nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒06‒30
eleven papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Monetary policy regime switches and macroeconomic dynamic By Andrew T. Foerster
  2. Nominal GDP Targeting and the Zero Lower Bound: Should We Abandon Inflation Targeting? By Billi, Roberto M.
  3. Uncertainty shocks, banking frictions, and economic activity By Dario Bonciani; Björn van Roye
  4. Sticky Price Inflation Index: An Alternative Core Inflation Measure By Ádám Reiff; Judit Várhegyi
  5. The effects of the Federal Reserve's date-based forward guidance By Matthew D. Raskin
  6. Optimal fiscal and monetary policy with occasionally binding zero bound constraints By Taisuke Nakata
  7. Capital flows to emerging market economies: a brave new world? By Shaghil Ahmed; Andrei Zlate
  8. Essays on banking and regulation. By Todorov, R.I.
  9. Using Financial Markets To Estimate the Macro Effects of Monetary Policy: By Pitschner, Stefan
  10. The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares By Eric Dor
  11. Outperforming the naïve Random Walk forecast of foreign exchange daily closing prices using Variance Gamma and normal inverse Gaussian Levy processes By Teneng, Dean

  1. By: Andrew T. Foerster
    Abstract: This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to inflation deviations from target lead to different determinacy regions and different output, inflation, and interest rate distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with a fixed monetary policy rule, expectations of future policy switches produce different outcomes depending upon the switching type. Monetary authorities with given inflation objectives need to adjust their policy parameters to counteract expectations of future policy switches.
    Date: 2013
  2. By: Billi, Roberto M. (Research Department, Central Bank of Sweden)
    Abstract: I compare nominal GDP level targeting to flexible inflation targeting in a small New Keynesian model subject to the zero lower bound on nominal policy rates. First, I study the performance of optimal discretionary policies. I find that, for a standard calibration, inflation targeting under discretion leaves the economy open to a deflationary trap. Nominal GDP level targeting under discretion, by contrast, provides a firm nominal anchor to the economy. Second, I study simple policy rules and the role of smoothing in the rules. With smoothing, a Taylor-type rule performs as well as a nominal GDP level rule. These result suggest that inflation targeting should not be ditched. Still, it can be improved significantly, by using policy rate smoothing to anchor inflation firmly.
    Keywords: nominal GDP target; optimal policy; simple rules; zero lower bound
    JEL: E31 E52 E58
    Date: 2013–06–01
  3. By: Dario Bonciani; Björn van Roye
    Abstract: In this paper we investigate the effects of uncertainty shocks on economic activity using a Dynamic Stochastic General Equilibrium (DSGE) model with heterogenous agents and a stylized banking sector. We show that frictions in credit supply amplify the effects of uncertainty shocks on economic activity. This amplification channel stems mainly from the stickiness in banking retail interest rates. This stickiness reduces the effectiveness in the transmission mechanism of monetary policy
    Keywords: Uncertainty Shocks, Financial frictions, Monetary Policy, Stochastic Volatility, Perturbation Methods, Third-order approximation
    JEL: E32 E52
    Date: 2013–06
  4. By: Ádám Reiff (Magyar Nemzeti Bank (central bank of Hungary)); Judit Várhegyi (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: We show that in both time-dependent and state-dependent sticky price models, prices of sticky price products (i.e. whose price changes rarely) contain more information about medium term inflation developments than those of flexible price products (i.e. whose price changes frequently). We do this by establishing a novel measure for the extent of forwardlookingness of newly set prices, and showing that it is at least 60% when the monthly price change frequency is less than 15%. This result is robust across various sticky price models. On the empirical front, we show that the Hungarian sticky price inflation index indeed has a forward-looking component, as it has favorable inflation forecasting properties on the policy horizon of 1-2 years to alternative inflation indicators (including core inflation). Both theoretical and empirical results suggest that the sticky price inflation index is a useful indicator for inflation targeting central banks.
    Keywords: sticky prices, core inflation, inflation measurement
    JEL: E31 E37 E58
    Date: 2013
  5. By: Matthew D. Raskin
    Abstract: Between August 2011 and December 2012 the Federal Open Market Committee (FOMC) used date-based forward guidance to help stimulate the U.S. economy and promote its objectives of maximum employment and price stability. Some have argued that the formulation of the guidance that the FOMC used may have reduced interest rates primarily by signaling a weak economic outlook rather than by signaling a more accommodative stance of monetary policy. I examine the impact of the date-based guidance, with the principal goal of discerning the extent to which it altered investors' views of the FOMC's policy reaction function. I show that one seemingly straightforward way to address this question--using estimates of the sensitivity of money market futures rates to macroeconomic data surprises--is confounded by the zero lower bound on nominal interest rates, a point that has more general implications for the analysis of the effects of monetary policy at the zero bound. I demonstrate that the problem can be overcome using distributions of investors' short-term interest rate expectations constructed from interest rate options. Using PDFs constructed from these options, along with survey measures of macroeconomic surprises, I find the date-based guidance led to a statistically significant and economically meaningful change in investors' perceptions of the FOMC's reaction function. This finding is robust to various regression specifications and the use of alternative options contracts and PDF fitting methodologies.
    Date: 2013
  6. By: Taisuke Nakata
    Abstract: This paper studies optimal government spending and monetary policy when the nominal interest rate is subject to the zero lower bound constraint in a stochastic New Keynesian economy. I find that the government chooses to increase its spending when at the zero lower bound by a substantially larger amount in the stochastic environment than it would in the deterministic environment. The presence of uncertainty creates a unique time-consistency problem if the steady-state is inefficient. Although access to government spending policy increases welfare in the face of a large deflationary shock, it decreases welfare during normal times as the government reduces the nominal interest rate less aggressively before reaching the zero lower bound
    Date: 2013
  7. By: Shaghil Ahmed; Andrei Zlate
    Abstract: We examine the determinants of net private capital inflows to emerging market economies. These inflows are computed from quarterly balance-of-payments data from 2002:Q1 to 2012:Q2. Our main findings are: First, growth and interest rate differentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such flows to interest rate differentials and risk aversion. Third, capital control measures introduced in recent years do appear to have discouraged both total and portfolio inflows. Fourth, in the pre-crisis period, there is some evidence that greater foreign exchange intervention to curb currency appreciation pressures brought more capital inflows down the line, but we cannot identify such an effect in the post-crisis period. Finally, we do not find statistically significant positive effects of unconventional U.S. monetary expansion on total net EME inflows, although there does seem to be a change in composition toward portfolio flows. Even for portfolio flows, U.S. unconventional policy is only one among several important factors.
    Date: 2013
  8. By: Todorov, R.I. (Tilburg University)
    Abstract: This thesis consists of three chapters that explore issues related to bank capital, multinational bank supervision, and bank lending in a developing country. The first chapter explores the impact of peer banks on bank capital adjustments. The second chapter evaluates the extent to which distortions in banks’ cross-border activities, such as foreign assets, deposits and equity, can introduce into regulatory interventions. The third chapter explores the impact of monetary policy and foreign credit market conditions on bank lending activities and asset portfolios in Uganda.
    Date: 2013
  9. By: Pitschner, Stefan (Universitat Pompeu Fabra)
    Abstract: In this paper, I use high-frequency financial market estimates to identify the monetary policy shock in a non-recursive 133 variable FAVAR. All restrictions are imposed exclusively on impact, and only on financial market variables. Using the economy's underlying factor structure as the link between its real and financial sides, I find that high-frequency responses contain valuable information about the behavior of lower-frequency macro variables. Even though the proposed identification scheme does not fall back on any of the standard (FA) VAR identifying assumptions, it confirms the classical finding that monetary policy has strong and significant delayed effects on real activity. I also obtain stock market responses that are compatible with the efficient market hypothesis and find that consumer prices react very little to monetary policy.
    Keywords: Monetary Policy; Impact Identication; FAVAR; Financial Markets; Efficient Market Hypothesis
    JEL: E44 E52 E58
    Date: 2013–05–01
  10. By: Eric Dor (IESEG School of Management (LEM-CNRS))
    Abstract: Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.
    Date: 2013–07
  11. By: Teneng, Dean
    Abstract: This work demonstrates that forecast of foreign exchange (FX) daily closing prices using the normal inverse Gaussian (NIG) and Variance Gamma (VG) Levy processes outperform the naïve Random Walk model. We use the open software R to estimate NIG and VG distribution parameters and perform several classical goodness–of -fits test to select best models. Seven currency pairs can be forecasted by both Levy processes: TND/GBP, EGP/EUR, EUR/GBP, EUR/JPY, JOD/JPY, USD/GBP, and XAU/USD, while USD/JPY and QAR/JPY can be forecasted with the VG process only. RMSE values show that NIG and VG forecast are comparable, and both outperform the naïve Random Walk out of sample. Appended R-codes are original.
    Keywords: Levy process, NIG, VG, forecasting, goodness of fits, foreign exchange, Random Walk model
    JEL: C44 C52 C53
    Date: 2013–06–26

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