nep-cba New Economics Papers
on Central Banking
Issue of 2016‒03‒29
27 papers chosen by
Maria Semenova
Higher School of Economics

  1. The interaction of monetary and macroprudential policies in economic stabilisation By Silvo, Aino
  2. Financial Frictions and Unconventional Monetary Policy in Emerging Economies By Roberto Chang; Andrés Velasco
  3. Determinants of the movements in the euro-dollar exchange rate during the sovereign debt crisis By Alessio Anzuini; Martina Cecioni; Stefano Neri
  4. Contemporary monetary policy in China: A move towards price-based policy? By Nuutilainen, Riikka
  5. Forward guidance and "lower for longer": The case of the ECB By Bletzinger, Tilman; Wieland, Volker
  6. How to monitor the exit from the Eurosystem's unconventional monetary policy: Is EONIA dead and gone? By Ronald Heijmans; Richard Heuver; Zion Gorgi
  7. Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops By Emmanuel Farhi; Jean Tirole
  8. Prudential policy at times of stagnation: a view from the trenches By Piergiorgio Alessandri; Fabio Panetta
  9. Lender of last resort versus buyer of last resort: The impact of the European Central Bank actions on the bank-sovereign nexus By Acharya, Viral; Pierret, Diane; Steffen, Sascha
  10. Conditional PPP and Real Exchange Rate Convergence in the Euro Area By Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
  11. The risk-taking channel of monetary policy in Norway By Artashes Karapetyan
  12. Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control By Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
  13. Financial Regulation in Europe: Foundations and Challenges By Beck, Thorsten; Carletti, Elena; Goldstein, Itay
  14. Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters By Glas, Alexander; Hartmann, Matthias
  15. Understanding Inflation as a Joint Monetary-Fiscal Phenomenon By Eric M. Leeper; Campbell Leith
  16. Comparing inflation and price level targeting: the role of forward guidance and transparency By Honkapohja, Seppo; Mitra, Kaushik
  17. Do inflation expectations matter in a stylised New Keynesian model? The case of Poland By Tomasz Łyziak
  18. Sluggish Inflation Expectations: A Markov Chain Analysis By Narayana R. Kocherlakota
  19. Measuring expectations of inflation: Effects of survey mode, wording, and opportunities to revise By Wandi Bruine de Bruin; Wilbert van der Klaauw; Maarten van Rooij
  21. The invisible hand of the government: "Moral suasion" during the European sovereign debt crisis By Ongena, Steven; Popov, Alexander; Van Horen, Neeltje
  22. Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis? By Madhusudan Mohanty; Kumar Rishabh
  23. The Impact of Monetary Policy on Inequality in the UK. An Empirical Analysis By Haroon Mumtaz; Angeliki Theophilopoulou
  24. Strategic central bank communication: discourse and game-theoretic analyses of the Bank of Japan's Monthly Report By Kohei Kawamura; Yohei Kobashi; Masato Shizume; Kozo Ueda
  25. Did quantitative easing affect interest rates outside the US? New evidence based on interest rate differentials By Belke, Ansgar; Gros, Daniel; Osowski, Thomas
  26. Discussion of economic conditions and implications for monetary policy By Kaplan, Robert Steven
  27. Monetary Policy According to HANK By Greg Kaplan; Benjamin Moll; Giovanni L. Violante

  1. By: Silvo, Aino
    Abstract: ​I analyse the dynamics of a New Keynesian DSGE model where the financing of investments is affected by a moral hazard problem. I solve for jointly Ramsey-optimal monetary and macroprudential policies. I find that when a financial friction is present in addition to the standard nominal friction, the optimal policy can replicate the first-best if the social planner can conduct both monetary and macroprudential policy to control both inflation and the level of investments. Using monetary policy alone is not enough to fully stabilise the economy: it leads to a policy trade-off between stabilising inflation and the output gap. When policy follows simple rules instead, the source of fluctuations is highly relevant for the choice of the appropriate policy mix.
    Keywords: monetary policy, macroprudential policy, financial frictions
    JEL: E32 E44 E52 G28
    Date: 2016–02–10
  2. By: Roberto Chang; Andrés Velasco
    Abstract: We analyze conventional and unconventional monetary policies in a dynamic small open-economy model with financial frictions. In the model, financial intermediaries or banks borrow from the world market and lend to domestic households. Banks can borrow abroad up to a multiple of their equity; in turn, there is a limit to how much bank equity households can hold. An economy-wide credit constraint and an endogenous interest rate spread emerge from this combination of external and domestic frictions. The resulting financial imperfections amplify the domestic effects of exogenous shocks and make those effects more persistent. In response to external balance shocks, fixed exchange rates are contractionary and flexible exchange rates expansionary (although less so in the presence of currency mismatches); the opposite is true in response to increases in the world interest rate. Unconventional policies, including central bank direct credit, discount lending, and equity injections to banks, have real effects only if financial constraints bind. Because of bank leverage, central bank discount lending and equity injections are more effective than direct credit. Sterilized foreign exchange intervention is equivalent to lending directly to domestic agents. Unconventional policies are feasible only to the extent that the central bank holds a sufficient amount of international reserves.
    JEL: E52 E58 F41
    Date: 2016–02
  3. By: Alessio Anzuini (Banca d'Italia); Martina Cecioni (Banca d'Italia); Stefano Neri (Banca d'Italia)
    Abstract: We identify the drivers of the movements in the euro-dollar exchange rate during the sovereign debt crisis. In particular, we show that the announcement of outright monetary transactions (OMT) by the Governing Council of the ECB during the summer of 2012 played a major role in the euro’s subsequent appreciation. OMT and the reform efforts undertaken by governments at national and European level saw off the risk of a euro-area break up and prompted net capital inflows. We estimate two models. The first is a reduced form high-frequency model, in which the exchange rate is explained by the differentials between interest rates in euros and dollars at both short- and long-term horizons, the sovereign spread in euro-area countries and an index of volatility. The second is a vector autoregressive (VAR) model including GDP growth differentials, short-term nominal interest rate differentials and inflation differentials between the euro area and the U.S., an average of the sovereign spreads of selected euro-area countries, the bilateral trade balance and the euro-dollar nominal exchange rate. Both approaches suggest that the evolution of the sovereign spread supported the value of the euro following the announcement of OMT in the summer of 2012.
    Keywords: exchange rates, sovereign spreads, vector autoregression
    JEL: F31 C32
    Date: 2016–01
  4. By: Nuutilainen, Riikka
    Abstract: ​This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1999––2012. Variation is allowed both in the policy targets as well as in the monetary policy instrument itself. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to in‡ation and leaning-against-the-wind behaviour. The paper shows that there is a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is irresponsive to economic conditions during the earlier years of the sample but does respond in the later years. This finding supports the view that the monetary policy settings of the People's Bank of China have come to place more weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are assigned to different instruments. The money supply instrument is utilised to control the price level and (after 2008) the interest rate instrument has been used to achieve the targeted output growth.
    Keywords: China, Monetary policy, Taylor rule, McCallum rule
    JEL: E52 E58
    Date: 2015–03–12
  5. By: Bletzinger, Tilman; Wieland, Volker
    Abstract: A number of contributions to research on monetary policy have suggested that policy should be asymmetric near the lower bound on nominal interest rates. As inflation and economic activity decline, policy should ease more aggressively than it would in the absence of the lower bound. As activity recovers and inflation picks up, the central bank should act to keep interest rates lower for longer than without the bound. In this note, we investigate to what extent the policy easing implemented by the ECB since summer 2013 mirrors the rate recommendations of a simple policy rule or deviates from it in a way that indicates a 'lower for longer' approach to policy near zero interest rates.
    Keywords: monetary policy,interest rates,European Central Bank,forward guidance,zero lower bound
    JEL: E43 E47 E52 E58
    Date: 2016
  6. By: Ronald Heijmans; Richard Heuver; Zion Gorgi
    Abstract: This paper investigates the impact of the "unconventional" monetary policy measures taken by the Eurosystem on both the unsecured and the secured money markets. Furthermore, we provide insight into the shifts between the unsecured and secured markets. We provide a euro area overview and a Core-versus-Periphery breakdown. Our results show that: 1) there is a clear segmentation between Core and Periphery; 2) the use of the unsecured money market has decreased substantially and is no longer representative as a reflection of the euro area as a whole; and 3) the use of the secured money markets has increased substantially in value terms since the start of the crisis. Both the secured and the unsecured money markets reacted strongly to the first 3-year long term refinancing operations and quantitative easing. It is not to be expected that turnover in the money markets will revert to pre-crisis levels, in part because new regulation, such as the Basel III requirements, dissuades banks from engaging in short-term lending. Therefore, monetary policy experts should also devote their attention to steering the rates in the secured money market.
    Keywords: monetary policy; repo; GC Pooling; MTS Repo; unsecured money market; central bank; Basel III
    JEL: E42 E44 E58 G01
    Date: 2016–03
  7. By: Emmanuel Farhi; Jean Tirole
    Abstract: The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.
    JEL: E0 F34 F36 G28 H63
    Date: 2016–01
  8. By: Piergiorgio Alessandri (Banca d'Italia); Fabio Panetta (Banca d'Italia)
    Abstract: In the euro area, macroprudential policy can be a powerful complement to monetary policy. However, its coordination with microprudential policy is a particularly delicate task. The coexistence of two supervisory regimes that rely on similar tools to pursue different objectives may at times give rise to conflicting decisions, or create uncertainty on the logic of the prudential framework. These risks are structurally greater in bank-based economies with highly concentrated banking sectors, and may be heightened in the contractionary phase of the cycle, when policymakers face a short-run trade-off between the resilience of the financial sector and the speed of economic recovery. This makes the micro/macro coordination problem a top priority for European supervisors today. In order to address it, supervisors must agree to rank their policy objectives and examine their interventions from a general equilibrium perspective. We remain agnostic as to how much capital European banks should ultimately be required to hold. Instead we stress that, irrespective of the target, supervisors should achieve it over the appropriate time span, minimizing any negative spillovers on credit supply and protecting the credibility of the newly-launched countercyclical macroprudential framework with all available means.
    Keywords: banking supervision, coordination, policy uncertainty, euro area
    JEL: G21 G28
    Date: 2015–11
  9. By: Acharya, Viral; Pierret, Diane; Steffen, Sascha
    Abstract: In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed - lender of last resort vs. buyer of last resort - in stabilizing the European financial sector. We find that (i) by being lender of last resort to banks via the long-term refinancing operations (LTRO), ECB temporarily reduced funding pressure for banks, but did not help to contain sovereign risk. In fact, banks of the peripheral countries used the public funds to increase their exposure to risky domestic debt, so that when solvency risk in the Eurozone worsened the run of private short-term investors from Eurozone banks intensified. (ii) In contrast, ECB's announcement of being a potential buyer of last resort via the Outright Monetary Transaction program (OMT) significantly reduced the bank-sovereign nexus. The OMT increased the market prices of sovereign bonds, leading to a permanent reversal of private funding flows to Eurozone banks holding these bonds.
    Keywords: money market funds,repos,bank risk,sovereign debt,ECB
    JEL: G01 G21 G28
    Date: 2016
  10. By: Paul R. Bergin; Reuven Glick; Jyh-Lin Wu
    Abstract: While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward purchasing power parity (PPP) became faster. To disentangle the possible causes for this finding we develop a novel methodology for conducting counterfactual simulations of an estimated VECM that distinguishes between the roles of the nominal exchange rate as an adjustment mechanism and as a source of shocks. We find evidence that prior to joining the euro currency union, member countries relied upon exchange rate adjustments as a mechanism to correct for PPP deviations arising from divergent domestic inflation rates. But the loss of the exchange rate as an adjustment mechanism after the introduction of the euro was more than compensated by the elimination of the exchange rate as a source of shocks, in combination with faster adjustment in national price indices. These findings support claims that flexible exchange rates are not necessary to promote long-run international relative price adjustment.
    JEL: F0 F15 F31
    Date: 2016–02
  11. By: Artashes Karapetyan (Norges Bank (Central Bank of Norway))
    Abstract: We identify the effects of monetary policy on credit risk-taking using a unique dataset covering the population of corporate borrowers in Norway. We find that a lower benchmark interest rate (interbank rates or overnight rates) induces the average bank to grant more loans to risky firms. We also find that the strength of the bank's balance-sheet is important: less capitalized banks are more likely to increase loan volumes to ex-ante risky firms compared to more capitalized ones (Jimenez et al., 2014). The data allow us to distinguish the changes in the supply of credit from the changes in credit demand. In all our specifications we control for both observed and unobserved firm and bank heterogeneity by using financial statement information and firm, bank and time fixed effects.
    Keywords: Risk-taking channel, monetary policy, nancial stability, credit risk
    JEL: E44 E5 G01 G21 G28 L14
    Date: 2016–02–15
  12. By: Funke, Michael; Mihaylovski, Petar; Zhu, Haibin
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE model, monetary policy, financial market reform, shadow banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–03–09
  13. By: Beck, Thorsten; Carletti, Elena; Goldstein, Itay
    Abstract: This chapter discusses recent regulatory reforms and relates them to different market failures in banking, based on the recent theoretical and empirical literature with focus on insights from the recent crisis. We also provide a broader discussion of challenges in financial sector regulation, related to the regulatory perimeter and financial innovation as tools financial market participants use to evade tighter regulatory frameworks. We argue for a dynamic view of regulation that takes into account the changing nature of risk-taking activities and regulatory arbitrage efforts. We also stress the need for a balanced approach between complex and simple tools, a strong focus on systemic in addition to idiosyncratic regulation, and a stronger emphasis on the resolution phase of financial regulation.
    Keywords: Banking; Basel III; financial stability; regulation
    JEL: G21 G28
    Date: 2016–03
  14. By: Glas, Alexander; Hartmann, Matthias
    Abstract: We analyze the determinants of average individual inflation uncertainty and disagreement based on data from the European Central Bank's Survey of Professional Forecasters. We empirically confirm the implication from a theoretical decomposition of inflation uncertainty that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods.
    Keywords: Inflation uncertainty; Disagreement; Density forecast; Central banking;Survey of Professional Forecasters.
    Date: 2016–03–15
  15. By: Eric M. Leeper; Campbell Leith
    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).
    JEL: E31 E52 E58 E61 E62 E63
    Date: 2016–01
  16. By: Honkapohja, Seppo; Mitra, Kaushik
    Abstract: We examine global dynamics under learning in New Keynesian models with price level targeting that is subject to the zero lower bound. The role of forward guidance is analyzed under transparency about the policy rule. Properties of transparent and non-transparent regimes are compared to each other and to the corresponding cases of inflation targeting. Robustness properties for different regimes are examined in terms of the domain of attraction of the targeted steady state and volatility of inflation, output and interest rate. We analyze the effect of higher inflation targets and large expectational shocks for the performance of these policy regimes.
    Keywords: adaptive learning, monetary policy, inflation targeting, zero interest rate lower bound
    JEL: E63 E52 E58
    Date: 2015–04–07
  17. By: Tomasz Łyziak
    Abstract: This paper estimates different versions of a stylised New Keynesian model of the Polish economy, in which alternative measures of inflation expectations are used. They include: model-based (rational) expectations as well as survey measures of inflation expectations formed by consumers, enterprises and financial sector analysts. After estimating the models we verify to what extent the use of different measures of inflation expectations affects the assessment of the monetary transmission mechanism, the exchange rate pass-through and the sacrifice ratio. Simulation results show different responses in all the analysed areas. For example, the maximum reaction of CPI inflation to the interest rate impulse is almost twice bigger if the direct measures of financial sector analysts are used instead of model-consistent expectations. Also the model with survey-based measures of producer inflation expectations displays stronger response of inflation to monetary policy impulse than the model, in which rational expectations are assumed. Estimates of the exchange rate pass-through from the models with survey-based expectations are very similar to each other, but stronger than in the model with rational expectations. The sacrifice ratio seems similar in the case of all versions of the New Keynesian model except its version with consumer inflation expectations that shows significantly larger output loss resulting from a permanent reduction of the inflation target than the other models. Differences in the assessment how monetary factors affect macroeconomic variables, particularly inflation, pose the question which model should be treated as the most adequate. To answer this question we run in-sample simulations, calculating inflation forecasting errors of all the models under consideration. We conclude that the model that assumes rational inflation expectations displays the lowest forecasting accuracy, while the model using inflation expectations of enterprises is the best-performing model. It suggests that the assumption of rational inflation expectations does not match the actual data well. Inflation expectations of Polish enterprises seem the most relevant from the macroeconomic point of view – more relevant than inflation expectations of consumers and financial sector analysts.
    Keywords: Inflation expectations, survey, New Keynesian model, monetary transmission mechanism, Poland.
    JEL: C54 D84 E17 E43
    Date: 2016
  18. By: Narayana R. Kocherlakota
    Abstract: A large body of recent empirical work on inflation dynamics documents that current real variables (like unemployment or output gaps) have little explanatory power for future inflation. Motivated by these findings, I explore the properties of a wide class of models in which inflation expectations respond little, if at all, to real economic conditions. In this general context, I examine Markov equilibria to games in which the relevant forcing processes are Markov chains and the central bank chooses a short- term nominal interest rate at each date subject to a lower bound. I construct a simple numerical algorithm to solve for such Markov equilibria. I apply the algorithm to a numerical example. In the example, the economy can experience long periods of what looks like secular stagnation because households believe that there is a significant risk of a crisis (that is, a sharp decline in economic activity). Within the example, there are large benefits to being able to reduce the lower bound on the short-term nominal interest rate by as little as fifty basis points.
    JEL: E31 E32 E52 E58
    Date: 2016–02
  19. By: Wandi Bruine de Bruin; Wilbert van der Klaauw; Maarten van Rooij
    Abstract: Several national consumer surveys aim to elicit consumers' inflation expectations. Median reported expectations have been shown to track objective inflation estimates over time, although respondents display relatively large disagreement. Observed medians, however, tend to differ between consumer surveys, possibly reflecting survey design differences. In this paper, we examine the importance of three survey features in explaining these differences: question wording ('prices in general' vs. 'inflation'), interview mode (face-to-face vs. web), and the explicit opportunity to revise responses. We find systematic effects on item non-responses, reported inflation expectations and their dispersion. We discuss implications of our findings for survey design.
    Keywords: Consumer surveys; inflation expectations; question wording; mode effects
    JEL: E31 D84
    Date: 2016–03
  20. By: Barış Soybilgen (İstanbul Bilgi University); Ege Yazgan (İstanbul Bilgi University)
    Abstract: Expectations on the future state of the inflation play a critical part in the process of price level determination in the market. Therefore, central banks closely follow the developments in inflation expectations to able to pursue a successful monetary policy. In Turkey, the Central Bank of the Republic of Turkey (CBRT) asks experts and decision makers from ï¬ nancial and real sectors about their expectations/predictions on the current and the future state of inflation every month to obtain market expectations on inflation. This paper examines these predictions of inflation using techniques of forecasting literature. We analyze both point and sign accuracy of these predictions. Point predictions from CBRT surveys are compared with those obtained from AR models, and tested whether they are statistically different. Sign predictions are tested whether they are valuable to a user. We also test predictions for unbiasedness.
    Keywords: Inflation Expectations, Evaluation Procedures, Sign Forecast Accuracy
    JEL: E37 E31
    Date: 2016–02
  21. By: Ongena, Steven; Popov, Alexander; Van Horen, Neeltje
    Abstract: Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state- owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a 'moral suasion' mechanism, and they are not driven by concurrent risk- shifting, carr- trading, regulatory compliance, or shocks to investment opportunities.
    Keywords: moral suasion; Sovereign debt; sovereign- bank loop
    JEL: F34 G21 H63
    Date: 2016–03
  22. By: Madhusudan Mohanty; Kumar Rishabh
    Abstract: In contrast to the benign neglect of the financial system in traditional monetary models, there has been growing evidence in recent years that the size and the structure of financial intermediation play a critical role in the transmission of monetary policy. This paper reviews the implications of three key post-2008 crisis developments in financial intermediation - the role of banks, the globalisation of debt markets and the sustained decline in global long-term interest rates - for various transmission channels of monetary policy in EMEs. The paper argues that the globalisation of debt markets means that monetary policy can no longer be conducted through the short-term interest rate alone. This raises questions about the appropriate instruments to be used for economic stabilisation in this new environment.
    Keywords: financial intermediation, monetary policy, central banks
    Date: 2016–03
  23. By: Haroon Mumtaz (Queen Mary University of London); Angeliki Theophilopoulou (University of Westminister)
    Abstract: The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We find that contractionary monetary policy shocks lead to a deterioration in earnings, income and consumption inequality and contribute to their fluctuation. The response of income and consumption at different quantiles suggests that contractionary policy has a larger negative effect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing contributed to the increase in inequality over the Great Recession.
    Keywords: Inequality, Earnings, Income, SVAR, Monetary policy shocks
    JEL: E2 E3 E4 E5
    Date: 2016–02
  24. By: Kohei Kawamura; Yohei Kobashi; Masato Shizume; Kozo Ueda
    Abstract: We conduct a discourse analysis of the Bank of Japan's Monthly Report and examine its characteristics in relation to business cycles. We find that the difference between the number of positive and negative expressions in the reports leads the leading index of the economy by approximately three months, which suggests that the central bank' reports have some superior information about the state of the economy. Moreover, ambiguous expressions tend to appear more frequently with negative expressions. Using a simple persuasion game, we argue that the use of ambiguity in communication by the central bank can be seen as strategic information revelation when the central bank has an incentive to bias the reports (and hence beliefs in the market) upwards.
    Keywords: Monetary policy, transparency, natural language processing, modality, latent Dirichlet allocation (LDA), verifiable disclosure model
    JEL: D78 D82 E58 E61
    Date: 2016–03
  25. By: Belke, Ansgar; Gros, Daniel; Osowski, Thomas
    Abstract: This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed’s quantitative easing programme (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyse the impact of the Fed’s QE1 programme on the stability of the US-euro long-term interest rate relationship by using a CVAR (cointegrated vector autoregressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilised the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.
    Date: 2016–01
  26. By: Kaplan, Robert Steven (Federal Reserve Bank of Dallas)
    Abstract: Remarks before the University of Texas Investment Management Company 20th Anniversary Event, Austin, TX, March 3, 2016.
    Date: 2016–03–03
  27. By: Greg Kaplan; Benjamin Moll; Giovanni L. Violante
    Abstract: We revisit the transmission mechanism of monetary policy for household consumption in a Heterogeneous Agent New Keynesian (HANK) model. The model yields empirically realistic distributions of household wealth and marginal propensities to consume because of two key features: multiple assets with different degrees of liquidity and an idiosyncratic income process with leptokurtic income changes. In this environment, the indirect effects of an unexpected cut in interest rates, which operate through a general equilibrium increase in labor demand, far outweigh direct effects such as intertemporal substitution. This finding is in stark contrast to small- and medium-scale Representative Agent New Keynesian (RANK) economies, where intertemporal substitution drives virtually all of the transmission from interest rates to consumption.
    JEL: E0
    Date: 2016–01

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