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on Monetary Economics |
| By: | Jagjit S. Chadha; Germana Corrado; Luisa Corrado |
| Abstract: | We decompose aggregate consumption by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to effect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of assets, the demand for loans, the asset price and the quantity of housing collateral. We show that even though house price do not represent wealth, aggregate consumption is not independent of movements in house prices. We consider the case for employing macro-prudential policy jointly with monetary and fiscal policy in order to minimise losses for a representative household. |
| Keywords: | Credit constrained households; housing collateral; asset prices; bank lending; default risk; macro-prudential; fiscal and monetary policy |
| JEL: | E31 E40 E51 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1316&r=mon |
| By: | Ansgar Belke; Marcel Wiedmann |
| Abstract: | In this paper, we analyze the long-run behavior and short-run dynamics of stock markets across some selected developed and emerging economies – namely the United States, the Euro Area, Japan, the United Kingdom, Australia, South Korea, Thailand and Brazil – in the Cointegrated Vector-Autoregressive (CVAR) framework. The main purpose is to assess empirically if liquidity conditions play a significant role for stock market developments. As an innovation, liquidity conditions enter the analysis from three angles: in the form of a broad monetary aggregate, the interbank overnight rate and net capital flows which in our case stands for the share of global liquidity that arrives in the recipient economy. A second aim is to check empirically whether central banks are able to serve as a driver of the stock market as it, for instance, seems to be the case in late 2012 and 2013 in the wake of the forward guidance conveyed by central banks worldwide. |
| Keywords: | Asset prices; CVAR; central banks; monetary policy; VECM |
| JEL: | E43 E58 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0435&r=mon |
| By: | Kashiwabara, Chie |
| Abstract: | In the post-Asian crisis period, bank loans to the manufacturing sector have shown a slow recovery in the affected countries, unexceptionally in the Philippines. This paper provides a literacy survey on the effectiveness of the Central Bank’s monetary policy and the responsiveness of the financial market, and discusses on the future works necessary to better understand the monetary policy effectiveness in the Philippines. As the survey shows, most previous works focus on the correlation between the short-term policy rates and during the period of monetary tightening and relatively less interest in quantitative effectiveness. Future tasks would shed lights on (1) the asset side – other than loan outstanding – of banks to analyze their behavior/preference in structuring portfolios, and (2) the quantitative impacts during the monetary easing period. |
| Keywords: | Philippines, Monetary policy, Loans, Credit, Monetary policy measure, Credit channel, Bank loan |
| JEL: | E42 E52 G38 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper413&r=mon |
| By: | Hiroshi Fujiki (Associate Director-General and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hiroshi.fujiki@boj.or.jp)) |
| Abstract: | Fujiki (2003, 2006) extended the Freeman (1996) model to a two- country model, demonstrating that elastic money supplies in foreign exchange markets and the domestic credit market yield efficiency gains in monetary equilibrium, and that several institutional designs equally achieve the desired elastic money supplies. The present paper considers four institutional designs using a model similar to Fujiki (2003): a combination of central bank discount window policy and the CLS Bank; a central bank intervention both in the domestic credit market and the foreign exchange market; cross-border collateral arrangements; and foreign currency liquidity swap lines. These institutional designs yield the same efficiency gains in our model. |
| Keywords: | Foreign exchange market, CLS, Cross-border collateral arrangements, Liquidity swap lines |
| JEL: | E58 F31 F33 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:13-e-07&r=mon |
| By: | Hyuk Jae Rhee (Department of Economics, University of Windsor); Jeongseok Song (Department of Economics,Chung-Ang University) |
| Abstract: | In this paper, we incorporate key ingredients of a small open economy into the New Keynesian model with unemployment of Gali (2011a,b) to discuss the design of the monetary policy. The main findings regarding the issue of monetary policy design can be summarized as threefold. First, the optimal policy is to seek to minimize variance of domestic price inflation, wage inflation, and the output gap if both domestic price and wage are sticky. Second, stabilizing unemployment rate is important to reduce the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Last, controlling CPI inflation is the best when the policy is not allowed to respond to unemployment rate. |
| Keywords: | Unemployment; Monetary policy; Small open economy. |
| JEL: | E31 E58 F41 |
| Date: | 2013–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:wis:wpaper:1309&r=mon |
| By: | Pirovano, Mara |
| Abstract: | This paper presents a framework to analyze the interplay between ?financial frictions at the household and fi?rm level, liability dollarization and monetary policy in a small open economy subject to productivity and capital infl?ow shocks. Optimized monetary policy rules are calculated under several speci?cations (infl?ation targeting, exchange rate targeting, fi?xed exchange rate, credit growth targeting) and for two central bank?s objectives (macreconomic stability and macroeconomic plus fi?nancial stability). I ?find that, fi?rst, adding ?financial stability to the central bank?s objectives results in more inertial monetary policy rules. Second, the optimized Taylor rules under the ?financial stability objective achieve a lower volatility of infl?ation and of credit growth at the same time. However, this comes at the expense of a higher standard deviation of production. Third, when ?financial stability is included among the central bank?s objectives, engaging in exchange rate smoothing delivers the smallest value of the central bank?s loss function, mainly arising through a much reduced volatility of the credit aggregate. In the considered economy, credit growth targeting is suboptimal because of the effect of stronger interest rate increase on currency ?uctuations, which reinforce the ?financial accelerator. Finally, for the considered shocks, the extent of co-movement of fi?nancial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate fl?exibility. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2013014&r=mon |
| By: | Deniz Igan, Alain Kabundi, Francisco Nadal De Simone, Natalia Tamirisa |
| Abstract: | This paper evaluates the strength of the balance sheet channel in the U.S. monetary policy transmission mechanism over the past three decades. Using a Factor-Augmented Vector Autoregression model on an expanded data set, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while money market fund assets grow. The balance sheet effects are comparable in magnitude to the traditional interest rate channel. However, their economic significance in the run-up to the recent financial crisis was small. Large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable expansion of mortgage credit, suggesting an important role for macroprudential policies. |
| Keywords: | monetary policy transmission, balance sheets, FAVAR, generalized dynamic factor models |
| JEL: | E44 E52 G20 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:364&r=mon |
| By: | Luca Fornaro |
| Abstract: | I provide a framework for understanding debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging world consumption demand is depressed and the world interest rate is low, reecting a high propensity to save. If exchange rates are allowed to oat, deleveraging countries can depreciate their nominal exchange rate to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut off, and therefore the falls in consumption demand and in the world interest rate are amplified. Hence, monetary unions are especially prone to hit the zero lower bound on the nominal interest rate and enter a liquidity trap during deleveraging. In a liquidity trap deleveraging gives rise to a union-wide recession, which is particularly severe in high-debt countries. The model suggests several policy interventions that mitigate the negative impact of deleveraging on output in monetary unions. JEL classification: E31, E44, E52, F32, F34, F41, G01, G15 |
| Keywords: | Global Debt Deleveraging, Liquidity Trap, Monetary Union, Precautionary Savings, Debt Deflation |
| Date: | 2013–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:182&r=mon |
| By: | Beatrice D. Simo-Kengne (University of Pretoria); Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Rangan Gupta (University of Pretoria) |
| Abstract: | This paper investigates whether changes in monetary transmission mechanism respond to variations in asset prices. We distinguish between bull and bear markets and employ a TVP-VAR approach with stochastic volatility to assess the evolution of the monetary policy in relation to housing and stock prices. We measure the relative importance of housing and stock prices in the conduct of monetary policy and their possible feedback effects over both time and horizon and across regimes. Empirical results from annual data on the US spanning the period from 1890 to 2012 indicate that monetary policy responds more strongly to asset prices during bull regimes. While the bigger monetary effect of stock price shocks occurs prior to the 1970s, monetary policy appears to respond more strongly to housing price than stock price shocks after the 1970s. Similarly, contractionary monetary policy exerts a larger effect on both asset categories during bull markets. Particularly, larger negative responses of house prices to monetary policy shocks occur after the 1980s, corresponding to the bull regime in the housing market. Conversely, the stock-price effect of monetary policy shocks dominates before the 1980s, where stock-market booms achieved more importance. |
| Keywords: | Monetary policy, house prices, stock prices, TVP-VAR |
| JEL: | C32 E52 G10 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2013-20&r=mon |
| By: | Hasui, Kohei |
| Abstract: | This paper analyzes the effects of monetary policy shock when there is a non-negative constraint on the nominal interest rate. I employ two algorithms: the piecewise linear solution and Holden and Paetz's (2012) algolithm (the HP algorithm). I apply these methods to a dynamic stochastic general equilibrium (DSGE) model which has sticky prices, sticky wages, and adjustment costs of investment. The main findings are as follows. First, the impulse responses obtained with the HP algorithm do not differ much from those obtained with the piecewise linear solution. Second, the non-negative constraint influences the effects of monetary policy shocks under the Taylor rule under some parameters. In contrast, the constraint has little effects on the response to money growth shocks. Third, wage stickiness contributes to the effects of the non-negative constraint through the marginal cost of the product. The result of money growth shock suggests that it is important to analyze the effects of the zero lower bound (ZLB) in a model which generates a significant liquidity effect. |
| Keywords: | Zero lower bound; Monetary policy shock; Wage stickiness; Liquidity effect |
| JEL: | E47 E49 E52 |
| Date: | 2013–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49394&r=mon |
| By: | Thomas Seegmuller (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS); Lise Clain-Chamosset-Yvrard (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM and EHESS) |
| Abstract: | We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state. |
| Keywords: | Indeterminacy; Rational bubble; Cash-in-advance constraint; Collateral; Progressive taxation; Monetary policy. |
| JEL: | D91 E32 E63 |
| Date: | 2013–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1343&r=mon |
| By: | Jagjit S.Chadha; Elisa Newby |
| Abstract: | This paper assesses Revolutionary and Napoleonic wartime economic policy. Suspension of gold convertibility in 1797 allowed the Bank of England to nurture British monetary orthodoxy. The Order of the Privy Council suspended gold payments on Bank of England notes and afforded simultaneous protection to the government and the Bank in pursuit of the conflicting goals of price stability and war finance. The government, the Bank of England and the commercial banks formed a loose alliance drawing on due political and legal processes and also paid close attention to public opinion. We suggest that the ongoing solvency of the Bank of England was facilitated by suspension and allowed the Bank to continue to make substantial profits throughout the Wars. It became acceptable for merchants to continue to trade with non-convertible Bank of England notes and for the government to finance the war effort, even with significant recourse to unfunded debt. These aspects combined to create a suspension of convertibility that did not undermine the currency. By contrast, the Assignats debacle had cost the French monetary system its reputation in the last decade of the 18th century and so Napoleonic finance had to evolve within a more rigid and limiting framework. |
| Keywords: | Monetary Orthodoxy; Suspension of Convertibility; War Finance |
| JEL: | C61 E31 E4 E5 N13 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1315&r=mon |
| By: | Ansgar Belke |
| Abstract: | Small and medium size enterprises (SMEs) of southern euro area economies (e.g. Italy, Spain) pay significantly higher borrowing rates than their peers of the core (e.g. Germany, France) and this divergence is widening. It is argued that severe market failures prevent SMEs in southern euro area countries from access to key inputs, in particular access to finance. This paper makes an assessment of feasible options to improve finance access of SMEs, available to EU institutions as well as to the ECB in the context of its price stability mandate. Because of nonnegligible moral hazard issues, the paper is sceptical about a stronger involvement of the ECB in the (indirect) financing of SMEs through the securitisation of banks`loans or their use as collateral for monetary policy operations. The paper concludes with some proposals for extending finance access of SMEs, including through mutual guarantee institutions along the lines recently pursued by the European Investment Bank. |
| Keywords: | ECB; financial crisis; bank-firm relationships; credit guarantee schemes; monetary policy transmission; small business finance |
| JEL: | E23 E51 G21 O16 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0430&r=mon |
| By: | Sergio Cesaratto |
| Abstract: | The paper provides an account of the meaning and implications of TARGET 2 in the Eurozone (EZ) balance of payments crisis. In this context, it discusses Hans-Werner Sinn’s thesis about a stealth bail-out of the EZ periphery by the ECB from a heterodox perspective. Financial liberalisation, a relatively loose monetary policy and the provisional fading of devaluation risks generated ephemeral growth in some peripheral EZ countries sustained by capital flows from corecountries. This has been followed by real exchange rate revaluation and deterioration of foreign accounts. As a result, external financing flows dried up and the previous stock of loans began to be repatriated. TARGET 2 has played a fundamental role in avoiding a precipitous crisis. This distinguishes the European crisis from more traditional balance of payments crises. However, the presence of TARGET 2 does not offset the absence of the financial crisis prevention and resolution mechanisms that are characteristic of fully-fledged political and currency unions |
| JEL: | E11 E12 E42 E58 F32 F33 F34 F36 N24 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:681&r=mon |
| By: | James M. Nason (Federal Reserve Bank of Philadelphia); Gregor W. Smith (Queen's University) |
| Abstract: | We provide a new way to filter US inflation into trend and cycle components, based on extracting long-run forecasts from the Survey of Professional Forecasters. We operate the Kalman filter in reverse, beginning with observed forecasts, then estimating parameters, and then extracting the stochastic trend in inflation. The trend-cycle model with unobserved components is consistent with numerous studies of US inflation history and is of interest partly because the trend may be viewed as the Fed’s evolving inflation target or long-horizon expected inflation. The sluggish reporting attributed to forecasters is consistent with evidence on mean forecast errors. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation forecasts, the unobserved-components model and the sticky-information model. |
| Keywords: | US inflation, professional forecasts, sticky information, Beveridge-Nelson |
| JEL: | E31 E37 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1316&r=mon |
| By: | Nicola Acocella (Department of Metodi e modelli per l'economia, il territorio e la finanza MEMOTEF - Sapienza University of Rome (Italy)) |
| Abstract: | In this paper we study policy reactions to the crisis across the Atlantic, with specific emphasis on its Eastern side. We want to explain the different attitude of European policymakers vis-à-vis their USA homologues and to this end we choose the perspective of the historical roots of European monetary union (EMU) institutions. |
| Keywords: | exit policies, monetary policy, fiscal policy, institutions |
| JEL: | B22 E58 E63 P52 |
| URL: | http://d.repec.org/n?u=RePEc:rsq:wpaper:22/13&r=mon |
| By: | Megersa, Kelbesa; Cassimon, Danny |
| Abstract: | Currency crises, generally defined as rapid depreciations of a local currency or loss of foreign exchange reserves, are common incidents in modern monetary systems. Due to their repeated occurrence and severity, they have earned wide coverage by both theoretical and empirical literature. However, unlike advanced and emerging economies, currency crises in low-income countries have not received due attention. This paper uses the signals approach developed by Kaminsky et al. (1998) and assesses currency crisis in Ethiopia over the time frame January 1970 to December 2008. Using the Exchange Market Pressure Index (EMPI), we identify three currency crisis episodes that coincide with the liberalisation following the fall of Ethiopian socialism, the Ethio-Eritrean border conflict, and the zenith of the global financial crisis. The timing shows the importance of both local and international dynamics. More macro-economic indicators picked up the first crisis in a 24 month signalling window, compared to the latter two. Three categories of indicators were used: current account, capital account and domestic financial sector. None of the capital account indicators were significant based on the noise-to-signal ratio rule. One possible explanation for this might be the weak integration of the Ethiopian economy with global capital markets. |
| Keywords: | Currency crisis; financial crisis; early warning systems; signals approach; Ethiopia |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:iob:wpaper:2013007&r=mon |
| By: | Jun Nagayasu (Faculty of engineering, information & systems, University of Tskuba) |
| Abstract: | This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes time-varying parameter methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the time of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP. |
| Keywords: | forward premium puzzle, risk premium, time varying parameters, financial crises |
| JEL: | F31 F36 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:str:wpaper:1317&r=mon |
| By: | Joscha Beckmann; Robert Czudaj |
| Abstract: | Although the link between oil prices and dollar exchange rates has been frequently analyzed, a clear distinction between prices and nominal exchange rate dynamics and a clarifi cation of the issue of causality has not been provided. In addition, previous studies have mostly neglected nonlinearities which for example may stem from exogenous oil price shocks. Using monthly data for various oil-exporting and oil-importing countries, this study contributes to the clarification of those issues. We discriminate between long-run and time-varying short-run dynamics, using a Markov-Switching vector error correction model. In terms of causality, the results differ between the economies under observation but suggest that the most important causality runs from exchange rates to oil prices, with a depreciation of the dollar triggering an increase in oil prices. On the other hand, changes in nominal oil prices are responsible for ambiguous real exchange rate effects mostly through the price differential and partly also through a direct influence on the nominal exchange rate. Overall, the fact that the adjustment pattern frequently differs between regimes underlines the fact that the relationships are subject to changes over time, suggesting that nonlinearities are an important issue when analyzing oil prices and exchange rates.orex interventions. Our results indicate that only coordinated interventions seem to stabilize the Dollar-Yen exchange rate in a long-run perspective. This is a novel contribution to the literature. |
| Keywords: | Bayesian econometrics; cointegration; exchange rates; Markov-switching model; oil prices; oil-importing and oil-exporting countries |
| JEL: | C32 E31 F31 G15 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0431&r=mon |
| By: | Yu Zhu (University of Wisconsin - Madison); Randall Wright (University of Wisconsin); Chao He (Renmin University of China) |
| Abstract: | Housing, in addition to providing direct utility, facilitates credit transactions when home equity serves as collateral. We document big increases in home-equity loans coinciding with the start of the house-price boom, and suggest an explanation. When it is used as collateral, housing can bear a liquidity premium. Since liquidity is endogenous, even when fundamentals are deterministic and time invariant equilibrium house prices can display complicated patterns -- including cyclic, chaotic and stochastic trajectories -- some of which resemble bubbles. Our framework is tractable, with exogenous or with endogenous supply, and with exogenous or endogenous credit limits. Yet it captures several salient qualitative features of actual housing markets. Numerical work shows the model can also capture some, if not all, quantitative features, as well. The effects of monetary policy are also discussed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:168&r=mon |