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on Monetary Economics |
| By: | Ansgar Belke; Jens Klose |
| Abstract: | We propose an alternative way of estimating Taylor reaction functions if the zero-lowerbound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state-space model that additionally generates a timevarying series for the equilibrium real interest rate and the potential output - both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre- and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth. |
| Keywords: | zero-lower-bound, Federal Reserve, European Central Bank, equilibrium real interest rate, Taylor rule |
| JEL: | E43 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1218&r=mon |
| By: | Abbassi, Puriya; Linzert, Tobias |
| Abstract: | The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates looking at, first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB's non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises. -- |
| Keywords: | Monetary transmission mechanism,Non-standard monetary policy measures,European Central Bank,Interbank money market |
| JEL: | E43 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:142012&r=mon |
| By: | Hernando Vargas Herrera; Pamela Cardozo |
| Abstract: | We analyse three models to determine the conditions under which reserve requirements are used as a part of an optimal monetary policy framework in an inflation targeting regime. In all cases the Central Bank (CB) minimizes an objective function that depends on deviations of inflation from its target, the output gap and deviations of reserve requirements from its optimal long term level. In a closed economy model we find that optimal monetary policy implies setting reserve requirements at their long term level, while adjusting the policy interest rate to face macroeconomic shocks. Reserve requirements are included in an optimal monetary policy response in an open economy model with the same CB objective function and in a closed economy model in which the CB objective function includes financial stability. The relevance, magnitude and direction of the movements of reserve requirements depend on the parameters of the economy and the shocks that affect it. |
| Date: | 2012–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:009824&r=mon |
| By: | Carlstrom, Charles (Federal Reserve Bank of Cleveland); Fuerst, Timothy (Federal Reserve Bank of Cleveland); Paustian, Matthias (Bank of England) |
| Abstract: | Recent monetary policy experience suggests a simple test for models of monetary non-neutrality. Suppose the central bank pegs the nominal interest rate below steady state for a reasonably short period of time. Familiar intuition suggests that this should be inflationary. We pursue this simple test in three variants of the familiar Dynamic New Keynesian (DNK) model. Some variants of the model produce counterintuitive inflation reversals where an interest rate peg leads to sharp deflations. |
| Keywords: | Fixed interest rates; New Keynesian model; zero lower bound |
| JEL: | E32 |
| Date: | 2012–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0459&r=mon |
| By: | Christiane Baumeister; Luca Benati |
| Abstract: | We explore the macroeconomic effects of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a time-varying parameter structural VAR model. We identify a ‘pure’ spread shock defined as a shock that leaves the policy rate unchanged, which allows us to characterize the macroeconomic consequences of a decline in the yield spread induced by central banks’ asset purchases within an environment in which the policy rate is constrained by the effective zero lower bound. Two key findings stand out. First, compressions in the long-term yield spread exert a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the Federal Reserve’s and the Bank of England’s asset purchase programs on long-term yield spreads, our counterfactual simulations suggest that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression. |
| Keywords: | Econometric and statistical methods; Interest rates; Monetary policy framework; Transmission of monetary policy |
| JEL: | C11 C32 E52 E58 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-21&r=mon |
| By: | Carlos Madeira; Basit Zafar |
| Abstract: | Using the panel component of the Michigan Survey of Consumers we estimate a learning model of inflation expectations, allowing for heterogeneous use of both private information and lifetime inflation experience. We find that women, ethnic minorities, and less educated agents have a higher degree of heterogeneity in their private information, and are slower to update their expectations. During the 2000s, consumers believe inflation to be more persistent in the short term, but temporary fluctuations in inflation have less effect on expectations of personal income and long-term inflation. Finally, we find evidence that heterogeneous expectations by consumers generate higher mark-ups and inflation. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:667&r=mon |
| By: | Carlos Carvalho; Fernanda Nechio |
| Abstract: | The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence - policy inertia or persistent policy shocks - is key. |
| Keywords: | Capital ; Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-08&r=mon |
| By: | Marta Areosa; Waldyr Areosa |
| Abstract: | We present a DSGE model with heterogeneously informed agents and two investment opportunities – stocks and bonds – to study the interaction between monetary policy and asset prices. The information is both sticky, as in Mankiw e Reis (2002), and dispersed, as in Morris e Shin (2002). This framework allows us to (i) show that variations in stock market wealth affect consumption, (ii) demonstrate that a central bank can prevent the creation of boom-bust episodes in the economy, (iii) determine the moment of a bust occurrence and (iv) study the impulse responses to dividend and informational shocks. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:285&r=mon |
| By: | Shutao Cao; Wei Dong; Ben Tomlin |
| Abstract: | This paper studies the sensitivity of Canadian producer prices to the Canada-U.S. exchange rate. Using a unique product-level price data set, we estimate and analyze the impact of movements in the exchange rate on both domestic and export producer prices. First, we find that both domestic and export prices are sensitive to movements in the exchange rate. A one percent depreciation in Canadian dollar is associated with a 0.18 (0.25 conditional on price changes in the currency of pricing) percent increase in domestic prices, and a 0.39 (0.60 conditional on price changes in the currency of pricing) percent increase in export prices (once prices are converted into a single currency). Next, we find that there is an important difference in export price sensitivity to the exchange rate depending on the currency of pricing. Those Canadian producers that invoice their exported products in Canadian dollars do not adjust prices to movements in the exchange rate. Meanwhile, those invoicing in U.S. dollars increase their Canadian dollar prices when the Canadian dollar depreciates. Finally, for the same good sold in both the domestic and U.S. markets, the currency of pricing appears to play an important role in determining mark-up adjustment and the degree of pricing to market. These findings shed light on understanding the sources of incomplete exchange rate pass-through into import prices, as well as the indirect effect of the exchange rates on domestic prices through import competition and the use of imported inputs. |
| Keywords: | Exchange rates; Inflation and prices; Market structure and pricing |
| JEL: | F31 F41 E30 L11 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-20&r=mon |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. Two surprising results are obtained. First, that a pegging economy might be better off with a closed capital account than with an open one. Second, that the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be greater in financially open economies than in financially closed ones. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:672&r=mon |
| By: | Wermers, Russ |
| Abstract: | This paper studies daily investor flows to and from each money market mutual fund during the period prior to and including the money fund crisis of September and October 2008. We focus on the determinants of flows in the prime money fund category to shed light on the covariates of money fund runs, since this category was, by far, the most heavily impacted by the money fund crisis. We find that institutional investors moved their money simultaneously (or with a one-day delay) into or out of prime money funds, especially within the same fund complex. Specifically, during September and October 2008, flows in a given prime institutional fund are strongly correlated with same-day flows in all other same-complex prime institutional funds, indicating that the money fund crisis was especially focused on certain types of fund complexes. To illustrate, a daily outflow of 1% of total assets from other same-complex prime institutional money funds predicts, on average, a 0.92% outflow in a given prime institutional money fund during the same day; by contrast, prime fund flows are not correlated with same-day, different complex prime fund flows. We also find that investors are sensitive to the liquidity of money fund holdings: correlated flow patterns are less likely to occur in money funds with greater levels of securities with very short maturity (seven days or less). Our analysis also suggests that prime retail money funds also exhibited persistent outflows, and that (similar to institutional shareclasses) retail runs were focused on certain complexes, as well as on funds holding lower levels of short-maturity securities. -- |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1205&r=mon |
| By: | Nidhaleddine Ben Cheikh (University of Rennes 1 - CREM (UMR 6211 CNRS)) |
| Abstract: | This paper examines the exchange rate pass-through (ERPT) into import prices using recent panel data techniques. For a sample of 27 OECD countries, panel cointegration tests provide an evidence for the existence of long-run equilibrium relationship in pass-through equation. Following Pedroni (2001), we employ both FM-OLS and DOLS estimators and show that long-run ERPT elasticity does not exceed 0.70%. Individual estimates of ERPT are heterogeneous across 27 OECD countries, ranging from 0.23% in France to 0.98% in Poland. When we look for the macroeconomic determinants of this long-run heterogeneity, we implement a panel threshold methodology as introduced by Hansen (2000). Our results indicate a regime-dependence of ERPT, that is, countries with higher inflation regime and more exchange rate volatility would experience a higher degree of pass-through. |
| Keywords: | Exchange Rate Pass-Through, Import Prices, Panel Cointegration, Panel Threshold |
| JEL: | C23 E31 F31 F40 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201225&r=mon |
| By: | McKenzie, Rex; Pons-Vignon, Nicolas |
| Abstract: | Abstract This is a review article; its purpose is to support a debate on the use of the best available economic theory and evidence in monetary policy in contemporary South Africa. In order to do so, I contrast South Africa's laissez-faire management of capital flows with the experience of other countries where the authorities have opted to use capital control techniques of one type or another. The empirical evidence is fairly substantial, capital control techniques can play a useful part in staving off fragility and financial crisis in the event of sharp surges in capital flows. The key idea is that capital control techniques would offer the authorities more freedom and flexibility in the management of capital flows and the pursuit of monetary policy. The article follows on from Mohammed (2010) who concludes that South African policy makers have not yet learned the relevant lessons stemming from their neoliberal embrace. This article takes up that theme and uses macroeconomic data to show that without capital controls South Africa courts a financial crisis that can be transmitted via any one of at least three channels. |
| Keywords: | monetary policy; capital flows; capital controls |
| JEL: | E52 E44 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40119&r=mon |
| By: | Pablo Pincheira; Carlos Medel |
| Abstract: | The use of different time-series models to generate forecasts is fairly usual in the forecasting literature in general, and in the inflation forecast literature in particular. When the predicted variable is stationary, the use of processes with unit roots may seem counterintuitive. Nevertheless, in this paper we demonstrate that forecasting a stationary variable with driftless unit-root-based forecasts generates bounded Mean Squared Prediction Errors errors at every single horizon. We also show via simulations that persistent stationary processes may be better predicted by unit-root-based forecasts than by forecasts coming from a model that is correctly specified but that is subject to a higher degree of parameter uncertainty. Finally we provide an empirical illustration in the context of CPI inflation forecasts for three industrialized countries. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:669&r=mon |
| By: | C. Liberati; M. Marzo; P. Zagaglia; P. Zappa |
| Abstract: | We study the frictions in the patterns of trades in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use network-topology method on data from overnight transactions in the Electronic Market for Interbank Deposits (e-Mid) to investigate on two main issues. First, we characterize the division of roles between borrowers and lenders in long-run relations by providing evidence on network formation at a yearly frequency. Second, we identify the ‘key players’ in the marketplace and study their behaviour. Key players are ‘locally-central banks’ within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold. We show that the aggregate trading patterns in e-Mid are characterized by largely asymmetric relations. This implies a clear division of roles between lenders and borrowers. Second, the key players do not exploit their position of network leaders by imposing opportunistic pricing policies. We find that only a fraction of the networks composed by big players are characterized by interest rates that are statistically different from the average market rate throughout the turmoil period. |
| JEL: | D85 G01 G10 G21 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp841&r=mon |
| By: | Liberati, Caterina; Marzo, Massimiliano; Zagaglia, Paolo; Zappa, Paola |
| Abstract: | We study the frictions in the patterns of trades in the Euro money market. We characterize the structure of lending relations during the period of recent financial turmoil. We use network-topology method on data from overnight transactions in the Electronic Market for Interbank Deposits (e-Mid) to investigate on two main issues. First, we characterize the division of roles between borrowers and lenders in long-run relations by providing evidence on network formation at a yearly frequency. Second, we identify the 'key players' in the marketplace and study their behaviour. Key players are ‘locally-central banks’ within a network that lend (or borrow) large volumes to (from) several counterparties, while borrowing (or lending) small volumes from (to) a small number of institutions. Our results are twofold. We show that the aggregate trading patterns in e-Mid are characterized by largely asymmetric relations. This implies a clear division of roles between lenders and borrowers. Second, the key players do not exploit their position of network leaders by imposing opportunistic pricing policies. We find that only a fraction of the networks composed by big players are characterized by interest rates that are statistically different from the average market rate throughout the turmoil period. |
| Keywords: | market microstructure; network analysis; money markets; asset pricing |
| JEL: | G10 D85 G01 G21 |
| Date: | 2012–07–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40223&r=mon |