nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒06‒09
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The effects of unconventional and conventional U.S. monetary policy on the dollar By Reuven Glick; Sylvain Leduc
  2. Monetary Policy and Credit Cycles: A DSGE Analysis By Florina-Cristina Badarau; Alexandra Popescu
  3. Analyzing Federal Reserve asset purchases: from whom does the Fed buy? By Seth Carpenter; Selva Demiralp; Jane Ihrig; Elizabeth Klee
  4. Reserve Requirement Analysis using a Dynamical System of a Bank based on Monti-Klein model of Bank's Profit Function By Novriana Sumarti; Iman Gunadi
  5. A simple Empirical Measure of Central Bank's Conservatism By Grégory Levieuge; Yannick Lucotte
  6. Do central banks’ forecasts take into account public opinion and views? By Ricardo Nunes
  7. Crash Risk in Currency Returns By Jeremy Graveline; Irina Zviadadze; Mikhail Chernov
  8. The Euro exchange rate during the European sovereign debt crisis – dancing to its own tune? By Michael Ehrmann; Chiara Osbat; Jan Strasky; Lenno Uusküla
  9. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Ben Cheikh, Nidhaleddine
  10. Optimal Term Length for an Overconfident Central Banker By Etienne Farvaque; Norimichi Matsueda
  11. Estimates of Fundamental Equilibrium Exchange Rates, May 2013 By William R. Cline
  12. Monetary Policy, R&D and Economic Growth in an Open Economy By Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing
  13. The Bank of Russia at the Crossroads: Does the Monetary Policy Needs Easing By Eugene Goryunov; Pavel Trunin
  14. The Leading Indicator Property of the Term Spread and the Monetary Policy Factors in Japan By Hiroshi Nakaota; Yuichi Fukuta
  15. Coping with the Recent Financial Crisis, did Inflation Targeting Make Any Difference? By Armand Fouejieu Azangue
  16. Design Failures in the Eurozone - can they be fixed? By Paul de Grauwe
  17. Close but not a Central Bank: The New York Clearing House and issues of clearing house loan certificates By Jon R Moen; Ellis W Tallman
  18. Finance at Center Stage: Some Lessons of the Euro Crisis By Maurice Obstfeld
  19. Capital Flows in the Euro Area By Philip R. Lane
  20. Country adjustment to a ‘sudden stop’: Does the euro make a difference? By Daniel Gros; Cinzia Alcidi
  21. The new decrease of interest rates by the ECB will be totally ineffective By Eric Dor
  22. The Share of Systematic Variation in Bilateral Exchange Rates By Adrien Verdelhan
  23. Should non-euro area countries join the single supervisory mechanism? By Zsolt Darvas; Guntram B. Wolff
  24. Efficient Online Exchange via Fiat Money By Jie Xu; Mihaela van der Schaar; William Zame

  1. By: Reuven Glick; Sylvain Leduc
    Abstract: We examine the effects of unconventional and conventional monetary policy announcements on the value of the dollar using high-frequency intraday data. Identifying monetary policy surprises from changes in interest rate futures prices in narrow windows around policy announcements, we find that surprise easings in monetary policy since the crisis began have had significant effects on the value of the dollar. We document that these changes are comparable to the effects of conventional policy changes prior to the crisis.
    Keywords: Dollar ; Monetary policy
    Date: 2013
  2. By: Florina-Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Alexandra Popescu (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The recent fi nancial crisis revealed several flaws in both monetary and fi nancial regulation. Contrary to what was believed, price stability is not a suffi cient condition for financial stability. At the same time, micro-prudential regulation alone becomes insu fficient to ensure the financial stability objective. In this paper, we propose an ex-post analysis of what a central bank could have done to improve the reaction of the economy to the financial bubble. We study by means of a fi nancial accelerator DSGE model the dynamics of our economy when the central bank has, fi rst, only traditional objectives, and second, when an additional financial stability objective is added. Overall, results indicate that a more aggressive monetary policy would have had little success in improving the response of the economy to the financial bubble, as the actions of the central bank would have remained limited by the use of a single instrument, the interest rate.
    Keywords: bank capital channel, credit cycles, financial stability, monetary policy.
    Date: 2012–09–18
  3. By: Seth Carpenter; Selva Demiralp; Jane Ihrig; Elizabeth Klee
    Abstract: Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve's asset purchases have tried to measure the interest rate effects of the policies. Several papers provide evidence that these programs do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to "preferred habitat" models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. We exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households, with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets.
    Date: 2013
  4. By: Novriana Sumarti; Iman Gunadi
    Abstract: Commercial banks and other depository institutions in some countries are required to hold in reserve against deposits made by their customers at their Central Bank or Federal Reserve. Although some countries have been eliminated it, this requirement is useful as one of many Central Bank's regulation made to control rate of inflation and conditions of excess liquidity in banks which could affect the monetary stability. The amount of this reserve is affected by the volumes of the commercial bank's loan and deposit, and also by the bank's Loan to Deposit Ratio (LDR) value. In this research, a dynamical system of the volume of deposits (dD/dt) and loans (dL/dt) of a bank is constructed from the bank profit equation by Monti-Klein. The model is implemented using the regulation of Bank of Indonesia, and analysed in terms of the behaviour of the solution. Based on some simplifying assumptions in this model, the results show that eventhough the LDR values at the initial points of two solutions are the same, the behavior of solutions will be significantly different due to different magnitude of L and D volumes.
    Date: 2013–06
  5. By: Grégory Levieuge (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Yannick Lucotte (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: In this paper we suggest a simple empirical and model independent measure of Central Banks' Conservatism, based on the Taylor curve. This new indicator can easily be extended in time and space, whatever the underlying monetary regime of the considered countries. We demonstrate that it evolves in accordance with the monetary experiences of 32 OECD member countries from 1980, and is largely equivalent to the model-based measure provided by Krause & M endez [Southern Economic Journal, 2005]. We nally bring forward the interest of such an indicator for further empirical analysis dealing with the preferences of Central Banks.
    Keywords: Central Banks' preferences, Conservatism, Taylor curve, Taylor rule
    Date: 2012–05–04
  6. By: Ricardo Nunes
    Abstract: The Federal Reserve through the Federal Open Market Committee (FOMC) regularly releases macroeconomic forecasts to the general public and the US congress with the purpose of explaining the likely evolution of the economy and the appropriate stance of monetary policy. Immediately before doing so, the FOMC receives a forecast produced by the Federal Reserve staff which remains private for five years. The literature has pointed out that, despite the informational advantage of the FOMC, its forecast differs from and is not always more accurate than the staff forecast. This finding has raised concerns regarding the loss of relevant information and the usefulness of the FOMC forecasts. This paper brings evidence that the FOMC forecast also incorporates other publicly available forecasts and views, and that the weight attributed to public forecasts is larger than what is optimal given a mean squared error objective. These findings are consistent with i) the institutional role of the FOMC in being representative of a variety of public views, ii) the academic literature recommendation to use equal weights and not to overfit specific forecasts based on past performance. The statistical model can also account for several empirical regularities of the forecasts.
    Date: 2013
  7. By: Jeremy Graveline (University of Minnesota); Irina Zviadadze (London Business School); Mikhail Chernov (London School of Economics)
    Abstract: We quantify the sources of risk in currency returns as a first step toward understanding the returns to currency speculation. To do this, we develop and estimate an empirical model of exchange rate dynamics using daily data for four currencies relative to the US dollar: the Australian dollar, the British pound, the Swiss franc, and the Japanese yen. The model includes (i) normal shocks with stochastic variance, (ii) jumps up and down in the exchange rate, and (iii) jumps in the variance. We identify these components using data on exchange rates and at-the-money implied variances. We nd that the probability of an upward (downward) jump in the exchange rate, associated with depreciation (appreciation) of the US dollar, is increasing in the domestic (foreign) interest rate. The probability of jumps in variance is increasing in the variance but not related to interest rates. Many of the jumps in exchange rates are associated with macroeconomic and political news, but jumps in variance are not. On average, jumps account for 25% (and can be as high as 40%) of total currency risk over horizons of one to three months. Preliminary analysis suggests that properties of currency returns correspond to observed option smiles and that jump risk is priced.
    Date: 2012
  8. By: Michael Ehrmann; Chiara Osbat; Jan Strasky; Lenno Uusküla
    Abstract: This paper studies the determinants of the euro exchange rate during the European sovereign debt crisis, allowing a role for macroeconomic fundamentals, policy actions and the public debate by policy makers. It finds that the euro exchange rate mainly danced to its own tune, with a particularly low explanatory power for macroeconomic fundamentals. Among the few factors that are found to have affected changes in exchanges rate levels are policy actions at the EU level and by the ECB. The findings of the paper also suggest that financial markets might have been less reactive to the public debate by policy makers than previously feared. Still, there are instances where exchange rate volatility was increasing in response to news, such as on days when several politicians from AAA-rated countries went public with negative statements, suggesting that communication by policy makers at times of crisis should be cautious about triggering undesirable financial market reactions
    Keywords: exchange rates, fundamentals, announcements, sovereign debt crises
    JEL: E52 E62 F31 F42 G14
    Date: 2013–05–24
  9. By: Ben Cheikh, Nidhaleddine
    Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.
    Keywords: Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–05
  10. By: Etienne Farvaque (Faculty of International Affairs, The University of Le Havre); Norimichi Matsueda (School of Economics, Kwansei Gakuin University)
    Abstract: This paper discusses the implications of overconfidence when it affects a monetary policy-maker. We consider two forms of overconfidence: the illusion of precision and the illusion of control. Embedding them in a standard New Keynesian framework, we derive the optimal term length of a central banker and examine how it depends on the types and degrees of overconfidence. In particular, we show that the legal mandate should be lengthened when these two types of biases increase concurrently.
    Keywords: central banker; overcondence; legal mandate; optimal term length
    JEL: E58 H11
    Date: 2013–06
  11. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: In this semiannual update, William R. Cline presents new estimates of fundamental equilibrium exchange rates (FEERs). Once again it is found that the key cases of the United States and China involve only modest over- and undervaluation, respectively. However, the Japanese yen is found to have fallen substantially below its FEER as a consequence of the aggressive quantitative easing policy, and Cline suggests that if the currency continues much further along a downward path, the G-7 may need to consider joint intervention to curb its decline. The study concludes by adding a variant of the calculations in which rich countries are set a floor target of at least a zero current account balance, and emerging market economies are set a ceiling target of zero balance. In this "aggressive rebalancing" in which capital would no longer flow "uphill" from poor to rich countries, the US dollar would require a much larger depreciation and the Chinese renminbi a much larger appreciation.
    Date: 2013–05
  12. By: Chu, Angus C.; Cozzi, Guido; Lai, Ching-Chong; Liao, Chih-Hsing
    Abstract: This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant.
    Keywords: monetary policy, economic growth, R&D, trade in intermediate goods.
    JEL: E41 F43 O30 O40
    Date: 2013–06
  13. By: Eugene Goryunov (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy)
    Abstract: This study develops the approach of corruption measurement based on the income-expenditure comparison. Using micro-level data on reported household earnings, expenditures and assets provided by Russian Longitudinal Monitoring Survey for the period 2000-2009 we find that households with workers in the public sector receive lower earnings than their private sector counterparts, but enjoy the same level of consumption expenditures, in other words there exists an expenditure-income gap in favor of the public sector. Controlling for the reported level of earnings, households with workers in the private sector do not show neither a significantly higher probability of possessing country houses, cars and computers, nor living in better housing conditions, nor having higher financial wealth. The analysis of current and accumulated savings, risk aversion and volatility of wages does not show any sign of distinction between two sectors. Thus, differences in assets and precautionary motives of workers cannot reconcile the sizeable expenditure-income gap. Unexplained differences are referred to unreported income, or bribes.
    Keywords: Central Bank, monetary policy, monetary easing.
    JEL: E42 E51 E52 E58 E61 E63
    Date: 2013
  14. By: Hiroshi Nakaota (Faculty of Social Relations, Kyoto Bunkyo University); Yuichi Fukuta (Graduate School of Economics, Osaka University)
    Abstract: Many studies have observed the leading indicator property of the term spread (LIPTS), which indicates that the term spread\the difference between long- and short-term interest rates\ has the information on future economic conditions. We examine whether this property is related to the monetary policy or not using the Japanese monthly data with consideration for structural changes. Results of structural change tests show that the term spread has the predictive ability for the future economic activity from 1982:4 to 1997:8. Decomposing the term spread into three parts; one is explained by past monetary policy shocks, another is explained by expected future call rates and the other is the remaining part, we find that all three parts are significantly related to the future economic growth rate. Hence, we find that the monetary policy play an important role for the LIPTS.
    Keywords: leading indicator property of the term spread (LIPTS), term spread, future economic activity, monetary policy
    JEL: E32 E43 E44
    Date: 2013–05
  15. By: Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: The effects of the 2008/2009 financial crisis went largely among the financial markets and hit the real economy, generating one of the greatest global economic shocks. The aim of this study is to investigate whether inflation targeting has made a difference during this crisis. We first present some arguments suggesting that inflation targeters can be expected to do better when facing a global shock. Applying difference in difference in the spirit of Ball and Sheridan (2005), we assess the difference between targeters and non-targeters and find that there is no significant difference concerning inflation rate and GDP growth. However, the rise in interest rates and inflation volatility during the crisis has been significantly less pronounced for targeters.
    Keywords: inflation targeting, financial crisis, macroeconomic performances, difference in difference.
    Date: 2012–05–22
  16. By: Paul de Grauwe
    Abstract: I analyze the nature of the design failures of the Eurozone. I argue first that the endogenous dynamics of booms and busts that are endemic in capitalism continued to work at the national level in the Eurozone and that the monetary union in no way disciplined these into a union-wide dynamics. On the contrary the monetary union probably exacerbated these national booms and busts. Second, the existing stabilizers that existed at the national level prior to the start of the union were stripped away from the member-states without being transposed at the monetary union level. This left the member states “naked” and fragile, unable to deal with the coming national disturbances. I study the way these failures can be overcome. This leads me to stress the role of the ECB as a lender of last resort and the need to make macroeconomic policies more symmetric so as to avoid a deflationary bias in the Eurozone. I conclude with some thoughts on political unification, and the dangers of unification without democratic legitimacy.
    JEL: E44 E58 E61 F32 G01 H63
    Date: 2013–04
  17. By: Jon R Moen; Ellis W Tallman
    Abstract: The paper examines the New York Clearing House (NYCH) as a lender of last resort by looking at clearing-house-loan-certificate borrowing during five banking panics of the National Banking Era (1863–1913). In that system, adequate aggregate liquidity provision was passive and dependent upon member bank borrowing. We document bank borrowing behavior using bank-level data for clearing-house loan certif cates issued to NYCH member banks. The historical record reveals that the large New York City banks behaved in ways that resembled those of a central bank in 1884 and in 1890, but less so in the more severe crises.
    Keywords: Financial institutions ; Clearinghouses (Banking) ; Financial markets
    Date: 2013
  18. By: Maurice Obstfeld
    Abstract: Because of recent economic crises, financial fragility has regained prominence in both the theory and practice of macroeconomic policy. Consistent with macroeconomic paradigms prevalent at the time, the original architecture of the euro zone assumed that safeguards against inflation and excessive government deficits would suffice to guarantee macroeconomic stability. Recent events, in both Europe and the industrial world at large, challenge this assumption. After reviewing the roots of the euro crisis in financial-market developments, this essay draws some conclusions for the reform of euro area institutions. The euro area is moving quickly to correct one flaw in the Maastricht treaty, the vesting of all financial supervisory functions with national authorities. However, the sheer size of bank balance sheets suggest that the euro area must also confront a financial/fiscal trilemma: countries in the euro zone can no longer enjoy all three of financial integration with other member states, financial stability, and fiscal independence, because the costs of banking rescues may now go beyond national fiscal capacities. Thus, plans to reform the euro zone architecture must combine centralized supervision with some centralized fiscal backstop to finance bank resolution in situations of insolvency.
    JEL: E44 F36 G15 G21
    Date: 2013–04
  19. By: Philip R. Lane
    Abstract: We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.
    JEL: E42 F32 F41
    Date: 2013–04
  20. By: Daniel Gros; Cinzia Alcidi
    Abstract: A ‘sudden stop’ to (private) capital inflows is usually very disruptive to an economy because it forces an almost immediate reversal in the current account unless the country in question receives substantial balance of payments assistance. The analysis presented in this paper starts from the observation that two groups of European countries, neither of which could use the exchange rate as an adjustment instrument, experienced a sudden stop after the outbreak of the global financial crisis. The first group comprises five euro area member states under financial stress during the euro area debt crisis (“GIIPS”). The second group comprises four newer EU Member States in Central and Eastern Europe (“BELL”). We highlight the differences in the adjustment paths of these two groups and analyse the factors which can explain them. The main finding is that the adjustment was quicker outside EMU than inside. The shock absorbers provided by the financial ‘plumbing’ of the Eurosystem offset much of the reversal in private capital flows and seem to have created an environment in which the pressure for a quick adjustment was much weaker. We also find that the structure of the domestic banking industry plays a key role. Foreign ownership of banks provided a loss absorber in the BELL favouring a quick correction, while the legacy of the banking crisis in some of GIIPS, where foreign ownership of banks was limited, is likely to weight for long time on their still incomplete.
    JEL: E20 F32 F36 H60
    Date: 2013–04
  21. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Abstract: On May 2 the ECB has decreased the interest rate on the main refinancing operations of the Eurosystem by 25 basis points, to 0.50%, starting from the operation to be settled on 8 May 2013. The interest rate on the marginal lending facility will also be decreased by 50 basis points, to 1.00%. This short paper explains the structural reasons why the current monetary policy conducted by the ECB is ineffective.
    Date: 2013–05
  22. By: Adrien Verdelhan (MIT Sloan)
    Abstract: Changes in exchange rates are not random. Two economically motivated factors account for 20% to 90% of the daily, monthly, quarterly, and annual exchange rate movements in developed countries and in emerging and developing countries with floating exchange rates. The different shares of systematic variation across currencies are related to financial and macroeconomic measures of world integration. Across countries, the more integrated the equity and bond markets, the higher the share of systematic currency variation. These results have direct implications for asset managers, motivate further work on exchange rates, and offer new insights into international economics and finance models.
    Date: 2012
  23. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Highlights 1) Irrespective of the euro crisis, a European banking union makes sense, including for non-euro area countries, because of the extent of European Union financial integration. The Single Supervisory Mechanism (SSM) is the first element of the banking union. 2) From the point of view of non-euro countries, the draft SSM regulation as amended by the EU?Council includes strong safeguards relating to decision-making, accountability, attention to financial stability in small countries and the applicability of national macro-prudential measures. Non-euro countries will also have the right to leave the SSM and thereby exempt themselves from a supervisory decision. 3) The SSM by itself cannot bring the full benefits of the banking union, but would foster financial integration, improve the supervision of cross-border banks, ensure greater consistency of supervisory practices, increase the quality of supervision, avoid competitive distortions and provide ample supervisory information. 4) While the decision to join the SSM is made difficult by the uncertainty about other elements of the banking union, including the possible burden sharing, we conclude that non-euro EU?members should stand ready to join the SSM and be prepared for the negotiations of the other elements of the banking union.
    Keywords: euro crisis, European banking union, bank supervision, single supervisory mechanism
    JEL: G21
    Date: 2013–05
  24. By: Jie Xu (Electrictal Engineering, UCLA); Mihaela van der Schaar (Electrictal Engineering, UCLA); William Zame (University of California, Los Angeles)
    Abstract: In many online systems, individuals provide services for each other; the recipient of the service obtains a benefit but the provider of the service incurs a cost. If benefit exceeds cost, provision of the service increases social welfare and should therefore be encouraged but the individuals providing the service gain no (immediate) benefit from providing the service and hence have an incentive to withhold service. Hence there is scope for designing a protocol that improves welfare by encouraging exchange. To operate successfully within the confines of the online environment, such a protocol should be distributed, robust, and consistent with individual incentives. This paper proposes and analyzes protocols that rely solely on the exchange of fiat money or tokens. The analysis has much in common with work on search models of money but the requirements of the environment also lead to many differences from previous analyses - and some surprises; in particular, existence of equilibrium becomes a thorny problem and the optimal quantity of money is different.
    Date: 2013

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