nep-cba New Economics Papers
on Central Banking
Issue of 2016‒01‒29
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Policy and macro signals as inputs to inflation expectation formation By Hubert, Paul; Maule, Becky
  2. Inflation expectations and monetary policy under disagreements By Yoshiyuki Nakazono
  3. Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation By Van Zandweghe, Willem; Hirose, Yasuo; Kurozumi, Takushi
  4. Asymmetric Inflation Expectations, Downward Rigidity of Wages and Asymmetric Business Cycles By David Rezza Baqaee
  5. Understanding Inflation as a Joint Monetary-Fiscal Phenomenon By Campbell Leith; Eric Leeper
  6. Exploring International Differences in Inflation Dynamics By Yamin Ahmad; Olena Mykhaylova
  7. Macroprudential policy: objectives, instruments and indicators By Javier Mencía; Jesús Saurina
  8. Taming macroeconomic instability : monetary and macro prudential policy interactions in an agent-based model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  9. Global Liquidity and Monetary Policy Autonomy By Stefan Angrick
  10. The Shape of Regulation to Come By José Jorge
  11. What drives the global official/policy interest rate? By Ratti, Ronald; Vespignani, Joaquin
  12. Understanding the deviations of the Taylor Rule: a new methodology with an application to Australia By Hudson, Kerry; Vespignani, Joaquin
  13. Monetary policy and indeterminacy after the 2001 slump By Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
  14. Liquidity, Government Bonds and Sovereign Debt Crises By Francesco Molteni
  15. Fragility of Money Markets By Ranaldo, Angelo; Rupprecht, Matthias; Wrampelmeyer, Jan

  1. By: Hubert, Paul (OFCE — Sciences Po.); Maule, Becky (Bank of England)
    Abstract: How do private agents interpret central bank actions and communication? To what extent do the effects of monetary shocks depend on the information disclosed by the central bank? This paper investigates the effect of monetary shocks and shocks to the Bank of England’s inflation and output projections on the term structure of UK private inflation expectations, to shed light on private agents’ interpretation of central bank signals about policy and the macroeconomic outlook. We proceed in three steps. First, we correct our dependent variables — market-based inflation expectation measures — for potential risk, liquidity and inflation risk premia. Second, we extract exogenous shocks following Romer and Romer (2004)’s identification approach. Third, we estimate the linear and interacted effects of these shocks in an empirical framework derived from the information frictions literature. We find that private inflation expectations respond negatively to contractionary monetary policy shocks, consistent with the usual transmission mechanism. In contrast, we find that inflation expectations respond positively to positive central bank inflation or output projection shocks, suggesting private agents put more weight on the signal that they convey about future economic developments than about the policy outlook. However, when shocks to central bank inflation projections are interacted with shocks to output projections of the same sign, they have no effect on inflation expectations, suggesting that private agents understand the functioning of the central bank reaction function and put more weight on the policy signal when there is no trade-off. We also find that the effects of contractionary monetary shocks are amplified when they are accompanied by positive shocks to central bank inflation projections. The co-ordination of policy decisions and macroeconomic projections thus appears important for managing inflation expectations.
    Keywords: Monetary policy; information processing; signal extraction; market-based inflation expectations; central bank projections; real-time forecasts
    JEL: E52 E58
    Date: 2016–01–22
  2. By: Yoshiyuki Nakazono (Yokohama City University)
    Abstract: Using a wide range of survey data on Japanese inflation outlook, this study examines two types of disagreements regarding inflation expectations and accordingly, presents monetary policy implications. The analysis reveals three key findings. First, information rigidities are determinants of cross-sectional disagreement among not only households but also experts. Second, survey data indicate dissonance regarding the long-run forecasts of inflation rates between the central bank and economic entities, despite the adoption of a 2% inflation target in January 2013 and the introduction of an unconventional monetary policy (QQE) in April 2013. While short- and mid-term inflation forecasts by households are generally close to the 2% target rate, long-term forecasts fail to converge to the target level. Finally, under the two types of disagreements, the private sector's perception about a monetary policy stance does not significantly differ before and after the introduction of the inflation target and QQE. These findings suggest that the policy regime of the monetary policy dose not abruptly change on basis of perception; that is, there is no upheaval in the agentsf perception about a monetary policy stance enough to induce a regime change.
    Keywords: disagreement; forecast data; inflation expectations; inflation target; information rigidities; unconventional monetary policy
    JEL: E31 E44 E52 E58
    Date: 2016–01–14
  3. By: Van Zandweghe, Willem (Federal Reserve Bank of Kansas City); Hirose, Yasuo; Kurozumi, Takushi
    Abstract: What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables suffices for explaining the shift.
    Keywords: Equilibrium indeterminacy; Monetary policy; Inflation
    JEL: C11 E31 E52
    Date: 2015–12–01
  4. By: David Rezza Baqaee (Department of Economics, London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Household expectations of the in ation rate are much more sensitive to inflation than to disinflation. To the extent that workers have bargaining power in wage determination, this asymmetry in their beliefs can make wages respond quickly to inflationary forces but sluggishly to deflationary ones. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation in ways consistent with the data. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.
    Date: 2015–12
  5. By: Campbell Leith; Eric Leeper
    Abstract: We develop the theory of price-level determination in a range of models using both ad hoc policy rules and jointly optimal monetary and fiscal policies and discuss empirical issues that arise when trying to identify monetary-fiscal regime. The article concludes with directions in which theoretical and empirical developments may go. The article is prepared for the Handbook of Macroeconomics, volume 2 (John B. Taylor and Harald Uhlig, editors, Elsevier Press).
    Date: 2016–01
  6. By: Yamin Ahmad (Department of Economics, University of Wisconsin-Whitewater); Olena Mykhaylova (Department of Economics, College of the Holy Cross)
    Abstract: Standard closed-economy DSGE models have difficulty replicating the persistence of inflation. We use a multicountry dataset to establish some empirical regularities on persistence and volatility of aggregate consumer prices for 161 countries. We find persistence to be high (low) on average for developed (developing) countries, while volatility is low (high) on average for the same country groupings. We then employ a two-country DSGE framework to investigate the extent to which structural open economy features, such as incomplete exchange rate pass-through, the existence of nontraded goods, and international financial market incompleteness, can help in replicating the persistence and volatility of consumer prices. Our simulation results indicate that nominal price inertia in both wholesale and retail sectors has the potential to reconcile both the persistence and volatility of simulated inflation series with the data. When we simulate inflation series in the version of the model calibrated to a developing-developed country pair by allowing for different price contract durations and export currency choices, we are able to replicate the empirical differences reported in the first part of the paper.
    Keywords: Inflation dynamics, persistence, volatility, DSGE modeling, simulations
    JEL: E31 F41 C22
    Date: 2015–09
  7. By: Javier Mencía (Banco de España); Jesús Saurina (Banco de España)
    Abstract: This document presents the analytical framework recently developed by the Banco de España for the implementation of its macroprudential policy. The methodology described uses a broad set of indicators that enables macroprudential risks to be monitored through risk mapping. This framework will provide support for the Banco de España’s broad macroprudential policy stance. Este documento presenta el marco analítico desarrollado recientemente por el Banco de España para la puesta en marcha de su política macroprudencial. La metodología descrita incorpora un amplio conjunto de indicadores que permiten realizar un seguimiento de los riesgos macroprudenciales a través de un mapa de riesgos. El marco servirá de soporte para definir la orientación general de la política macroprudencial del Banco de España.
    Keywords: early warning indicators, macroprudential policy stance, macroeconomic actual conditions
    JEL: G21 G32
    Date: 2016–01
  8. By: Lilit Popoyan (Institute of Economics, (LEM)); Mauro Napoletano (OFCE Sciences Po and Skema Businnes School); Andrea Roventini (Institute of Economics, (LEM))
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macroprudential regulations and their possible interactions with dierent monetary policy rules.The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple- mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplifiedregulatory framework. Finally, the components of Basel III are non-additive: the inclusion of an additional lever does not always improve the performance of the macro prudential regulation
    Keywords: Macro-prudential policy, Basel III regulation, financial stability, monetary policy, agent-based computational economics.
    JEL: C63 E52 E6 G01 G21 G28
    Date: 2015–12
  9. By: Stefan Angrick
    Abstract: This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.
    Keywords: central banking, balance sheets, monetary policy, exchange rates, policy autonomy
    JEL: E51 E58 F41
    Date: 2015
  10. By: José Jorge (Faculdade de Economia, Universidade do Porto, cef.up)
    Abstract: We identify the main changes in the global financial system over the last decade, pointing out the fragilities of the existing banking regulation. We then propose a variety of responses to the new challenges, like limiting banks’ non-core liabilities, introducing contingent capital and risk-weights that account for systemic risk, combining monetary policy with policies that promote financial stability, improving international cooperation regarding liquidity facilities, integrating regulation on deposit insurance and resolution of bank default. We point out some unexpected difficulties which threaten the reform agenda, and conclude with a warning: the business cycle matters when assessing the cost of new regulations, and imposing tighter rules that will create a credit crunch during a recession is questionable.
    Keywords: Keywords: Financial regulation
    JEL: G28
    Date: 2016–01
  11. By: Ratti, Ronald (School of Business, University of Western Sydney); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of official/policy interest rate. We find that 62% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (21%), oil prices (18%), global output (15%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output and prices and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVAR
    JEL: E44 E50 Q43
    Date: 2015
  12. By: Hudson, Kerry (Tasmanian School of Business & Economics, University of Tasmania); Vespignani, Joaquin (Tasmanian School of Business & Economics, University of Tasmania)
    Abstract: This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia‘s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world‘s largest economy.
    Keywords: Taylor Rule, Monetary Policy, Small Open Economy
    JEL: E40 E52 E50
    Date: 2015
  13. By: Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical inflation series in the estimation. When using CPI or PCE, we find some support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. Instead, when measuring inflation with core PCE, monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator. We re-formulate the artificial economy as a factor model where the theory's concept of inflation is the common factor to the three empirical inflation series. We find that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy.
    Keywords: Great Deviation, Indeterminacy, Taylor Rules.
    JEL: E32 E52 E58
    Date: 2016–01
  14. By: Francesco Molteni
    Abstract: This paper analyses the European financial crisis through the lens of sovereign bond liquidity. Using novel data we show that government securities are the prime collateral in the European repo market, which is becoming an essential source of funding for the banking system in the Euro area. We document that repo haircuts on peripheral government bonds sharply increased during the crisis, reducing their liquidity and amplifying the raise in the yields of these securities. We study the systemic impact of a liquidity shock on the business cycle and asset prices through a dynamic stochastic general equilibrium model with liquidity frictions. The model predicts a drop in economic activity, inflation and value of illiquid government bonds. We show that an unconventional policy which consists of purchasing illiquid bonds by issuing liquid bonds can alleviate the contractionary effect of liquidity shock. A Bayesian structural vector autoregressive model for the Irish economy confirms empirically the negative impact of a rise in haircuts on the value of government bonds.
    Keywords: repo;haircuts;government bonds;liquidity shock;quantitative easing
    JEL: E44 E58 G12
    Date: 2015–12
  15. By: Ranaldo, Angelo; Rupprecht, Matthias; Wrampelmeyer, Jan
    Abstract: We provide the first comprehensive theoretical model for money markets encompassing unsecured and secured funding, asset markets, and central bank policy. Capital-constrained, leveraged banks invest in assets and raise short-term funds by borrowing in the unsecured and secured money markets. Our model derives how funding liquidity across money markets is related, explains how a shock to asset values can lead to mutually reinforcing liquidity spirals in both money markets, and shows how borrowers' flight-to-safety and risk-seeking behavior impacts their liability structure. We derive the social optimum and show which combination of conventional and unconventional monetary policies and regulatory measures can reduce money market fragility.
    Date: 2016–01

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