretical prediction that public information acts as a focal point in the context of the US monetary policy. We aim at establishing whether the publication of FOMC inflation forecasts affects the cross-sectional dispersion of private inflation expectations. Our main finding is that publishing FOMC inflation forecasts has a negative effect on the cross-sectional dispersion of private current-year inflation forecasts. This effect is found to be robust to another survey dataset and to various macroeconomic controls. Moreover, we find that the dispersion of private inflation forecasts is not affected by the dispersion of views among FOMC members.
    Keywords: monetary policy,central bank communication,public information, survey expectations,dispersion
    JEL: E52 E58 E37
    Date: 2013–07
  2. By: Yuki Teranishi
    Abstract: We investigate a new source of economic stickiness: namely, staggered loan interest rate contracts under monopolistic competition. The paper introduces this mechanism into a standard New Keynesian model. Simulations show that a response to a financial shock is greatly amplified by the staggered loan contracts though a response to a productivity, cost-push or monetary policy shock is not much affected. We derive an approximated loss function and analyse optimal monetary policy. Unlike other models, the function includes a quadratic loss of the first-order difference in loan rates. Thus, central banks have an incentive to smooth the policy rate.
    Keywords: Staggered loan interest rate, economic fluctuation, optimal monetary policy
    JEL: E32 E44 E52 G21
    Date: 2013–07
  3. By: Carin van der Cruijsen; Jakob de Haan; David-Jan Jansen
    Abstract: Using eight annual surveys from the Netherlands between 2006 and 2013, we examine whether financial crisis experiences affect trust in banks, trust in the banking supervisor, and generalized trust. Adverse experiences during the financial crisis do not only directly lower trust in banks, but also have a negative effect on generalized trust. Customers of a bank that ran into problems have less trust in banks than respondents without this experience. Our results also indicate that respondents who were customer of a bank that failed have a significantly stronger decline of generalized trust than respondents without this experience. Personal financial crisis experiences do not have a significant effect on trust in the banking supervisor.
    Keywords: trust; bank bailout; bank failure; financial crisis; households; survey data
    JEL: D10 D84 E58
    Date: 2013–08
  4. By: Bel, K.; Paap, R.
    Abstract: Forecasts of key macroeconomic variables may lead to policy changes of governments, central banks and other economic agents. Policy changes in turn lead to structural changes in macroeconomic time series models. To describe this phenomenon we introduce a logistic smooth transition autoregressive model where the regime switches depend on the forecast of the time series of interest. This forecast can either be an exogenous expert forecast or an endogenous forecast generated by the model. Results of an application of the model to US inflation shows that (i) forecasts lead to regime changes and have an impact on the level of inflation; (ii) a relatively large forecast results in actions which in the end lower the inflation rate; (iii) a counterfactual scenario where forecasts during the oil crises in the 1970s are assumed to be correct leads to lower inflation than observed.
    Keywords: forecasting;nonlinear time series;inflation;regime switching
    Date: 2013–08–08
  5. By: Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: This paper analyzes the voting records of four central banks (Sweden, Hungary, Poland and the Czech Republic) with spatial models of voting. We infer the policy preferences of the monetary policy committee members and use these to analyze the evolution in preferences over time and the differences in preferences between member types and the position of the Governor in different monetary policy committees.
    Keywords: Ideal points;Voting records;Central Banking;NBP;CNB;MNB;Riksbank.
    JEL: E58 E59 C11
    Date: 2013
  6. By: Guido Ascari; Argia M. Sbordone
    Abstract: Most macroeconomic models for monetary policy analysis are approximated around a zero-inflation steady state, but most central banks target inflation at a rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound (ZLB) constraint on monetary policy. In this survey, we show the importance of appropriately accounting for a low, positive trend inflation rate for the conduct of monetary policy. We first review empirical research on the evolution and dynamics of U.S. trend inflation, as well as some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. Then we construct a generalized New Keynesian model that accounts for a positive trend inflation rate. We find that, in this model, higher trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution in evaluating recent proposals to address the existing ZLB situation by raising the underlying rate of inflation.
    Keywords: Inflation (Finance) ; Monetary policy ; Inflation targeting
    Date: 2013
  7. By: Wang, Yongzhong; Freeman, Duncan
    Abstract: The US financial crisis and subsequent European sovereign debt crisis not only constitute serious threats to the security of China’s foreign exchange reserves, but also provide an advantageous opportunity for China to change its ideas on foreign exchange reserve management. First, according to rules of thumb, the authors assess the optimal size of China’s foreign exchange reserves in terms of short-term external debt, imports and domestic liquid assets. Second, the paper estimates the asset structure of China’s foreign reserves based on the statistics on China’s holding of US and Japanese securities. Third, the authors calculate the People’s Bank of China sterilization costs from the perspective of issuing central bank notes and raising required reserve ratios. Fourth, the paper measures the total and net investment yield of China’s foreign reserves in terms of nominal dollars, real dollars (dollar index) and nominal renminbi. Finally, the authors put forward suggestions on how to accelerate the diversification of China’s international reserves.
    Keywords: International financial crisis, foreign exchange reserves, management, diversification.
    JEL: E58 F31 G18
    Date: 2013–03–29
  8. By: Tatiana Kirsanova (University of Glasgow); Jack Rogers (Department of Economics, University of Exeter)
    Abstract: What role does the proportion of fixed versus variable rate debt contracts play in the macroeconomy? We explore this issue by integrating borrowing-constrained households with a quantity-optimising banking sector that lends under either fixed or variable rates. Our framework is then used to investigate the relationships between the structure of debt contracts and monetary policy. In particular, we study the propagation of productivity shocks in the non-durable sector under Ramsey monetary policy. The introduction of overlapping debt contracts tempers the effect of the financial multiplier and reduces the deterministic component of social welfare, but we also show that an appropriate design of debt contracts, including both their length and their interest rate composition, can reduce volatility of the key economic variables, in such a way that the financial sector can play a stabilising role in the economy. We demonstrate that an intermediate ratio of fixed- and variable-rate debt contracts is socially optimal.
    Keywords: Optimal Monetary Policy, Fixed Rate Debt, Durable Goods, Collateral Constraints, Financial Accelerator.
    JEL: E52
    Date: 2013
  9. By: Matthew Greenwood-Nimmo (University of Melbourne); Artur Tarassow (Universität Hamburg (University of Hamburg))
    Abstract: The Financial Instability Hypothesis associated with Hyman Minsky has profound implications for the conduct of monetary policy in modern capitalist economies. At its core is the proposition that the central bank may contribute to the financial fragility of leveraged firms in its pursuit of inflation-targeting interest rate policies. This paper develops a small macroeconomic model incorporating many of the salient features of a Minskyan economy. The imposition of the resulting theoretical restrictions in a CVAR model provides support for Minsky’s main proposition that interest rate innovations can drive a wedge between the cash-inflows of firms and their debt-servicing obligations. The paper concludes that the implementation of countercyclical capital requirements can provide monetary policymakers with additional policy instruments that can be used to cool overheated sectors without recourse to the ‘blunt instrument’ of interest rate policy.
    Keywords: Monetary Policy, Inflation Targeting, Financial Instability Hypothesis, Cointegrating VAR, Asset Price Cycles
    JEL: C32 C51 E32 E52
    Date: 2013–09
  10. By: Stefan Kawalec (Capital Strategy Sp. z o. o.); Ernest Pytlarczyk (BRE Bank S.A.)
    Abstract: In Kawalec and Pytlarczyk (2013), we argue that the single European currency constitutes a serious threat to the European Union and the Single European Market,and we propose a controlled dismantlement of the Eurozone. In this paper, we undertake a deeper analysis of the measures which would minimize the risks throughout the process of the Eurozone dismantlement and contribute to rebuilding confidence in the future of Europe. · The dismantlement should be the result of a consensual decision to replace the euro with an alternative system of currency coordination. · The dismantlement should start with the exit of the most competitive countries. In the meantime, the euro should remain the common currency of less competitive countries. · The European Central Bank (ECB) should be preserved as the central bank for all 17 Eurozone member countries, even after some of those countries have replaced the euro with new currencies. In this capacity, the ECB should be in charge of designing,preparing, and implementing the segmentation of the Eurozone as well as managing the new currency coordination system – European Monetary System 2. · The forthcoming EU – USA free trade agreement would build new momentum for economic growth and contribute to restoring confidence in the future of Europe. As of today, neither the member states of the Eurozone nor European institutions such as the European Commission or the ECB have been able to come up with a game-changing proposal such as the Eurozone dismantlement. However, this may change as a result of adverse economic and political developments. One of the potential triggers could be the situation in France. Classification-JEL: E5, E58, F15, F31, G18
    Keywords: Eurozone crisis; Euro breakup; European Central Bank; Dismantlement of the Eurozone; currency coordination; European Monetary System 2.
    Date: 2013
  11. By: Cheng, G.
    Abstract: Based on a dynamic open-economy macroeconomic model, this paper aims at understanding the contribution of domestic financial underdevelopment to foreign reserve accumulation in some emerging market economies, especially in China. It is argued that foreign reserve accumulation is part and parcel of a growth strategy based on strong capital investment in a financially constrained economy. It is further proved using a Ramsey problem that purchasing international reserves is a welfare-improving policy in terms of production efficiency gains if it is jointly used with capital controls. In fact, when domestic firms are occasionally credit-constrained and they do not have a direct access to international financial market, they need domestic saving instruments to increase their retained earnings so that they can sufficiently invest in capital. The central bank plays the role of financial intermediary and provides domestic firms with liquid public bonds, thus relaxing domestic financial constraints. The proceeds of domestic public bonds are invested abroad due to the limited scope of domestic financial market and a depressed domestic interest rate, leading to foreign reserve stockpiling. The speed of foreign reserve accumulation would slow down once the economic growth rate decelerates and the domestic financial market develops.
    Keywords: Foreign reserves, capital controls, credit constraints, domestic savings, capital investment, economic growth, Chinese economy.
    JEL: E22 F31 F41 F43
    Date: 2013
  12. By: Vespignania, Joaquin L. (School of Economics and Finance, University of Tasmania); Ratti, Ronald A. (School of Business, University of Western Sydney)
    Abstract: There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods.
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–08–05
  13. By: Mahmoudi, Babak
    Abstract: I construct a model of the monetary economy, in which different assets provide liquidity services. Assets differ in terms of the liquidity services they provide, and money is the most liquid asset. The central bank can implement policies by changing the relative supply of money and other assets. I show that the central bank can change the overall liquidity and welfare of the economy by changing the relative supply of assets with different liquidity characteristics. A liquidity trap exists away from the Friedman rule that has a positive real interest rate; the central bank's asset purchase/sale programs may be ineffective in instances of low enough inflation rates. My model also enables me to study the welfare effects of a restriction on trade with government bonds.
    Keywords: Open-Market Operation, Liquidity Effects, Liquidity Trap
    JEL: E0 E4 E5
    Date: 2013–06–21
  14. By: Eric T. Swanson; John C. Williams
    Abstract: The zero lower bound on nominal interest rates began to constrain many central banks’ setting of short-term interest rates in late 2008 or early 2009. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the monetary policy rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we apply the methods of Swanson and Williams (2013) to medium- and longer-term yields and exchange rates in the U.K. and Germany. In particular, we compare the sensitivity of these rates to macroeconomic news during periods when short-term interest rates were very low to that during normal times. We find that: 1) USD/GBP and USD/EUR exchange rates have been essentially unaffected by the zero lower bound, 2) yields on German bunds were essentially unconstrained by the zero bound until late 2012, and 3) yields on U.K. gilts were substantially constrained by the zero lower bound in 2009 and 2012, but were surprisingly responsive to news in 2010–11. We compare these findings to the U.S. and discuss their broader implications.
    Keywords: Interest rates ; Monetary policy
    Date: 2013
  15. By: Vespignania, Joaquin L. (School of Economics and Finance, University of Tasmania); Ratti, Ronald A. (School of Business, University of Western Sydney)
    Abstract: This paper examines the influence of monetary shocks in China on the U.S. economy over 1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through effects in demand for imports, particularly that of commodities. China’s growth influences world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. China’s monetary expansion is also associated with significant decreases in the trade weighted value of the U.S. dollar that is due to the operation of a pegged currency. China manages the exchange rate and has extensive capital controls in place. In terms of the Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a managed exchange rate permit China to pursue an independent monetary policy with consequences for the U.S.
    Keywords: Keywords: International monetary transmission, China’s monetary aggregates
    JEL: E52 F41 F42
    Date: 2013–08–05
  16. By: Ligthart, Jenny; He, Xiaoli; Jacobs, Jan; Kuper, Gerard (Groningen University)
    Abstract: This paper analyses the impact of the Global Financial Crisis on the Euro area utilizing a simple dynamic macroeconomic model with interaction between monetary policy and fiscal policy. The model consists of an IS curve, a Phillips curve, a term structure relation, a debt accumulation equation and a Taylor monetary policy rule supplemented with a Zero Lower Bound, and a fiscal policy rule. The model is alibrated/estimated for EU-16 countries for the period 1980Q1-2009Q4. The impact of the Global Financial Crisis is studied by means of impulse responses following a combined, prolonged aggregate demand and public debt shock. The simulation mimicking the GFC turns out to work fairly well. However, the required size of the shock is quite large.
    Date: 2013
  17. By: Baki Demirel (University of Gaziosmanpasa, Faculty of Economics and Administrative Sciences, Economics); Baris Alpaslan (University of Manchester, School of Social Sciences, Economics); Emre Guneser Bozdag (University of Gazi, Faculty of Economics and Administrative Sciences, Economics)
    Abstract: After 1980s, chronic inflation in Turkey has shaken the confidence in the domestic currency, and thus operating debit-credit transactions through dollars. The aim of this study is to analyse the impact of exchange rate pass-through into inflation in both Turkey and emerging market economies that were highly dollarized and shifted to a flexible exchange rate regime, together with inflation targeting policy in an attempt to switch to the advanced economy, and to examine whether stabilization programs under flexible exchange rate regimes and particularly inflation targeting policy may eliminate dollarization in the periods 1995-2001 and 2002-2010.
    Keywords: De-Dollarization, Inflation Targeting, Exhange Rate Pass-Through
    JEL: E42 E52 E58
    Date: 2013–09
  18. By: Jack R. Rogers (Department of Economics, University of Exeter)
    Abstract: This paper investigates the transmission from UK policy and a range of wholesale money market rates to retail mortgage rates using the long-run estimator proposed by Phillips and Loretan (1991), with a single-equation error correction model (SEECM) framework, from 1995 to 2009. I document the economy-wide effect of the financial market turmoil since August 2007, and show how this has altered long- and short-term relationships. In the long-run there is evidence of a contrast between the discounted mortgage rates that banks may use to initially attract customers, and standard variable rates, with pass-through complete for the former but not for the latter. For fixed rate mortgages, pass-through is generally complete. Since the crisis, for eight of the seventeen estimated relationships I find strong evidence in the long-run of both a significant jump in equilibrium spreads, and a fall in pass-through, whilst in the short-run there is a considerable weakening of the process that re-adjusts retail rates back towards their equilibrium with the money market. Although I do not find strong statistical evidence for an asymmetric re-adjustment process before August 2007, retail mortgage rates generally take considerably longer to move back towards their equilibrium with wholesale rates during times when they are relatively expensive. These results add to previous studies by showing that the UK retail banking sector is imperfectly competitive at the aggregate level, and also suggest that discounted rates are used as a highly competitive loss-leader product.
    Keywords: Mortgage Rates, Monetary Transmission, Error Correction Model.
    JEL: E43 E52
    Date: 2013

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