nep-cba New Economics Papers
on Central Banking
Issue of 2020‒09‒21
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Reading a central banker's preference: A non parametric regression approach By Cheolbeom Park; Sookyung Park
  2. The great lockdown: pandemic response policies and bank lending conditions By Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
  3. Does Publication of Interest Rate Paths Provide Guidance? By Natvik, Gisle J.; Rime, Dagfinn; Syrstad, Olav
  4. Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations By Brent Bundick; Andrew Lee Smith
  5. Central Bank Independence and Inflation: An Empirical Analysis By Chiquiar Daniel; Ibarra-Ramírez Raúl
  6. Implementing Monetary Policy in an "Ample-Reserves" Regime: Maintaining an Ample Quantity of Reserves (Note 2 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  7. The role of IMF conditionality for central bank independence By Rau-Goehring, Matthias; Reinsberg, Bernhard; Kern, Andreas
  8. Limitations on the Effectiveness of Monetary Policy Forward Guidance in the Context of the COVID-19 Pandemic By Andrew T. Levin; Arunima Sinha
  9. Why Do Central Banks Make Public Announcements of Open Market Operations? By Narayan Bulusu
  10. Sliding Down the Slippery Slope? Trends in the Rules and Country Allocations of the Eurosystem’s PSPP and PEPP By Annika Havlik; Friedrich Heinemann
  11. Coping with Disasters: Two Centuries of International Official Lending By Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
  12. International Evidence on Shock-Dependent Exchange Rate Pass-Through By Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
  13. Optimal Dynamic Capital Requirements and Implementable Capital Buffer Rules By Matthew B. Canzoneri; Behzad T. Diba; Luca Guerrieri; Arsenii Mishin
  14. A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954 By Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
  15. Monetary Policy and Cross-Border Interbank Market Fragmentation: Lessons from the Crisis By Tobias Blattner; Jonathan Swarbrick
  16. Bank reserves and broad money in the global financial crisis: a quantitative evaluation By Chadha, Jagjit S.; Corrado, Luisa; Meaning, Jack; Schuler, Tobias
  17. Monetary Policy Independence and the Strength of the Global Financial Cycle By Jonathan Witmer
  18. Nonlinear Exchange Rate Pass-Through in Mexico By Jaramillo Rodríguez Jorge; Pech Moreno Luis Alberto; Ramírez Claudia; Sanchez-Amador David
  19. Average is Good Enough: Average-inflation Targeting and the ELB By Robert Amano; Stefano Gnocchi; Sylvain Leduc; Joel Wagner
  20. Real Exchange Rate Shocks and Export-Oriented Businesses in Iran: An Empirical Analysis Using NARDL Model By Saadati, Alireza; Honarmandi, Zahra; Zarei, Samira
  21. Keynes, Inflation, and the Public Debt: "How to Pay for the War" as a Policy Prescription for Financial Repression? By Teupe, Sebastian
  22. Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents By Bahl, Ojasvita; Ghate, Chetan; Mallick, Debdulal
  23. How puzzling is the forward premium puzzle? A meta-analysis By Havranek, Tomas; Novak, Jiri; Zigraiova, Diana
  24. Monetary rules in an open economy with distortionary subsidies and inefficient shocks: A DSGE approach for Bolivia By Jemio Hurtado, Valeria

  1. By: Cheolbeom Park (Department of Economics, Korea University, 145 Anamro, Seongbukgu, Seoul, Korea 02841); Sookyung Park (Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Republic of Korea)
    Abstract: We examine the role of the Fed's preference in the understanding of inflation rate and unemployment rate evolution using US data over the period of 1960-2017. Facing the evidence of instability in a constant-coefficient regression, we run a nonparametric regression, and find that the Fed's preference parameters have moved, implying that its preference can be represented by the asymmetric preference model putting more weights on high unemployment rate approximately before the era of Volcker's chairmanship and by the inflation targeting model during the 1980s and 1990s. The Fed's preferences again seem concerned about higher unemployment after the Global Financial Crisis.
    Keywords: asymmetric preference, inflation, monetary policy, time-varying parameter, unemployment, nonparametric regression
    JEL: E31 E52 E61
    Date: 2020
  2. By: Altavilla, Carlo; Barbiero, Francesca; Boucinha, Miguel; Burlon, Lorenzo
    Abstract: This study analyses the policy measures taken in the euro area in response to the outbreak and the escalating diffusion of new coronavirus (COVID-19) pandemic. We focus on monetary, microprudential and macroprudential policies designed specifically to support bank lending conditions. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. The results show that in the absence of the funding cost relief and capital relief associated with the pandemic response measures, banks’ ability to supply credit would have been severely affected. The results also indicate that the coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we investigate the potential real effects of the joint pandemic response measures by estimating the adjustment in labour input variables for firms that in the past have been more exposed to similar policies. We find that, in absence of monetary and prudential policies, the pandemic would lead to a significantly larger decline in firms’ employment. JEL Classification: E51, E52, E58, G01, G21, G28
    Keywords: bank lending, COVID-19 crisis, monetary policy, prudential policy
    Date: 2020–09
  3. By: Natvik, Gisle J.; Rime, Dagfinn; Syrstad, Olav
    Abstract: Does the central bank practice of publishing interest rate projections (IRPs) improve how market participants map new information into future interest rates? Using high-frequent data on Forward Rate Agreements (FRAs) we compute market forecast errors; differences between expected future interest rates and ex post realizations. We assess their change in narrow windows around monetary policy announcements and macroeconomic releases in Norway and Sweden. Overall, communication of future policy plans do not improve markets’ response to information, irrespective of whether or not IRPs are in place. A decomposition of market reactions into responses to the current monetary policy action (“target”) and responses to signals about the future (“path”), reveals that only policy actions lead to improvements in market forecasts.
    Keywords: monetary policy, interest rate paths, forward guidance, high-frequency data, forecasts
    JEL: O13 Q33
    Date: 2019–10–03
  4. By: Brent Bundick; Andrew Lee Smith
    Abstract: In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations in Japan. Moreover, the improved anchoring of U.S. inflation expectations can account for much of the observed flattening of the Phillips curve. Finally, we present evidence that initial Federal Reserve communication around its longer-run inflation objective may have led inflation expectations to anchor at a level below 2 percent.
    Keywords: Monetary policy; Inflation; Inflation targeting; Central bank communication; Structural breaks; Phillips Curve
    JEL: E31 E52 E58
    Date: 2020–09–03
  5. By: Chiquiar Daniel; Ibarra-Ramírez Raúl
    Abstract: This paper analyzes the relationship between central bank independence and inflation in a panel of 182 countries for the period from 1970 to 2018. To measure the degree of independence, two measures are used, the Garriga (2016) index, constructed from the laws and internal regulations of central banks, and the Dreher et al. (2008) index, based on the turnover rate of governors. The results indicate that greater central bank independence is associated with lower levels of inflation, both for highincome countries and for low and middle-income countries. There is also a negative relationship between inflation volatility and central bank independence, although the results are statistically significant only when using the full sample of countries. The results are robust to the use of the two alternative measures of Independence and to the use of two alternative approaches to avoid simultaneity.
    Keywords: Central Bank Independence;Inflation
    JEL: E31 E52 E58
    Date: 2019–12
  6. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: In this second note, we describe some important influences on the supply of and demand for reserves and how the Fed will need to account for these influences in maintaining an ample quantity of reserves over the long run. These considerations are most relevant in normal times, not in periods in which there are severe strains in financial markets or weakness in economic activity that necessitate aggressive policy actions by the Fed that substantially increase reserves.
    Date: 2020–08–28
  7. By: Rau-Goehring, Matthias; Reinsberg, Bernhard; Kern, Andreas
    Abstract: This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse. Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we compile a unique dataset that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2014. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks. JEL Classification: E52, E58, F5
    Keywords: central bank independence, conditionality, International Monetary Fund, international political economy
    Date: 2020–08
  8. By: Andrew T. Levin; Arunima Sinha
    Abstract: We examine the effectiveness of forward guidance at the effective lower bound (ELB) in the context of the COVID-19 pandemic. Survey evidence underscores the myopia of professional forecasters at the initial stages of the pandemic and the extraordinary dispersion of their recent forecasts. Moreover, financial markets are now practically certain that U.S. short-term nominal interest rates will remain at the ELB for the next several years; consequently, forward guidance would have to refer to a much longer time horizon than in previous experience. To analyze the effects of these issues, we consider a canonical New-Keynesian model with three modifications: (1) expectations formation incorporates the mechanisms that have been proposed for addressing the forward guidance puzzle; (2) the central bank has imperfect credibility in making longer-horizon commitments regarding the path of monetary policy; and (3) the central bank may not have full knowledge of the true structure of the economy. In this framework, providing substantial near-term monetary stimulus hinges on making promises of relatively extreme overshooting of output and inflation in subsequent years, and hence forward guidance has only tenuous net benefits and may even be counterproductive.
    JEL: E52 E58
    Date: 2020–08
  9. By: Narayan Bulusu
    Abstract: Central banks make public the results of open market operations (OMOs), which they use to adjust the liquidity available to the financial system to maintain the short-term borrowing rate in the range compatible with achieving their monetary policy objectives. This paper shows that such announcements are costly because they moderate the impact of changes in supply achieved through OMOs. Nevertheless, communication of OMOs is desirable because it improves the transparency of the funding market, which makes the price of liquidity—a key input into economic decision making—more reflective of underlying demand and supply of liquidity.
    Keywords: Central bank research; Monetary policy implementation
    JEL: D5 D52 E5 E58 G2 G21
    Date: 2020–09
  10. By: Annika Havlik; Friedrich Heinemann
    Abstract: The Eurosystem has become one of the crucial players in the market for euro area government bonds. After first substantive purchases through the Securities Market Programme (SMP) in 2010, the Eurosystem’s involvement has reached a new breadth and magnitude with the establishment of the Public Sector Purchase Programme (PSPP) in 2015. On top of this, the ECB Council has set up the Pandemic Emergency Purchase Programme (PEPP) in March 2020 in order to stabilize the euro area economy in the crisis and to contain the rise of sovereign risk premia.This study analyzes trends in the rules, volumes and country allocations of the two active sovereign purchase programmes, the PSPP and the PEPP. For an economic assessment, it is of importance to which extent the purchase programmes are of an asymmetric nature and whether the Eurosystem increasingly accepts the role of a strategic creditor who has veto power in debt negotiations.
    Date: 2020
  11. By: Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. We assemble the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015. Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official crossborder finance, with official flows often stepping in when private flows retrench. In line with the predictions of recent theoretical contributions, we find that official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.
    Keywords: International capital flows,disaster response,global financial safety net,bail-outs
    JEL: E42 F33 F34 F35 F36 G01 G20 N1 N2
    Date: 2020
  12. By: Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
    Abstract: We analyse the economic conditions (the “shocks”) behind currency movements and show how that analysis can help address a range of questions, focusing on exchange rate pass-through to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.
    JEL: E31 E37 E52 F47
    Date: 2020–08
  13. By: Matthew B. Canzoneri; Behzad T. Diba; Luca Guerrieri; Arsenii Mishin
    Abstract: We build a quantitatively relevant macroeconomic model with endogenous risk-taking. In our model, deposit insurance and limited liability can lead banks to make risky loans that are socially inefficient. This excessive risk-taking can be triggered by aggregate or sectoral shocks that reduce the return on safer loans. Excessive risk-taking can be avoided by raising bank capital requirements, but unnecessarily tight requirements lower welfare by limiting liquidity producing bank deposits. Consequently, optimal capital requirements are dynamic (or state contingent). We provide examples in which a Ramsey planner would raise capital requirements: (1) during a downturn caused by a TFP shock; (2) during an expansion caused by an investment-specific shock; and (3) during an increase in market volatility that has little effect on the business cycle. In practice, the economy is driven by a constellation of shocks, and the Ramsey policy is probably beyond the policymaker's ken; so, we also consider implementable policy rules. Some rules can mimic the optimal policy rather well but are not robust to all the calibrations we consider. Basel III guidance calls for increasing capital requirements when the credit to GDP ratio rises, and relaxing them when it falls; this rule does not perform well. In fact, slightly elevated static capital requirements generally do about as well as any implementable rule.
    Keywords: Countercylical capital buffer; DSGE models; Bank capital requirements; Ramsey policy
    JEL: C51 E58 G28
    Date: 2020–08–06
  14. By: Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
    Abstract: This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and to better understand how monetary policy was transmitted to banking and financial markets. For the 1920s and 1930s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate which many studies have used for that purpose. For the 1940s-1950s, our series provides new information about the transition away from wartime interest-rate pegs culminating in the 1951 Treasury-Federal Reserve Accord.
    Keywords: Federal funds rate; Call loan rate; Money market; Federal Reserve System;
    JEL: E43 E44 E52 G21 N22
    Date: 2020–08–19
  15. By: Tobias Blattner; Jonathan Swarbrick
    Abstract: We present a two-country model featuring risky lending and cross-border interbank market frictions. We find that (i) the strength of the financial accelerator, when applied to banks operating under uncertainty in an interbank market, will critically depend on the economic and financial structure of the economy; (ii) adverse shocks to the real economy can be the source of banking crisis, causing an increase in interbank funding costs, aggravating the initial shock; and (iii) asset purchases and central bank long-term refinancing operations can be effective substitutes for, or supplements to, conventional monetary policy.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; International financial markets; Monetary policy framework; Transmission of monetary policy
    JEL: E52 F36
    Date: 2020–08
  16. By: Chadha, Jagjit S.; Corrado, Luisa; Meaning, Jack; Schuler, Tobias
    Abstract: The Federal Reserve responded to the global financial crisis by initiating an unprecedented expansion of central bank money (bank reserves) once the policy rate had reached the lower bound. To capture the salient features of the crisis, we develop a model where the central bank can provide reserves on demand and also use reserves to buy government bonds. We show that the provision of reserves through either channel reduces the cost of providing loans as they act as a substitute for private sector collateral and costly monitoring activity. We illustrate this mechanism by examining the role of reserves in projecting stable growth in broad money after the financial crisis. We also run a counterfactual which suggests that, if the Federal Reserve had not provided bank reserves on such a large scale, broad money would have fallen, the economy might have experienced a deeper contraction, and the recovery would have been more protracted, taking perhaps twice as long to return to equilibrium. JEL Classification: E31, E40, E51
    Keywords: liquidity provision, non-conventional monetary policy, quantitative easing
    Date: 2020–08
  17. By: Jonathan Witmer
    Abstract: 24/7 payment settlement may impact the demand for central bank reserves and thus could have an effect on monetary policy implementation. Using the standard workhorse model of monetary policy implementation (Poole, 1968), we show that 24/7 payment settlement induces a precautionary demand for central bank balances. Absent any changes or response by the central bank, this will put upward pressure on the overnight interest rate in a standard corridor system of monetary policy implementation. A floor system is much less sensitive to this change, as long as excess balances are large enough.
    Keywords: Monetary policy implementation; Payment clearing and settlement systems
    JEL: E43
    Date: 2020–06
  18. By: Jaramillo Rodríguez Jorge; Pech Moreno Luis Alberto; Ramírez Claudia; Sanchez-Amador David
    Abstract: This paper aims to investigate if the exchange rate pass-through (ERPT) to consumer prices follows a nonlinear behavior in Mexico. To look for nonlinearities, we employ a Threshold VAR approach (TVAR). The threshold allows us to differentiate regimes of "high" or "low" depreciation and the effect of exchange rate movements onto prices in each of these regimes. Our results suggest the existence of nonlinearities in Mexico only for the merchandise inflation measure, including the food and non-food subindices, with an estimated threshold that varies from an annual depreciation rate of 7.20 to 7.30 percent. Even though we find that these ERPT coefficients differ between regimes from a statistical point of view, the effect over headline inflation is small. Our results are consistent with the consolidation of a low ERPT in Mexico.
    Keywords: Exchange-Rate Pass-through;Threshold VAR;Inflation;Foreign Exchange
    JEL: C32 E31 F31
    Date: 2019–11
  19. By: Robert Amano; Stefano Gnocchi; Sylvain Leduc; Joel Wagner
    Abstract: The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find it to be relatively short for business cycle shocks of standard magnitude and duration. In this case, we show that the properties of the economy are quantitatively similar to those under a price-level target.
    Keywords: Business fluctuations and cycles; Economic models; Monetary policy framework
    JEL: E52
    Date: 2020–07
  20. By: Saadati, Alireza; Honarmandi, Zahra; Zarei, Samira
    Abstract: In this paper, the asymmetric and nonlinear effects of the real exchange rate shocks on different export-oriented businesses, i.e. Petrochemical, Basic Metal, and Mining industries stock indexes, in Tehran Stock Exchange is examined. From the policymakers’ perspective, this idea is theoretically interpreted as a "fear of appreciation" hypothesis that refers to the intervention of central banks in foreign exchange markets to restrict currency appreciation rather than depreciation to defend export competitiveness. To this aim, in addition to the main variables, the monthly time series data of the control variables, i.e. inflation, OPEC oil price, and international sanctions, from 2012:01 to 2020:01 are used. Our findings based on the NARDL approach illustrate that not only have exchange rate shocks significant effects on different stock indexes, but these relationships are asymmetric and nonlinear. Moreover, the results have confirmed the fear of depreciations hypothesis in the export-oriented industries, that means the central bank of Iran tends to pursue the “leaning-against-the-depreciation-wind” policy rather than “leaning-against-the-appreciation-wind” one.
    Keywords: Exchange Rate Shocks, Export-Oriented Industries, fear of depreciation, NARDL Model.
    JEL: C58 E44 F31 G32
    Date: 2020–05–20
  21. By: Teupe, Sebastian
    Abstract: This paper discusses whether John Maynard Keynes' "How to Pay for the War" provided prescriptions for the policies of "financial repression" that were implemented in England, and other countries, following World War II. It focuses on contemporary understandings of inflation which has been identified as a key factor for driving down public debt levels. Keynes has been widely acknowledged as influential in the management of public debt, and "How to Pay for the War" has been cited as proof for a widely held belief in "money illusion", suggesting the possibility of using inflation for driving down real interest rates of public bonds. It seems reasonable to suppose that Keynes' writings were instrumental in translating English monetary experiences of the 1920s and 1930s into expectations of policy makers during and after the Second World War, and thus provide an important explanation for the why and when of "financial repression". The paper argues that Keynes provided only partly ammunition for a policy of "financial repression", and none for using inflation as a "tax gatherer" to the detriment of domestic savers in general. Crediting him as a source for widespread "money illusion" is also out of line with the historical record.
    JEL: B20 E31 H63 N24 N44
    Date: 2020
  22. By: Bahl, Ojasvita; Ghate, Chetan; Mallick, Debdulal
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse domestic or external shocks. Such interventions typically involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on the sectoral and aggregate dynamics of inflation, and the distribution of consumption amongst rich and poor households? To address this, we build a tractable two-sector (agriculture and manufacturing) two-agent (rich and poor) New Keynesian DSGE model with redistributive policy shocks. We calibrate the model to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not. Our paper contributes to a growing literature on understanding the role of consumer heterogeneity in monetary policy.
    Keywords: TANK models, HANK Models, Inflation Targeting, Emerging Market and Developing Economies, Food Security, Procurement and Redistribution, DSGE.
    JEL: E31 E32 E44 E52 E63
    Date: 2020–07–07
  23. By: Havranek, Tomas; Novak, Jiri; Zigraiova, Diana
    Abstract: A key theoretical prediction in financial economics is that under risk neutrality and rational expectations a currency's forward rates should form unbiased predictors of future spot rates. Yet scores of empirical studies report negative slope coefficients from regressions of spot rates on forward rates. We collect 3,643 estimates from 91 research articles and using recently developed techniques investigate the effect of publication and misspecification biases on the reported results. Correcting for these biases yields slope coefficients of 0.31 and 0.98 for developed and emerging currencies respectively, which implies that empirical evidence is in line with the theoretical prediction for emerging economies and less puzzling than commonly thought for developed economies. Our results also suggest that the coefficients are systematically influenced by the choice of data, numeraire currency, and estimation method.
    Date: 2020–09–07
  24. By: Jemio Hurtado, Valeria
    Abstract: Through an estimated and calibrated DSGE model with imperfect competition and nominal rigidities, this work aims to assess the dynamic effects of exogenous perturbations in a small open economy to provide a prescription of a simple monetary policy rule associated with the minimal welfare losses in the case of Bolivia. Following Gali and Monacelli (2005) and De Paoli (2009), I display the baseline model in a canonical representation. Yet, unlike them, I consider the presence of efficient and inefficient perturbations, namely government spending, productivity, foreign demand, and cost-push shocks, to analyze its effects in terms of observable variables but also on the relevant output gap. Moreover, considering the significance of raw materials as a proportion of the Bolivian exports, I extend the model by taking into account a distortionary subsidy on consumption financed by the positive profits of the commodity sector, Further, in the style of Gali and Monacelli (2005), I compare the welfare implications under two scenarios: A monetary rule focus on maintain a nominal exchange rate peg (fixed) regime and a Taylor rule. The main results reveal that the latter outperforms the former when the full set of shocks occurs simultaneously, showing the importance of inflation targeting. Yet, by focusing only on inefficient exogenous perturbations, and taking into account a pegged regime and a simple Taylor rule based on consumer and producer price inflation, the ranking of monetary policy aligns in the first place an exchange rate peg. This scenario shows the potential success of alternative simple monetary rules under these circumstances.
    Keywords: Macroeconomics; Monetary Policy; Business Cycles; Bayessian Estimation
    JEL: C11 C13 C15 E0 E12 E32 E52 E58 F41 F44
    Date: 2020–07–14

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