nep-mon New Economics Papers
on Monetary Economics
Issue of 2012‒12‒06
twenty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Establishing a Hawkish Reputation: Interest Rate Setting by Newly Appointed Central Bank Governors By Matthias Neuenkirch
  2. Designing Monetary Policy Committees By Volker Hahn
  3. The Credibility of Monetary Policy Announcements - Empirical Evidence for OECD Countries since the 1960s By Ansgar Belke; Andreas Freytag; Johannes Keil; Friedrich Schneider
  4. Transparency, Expectations Anchoring and the Inflation Target By Guido Ascari; Anna Florio
  5. International monetary policy spillovers in an asymmetric world monetary system - The United States and China By Kristina Spantig
  6. "Infrequent Changes of the Policy Target: Robust Optimal Monetary Policy under Ambiguity" By Shin-ichi Fukuda
  7. Interest Rate Forecasts in Inflation Targeting Open-Economies By Alessandro Flamini
  8. Monetary Policy with Sectoral Linkages and Durable Goods By Ivan Petrella; Raffaele Rossi; Emiliano Santoro
  9. The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery By Stephanie Schmitt-Grohé; Martín Uribe
  10. The sustainability of monetary unions. Can the Euro survive? By Canofari Paolo; Marini Giancarlo; Piersanti Giovanni
  11. Regional Financial Arrangements and the International Monetary Fund By Barry Eichengreen
  12. Reserve Accumulation, Growth and Financial Crises By Benigno, Gianluca; Fornaro, Luca
  13. Loss Aversion and the Asymmetric Transmission of Monetary Policy By Edoardo Gaffeo; Ivan Petrella; Damjan Pfajfar; Emiliano Santoro
  14. Macroprudential, microprudential and monetary policies: conflicts, complementarities and trade-offs By Paolo Angelini; Sergio Nicoletti-Altimari; Ignazio Visco
  15. Strategic interactions and contagion effects under monetary unions By Canofari Paolo; Di Bartolomeo Giovanni; Piersanti Giovanni
  16. The Empirical Implications of the Interest-Rate Lower Bound By Gust, Christopher; López-Salido, J David; Smith, Matthew E
  17. The Federal Reserve, Emerging Markets, and Capital Controls: A High Frequency Empirical Investigation By Sebastian Edwards
  18. Global excess liquidity and asset prices in emerging countries: a pvar approach By Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat
  19. Discretion vs. Timeless Perspective Policy-Making: the Role of Input-Output Interactions By Ivan Petrella; Raffaele Rossi; Emiliano Santoro
  20. How Fast Are Prices in Japan Falling? By IMAI Satoshi; SHIMIZU Chihiro; WATANABE Tsutomu
  21. TARGET2 and Central Bank Balance Sheets By Karl Whelan
  22. Will TARGET2-Balances be Reduced again after an End of the Crisis? By Christian Fahrholz; Andreas Freytag

  1. By: Matthias Neuenkirch (University of Aachen)
    Abstract: In this paper, we explore the interest rate setting behavior of newly appointed central bank governors. We use the sample of Kuttner and Posen (2010) which covers 15 OECD countries and estimate an augmented Taylor (1993) rule for the period 1974–2008. Our results are as follows: First, newly appointed governors fight inflation more aggressively during the first four to eight quarters of their tenure in an effort to establish the reputation of being inflation-averse. Second, we find a significantly stronger reaction to inflation for newly appointed governors in monetary policy frameworks with an at least partly independent central bank and an explicit nominal anchor.
    Keywords: Central bank governors, credibility, inflation, monetary policy, reputation, Taylor rules.
    JEL: E31 E43 E52 E58
    Date: 2012
  2. By: Volker Hahn (Department of Economics, University of Konstanz, Germany)
    Abstract: We integrate a monetary policy committee into a New Keynesian model to assess the consequences of the committee's institutional characteristics for welfare. First, we prove that uncertainty about the committee's future composition may be desirable. Second, we show that longer terms of central bankers lead to more effective output stabilization at the expense of higher inflation variability. Third, larger committees allow for more efficient stabilization of both output and inflation, provided that the pool of candidates is sufficiently diverse. Finally, longer terms induce the government to appoint more conservative central bankers, which is conducive to welfare.
    Keywords: Monetary policy committees, term length, committee size, New Keynesian model
    JEL: E58 D71
    Date: 2012–11–19
  3. By: Ansgar Belke (University of Duisburg-Essen and IZA Bonn); Andreas Freytag (Friedrich-Schiller-University Jena); Johannes Keil (University of Duisburg-Essen); Friedrich Schneider (Johannes-Kepler-University Linz)
    Abstract: Monetary policy rules have been considered as fundamental protection against inflation. However, empirical evidence for a correlation between rules and inflation is relatively weak. In this paper, we first discuss likely causes for this weak link and present the argument that monetary commitment is not credible in itself. It can grant price stability best if it is backed by an adequate assignment of economic policy. An empirical assessment based on panel data covering five decades and 22 OECD countries confirms the crucial role of a credibly backed monetary commitment to price stability.
    Keywords: credibility, central bank independence, price stability, monetary commitment
    JEL: E31 E50 E52
    Date: 2012
  4. By: Guido Ascari (Department of Economics and Management, University of Pavia); Anna Florio (Polytechnic of Milan)
    Abstract: This paper proves that a higher inflation target unanchors expectations, as feared by Fed Chairman Bernanke. The higher the inflation target, the smaller the E-stability region when a central bank follows a Taylor rule in a New Keynesian model allowing for trend inflation and adaptive learning. Moreover, the higher the inflation target, the more the policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases the inflation target and increase the monetary policy response to output would be "reckless". Moreover, we show that transparency is an essential component of the inflation targeting framework and it helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target.
    Keywords: Trend Inflation, Learning, Monetary Policy, Trasparency
    JEL: E5
    Date: 2012–11
  5. By: Kristina Spantig (Graduate Programme "Global Financial Markets")
    Abstract: The paper scrutinizes the spillover effects of expansionary monetary policies of a center economy to the macroeconomic policies of periphery countries, dependent on the exchange rate regime. In particular the impact of the US quantitative easing on the Chinese economy is analysed. The results suggest that the exchange rate regime plays a minor role in insulating the economies at the periphery of the world monetary system from monetary policy shocks in the center. The only exception is capital controls which enable the periphery countries, in particular China, to maintain a certain degree of monetary independence in the short run. In the long run a closer Chinese-European policy coordination is argued to create a counterbalance to the predominance of the US dollar in the currently asymmetric world monetary system. This would provide an incentive to the US to phase out undue monetary expansion.
    Keywords: monetary policy, excess liquidity, spillovers, US, China
    JEL: E31 E42 E52 E61
    Date: 2012
  6. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo)
    Abstract: In many countries, the monetary policy instrument sometimes remains unchanged for a long period and shows infrequent responses to exogenous shocks. The purpose of this paper is to provide a new explanation on why the central bank's policy instrument remains unchanged. In the analysis, we explore how uncertainty on the private agents' expectations affects robust optimal monetary policy. We apply the Choquet expected decision theory to a new Keynesian model. A main result is that the policymaker may frequently keep the interest rate unchanged even when exogenous shocks change output gaps and inflation rates. This happens because a change of the interest rate increases additional uncertainty for the policymaker. To the extent that the policymaker has uncertainty aversion, it can therefore be optimal for the policymaker to maintain an unchanged policy stance for some significant periods and to make discontinuous changes of the target rate. Our analysis departs from previous studies in that we determine an optimal monetary policy rule that allows time-variant feedback parameters in a Taylor rule. We show that if the policymaker has small uncertainty aversion, the calibrated optimal stop-go policy rule can predict actual target rates of FRB and ECB reasonably well.
    Date: 2012–09
  7. By: Alessandro Flamini (Department of Economics and Management, University of Pavia)
    Date: 2012–11
  8. By: Ivan Petrella (Birkbeck, University of London); Raffaele Rossi (Lancaster University); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: We study the normative implications of a New Keynesian model featuring intersectoral trade of intermediate goods between two sectors that produce durables and non-durables. The interplay between durability and sectoral production linkages fundamentally alters the intersectoral stabilization trade-off as it emerges in otherwise standard two-sector models. We compare the welfare properties of a timeless-perspective monetary policy with the performance of simple instrumental rules that adjust the policy rate in response to the output gap and alternative aggregate measures of final goods price inflation. Aggregating durable and non-durable inflation depending on the relative degrees of sectoral price stickiness may induce a severe bias. Input materials attenuate the response of sectoral inflations to movements in the real marginal costs, so that the effective slopes of the sectoral supply schedules are not properly accounted for by conventional measures of core inflation.
    Keywords: Durable Goods, Input-Output Interactions, Monetary Policy, Interest Rate Rules
    JEL: E23 E32 E52
    Date: 2012–10–11
  9. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: The great contraction of 2008 pushed the U.S. economy into a protracted liquidity trap (i.e., a long period with zero nominal interest rates and inflationary expectations below target). In addition, the recovery was jobless (i.e., output growth recovered but unemployment lingered). This paper presents a model that captures these three facts. The key elements of the model are downward nominal wage rigidity, a Taylor-type interest-rate feedback rule, the zero bound on nominal rates, and a confidence shock. Lack-of-confidence shocks play a central role in generating jobless recoveries, for fundamental shocks, such as disturbances to the natural rate, are shown to generate recessions featuring recoveries with job growth. The paper considers a monetary policy that can lift the economy out of the slump. Specifically, it shows that raising the nominal interest rate to its intended target for an extended period of time, rather than exacerbating the recession as conventional wisdom would have it, can boost inflationary expectations and thereby foster employment.
    JEL: E24 E31 E32 E52
    Date: 2012–11
  10. By: Canofari Paolo; Marini Giancarlo; Piersanti Giovanni
    Date: 2012–10
  11. By: Barry Eichengreen (Asian Development Bank Institute (ADBI))
    Abstract: The rise of regional monetary arrangements poses a challenge for the International Monetary Fund (IMF)'s global surveillance efforts. This paper reviews how the IMF has responded to earlier regional initiatives, from the European Payments Union of the 1950s and the Gold Pool of the 1960s to the CFA franc zone and the European Monetary System. The penultimate section draws out the implications for monetary regionalism in East Asia.
    Keywords: Regional monetary arrangements, IMF, global surveillance, East Asia
    JEL: F30 F53 F55
    Date: 2012–11
  12. By: Benigno, Gianluca; Fornaro, Luca
    Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: i) Faster growing countries are associated with lower net capital inflows and ii) Countries that grow faster accumulate more international reserves and receive more net private inflows. We study a two-sector, tradable and non-tradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. This generates a positive link between reserve accumulation, growth and current account surpluses. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. We use the model to compare the laissez-faire equilibrium and the optimal reserve policy in an economy that is opening to international capital flows. We find that the optimal reserve management entails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. We also find that the welfare gains of reserve policy are large, in the order of 1% of permanent consumption equivalent.
    Keywords: financial crises; foreign reserve accumulation; gross capital flows; growth
    JEL: F31 F32 F41 F43
    Date: 2012–11
  13. By: Edoardo Gaffeo (University of Trento); Ivan Petrella (Birkbeck, University of London); Damjan Pfajfar (University of Tilburg); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: There is widespread evidence that monetary policy exerts asymmetric effects on output over contractions and expansions in economic activity, while price responses display no sizeable asymmetry. To rationalize these facts we develop a dynamic general equilibrium model where households' utility depends on consumption deviations from a reference level below which loss aversion is displayed. In line with the prospect theory pioneered by Kahneman and Tversky (1979), losses in consumption loom larger than gains. State-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption generate competing effects on output and infl?ation. The resulting state-dependent trade-off between output and infl?ation stabilization recommends stronger policy activism towards in?flation during expansions
    Keywords: Asymmetry, Monetary Policy, Business Cycle, Prospect Theory
    JEL: E32 E42 E52 D03 D11
    Date: 2012–07–16
  14. By: Paolo Angelini (Banca d'Italia); Sergio Nicoletti-Altimari (Banca d'Italia); Ignazio Visco (Banca d'Italia)
    Abstract: We review the recent literature on macroprudential policy and its interaction with other policies, extracting several points. First, there are externalities in the financial sector, often in the form of excessive credit growth. Second, monetary policy needs to take financial stability into account. Third, macroprudential instruments can moderate the financial cycle. Finally, there are complementarities between monetary and macroprudential policies, but also potential conflict. We then relate these points to recent events in the euro area where, following the sovereign debt crisis, a retrenchment of finance within national borders is taking place, amplifying the divergences across economies. We argue that in principle national authorities would like to adjust macroprudential instruments to compensate for the highly heterogeneous financial conditions, but at present they have little leeway to do so, since in the run-up to the crisis insufficient capital buffers had been accumulated. Various factors may explain low bank capitalization levels worldwide. We discuss the role of risk-weighted assets, which may have inadequately captured actual risks in many jurisdictions; we also document that European and US banks’ capital ratios decline monotonically with bank size. This confirms that key features of the microprudential apparatus are crucial for preventing financial instability.
    Keywords: macroprudential policy, monetary policy, capital requirements
    JEL: E44 E58 E61
    Date: 2012–11
  15. By: Canofari Paolo; Di Bartolomeo Giovanni; Piersanti Giovanni
    Date: 2012–10
  16. By: Gust, Christopher; López-Salido, J David; Smith, Matthew E
    Abstract: Using Bayesian methods, we estimate a nonlinear DSGE model in which the interest-rate lower bound is occasionally binding. We quantify the size and nature of disturbances that pushed the U.S. economy to the lower bound in late 2008 as well as the contribution of the lower bound constraint to the resulting economic slump. Compared with the hypothetical situation in which monetary policy can act in an unconstrained fashion, our estimates imply that U.S. output was more than 1 percent lower, on average, over the 2009{2011 period. Moreover, around 20 percent of the drop in U.S. GDP during the recession of 2008-2009 was due to the interest-rate lower bound. We show that the estimated model is capable of generating lower bound episodes that resemble salient characteristics of the observed U.S. episode, including its expected duration.
    Keywords: Bayesian estimation; DSGE model; zero lower bound
    JEL: C11 C32 E32 E52
    Date: 2012–11
  17. By: Sebastian Edwards
    Abstract: In this paper I use weekly data from seven emerging nations – four in Latin America and three in Asia – to investigate the extent to which changes in Fed policy interest rates have been transmitted into domestic short term interest rates during the 2000s. The results suggest that there is indeed an interest rates “pass through” from the Fed to emerging markets. However, the extent of transmission of interest rate shocks is different – in terms of impact, steady state effect, and dynamics – in Latin America and Asia. The results also indicate that capital controls are not an effective tool for isolating emerging countries from global interest rate disturbances. Changes in the slope of the U.S. yield curve, including changes generated by a “twist” policy, affect domestic interest rates in emerging countries. I also provide a detailed case study for Chile.
    JEL: F30 F32
    Date: 2012–11
  18. By: Sophie Brana; Marie-Louise Djigbenou; Stéphanie Prat (Larefi, Université Bordeaux IV)
    Abstract: The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on good and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at the global level has spillover effects on output and price level in emerging countries. The impact on real estate and commodity prices in emerging countries is less clear.
    Keywords: Global liquidity, excess liquidity indicators, crises indicators, emerging countries, financial crisis
    JEL: E44 E52 F3 G01
    Date: 2012–04
  19. By: Ivan Petrella (Birkbeck, University of London); Raffaele Rossi (Lancaster University); Emiliano Santoro (Catholic University of Milan and University of Copenhagen)
    Abstract: This paper contributes to a recent debate about the structural and institutional conditions under which discretionary monetary policy-making may be superior to timeless perspective. To this end, we formulate an input-output economy in which firms' technology employs both labor and intermediate goods produced by all firms in the economy. Unlike price stickiness, input materials reduce the slope of the New Keynesian Phillips curve, while leaving the policy maker's preference for consumption stabilization unaffected. Strategic complementarities stemming from realistic degrees of input-output interactions greatly amplify the loss of social welfare under timeless perspective, even for small departures of the economy from its steady state. By contrast, price rigidity proves to be ineffective at improving the performance of discretion relative to timeless perspective.
    Keywords: Input-Output Economy, Monetary Policy, Discretion, Timeless Perspective
    JEL: E23 E32 E52
    Date: 2012–11–05
  20. By: IMAI Satoshi; SHIMIZU Chihiro; WATANABE Tsutomu
    Abstract: The consumer price inflation rate in Japan has been below zero since the mid-1990s. However, despite the presence of a substantial output gap, the rate of deflation has been much smaller than that observed in the United States during the Great Depression. Given this, doubts have been raised regarding the accuracy of Japan's official inflation estimates. Against this backdrop, the purpose of this paper is to investigate to what extent estimates of the inflation rate depend on the methodology adopted. Our specific focus is on how inflation estimates depend on the method of outlets, products, and price sampling employed. For the analysis, we use daily scanner data on prices and quantities for all products sold at about 200 supermarkets over the last 10 years. We regard this dataset as the "universe" and send out (virtual) price collectors to conduct sampling following more than 60 different sampling rules. We find that the officially released outcome can be reproduced when employing a sampling rule similar to the one adopted by the Statistics Bureau of Japan. However, we obtain numbers quite different from the official ones when we employ different rules. The largest rate of deflation we find using a particular rule is about one percent per year, which is twice as large as the official number, suggesting the presence of substantial upward bias in the official inflation rate. Nonetheless, our results show that the rate of deflation over the last decade is still small relative to that in the United States during the Great Depression, indicating that Japan's deflation is moderate.
    Date: 2012–11
  21. By: Karl Whelan (University College Dublin)
    Abstract: The Eurosystem’s TARGET2 payments system has featured heavily in academic and popular discussions in recent years. Much of this commentary had described the system as being responsible for a “secret bailout” of Europe’s periphery which has led to huge credit risks for the Bundesbank should the euro break up. This paper discusses the TARGET2 system, focusing in particular on how it impacts the balance sheets of the central banks that participate in the system. It concludes that the TARGET2 is largely innocent of the charges that have been levelled against it. Arguments that TARGET2 facilitated a bailout of the periphery or that the system is playing a key role in facilitating peripheral current account deficits turn out to be wide of the mark. Risks to Germany due to the loss of TARGET2-related revenues for the Bundesbank after a euro break-up turn out to relatively small because these revenues are limited and because there are potentially large gains from new seigniorage revenues in this scenario. Many criticisms involving TARGET2 turn out, on closer examination, to be criticisms of the ECB’s core principle of treating credit institutions across the euro area in an equal manner. Proposals that the ECB adopt procedures that discriminate between banks in different countries (or that restrict the operation of payments systems in certain countries) are likely to be incompatible with the continuation of the euro as a common currency.
    Keywords: TARGET2, ECB, Euro Crisis
    JEL: E51 E52 E58
    Date: 2012–11–21
  22. By: Christian Fahrholz (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Andreas Freytag (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: This article deals with the macro-economics of the Trans-European Automated Re- al-time Gross Settlement Express Transfer System (TARGET2). Originally, the TARGET2 was in-tended to solely function as a monetary arrangement for liquidity issues. It is shown that the TARGET2 contributes to a substantial misallocation of real resources within the Eurozone (EZ). The discussion highlights that there are no tendencies for rebalancing TARGET2-claims and liabilities, but rather a dynamic towards infinite and prolonged TARGET2-imbalances in the form of hysteresis.
    Keywords: XXXXX
    Date: 2012–05–28

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