nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒05‒24
nineteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Global liquidity trap By Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi
  2. The influence and policy signaling role of FOMC forecasts By Paul Hubert
  3. The role of the bank lending channel and impacts of stricter capital requirements on the Chinese banking industry By Xiong , Qiyue
  4. Do The Central Banks Always Do The Right Thing For Their Economies? An Appraisal Of The Monetary Policy Strategy Of The ECB By Covi, Giovanni
  5. ECB projections as a tool for understanding policy decisions By Paul Hubert
  6. Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic By Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller
  7. Monetary policy regimes in CIS economies and their ability to provide price and financial stability By Dabrowski , Marek
  8. The Bank of Russia at the Crossroads: does the monetary policy needs easing By Evgeny Gorunov; Pavel Trunin
  9. Monetary policy and hysteresis in potential output By Kienzler, Daniel; Schmid, Kai Daniel
  10. Assessment of Money Demand in the Russian Economy with the Development of Banking Technology By Elena Sinelnikova,
  11. Debt, inflation and central bank independence By Fernando M. Martin
  12. Inflationary Implication of Gold Price in Vietnam* By Thi Kim Cuc Nguyen; Reza Yamora Siregar
  13. How Experts Decide: Preferences or Private Assessments on a Monetary Policy Committee?* By Stephen Hansen; Carlos Velasco Rivera; Michael McMahon
  14. Pushing On a String: US Monetary Policy is Less Powerful in Recessions By Silvana Tenreyro; Gregory Thwaites
  15. Inflation in the Great Recession and New Keynesian models By Marco Del Negro; Marc P. Giannoni; Frank Schorfheide
  16. How Well Does "Core" Inflation Capture Permanent Price Changes? By Michael D. Bradley; Dennis W. Jansen; Tara M. Sinclair
  17. Real-Time Historical Analysis of Monetary Policy Rules By Alex Nikolsko-Rzhevskyy; David Papell
  18. Trading partners in the interbank lending market By Gara Afonso; Anna Kovner; Antoinette Schoar
  19. Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates By Robert Dekle

  1. By: Ippei Fujiwara, Tomoyuki Nakajima, Nao Sudo, Yuki Teranishi
    Abstract: How should monetary policy respond to a global liquidity trap," where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.
    Keywords: Zero interest rate policy, two-country model, international spillover, monetary policy coordination
    JEL: E52 E58 F41
    Date: 2013
  2. By: Paul Hubert (Ofce sciences-po)
    Abstract: Policymakers at the Federal Open Market Committee (FOMC) publish forecasts since 1979. We examine the effects of publishing FOMC inflation forecasts in two steps using a structural VAR model. We assess whether they influence private inflation expectations and the underlying mechanism at work: do they convey policy signals for forward guidance or help interpreting current policy decisions? We provide original evidence that FOMC inflation forecasts are able to influence private ones. We also find that FOMC forecasts give information about future Fed rate movements and affect private expectations in a different way than Fed rate shocks. This body of evidence supports the use of central bank forecasts to affect inflation expectations especially while conventional policy instruments are at the zero lower bound
    Keywords: Monetary policy, Forecasts, FOMC, influence, Policy signals, structural Var
    JEL: E52 E58
    Date: 2013–02
  3. By: Xiong , Qiyue (BOFIT)
    Abstract: This paper focuses on the role the bank lending channel in transmission of monetary policy in China. Using unbalanced quarterly panel data from 2Q2000 to 4Q2011, a one-step GMM estimator is applied to establish the existence the bank lending channel. The findings suggest central bank monetary policy asymmetrically affects bank lending behavior. Small banks are found more sensitive to contractionary monetary policy in the Chinese context. Well capitalized banks appear to be more likely to adjust their lending behaviors in response to expansionary monetary policy, and conversely, undercapitalized banks tend to adjust with the advent of contractionary monetary policy. The importance of the bank lending channel declines after China introduced stricter capital regulations in early 2004, but the effect is still apparent in times of expansionary policy.
    Keywords: bank characteristics; capital regulation; bank lending channel; asymmetric effects
    JEL: E52
    Date: 2013–05–02
  4. By: Covi, Giovanni
    Abstract: The general aim of the paper is to address the doubts that too often the Central Banks’ tools and operations don’t fit for a fine tuning of the economies, and this is even more true in harsh times. The paper begins with an overview on the great failures respectively of the Federal Reserve, the so called "golden silence" in the 1929 Great Crash, and of the European Central Bank during the second great contraction, the 2008 Financial Crisis. Then I critically appraise the so-called “Two pillar approach”, a methodological tool employed by the ECB for assessing the risks to price stability. I survey the literature on the subject with the purpose of going at the roots of the “technical” difficulties. The first outcome emphasizes the existing disagreement between the criticisms and the proposed solutions. The second outcome is the unanimity of the opinions that the inflation target chosen at 2% by ECB for the Eurozone is too low, thereby making the whole MPS excessively restrictive. I conclude observing that the “core” inflation-target of 2% is in fact at the very basis of the ECB non-intervention policy. For a simple and sobering reason: even if between 2003 and 2008 the stock market bubble was growing at unreal rate, since the inflation target wasn’t in any jeopardy, the European Central Bank didn’t do anything. Maintaining the goal of price stability was much more important than assuring financial stability, thereby preventing the Financial Crisis.
    Keywords: Monetary Policy – Central Banking – European Central Bank – Inflation - Financial Crisis
    JEL: E52 E58
    Date: 2013–05–19
  5. By: Paul Hubert (Ofce sciences-po)
    Abstract: The European Central Bank publishes inflation projections quarterly. This paper aims at establishing whether they influence private forecasts and whether they may be considered as an enhanced means of implementing policy decisions by facilitating private agents’ information processing. We provide original evidence that ECB inflation projections do influence private inflation expectations. We also find that ECB projections give information about future ECB rate movements, and that the ECB rate has different effects if complemented or not with the publication of ECB projections. We conclude that ECB projections enable private agents to correctly interpret and predict policy decisions.
    Keywords: Monetary policy, ECB, Private forecasts, Influence, Structural Var
    JEL: E52 E58
    Date: 2013–02
  6. By: Aleksander Berentsen; Alessandro Marchesiani; Christopher J. Waller
    Abstract: An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that the optimal framework is a floor system if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is optimal to operate a channel system.
    Keywords: Monetary policy, floor system, channel system, standing facilities
    JEL: E52 E58 E59
    Date: 2013–05
  7. By: Dabrowski , Marek (BOFIT)
    Abstract: Achieving price stability has been a serious challenge for CIS countries. In the first half of the 1990s, they experienced very high inflation or hyperinflation, which had originated in the perestroika period and following the dissolution of the ruble area. After the introduction of new currencies and stabilization programs in the mid-1990s, inflation moderated to two-digit levels. However, for lack of sufficient fiscal policy support, this partial progress did not succeed in preventing the financial crisis of 1998/99. The economic boom of the 2000s allowed for a return to macroeconomic stability with stronger fiscal fundamentals, but nevertheless proved insufficient to withstand the shock from the global financial crisis of 2008/09. The paper analyses the evolution monetary policy regimes of in the CIS countries over the decade of the 2000s and early 2010s and is based on the publicly available cross-country statistics and other information provided by the IMF. The paper compares financial openness in these economies both de jure and de facto. These findings will be tested against the empirical data on exchange rate movements and changes in central banks’ international reserves. The paper concludes with a discussion on practical choices which CIS countries have in respect of their future monetary policy regimes.
    Keywords: monetary policy; CIS; financial openness; inflation
    JEL: E42 E58 P24 P52
    Date: 2013–05–02
  8. By: Evgeny Gorunov (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: Recent slowdown of economic growth forces Russian political authorities to seek for policy measures to support economic activity. Monetary expansion is considered as one of the possible alternatives, which we consider inappropriate. During the whole post-crisis period monetary authorities of advances economies in their attempts to boost recovery relied heavily on different sorts of monetary stimulus. Thus it is sometimes argued that Russia should better use such kind of experience and shift to aggressive monetary expansion. This view is mostly wrong since it shows misunderstanding of the goals of the monetary easing policy implemented in advanced economies and also ignores the differences between Russia and advanced countries with respect to macroeconomic conditions. There are two main reasons for extraordinary monetary expansion in advanced economies: sizable cyclical recession and “zero lower bound” problem. Since none of these is present in Russia there’s no reason for implementation of monetary easing policy.
    Keywords: monetary policy, Bank of Russia
    JEL: E41 E42 E52 E58 E61
    Date: 2013
  9. By: Kienzler, Daniel; Schmid, Kai Daniel
    Abstract: We show that actively stabilizing economic activity plays a more prominent role in the conduct of monetary policy when potential output is subject to hysteresis. We augment a basic New Keynesian model by hysteresis in potential output and contrast simulation outcomes of this extended model to the standard model. We find that considering hysteresis allows for a more realistic propagation of macroeconomic shocks and persistent movements in output after monetary shocks. Our central policy implication of active output gap stabilization arises from stability analyses and welfare considerations. --
    Keywords: Monetary Policy,Hysteresis,Potential Output,Output Gap Mismeasurement
    JEL: E32 E50 E52
    Date: 2013
  10. By: Elena Sinelnikova, (Gaidar Institute for Economic Policy)
    Abstract: Traditional microeconomic approaches to demand for money problem are considered in the article. It also discusses current view of monetary theory on concept of “money”. New approach gives reasoning to existence of variety of payment innovations. It provides theoretical base for inclusion of variable that describes innovations in payment sphere into equation of money demand in Russia. As a result a stable (during 2000—2010 years) money demand equation is obtained
    Keywords: money demand, payment innovations, stability, search and matching theory
    JEL: E41 E31 E52 C22
    Date: 2012
  11. By: Fernando M. Martin
    Abstract: Making the central bank more independent from political pressures lowers inflation and increases the primary deficit, persistently. In the long-run, however, fiscal considerations are paramount and inflation comes back up to accommodate the higher financial burden of accumulated public debt. Endowing instead the central bank with an explicit inflation target lowers long-run inflation and implies non-trivial welfare gains for private agents. Inflation-targeting has the added virtue of determining the primary deficit independently of political frictions. The theory helps explain several key developments in postwar U.S. policy.
    Date: 2013
  12. By: Thi Kim Cuc Nguyen; Reza Yamora Siregar
    Abstract: The sustained elevated gold price domestically, hovering persistently above the global market price, underscores the peculiar nature of the gold market in Vietnam and the resiliently strong demand for gold in the local market. In particular, the movements in the price of gold seem to lead a symmetrical trend in the headline inflation since the outbreak of the 2007 global financial crisis. The primary objective of this study is therefore to assess possible inflationary consequence of the gold price movements in Vietnam. Past studies demonstrate that if gold could be viewed as a financial asset, shifts in the gold price should be monitored as one of the determining factors of inflation. Yet, hardly any study has assessed potential inflationary implication of gold in Vietnam, especially during the recent years of volatile and double-digit inflation rates.
    Keywords: Gold Price, Vietnam, Money Demand, and Inflation
    JEL: C24 E31 E41 E52
    Date: 2013–04
  13. By: Stephen Hansen; Carlos Velasco Rivera; Michael McMahon
    Abstract: Using voting data from the Bank of England, we show that different individual assessments of the economy strongly influence votes after controlling for individual policy preferences. We estimate that internal members form more precise assessments than externals and are also more hawkish, though preference differences are very small if members vote strategically. Counterfactual analysis shows that committees add value through aggregating private assessments, but that gains to larger committees taper off quickly beyond five members. There is no evidence that externals add value through preference moderation. Since their assessments also have lower precision, mixed committees may not be optimal.
    Keywords: Committees, Monetary policy
    JEL: E52 E58 D78
    Date: 2013–04
  14. By: Silvana Tenreyro; Gregory Thwaites
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: asymmetric effects of monetary policy, transmission mechanism, recession, durable goods, local projection methods
    JEL: E52 E32
    Date: 2013–05
  15. By: Marco Del Negro; Marc P. Giannoni; Frank Schorfheide
    Abstract: It has been argued that existing DSGE models cannot properly account for the evolution of key macroeconomic variables during and following the recent Great Recession, and that models in which inflation depends on economic slack cannot explain the recent muted behavior of inflation, given the sharp drop in output that occurred in 2008-09. In this paper, we use a standard DSGE model available prior to the recent crisis and estimated with data up to the third quarter of 2008 to explain the behavior of key macroeconomic variables since the crisis. We show that as soon as the financial stress jumped in the fourth quarter of 2008, the model successfully predicts a sharp contraction in economic activity along with a modest and more protracted decline in inflation. The model does so even though inflation remains very dependent on the evolution of both economic activity and monetary policy. We conclude that while the model considered does not capture all short-term fluctuations in key macroeconomic variables, it has proven surprisingly accurate during the recent crisis and the subsequent recovery.
    Keywords: Inflation (Finance) ; Recessions ; Keynesian economics ; Stochastic analysis ; Equilibrium (Economics) ; Econometric models
    Date: 2013
  16. By: Michael D. Bradley; Dennis W. Jansen; Tara M. Sinclair
    Abstract: Does excluding food and energy prices from the Consumer Price Index (CPI) produce a measure that captures permanent price changes? To examine this question we decompose CPI inflation and “core†inflation into their permanent and transitory components using a correlated unobserved components model. One of the key aspects of the correlated unobserved components model is that it allows shocks to the permanent component to potentially be more variable than shocks to the series itself, due to offsetting transitory shocks correlated with the permanent shocks. The stationarity of inflation may be time-varying, so we examine the performance of the core measure of inflation for periods during which it appears that inflation is I(1) and for periods during which it appears that inflation is I(0). For a period in which inflation appears to be I(1), we find that core inflation and the permanent component of overall inflation are closely related, although core inflation does have some drawbacks as a measure of permanent inflation. For a period in which inflation appears to be I(0), we decompose the core and overall price levels and find that the permanent component of core CPI is much more volatile than the actual core series and that core excludes volatile permanent shocks to the overall price level.
    Keywords: Consumer Price Index, Inflation, Unobserved Components, Food and Energy Prices
    JEL: C32 E31
    Date: 2013–05
  17. By: Alex Nikolsko-Rzhevskyy (Lehigh University); David Papell (University of Houston)
    Abstract: The size of the output gap coefficient is the key determinant of whether quantitative easing since 2009 and continued near-zero interest rates can by justified by a Taylor rule. Fed Chair Ben Bernanke and Vice-Chair Janet Yellen have argued that John Taylor proposed a monetary policy rule with a larger output gap coefficient in his 1999 paper than in his 1993 paper, and have used this argument to justify negative prescribed interest rates in 2009-2010 and near-zero interest rates through 2015. While Taylor neither proposed nor advocated a different rule in 1999 than in 1993, he did not draw a distinction between the implications of the two rules. In accord with common practice at the time, Taylor used revised data. We show that, using real-time data available to policymakers (although not to Taylor when he wrote the paper), there is a sharp difference in the implications of rules with a smaller and a larger output gap coefficient. If John Taylor had been able to use real-time data in his 1999 paper, the importance of the distinction between Taylor’s original rule with a smaller output gap coefficient and other rules with a larger coefficient would have been evident much earlier.
    Keywords: Real-Time Data, Monetray Policy Rules, Taylor Rule
    JEL: E52
    Date: 2013–05–20
  18. By: Gara Afonso; Anna Kovner; Antoinette Schoar
    Abstract: There is substantial heterogeneity in the structure of trading relationships in the U.S. overnight interbank lending market: Some banks rely on spot transactions, while most form stable, concentrated borrowing relationships to hedge liquidity needs. As a result, borrowers pay lower prices and borrow more from their concentrated lenders. Exogenous shocks to liquidity supply (days with low GSE lending) lead to marketwide drops in liquidity and a rise in interest rates. However, borrowers with concentrated lenders are almost completely insulated from the shocks, while liquidity transmission affects the rest of the market via higher interest rates and reduced borrowing volumes.
    Keywords: Interbank market ; Bank liquidity
    Date: 2013
  19. By: Robert Dekle (University of Southern California (Email:
    Abstract: We tackle the important issue of what the appropriate trends in the real Yen-Dollar andRMB-Dollar are over time. Over the long-run, the real yen has been appreciating against the U.S. dollar; while the real RMB-dollar rate has been depreciating (until 1999). In this paper, we build a macroeconomic-trade model of Japan-U.S. trade on theone hand, and China-U.S. trade on the other. Our model is essentially a general equilibrium extension of the Balassa-Samuelson effect. We show that these long-run trends in the real yen-dollar and RMB-dollar rates in the data can be justified by our model.
    Keywords: equilibrium real exchange rates, Balassa-Samuelson effect, structural transformation, sectoral change, productivity
    JEL: F3
    Date: 2013–05

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