nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒08‒05
twenty-two papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Party Affiliation Rather than Former Occupation: The Background of Central Bank Governors and its Effect on Monetary Policy By Matthias Neuenkirch; Florian Neumeier
  2. Implicit Asymmetric Exchange Rate Peg under Inflation Targeting Regimes: The Case of Turkey By Ahmet Benlialper; Hasan Cömert
  3. Reserve Option Mechanism as a Stabilizing Policy Tool : Evidence from Exchange Rate Expectations By Ahmet Degerli; Salih Fendoglu
  4. Not all international monetary shocks are alike for the Japanese economy By Vespignani, Joaquin L.; Ratti , Ronald A.
  5. The global move into the zero interest rate and high debt trap By Schnabl, Gunther
  6. Optimal monetary and tariff policy in open economies By Chan Wang; Heng-fu Zou
  7. Alternative Tools to Manage Capital Flow Volatility By Koray Alper; Hakan Kara; Mehmet Yorukoglu
  8. Bank Behavior in Oligopoly, Bank- Clients and Monetary Policy By dala, eleni; karpetis, christos; varelas, erotokritos
  9. Optimal monetary policy in open economies: the role of reference currency in vertical production and trade By Chan Wang; Heng-fu Zou
  10. Effects of explicit FOMC policy rate guidance on market interest rates By Richhild Moessner
  11. Anchoring of Consumers’ Inflation Expectations: Evidence from Microdata By Michael J. Lamla; Lena Dräger
  12. How do Banks’ Stock Returns Respond to Monetary Policy Committee Announcements in Turkey? Evidence from Traditional versus New Monetary Policy Episodes By Guray Kucukkocaoglu; Deren Unalmis; Ibrahim Unalmis
  13. Monetary policy shocks: We got news! By Sandra Gomes; Nikolay Iskrev; Caterina Mendicino
  14. Reconciling narrative monetary policy disturbances with structural VAR model shocks? By Kliem, Martin; Kriwoluzky, Alexander
  15. Macroeconomic dynamics near the ZLB: a tale of two equilibria By S. Boragan Aruoba; Frank Schorfheide
  16. Collateral monetary equilibrium with liquidity constraints in an infinite horizon economy By Ngoc-Sang Pham
  17. Inflation persistence in Central and Eastern European countries By Zsolt Darvas; Balázs Varga
  18. The financial content of inflation risks in the euro area. By Andrade, P.; Fourel, V.; Ghysels, E.; Idier, I.
  19. Money-based inflation risk indicator for Russia: a structural dynamic factor model approach By Elena Deryugina; Alexey Ponomarenko
  20. A Comment on Chicago Rule, Chicago School, and Commercial Bank Seigniorage By varelas, erotokritos
  21. Time-varying business volatility, price setting, and the real effects of monetary policy By Bachmann, Rüdiger; Born, Benjamin; Elstner, Steffen; Grimme, Christian
  22. Quantitative Easing and Related Capital Flows into Brazil: measuring its effects and transmission channels through a rigorous counterfactual evaluation By João Barata R. B. Barroso; Luiz A. Pereira da Silva; Adriana Soares Sales

  1. By: Matthias Neuenkirch (University of Aachen); Florian Neumeier (University of Marburg)
    Abstract: In this paper, we analyze the relationship between certain characteristics of incumbent central bank governors and their interest rate-setting behavior. We focus on (i) occupational backgrounds, (ii) party affiliation, and (iii) experience in office and estimate augmented Taylor rules for 20 OECD countries and the period 1974-2008. Our findings are as follows. First, the tenures of central bank governors who are affiliated with a political party are characterized by a relatively dovish monetary policy stance, irrespective of their partisan ideology. Second, party affiliation appears to be more important than occupational background, i.e., all bankers with(out) a party affiliation behave very similarly to each regardless of their specific occupational background. Third, party members react significantly less to inflation and more to output the longer they stay in office.
    Keywords: Central Bank Governors, Monetary Policy, Occupation, Partisanship, Taylor Rules
    JEL: E31 E43 E52 E58
    Date: 2013
  2. By: Ahmet Benlialper (Department of Economics, METU); Hasan Cömert (Department of Economics, METU)
    Abstract: Especially, after the 2000s, many developing countries let exchange rates float and began implementing inflation targeting regimes based on mainly manipulation of expectations and aggregate demand. However, most developing countries implementing inflation targeting regimes experienced considerable appreciation trends in their currencies. Might have exchange rates been utilized as implicit tools even under inflation targeting regimes in developing countries? To answer this question and investigate the determinants of inflation under an inflation targeting regime, as a case study, this paper analyzes the Turkish experience with the inflation targeting regime between 2002 and 2008. There are two main findings of this paper. First, the evidence from a Vector Autoregressive (VAR) model suggests that the main determinants of inflation in Turkey during this period are supply side factors such as international commodity prices and the variation in exchange rate rather than demand side factors. Since the Turkish lira (TL) was considerably over-appreciated during this period, it is apparent that the Turkish Central Bank benefited from the appreciation of the TL in its fight against inflation during this period. Second, our findings suggest that the appreciation of the TL is related to the deliberate asymmetric policy stance of the Bank with respect to the exchange rate. Both the econometric analysis from a VAR model and descriptive statistics indicate that appreciation of the Turkish lira was tolerated during the period under investigation whereas depreciation was responded aggressively by the Bank. We call this policy stance under the inflation targeting regimes as “implicit asymmetric exchange rate peg”. The Turkish experience indicates that, as opposed to rhetoric of central banks in developing countries, inflation targeting developing countries may have an asymeyric stance toward exchange rates and favour appreciation of their currencies to hit their inflation targets. In this sense, IT seems to contribute to the ignorance of dangers regarding to over-appreciation of currencies in developing countries.
    Keywords: Inflation Targeting, Central Banking, Developing Countries, Exchange Rates
    JEL: E52 E58 E31 F31
    Date: 2013–07
  3. By: Ahmet Degerli; Salih Fendoglu
    Abstract: During the recent era, many emerging market economies have implemented unconventional policy measures to mitigate the effect of large swings in short-term capital flows on domestic business cycles. This paper focuses on a specific unconventional policy tool introduced by the Central Bank of Turkey, the Reserve Option Mechanism (ROM), that in principle contains excessive fluctuations in foreign exchange rate and helps cushion the economy from large swings in external factors. The results suggest that, after the introduction the ROM (i) market expectations are leaned towards a significantly lower volatility or skewness in the USD/TL relative to other emerging market exchange rates; (ii) controlling for a set of domestic and common external factors, the USD/TL expectations have exhibited lower levels of volatility, skewness and kurtosis; (iii) the higher the intensity of ROM (the fraction of ROM-based reserves in total international reserves) the stronger the effect of ROM on exchange rate expectations. Last, we provide evidence that the mechanism acts as an automatic stabilizer of expectations about excessive movements in the exchange rate: the mechanism decreases the sensitivity of expected USD/TL kurtosis to the common external factor (by an estimated decrease of about 85%).
    Keywords: Options-based Exchange Rate Expectations, Reserve Option Mechanism, Unconventional Monetary Policy
    JEL: F31 F40
    Date: 2013
  4. By: Vespignani, Joaquin L.; Ratti , Ronald A.
    Abstract: It is found that over 1999:1-2012:12 China’s monetary expansion influences Japan through the effect of China’s growth on world commodity prices, increased demand for imports, and exchange rate policy. China’s monetary expansion is associated with significant increases in Japan’s industrial production, exports and inflation, and decreases in the trade-weighted yen. In contrast, U.S. monetary expansion results in contraction in Japan’s industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models are estimated. Results are robust to various contemporaneous restrictions for the effect of international monetary variables, the interaction of foreign and domestic variables and to factor augmented VAR to identify monetary shocks.
    Keywords: International Monetary shocks, Japanese economy, Oil/commodity prices, SVEC models
    JEL: E4 E42 E5 E58 F0 F00
    Date: 2013–07–15
  5. By: Schnabl, Gunther
    Abstract: The paper identifies based on the monetary overinvestment (malinvestment) theories by Wicksell (1898), Mises (1912) and Hayek (1929) monetary policy mistakes in large industrial countries issuing international currencies. It its argued that a benign neglect towards monetary policy reform in a world dominated by financial markets has led to a erosion of the allocation and signaling function of the interest rate, which has triggered an excessive rise of government debt and structural distortions in the world economy. The backlash of high government debt levels on monetary policy making is argued to lead to the hysteresis of low interest rates and high government debt levels. In this context, monetary reform is discussed with respect to the exit from low interest rates and high debt policies and a reform of the prevalent world monetary system. It is concluded that enhanced competition between dollar and euro as international currencies, which is refereed by East Asia, can be a promising approach towards a more stable world monetary system. --
    Keywords: Economic Instability,Credit Cycles,Monetary Policy,Hayek,Mises,Monetary Policy Reform,Currency Competition
    JEL: E42 E58 F33 F44
    Date: 2013
  6. By: Chan Wang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper investigates the relationship between optimal monetary and tariff policy in open economies. In producer-currency pricing (PCP) case, as in Obstfeld and Rogoff (2002), optimal tariff policy rules are separable from optimal monetary policy rules. Except for PCP case, they are not separable from each other. The increase of tariffs will lead to a more insulated world economy in the sense that both home and foreign pay more attention to their domestic goals respectively. When tariffs are chosen optimally, except for PCP and reference-currency pricing (RCP) cases, optimal monetary policy is inward-looking. We also extend the model to consider gains from cooperation. Except for LCP case, there are gains from cooperation between Home and Foreign monetary policy makers. By comparison, there are gains from cooperation between Home and Foreign tariff policy makers in various cases.
    Keywords: Open economies, Tariff policy, Monetary policy, Exchange rate pass-through elasticity, International cooperation
    JEL: E52 F41 F42
    Date: 2013–07–28
  7. By: Koray Alper; Hakan Kara; Mehmet Yorukoglu
    Abstract: Heightened volatility in cross-border capital flows has increased exchange rate volatility across emerging markets as well as in advanced economies, setting the stage for more active management of currencies. Traditionally, foreign exchange rate intervention has been the primary tool to address these types of challenges. However, given the limitations of foreign exchange rate intervention, it may be well worthwhile to explore alternative mechanisms for dealing with capital flow volatility. This paper explains how the new policy framework adopted by the Central Bank of the Republic of Turkey (CBRT) in the past two years has eased the need to conduct FX interventions. We first describe the rationale for the new policy framework, which is an augmented version of inflation targeting, with more emphasis on macro financial risks. Next, we explain the new instruments developed by the CBRT and their contribution to coping with capital flow volatility. In particular, we focus on the Reserve Option Mechanism, which is designed as a shock absorber for volatile capital flows, and thus reduces the need for FX intervention. We demonstrate that, since the adoption of new policy tools, the volatility of the Turkish lira has been remarkably low in comparison with the currencies of peer economies.
    Keywords: Monetary policy, Capital flows, Exchange rate interventions, Financial stability
    JEL: E52 E58 F31 F32
    Date: 2013
  8. By: dala, eleni; karpetis, christos; varelas, erotokritos
    Abstract: This paper investigates the impact of monetary policy on the optimal bank behavior under oligopolistic conditions. In addition, we attempt to extend this analysis in the sphere of bank-clients behavior.We concentrate on the way the minimum reserve requirements of commercial banks influence the optimal bank behavior in oligopoly. In particular, we are interested in the influence of this instrument of monetary policy on the interest rate spread. For this reason, we formulate a two-stage Cournot game with scope economies.We conclude that the sign of each change depends on the type of scope economies. Finally, treating an overlapping generation model as a guiding principle, we show that the minimum reserve requirements of commercial banks have an impact on the depositors’ and borrowers’ two periods’ optimal level of consumption.
    Keywords: Bank behavior, Scope economics, Monetary policy
    JEL: D4 E44 E51
    Date: 2013–06–30
  9. By: Chan Wang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper examines optimal monetary policy rules in open economies with vertical production and trade in which we emphasize the role played by reference currency. As evidenced by empirical ï¬ndings, we assume ï¬nal goods prices are sticky, but intermediate goods prices are flexible. We ï¬nd that the asymmetry of exporters' pricing behavior implies that the responses of monetary authorities to productivity shocks from the stage of ï¬nal goods production are asymmetric but symmetric to productivity shocks from the stage of intermediate goods production. We also ï¬nd that gains from cooperation are related to the covariance of productivity shocks in two stages. In addition, we give the conditions under which home and foreign are willing to take part in cooperation respectively. As for exchange rate policy, we ï¬nd that the volatility of nominal exchange rate in RCP case is greater than that in LCP case, but smaller than that in PCP case. The volatility of real exchange rate in RCP case is, however, greater than those in PCP and LCP cases.
    Keywords: Vertical production and trade, Reference-currency pricing, Optimal monetary policy, Monetary cooperation, Exchange rates
    JEL: E5 F3 F4
    Date: 2013–07–28
  10. By: Richhild Moessner
    Abstract: We quantify the impact of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on market interest rates. We study the impact on short- to medium-term interest rates implied by Eurodollar interest rate futures contracts, and on near- to long-term interest rates implied by US Treasury securities. We find that explicit policy rate guidance announcements significantly reduced interest rates implied by Eurodollar futures at horizons of 1 to 5 years ahead, with the largest effect at the intermediate horizon of 3 years. We also find that they significantly reduced forward interest rates implied by US Treasuries at horizons of 1 to 7 years ahead, with the largest effect at the intermediate horizons of 4 and 5 years. Moreover, we find that explicit FOMC policy rate guidance led to a significant reduction in the term spread, ie to a fiattening of the yield curve, both for the Eurodollar futures curve and the US Treasury yield curve.
    Keywords: Monetary policy; central bank communication; policy rate guidance
    JEL: E58
    Date: 2013–07
  11. By: Michael J. Lamla (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Lena Dräger (University of Hamburg, Germany)
    Abstract: In this paper we explore the degree of anchoring of consumers’ long-run inflation expectations. If expectations are firmly anchored, short- and long-run expectations should show no comovement in response to transitory shocks. Utilizing the University of Michigan Survey of Consumer’s rotating panel microstructure, we can identify changes in inflation expectations of individual consumers over time. Our results indicate that long-run inflation expectations became more anchored over the last decades. While the degree of comovement fell significantly after 1996, the probability of a joint adjustment stayed constant. Regarding the possible determinants, we find that consumers’ rising interest rate expectations and perceived news on the monetary policy stance have a detrimental effect on the anchoring of long-run expectations. This effect is no longer present in the post-1996 period. Notably, a positive effect of perceived news on government debt on the degree of comovement emerges after 1996, alluding to a potentially problematic link between fiscal and monetary policy.
    Keywords: Anchoring, inflation expectations, microdata, news
    JEL: E52 D84
    Date: 2013–07
  12. By: Guray Kucukkocaoglu; Deren Unalmis; Ibrahim Unalmis
    Abstract: Using a methodology that is robust to endogeneity and omitted variables problems, it is found that the stock returns of all banks that are listed in Borsa Istanbul respond significantly to the monetary policy surprises on Monetary Policy Committee (MPC) meeting days prior to May 2010. It is shown that stock returns of banks for which interest payments constitute an important share in their balance sheets respond more aggressively to the changes in policy rates. In addition, foreign banks and participation banks give relatively less responses to monetary policy surprises. Estimation results differ between traditional and new monetary policy episodes.
    Keywords: Monetary Policy, Stock Market, Banking System, Emerging Markets, Identification through Heteroscedasticity
    JEL: E43 E44 E52
    Date: 2013
  13. By: Sandra Gomes; Nikolay Iskrev; Caterina Mendicino
    Abstract: We augment a medium-scale DSGE model with monetary policy news shocks and …t it to US data. Monetary policy news shocks improve the performance of the model both in terms of marginal data density and in terms of its ability to match the empirical moments of the variables used as observables. We estimate several versions of the model and …nd that the one with news shocks over a two-quarter horizon dominates in terms of overall goodness of …t. We show that, in the estimated model: (1) adding monetary policy news shocks to the model does not lead to identi…cation problems; (2) monetary policy news shocks account for a larger fraction of the unconditional variance of the observables than the standard unanticipated monetary policy shock; (3) these news shocks also help to achieve a better matching of the covariances of consumption growth and the interest rate.
    JEL: C50 E32 E44
    Date: 2013
  14. By: Kliem, Martin; Kriwoluzky, Alexander
    Abstract: Structural VAR studies disagree with narrative accounts about the history of monetary policy disturbances. We investigate whether employing the narrative monetary shock account as a proxy variable in a VAR model aligns both shock series. We quantify the extent to which the disagreement still applies and identify two explanations for the disagreement. One explanation is measurement error in the narrative time series, another is a misspecification of the VAR model. --
    Keywords: vector autoregression model,monetary policy shocks,narrative identification
    JEL: E31 E32 E52
    Date: 2013
  15. By: S. Boragan Aruoba; Frank Schorfheide
    Abstract: This paper studies the dynamics of a New Keynesian dynamic stochastic general equilibrium (DSGE) model near the zero lower bound (ZLB) on nominal interest rates. In addition to the standard targeted-inflation equilibrium, we consider a deflation equilibrium as well as a Markov sunspot equilibrium that switches between a targeted-inflation and a deflation regime. We use the particle filter to estimate the state of the U.S. economy during and after the 2008-09 recession under the assumptions that the U.S. economy has been in either the targeted-inflation or the sunspot equilibrium. We consider a combination of fiscal policy (calibrated to the American Recovery and Reinvestment Act) and monetary policy (that tries to keep interest rates near zero) and compute government spending multipliers. Ex-ante multipliers (cumulative over one year) under the targeted-inflation regime are around 0.9. A monetary policy that keeps interest rates at zero can raise the multiplier to 1.7. The ex-post (conditioning on the realized shocks in 2009-11) multiplier is estimated to be 1.3. Conditional on the sunspot equilibrium, the multipliers are generally smaller and the scope for conventional expansionary monetary policy is severely limited.
    Keywords: Government spending policy ; Monetary policy ; Fiscal policy ; Macroeconomics - United States
    Date: 2013
  16. By: Ngoc-Sang Pham (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap.
    Keywords: Monetary economy; liquidity constraint; collateralized asset; infinite horizon; liquidity trap
    Date: 2013–07
  17. By: Zsolt Darvas; Balázs Varga
    Abstract: This paper studies inflation persistence with time-varying coefficient autoregressions for twelve central European countries,in comparison with the United States and the euro area. Inflation persistence tends to be higher in times of high inflation. Since the oil price shocks, inflation persistence has declined both in the US and euro-area. In most central and eastern European countries, for which our study covers 1993-2012, inflation persistence has also declined, with the main exceptions of the Czech Republic, Slovakia and Slovenia, where persistence seems to be rather stable.
    Date: 2013–07
  18. By: Andrade, P.; Fourel, V.; Ghysels, E.; Idier, I.
    Abstract: Recent studies emphasize that survey-based inflation risk measures are informative about future inflation and thus useful for monetary authorities. However, these data are typically available at a quarterly frequency whereas monetary policy decisions require a more frequent monitoring of such risks. Using the ECB survey of professional forecasters, we show that high-frequency financial market data have predictive power for the low-frequency survey-based inflation risk indicators observed at the end of a quarter. We rely on MIDAS regressions to handle the problem of mixing data with different frequencies that such an analysis implies. We also illustrate that upside and downside risks react differently to financial indicators.
    Keywords: inflation forecasts, inflation risk, survey data, financial data, MIDAS regression.
    JEL: E31 E37 C53 C83
    Date: 2013
  19. By: Elena Deryugina; Alexey Ponomarenko
    Abstract: The authors estimate a dynamic factor model for the cross-section of monetary and price indicators for Russia.  They extract the common part of the dataset's fluctuations and decompose it into structural shocks.  One of the shocks identified has empirical properties (in terms of impulse response functions) that are fully in line with the theoretically expected relationship between money growth and inflation, confirming that the process identified has the capacity for economic interpretation.  Based on the finding, recent inflationary developments in Russia are decomposed into those that are associated with changes in monetary stance and other shorter-lived shocks.  The analysis in this paper is based on the course material taught in the CCBS course: 'Applied Bayesian Econometrics for central bankers'. 
    Keywords: Money-based, inflation, Russia, structural dynamic factor model
    Date: 2013–04
  20. By: varelas, erotokritos
    Abstract: Chicago rule is shown to be the unique optimal monetary policy rule from the viewpoint of an intergenerational welfare-maximizing social planner. But, in the absence of commercial banking, it really mandates the elimination of the public sector, because it involves the elimination of central bank seigniorage and hence, of the government spending based on this seigniorage, rendering subsequently tax finance incapable of sustaining alone such spending. In the presence of commercial banking, the government does have the option of benefiting from commercial bank seigniorage by borrowing it countercyclically as implied by Chicago rule, which is found to operate like a full-reserve requirement
    Keywords: Chicago rule, Seigniorage, Intergenerational modeling
    JEL: E3 E4 E5 E6
    Date: 2013–08–01
  21. By: Bachmann, Rüdiger; Born, Benjamin; Elstner, Steffen; Grimme, Christian
    Abstract: Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%. --
    Keywords: survey data,time-varying volatility,price setting,New Keynesian model,monetary policy
    JEL: E30 E31 E32 E50
    Date: 2013
  22. By: João Barata R. B. Barroso; Luiz A. Pereira da Silva; Adriana Soares Sales
    Abstract: This paper investigates whether quantitative easing policies produces spillover effects from advanced economies into emerging markets affecting prices and asset markets, and, if so, how much of these effects is attributed to “excessive” capital inflows. We focus on the Brazilian economy and on quantitative easing (QE) policies adopted by the Federal Reserve. Our evaluation methodology is an extension of Pesaran and Smith (2012) and estimates ex-ante and ex-post policy effects over a grid of counterfactuals. We also provide a decomposition of the transmission channels of the policy effects, and test for their statistical significance. The decomposition method is novel and stems from a vector autoregressive model of the endogenous variables where the different channels are represented. Our results are consistent with the view that QE policies had a positive effect on growth but also had other significant spillover effects on the Brazilian economy. These effects were mostly transmitted through “excessive” capital inflows that led to exchange rate appreciation, stock market price increases and a credit boom. The effect on inflation was less robust, mitigated by currency appreciation and dependent on whether global activity reacts more strongly to quantitative easing.
    Date: 2013–07

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