nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒10‒05
twelve papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Reassessing the Tehsis of the Monetary History By David Laidler
  2. Nominal Stability and Financial Globalization By Michael B Devereux; Ozge Senay; Alan Sutherland
  3. Monetary Policy Frameworks in Asia: Experience, Lessons, and Issues By Morgan, Peter J.
  4. The federal funds market, excess reserves, and unconventional monetary policy By Jochen Güntner
  5. Is bank debt special for the transmission of monetary policy? Evidence from the stock market By Filippo Ippolito; Ali K. Ozdagli; Ander Pérez Orive
  6. Expectations and Monetary Policy: Experimental Evidence By Oleksiy Kryvtsov; Luba Petersen
  7. The Monetary Transmission Mechanism in the Tropics: A Narrative Approach By Andrew Berg; Luisa Charry; Rafael A Portillo; Jan Vlcek
  8. The Euro Interbank Repo Market By Mancini, Loreano; Ranaldo, Angelo; Wrampelmeyer, Jan
  9. The Role of the Exchange Rate Regime in the Process of Real and Nominal Convergence By D'Adamo, Gaetano; Rovelli, Riccardo
  10. Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates. By Jamel Saadaoui
  11. A quantitative look at the Italian banking system: evidence from a new dataset since 1861 By Riccardo De Bonis; Fabio Farabullini; Miria Rocchelli; Alessandra Salvio; Andrea Silvestrini
  12. Understanding FX Liquidity By Karnaukh, Nina; Ranaldo, Angelo; Söderlind, Paul

  1. By: David Laidler (University of Western Ontario)
    Abstract: The economic crisis that began in 2007 and still lingers has invited comparison with the Great Depression of the 1930s. It has also generated renewed interest in Milton Friedman and Anna Schwartz’s explanation of the latter as mainly the consequence of the Fed’s failure as a lender of last resort at its onset, and the ineptitude of its policies thereafter. This explanation is reassessed in the light of events since 2007, and it is argued that its plausibility emerges enhanced, even though policy debates in recent years have paid more attention to interest rates and credit markets than to Friedman and Schwartz’s key variable, the quantity of money.
    Keywords: Great Depression; Great Contraction; Great Recession; Keynesianism; Monetarism; Lender of Last Resort; Money; High-powered money; Monetary base; Currency; Bank reserves; Quantitative easing; Open-market operations
    JEL: B22 E32 E51 E58 N2
    Date: 2013
  2. By: Michael B Devereux (University of British Columbia, CEPR and NBER); Ozge Senay (University of St Andrews); Alan Sutherland (University of St Andrews and CEPR)
    Abstract: Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.
    Keywords: Nominal stability, Financial Globalization, Country Portfolios
    JEL: E52 E58 F41
    Date: 2013–09–30
  3. By: Morgan, Peter J. (Asian Development Bank Institute)
    Abstract: This paper reviews the history of East Asian monetary policy frameworks since 1990; describes current monetary policy frameworks, including issue of price versus financial stability for a central bank and the policies a central bank can use to manage financial stability; the monetary policy transmission mechanism based on financial linkages and financial deepening; assesses policy outcomes including inflation targeting and responses to the “Impossible Trinity”; and makes overall conclusions. The paper finds that East Asian central banks have managed inflation and growth well over the past decade, but the difficulties faced by central banks of advanced countries in the aftermath of the GFC suggests that not all problems have been solved.
    Keywords: monetary policy; macroprudential policy; inflation targeting; financial stability; currency regime; capital flows; emerging economies
    JEL: E52 E58 F31 F32 G18
    Date: 2013–09–27
  4. By: Jochen Güntner
    Abstract: Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows, in an analytically tractable way, how interbank trade and excess reserves emerge in general equilibrium. Investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks, I find that federal funds market participation is irrelevant in response to standard supply and demand shocks, whereas it matters for “uncertainty shocks”, i.e. mean-preserving spreads in the cross-section of liquidity risk. Liquidity injections by the central bank can absorb the effects of financial shocks on the real economy, although excess reserves might increase and federal funds might be crowded out, as a side effect.
    Keywords: Excess reserves, Federal funds market, Financial frictions, Liquidity risk, Unconventional monetary policy
    JEL: C61 E32 E51 E52
    Date: 2013–09
  5. By: Filippo Ippolito; Ali K. Ozdagli; Ander Pérez Orive
    Abstract: We combine existing balance sheet and stock market data with two new datasets to study whether, how much, and why bank lending to firms matters for the transmission of monetary policy. The first new dataset enables us to quantify the bank dependence of firms precisely, as the ratio of bank debt to total assets. We show that a two standard deviation increase in the bank dependence of a firm makes its stock price about 25% more responsive to monetary policy shocks. We explore the channels through which this effect occurs, and find that the stock prices of bank-dependent firms that borrow from financially weaker banks display a stronger sensitivity to monetary policy shocks. This finding is consistent with the bank lending channel, a theory according to which the strength of bank balance sheets matters for monetary policy transmission. We construct a new database of hedging activities and show that the stock prices of bank-dependent firms that hedge against interest rate risk display a lower sensitivity to monetary policy shocks. This finding is consistent with an interest rate pass-through channel that operates via the direct transmission of policy rates to lending rates associated with the widespread use of floating-rates in bank loans and credit line agreements.
    Keywords: bank lending channel, monetary policy transmission, firm financial constraints, bank financial health, floating interest rates
    JEL: G21 G32 E52
    Date: 2013–09
  6. By: Oleksiy Kryvtsov (Bank of Canada); Luba Petersen (Simon Fraser University)
    Abstract: The effectiveness of monetary policy depends, to a large extent, on market expectations of its future actions. In a standard New Keynesian business cycle model with rational expectations, systematic monetary policy reduces the variance of inflation and output gap by at least two-thirds. These stabilization benefits can be substantially smaller if expectations are non-rational. We design an economic experiment that identifies the contribution of expectations to macroeconomic stabilization achieved by systematic monetary policy. We find that, despite some non-rational component in expectations formed by experiment participants, monetary policy is quite potent in providing stabilization, reducing roughly a half of macroeconomic variance.te potent in providing stabilization, reducing roughly a half of macroeconomic variance.
    Keywords: Expectations, Monetary Policy, Inflation, Laboratory Experiment, Experimental Macroeconomics
    JEL: C9 D84 E3 E52
    Date: 2013–09
  7. By: Andrew Berg; Luisa Charry; Rafael A Portillo; Jan Vlcek
    Abstract: Many central banks in low-income countries in Sub-Saharan Africa are modernising their monetary policy frameworks. Standard statistical procedures have had limited success in identifying the channels of monetary transmission in such countries. Here we take a narrative approach, following Romer and Romer (1989), and center on a significant tightening of monetary policy that took place in 2011 in four members of the East African Community: Kenya, Uganda, Tanzania and Rwanda. We find clear evidence of the transmission mechanism in most of the countries, and argue that deviations can be explained by differences in the policy regime in place.
    Date: 2013–09–20
  8. By: Mancini, Loreano; Ranaldo, Angelo; Wrampelmeyer, Jan
    Abstract: The market for repurchase agreements (repos) is an important part of the shadow banking system. Using a novel and comprehensive dataset, we provide the first systematic study of the euro interbank repo market. We document the evolution of repo market activity and identify risk and central bank liquidity provisions as the main state variables. In contrast to repo markets in the United States, we find that the bilateral central counterparty-based segment was resilient during 2006{13, which includes severe crisis periods. An increase in risk significantly increases repo trading volume, but has virtually no effect on repo rates, average maturity, and haircuts. Moreover, volume in the unsecured market is negatively related to repo volume. This suggests that, under certain conditions, banks use the repo market as a means of liquidity hoarding. We identify the distinguishing characteristics that render the euro interbank repo market resilient during the crisis, namely its infrastructure, including anonymous trading via a central counterparty, the exclusive reliance on safe collateral, and the reusability of collateral.
    Keywords: Repo market, secured funding, liquidity hoarding, shadow banking system, financial crisis, unconventional monetary policy
    JEL: G01 G21 G28
    Date: 2013–09
  9. By: D'Adamo, Gaetano (Universidad de Valencia); Rovelli, Riccardo (University of Bologna)
    Abstract: During the last decade, economists have intensively searched for evidence on the importance of the Balassa-Samuelson (B-S) hypothesis in explaining nominal convergence. One general result is that B-S can at best explain only part of the excess inflation observed in the European catching-up countries, which suggests that other factors may be at play. In these and related studies, however, the potential role of the exchange rate regime in affecting price convergence in Europe has been overlooked. In this respect, we claim that the choice of the exchange rate regime has decisively affected the path of nominal convergence. To show this, we first model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a B-S type of regression for each regime. Our results show that, for countries which pegged to or adopted the euro, the effect of the same increase in the dual productivity growth (that is, the difference in productivity growth between the traded and non-traded sectors) on the dual inflation differential is more than twice as large as that in the "flexible" countries. We conclude that, in a catching-up country, premature euro adoption may foster excess inflation, beyond that which is to be expected as a consequence of productivity convergence on the basis of the B-S effect.
    Keywords: exchange rate regimes, Balassa-Samuelson effect, inflation, euro adoption
    JEL: C34 E52 F31
    Date: 2013–09
  10. By: Jamel Saadaoui
    Abstract: The reduction of global imbalances observed during the climax of crisis is incomplete. In this context, currencies realignments are still proposed to ensure global macroeconomic stability. These realignments are based on equilibrium rates derived from equilibrium exchange rate models. Among these models, we have the fundamental equilibrium exchange rate model introduced by Williamson (1994). This approach is often labelled as normative mainly because the equilibrium is not uniquely determined. If the FEER is not related either in the short or in the long to the real exchange rates, we see no clear justification to intervene in foreign exchange markets based on these equilibrium rates. In this case, the FEER does not include any element of long run predictive value and should not be used to reduce global imbalances. This paper provides panel empirical evidences that the FEER is related to real exchange rate in the long run and thus could be a useful tool to prevent the resurgence of large global imbalances and associated risks.
    Keywords: Global Imbalances, Equilibrium Exchange Rate, International Monetary Cooperation.
    JEL: C23 F31 F32 F33 F41
    Date: 2013
  11. By: Riccardo De Bonis; Fabio Farabullini; Miria Rocchelli; Alessandra Salvio; Andrea Silvestrini
    Abstract: Building on a new dataset on Italian banks and other financial corporations from 1861 to 2011, the novelty of this paper is to examine the patterns of the main items of bank’s balance sheets, such as deposits, capital and reserves, bonds issued, bonds held in portfolio, and loans for a period of 150 years. The long time behaviour of credit maturity, postal savings, State ownership of banks, and bank interest rates is also studied.
    Keywords: Banks, central bank, loans, deposits, interest rates, postal savings
    JEL: C82 G21 N13 N14 Y1
    Date: 2013–09
  12. By: Karnaukh, Nina; Ranaldo, Angelo; Söderlind, Paul
    Abstract: Previous studies of liquidity in the foreign exchange (FX) market span short time periods or focus on specific measures of liquidity. In contrast, we provide a comprehensive study of FX liquidity and commonality over more than two decades and a cross-section of forty exchange rates. After identifying the most accurate liquidity proxies based on low-frequency and readily available data, we show that commonality in FX liquidities is stronger for developed currencies and in highly volatile markets. We also show that FX liquidity deteriorates with risk in stock, bond and FX markets, and that riskier currencies are more exposed to liquidity drops.
    Keywords: exchange rates, liquidity, transaction costs, commonality, low-frequency data
    JEL: C15 F31 G12 G15
    Date: 2013–09

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