nep-cba New Economics Papers
on Central Banking
Issue of 2018‒04‒09
twenty-six papers chosen by
Maria Semenova
Higher School of Economics

  1. Deconstructing monetary policy surprises: the role of information shocks By Jarociński, Marek; Karadi, Peter
  2. Global Factors and Trend Inflation By Güneş Kamber; Benjamin Wong
  3. Some Thoughts On International Monetary Policy Coordination By Charles I. Plosser
  5. Macroprudential regulation in the European Union in 1995-2014: introducing a new data set on policy actions of a macroprudential nature By Budnik, Katarzyna; Kleibl, Johannes
  6. Monetary Policy Obeying the Taylor Principle Turns Prices Into Strategic Substitutes By Cornand, Camille; Heinemann, Frank
  7. Monetary policy in the grip of a pincer movement By Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
  8. Observing and shaping the market: the dilemma of central banks By Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
  9. The dynamic impact of monetary policy on regional housing prices in the US: Evidence based on factor-augmented vector autoregressions By Fischer, Manfred M.; Huber, Florian; Pfarrhofer, Michael; Staufer-Steinnocher, Petra
  10. US Infl ation and Infl ation Uncertainty Over 200 Years By Don Bredin; Stilianos Fountas
  11. The Optimal Inflation Target and the Natural Rate of Interest By P. Andrade; J. Galí; H. Le Bihan; J. Matheron
  12. Cultural Differences in Monetary Policy Preferences By Adriel Jost
  13. Could a Higher Inflation Target Enhance Macroeconomic Stability? By José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
  14. Sovereign Default and Monetary Policy Tradeoffs By Bi, Huixin; Leeper, Eric M.; Leith, Campbell
  15. Proposals for monetary reform: A critical assessment using the general quantity equation by Wolfgang Stützel By Tarne, Ruben
  16. Housing boom-bust cycles and asymmetric macroprudential policy By William Gatt
  17. Financial Disruption and State Dependant Credit Policy By Thibaud Cargoet; Jean-Christophe Poutineau
  18. New Perspectives on Forecasting Inflation in Emerging Market Economies: An Empirical Assessment By Duncan, Roberto; Martinez-Garcia, Enrique
  19. How does monetary policy affect income inequality in Japan? Evidence from grouped data By Martin Feldkircher; Kazuhiko Kakamu
  20. The Brexit as a Forerunner: Monetary Policy, Economic Order and Divergence Forces in the European Union By Sebastian Müller; Gunther Schnabl
  21. Portfolio rebalancing and the transmission of large-scale asset programmes: evidence from the euro area By Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
  22. Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s By Carlson, Mark A.; Jaremski, Matthew
  23. Central Bank Policy Announcements and Changes in Trading Behavior: Evidence from Bond Futures High Frequency Price Data By Koichiro Kamada; Tetsuo Kurosaki; Ko Miura; Tetsuya Yamada
  24. The liquidity effect of the Federal Reserve’s balance sheet reduction on short-term interest rates By Brauning, Falk
  25. The inflation-growth relationship in SSA inflation targeting countries By Nomahlubi Mavikela; Simba Mhaka; Andrew Phiri
  26. The Fed's Discount Window: An Overview of Recent Data By Felix P. , Ackon; Ennis, Huberto M.

  1. By: Jarociński, Marek; Karadi, Peter
    Abstract: Central bank announcements simultaneously convey information about monetary policy and the central bank’s assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency comovement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy non-neutrality. We make this point formally and offer an interpretation of the central bank information shock using a New Keynesian macroeconomic model with financial frictions. JEL Classification: E32, E52, E58
    Keywords: central bank private information, event study, high-frequency identification, monetary policy shock, structural VAR
    Date: 2018–02
  2. By: Güneş Kamber; Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: Many studies have shown that domestic inflation in different countries tends to behave similarly. One possible explanation for this observation is that domestic inflation dynamics are in part determined by global factors. This implies that central banks need to account for global factors when explaining and predicting inflation. Their importance however depends on whether they have long lasting effects on domestic inflation rates. Using a large macroeconomic dataset, we propose a methodology to decompose inflation into its permanent (trend) and transitory (gap) components. We then quantify the role of domestic and global factors in determining each of these components. We first apply the model to a sample of economies with long-standing inflation targeting regimes. We then extend our analysis to a sample of ten Asian economies to draw comparisons. In our first sample, we find that global factors have a sizeable influence on inflation behaviour. However, this is mainly temporary and appears to reflect movements in commodity prices. The effect of global factors on trend inflation is small. In our second sample, a set of countries with more diverse monetary policy regimes, we find global factors have a much larger role. A possible explanation is that inflation targeting may have reduced the influence of global factors on trend inflation.
    Date: 2018–02
  3. By: Charles I. Plosser
    Abstract: In this short paper, I review previous efforts at international coordination among central banks. In particular, I highlight the ultimate failure of both the gold standard and the Bretton Woods regimes. In both cases, the desire for a fixed rate regime forcing each country to make domestic monetary and fiscal policies subservient to pressures from the external balance. These regimes were not incentive compatible with sovereign nations' desire to pursue independent monetary and fiscal policy. Thus, future efforts at coordination that seek to constrain or limit central bank's domestic goals will most likely fail as well. I agree with John Taylor that the best results are likely to arise in more rule-like regimes with flexible exchange rates and capital mobility where the rules are more incentive compatible with domestic desires.Â
    Keywords: Â
    Date: 2018–01
  4. By: Hanna O. Sakhno (National Research University Higher School of Economics)
    Abstract: After the recent global financial crisis, central banks in advanced and developing economies found themselves unable to stick to their mandate goal of price stability by resorting to traditional instruments of monetary policy. When key interest rates approached the zero bound, the need to develop a new toolkit of liquidity provision arose. Central banks embarked on numerous non-standard monetary policy measures aimed at ensuring financial stability and restoring economic growth. Communication has become an effective auxiliary instrument of economic policy, and markets started paying precise attention to the way central bankers report information regarding the future path of monetary policy. The purpose of this paper is to provide an overview of recent trends and developments in central bank communication strategies. By resorting to the existing literature, we analyze the origins of central bank communication and the evolution of its role in time. We also study the main instruments of communication strategies of large central banks. In the final part of the study, we investigate the communication strategy of the US Federal Reserve and the way it may cause spillovers to fragile markets abroad. We outline at least three major channels of international policy transmission: through stocks, bonds and exchange rates fluctuations
    Keywords: central bank communication, unconventional monetary policy, international spillovers, the Federal Reserve.
    JEL: E42 E52 E58
    Date: 2018
  5. By: Budnik, Katarzyna; Kleibl, Johannes
    Abstract: This paper introduces a new comprehensive data set on policies of a macroprudential nature in the banking sectors of the 28 member states of the European Union (EU) between 1995 and 2014. The Macroprudential Policies Evaluation Database (MaPPED) offers a detailed overview of the “life-cycle” of policy instruments which are either genuinely macroprudential or are essentially microprudential but likely to have a significant impact on the whole banking system. It tracks events of the introduction, recalibration and termination of eleven categories and 53 subcategories of instruments. MaPPED has been based on a carefully designed questionnaire, which has been completed in cooperation with experts from national central banks and supervisory authorities of all EU member states. This paper describes the design and structure of the new data set and presents the first descriptive analysis of the use of policy measures with a macroprudential nature in the EU over the last two decades. The results indicate that there has been a remarkable variation in the use of policies of a macroprudential nature both across EU countries and over time. Moreover, the analysis provides some tentative evidence of an impact of capital buffers, lending restrictions and caps on maturity mismatches on credit to the non-financial private sector in the EU as well as of the relative ineffectiveness of sectoral risk weights in controlling credit growth. JEL Classification: E50, E60, G28
    Keywords: financial stability, macroprudential instruments, macroprudential policy, policy assessment
    Date: 2018–01
  6. By: Cornand, Camille (University of Lyon); Heinemann, Frank (TU Berlin)
    Abstract: Monetary policy affects the degree of strategic complementarity in firms pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.
    Keywords: monopolistic competition; monetary policy rule; pricing decisions; strategic complementarity; strategic substitutability.;
    JEL: E52 C72
    Date: 2018–04–04
  7. By: Claudio Borio; Piti Disyatat; Mikael Juselius; Phurichai Rungcharoenkitkul
    Abstract: Monetary policy has been in the grip of a pincer movement, caught between growing financial cycles, on the one hand, and an inflation process that has become quite insensitive to domestic slack, on the other. This two-pronged attack has laid bare some of the limitations of prevailing monetary policy frameworks, particularly in the analytical notions that have guided much of its practice. We argue that the natural rate of interest as a guidepost for monetary policy has a couple of limitations: the concept, as traditionally conceived, neglects the state of the financial cycle in the definition of equilibrium; in addition, it underestimates the role that monetary policy regimes may play in persistent real interest rate movements. These limitations may expose monetary policy to blindsiding by the collateral damage that comes from an unhinged financial cycle. We propose a more balanced approach that recognises the difficulties monetary policy has in fine-tuning inflation and responds more systematically to the financial cycle.
    Keywords: monetary policy, financial stability, financial cycle, natural interest rate, inflation
    JEL: E32 E40 E44 E50 E52
    Date: 2018–03
  8. By: Romain Baeriswyl; Camille Cornand; Bruno Ziliotto
    Abstract: While the central bank observes market activity to assess economic fundamentals, it shapes the market outcome through the conduct of monetary policy. A dilemma arises from this dual role because the more the central bank shapes the market, the more it influences the informational content of market prices. This paper analyses the optimal monetary policy action and disclosure when central bank information is endogenous for three operational frameworks: pure communication, action and communication, and signalling action. Although taking the endogenous nature of central bank information into account calls for less activism from the central bank, full transparency remains optimal when the weight assigned to price dispersion in social welfare takes on its micro-founded value.
    Keywords: Endogenous information, overreaction, central bank communication
    JEL: D82 E52 E58
    Date: 2018
  9. By: Fischer, Manfred M.; Huber, Florian; Pfarrhofer, Michael; Staufer-Steinnocher, Petra
    Abstract: In this study interest centers on regional differences in the response of housing prices to monetary policy shocks in the US. We address this issue by analyzing monthly home price data for metropolitan regions using a factor-augmented vector autoregression (FAVAR) model. Bayesian model estimation is based on Gibbs sampling with Normal-Gamma shrinkage priors for the autoregressive coefficients and factor loadings, while monetary policy shocks are identified using high-frequency surprises around policy announcements as external instruments. The empirical results indicate that monetary policy actions typically have sizeable and significant positive effects on regional housing prices, revealing differences in magnitude and duration. The largest effects are observed in regions located in states on both the East and West Coasts, notably California, Arizona and Florida.
    Keywords: Regional housing prices, metropolitan regions, Bayesian estimation, high-frequency identification
    Date: 2018
  10. By: Don Bredin (University College Dublin, Ireland); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper uses historical US infl ation data covering over two centuries, to examine the impact of the establishment of the US Federal Reserve on average US in flation and infl ation uncertainty. We find that the founding of the Fed is associated with higher average US infl ation and lower infl ation uncertainty. Critically, these results are not driven by the post-1980 period, where the Fed policy is characterized by the dual mandate. Other important results are that the Gold Standard period is associated with both lower infl ation and in flation uncertainty, and that banking and stock market crises are a positive determinant of infl ation uncertainty and perhaps infl ation. The two world wars and the US civil war are associated with both higher infl ation and higher infl ation uncertainty. In addition, we find that the central bank has responded to increasing in flation uncertainty in a stabilizing manner in support of the Holland hypothesis.
    Keywords: asymmetric GARCH, recession, infl ation uncertainty.
    JEL: C22 E31
    Date: 2018–04
  11. By: P. Andrade; J. Galí; H. Le Bihan; J. Matheron
    Abstract: We study how changes in the value of the steady-state real interest rate affect the optimal inflation target, both in the U.S. and the euro area, using an estimated New Keynesian DSGE model that incorporates the zero (or effective) lower bound on the nominal interest rate. We find that this relation is downward sloping, but its slope is not necessarily one-forone: increases in the optimal inflation rate are generally lower than declines in the steadystate real interest rate. Our approach allows us not only to assess the uncertainty surrounding the optimal inflation target, but also to determine the latter while taking into account the parameter uncertainty facing the policy maker, including uncertainty with regard to the determinants of the steady-state real interest rate. We find that in the currently empirically relevant region for the US as well as the euro area, the slope of the curve is close to -0.9. That finding is robust to allowing for parameter uncertainty.
    Keywords: inflation target, effective lower bound.
    JEL: E31 E52 E58
    Date: 2018
  12. By: Adriel Jost
    Abstract: The monetary policy preferences of a population are often explained by the country’s economic history. Based on Swiss data, this paper indicates that while different language groups may share the economic history, they demonstrate distinct monetary policy preferences. This suggests that distinct monetary policy preferences among the populations of different countries may be determined by not only their economic histories but also their distinct cultural backgrounds.
    Keywords: Inflation preferences, Culture, Monetary policy
    JEL: D01 E31 E52 E58 Z13
    Date: 2018
  13. By: José Dorich; Nicholas Labelle; Vadym Lepetyuk; Rhys R. Mendes
    Abstract: Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
    Keywords: Economic models, Inflation targets, Monetary policy framework
    JEL: E32 E37 E43 E52
    Date: 2018
  14. By: Bi, Huixin (Federal Reserve Bank of Kansas City); Leeper, Eric M.; Leith, Campbell
    Abstract: The paper is organized around the following question: when the economy moves from a debt-GDP level where the probability of default is nil to a higher level- the "fiscal limit" where the default probability is non-negligible, how do the effects of routine monetary operations designed to achieve macroeconomic stabilization change?
    Keywords: Fiscal Sustainability; Sovereign Debt Default; Fiscal Limit
    JEL: E30 E62 H30 H60
    Date: 2018–03–12
  15. By: Tarne, Ruben
    Abstract: Europe is still suffering from the turmoil created by the Great Financial Crisis. Finding solutions to the danger of new financial crises is an important criterion for a stable European Union. Proponents of the Sovereign Money System (SMS) identify the ability of private banks to create money as the main contributor to the outbreak of financial crisis. Hence, they want to put the control of the monetary base into the hands of a public institution. This paper will investigate whether the strategy of setting the monetary base - in a SMS - is grounded in realistic assumptions. They claim that the velocity for "real" transactions is stable and therefore, a "workable" link from money base to economic activity can be established. Yet, this claim stands on the shaky assumption that "payment traditions" are unchanging and the dubious concept of "velocity of circulation". Post-Keynesians have criticised the latter, but have not contributed an alternative concept of the relationship between the level of economic activity and the means of payment necessary to achieve it. This, however, would help clarify the critique of a monetary policy strategy, which tries to set the monetary base in the SMS environment, as it would illuminate the specific assumptions that need to hold in order for a link between economic activity and the money supply to be stable. Already in 1957, Stützel tried to establish a relationship - based on balance mechanics - between economic activity and changes in means of payment that was free of the limitations of the equation of exchange. The paper will reformulate Stützel's equation and clarify it with the help of stock-flow consistent Taccounts in order to apply it to the SMS. In doing so, it becomes obvious that the connection between economic activity and changes in means of payment is quite unpredictable. For a stable relationship, a lot of very specific, unrealistic assumptions need to hold. Therefore, the setting of an "optimal" amount of the monetary base in the SMS is, apart from many other of the SMS' problems, not realistic. Stützel's "general quantity equation" provides a clear relationship between money and economic activity that could help the existing endogenous money theory to be more precise in that regard.
    Keywords: Sovereign Money,Balance mechanics,Stock-flow consistency,Demand for money,Money supply,Financial crises
    JEL: E41 E42 E51 E58 G01
    Date: 2018
  16. By: William Gatt (Central Bank of Malta)
    Abstract: Macroprudential policy is pre-emptive, aimed at preventing crises. Empirical evidence hints at the existence of asymmetric policy in booms and recessions. This paper uses a New Keynesian model with a financial friction on mortgage borrowing and collateral to show what implications this asymmetry might have on the economy. The main source of fluctuations is a bubble in the housing market, which causes house prices and credit to deviate from their fundamental values, leading to a boom and bust cycle. The main macroprudential tool is the regulatory loan to value (LTV) ratio. The author finds that while the asymmetric policy dampens the boom phase, it introduces more volatility in the economy by exacerbating the correction that follows. The higher the asymmetry in the policy response, the more volatile the economy is relative to one in which policy reacts symmetrically.
    JEL: C61 E32 E44 E61 R21
    Date: 2018
  17. By: Thibaud Cargoet (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper analyses how long credit policy measures should last to restore a normal function-ning of the loan market. We build a DSGE model where financial intermediaries and non financial agents face balance sheet constraints. Our results are two. First, we find that a credit policy has an intertemporal effect as it smoothes the negative shock along a greater number of periods. It dampens the inital negative consequences of financial shocks at the expense of a higherlength of the uncoventional period. Second, accounting for the joint effect of shocks on the length of the starurated period and on the fluctuation of activity in the transitory period back to the steady state situation, we find that the positive effect of this policy requires some qualification. For the benchmark calibration, conducting such a policy affects activity positively. However, for a high value of firm's leverage we find that unconventional monetary policy can be counterproductive. Ignoring credit policy will generate higher short run losses in activity but the transition to the steady state would be quicker, implying lower short run activity losses than those encountered with a credit policy where the transition to the steady state would last longer.
    Keywords: Financial Frictions,Financial Accelerator,DSGE model
    Date: 2018–01
  18. By: Duncan, Roberto (Ohio University); Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: We use a broad-range set of inflation models and pseudo out-of-sample forecasts to assess their predictive ability among 14 emerging market economies (EMEs) at different horizons (1 to 12 quarters ahead) with quarterly data over the period 1980Q1-2016Q4. We find, in general, that a simple arithmetic average of the current and three previous observations (the RW-AO model) consistently outperforms its standard competitors - based on the root mean squared prediction error (RMSPE) and on the accuracy in predicting the direction of change. These include conventional models based on domestic factors, existing open-economy Phillips curve-based specifications, factor-augmented models, and time-varying parameter models. Often, the RMSPE and directional accuracy gains of the RW-AO model are shown to be statistically significant. Our results are robust to forecast combinations, intercept corrections, alternative transformations of the target variable, different lag structures, and additional tests of (conditional) predictability. We argue that the RW-AO model is successful among EMEs because it is a straightforward method to downweight later data, which is a useful strategy when there are unknown structural breaks and model misspecification.
    JEL: E31 F41 F42 F47
    Date: 2018–01–01
  19. By: Martin Feldkircher; Kazuhiko Kakamu
    Abstract: We examine the effects of monetary policy on income inequality in Japan using a novel econometric approach that jointly estimates the Gini coefficient based on micro-level grouped data of households and the dynamics of macroeconomic quantities. Our results indicate different effects on income inequality for different types of households: A monetary tightening increases inequality when income data is based on households whose head is employed (workers' households), while the effect reverses over the medium term when considering a broader definition of households. Differences in the relative strength of the transmission channels can account for this finding. Finally we demonstrate that the proposed joint estimation strategy leads to more informative inference while results based on the frequently used two-step estimation approach yields inconclusive results.
    Date: 2018–03
  20. By: Sebastian Müller; Gunther Schnabl
    Abstract: We analyze the effects of the increasingly expansionary monetary policies on the economic order and on the European integration process. We argue that the market orders shaped in postwar Germany and in Margret Thatcher’s United Kingdom have long served as cornerstones for growth, prosperity and social cohesion in Europe. It is shown that the monetary policies of the European Central Bank and the Bank of England have undermined these orders, thereby eroding productivity gains and growth. Combined with negative distribution effects, ultra-loose monetary policies constitute the breeding ground for divergence forces in the European Union as heralded by the Brexit.
    Keywords: European integration, economic order, Walter Eucken, Friedrich August von Hayek, Margret Thatcher, inequality, monetary policy, political polarization, divergence, Brexit
    JEL: B25 E58 E65
    Date: 2018
  21. By: Albertazzi, Ugo; Becker, Bo; Boucinha, Miguel
    Abstract: Large-scale asset programmes aim to impact the real economy through the financial system. The ECB has focused much of its policies on safe assets. An intended channel of transmission of this type of programme is the “portfolio rebalancing channel”, whereby investors are influenced to shift their investments away from such safe assets towards assets with higher expected returns, including lending to households and firms. We examine the portfolio rebalancing channel around the ECB’s asset purchase program (APP). We exploit cross-sectional heterogeneity in the impact of APP on the valuation of the financial portfolio held by different sectors of the European economy. Overall, our results provide evidence of an active portfolio rebalancing channel. In more vulnerable countries, where macroeconomic unbalances and relatively high risk premia remain, APP was mostly reflected into a rebalancing towards riskier securities. In less vulnerable countries, where constraints on loan demand and supply are less significant, the rebalancing was observed mostly in terms of bank loans. Examining large European banks, we confirm similar geographical differences. JEL Classification: E44, E51, G21
    Keywords: portfolio rebalancing, quantitative easing, search for yield, unconventional monetary policy
    Date: 2018–01
  22. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Jaremski, Matthew
    Abstract: Maintaining sufficient liquidity in the financial system is vital for financial stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.
    Keywords: Financial stability; Free-riding; Liquidity requirements; Reserve requirements
    JEL: D40 G38 N21 N41
    Date: 2018–03–12
  23. By: Koichiro Kamada (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Tetsuo Kurosaki (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ko Miura (Research and Statistics Department, Bank of Japan (currently, University of Wisconsin-Madison)); Tetsuya Yamada (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan, (E-mail:
    Abstract: We present a theoretical model to explain how financial traders incorporate public and private information into security prices. We explain that the model enables us to simultaneously identify when public information caused surprises and how large an impact it had on the market. By applying the model to the tick-by-tick data on Japanese government bond futures prices, we show that the Bank of Japan fs introduction of quantitative and qualitative monetary easing was one of the most surprising episodes during the period from 2005 to 2016. We also show that the sensitivity to the Bank fs announcements has strengthened since the introduction of the negative interest rate policy, whereas the sensitivity to economic indicators and surveys has weakened substantially.
    Keywords: Central bank announcements, Government bond futures, Herding behavior, Information efficiency, Market microstructure
    JEL: C14 D40 D83 E58 G12 G14
    Date: 2018–03
  24. By: Brauning, Falk (Federal Reserve Bank of Boston)
    Abstract: I examine the impact of the Federal Reserve’s balance sheet reduction on short-term interest rates emanating from the declining supply of reserve balances. Using an exogenous shift in the supply of reserves, I estimate that by January 2019, when the Fed will have reduced its portfolio by $500 billion, the overnight repurchase agreement (repo) spread (relative to the lower bound of the federal funds target range) will be 10 basis points higher and the fed funds spread will be 2 basis points higher than in October 2017, all else being equal. I also find that a declining supply of reserve balances reduces recourse to the Fed’s overnight reverse repo (RRP) facility, which might initially dampen the tightening effects on short-term rates of the Fed’s balance sheet reduction.
    Keywords: monetary policy; interest rates; liquidity effect; Federal Reserve balance sheet
    JEL: E42 E43 E52 G21
    Date: 2017–10–01
  25. By: Nomahlubi Mavikela (Department of Economics, Nelson Mandela University); Simba Mhaka (Department of Economics, Nelson Mandela University); Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.
    Keywords: Inflation, Economic Growth, quantile regression, Inflation targeting; South Africa, Ghana, Sub-Saharan Africa (SSA).
    JEL: C32 C51 E31 E52 O40
    Date: 2018–01
  26. By: Felix P. , Ackon (Federal Reserve Bank of Richmond); Ennis, Huberto M. (Federal Reserve Bank of Richmond)
    Abstract: From July 2010 until June 2015, the Federal Reserve made over 16,000 loans to financial institutions through the discount window. Recent regulations mandate the release of detailed information about individual loans two years after their occurrence. We study the newly available loan data and uncover the main patterns that broadly describe activity at the Fed’s discount window in recent years.
    Keywords: discount window;
    Date: 2018–03–23

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