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on Monetary Economics |
| By: | David Cobham |
| Abstract: | Different ‘monetary architectures’ are distinguished, as a background to a discussion of the change in developed country monetary policy frameworks from fixed exchange rates under the Bretton Woods international monetary system to, ultimately, formal or informal inflation targeting. The introduction and experience of monetary targets in the 1970s is considered, followed by an analysis of the changes in countries’ monetary architectures, with particular reference to money and bond markets and to France and Italy, in the 1980s. Exchange rate targeting in Europe in the 1980s and 1990s is examined, followed by the changes in central bank independence in the 1990s. This leads to a discussion of the introduction of inflation targeting, and the issues raised for inflation targeting by the financial crisis of the late 2000s. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1203&r=mon |
| By: | Dinger, Valeriya (Universitaet Osnabrueck); Steinkamp, Sven (Universitaet Osnabrueck); Westermann, Frank (Universitaet Osnabrueck) |
| Abstract: | Central bank credit has expanded dramatically in some of the euro area member countries since the beginning of the financial crisis. This paper makes two contributions to understand this stylized fact. First, we discuss a simple model of monetary policy that includes (i) a credit channel and (ii) a common pool problem in a monetary union. We illustrate that the interaction of the two elements leads to an inflation bias that is independent of the standard time-inconsistency bias. Secondly, we present empirical evidence that is consistent with the view that national central banks in the euro area have indeed followed an independent monetary policy. We show that after 2007, central bank credit has been highly correlated with unemployment, but not with inflation in the respective countries. |
| Keywords: | Tragedy of the Commons, Inflation Bias, Credit Channel, TARGET2, Euro Area |
| JEL: | E52 E58 H41 |
| Date: | 2012–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:iee:wpaper:wp0094&r=mon |
| By: | Luis Felipe Céspedes; Roberto Chang; Andrés Velasco |
| Abstract: | This paper reviews the recent experience of a half-dozen Latin American inflation-targeting (IT) nations. We document repeated and large deviations from the standard IT framework: exchange market interventions have been lasting and widespread; the real exchange rate has often become a target of policy, though this target is seldom made explicit; a range of other non-conventional policy tools, especially changes in reserve requirements but occasionally also taxes or restrictions on international capital movements, also came into common use. As in developed nations, during the 2008-2009 crisis issues of liquidity provision took center stage. We also attempt a first evaluation of the emerging modified framework of monetary policy. In general terms, the new approach seems to have been effective, at the very least since the region weathered the crisis reasonably well. But also, and perhaps more importantly, many questions remain about the desirability of non-conventional monetary policies in Latin America. |
| JEL: | E52 E58 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18570&r=mon |
| By: | Marc Pourroy; Benjamin Carton; Dramane Coulibaly |
| Abstract: | The two episodes of food price surges in 2007 and 2011 have raised the question of how monetary authorities should react to such external relative price shocks. These inflation shocks have been particularly challenging for developing and emerging economies’ central banks who have adopted inflation targeting strategies during the last decade. We develop a new-Keynesian small open-economy model that distinguishes three price indexes: an overall consumer prices index, the exact index of core inflation based on sticky prices, and a proxy for the core inflation index based on non-food prices. We show that nonfood inflation is a good proxy for core inflation in high-income countries, but not for middle-income and low-income countries. Although, in these countries we find that associating non-food inflation and core inflation may be promoting badly-designed policies, and consequently central banks should target headline inflation rather than non-food inflation. This result holds because non-tradable food goods represent a significant share in total consumption. Indeed, the poorer the country, the higher the share of purely domestic food goods in consumption and the more detrimental lack of attention to the evolution in food prices. |
| Keywords: | Monetary Policy;Commodities;Food prices;DSGE models |
| JEL: | E32 E52 O23 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-33&r=mon |
| By: | David Cobham |
| Abstract: | The financial crisis, on the one hand, and the recourse to ‘unconventional’ monetary policy, on the other, have given a sharp jolt to perceptions of the role and status of central banks. In this paper we start with a brief ‘contrarian’ history of central banks since the second world war, which presents the Great Moderation and the restricted focus on inflation targeting as a temporary aberration from the norm. We then discuss how recent developments in fiscal and monetary policy have affected the role and status of central banks, notably their relationships with governments, before considering the environment central banks will face in the near and middle future and how they will have to change to address it. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1205&r=mon |
| By: | Hyunduk Suh |
| Abstract: | This paper examines the interactions of macroprudential policy and monetary policy in a New Keynesian DSGE model with financial frictions. Macroprudential policy can stabilize credit cycles. However, a macroprudential instrument that aims to stabilize a specific segment of the credit market can cause regulatory arbitrage, that is, a reallocation of credit to a less regulated part of the market. Within this model, welfare-maximizing monetary policy aims to stabilize only inflation and macroprudential policy only stabilizes credit. Two aspects of the model account for this dichotomy. First, credit stabilization is welfare improving because lower volatility is compensated by higher mean equilibrium credit and capital. Second, monetary policy is sub-optimal for credit stabilization. The reason is that it operates on the decisions of borrowers and savers, while macroprudential policy operates only on the decisions of borrowers. |
| Keywords: | Ratio analysis |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-28&r=mon |
| By: | Huberto M. Ennis; Alexander L. Wolman |
| Abstract: | Bank reserves in the United States increased dramatically at the end of 2008. Subsequent asset purchase programs in 2009 and 2011 more than doubled the quantity of reserves outstanding. These events required major adjustments in banks' balance sheets. We study the evolution of reserve holdings across banks from the fall of 2008 until the middle of 2011 and document how banks' balance sheets changed concurrently. Motivated by the potential implications for monetary policy of operating with a high level of reserves, we focus particular attention on those banks which accumulated large quantities of reserves. |
| Keywords: | Interest ; Financial markets ; Inflation (Finance) ; Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:12-05&r=mon |
| By: | David Cobham |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1207&r=mon |
| By: | Österholm, Pär (National Institute of Economic Research); Beechey, Meredith (Sveriges Riksbank) |
| Abstract: | In this paper, we evaluate two types of Swedish policy interest-rate ex-pectations: survey expectations and expectations inferred from market pricing. The data are drawn from the most prominent survey of finan-cial-market economists and from Swedish financial markets and the data are carefully matched by date to ensure comparability. Results show that both kinds of expectations suffer from bias and inefficiency and in terms of forecast precision there is no clear winner. We do find, though, evi-dence that the forecast accuracy of both kinds of policy-rate expectations has improved since the Riksbank started publishing its own policy-rate forecast, suggesting that this communication strategy has been beneficial from a policy perspective. |
| Keywords: | Survey data; Monetary policy; Sveriges Riksbank |
| JEL: | E47 E52 |
| Date: | 2012–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nierwp:0127&r=mon |
| By: | David Cobham; Yue Kang |
| Abstract: | When Bank of England (and the Federal Reserve Board) introduced their quantitative easing (QE) operations they emphasised the effects on money and credit, but much of their empirical research on the effects of QE focuses on long-term interest rates. We use a flow of funds matrix with an independent central bank to show the implications of QE and other monetary developments, and argue that the financial crisis, the fiscal expansion and QE are likely to have constituted major exogenous shocks to money and credit in the UK which could not be digested immediately by the usual adjustment mechanisms. We present regressions of a reduced form model which considers the growth of nominal spending as determined by the growth of nominal money and other variables. These results suggest that money was not important during the Great Moderation but has had a much larger role in the period of the crisis and QE. We then use these estimates to illustrate the effects of the financial crisis and QE. We conclude that it would be useful to incorporate money and/or credit in wider macroeconometric models of the UK economy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1206&r=mon |
| By: | Bruno Feunou; Jean-Sébastien Fontaine |
| Abstract: | We provide a decomposition of nominal yields into real yields, expectations of future inflation and inflation risk premiums when real bonds or inflation swaps are unavailable or unreliable due to their relative illiquidity. We combine nominal yields with surveys of inflation forecasts within a no-arbitrage model where conditional expectations are latent but spanned by the history of the observed data, analog to a GARCH model for the conditional variance. The filtering problem is numerically trivial and we conduct a battery of out-of-sample comparisons. Our favored model matches the quarterly inflation forecasts from surveys and uses the information in yields to produce the best monthly forecasts. Moreover, we restrict the distribution of the inflation Sharpe ratios to achieve economically reasonable estimates of the inflation risk premium and of the real rates. We find that the inflation risk premium (i) is positive on average, (ii) rises when the unemployment rate increases and (iii) when the level of interest rates decreases. Hence, real yields are more pro-cyclical than nominal yields due to variations of the inflation risk premiums. |
| Keywords: | Asset Pricing; Econometric and statistical methods; Inflation and prices; Interest rates |
| JEL: | E43 E47 G12 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-37&r=mon |
| By: | David Cobham; Yue Kang |
| Abstract: | The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1208&r=mon |
| By: | TengTeng Xu |
| Abstract: | This paper examines the role of bank credit in modeling and forecasting business cycle fluctuations, and investigates the international transmission of US credit shocks, using a global vector autoregressive (GVAR) framework and associated country-specific error correction models. The paper constructs and compiles a dataset on bank credit for 33 advanced and emerging market economies from 1979Q1 to 2009Q4. The empirical results suggest that the incorporation of credit provides significant improvement in modeling and forecasting output growth, changes in inflation and long run interest rates, for countries with developed banking sector. Impulse response analysis provide strong evidence of the international spillover of US credit shocks to the UK, the Euro area, Japan and other industrialized economies, and the propagation to the real economy. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Econometric and statistical methods; International financial markets |
| JEL: | C32 G21 E44 E32 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-36&r=mon |
| By: | David Cobham |
| Abstract: | The financial crisis and the role played within it by fluctuations in house prices has reopened the debate about whether monetary policy should respond to asset prices. This paper investigates how the central banks of the euro area, the UK and the US considered, understood and responded to the trends in house prices in the six or seven years preceding the crisis, and how they have analysed those developments since the crisis. It suggests that these central banks, particularly the Anglo-Saxon ones, might have been able to take some useful action if they had devoted more intellectual resources to analysing the possible misalignments of house prices and been willing to act on them. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:hwuedp:1204&r=mon |
| By: | Mark A. Carlson; David C. Wheelock |
| Abstract: | We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring. When this original framework did not prevent the banking panics of the 1930s, Congress amended the Act and gave the Federal Reserve considerably greater powers to respond to financial crises. Over the subsequent decades, the Federal Reserve responded more aggressively when it perceived that there were threats to financial stability and ultimately to economic activity. We review some notable episodes and show how they anticipated in several respects the Federal Reserve’s responses to the financial crisis in 2007-2009. We also discuss some of the lessons that can be learned from these responses and some of the challenges that face a lender of last resort. |
| Keywords: | Federal Reserve banks ; Banks and banking, Central ; Discount window |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-056&r=mon |