nep-cba New Economics Papers
on Central Banking
Issue of 2016‒09‒11
thirty papers chosen by
Maria Semenova
Higher School of Economics

  1. Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy By Lasitha R. C. Pathberiyay
  2. Global Financial Conditions and Monetary Policy Autonomy By Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss
  3. Financial shocks and inflation dynamics By Angela Abbate; Sandra Eickmeier; Esteban Prieto
  4. Inflation Targeting and Liquidity Traps under Endogenous Credibility By Hommes, C.H.; Lustenhouwer, J.
  5. Words Matter: A Textual Analysis of SBP’s Monetary Policy Reviews By Asif Mahmood; Muhammad Zuhair Munawar
  6. Nominal income versus Taylor-type rules in practice By Benchimol, Jonathan; Fourçans, André
  7. Central Banks’ Predictability: An Assessment by Financial Market Participants By Bernd Hayo; Matthias Neuenkirch
  8. When did inflation expectations in the euro area de-anchor? By Andrea Fracasso; Rocco Probo
  9. Monetary Policy in a Developing Country: Loan applications and Real effects By Camelia Minoui; Charles Abuka; Ronnie K. Alinda; Jose-Luis Peydro; Andrea F. Presbitero
  10. Monetary Transmission in Developing Countries; Evidence from India By Prachi Mishra; Peter J Montiel; Rajeswari Sengupta
  11. Negative Interest Rate Policy (NIRP); Implications for Monetary Transmission and Bank Profitability in the Euro Area By Andreas Jobst; Huidan Lin
  12. Outside the Band; Depreciation and Inflation Dynamics in Chile By Esther Perez Ruiz
  13. Government Spending Multipliers under the Zero Lower Bound: Evidence from Japan By Thuy Lan Nguyen; Dmitriy Sergeyev; Wataru Miyamoto
  14. Monetary Policy Implementation and Volatility Transmission along the Yield Curve; The Case of Kenya By Emre Alper; R. Armando Morales; Fan Yang
  15. Central Bank Sentiment and Policy Expectations By Paul Hubert; Fabien Labondance
  16. Evolution of Exchange Rate Behavior in the ASEAN-5 Countries By Vladimir Klyuev; To-Nhu Dao
  17. The Dynamics of Sovereign Debt Crises and Bailouts By Francisco Roch; Harald Uhlig
  18. Monetary policy and financial asset prices in Poland By Mariusz Kapuściński
  19. Sovereign Risk and Bank Risk-Taking By Anil Ari
  20. Monetary Policy and Mispricing in Stock Markets By Benjamin Beckers; Kerstin Bernoth
  21. Bank Exposures and Sovereign Stress Transmission By Carlo Altavilla; Marco Pagano; Saverio Simonelli
  22. The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis By Tevdovski, Dragan; Petrevski, Goran; Bogoev, Jane
  23. Monetary Policy, Heterogeneity and the Housing Channel By Serdar Ozkan; Kurt Mitman; Fatih Karahan; Aaron Hedlund
  24. Inflation and the Black Market Exchange Rate in a Repressed Market; A Model of Venezuela By Valerie Cerra
  25. Monetary and Fiscal Policy Design at the Zero Lower Bound - Evidence from the Lab By Hommes, C.H.; Massaro, D.; Salle, I.
  26. Monetary Policy for a Bubbly World By Vladimir Asriyan; Luca Fornaro; Alberto Martín; Jaume Ventura
  27. Banking Union and the ECB as Lender of Last Resort By Karl Whelan
  28. Mutual Fund Flows, Monetary Policy and Financial Stability By Banegas, Ayelen; Montes-Rojas, Gabriel; Siga, Lucas
  29. Changes in Prudential Policy Instruments — A New Cross-Country Database By Eugenio M Cerutti; Ricardo Correa; Elisabetta Fiorentino; Esther Segalla
  30. What is Responsible for India’s Sharp Disinflation? By Sajjid Chinoy; Pankaj Kumar; Prachi Mishra

  1. By: Lasitha R. C. Pathberiyay (School of Economics, The University of Queensland, St Lucia, Brisbane, Australia)
    Abstract: The nominal interest rates were at zero level in the recent past in many countries across the globe. It has been widely debated recently what a central bank should do to stimulate the economy when the nominal interest rate is at the zero lower bound (ZLB). The optimal monetary policy literature suggests that monetary policy inertia, i.e. committing to continue zero interest regime even after the ZLB is not binding, is a way to get the economy out of recession. In this paper, I examine whether this result holds when monetary policy has not only the conventional demand-side effect but also a supply-side effect on the economy. To accomplish this objective, I incorporate the cost channel of monetary policy into an otherwise standard new Keynesian model and evaluate the optimal monetary policy at the ZLB. The study revealed some important insights in the conduct of the optimal monetary policy in a cost channel economy at the ZLB. First, the discretionary policy requires central banks to keep interest rates at the zero lower bound for longer in a cost channel economy compared to no-cost channel economies. This is because, in cost channel economies, the deflation is high and persistent due to a larger negative demand shock than that found in no-cost channel economies. Further, cost channel economies introduce a policy trade-o between inflation and output gap. Under commitment policy, the simulation exercise shows that the central bank is able to terminate the zero interest rate regime earlier in a cost channel economy than otherwise. The reason for that is, in a cost channel economy, the private sector has inflated inflationary expectations when the central bank is planning to conduct a tight monetary policy. This result is in contrast to the results found under discretionary policy. It was also revealed that the cost channel generates substantially high welfare losses, under both discretionary and commitment policies. Accordingly, abstracting the cost channel in these types of models can lead to under estimation of welfare losses.
    Keywords: optimal monetary policy, zero rates on nominal interest rates, cost channel of monetary policy, new Keynesian model, liquidity trap
    JEL: E31 E52 E58 E61
    Date: 2016–09–01
  2. By: Carlos Caceres; Yan Carriere-Swallow; Bertrand Gruss
    Abstract: Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.
    Keywords: Economic conditions;Small open economies;Monetary policy;Central bank autonomy;Central banking and monetary issues;Spillovers;Vector autoregression;Econometric models;Monetary policy; monetary conditions; autonomy; global financial cycle.
    Date: 2016–06–08
  3. By: Angela Abbate; Sandra Eickmeier; Esteban Prieto
    Abstract: We assess the effects of financial shocks on inflation, and to what extent financial shocks can account for the "missing disinflation" during the Great Recession. We apply a vector autoregressive model to US data and identify financial shocks through sign restrictions. Our main finding is that expansionary financial shocks temporarily lower inflation. This result withstands a large battery of robustness checks. Moreover, negative financial shocks helped preventing a deflation during the crisis. We then explore the transmission channels of financial shocks relevant for inflation, and find that the cost channel explains the inflation response. A policy implication is that financial shocks that move output and inflation in opposite directions may worsen the trade-off for a central bank with a dual mandate.
    Keywords: Financial shocks, inflation dynamics, monetary policy, financial frictions, cost channel, sign restrictions
    JEL: E31 E44 E58
    Date: 2016–09
  4. By: Hommes, C.H. (University of Amsterdam); Lustenhouwer, J. (University of Amsterdam)
    Abstract: We derive policy implications for an inflation targeting central bank, who’s credibility is endogenous and depends on its past ability to achieve its targets. We do this in a New Keynesian framework with heterogeneous agents and boundedly rational expectations. Our assumptions about expectation formations are more in line with expectations observed in survey data and laboratory experiments than the fairly restrictive rational expectations hypothesis. We find that the region of allowed policy parameters is strictly larger under heterogeneous expectations than under rational expectations. Furthermore, with theoretically optimal monetary policy, global stability of the fundamental steady state can be achieved, implying that the system always converges to the targets of the central bank. This result however no longer holds when the zero lower bound (ZLB) on the nominal interest rate is accounted for. Self-fulfilling deflationary spirals can then occur, even under optimal policy. The occurrence of these liquidity traps crucially depends on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target, aggressive monetary easing, or a more aggressive response to inflation.
    Date: 2015
  5. By: Asif Mahmood (State Bank of Pakistan); Muhammad Zuhair Munawar (State Bank of Pakistan)
    Abstract: In this paper we perform a textual analysis of monetary policy statements issued during the past ten years by State Bank of Pakistan and compare them with policy reviews of seven selected central banks from regional, emerging and advanced economies. Broadly, we divided our analysis into three parts. In the first part, we attempt to estimate the contribution of macroeconomic contents in the monetary policy analysis of selected central banks. The second part deals with the decomposition of macroeconomic contents in driving the policy decisions. In the last section, we attempt to measure the forward-looking content in the monetary policy reviews and also their predictive power. Key findings suggest that, across the sample, trends in inflation and developments in external sector play an important role in driving the monetary policy stance. Also, it is found that the inflation targeting central banks have more forward-looking content in their policy reviews than non-inflation targeters. On the basis of empirical estimation, the former central banks are also found to be more proactive in adjusting the policy stance to given macroeconomic conditions and their outlook.
    Keywords: monetary policy, central bank, communication
    JEL: E52 E58
    Date: 2016–08
  6. By: Benchimol, Jonathan (Bank of Israel); Fourçans, André (Essec Business School)
    Abstract: Since the beginning of the financial crisis, a lively debate has emerged regarding which monetary policy rule the Fed (and other central banks) should follow, if any. To clarify this debate, several questions must be answered. Which monetary policy rule best the historical data? Which monetary policy rule best minimizes economic uncertainty and the Fed’s loss function? Which rule is best in terms of household welfare? Among the different rules, are NGDP growth or level targeting rules a good option, and when? Do they perform better than Taylor-type rules? To answer these questions, we use Bayesian estimations to test the Smets and Wouters (2007) model under nine different monetary policy rules with US data from 1955 to 2015 and over three different sub-periods. We find that when considering only the central bank’s loss function, the estimates generally indicate the superiority of NGDP level targeting rules, whatever the period. However, if other criteria are considered, the central bank’s objectives are not consistently met by a single rule for all periods.
    Keywords: Monetary policy; NGDP targeting; Taylor rule; DSGE model
    JEL: E32 E52 E58
    Date: 2016–07–04
  7. By: Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier)
    Abstract: In this paper, we examine the relationship between market participants’ perception of central bank predictability and their assessment of central bank communication skills and success in conveying objectives as well as the importance of transparency-enhancing measures, such as voting records, transcripts or minutes of policy meetings, and conditional interest rate projections. Our analysis is based on a unique dataset of almost 500 market participants worldwide who were asked questions with respect to the performance of the Bank of England, the Bank of Japan, the European Central Bank, and the Federal Reserve. Our results indicate a positive and economically notable relationship between central banks’ ability to convey their objectives and their overall communication skills on the one hand, and market participants’ perception of the banks’ predictability on the other hand, for all four central banks. The dissemination of more specific information does not appear to contribute to better central bank predictability. This raises doubts about the widely-held notion that implementing ever more transparency-enhancing measures will improve central bank predictability.
    Keywords: Central Bank, Communication, Financial Market Participants, Objectives, Predictability, Survey, Transparency
    JEL: E52 E58
    Date: 2016
  8. By: Andrea Fracasso; Rocco Probo
    Abstract: Long-term inflation expectations in the euro area remained well anchored during the global financial crisis and were therefore insensitive to the arrival of economic news. This article investigates the behaviour of expectations in the euro area during the most recent period and finds evidence that the de-anchoring of expectations started in December 2011 and never reversed. This is in line with the more aggressive stance held by the ECB in the following months as well as with the pattern of ECB Professional ForecastersÕ expectations.
    Keywords: Inflation expectations, ECB, Euro area, De-anchoring
    JEL: E31 E52 E58 C22
    Date: 2016
  9. By: Camelia Minoui (International Monetary Fund); Charles Abuka; Ronnie K. Alinda; Jose-Luis Peydro; Andrea F. Presbitero
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Monetary policy transmission; Bank leading channel; Bank balance sheet channel, Developing countries
    JEL: E42 E44 E52 E58
    Date: 2015–11–29
  10. By: Prachi Mishra; Peter J Montiel; Rajeswari Sengupta
    Abstract: We examine the strength of monetary transmission in India, using a conventional structural VAR methodology. We find that a tightening of monetary policy is associated with a significant increase in bank lending rates and conventional effects on the exchange rate, though pass-through to lending rates is only partial and exchange rate effects are weak. We could find no significant effects on real output or the inflation rate. Though the message for the effectiveness of monetary transmission in India is therefore mixed, our results for India are more favorable than is often found for other developing countries.
    Keywords: Monetary transmission mechanism;India;Banks;Loans;Monetary policy;Inflation targeting;Developing countries;Vector autoregression;Econometric models;monetary policy, bank lending, India
    Date: 2016–08–08
  11. By: Andreas Jobst; Huidan Lin
    Abstract: More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB’s balance sheet rather than substantial additional reductions in the policy rate.
    Keywords: Negative interest rates;Euro Area;Interest rate policy;Banks;Profits;Monetary transmission mechanism;Unconventional monetary policy instruments;European Central Bank;negative rates, NIRP, unconventional monetary policy, monetary transmission
    Date: 2016–08–10
  12. By: Esther Perez Ruiz
    Abstract: This paper examines inflation dynamics in Chile during the last peso depreciation episode 2013-15. The evidence is for substantial pass-through effects to inflation, given the large and persistent depreciation movement. Widespread indexation practices in non-traded goods markets are found to amplify the inflation response to the depreciation, while the role of wage indexation is less relevant to the inflation dynamics. Overall, inflation would have remained within the central bank’s target band absent the peso depreciation. The analysis also shows that tightening monetary policy in response to a depreciation shock can be costly in terms of output: the response of activity to rates is found to be strong, while the transmission from activity to inflation is found to be weak. Simulations under uncertainty about the extent of the pass-through also suggest that monetary policy can play a countercyclical role in the face of depreciation shocks at a moderate inflationary cost, as long as inflation expectations remain anchored.
    Keywords: Inflation;Chile;Exchange rate depreciation;Goods;Monetary policy;Floating exchange rates;Exchange rate regimes;Small open economies;Econometric models;Time series;traded goods inflation, non-traded goods inflation, exchange rate pass-through, indexation, monetary policy, Chile
    Date: 2016–07–06
  13. By: Thuy Lan Nguyen (Santa Clara University); Dmitriy Sergeyev (Bocconi University); Wataru Miyamoto (Bank of Canada)
    Abstract: Using a rich data set on government spending forecasts, we estimate the effects of unexpected government spending both when the nominal interest rate is near zero lower bound (ZLB) and outside of the ZLB period in Japan. The output multiplier is 1.5 on impact in the ZLB period, while it is 0.7 outside of the ZLB period. We estimate that the government spending shocks increase both private consumption and investment during the ZLB period but crowd them out in the normal period. The unemployment rate decreases in the ZLB period, while it does not respond significantly during the normal period. We argue that these results are not driven by the amount of slack in the economy. We estimate a positive but mild inflation response in both periods. A calibrated standard New Keynesian model with a fundamental-driven ZLB period can match our empirical findings.
    Date: 2016
  14. By: Emre Alper; R. Armando Morales; Fan Yang
    Abstract: This paper analyzes the degree to which volatility in interbank interest rates leads to volatility in financial instruments with longer maturities (e.g., T-bills) in Kenya since 2012, year in which the monetary policy framework switched to a forward-looking approach, relative to seven other inflation targeting (IT) countries (Ghana, Hungary, Poland, South Africa, Sweden, Thailand, and Uganda). Kenya shows strong volatility transmission and high persistence similar to other countries in transition to a more forward-looking monetary policy framework. These results emphasize the importance of a strong commitment to an interbank rate as an operational target and suggest that the central bank could reduce uncertainty in short-term yields significantly by smoothing out the overnight interest rates around the policy rate.
    Keywords: Monetary policy;Kenya;Inflation targeting;Interest rates;Treasury bills and bonds;Econometric models;Monetary policy implementation, inflation targeting, volatility transmission
    Date: 2016–06–20
  15. By: Paul Hubert (OFCE, Sciences Po); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: We explore empirically the theoretical prediction that waves of optimism or pessimism may have aggregate effects, in the context of monetary policy. We investigate whether the sentiment conveyed by ECB and FOMC policymakers in their statements affect the term structure of private short-term interest rate expectations. First, we quantify central bank tone using a computational linguistics approach. Second, we identify sentiment as exogenous shocks to these quantitative measures using an augmented narrative approach following the information friction literature. Third, we estimate the impact of sentiment on private agents’ expectations about future short-term interest rates using a high-frequency methodology and an ARCH model. We find that sentiment shocks increase private interest rate expectations around maturities of one and two years. We also find that this effect is non-linear and depends on the state of the economy and on the characteristics (precision, sign and size) of the sentiment signal.
    Keywords: Animal spirits, Optimism, Confidence, Central bank communication, Interest rate expectations, ECB, FOMC
    JEL: E43 E52 E58
    Date: 2016–07
  16. By: Vladimir Klyuev; To-Nhu Dao
    Abstract: This paper examines exchange rate behavior in the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand). It finds that for the last 10 years there is no evidence that their central banks target particular exchange rate levels against any currency or basket. Thus, contrary to some assertions, they do not belong to a U.S. dollar club, a Japanese yen club, a Chinese renminbi club, or an ASEAN club. At the same time, they clearly try to smooth short-term volatility, particularly vis-Ã -vis the U.S. dollar. The degree of smoothing declined noticeably after the Asian Financial Crisis and less obviously after the Global Financial Crisis, with heterogeneity across countries. Short-term smoothing without level targeting does not interfere with monetary policies aimed at price stability.
    Keywords: Exchange rate policy;Indonesia;Malaysia;Philippines;Singapore;Thailand;Association of Southeast Asian Nations;Exchange rates;Monetary policy;Cross country analysis;Exchange rate regimes; exchange rate volatility; fear of floating; currency blocks; ASEAN
    Date: 2016–08–08
  17. By: Francisco Roch; Harald Uhlig
    Abstract: Motivated by the recent European debt crisis, this paper investigates the scope for a bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a bailout agency, and characterize the minimal actuarially fair intervention that guarantees the no-buyers-strike fundamental equilibrium, relying on the market for residual financing. The intervention makes it cheaper for governments to borrow, inducing them borrow more, leaving default probabilities possibly rather unchanged. The maximal backstop will be pulled precisely when fundamentals worsen.
    Keywords: Sovereign debt defaults;Financial crises;Euro Area;Debt markets;Private sector;Econometric models;Default, Bailouts, Self-fulfilling Crises, Endogenous Borrowing Constraints, Long-term Debt, OMT, Eurozone Debt Crisis.
    Date: 2016–07–11
  18. By: Mariusz Kapuściński
    Abstract: The aim of this study is to investigate the effects of monetary policy on financial asset prices in Poland. Following Gürkaynak et al. (2005) I test how many factors adequately explain the variability of short-term interest rates around MPC meetings, finding that there are two such factors. The first one has a structural interpretation as a “current interest rate change” factor and the second one as a “future interest rate changes” factor, with the latter related to MPC communication. Regression analysis shows that, controlling for foreign interest rates and global risk aversion, both MPC actions and communication matter for government bond yields, and that communication is more important for stock prices. Furthermore, the foreign exchange rate used to depreciate (appreciate) after MPC statements signalling tighter (easier) future monetary policy. However, the effect disappeared at the end of the sample. For most of the sample the exchange rate would appreciate (depreciate) or would not change in a statistically significant manner after an increase (a decrease) of the current interest rate. The results indicate that not only changes of the current interest rate but also MPC communication matters for financial asset prices in Poland. It has important implications for the conduct of monetary policy, especially in a low inflation and low interest rate environment.
    Keywords: monetary policy, financial asset prices, Poland.
    JEL: E51 G12
    Date: 2015
  19. By: Anil Ari (University of Cambridge)
    Abstract: In European countries recently hit by a sovereign debt crisis, the share of domestic sovereign debt held by the national banking system has sharply increased, raising issues in their economic and financial resilience, as well as in policy design. This paper examines these issues by analyzing the banking equilibrium in a model with optimizing banks and depositors. To the extent that sovereign default causes bank losses also independently of their holding of domestic government bonds, undercapitalized banks have an incentive to gamble on these bonds. The optimal reaction by depositors to insolvency risk imposes discipline, but also leaves the economy susceptible to self-fulfilling shifts in sentiments, where sovereign default also causes a banking crisis. Policy interventions face a trade-off between alleviating funding constraints and strengthening incentives to gamble. Subsidized loans to banks, similar to the ECB's non-targeted longer-term refinancing operations (LTRO), may eliminate the good equilibrium when the banking sector is undercapitalized. Targeted interventions have the capacity to eliminate adverse equilibria.
    Date: 2016
  20. By: Benjamin Beckers; Kerstin Bernoth
    Abstract: This paper investigates whether central banks can attenuate excessive mispricing in stocks as suggested by the proponents of a \leaning against the wind" (LATW) monetary policy. For this, we decompose stock prices into a fundamental component, a risk premium, and a mispricing component. We argue that mispricing can arise for two reasons: (i) from false subjective expectations of investors about future fundamentals and equity premia; and (ii) from the inherent indeterminacy in asset pricing in line with rational bubbles. We show that the response of the excessive stock price component to a monetary policy shock is ambiguous in both the short- and long-run, and depends on the nature of the mispricing. Subsequently, we evaluate the scope for a LATW policy empirically by employing a time-varying coefficient VAR with a flexible identification scheme based on impact and long-run restrictions using data for the S&P500 index from 1962Q1 to 2014Q4. We _nd that a contractionary monetary policy shock in fact lowers stock prices beyond what is implied by the response of their underlying fundamentals.
    Keywords: Asset pricing, bubbles, financial stability, leaning against the wind, mispricing, monetary policy, time-varying coefficient VAR, zero and sign restrictions
    JEL: E44 E58 E52 G12 G14
    Date: 2016
  21. By: Carlo Altavilla (European Central Bank); Marco Pagano (University of Naples Federico II, CSEF, EIEF, CEPR, and ECGI); Saverio Simonelli (University of Naples Federico II)
    Abstract: Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the causes and effects of banks’ sovereign exposures during and after the euro crisis. First, in the vulnerable countries, the publicly owned, recently bailed out and less strongly capitalized banks reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks, suggesting that their choices were affected both by moral suasion and by yield-seeking. Second, their exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending cannot be ascribed to spurious correlation or reverse causality.
    Date: 2016
  22. By: Tevdovski, Dragan; Petrevski, Goran; Bogoev, Jane
    Abstract: We analyse the effects of fiscal and monetary policies in two South Eastern European (SEE) economies with currency pegs (Croatia and Macedonia) estimated by the Bayesian Vector Autoregression. The main results of the study are as follows: Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find opposite reaction of fiscal authorities to a monetary shock: monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia.
    Keywords: Fiscal Policy, Monetary Policy, Bayesian VAR
    JEL: E52 E58 E62 E63
    Date: 2016–03–21
  23. By: Serdar Ozkan (University of Toronto); Kurt Mitman (Stockholm University); Fatih Karahan (Federal Reserve Bank of New York); Aaron Hedlund (University of Missouri)
    Abstract: We investigate the role of housing and mortgage debt in the transmission of monetary policy to household consumption and the aggregate economy. In order to do so, we develop a heterogenous agents model with a frictional housing market, nominal long-term borrowing, default, and price rigidities. The model is able to capture rich heterogeneity in home ownership and leverage. Endogenous cyclical movements in house prices as well as counter-cyclical dynamics in the liquidity of housing allows us to explore the various indirect mechanisms through which monetary policy affects consumption. Nominal long-term mortgage debt implies that changes in monetary policy will result in redistribution between lenders and borrowers. Further, a contractionary monetary policy shock raises the cost of borrowing which reduces liquidity in the housing market, depresses house prices and feeds back into increasing the cost of borrowing. We find that this amplification channel disproportionally affects households with high leverage and high marginal propensities to consume. Finally, we investigate how booms and busts in the housing market asymmetrically affect the efficacy of monetary policy.
    Date: 2016
  24. By: Valerie Cerra
    Abstract: This paper presents a stylized general equilibrium model of the Venezuelan economy. The model explains how the recent sharp fall in oil revenue combines with foreign exchange rationing to produce a steep rise in inflation. Counterintuitively, a devaluation of the official exchange rate could temporarily reduce inflation. The model also explains how the hyper-depreciation of the black market exchange rate reflects prices in the most distorted goods markets.
    Keywords: Inflation;Venezuela;Fiscal policy;Monetary policy;Devaluation;Official exchange market rates;Shadow economy;Consumer goods;General equilibrium models;inflation; black market; exchange rate; Venezuela; foreign exchange rationing; scarcity; cash in advance constraint; oil revenue; fiscal dominance
    Date: 2016–08–03
  25. By: Hommes, C.H. (University of Amsterdam); Massaro, D. (University of Amsterdam); Salle, I. (University of Amsterdam)
    Abstract: The global economic crisis of 2007-8 pushed many advanced economies into a liquidity trap, a macroeconomic scenario characterised by nominal rates at the zero lower bound (ZLB), low inflation and output below trend. We design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicited directly from human subjects. Our results suggest that monetary policy alone is not sufficient to insulate the economy from the risk of falling into a liquidity trap, even if it preventively cuts the interest rate when inflation threatens to fall below a certain threshold. However, such policy augmented with a fiscal switching rule succeeds in avoiding and escaping liquidity trap episodes. We also measure larger-than-unity fiscal multipliers when monetary policy is constrained by the ZLB. Experimental results in different treatments are well explained by adaptive learning.
    Date: 2015
  26. By: Vladimir Asriyan; Luca Fornaro; Alberto Martín; Jaume Ventura
    Abstract: We propose a model of money, credit and bubbles, and use it to study the role of monetary policy in managing asset bubbles. In this model, bubbles pop up and burst, generating fluctuations in credit, investment and output. Two key insights emerge from the analysis. First, the growth rate of bubbles, which is driven by agents’ expectations, can be set in real or in nominal terms. This gives rise to a novel channel of monetary policy, as changes in the inflation rate affect the real growth rate of bubbles and their effect on economic activity. Crucially, this channel does not rely on contract incompleteness or price rigidities. Second, there is a natural limit on monetary policy’s ability to control bubbles: the zero-lower bound. When a bubble crashes, the economy may enter into a liquidity trap, a regime in which agents shift their portfolios away from bubbles - and the credit that they sustain - to money, reducing intermediation, investment and growth. We explore the implications of the model for the conduct of “conventional” and “unconventional” monetary policy, and we use the model to provide a broad interpretation of salient macroeconomic facts of the last two decades.
    Keywords: Bubbles, monetary policy, liquidity, traps, financial frictions
    JEL: E32 E44
    Date: 2016–09
  27. By: Karl Whelan
    Abstract: This paper focuses on how the lender of last resort function works in the euro area. It argues that the Eurosystem does not provide a clear and transparent lender of last resort facility and discusses how this has promoted financial instability and has critically undermined free movement of capital in the euro area. Until this weakness in the euro area’s policy infrastructure is fixed, it will be difficult to have a truly successful banking union.
    Keywords: European Central Bank; Lender of last resort; Banking union
    JEL: E58 G21
    Date: 2016–08
  28. By: Banegas, Ayelen; Montes-Rojas, Gabriel; Siga, Lucas
    Abstract: We study the links between monetary policy and mutual fund flows, and the potential risks to financial stability that might arise from such flows, using data over the 2000-14 period. We find that monetary policy can have a direct influence on the allocation decisions of mutual fund investors. In particular, we show that monetary policy shocks explain mutual fund flow dynamics and that the effect of these shocks differs by investment strategy. Results suggest that positive shocks to the path of monetary policy (unexpected tightening) are associated with persistent outflows from bond mutual funds. Conversely, a tighter-than-expected monetary policy path will cause net inflows into equity funds. In an industry that "mutualizes" redemption costs and where many funds may engage in liquidity transformation, our flow-performance analysis provides evidence of the potential existence of a first-mover advantage in less liquid segments of the market.
    Keywords: First-mover advantage ; Monetary policy ; Mutual fund flows
    JEL: G20 G23 E52
    Date: 2016–07–26
  29. By: Eugenio M Cerutti; Ricardo Correa; Elisabetta Fiorentino; Esther Segalla
    Abstract: This paper documents the features of a new database that focuses on changes in the intensity in the usage of several widely used prudential tools, taking into account both macro-prudential and micro-prudential objectives. The database coverage is broad, spanning 64 countries, and with quarterly data for the period 2000Q1 through 2014Q4. The five types of prudential instruments in the database are: capital buffers, interbank exposure limits, concentration limits, loan to value (LTV) ratio limits, and reserve requirements. A total of nine prudential tools are constructed since some useful further decompositions are presented, with capital buffers divided into four subindices: general capital requirements, real state credit specific capital buffers, consumer credit specific capital buffers, and other specific capital buffers; and with reserve requirements divided into two sub-indices: domestic currency capital requirements and foreign currency capital requirements. While general capital requirements have the most changes from the cross-country perspective, LTV ratio limits and reserve requirements have the largest number of tightening and loosening episodes. We also analyze the instruments’ usage in relation to the evolution of key variables such as credit, policy rates, and house prices, finding substantial differences in the patterns of loosening or tightening of instruments in relation to business and financial cycles.
    Keywords: Policy instruments;Macroprudential Policy;Financial institutions;Business cycles;Developed countries;Emerging markets;Data collection;Cross country analysis;Macroprudential policies, Microprudential Policies, Financial cycles
    Date: 2016–06–08
  30. By: Sajjid Chinoy; Pankaj Kumar; Prachi Mishra
    Abstract: We analyze the dramatic decline in India’s inflation over the last two years using an augmented Phillips Curve approach and quantify the role of different factors. Our results suggest that, contrary to popular perception, the direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices. Instead, we find that inflation is a highly persistent process in India, reflecting very adaptive expectations and the backward looking nature of wage and support price-setting. As a consequence, we find that a moderation of expectations, both backward and forward, and a rationalization of Minimum Support Prices (MSPs), explain the bulk of the disinflation over the last two years.
    Keywords: Disinflation;India;Inflation;Wages;Econometric models;inflation, India
    Date: 2016–08–08

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