nep-cba New Economics Papers
on Central Banking
Issue of 2017‒01‒01
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. The Efficiency of Monetary Policy when Guiding Inflation Expectations By Christian Bauer; Sebastian Weber
  2. Trust in the central bank and inflation expectations By Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
  3. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By Mariana García-Schmidt; Michael Woodford
  4. Monetary Policy, Private Debt and Financial Stability Risks By Gregory Bauer; Eleonora Granziera
  5. Financial vulnerability and monetary policy By Adrian, Tobias; Duarte, Fernando M.
  6. Delphic and Odyssean monetary policy shocks: Evidence from the euro-area By Philippe Andrade; Filippo Ferroni
  7. Monetary Policy and Indeterminacy after the 2001 Slump By Firmin Doko Tchatoka; Nicolas Groshenny; Qazi Haque; Mark Weder
  8. Dealing with Quantitative Easing Spillovers in East Asia: The Role of Institutions and Macroprudential Policy By Saiki, Ayako; Chantapacdepong, Pornpinun; Volz, Ulrich
  9. The Politics of Central Bank Independence By de Haan, J.; Eijffinger, Sylvester
  10. Optimal Monetary Policy in a Pure Currency Economy with Heterogenous Agents By Nicola Amendola; Leo Ferraris; Fabrizio Mattesini
  11. Do central banks respond timely to developments in the global economy? By Hilde C. Bjørnland; Leif Anders Thorsrud
  12. Trend inflation and exchange rate dynamics: A New Keynesian approach By Takashi Kano
  13. State-Dependent Transmission of Monetary Policy in the Euro Area By Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
  14. Should Central Bank Forget Reserve Requirements? Assessment of Reserve Requirements in Transmitting SBP’s Policy Shocks to Retail Interest Rates and Exchange Rate By Muhammad Omer
  15. Financial Variables in a Policy Rule: Does It Bring Macroeconomic Benefits? By Jan Zacek
  16. Uncovering the heterogeneous effects of ecb unconventional monetary policies across euro area countries By Pablo Burriel; Alessandro Galesi
  17. Access to Credit and Unconventional Monetary policy in the Eurozone after the Financial Crisis By Petr Korab
  18. Will helicopter money be spent? New evidence By Maarten van Rooij; Jakob de Haan
  19. Monetary policy and regional house-price appreciation By Cooper, Daniel H.; Luengo-Prado, Maria Jose; Olivei, Giovanni P.
  20. Spillovers of banking regulation: The effect of the German bank levy on the lending rates of regional banks and their local competitors By Haskamp, Ulrich
  21. A Portfolio Model of Quantitative Easing By Jens H. E. Christensen; Signe Krogstrup
  22. Prudential Policies and Their Impact on Credit in the United States By Paul S. Calem; Ricardo Correa; Seung Jung Lee
  23. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Arias, Jonas E.; Caldara, Dario; Rubio-Ramirez, Juan F.
  24. How Would Monetary Policy Look Like if John Rawls Had Been Hired as a Chairman of the Fed? By Marta B. M. Areosa; Waldyr D. Areosa; Pierre Monnin
  25. Monetary Policy Implementation and Private Repo Displacement : Evidence from the Overnight Reverse Repurchase Facility By Alyssa G. Anderson; John Kandrac
  26. On the Effects of A Negative Interest Rate Policy By Yuzo Honda

  1. By: Christian Bauer; Sebastian Weber
    Abstract: We assess the efficiency of monetary policy to guide inflation expectations in high and low regimes. Using quantile regression we analyze the persistence of inflation expectations from the Consensus Economics Survey at different quantiles. We find a) empirical evidence that expectations are not anchored in the tails of their distribution and b) robust evidence for structural breaks for the USA and Italy. After the outbreak of the Global Financial crisis expectations become unanchored. The Fed's unconventional monetary policy at the ZLB in thus ineffective in guiding inflation expectations.
    Keywords: Inflation expectations, persistence, monetary policy, quantile regressions, structural breaks, quantile unit root test, zero lower bound
    JEL: C22 C32 D84 E31 E52
    Date: 2016
  2. By: Dimitris Christelis; Dimitris Georgarakos; Tullio Jappelli; Maarten van Rooij
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals' expectations and uncertainty about future inflation, and also whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB's inflation target. These findings hold after controlling for people's knowledge about the objectives of the ECB. In addition, higher trust in the ECB raises expectations about GDP growth. The findings suggest that a central bank can influence the economy through people's expectations, even in times when conventional monetary policy tools likely have weak effects.
    Keywords: inflation expectations; inflation uncertainty; Anchorin; Trust in the ECB; Subjective Expectations
    JEL: D12 D81 E03 E40 E58
    Date: 2016–12
  3. By: Mariana García-Schmidt; Michael Woodford
    Abstract: A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian" proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models have the property that perfect foresight equilibria with a low fixed interest rate forever involve low inflation might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium (PFE). We propose an explicit cognitive process by which agents form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a PFE can arise as a limiting case of our more general concept of reflective equilibrium. But we show that a policy of fixing the interest rate for a long period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to our alternative approach, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary; but likely less so than the usual PFE analysis would imply, and much less in the case of a long-horizon commitment.
    Date: 2016–12
  4. By: Gregory Bauer; Eleonora Granziera
    Abstract: Can monetary policy be used to promote financial stability? We answer this question by estimating the impact of a monetary policy shock on private-sector leverage and the likelihood of a financial crisis. Impulse responses obtained from a panel VAR model of 18 advanced countries suggest that the debt-to-GDP ratio rises in the short run following an unexpected tightening in monetary policy. As a consequence, the likelihood of a financial crisis increases, as estimated from a panel logit regression. However, in the long run, output recovers and higher borrowing costs discourage new lending, leading to a deleveraging of the private sector. A lower debt-to-GDP ratio in turn reduces the likelihood of a financial crisis. These results suggest that monetary policy can achieve a less risky financial system in the long run but could fuel financial instability in the short run. We also find that the ultimate effects of a monetary policy tightening on the probability of a financial crisis depend on the leverage of the private sector: the higher the initial value of the debt-to-GDP ratio, the more beneficial the monetary policy intervention in the long run, but the more destabilizing in the short run.
    Keywords: Credit and credit aggregates, Financial stability, Monetary Policy, Transmission of monetary policy
    JEL: E E52 E58 C21 C23
    Date: 2016
  5. By: Adrian, Tobias (Federal Reserve Bank of New York); Duarte, Fernando M. (Federal Reserve Bank of New York)
    Abstract: We present a parsimonious New Keynesian model that features financial vulnerabilities. The vulnerabilities generate time varying downside risk of GDP growth by driving the dynamics of risk premia. Monetary policy impacts the output gap directly via the IS curve, and indirectly via its impact on financial vulnerabilities. The optimal monetary policy rule always depends on financial vulnerabilities in addition to output, inflation, and the real rate. We show that a classic Taylor rule exacerbates downside risk of GDP growth relative to an optimal Taylor rule, thus generating welfare losses associated with negative skewness of GDP growth.
    Keywords: monetary policy; macro-finance; financial stability
    JEL: E52 G10 G12
    Date: 2016–12–01
  6. By: Philippe Andrade (Banque de France); Filippo Ferroni (Banque de France and University of Surrey)
    Abstract: In this paper, we study the impact of the ECB announcements on the market-based expectations of interest rates and of in ation rates. We nd that the impact of the ECB announcements on in ation expectations has changed over the last fteen years. In particular, while in the central part of our sample the ECB announcements were read as a signal about the economic conditions (i.e. Delphic component), in latest episodes they have been interpreted as a commitment device on future monetary policy accommodation (i.e. Odyssean component). We propose an approach to separately identify the Delphic and Odyssean component of the ECB monetary policy announcements and we measure their dynamic impact on the economy.
    JEL: C10 E52 E32
    Date: 2016–10
  7. By: Firmin Doko Tchatoka (School of Economics, University of Adelaide); Nicolas Groshenny (School of Economics, University of Adelaide); Qazi Haque (School of Economics, University of Adelaide); Mark Weder (School of Economics, University of Adelaide)
    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. We find that only when measuring inflation with core PCE does monetary policy appear 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 and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an economy that distinguishes between core and headline inflation rates. This model comfortably rules out indeterminacy.
    Keywords: Indeterminacy, Taylor Rules, Great Deviation
    JEL: E32 E52 E58
    Date: 2016–12
  8. By: Saiki, Ayako (Asian Development Bank Institute); Chantapacdepong, Pornpinun (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: This paper explores the impact of advanced countries’ quantitative easing on emerging market economies (EMEs) and how macroprudential policy and good governance play a role in preventing potential financial vulnerabilities. We used confidential locational bank statistics data from the Bank for International Settlements to examine whether quantitative easing has caused an appreciation of EMEs’ currencies and how it has done so, and whether this has in turn boosted foreign-currency borrowing, thus making EMEs vulnerable to balance sheet and maturity mismatch problems. While focusing our analysis on East Asian economies, we compare them with Latin American economies, which were also major recipients of quantitative easing capital inflows. We found that government effectiveness plays an important role in curbing excessive borrowing when the exchange rate is overvalued.
    Keywords: Quantitative easing; spillover effects; macroprudential policy; good governance; capital inflows; emerging market economies (EMEs); East Asia; Latin America
    JEL: E44 E58 F31 F32 F34
    Date: 2016–12–27
  9. By: de Haan, J.; Eijffinger, Sylvester (Tilburg University, Center For Economic Research)
    Abstract: This paper reviews recent research on the political economy of monetary policy-making, both by economists and political scientists. The traditional argument for central bank independence (CBI) is based on the desire to counter inflationary biases. However, studies in political science on the determinants of central bank independence suggest that governments may choose to delegate monetary policy in order to detach it from political debates and power struggles. This argument would be especially valid in countries with coalition governments, federal structures and strongly polarized political systems. The recent financial crisis has changed the role of central banks as evidenced by the large set of new unconventional monetary and macro-prudential policy measures. But financial stability and unconventional monetary policies have much stronger distributional consequences than conventional monetary policies and this has potential implications for the central bank’s independence. It may also have changed the regime from monetary dominance to fiscal dominance. However, our results do not suggest that CBI has been reduced since the Great Financial Crisis. This holds both for legal measures of CBI and the turnover rate of central bank governors.
    Keywords: central bank independence; fiscal dominance; determinantsof CBI
    JEL: E42 E52 E58
    Date: 2016
  10. By: Nicola Amendola (DEF & CEIS,University of Rome Tor Vergata); Leo Ferraris (DEF & CEIS,University of Rome Tor Vergata); Fabrizio Mattesini (DEF & CEIS,University of Rome Tor Vergata)
    Abstract: This paper shows that, in a pure currency economy with heterogeneous agents and multiple commodities, a pecuniary externality plays a key role in making the equilibrium allocation constrained inefficient. Monetary policy intervention can help improve matters.
    Keywords: Money,Heterogeneity,Pecuniary Externality,Monetary Policy
    JEL: E40
    Date: 2016–12–17
  11. By: Hilde C. Bjørnland (Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (Norges Bank (Central Bank of Norway))
    Abstract: Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, in flation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.
    Keywords: Monetary policy, interest rate path, forecast revisions and global indicators
    JEL: C11 C53 C55 E58 F17
    Date: 2016–12–21
  12. By: Takashi Kano
    Abstract: The paper studies exchange rate implications of trend inflation within a two-country New Keynesian (NK) model under incomplete international financial markets. A NK Phillips curve generalized by trend inflation with a positive long-run mean implies an expectational difference equation of inflation with higher-order leads of expected inflation. The resulting two-country inflation differential is smoother, more persistent, and more insensitive to a real exchange rate. General equilibrium then yields (i) a persistent real exchange rate with an autoregressive root close to one, (ii) a hump-shaped impulse response of a real exchange rate with a half-life longer than four years, (iii) a volatile real exchange rate relative to cross-country inflation differential, (iv) an almost perfect co-movement between real and nominal exchange rates and (v) a sharp rise in the volatility of a real exchange rate from a managed nominal exchange rate regime to a flexible one within an otherwise standard two-country NK model. Trend inflation, therefore, approaches empirical puzzles of exchange rates dynamics.
    Keywords: Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Models
    JEL: E31 E52 F31 F41
    Date: 2016–12
  13. By: Jan Pablo Burgard; Matthias Neuenkirch; Matthias Nöckel
    Abstract: In this paper, we estimate a logit mixture vector autoregressive (Logit-MVAR) model describing monetary policy transmission in the euro area over the period 1999–2015. MVARs allow us to differentiate between different states of the economy. In our model, the state weights are determined by an underlying logit model. In contrast to other classes of non-linear VARs, the regime affiliation is neither strictly binary nor binary with a (short) transition period. We show that monetary policy transmission in the euro area can indeed be described as a mixture of two states. The first (second) state with an overall share of 80% (20%) can be interpreted as a “normal state” (“crisis state”). In both states, output and prices are found to decrease after monetary policy shocks. During “crisis times,” the contraction is much stronger, as the peak effect is more than twice as large when compared to “normal times.” In contrast, the effect of monetary policy shocks is less enduring in crisis times. Both findings provide a strong indication that the transmission mechanism is indeed different for the euro area during times of economic and financial distress.
    Keywords: Economic and financial crisis, euro area, mixture VAR, monetary policy transmission, state-dependency
    JEL: C32 E52 E58
    Date: 2016
  14. By: Muhammad Omer (State Bank of Pakistan)
    Abstract: We have investigated the effectiveness of monetary policy tools, the discount rate and the reserve requirement ratio, in Pakistan by studying their pass through to the retail interest rates and the exchange rate. We find that the pass-through of the required reserve ratio to the retail rates and exchange rate is significant but incomplete. The pass through of discount rate; to the lending rate is complete; to the deposit rate is incomplete and; to the exchange rate is insignificant. Our results suggest that the required reserve is a more powerful tool for stabilizing the exchange rate shocks than discount rate. We, therefore, recommend State Bank of Pakistan to not to ignore the reserve requirement ratio as an active policy tool, specifically when exchange rate is under speculative attack.
    Keywords: Interest rates, monetary policy, exchange rate
    JEL: E43 E52 F31
    Date: 2016–12
  15. By: Jan Zacek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: After the recent financial crisis of 2007, a connection between monetary policy and financial stability has started to be thoroughly investigated. One of the particular areas of this research field deals with the role of various financial variables in the monetary policy rules. The main purpose of this research is to find whether direct incorporation of the financial variables in the monetary policy rule can bring macroeconomic benefits in terms of lower volatility of inflation and output. So far, the main emphasis of the research has been placed on the investigation of the augmented Taylor rules in the context of a closed economy. This paper sheds light on the performance of the augmented Taylor rules in a small open economy. For this purpose, a New Keynesian DSGE model with two types of financial frictions is constructed. The model is calibrated for the Czech Republic. This work provides four conclusions. First, incorporation of the financial variables (asset prices and the volume of credit) in the monetary policy rule is beneficial for macroeconomic stabilization in terms of lower implied volatilities of inflation and output. Second, the usefulness of the augmented monetary policy rule is the most apparent in case of the shock originating abroad. Third, there is a strong link between the financial and the real side of an economy. Fourth, if the banking sector experiences a sharp drop in bank capital that brings this sector into decline, activity in the whole economy deteriorates and monetary policy is not able to achieve macroeconomic stability using its conventional tools.
    Keywords: DSGE models, financial imperfections, inflation targeting, monetary policy
    JEL: E31 E43 E52 E58
    Date: 2016–12
  16. By: Pablo Burriel (Banco de España); Alessandro Galesi (Banco de España)
    Abstract: We assess the effects of the ECB’s recent unconventional monetary policy measures by estimating a global VAR that exploits panel variation among all euro area economies and explicitly takes into account cross-country interdependencies. Unconventional monetary policy measures have benefi cial effects on activity, credit, infl ation and equity prices, and lead to a depreciation of the exchange rate. Most euro area members benefi t from these measures, but with a substantial degree of heterogeneity. Cross-country spillovers account for a sizable fraction of such dispersion, and substantially amplify effects. Countries with less fragile banking systems benefi t the most from unconventional monetary policy measures. Compared to expansionary conventional monetary policies, unconventional measures are particularly effective in reducing fi rms’ fi nancing costs and boosting credit.
    Keywords: unconventional monetary policy, euro area, GVAR, heterogeneity, spillovers
    JEL: C32 E52 E58
    Date: 2016–12
  17. By: Petr Korab (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: This paper investigates the availability of bank credit to enterprises in the Eurozone after the recent financial crisis. The analysis draws from a rich firm-level dataset on perceived credit availability of micro, small and medium-sized, and large enterprises in 11 countries in the Euro Area during the time horizon 2010 – 2014. Employing probit and logit estimators, the empirical results suggest that GDP growth is a significant factor improving availability to small and medium-sized and large firms in the post-crisis period. On the contrary, the asset-purchase programmes of the European Central Bank did not show a significant impact on credit availability to micro and small and medium-sized enterprises. The findings support the decision of the ECB to further intensify asset purchasing and officially introduce the program of quantitative easing in 2015.
    Keywords: credit availability, credit rationing, credit constraints, credit supply, financial crisis recovery
    JEL: E51 E52
    Date: 2016–12
  18. By: Maarten van Rooij; Jakob de Haan
    Abstract: According to some economists, central banks should use 'helicopter money' (monetary financing of government expenditure or transfers to households) to boost inflation (expectations). Based on a survey among Dutch households, we examine whether respondents intend to spend the money received via such a transfer. Our findings suggest that only a small part of transfers will be spent and that such a transfer will hardly affect inflation expectations. Furthermore, whether transfers come from the central bank or the government hardly makes any difference. Finally, our results suggest that using helicopter money would have mixed consequences for public trust in the ECB.
    Keywords: Helicopter money; central banking; ECB; trust; unconventional monetary policy
    JEL: E52 E58 D14
    Date: 2016–12
  19. By: Cooper, Daniel H. (Federal Reserve Bank of Boston); Luengo-Prado, Maria Jose (Federal Reserve Bank of Boston); Olivei, Giovanni P. (Federal Reserve Bank of Boston)
    Abstract: This paper examines the link between monetary policy and house-price appreciation by exploiting the fact that monetary policy is set at the national level, but has different effects on state-level activity in the United States. This differential impact of monetary policy provides an exogenous source of variation that can be used to assess the effect of monetary policy on state-level housing prices. Policy accommodation equivalent to 100 basis points on an equilibrium real federal funds rate basis raises housing prices by about 2.5 percent over the next two years. However, the estimated effect increases to 6.6 percent during the early 2000s housing boom.
    JEL: E43 E44 E52 E58
    Date: 2016–11–30
  20. By: Haskamp, Ulrich
    Abstract: During the financial crisis numerous European governments decided to rescue domestic banks with public funds to prevent a collapse of the banking system. To internalize the public costs, bank levies have been introduced in many countries. This paper analyzes the German bank levy which was implemented from 2011 till 2014 and its effect on lending rates of regional banks. We examine not only if banks shift the cost of the levy to their customers' lending rates, but also whether there are spillovers to their local competitors. The German savings and cooperative banks are a perfect setting to study such effects as they only operate within well-defined regions, allowing us to identify their local competitors. Additionally, only some of them are subject to the levy due to a tax allowance. Further, with a market share of 42.8% in total, they are relevant. Firstly, we find that a bank that has to pay the bank levy raises its lending rate by about 0.14 percentage points. Secondly, we examine whether the increased lending rates of paying banks spill over to their local competitors. We find this indirect effect to be about one third of the size. Given an average lending rate of 4.96%, these effects are economically significant. Lastly, adverse effects of the levy on paying banks' loan supply growth are absorbed by their competitors to a certain extent.
    Keywords: bank regulation,bank levy,regional spillover,lending rates
    JEL: E43 G21 G28 R10
    Date: 2016
  21. By: Jens H. E. Christensen; Signe Krogstrup
    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.
    Keywords: unconventional monetary policy, transmission, reserve-induced portfolio balance channel
    JEL: G11 E43 E50 E52 E58
    Date: 2016
  22. By: Paul S. Calem; Ricardo Correa; Seung Jung Lee
    Abstract: We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks—banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.
    Keywords: Bank stress tests ; CCAR ; Home Mortgage Disclosure Act (HMDA) data ; Jumbo mortgages ; Leveraged lending ; Macroprudential policy ; Shared National Credit (SNC) data ; Interagency Guidance on Leveraged Lending ; Syndicated loan market
    JEL: G21 G23 G28
    Date: 2016–12–13
  23. By: Arias, Jonas E. (Federal Reserve Bank of Philadelphia); Caldara, Dario (Federal Reserve Board of Governors); Rubio-Ramirez, Juan F. (Emory University & Federal Reserve Bank of Atlanta)
    Abstract: This paper studies the effects of monetary policy shocks using structural vector autoregressions (SVARs). We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. We consistently find that an increase in the fed funds rate induces a contraction in output. We also show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse responses to a monetary shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability. This finding accounts for the difference in results with Uhlig (2005), who found that contractionary monetary policy shocks have no clear effect on output. When we reconcile the two approaches by combining both sets of restrictions, monetary policy shocks remain contractionary.
    Keywords: SVARs; monetary policy shocks; systematic component of monetary policy
    JEL: C51 E52
    Date: 2016–12–01
  24. By: Marta B. M. Areosa; Waldyr D. Areosa; Pierre Monnin
    Abstract: Using a textbook New Keynesian model extended with an inequality channel, we examine optimal monetary policy departing from the traditional utilitarian social welfare function, to consider alternative functions, including the Rawlsian approach of putting only weight to the agent with the lowest welfare level. Our main results show the optimal responses from a Rawlsian monetary authority are: (i) a less aggressive monetary tightening, but inducing a more pronounced drop in inflation after a monetary shock; (ii) a monetary policy easing after an increase in government spending and (iii) a more pronounced drop in the interest rate after a positive total factor productivity shock.
    Date: 2016–12
  25. By: Alyssa G. Anderson; John Kandrac
    Abstract: In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases the bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions.
    Keywords: Repo ; Money market mutual funds ; Monetary policy ; Federal Reserve
    JEL: G23 E52 G11 E58
    Date: 2016–10–31
  26. By: Yuzo Honda (Department of Informatics, Kansai University)
    Abstract: This paper reports what effects the negative interest rate policy (NIRP), introduced by the Bank of Japan in February 2016, brought about on the Japanese economy. First, NIRP was very effective in stimulating Private Residential Investment. Second, it lowered the long-term interest rate and was likely to have supported Private Non-Residential Investment. Third, there is a reason to believe that it probably stopped around August 2016 the yen appreciation trend in the foreign exchange rates. Fourth, it was also likely to have stopped the downward trend of stock prices around August 2016. Overall, NIRP was empirically found to have expansionary effects. It is a legitimate policy tool to alleviate the zero interest rate lower bound, though due considerations should be given to its side effects at the same time.
    Keywords: Negative Interest Rate, Residential Investment, Non-Residential Investment, Foreign Exchange Rate
    JEL: E52
    Date: 2016–12

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