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on Monetary Economics |
| By: | Saroj Bhattarai; Jae Won Lee; Woong Yong Park |
| Abstract: | We introduce “financial imperfections” - asymmetric net wealth positions, incomplete risksharing, and interest rate spread across member countries - in a prototypical two-country currency union model and study implications for monetary policy transmission mechanism and optimal policy. In addition to, and independent from, the standard transmission mechanism associated with nominal rigidities, financial imperfections introduce a wealth redistribution role for monetary policy. Moreover, the two mechanisms reinforce each other and amplify the effects of monetary policy. On the normative side, financial imperfections, via interactions with nominal rigidities, generate two novel policy trade-offs. First, the central bank needs to pay attention to distributional efficiency in addition to macroeconomic (and price level) stability, which implies that a strict inflation targeting policy of setting union-wide inflation to zero is never optimal. Second, the interactions lead to a trade-off in stabilizing relative consumption versus the relative price gap (the deviation of relative prices from their efficient level) across countries, which implies that the central bank allows for less flexibility in relative prices. Finally, we consider how the central bank should respond to a financial shock that causes an increase in the interest rate spread. Under optimal policy, the central bank strongly decreases the deposit rate, which reduces aggregate and distributional inefficiencies by mitigating the drop in output and inflation and the rise in relative consumption and prices. Such a policy response can be well approximated by a spreadadjusted Taylor rule as it helps the real interest rate track the efficient rate of interest. |
| Keywords: | Price levels ; Money supply |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:150&r=mon |
| By: | Christiaan Pattipeilohy; Jan Willem van den End; Mostafa Tabbae; Jon Frost; Jakob de Haan |
| Abstract: | We first sketch how central banks have used unconventional monetary policy measures by using three indicators based on the composition of the balance sheet of eleven central banks. Our analysis suggests that although the ECB’s balance sheet has increased dramatically during the crisis, the non-standard monetary policy measures had only a moderate impact on the composition of the ECB’s balance sheet compared to other central banks, such as the Fed and the Bank of England. Next, we take stock of research analysing the effects of unconventional monetary policy of the ECB after the onset of the crisis. A crucial question is to what extent these measures have been able to affect interest rates, thereby restoring the monetary policy transmission process and supporting the central bank objectives. Finally, we offer new evidence on the effectiveness of the ECB’s unconventional monetary policy measures, i.e. extended liquidity provision (LTRO) and the Securities Market Programme (SMP). Our results suggest that the LTRO interventions in general had a favorable (short-term) effect on government bond yields. Changes in the SMP only had a visible downward effect on bond yields in Summer 2011, when the program was reactivated for Italy and Spain, but this effect dissipated within a few weeks. |
| Keywords: | unconventional monetary policy; non-standard monetary policy; central bank balance sheet; European Central Bank |
| JEL: | E40 E50 E58 E60 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:381&r=mon |
| By: | Fungácová, Zuzana (BOFIT); Solanko, Laura (BOFIT); Weill, Laurent (BOFIT) |
| Abstract: | This paper examines how bank competition influences the bank lending channel in the Euro area countries. Using a large panel of banks from 12 euro area countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy through the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that the bank market power has a significant impact on monetary policy effectiveness. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy. |
| Keywords: | bank competition; bank lending channel; monetary policy; euro area |
| JEL: | E52 G21 |
| Date: | 2013–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_017&r=mon |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A |
| Abstract: | This paper examines the influence of monetary shocks in China on the U.S. economy over 1996-2012. The influence on the U.S. is through the sheer scale of China’s growth through effects in demand for imports, particularly that of commodities. China’s growth influences world commodity/oil prices and this is reflected in significantly higher inflation in the U.S. China’s monetary expansion is also associated with significant decreases in the trade weighted value of the U.S. dollar that is due to the operation of a pegged currency. China manages the exchange rate and has extensive capital controls in place. In terms of the Mundell–Fleming model, with imperfect capital mobility, sterilization actions under a managed exchange rate permit China to pursue an independent monetary policy with consequences for the U.S. |
| Keywords: | International monetary transmission, U.S. Macroeconomics, China’s monetary policy |
| JEL: | E42 E5 E50 E52 E58 |
| Date: | 2013–07–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48050&r=mon |
| By: | Fumio Hayashi (Hitotsubashi University); Junko Koeda (The University of Tokyo) |
| Abstract: | Central banks of major market economies have recently adopted QE (quantitative easing), allowing excess reserves to build up while maintaining the policy rate at very low levels. We develop a regime-switching SVAR (structural vector autoregression) in which the monetary policy regime, chosen by the central bank responding to economic conditions, is endogenous and observable. The model can incorporate the exit condition for terminating QE. We then apply the model to Japan, a country that has accumulated, by our count, 130 months of QE as of December 2012. Our impulse response analysis yields two findings about QE. First, an increase in reserves raises inflation and output. Second, terminating QE is not necessarily deflationary. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf322&r=mon |
| By: | Thanabalasingam Vinayagathasan (National Graduate Institute for Policy Studies) |
| Abstract: | This paper attempts to identify the monetary policy indicator that better explains the Sri Lankan monetary policy transmission mechanism. This study also estimates how shocks stemming from foreign monetary policy and/or oil price affect domestic macroeconomic variables. To that end, we use a seven variable structural VAR model by utilizing monthly time series data from Sri Lanka covering the period from January 1978 to December 2011. Impulse response functions and variance decompositions are used to describe the relationships among variables. Our empirical findings suggest that the interest rate shocks play a significant and better role in explaining the movement of economic variables than monetary aggregate shocks or exchange rate shocks. Second, the targeting of reserve money is a better strategy for the Sri Lankan economy than a focus on narrow or broad money. Third, our findings clearly show that foreign monetary policy shocks and oil price shocks do not seem to affect the domestic economy. Finally, the inclusion of oil price in the SVAR model helped us overcome the puzzles that often appear in the existing literature in monetary economics. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:13-13&r=mon |
| By: | John C. Williams |
| Abstract: | This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-15&r=mon |
| By: | Ruth Reyes Nidia; José Eduardo Gómez G.; Jair Ojeda Joya |
| Abstract: | We study the existence of a monetary policy transmission mechanism through banks in Colombia, using monthly banks’ balance sheet data for the period 1996:4 – 2012:12. We obtain results which are consistent with the basic postulates of the bank lending channel (and the risk-taking channel) literature. The impact of short-term interest rates on the growth rate of loans is negative, indicating that increases in these rates lead to reductions in the growth rate of loans. This impact is stronger for consumer loans than for commercial loans. We find important heterogeneity in the monetary policy transmission across banks depending on banks-specific characteristics. |
| Keywords: | Monetary policy transmission; Bank lending channel; Risk taking channel; Colombia. Classification JEL: E5; E52; E59; G21. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:772&r=mon |
| By: | Carl Chiarella; Corrado Di Guilmi |
| Abstract: | The paper presents an agent based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule which includes the financial position of firms as a target. Monte Carlo simulations show that an excessive sensitivity of the central bank to inflation, the output gap and firms' debt can have undesired and destabilising effects on the system, while an active fiscal policy appears to be able to effectively stabilise the economy. The paper also addresses the puzzle of low inflation during stock market booms by testing different behavioural rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit can be identified as the main source of the divergent dynamics of prices in the real and financial sector. |
| Keywords: | Financial fragility, monetary policy, debt deflation, agent based modelling, complex dynamics. |
| JEL: | E12 E31 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-42&r=mon |
| By: | Eijffinger, S.C.W.; Mahieu, R.J.; Raes, L.B.D. (Tilburg University, Center for Economic Research) |
| Abstract: | Abstract: We analyze revealed policy preferences in monetary policy committees. From the voting records of the Bank of England we estimate the policy preferences with spatial models of voting. We analyze systematic patterns in these policy preferences. We find that internal committee members tend to hold centrist policy preferences while pronounced policy preferences are generally held by external members. Committee members with a career in academia and the industry hold more diverse policy preferences whereas committee members with central bank experience exhibit little heterogeneity in preferences. The median voter does not vary systematically according to career background. |
| Keywords: | Voting records;Central Banking;Committees;Ideal points. |
| JEL: | E58 E59 C11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2013024&r=mon |
| By: | Christian Merkl |
| Abstract: | This paper shows that announced credible disinflations under inflation targeting lead to a boom in a standard New Keynesian model (i.e. a disinflationary boom). This finding is robust with respect to various parameterizations and disinflationary experiments. Thus, it differs from previous findings about disinflationary booms under monetary targeting |
| Keywords: | Disinflation, Disinflationary Boom, Inflation Targeting |
| JEL: | E30 E31 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1851&r=mon |
| By: | Scott J. Dressler (Department of Economics and Statistics, Villanova School of Business, Villanova University); Erasmus Kersting (Department of Economics and Statistics, Villanova School of Business, Villanova University) |
| Abstract: | This paper examines a DSGE environment with endogenous excess reserve holdings in the banking sector. Excess reserves act as an extensive margin of bank lending which is inactive in traditional limited participation models where banks hold minimal reserves by assumption. The results of our model suggest that this extensive margin of bank lending can dampen and even overcome the standard liquidity effect of monetary contractions, amplify the output response to productivity shocks, and bring about large, short-run responses to changes in the interest rate paid on reserves. |
| Keywords: | Financial Intermediation; Excess Reserves; Liquidity Effect; Output Amplification |
| JEL: | C68 E44 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:24&r=mon |
| By: | James A. Clouse |
| Abstract: | The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to the classic analysis of Brainard (1967), policymakers may seek to reduce the variance of output by scaling back the level of policy accommodation provided today in response to an aggregate demand shock relative to the level that would otherwise be provided. However, the policy implications of this possible connection between monetary policy and financial stability are complex even in the simple example considered here. In particular, financial stability considerations may also increase the relative benefits of following a commitment policy relative to a discretionary strategy. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-41&r=mon |
| By: | Quamrul Ashraf; Boris Gershman; Peter Howitt |
| Abstract: | We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that, in our model economy, increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality. |
| Keywords: | Agent-based computational model, inflation, price dispersion, firm turnover |
| JEL: | C63 E00 E31 E50 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2013-10&r=mon |
| 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: | O30 O40 E41 F43 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2013:15&r=mon |
| By: | Michael Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Optimal indexation of long-term government debt is studied under two monetary policy regimes: inflation targeting (IT) and price-level targeting (PT). Under IT, full indexation is optimal because long run inflation risk is substantial due to base-level drift, making indexed bonds a much better store of value than nominal bonds. Under PT, where long run inflation risk is largely eliminated, optimal indexation is substantially lower because nominal bonds become a better store of value relative to indexed bonds. These results are robust to the PT target horizon, imperfect credibility of PT and model calibration, but the assumption that indexation is lagged is crucial. From a policy perspective, a key finding is that accounting for optimal indexation has important welfare implications for comparisons of IT and PT. |
| Keywords: | government debt, inflation risk, inflation targeting, price-level targeting. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2013_11&r=mon |
| By: | Feldkircher, Martin (BOFIT); Horvath, Roman (BOFIT); Rusnak, Marek (BOFIT) |
| Abstract: | In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-infation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures. |
| Keywords: | exchange market pressures; financial crisis |
| JEL: | F31 F37 |
| Date: | 2013–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_011&r=mon |
| By: | Palma, Nuno |
| Abstract: | The Taylor hypothesis is the conjecture that the 2007-2009 financial crisis and the 2008-present downturn have been caused by loose monetary policy during 2002-2006. According to the Taylor hypothesis the Fed deviated from well-know rules of monetary policy-making over this period, and this deviation caused an inefficient boom and subsequent bust. I use a well know economic model of the US aggregate economy (Christiano, Eichenbaum and Evans 2005) to test this hypothesis. I interpret shocks as deviations from Taylor-type rules. I conclude that the Taylor hypothesis for the Taylor rule fails to reproduce observed fluctuations in the data. Output increases only 0.3% at maximum which occurs at 2004:Q2. In the data, the output gap was at it's maximum in 2006:Q3. However, the Taylor hypothesis modified to incorporate persistence in the policy rule can partly explain the boom of the economy after 2001. |
| Keywords: | Business Cycle, Financial Crisis, Great Moderation, Monetary Shocks, Persistence |
| JEL: | E32 E37 E4 E43 E5 E52 E58 E65 |
| Date: | 2013–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48197&r=mon |
| By: | Naohisa Hirakata; Yoshihiko Hogen; Nao Sudo; Kozo Ueda |
| Abstract: | In this paper, we study bank loan responses to monetary policy and bank capital shocks using Japan’s disaggregated data sorted by borrower firms’ size and industry. Employing a block recursive VAR, we demonstrate that bank loan responses exhibit large sectoral heterogeneity. Among a broad range of indicators about borrower firms’ characteristics, the heterogeneity is tightly linked to borrower firms’ liability conditions. Firms with a lower capital ratio tend to experience larger drops in bank loans following a contractionary monetary policy shock and/or a negative bank capital shock. In addition, we find that firms’ substitution motive from alternative financial measures also explains the heterogeneity, while the firms’ inventory motive that is stressed in the empirical literature for U.S. banks does not. Our results indicate the importance of considering a compositional shift of bank loans across borrower firms in implementing accommodative monetary policy and capital injection policy. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:149&r=mon |
| By: | Hans DEWACHTER; Deniz ERDEMLIOGLU; Jean-Yves GNABO; Christelle LECOURT |
| Abstract: | In this paper, we examine the intra-day effects of verbal statements and comments on the FX market uncertainty using two measures: continuous volatility and discontinuous jumps. Focusing on the euro-dollar exchange rate, we provide empirical evidence of how these two sources of uncertainty matter in measuring the short-term reaction of exchange rates to communication events. Talks significantly trigger large jumps or extreme events for approximately an hour after the news release. Continuous volatility starts reacting prior to the news, intensifies around the release time and stays at high levels for several hours. Our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe, and higher than normal. Disentangling the US and Euro area statements, we also find that abnormal levels of volatility are mostly driven by the communication of the Euro area officials rather than US authorities. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces13.04&r=mon |
| By: | Loriana Pelizzon (Department of Economics, University of Venice Cà Foscari); Domenico Sartore (Department of Economics, University of Venice Cà Foscari) |
| Abstract: | This paper investigates the key role played by different factors, such as the use of Asset Backed Commercial Paper as collaterals in the short-term debt market, credit risk and the injection of liquidity by Central Banks through so-called unconventional measures, on the persistent spread during the subprime crisis bet. The empirical analysis shows that, in addition to credit risk, a relevant variable for explaining the interbank rate dynamics is the outstanding volume in the Asset Backed Commercial Paper market. In short, the large spread observed in the market is explained by the inter-relationship between collateralized short-term debt markets and the unsecured interbank market. It is also shown that Central Bank "non-conventional" intervention variables are relevant in affecting the spread both in the long-run but mostly in the short-run. |
| Keywords: | Subprime Crisis; Collateral Liquidity; Unconventional Monetary Policy. |
| JEL: | C01 C22 E58 G01 G15 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2013:14&r=mon |
| By: | Arie Krampf |
| Abstract: | During the 20th century, the institution called central bank was diffused globally. However, central banking practices differed significantly between European market-based economies and developing economies. This paper traces the ideas and norms that shaped and legitimized central banking practices in the two areas. The paper argues that during the period from the 1940s to the 1970s two central banking policy norms existed: the liberal norm, which emerged in Europe, and the developmental central banking norm, which emerged in Latin America and diffused to East Asia. The paper seeks to trace the life cycles of the two norms: to specify the ideational content of each norm and to identify the actors and networks that produced, promoted and diffused them. The paper makes two contributions. First, theoretically, on the basis of Finnemore and Sikkink’s theory of international norms’ dynamics, it introduces a mechanism that explains the emergence and internationalization of an alternative international norm in the periphery that challenges the standard international norm. Second, it contributes to the literature on comparative regionalism by historicizing the liberal/European standard of central banking practices and by identifying the existence of an alternative standard for central banking practices in developing countries. The paper covers the period from the 1940s to the 1970s. |
| Keywords: | regulations; European Central Bank; European Central Bank; economics; history |
| Date: | 2013–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:erp:kfgxxx:p0049&r=mon |
| By: | Robert G. Murphy (Boston College) |
| Abstract: | This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I find evidence that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore two reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that the sticky-information approach is better able to explain the recent path of inflation than the sticky-price approach. |
| Keywords: | Inflation, Phillips curve, Great Recession, Sticky Information |
| JEL: | E30 E31 |
| Date: | 2013–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:823&r=mon |
| By: | Nicolas Veron (Peterson Institute for International Economics) |
| Abstract: | New obstacles to the European banking union have emerged over the last year, but a successful transition is both necessary and possible. European leaders have to acknowledge a sequence of policy changes that must take place before the banking union can be completed. Specifically, in the second half of 2014, the European Central Bank (ECB) will gain supervisory authority over most of Europe’s banking system. This handover is the first of two milestones that will define the eventual success or failure of the banking union project. The second milestone will be a change in the European treaties that will establish the robust legal basis needed for a sustainable union. Together, these two milestones are a bridge that will allow Europe to cross the choppy waters that separate it from a sustainable policy framework. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-17&r=mon |
| By: | Harashima, Taiji |
| Abstract: | Keynes’ original intention in introducing the concept of a liquidity trap was to explain the reason why persistent large amounts of unutilized resources were generated during the Great Depression. This paper shows that this type of phenomenon cannot be explained in the framework of a traditional competitive market equilibrium. Instead, it can be understood in terms of a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path because a Nash equilibrium can conceptually coexist with Pareto inefficiency. Such a Nash equilibrium will be selected when an upwards time preference shock occurs. At this Nash equilibrium, monetary policies are useless but fiscal policies are very effective as Keynes argued, but for different reasons. |
| Keywords: | Liquidity trap; Monetary policy; Fiscal policy; Pareto inefficiency; Time preference |
| JEL: | E32 E52 E62 |
| Date: | 2013–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:48115&r=mon |
| By: | Yothin Jinjarak; Ilan Noy; Huanhuan Zheng |
| Abstract: | Controls on capital inflows have been experiencing a renaissance since 2008, with several prominent emerging markets implementing them. We focus on Brazil, which instituted five changes in its capital account regime in 2008-2011. Using the synthetic control method, we construct counterfactuals (i.e., Brazil with no policy change) for each of these changes. We find no evidence that any tightening of controls was effective in reducing the magnitudes of capital inflows, but we observe some modest and short-lived success in preventing further declines in inflows when the capital controls were relaxed. We hypothesize that price-based capital controls’ only perceptible effect is to be found in the content of the signal they broadcast regarding the government’s larger intentions and sensibilities. Brazil’s left-of-center government’s willingness to remove controls was perceived as a noteworthy indication that the government was not as hostile to the international financial markets as many expected it to be. |
| JEL: | E60 F32 G23 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19205&r=mon |