nep-cba New Economics Papers
on Central Banking
Issue of 2016‒08‒21
fifteen papers chosen by
Maria Semenova
Higher School of Economics

  1. Inflation expectations, disagreement, and monetary policy By Hoffmann, Mathias; Hürtgen, Patrick
  2. Infrequent but Long-Lived Zero-Bound Episodes and the Optimal Rate of Inflation By Marc Dordal-i-Carreras; Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
  3. A Portfolio Model of Quantitative Easing By Christensen, Jens H. E.; Krogstrup, Signe
  4. Velocity in the Long Run: Money and Structural Transformation By Antonio Mele; Radoslaw Stefanski
  5. Optimal Macroprudential and Monetary Policy in a Currency Union By Dmitriy Sergeyev
  6. Cross-border Spillover Effects of Unconventional Monetary Policies on Swiss Asset Prices By Severin Bernhard; Till Ebner
  7. An empirical assessment of exchange arrangements and inflation performance By Cruz-Rodríguez, Alexis
  8. The Risk-Adjusted Monetary Policy Rule By Nakata, Taisuke; Schmidt, Sebastian
  9. Interest on Reserves, Interbank Lending, and Monetary Policy By Stephen Williamson
  10. Can monetary policy drive economic growth? empirical evidence from Tanzania By Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Mbaya
  11. The Case for Flexible Exchange Rates in a Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
  12. Negative Interest Rate Policies: Sources and Implications By Carlos Arteta; M. Ayhan Kose; Marc Stocker; Temel Taskin
  13. The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation By Emi Nakamura; Jón Steinsson; Patrick Sun; Daniel Villar
  14. Dissemination of Information by the Federal Reserve System: An Overview and Benchmark By Araujo, Luiz Nelson
  15. A mechanism to regulate sovereign debt restructuring in the euro area By Andritzky, Jochen; Christofzik, Désirée I.; Feld, Lars P.; Scheuering, Uwe

  1. By: Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: Survey data on inflation expectations show that: (i) private sector forecasts and central bank forecasts are not fully aligned and (ii) private sector forecasters disagree about inflation expectations. To reconcile these two facts we introduce dispersed information in a New Keynesian model, where as a result, inflation expectations differ between the private sector and the central bank. We show that output and inflation responses change markedly when the central bank responds to private sector inflation expectations rather than to their own.
    Keywords: business cycles,survey data,learning,disagreement,monetary policy
    JEL: E52 E31 D83
    Date: 2016
  2. By: Marc Dordal-i-Carreras; Olivier Coibion; Yuriy Gorodnichenko; Johannes Wieland
    Abstract: Countries rarely hit the zero-lower bound on interest rates, but when they do, these episodes tend to be very long-lived. These two features are difficult to jointly incorporate into macroeconomic models using typical representations of shock processes. We introduce a regime switching representation of risk premium shocks into an otherwise standard New Keynesian model to generate a realistic distribution of ZLB durations. We discuss what different calibrations of this model imply for optimal inflation rates.
    JEL: E3 E4 E5
    Date: 2016–08
  3. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco); Krogstrup, Signe (Swiss National Bank)
    Abstract: This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, commonly known as quantitative easing (QE). Two financial frictions—segmentation of the market for central bank reserves and imperfect asset substitutability—give rise to two distinct portfolio effects. One derives from the reduced supply of the purchased assets. The other runs through banks’ portfolio responses to the created reserves and is independent of the assets purchased. The results imply that central bank reserve expansions can affect long-term bond prices even in the absence of long-term bond purchases.
    JEL: E43 E50 E52 E58 G11
    Date: 2016–07–21
  4. By: Antonio Mele (University of Surrey); Radoslaw Stefanski (University of St Andrews)
    Abstract: Monetary velocity declines as economies grow. We argue that this is due to the process of structural transformation - the shift of workers from agricultural to non-agricultural production associated with rising income. A calibrated, two-sector model of structural transformation with monetary and non-monetary trade accurately generates the long run monetary velocity of the US between 1869 and 2013 as well as the velocity of a panel of 92 countries between 1980 and 2010. Three lessons arise from our analysis: 1) Developments in agriculture, rather than non-agriculture, are key in driving monetary velocity; 2) Inflationary policies are disproportionately more costly in richer than in poorer countries; and 3) Nominal prices and inflation rates are not `always and everywhere a monetary phenomenon': the composition of output influences money demand and hence the secular trends of price levels.
    Keywords: structural transformation, monetary shares, velocity, agricultural productivity, nonmonetary exchange 1 We would like to thank Martin Ellison, Alexander Berentsen, Fernando Martin, Domenico Ferraro, B
    JEL: O1 O4 E4 E5 N1
    Date: 2016–07–28
  5. By: Dmitriy Sergeyev (Bocconi University)
    Abstract: I solve for optimal macroprudential and monetary policies for members of a currency union in an open economy model with nominal price rigidities, demand for safe as- sets, and collateral constraints. Monetary policy is conducted by a single central bank, which sets a common interest rate. Macroprudential policy is set at a country level through the choice of reserve requirements. I emphasize two main results. First, with asymmetric countries and sticky prices, the optimal macroprudential policy has a country-specific stabilization role beyond optimal regulation of financial sectors. This result holds even if optimal fiscal transfers are allowed among the union members. Second, there is a role for global coordination of country-specific macroprudential policies. This is true even when countries have no monopoly power over prices of internationally traded goods or assets. These results build the case for coordinated macroprudential policies that go beyond achieving financial stability objectives.
    Date: 2016
  6. By: Severin Bernhard; Till Ebner
    Abstract: Unconventional monetary policies (UMPs) by the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan exert important spillover effects on asset prices in Switzerland if market anticipation of UMP announcements is properly accounted for. Using a broad event set and a long-term bond futures-based measure as a proxy for market anticipation of the announcements, we show that the unexpected part of those UMPs boost Swiss government and corporate bond prices, induce the CHF to appreciate, and dampen Swiss equity prices. Four extensions provide additional insights: First, the estimated effects are strongest for announcements by the ECB. Second, the impact on government bonds is largest for bonds with residual maturities of 7-10 years. Third, the impact of foreign UMP shocks on exchange rates and Swiss bond yields is less pronounced after the introduction of the EURCHF-floor by the Swiss National Bank on September 6, 2011. Fourth, the sign of spillover effects differs for positive and negative UMP surprises, but their strength does not. Our results hint at an important role played by both international portfolio re-balancing channels and international signalling channels in the transmission of foreign monetary policy shocks to Swiss asset prices.
    JEL: E52 E58 E65 F31 F42 G12
    Date: 2016
  7. By: Cruz-Rodríguez, Alexis
    Abstract: This article provides empirical support for the hypothesis that different exchange rate regimes have an impact on inflation in advanced, emerging and developing countries. The effects of different exchange rate regimes on inflation performance are examined through least squares dummy variables regressions using panel data on 125 countries for the post-Bretton Woods (1974-1999). Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four different classification schemes. Three de facto and one de jure classifications are used. Consequently, the sensitivity of these results to alternative exchange rate classifications is also tested. The empirical findings indicate that countries with fixed regimes tend to have a lower inflation rate compared to floating and intermediate exchange rate regimes, particularly in emerging and developing countries.
    Keywords: Exchange rate regimes, inflation
    JEL: E31 F31 F33
    Date: 2016–07–28
  8. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: Macroeconomists are increasingly using nonlinear models to account for the effects of risk in the analysis of business cycles. In the monetary business cycle models widely used at central banks, an explicit recognition of risk generates a wedge between the inflation-target parameter in the monetary policy rule and the risky steady state (RSS) of inflation---the rate to which inflation will eventually converge---which can be undesirable in some practical applications. We propose a simple modification to the standard monetary policy rule to eliminate the wedge. In the proposed risk-adjusted policy rule, the intercept of the rule is modified so that the RSS of inflation equals the inflation-target parameter in the policy rule.
    Keywords: Effective Lower Bound ; Inflation Targeting ; Monetary Policy Rule ; Risk ; Risky Steady State
    JEL: E32 E52
    Date: 2016–07
  9. By: Stephen Williamson (Federal Reserve Bank of St. Louis)
    Abstract: A two-sector general equilibrium banking model is constructed to study the functioning of a floor system of central bank intervention. Only retail banks can hold reserves, and these banks are also subject to a capital requirement, which creates "balance sheet costs" of holding reserves. An increase in the interest rate on reserves has very different qualitative effects from a reduction in the central bank's balance sheet. Increases in the central bank's balance sheet can have redistributive effects, and can reduce welfare. A reverse repo facility at the central bank puts a floor under the interbank interest rate, and is always welfare improving. However, an increase in reverse repos outstanding can increase the margin between the interbank interest rate and the interest rate on government debt.
    Date: 2016
  10. By: Nyorekwa, Enock Twinoburyo; Odhiambo, Nicholas Mbaya
    Abstract: The role of monetary policy in promoting economic growth remains empirically an open research question. This paper attempts to bridge the knowledge gap by investigating the impact of monetary policy on economic growth in Tanzania during the period from 1975 to 2013 ??? using the autoregressive distributed lag (ARDL) bounds-testing approach. The study uses two proxies of monetary policy, namely, money supply and interest rate, to examine this linkage. The empirical results of this study confirm the existence of long-run monetary policy neutrality ??? irrespective of the proxy used to measure monetary policy. However, the short-run results only confirm the existence of monetary policy neutrality ??? but only when the interest rate is used as a proxy for monetary policy. When money supply is used to measure monetary policy, a negative relationship between monetary policy and economic growth is found to predominate
    Keywords: Monetary Policy, Economic Growth, Interest Rate, Money Supply
    Date: 2016–08
  11. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
    Abstract: We analyze macroeconomic stabilization in a small open economy which faces a large recession in the rest of the world. We show that for the economy to remain isolated from the shock, the exchange rate must depreciate not only to offset the collapse in external demand, but also to decouple domestic prices from deflation in the rest of the world. If monetary policy becomes constrained by the zero lower bound, the scope of exchange rate depreciation is limited. Still, in this case there is a ``benign coincidence'': fiscal policy is particularly effective in stabilizing economic activity. Under fixed exchange rates, instead, the impact of the external shock is particularly severe and the effectiveness of fiscal policy reduced.
    Keywords: Benign coincidence; Exchange rate; external shock; External-demand multiplier; Fiscal Multiplier; great recession; zero lower bound
    JEL: E31 F41 F42
    Date: 2016–08
  12. By: Carlos Arteta (Development Prospects Group, World Bank); M. Ayhan Kose (Development Prospects Group, World Bank; Brookings Institution; CEPR; CAMA); Marc Stocker (Development Prospects Group, World Bank); Temel Taskin (Development Prospects Group, World Bank)
    Abstract: Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. We report four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy maker’s toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.
    Keywords: Unconventional monetary policy, quantitative easing; bank profitability, financial stability, negative yields, event study, emerging markets, developing countries.
    JEL: E52 E58 E60
    Date: 2016–09
  13. By: Emi Nakamura; Jón Steinsson; Patrick Sun; Daniel Villar
    Abstract: A key policy question is: How high an inflation rate should central banks target? This depends crucially on the costs of inflation. An important concern is that high inflation will lead to inefficient price dispersion. Workhorse New Keynesian models imply that this cost of inflation is very large. An increase in steady state inflation from 0% to 10% yields a welfare loss that is an order of magnitude greater than the welfare loss from business cycle fluctuations in output in these models. We assess this prediction empirically using a new dataset on price behavior during the Great Inflation of the late 1970's and early 1980's in the United States. If price dispersion increases rapidly with inflation, we should see the absolute size of price changes increasing with inflation: price changes should become larger as prices drift further from their optimal level at higher inflation rates. We find no evidence that the absolute size of price changes rose during the Great Inflation. This suggests that the standard New Keynesian analysis of the welfare costs of inflation is wrong and its implications for the optimal inflation rate need to be reassessed. We also find that (non-sale) prices have not become more flexible over the past 40 years.
    JEL: E31 E50
    Date: 2016–08
  14. By: Araujo, Luiz Nelson
    Abstract: This paper examines the Federal Reserve System’s dissemination of information strategy to see how well it has worked and how it can be improved. The System provides information to a broad spectrum of individuals and organizations. The evidence collected, for the first time, shows a high level of discrepancy in relation to the use of social media channels to disseminate information among Banks in the Federal Reserve System. Overall, the Federal Reserve System adopts and makes available to stakeholders the same platforms for the dissemination of information. They use the same general structure of alternatives, but with significant differences in accessibility, availability, and quality. There are many options to improve the current offerings in these three attributes when one takes into account not only the best practice within the System but also that adopt by central banks in other jurisdictions, and even organizations in the private sector.
    Keywords: Federal Reserve System, Federal Reserve Banks, Fed, Central Bank Communication, Central Bank Dissemination of Information, Social Media Channels
    JEL: E58 E59
    Date: 2016–08–15
  15. By: Andritzky, Jochen; Christofzik, Désirée I.; Feld, Lars P.; Scheuering, Uwe
    Abstract: To make the no-bailout clause credible and enhance the effectiveness of crisis assistance, a consistent institutional and legal framework is needed to ensure that private creditors contribute to crisis resolution. Getting activated as part of ESM crisis assistance, we propose a two-stage mechanism that allows to postpone the fateful distinction between liquidity and solvency crises: At the onset of a ESM programme, the framework demands an immediate maturity extension if the debt burden is high, followed by deeper debt restructuring if post-crises debt proves unsustainable. The mechanism is easily implemented by amending ESM guidelines and compelling countries to issue debt with Creditor Participation Clauses (CPCs). As debt is rolled over, the mechanism gradually phases in, leaving countries time to reduce debt. Given that private sector involvement reduces financing needs, the ESM could provide longer programmes and more time for reforms.
    Date: 2016

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