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on Central Banking |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Zied Ftiti (EDC Paris Business School, France); Fredj Jawadi (University of Evry, France) |
| Abstract: | Since the publication of Friedman’s (1977) Nobel lecture, the relationship between the mean function of the inflation stochastic process and its uncertainty has been the subject of much research. Friedman postulated that high inflation causes increased inflation uncertainty. Ball (1992) produces macroeconomic theory that could justify that causality. But other researchers have found the converse causality, from increased inflation uncertainty to increased mean inflation, and postulated macroeconomic theory that could support their views. In addition, some researchers have found inverse correlation between mean inflation and inflation volatility with causation in either direction. These controversies are important, since they have different implications for economic theory and policy. We conduct a systematic econometric study of the relationship among the first two moments of the inflation stochastic process using state of the art approaches. We propose a time-varying inflation uncertainty measure based on stochastic volatility to take into account unpredictable shocks. Further, we extend previous related literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and the continuous wavelet methodology. We theoretically justify their use through an extension of Ball's (1992) model. These frequency approaches have two advantages, they provide the analyses for different frequency horizons and do not impose restriction on the data. While related literature always focused on the US data, our study explores this relationship for five major developed and emerging countries (the US, the UK, the Euro area, South Africa, and China) over the last five decades to investigate robustness of our inferences and investigate sources of prior inconsistencies in inferences among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings depict a significant relationship between inflation and inflation uncertainty that varies with time and frequency and offer an improved comprehension of the ambiguous inflation versus inflation uncertainty relationship. This relationship seems positive in the short and medium terms during stable periods, confirming the Friedman-Ball theory, while it is negative during crisis periods. In addition, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes. |
| Keywords: | Inflation; Inflation uncertainty; Frequency approach; Wavelet; Semi-parametric approach; Stochastic volatility |
| JEL: | C14 E31 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201803&r=cba |
| By: | Jean Barthélemy (Département d'économie); Eric Mengus (HEC Paris - Recherche - Hors Laboratoire) |
| Abstract: | This paper revisits the ability of central banks to manage private sector's expectations depending on its credibility and how this affects the use of interest rate rules and pegs to achieve monetary policy objectives. When private agents can only provide limited incentives for the central bank to follow a policy, we show that resulting limited credibility allows a central bank to prevents the inflation from diverging by defaulting on past promises if necessary. As a result, the Taylor rule, when expected, anchors inflation expectations on a unique equilibrium path as long as the Taylor principle is satisfied. Finally, we also show that limited credibility restricts the impact of long-term interest rate pegs, so as to make current conditions less dependent on future policy changes. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f&r=cba |
| By: | Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques) |
| Abstract: | We investigate the role of both ECB’s asset purchases and market sentiment in the Eurozone sovereign debt crisis context. We explain the evolution of long-term interest rates in the Eurozone and in some Member States since the ECB started to purchase various securities for monetary policy purposes. We control for four categories of fundamentals: macroeconomic, international, financial and expectations. We show that unconventional monetary policies and country-specific market sentiment have significant negative and positive effects respectively. Our results suggest that ECB’s unconventional policies have been effective in mitigating the disruption in the channels of transmission across the different Eurozone countries. |
| Keywords: | Asset purchase programmes; ECB; Sovereign yields; Unconventional monetary policies; CISS |
| JEL: | E58 E52 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/8vns9so6b9pnqfo7eebjgfann&r=cba |
| By: | Atsushi Tanaka (School of Economics, Kwansei Gakuin University) |
| Abstract: | In this paper, the problem that a central bank might face after exiting monetary quantitative easing policy is examined. This paper develops a simple dynamic optimization model of a central bank, and the model finds that if the bank needs to absorb a substantial amount of excess reserves at the exit, then the monetary base might become uncontrollable. In this case, the bank has no option but to increase the monetary base by more than the target amount, which leads to undesirable money supply expansion and ultimately to inflation pressures. The model derives the condition that a central bank falls into such a difficult situation. |
| Keywords: | central bank, monetary base, quantitative easing, exit strategy |
| JEL: | E5 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:181&r=cba |
| By: | Ricardo Reis |
| Abstract: | Central banks have sometimes turned their attention to long-term interest rates as a target or as a diagnosis of policy. This paper describes two historical episodes when this happened - the US in 1942-51 and the UK in the 1960s - and uses a model of inflation dynamics to evaluate monetary policies that rely on going long. It concludes that these policies for the most part fail to keep inflation under control. A complementary methodological contribution is to re-state the classic problem of monetary policy through interest-rate rules in a continuous-time setting where shocks follow diffusions in order to integrate the endogenous determination of inflation and the term structure of interest rates. |
| Keywords: | Taylor rule, yield curve, pegs, ceilings, affine models |
| JEL: | E31 E52 E58 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_6998&r=cba |
| By: | Paul Hubert (Observatoire français des conjonctures économiques) |
| Abstract: | Does the effect of monetary policy depend on the macroeconomic information released by the central bank? Because differences between central bank’s and private agents’ information sets affect private agents’ interpretation of policy decisions, this paper aims to investigate whether the publication of macroeconomic information by the central bank modifies private responses to monetary policy. We assess the non-linear effects of monetary shocks conditional on the Bank of England’s macroeconomic projections on UK private inflation expectations. We find that inflation projections modify the impact of monetary shocks. When contractionary monetary shocks are interacted with positive (negative) projections, the negative effect of policy on inflation expectations is amplified (reduced). This suggests that providing guidance about central bank future expected inflation helps private agents’ information processing, and therefore changes their response to policy decisions.. |
| Keywords: | Monetary policy; Information processing; Signal extraction; Market based inflation expectations; Central bank projections; Real time forecasts |
| JEL: | E52 E58 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpmain:info:hdl:2441/6mrhmte8no840p587hv7bkohtn&r=cba |
| By: | Xiaodong Zhu |
| Abstract: | The rapid rise of shadow banking activities in China since 2009 has attracted a great deal of attention in both academia and policy circles. Most existing studies and commentary on China’s shadow banking have treated it as a recent phenomenon that appeared after the Global Financial Crisis and China’s response to it. In this paper, I argue that shadow banking is not a new phenomenon; it has always been a part of China’s financial system since the 1980s, and arose from the need to get around various lending restrictions imposed by the central government on banks. I also emphasize that there are two types of shadow banking activities, those initiated by banks and those initiated by local governments or state-owned enterprises. I provide evidence suggesting that the shadow banking activities initiated by banks tend to be efficiency enhancing, but those initiated by local governments and state-owned enterprises are more likely to be associated with misallocation of capital. The policy implication is that the central government should implement policies and regulations that break the link between financial institutions and local governments or state-owned enterprises. |
| Keywords: | China, Banking System, Shadow Banking, Capital Allocation |
| JEL: | G21 G23 G28 E44 O16 |
| Date: | 2018–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-605&r=cba |
| By: | Marina Azzimonti; Pierre Yared |
| Abstract: | We develop a theory of optimal government debt in which publicly-issued and privately-issued safe assets are substitutes. While government bonds are backed by future tax revenues, privately-issued safe assets are backed by the future repayment of pools of defaultable private loans. We find that a higher supply of public debt crowds out privately-issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates. Our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread. Moreover, the optimal level of public debt is higher the more severe are financial frictions. |
| JEL: | E21 E25 E62 H21 H63 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24534&r=cba |
| By: | Armin Seibert (National Research University Higher School of Economics); Andrei Sirchenko (National Research University Higher School of Economics); Gernot Muller (National Research University Higher School of Economics) |
| Abstract: | This paper introduces a model that addresses the key worldwide features of modern monetary policy making: the discreteness of policy interest rates both in magnitude and in timing, the preponderance of status quo decisions, policy inertia and regime switching. We capture them by developing a new dynamic discrete-choice model with switching among three latent policy regimes (dovish, neutral and hawkish), estimated via the Gibbs sampler with data augmentation. The simulations and an application to federal funds rate target demonstrate that ignoring these features leads to biased estimates, worse in- and out-of-sample fit, and qualitatively different inference. Using all Federal Open Market Committee?s (FOMC) decisions made both at scheduled and unscheduled meetings as sample observations, we model the Federal Reserve?s response to real-time data available right before each meeting, and control for the endogeneity of monetary policy shocks. The new model, fitted for Greenspan?s tenure, correctly predicts the directions of about 90% of the next decisions on the target rate (hike, no change, or cut) out of sample during Bernanke?s term including the status quo decisions after reaching the zero lower bound, while the conventional linear model fails to adequately tackle the zero bound and wrongly predicts further cuts. |
| Keywords: | Federal funds rate target, FOMC, discrete ordered choice, regime switching, endogeneity, MCMC, Gibbs sampler, data augmentation, autoregressive ordered probit, real-time data |
| JEL: | C11 C34 C35 E52 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:192/ec/2018&r=cba |
| By: | Gantungalag Altansukh; Ralf Becker; George Bratsiotis; Denise R. Osborn |
| Abstract: | This paper studies the link between domestic inflation for 19 OECD countries and a corresponding country-specific global inflation series. This is achieved through an iterative methodology, which iterates between coefficient and variance tests, while taking account of outliers. This procedure is applied to both univariate and bivariate inflation models that relate domestic and global inflation, with the latter is calculated as a trade-weighted average of inflation in a country's trading partners. The empirical analysis uses monthly consumer price inflation over 1970 to 2010 and the following key results emerge. First, the univariate analysis yields breaks in the conditional mean that are broadly consistent with the existing literature. Second, we document clusters of variance breaks occurring around the mid 1970s, early 1980s and early 1990s, casting doubt on the claim in the literature that changes of the in inflation has been mainly in the mean. Third, bivariate models show a positive and strengthening contemporaneous relationship between domestic and country specific global inflation. Although the dates and extent of change vary over countries, our results imply increased co-movements of inflation, particularly during the 1980s and 1990s. Fourth, we demonstrate that the above results crucially depend on an appropriate treatment of outliers. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:240&r=cba |
| By: | Iorember, Paul; Usar, Terzungwe; Ibrahim, Kabiru |
| Abstract: | The study looked into the stochastic properties of CPI-inflation rate for Nigeria from 1995Q1 to 2016Q4. The study employed an autoregressive fractionally integrated moving average and a general autoregressive conditional heteroskedasticity (ARFIMA-GARCH) methodology as well as ADF/KPSS to investigate the long-memory properties of CPI-Inflation for Nigeria. The study found that CPI-inflation in Nigeria is shock dissipating at a geometric rate (fast mean reverting ability). The ARFIMA-GARCH process showed that CPI inflation in Nigeria is a heteroskedastic fractionally integrated process with quick mean reverting ability. The study therefore concludes that shocks to CPI-inflation in Nigeria such as sudden hikes in prices of energy products will not cause a permanent change in general price level but will eventually return to its mean state, and therefore having an implication for the Inflation-Unemployment tradeoff of the Philips curve. |
| Keywords: | Inflation, AFIMA, GARCH, Fractional Integrated and Long Memory, ADF and KPSS |
| JEL: | B26 |
| Date: | 2018–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:85655&r=cba |
| By: | Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré |
| Abstract: | On January 15, 2015, the Swiss National Bank discontinued its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the pass-through of this unusually clean exchange rate shock into import unit values at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euros, the pass-through is immediate and complete. Second, for goods invoiced in Swiss francs, the pass-through is partial and exceptionally fast, beginning on the second working day after the exchange rate shock and reaching the medium-run pass-through after twelve working days on average. |
| Keywords: | Daily exchange rate pass-through, speed, large exchange rate shock |
| JEL: | F14 F31 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2018-05&r=cba |