nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒06‒13
twenty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary Policy Reform in a World of Central Banks By Gunther Schnabl
  2. Transparency: can central banks commit to truthful communication? By Julian A. Parra POlanía
  3. The Financial Crisis and the Changing Dynamics of the Yield Curve By Morten L. Bech; Yvan Lengwiler
  4. Determinants of Global and Intra-European Imbalances By Gunther Schnabl; Stephan Freitag
  5. Policy regimes, policy shifts, and U.S. business cycles By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  6. The response of interest rates to U.S. and U.K. quantitative easing By Jens H.E. Christensen; Glenn D. Rudebusch
  7. The Dollar and Its Discontents By Olivier Jeanne
  8. Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis By Mototsugu Shintani; Akiko Terada-Hagiwara; Tomoyoshi Yabu
  9. Exchange rate pass-through to various price indices: empirical estimation using vector error correction models By Andreas Bachmann
  10. The Shadow Banking System - Survey and Typological Framework By Jenny Poschmann
  11. Non-linearities in exchange rate pass-through: Evidence from smooth transition models By Ben Cheikh, Nidhaleddine
  12. The Impact of Policy Shocks on Financial Structure: Empirical Results from Japan By Moayedi, Vafa; Aminfard, Matin
  13. Inflation-hedging Portfolios in Different Regimes. By Brière, Marie; Signori, Ombretta
  14. Mythos TARGET2 - ein Zahlungsverkehrssystem in der Kritik By Peter Burgold; Sebastian Voll
  15. Does foreign exchange intervention volume matter? By Rasmus Fatum; Yohei Yamamoto
  16. Do Good Institutions Promote Counter-Cyclical Macroeconomic Policies? By César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
  17. International reserves and gross capital flows: dynamics during financial stress By Enrique Alberola; Aitor Erce Bank; José Maria Serena
  18. Pricing deflation risk with U.S. Treasury yields By Jens H.E. Christensen; Jose A. Lopez; Glenn D. Rudebusch
  19. The cost of a Greek Euro Exit for Spain By Eric Dor
  20. The Fragility of Overshooting By Pippenger, John
  21. Liquidity, risk and the global transmission of the 2007–08 financial crisis and the 2010–11 sovereign debt crisis title By Alexander Chudik; Marcel Fratzscher
  22. Macroeconomics with Financial Frictions: A Survey By Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov

  1. By: Gunther Schnabl (Institute for Economic Policy, University of Leipzig)
    Abstract: The paper identifies based on the monetary overinvestment theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a neglect towards monetary policy reform in a world dominated by financial markets has led to the erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of the government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to have led to a hysteresis of the liquidity trap. In this context, monetary reform is discussed with respect to the exit from low interest rate and high debt policies, an adaption of monetary policy rules to financial market dominated economic development, and the displacement of the prevalent world monetary system. Enhanced competition between dollar and euro as international currencies moderated by East Asia is proposed to constitute a more stable international monetary system.
    Keywords: Economic Instability, Credit Cycles, Monetary Policy, Hayek, Mises, Monetary Policy Rules, Monetary Policy Reform, Currency Competition
    JEL: E42 E58 F33 F44
    Date: 2012–05–28
  2. By: Julian A. Parra POlanía
    Abstract: To evaluate whether transparency is beneficial, it is usual to assume that the central bank may choose one of two options, opacity versus truthful communication. However, the monetary policymaker may have incentives to misrepresent private information so as to reduce economic volatility by manipulating inflation expectations. Using a standard model, this paper points out the fact that if misrepresentation is included as a possible action there is no rational expectations equilibrium with inflation announcements. Therefore, even if transparency is preferred over secrecy the central bank cannot credibly commit to truth-telling, in contrast to what is commonly assumed in the literature on transparency.
    Keywords: Central Bank Announcements, Monetary Policy, Transparency. Classification JEL:E52, E58, D82
    Date: 2012–05
  3. By: Morten L. Bech; Yvan Lengwiler (University of Basel)
    Keywords: term structure of interest rates, financial crisis, interest rate dynamics, LSAP, unconventional monetary policy
    JEL: E43 E52
    Date: 2012
  4. By: Gunther Schnabl (Institute for Economic Policy, University of Leipzig); Stephan Freitag (Institute for Economic Policy, University of Leipzig)
    Abstract: The paper discusses global current account imbalances in the context of an asymmetric world monetary system and asymmetric current account developments. It identifies the US and Germany as center countries with rising / high current account deficits (US) and surpluses (Germany). These are matched by current account surpluses of countries stabilizing their exchange rates against the dollar (dollar periphery) and current account deficits of countries stabilizing their exchange rate against the euro or members of the euro area (euro periphery). The paper finds that changes of world current account positions are closely linked to the monetary policy decision patterns both in the centers and peripheries. Whereas in the centers current account positions are affected by monetary policies, in the peripheries exchange rate stabilization cum sterilization matters. In specific, monetary expansion in the US as well as exchange rate stabilization and sterilization policies in the dollar periphery are found to have contributed to global imbalances.
    Keywords: Global Imbalances, Intra-European Imbalances, Asymmetric Monetary Policies, Foreign Reserve Accumulation, Sterilization, Granger Causality Tests, Panel Regressions
    JEL: F31 F32
    Date: 2012–05–28
  5. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy which resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post- Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred.
    Date: 2012
  6. By: Jens H.E. Christensen; Glenn D. Rudebusch
    Abstract: We analyze the declines in government bond yields that followed the announcements of plans by the Federal Reserve and the Bank of England to buy longer-term government debt. Using empirical dynamic term structure models, we decompose these declines into changes in expectations about future monetary policy and changes in term premiums. We find that declines in U.S. Treasury yields mainly reflected lower policy expectations, while declines in U.K. yields appeared to reflect reduced term premiums. Thus, the relative importance of the signaling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communications policies.
    Keywords: Monetary policy
    Date: 2012
  7. By: Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: Has the US dollar delivered the benefit that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves, especially when those returns are measured in terms of the countries' own consumption. Jeanne argues that countries that accumulate the most reserves should expect a low return in terms of their own consumption and that international monetary reform can do little to change that fact.
    Keywords: International monetary system, Dollar, Foreign exchange reserves, Triffin dilemma
    JEL: F36 F43
    Date: 2012–05
  8. By: Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Research Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well approximated by a class of smooth transition autoregressive (STAR) models using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.
    Keywords: Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices
    JEL: C22 E31 F31
    Date: 2012–04
  9. By: Andreas Bachmann
    Abstract: The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard long-run equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Pass-through to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run for the consumer price index and some of its sub-indices. Producer prices react significantly to exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time.
    Keywords: Exchange rate pass-through; consumer prices; import prices; cointegration; vector error correction models; new open economy macroeconomic model
    JEL: E31 F31 F41
    Date: 2012–05
  10. By: Jenny Poschmann (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: Even though the sector of Non-bank financial intermediaries (NBFI) or shadow banks represent a large part of the contemporary financial system, these institutions received almost no attention in macroeconomic studies so far. Their presence has significant influence on the conduct of monetary policy and systemic risk within the financial system. Therefore, it is important to understand the nexus within the shadow banking sector and connections with the traditional banking sector. This work will examine specific institutions involved in the shadow banking system and their development. A stylized banking sector including NBFI will be introduced and provides the starting point for subsequent research on monetary transmission.
    Keywords: shadow banking, financial intermediation, financial architecture, monetary policy
    JEL: G10 E44
    Date: 2012–05–28
  11. By: Ben Cheikh, Nidhaleddine
    Abstract: This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher.
    Keywords: Exchange Rate Pass-Through; Inflation; Smooth transition regression models; Euro area
    JEL: E31 C22 F41 F31
    Date: 2012–04
  12. By: Moayedi, Vafa; Aminfard, Matin
    Abstract: This study examines the relationship between Japan’s financial structure and the country’s fiscal/monetary policy. Vector Error Correction models are utilized to investigate the effect of policy shocks on financial structure development during a sample period of 48 years. Our findings reveal signs of an existing long-run relationship between policy variables and financial structure. Policymakers in Japan may have effectively influenced Japan’s financial structure development via fiscal and monetary actions. This result strengthens the assumption of a volatile financial structure due to policy interference. This study is the first of its kind and is intended to stimulate further research and debate.
    Keywords: Financial Structure; Fiscal Policy; Japan; Monetary Policy; VEC
    JEL: E62 E63
    Date: 2011–12–09
  13. By: Brière, Marie; Signori, Ombretta
    Abstract: The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.
    Keywords: portfolio optimisation; Inflation hedge; shortfall risk; pension finance;
    JEL: G23 E31 G11 G12
    Date: 2011–10
  14. By: Peter Burgold (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Sebastian Voll (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: TARGET2 ist seit gut einem Jahr Zielscheibe massiver akademischer Kritik. Wir legen dar, dass TARGET2 keiner Veränderungen bedarf. Die Salden sind keine echten Kredite und sollten nicht als solche betrachtet werden. Die zugrunde liegenden ökonomischen Probleme sind weder hinreichend noch notwendig mit dem Zahlungssystem verknüpft und können deswegen darüber nicht sinnvoll angegangen werden. Die geforderten Modifikationen stellen zudem keine überzeugenden Alternativen dar, insbesondere auch nicht für den Fall eines Auseinanderbrechens der Eurozone. Dann sind sie im Übrigen auch nur ein Teilproblem der zu regelnden Desintegration der Zentralbankbilanzen.
    Keywords: Eurokrise; Schuldenkrise, Währungsunion, Zentralbankkredit, grenzüberschreitender Zahlungsverkehr, Target2, Banknoten, Währungsdesintegration, euro crisis, debt crisis, monetary union, central bank credit, transnational payment system, Target2, banknotes, monetary disintegration
    JEL: E42 E59 F33
    Date: 2012–05–28
  15. By: Rasmus Fatum; Yohei Yamamoto
    Abstract: We investigate whether foreign exchange intervention volume matters for the exchange rate effects of intervention. Our investigation employs daily data on Japanese interventions from April 1991 to April 2012 and time-series estimations, nontemporal threshold analysis, as well as binary choice models. We find that intervention volume matters for the effects of intervention, but only to the extent that the exchange rate effect per intervention unit is magnified in a linear sense by the larger intervention amount. This is a policy-relevant finding that also adds to our understanding of how intervention works.
    Date: 2012
  16. By: César Calderón; Roberto Duncan; Klaus Schmidt-Hebbel
    Abstract: The literature has argued that developing countries are unable to adopt countercyclical monetary and fiscal policies due to financial imperfections and unfavorable political-economy conditions. Using a world sample of 115 industrial and developing countries for 1984-2008, we find that the level of institutional quality plays a key role in countries’ ability to implement counter-cyclical macroeconomic policies. The results show that countries with strong (weak) institutions adopt counter- (pro-) cyclical macroeconomic policies, reflected inextended monetary policy and fiscal policy rules. The threshold level of institutional quality at which monetary and fiscal policies are a-cyclical is found to be similar.
    Keywords: Counter-cyclical macroeconomic policies, institutions, fiscal policy, monetary policy
    JEL: E43 E52 E62
    Date: 2012
  17. By: Enrique Alberola; Aitor Erce Bank; José Maria Serena
    Abstract: This paper explores the role of international reserves as a stabilizer of international capital flows during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database using event analyses and standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves are useful during financial stress. International reserves facilitate financial disinvestment overseas by residents, offsetting the simultaneous drop in foreign financing.
    Date: 2012
  18. By: Jens H.E. Christensen; Jose A. Lopez; Glenn D. Rudebusch
    Abstract: We use an arbitrage-free term structure model with spanned stochastic volatility to determine the value of the deflation protection option embedded in Treasury inflation-protected securities (TIPS). The model accurately prices the deflation protection option prior to the financial crisis when its value was near zero; at the peak of the crisis in late 2008 when deflationary concerns spiked sharply; and in the post-crisis period. During 2009, the average value of this option at the five-year maturity was 41 basis points on a par-yield basis.
    Keywords: Deflation (Finance) ; Inflation-indexed bonds - United States
    Date: 2012
  19. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Abstract: This paper summarizes the main costs of a Greek euro exit for Spain, including its central bank. It is assumed that, after having left the euro, Greece would be compelled to default on any pre-existing sovereign debt denominated in euro. Indeed the new national currency would sharply depreciate. The debts denominated in euro's would thus become enormous once converted into the new currency. It is hard to conceive how the country could pay the service of these debts.
    Date: 2012–09
  20. By: Pippenger, John
    Abstract: Using VAR, a large literature claims to find evidence of some form of Dornbuschovershooting. But the evidence is fragile in the sense of Leamer. The literature uses the wrong test for overshooting, unusually narrow confidence intervals and questionable shocks. In addition, it is difficult to reconcile overshooting with the fact that daily and weekly exchangerates are approximately martingales.
    Keywords: Finance, General, Economics, General, International Economics, overshooting, fragility, exchange rate, martingale, impulse response, step response
    Date: 2012–05–30
  21. By: Alexander Chudik; Marcel Fratzscher
    Abstract: The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007–08 financial crisis and the 2010–11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010–11. Moreover, a fight-to-safety phenomenon across asset classes has become particularly strong during the 2010–11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission.
    Date: 2012
  22. By: Markus K. Brunnermeier; Thomas M. Eisenbach; Yuliy Sannikov
    Abstract: This article surveys the macroeconomic implications of financial frictions. Financial frictions lead to persistence and when combined with illiquidity to non-linear amplification effects. Risk is endogenous and liquidity spirals cause financial instability. Increasing margins further restrict leverage and exacerbate downturns. A demand for liquid assets and a role for money emerges. The market outcome is generically not even constrained efficient and the issuance of government debt can lead to a Pareto improvement. While financial institutions can mitigate frictions, they introduce additional fragility and through their erratic money creation harm price stability.
    JEL: A23 E1 E3 E4 E5 G01 G1 G2
    Date: 2012–05

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