nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒09‒16
twenty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Examining the role of monetary aggregates in China By Sánchez-Fung, José R.
  2. Excessive bank risk taking and monetary policy By Itai Agur; Maria Demertzis
  3. Anticipation of future consumption: a monetary perspective By Joao Ricardo Faria; Peter McAdam
  4. The Federal Reserve's balance sheet: a primer and projections By Seth B. Carpenter; Jane E. Ihrig; Elizabeth C. Klee; Alexander H. Boote; Daniel W. Quinn
  5. A global perspective on inflation and propagation channels By Luca Gattini; Huw Pill; Ludger Schuknecht
  6. Regional Monetary Cooperation in Latin America By José Antonio Ocampo; Daniel Titelman
  7. International channels of the Fed’s unconventional monetary policy By Michael D. Bauer; Christopher J. Neely
  8. Deriving the Taylor Principle when the Central Bank Supplies Money By Ceri Davies; Max Gillman; Michal Kejak
  9. Innocent Bystanders? Monetary Policy and Inequality in the U.S. By Yuriy Gorodnichenko; Lorenz Kueng; John Silvia; Olivier Coibion
  10. The Chicago Fed DSGE model By Scott Brave; Jeffrey R. Campbell; Jonas D. M. Fisher; Alejandro Justiniano
  11. A Tale of Politically-Failing Single-Currency Area By Assaf Razin; Steven Rosefielde
  12. Does monetary policy affect bank risk? By Yener Altunbas; Leonardo Gambacorta; David Marques-Ibanez
  13. The Influence of Banking Centralisation on Depositors: Regional Heterogeneities in the Transmission of Monetary Policy By John Ashton; Andros Gregoriou
  14. Stock market reaction to fed funds rate surprises: state dependence and the financial crisis By Alexandros Kontonikas; Ronald MacDonald; Aman Saggu
  15. Exchange Rate and Foreign Interest Rate Linkages for Sub-Saharan Africa Floaters By Alun H. Thomas
  16. Central Banking for Financial Stability in Asia By Masahiro Kawai; Peter J. Morgan
  17. The impact of commercial real estate on the financial sector, its tracking by central banks and some recommendations for the macro-financial stability policy of central banks By Olszewski, Krzysztof
  18. Business cycles, monetary transmission and shocks to financial stability: empirical evidence from a new set of Danish quarterly national accounts 1948-2010 By Kim Abildgren
  19. Financial structures and the real effects of credit-supply shocks in Denmark 1922-2011 By Kim Abildgren
  20. How much should I hold? Reserve Adequacy in Emerging Markets and Small Islands By Nkunde Mwase
  21. Household Production, Services and Monetary Policy By Constant Lonkeng Ngouana
  22. Expectations about the Federal Reserve's balance sheet and the term structure of interest rates By Jane Ihrig; Elizabeth Klee; Canlin Li; Brett Schulte; Min Wei

  1. By: Sánchez-Fung, José R. (BOFIT)
    Abstract: The paper examines the relative significance of monetary aggregates and interest rates in China using the information approach to monetary policy. The analysis reveals the superiority and robustness of a narrow monetary aggregate in contributing information about future movements in inflation.
    Keywords: monetary policy and inflation; information approach; monetary aggregates; interest rates; China
    JEL: E52
    Date: 2012–09–03
  2. By: Itai Agur (IMF (Singapore Regional Training Institute), 10 Shenton Way, MAS Building #14-03, Singapore 079117); Maria Demertzis (De Nederlandsche Bank, PO Box 98, 1000 AB Amsterdam, The Netherlands)
    Abstract: Why should monetary policy "lean against the wind"? Can’t bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital requirement. We derive from welfare that the regulator trades off bank risk and credit supply, and show that monetary policy affects both sides of this trade-off. Hence, regulation cannot neutralize the policy rate’s impact, and monetary policy matters for financial stability. An extension shows how the commonality of bank exposures affects monetary transmission. JEL Classification: E43, E52, E61, G01, G21, G28
    Keywords: Macroprudential, leverage, supervision, monetary transmission
    Date: 2012–08
  3. By: Joao Ricardo Faria (University of Texas El Paso, 500 West University Avenue, El Paso, Texas 79968-0703, USA); Peter McAdam (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt, Germany)
    Abstract: We adapt the (Sidrauski, 1967) monetary model to study the hypothesis of anticipation of future consumption. We assume that anticipation of future consumption affects an agent's instantaneous utility and that all effects of future consumption on current wellbeing are captured by the stock of future consumption. Monetary policy effectiveness is thereby reduced and a zero nominal lower interest rate (and thus the Friedman Rule) is destabilizing. Given this, we can derive a "just stable" equilibrium nominal interest rate with matching definitions for inflation and monetary growth. We demonstrate that these implied lower bounds match their historical analogues well. JEL Classification: E41, D91, O42
    Keywords: Anticipation, consumption behavior, money demand, money and growth, Friedman rule, stability
    Date: 2012–07
  4. By: Seth B. Carpenter; Jane E. Ihrig; Elizabeth C. Klee; Alexander H. Boote; Daniel W. Quinn
    Abstract: Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The securities holdings in excess of historical norms have been shown to be putting downward pressure on longer-term interest rates. One question asked is how long this unusual amount of monetary policy accommodation will be in place. Here we provide projections of the evolution of the Federal Reserve's balance sheet that are consistent with public economic forecasts and announced Federal Open Market Committee policy principles to help answer this question. We begin with a primer on the Federal Reserve's balance sheet. Then, with the foundational concepts in place, we present a framework for projecting Federal Reserve assets and liabilities through time. In the projections, the Federal Reserve's balance sheet remains large by historical standards for several years. Our baseline projection suggests that market participants likely do not expect the Federal Reserve's portfolio to return to a more normal size until August 2017, and its composition to return to normal until September 2018. Overall, this suggests that market participants believe that unconventional monetary policy will be in place for some time, likely depressing longer-term interest rates for a number of years.
    Date: 2012
  5. By: Luca Gattini (European Investment Bank, 98-100, Boulevard Konrad Adenauer, Luxembourg L-2950); Huw Pill (Goldman Sachs, Research Department); Ludger Schuknecht (German Ministry of Finance, Wilhelmstraße 97, 10117 Berlin, Germany and European Central Bank)
    Abstract: This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments. JEL Classification: E31, E51, E62, C32, F42
    Keywords: VAR, global inflation, global house prices, global money
    Date: 2012–08
  6. By: José Antonio Ocampo (Asian Development Bank Institute (ADBI)); Daniel Titelman
    Abstract: Latin American has the longest history of regional integration efforts in the developing world. This paper analyzes the experience of regional monetary cooperation in Latin America over the past three decades. This experience has been overall successful but also uneven, both in terms of country coverage and services provided. Although strictly not a form of monetary cooperation, development financing does play a useful complementary role by proving counter-cyclical or at least stable financing during crises, when private financing for developing countries dries up.
    Keywords: Regional monetary cooperation, Monetary cooperation, Latin America, development financing
    JEL: O23 O54
    Date: 2012–08
  7. By: Michael D. Bauer; Christopher J. Neely
    Abstract: Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling effects for any country. Our preferred bias-corrected model implies large signaling effects for Canada and the United States. The idea that LSAP announcements signal information about Canadian rates is intuitively attractive because conventional US monetary policy shocks strongly predict Canadian rates.
    Keywords: Monetary policy ; Bonds ; International finance
    Date: 2012
  8. By: Ceri Davies; Max Gillman; Michal Kejak
    Abstract: The paper presents a human-capital-based endogenous growth, cash-in-advance economy with endogenous velocity where exchange credit is produced in a decentralized banking sector, and money is supplied stochastically by the central bank. From this it derives an exact functional form for a general equilibrium `Taylor rule'. The inflation coefficient is always greater than one when the velocity of money exceeds one; velocity growth enters the equilibrium condition as a separate variable. The paper then successfully estimates the magnitude of the coefficient on inflation from 1000 samples of Monte Carlo simulated data. This shows that it would be spurious to conclude that the central bank has a reaction function with a strong response to inflation in a `Taylor principle' sense, since it is only meeting fiscal needs through the inflation tax. The paper also estimates several deliberately misspecified models to show how an inflation coefficient of less than one can result from model misspecification. An inflation coefficient greater than one holds theoretically along the balanced growth path equilibrium, making it a sharply robust principle based on the economy's underlying structural parameters.
    Date: 2012–07–23
  9. By: Yuriy Gorodnichenko; Lorenz Kueng; John Silvia; Olivier Coibion
    Abstract: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
    Keywords: Consumption , External shocks , Income distribution , Monetary policy ,
    Date: 2012–08–09
  10. By: Scott Brave; Jeffrey R. Campbell; Jonas D. M. Fisher; Alejandro Justiniano
    Abstract: The Chicago Fed dynamic stochastic general equilibrium (DSGE) model is used for policy analysis and forecasting at the Federal Reserve Bank of Chicago. This article describes its specification and estimation, its dynamic characteristics and how it is used to forecast the US economy. In many respects the model resembles other medium scale New Keynesian frameworks, but there are several features which distinguish it: the monetary policy rule includes forward guidance, productivity is driven by neutral and investment specific technical change, multiple price indices identify inflation and there is a financial accelerator mechanism.
    Keywords: Keynesian economics ; Forecasting ; Stochastic analysis
    Date: 2012
  11. By: Assaf Razin; Steven Rosefielde
    Abstract: The global financial crisis which erupted in the United States instantaneously swept across Europe. Like the United States, the European Monetary Union (EMU) was ripe for a crash. It had its own real estate bubble, specifically in Ireland and Spain, indulged in excessive deficit spending, financially deregulated, and rapidly expanded credit Policy responses and recovery patterns for key EU members like Germany and France, within the Eurozone, were similar. However, after the bubble burst and the crisis began unfolding it became clear that the Eurozone plight differed from America's in one fundamental respect. There was no exact counterpart of Eurozone GIIPS (Greece, Italy, Ireland, Portugal, and Spain) in the United States. Some American states had over-borrowed, but the sovereign debt crisis didn't place individual states at deflationary risk, or threaten the viability of the federal union. Not so for some members within the Eurozone. Politicians on both sides of the Atlantic can be uncooperative, but inter-state disputes are more easily finessed under the American federal system than the Eurozone politically weakly integrated system. The disparity is traced to the EU's and Eurozone's special form of governance called "supra-nationality" (a partially sovereign transnational organization) that has been largely ignored in economic treatises about the costs and benefits of monetary unions. The EZ members have put themselves in a monetary cage, akin to the gold standard, in which member states have surrendered control over their monetary and foreign exchange rate policies to the German dominated European Central Bank (ECB), without supplementary central fiscal, private banking and political union institutions.
    JEL: E00 F10 N0
    Date: 2012–09
  12. By: Yener Altunbas (Bangor Business School); Leonardo Gambacorta (Bank for International Settlements); David Marques-Ibanez (European Central Bank)
    Abstract: We investigate the effect of relatively loose monetary policy on bank risk through a large panel including quarterly information from listed banks operating in the European Union and the United States. We find evidence that relatively low levels of interest rates over an extended period of time contributed to an increase in bank risk. This result holds for a wide range of measures of risk, as well as macroeconomic and institutional controls including the intensity of supervision, securitization activity and bank competition. The results also hold when changes in realized bank risk due to the crisis are accounted for. The results suggest that monetary policy is not neutral from a financial stability perspective.
    Keywords: bank risk, monetary policy, credit crisis.
    JEL: E44 E52 G21
    Date: 2012–01
  13. By: John Ashton (Bangor Business School); Andros Gregoriou (Hull University)
    Abstract: This study examines whether regionally and nationally branching banks set deposits interest rates differently. This assessment of the UK retail deposit market between 1992 and 2008 indicates regional banks set deposit interest rates in a manner distinct to nationally branching banks. This deviation between changes in the market interest to retail interest rates is characterised by a non-linear mean reverting process. Deposit interest rates offered by regional banks also display lower levels, a slower response to wholesale interest rate increases and a swifter response to wholesale interest rate falls, relative to national banks. It is concluded this evidence is consistent with distinct monetary conditions existing in the UK regions.
    Keywords: Interest rate transmission, Market definition, Bank Branching.
    JEL: G21
    Date: 2012–02
  14. By: Alexandros Kontonikas; Ronald MacDonald; Aman Saggu
    Abstract: Traditionally, it is assumed that the population size of cities in a country follows a Pareto distribution. This paper examines the impact of Federal Funds rate (FFR) surprises on stock returns in the United States over the period 1989-2009, focusing on the impact of the recent financial crisis. We find that prior to the crisis, stock prices increased as a response to unexpected FFR cuts. State dependence is also identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear stock markets, and tightening credit market conditions. However, an important structural shift took place during the financial crisis, which changed the stock market response to FFR shocks, as well as the nature of state dependence. Specifically, during the crisis period stock market participants did not react positively to unexpected FFR cuts. Our results highlight the severity of the recent financial turmoil episode and the ineffectiveness of conventional monetary policy close to the zero lower bound for nominal interest rates.
    Keywords: Monetary Policy; Stock Market; State Dependence; Financial Crisis
    JEL: C32 E44 E52 G01 G14
    Date: 2012–09
  15. By: Alun H. Thomas
    Abstract: The paper considers the determinants of exchange rate movements among sub-Saharan countries that have flexible exchange rate regimes. The determinants are based on the law of one price and interest parity conditions. Results indicate that the exchange rates have responded significantly to changes in the US Treasury bill rate and to the EMBI spread in recent years. The effects are more important for countries with open capital accounts. On the other hand the paper does not provide any support for the interest rate parity theory because domestic interest rates have no bearing on exchange rate movements.
    Keywords: Exchange rates , Flexible exchange rate policy , Floating exchange rates , Interest rates , Sub-Saharan Africa ,
    Date: 2012–08–23
  16. By: Masahiro Kawai (Asian Development Bank Institute (ADBI)); Peter J. Morgan
    Abstract: A key lesson of the 2007–2009 global financial crisis (GFC) was the importance of containing systemic financial risk and the need for a “macroprudential†approach to surveillance and regulation that can identify system-wide risks and take appropriate actions to maintain financial stability. By virtue of their overview of the economy and the financial system and their responsibility for payments and settlement systems, there is a broad consensus that central banks should play a key role in monitoring and regulating financial stability. Emerging economies face additional challenges because of their underdeveloped financial systems and vulnerability to volatile international capital flows, especially “sudden stops†or reversals of capital inflows. This paper reviews the recent literature on this topic and identifies relevant lessons for central banks, especially those in Asia’s emerging economies. Major topics discussed include the debate about the definition of financial stability, the consistency of a financial stability objective with the more traditional and well-established central bank objective of price stability, the appropriate governance structure for coordination of macroprudential policy with other financial supervisors and entities, and the appropriate policy instruments to achieve macroprudential policy objectives, including conventional, unconventional, and macroprudential tools. Finally, the paper considers issues involved with regional financial regulatory cooperation. Overall, the report concludes that the “lean versus clean†debate has been resolved largely in favor of the former, and that central banks should have a financial stability mandate and the policy tools to successfully pursue that mandate.
    Keywords: Asia, Central Banking, Financial Stability, GFC lessons, systemic financial risk, emerging economies, macroprudential, financial system, financial regulatory cooperation, central banks
    JEL: E52 F31 G28
    Date: 2012–08
  17. By: Olszewski, Krzysztof
    Abstract: This article reviews the impact of commercial real estate (CRE hereafter) on macro-financial stability and gives some ideas, how central banks could deal with the risk. First, we present the main features of the CRE market, explain its cycle and outline risks related to this market. Its relation to the financial sector is discussed. Further on, basing on the experience of some countries with CRE crises, we critically assess the reactions of their central banks. The characteristics of the CRE market are presented on the case of Poland, because it is a fast growing market. Its analysis should simplify the understanding why the CRE market should be tracked by the central bank. Finally, we present some ideas for the data collection and analysis of the CRE market. Further on, we provide some hints for the macroeconomic and financial stability policy of central banks, which should help to reduce risk and at the same time enhance the growth of the CRE market.
    Keywords: Commercial Real Estate; macro-financial stability policy; banking sector; central banks;
    JEL: E30 E58 G28 E44
    Date: 2012–09–05
  18. By: Kim Abildgren (Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen K, Denmark)
    Abstract: In Denmark official quarterly national accounts are only available for the period since 1977. The paper constructs a set of summary non-seasonally adjusted quarterly national accounts for Denmark for 1948-2010 in current and constant prices as well as a set of other key quarterly macroeconomic indicators covering the Danish economy since 1948. As a first exploratory analysis of these two new data sets the paper reviews some of the stylised empirical evidence on the business cycle, the monetary transmission mechanism and shocks to financial stability that can be uncovered using filtering techniques and reduced-form vector autoregressive (VAR) models. The long-span data sets make it possible to estimate VAR models of a higher dimension than is usually found in the literature due to degrees-of-freedom problems. The results from the VAR analysis indicate a significant and long-lasting negative impact on real GDP following an exogenous shock to the banking sector’s write-down ratio. JEL Classification: C32, C82, E01, E32, E44, E52, N14
    Keywords: Quarterly national accounts, Danish economic history, business cycles, monetary transmission, financial stability, band-pass filters, VAR analysis
    Date: 2012–08
  19. By: Kim Abildgren (Danmarks Nationalbank, Havnegade 5, DK-1093 Copenhagen K, Denmark)
    Abstract: We examine the real effects of credit-supply shocks using a series of structural vector autoregressive models estimated on the basis on a new quarterly data set for Denmark spanning the past 90 years or so. We find no effects on the unemployment level from supplyshocks to credit from commercial/savings banks in the periods 1922-1949 and 1981-2011 even though these periods contained several cases of severe banking and financial crises. Furthermore, credit-supply shocks do not seem to explain any significant share of the volatility in the unemployment rate during these periods. We attribute these findings to the large market for mortgage-credit loans in Denmark raised through bond-financed mortgage banks combined with comprehensive government interventions to safeguard financial stability during times of crises. There might, however, be indications of real effects from credit-supply shocks in the period 1950-1980 where credit rationing and exchange controls served as important economic-policy instruments. Overall these results indicate that both the financialsystem structure as well as the extent of government intervention during banking crises play a key role to the significance of real effects of credit-supply shocks. These findings must be kept in mind when modelling the role of financial intermediaries in macroeconomic models. JEL Classification:
    Keywords: Credit-supply shocks, banking and financial crises, vector autoregressions, Danish economic history
    Date: 2012–08
  20. By: Nkunde Mwase
    Abstract: This paper investigates the drivers of reserves in emerging markets (EMs) and small island (SIs) and develops an operational metric for estimating reserves in SIs taking into account their unique characteristics. It uses quantile regression techniques to allow the estimated factors driving reserves holdings to vary along the reserves’ holding distribution and tests for equality among the slope coefficients of the various quantile regressions and the overall models. F-tests comparing the inter-quantile differences could not reject the null that the models for the different quantiles of SIs reserve distribution were similar but this was rejected for EMs distribution suggesting that models explaining drivers of reserve holdings should take into account the country’s reserve holdings. Empirical analysis suggests that the metric performs better than existing metrics in reducing crisis probabilities in SIs.
    Keywords: Economic models , Emerging markets , Reserves accumulation , Reserves adequacy , Small states ,
    Date: 2012–08–14
  21. By: Constant Lonkeng Ngouana
    Abstract: A distinctive feature of market-provided services is that some of them have close substitutes at home. Households may therefore switch between consuming home and market services in response to changes in the real wage - the opportunity cost of working at home - and changes in the price of market services. In order to analyze and quantify the implications of this trade-off for monetary policy, I embed a household sector into an otherwise standard sticky price DSGE model, which I calibrate to the U.S. economy. The results of the model are twofold. At the sectoral level, household production augments the service sector's New Keynesian Phillips curve with a sizable extra component that co-moves negatively with the output gap term, lowering the incentive of service sector firms to change their prices. This mechanism endogenously amplifies the real effects of a monetary shock in that sector, unlike in the nondurable goods sector for which households cannot manufacture substitutes at home. At the aggregate level, household production also implies more sluggish prices and a stronger response of real macroeconomic variables to a monetary shock. Some empirical support for this theory is provided.
    Keywords: Economic models , External shocks , Monetary policy , Production , Services sector , United States ,
    Date: 2012–08–16
  22. By: Jane Ihrig; Elizabeth Klee; Canlin Li; Brett Schulte; Min Wei
    Abstract: This paper provides a systematic assessment of the effect of the Federal Reserve's asset purchase programs on Treasury yields, with particular emphasis on the role of market expectations about the evolution of the Federal Reserve's balance sheet and of interest rates on the impact of the programs. We construct measures of such market expectations based on Blue Chip survey forecasts, Congressional Budget Office projections, and information from formal FOMC communications. Those measures are combined with a no-arbitrage term structure model, in which yields are driven by current and expected future private Treasury holdings, among other factors. This approach allows us to provide estimates of the term premium effects of the asset programs both at the time of the announcements and in the future as expectations about the economy and the Federal Reserve's balance sheet evolve. Our results suggest that the program with the largest initial impact on the ten year Treasury yield was the first purchase program, which is estimated to have held down rates by about 40 basis points in early 2009, and the initial maturity extension program had the second largest estimated impact at its inception, pushing rates down by about 20 basis points in late 2011. Currently, we estimate all programs combined are holding down the 10-year yield by about 65 basis points, of which about one-third is attributable to the first purchase program.
    Date: 2012

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