nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒04‒03
thirteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The information content of central bank interest rate projections: Evidence from New Zealand By Gunda-Alexandra Detmers; Dieter Nautz
  2. Labor-Market Frictions and Optimal Inflation By Carlsson, Mikael; Westermark, Andreas
  3. Optimal Policy When the Inflation Target is not Optimal By Sergio A. Lago Alves
  4. Do bank characteristics influence the effect of monetary policy on bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  5. Modifying Gaussian term structure models when interest rates are near the zero lower bound By Leo Krippner
  6. Expectations and Fluctuations : The Role of Monetary Policy By Rousakis, Michael
  8. Towards an explanation of cross-country asymmetries in monetary transmission By Georgiadis, Georgios
  9. Precautionary demand for money in a monetary business cycle model By Irina A. Telyukova; Ludo Visschers
  10. Implicit intraday interest rate in the UK unsecured overnight money market By Jurgilas, Marius; Zikes, Filip
  11. Trade Effects of Exchange Rates and their Volatility: Chile and New Zealand By Marilyne Huchet-Bourdon; Jane Korinek
  12. The Cantillon Effect of Money Injection through Deficit Spending By Wenli Cheng; Simon D. Angus
  13. The business cycle implications of banks’ maturity transformation By Andreasen, Martin; Ferman, Marcelo; Zabczyk, Pawel

  1. By: Gunda-Alexandra Detmers; Dieter Nautz (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank of New Zealand was the first central bank to publish interest rate projections as a tool for forward guidance of monetary policy. This paper provides new evidence on the information content of interest rate projections for market expectations about future short-term rates before and during the financial crisis. While the information content of interest rate projections decreases with the forecast horizon in both periods, we find that their impact on market expectations has declined significantly since the outbreak of the crisis.
    JEL: E52 E58
    Date: 2012–02
  2. By: Carlsson, Mikael (Research Department, Central Bank of Sweden); Westermark, Andreas (Research Department, Central Bank of Sweden)
    Abstract: In central theories of monetary non-neutrality the Ramsey optimal inflation rate varies between the negative of the real interest rate and zero. This paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription. We show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive. Specifically, for a standard U.S. calibration, we find a Ramsey optimal inflation rate of 1.11 percent per year.
    Keywords: Optimal Monetary Policy; Inflation; Labor-market Distortions
    JEL: E52 H21 J60
    Date: 2012–03–01
  3. By: Sergio A. Lago Alves
    Abstract: I assess the optimal policy to be followed by a welfare-concerned central bank when assigned an inflation target that is not necessarily welfare-optimal. I treat the inflation target as the trend inflation and I have three main contributions: (i) a welfare-based loss function fully derived under trend inflation, showing how the non-optimal inflation target acts as an extra inefficiency source; (ii) I show that the trend inflation does affect the relative weight of the output gap: they are inversely related; (iii) under trend inflation, I derive time consistent optimal policies with both unconditional and timeless commitment, and I show how to translate the pursuit of the inflation target into an additional constraint in the minimization step.
    Date: 2012–03
  4. By: Yener Altunbas (Centre for Banking and Financial Studies, University of Wales, Bangor, Gwynedd, LL57 2DG, United Kingdom.); Leonardo Gambacorta (Bank for International Settlements, Monetary and Economics Department, Centralbahnplatz 2, CH-4002 Basel, Switzerland.); David Marques-Ibanez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze whether the impact of monetary policy on bank risk depends upon bank characteristics. We relate the materialization of bank risk during the financial crisis to differences in the monetary policy stance and bank characteristics in the pre-crisis period for a large sample of listed banks operating in the European Union and the United States. We find that the insulation effect produced by capital and liquidity buffers on bank risk was lower for banks operating in countries that, prior to the crisis, experienced a particularly prolonged period of low interest rates. JEL Classification: E44, E52, G21.
    Keywords: Risk-taking channel, monetary policy, credit crisis, bank characteristics.
    Date: 2012–03
  5. By: Leo Krippner (Reserve Bank of New Zealand)
    Abstract: With nominal interest rates near the zero lower bound (ZLB) in many major economies, it is theoretically untenable to apply Gaussian affine term structure models (GATSMs) while ignoring their inherent material probabilities of negative interest rates. I propose correcting that deficiency by adjusting the entire GATSM term structure with an explicit function of maturity that represents the optionality associated with the present and future availability of physical currency. The resulting ZLB-GATSM framework remains tractable, producing a simple closed-form analytic expression for forward rates and requiring only elementary univariate numerical integration (over time to maturity) to obtain interest rates and bond prices. I demonstrate the salient features of the ZLB- GATSM framework using a two-factor model. An illustrative estimation with U.S. term structure data indicates that the ZLB-GATSM "shadow short rate" provides a useful gauge of the stance of monetary policy; in particular becoming negative when the U.S. policy rate reached the ZLB in late 2008, and moving more negative with subsequent unconventional monetary policy easings.
    JEL: E43 G12 G13
    Date: 2012–03
  6. By: Rousakis, Michael (University of Warwick)
    Abstract: How does the economy respond to shocks to expectations? This paper addresses this question within a cashless, monetary economy. A competitive economy features producers and consumers/workers with asymmetric information. Only workers observe current productivity and hence they perfectly anticipate prices, whereas all agents observe a noisy signal about long-run productivity. Information asymmetries imply that monetary policy and consumers' expectations have real effects. Non-fundamental, purely expectational shocks are conventionally thought of as demand shocks. While this remains a possibility, expectational shocks can also have the characteristics of supply shocks : if positive, they increase output and employment, and lower inflation. Whether expectational shocks manifest themselves as demand or supply shocks depends on the monetary policy pursued. Forward-looking policies generate multiple equilibria in which the role of consumers' expectations is arbitrary. Optimal policies restore the complete information equilibrium. They do so by manipulating prices so that producers correctly anticipate their revenue despite their uncertainty about current productivity. I design targets for forward-looking interest-rate rules which restore the complete information equilibrium for any policy parameters. In ation stabilization per se is typically suboptimal as it can at best eliminate uncertainty arising through prices. This offers a motivation for the Dual Mandate of central banks. Key words: Asymmetric information ; producer expectations ; consumer expectations ; business cycles ; supply shocks ; demand shocks ; optimal monetary policy JEL Classification: E32 ; E52 ; D82 ; D83 ; D84
    Date: 2012
  7. By: Shinji Takagi (Graduate School of Economics, Osaka University); Kenichi Hirose (Otaru University of Commerce); Issei Kozuru (Kosei Securities Testing the Effectiveness of Market-B)
    Abstract: The paper tests the effectiveness of marginal reserve requirements employed by the Japanese authorities in the 1970s to influence short-term capital flows, thereby contributing to the ongoing debate on the use of capital controls\market- or price-based ones in particular. While the case for using market-based controls almost entirely relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements in the 1990s, testing for their effectiveness on the volume of inflows is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem by applying the method of propensity score matching and find that an increase in marginal reserve requirements modestly reduced the volume of short-term capital inflows through non-resident free-yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short-term capital flows was small. We conclude that market-based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.The paper presents a political economy model of official foreign exchange market intervention and tests the model against the recent experience of Japan. In several industrial countries, the government is responsible for intervention decisions while the central bank is given operational independence in its conduct of monetary policy. The paper models the interaction between the two agencies, empirically tests the central bank reaction function, and considers conditions under which intervention might change monetary policy. Daily Japanese intervention data give broad support to the prediction of the model with respect to central bank behavior. Although it is difficult to be definitive about the hidden motive of central bank actions, during the extraordinary period of 2001-04 when Japan remained under deflationary pressure, the central bank, faced with large political costs of sterilization, accommodated a considerable portion of the massive interventions made by the government. Under normal conditions coordination between the two agencies might be desirable, not least to make the signal of any intervention credible, but giving an alternative agency the authority over intervention decisions can be a means of enhancing democratic accountability for an independent central bank while preserving the credibility of monetary policy.
    Keywords: foreign exchange market intervention; central banking; quantitative easing; Japanese intervention
    JEL: E42 E58 F31
    Date: 2012–04
  8. By: Georgiadis, Georgios
    Abstract: I quantify the importance of financial structure, labor market rigidities and industry mix for cross-country asymmetries in monetary transmission. To do so, I determine how closely the impulse responses to a monetary policy shock obtained from country-specific vectorautoregressive (VAR) models and a non-standard panel VAR model match. In the country-specific VAR models, the impulse responses vary across countries in an unrestricted fashion. In the panel VAR model, the impulse responses also vary across countries, but only to the extent that countries differ regarding their financial structure, labor market rigidities and industry mix. For a sample of 20 industrialized countries over the time period from 1995 to 2009, I find that up to 70% (50%) of the cross-country asymmetries in the responses of output (prices) to a monetary policy shock can be accounted for by crosscountry differences in financial structure, labor market rigidities and industry mix. While in the short run asymmetries in the output responses arise mainly due to cross-country differences in industry mix, in the medium and long run differences in financial structure and labor market rigidities gain more importance. Moreover, cross-country differences in industry mix appear to be of rather minor importance for cross-country asymmetries in the transmission of monetary policy to prices. --
    Keywords: Monetary Transmission,Financial Structure,Labor Market Rigidities,Industry Mix,Panel VAR,Heterogeneity
    JEL: C33 C51 E44 E52
    Date: 2012
  9. By: Irina A. Telyukova; Ludo Visschers
    Abstract: We investigate quantitative implications of precautionary demand for money for business cycle dynamics of velocity and other nominal aggregates. Accounting for such dynamics is a standing challenge in monetary macroeconomics: standard business cycle models that have incorporated money have failed to generate realistic predictions in this regard. In those models, the only uncertainty affecting money demand is aggregate. We investigate a model with uninsurable idiosyncratic uncertainty about liquidity need and find that the resulting precautionary motive for holding money produces substantial qualitative and quantitative improvements in accounting for business cycle behavior of nominal variables, at no cost to real variables
    Keywords: Precautionary demand for money, Business cycle fluctuations, Money velocity fluctuations
    Date: 2011–11
  10. By: Jurgilas, Marius (Norges Bank); Zikes, Filip (Bank of England)
    Abstract: This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large-value payments system (CHAPS) in 2003-09, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-09. The key interpretation is that an increase in the implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.
    Keywords: Interbank money market; intraday liquidity
    JEL: E42 E58 G21
    Date: 2012–03–19
  11. By: Marilyne Huchet-Bourdon; Jane Korinek
    Abstract: Trade deficits and surpluses are sometimes attributed to intentionally low or high exchange rate levels. The impact of exchange rate levels on trade has been much debated but the large body of existing empirical literature does not suggest an unequivocally clear picture of the trade impacts of changes in exchange rates. In addition, much of the evidence on this subject considers currencies of large economies, and overwhelmingly the United States.<p>This study examines the impact of exchange rates and their volatility on trade flows in two small, open economies – Chile and New Zealand – with three major trading partners, in two broadly defined sectors – agriculture on the one hand and manufacturing and mining on the other. It finds that exchange volatility impacts trade flows in the small, open economies more than was found for larger economies. Findings do not clearly indicate the direction of the impact, i.e. whether this volatility increases or decreases trade in all countries and sectors. Exchange rate levels, on the other hand, affect trade in both agriculture and manufacturing and mining sectors although their magnitude differs depending on the trading partner and sector. Moreover, this study indicates that a depreciation in the exchange rates in Chile and New Zealand would not lead to a strong change in their trade balances with three main trading partners across the board.
    Keywords: exchange rates, trade, New Zealand, real exchange rates, Chile, volatility, trade deficit, trade in agriculture, short-run effects, long-run effects, GARCH volatility, depreciation, currency movements, exchange rate appreciation, exchange hedging, small open economies, Chilean peso, New Zealand dollar
    JEL: F1 F31 O24 Q17
    Date: 2012–03–22
  12. By: Wenli Cheng; Simon D. Angus
    Abstract: This paper develops a simple dynamic model to study some of the implications of Cantillon’s insight that new money enters an economy at a specific point and that it takes time for the new money to permeate the economy. It applies a process analysis and uses numerical simulations to map out how the economy changes from one period to the next following a money injection. It finds that, within the region of stability, a money injection can generate oscillating changes in real variables for a considerably long period of time before converging back to the initial steady state. It also finds that a money injection benefits first recipients of the new money, but hurts later recipients and savers. Our simulation suggests that in our model savers can lose from a money injection even if they are first recipients of the new money.
    JEL: E51 E52 E37
    Date: 2012–03
  13. By: Andreasen, Martin (Bank of England); Ferman, Marcelo (LSE); Zabczyk, Pawel (Bank of England)
    Abstract: This paper develops a DSGE model in which banks use short-term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within a real business cycle framework that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model, where we find that maturity transformation reduces the real effects of a monetary policy shock.
    Keywords: Banks; DSGE model; financial frictions; firm heterogeneity; maturity transformation
    JEL: E22 E32 E44 G21
    Date: 2012–03–19

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