nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒10‒18
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The effects of monetary policy on asset prices bubbles: Some evidence By Jordi Galí; Luca Gambetti
  2. Modern Currency Wars: The United States versus Japan By McKinnon, Ronald; Liu, Zhao
  3. Do central banks respond to exchange rate movements? A Markov-switching structural investigation By Ragna Alstadheim; Hilde C. Bjørnland; Junior Maih
  4. Price Versus Financial Stability: A role for money in Taylor rules? By John Keating; Lee Smith
  5. Federal Reserve tools for managing rates and reserves By Antoine Martin; James McAndrews; Ali Palida; David Skeie
  6. Macroeconomic and monetary policy surprises and the term structure of interest rates By Marcello Pericoli
  7. How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment By Isabelle SALLE; Marc-Alexandre SENEGAS; Murat YILDIZOGLU
  8. Optimal Exchange Rate Policy in a Growing Semi-Open Economy. By Bacchetta, P.; Benhima, K.; Kalantzis, Y.
  9. Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations By Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
  10. Banking globalization, transmission, and monetary policy autonomy By Linda S. Goldberg
  11. Imperfect Credibility and Robust Monetary Policy By Richard Dennis
  12. Inflation Reports and Models: How Well Do Central Banks Really Write? By Ales Bulir; Jaromir Hurnik; Katerina Smidkova
  13. Currency forecast errors at times of low interest rates: evidence from survey data on the Yen/Dollar exchange rate By Ronald MacDonald; Jun Nagayasu
  14. Optimal Monetary Policy and Transparency under Informational Friction By Wataru Tamura
  15. Central bank and government in a speculative attack model By Giuseppe Cappelletti; Lucia Esposito
  16. Important Channels of Transmission Monetary Policy Shock in South Africa By Nombulelo Gumata, Alain Kabundi and Eliphas Ndou
  17. International experiences and domestic opportunities of applying unconventional monetary policy tools By Judit Krekó; Csaba Balogh; Kristóf Lehmann; Róbert Mátrai; György Pulai; Balázs Vonnák
  18. RMB internationalisation and currency co-operation in East Asia By Volz, Ulrich
  19. Current-account adjustments and exchange-rate misalignments By Blaise Gnimasoun; Valérie Mignon
  20. Foreign exchange constraints and macroeconomic dynamics in a small open economy By Senbeta, Sisay Regassa
  21. Cash-In-Advance Constraint on R&D in a Schumpeterian Growth Model with an Endogenous Market Structure By Chien-Yu Huang; Juin-Jen Chang; Lei Ji
  22. Central bank refinancing, interbank markets, and the hypothesis of liquidity hoarding: evidence from a euro-area banking system By Massimiliano Affinito
  23. Two Monetary Models with Alternating Markets By Gabriele Camera; YiLi Chien
  24. Auctions implemented by the Federal Reserve Bank of New York during the Great Recession By Olivier Armantier; John Sporn
  25. Asset Prices, Macro Prudential Regulation, and Monetary Policy By Otaviano Canuto; Matheus Cavallari

  1. By: Jordi Galí; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using vector-autoregressive models with time-varying parameters. Under our baseline identification scheme, the evidence cannot be easily reconciled with conventional views on the effects of interest rate changes on asset price bubbles.
    Keywords: leaning against the wind policies, .nancial stability, in.ation targeting, asset price booms.
    JEL: E52 G12
    Date: 2013–10
  2. By: McKinnon, Ronald (Asian Development Bank Institute); Liu, Zhao (Asian Development Bank Institute)
    Abstract: In 2013, through massive quantitative easing by the Bank of Japan (BOJ), the yen depreciated about 25% against the US dollar, stoking fears of Japan bashing by the US. However, this sharp depreciation simply restored the purchasing power parity of the yen with the dollar. Since 2008, quantitative easing by the BOJ has been similar to that carried out by the US Federal Reserve, the Bank of England, and the European Central Bank. So the BOJ can only be faulted as a currency belligerent if there is further significant yen depreciation. Led by the US, now all mature industrial countries are addicted to near-zero interest liquidity traps in both the short and long terms. Such ultra-low interest rates are causing lasting damage to the countries' financial systems, and to those of emerging markets, which naturally have higher interest rates. But exiting the trap creates a risk of chaos in long-term bond markets and is proving surprisingly difficult.
    Keywords: currency wars; liquidity trap; quantitative easing; dollar versus yen; purchasing power parity
    JEL: F31 F32
    Date: 2013–10–10
  3. By: Ragna Alstadheim (Norges Bank (Central Bank of Norway)); Hilde C. Bjørnland (BI Norwegian Business School and Norges Bank (Central Bank of Norway)); Junior Maih (Norges Bank (Central Bank of Norway))
    Abstract: Do central banks respond to exchange rate movements? According to Lubik and Schorfheide (2007) who estimate structural general equilibrium models with monetary policy rules, the answer is "Yes, some do". However, their analysis is based on a sample with multiple regime changes, which may bias the results. We revisit their original question using a Markov switching set up which explicitly allows for parameter changes. Fitting the data from four small open economies to the model, we find that the size of policy responses, and the volatility of structural shocks, have not stayed constant during the sample period (1982-2011). In particular, central banks in Sweden and the UK switched from a high response to the exchange rate in the 1980s and early 1990s, to a low response some time after inflation targeting was implemented. Canada also observed a regime change, but the decline in the exchange rate response was small relative to the increase in the response to inflation and output. Norway, on the other hand, did not observe a shift in the policy response over time, as the central bank has stayed in a regime of high exchange rate response prior and post implementing inflation targeting.
    Keywords: Monetary policy, Exchange rates, Inflation targeting, Markov switching, Small open economy
    JEL: C68 E52 F41
    Date: 2013–10–10
  4. By: John Keating (Department of Economics, The University of Kansas); Lee Smith (Department of Economics, The University of Kansas)
    Abstract: This paper analyzes optimal monetary policy in a standard New-Keynesian model augmented with a financial sector. The banks in the model are subject to shocks which impede their ability and willingness to produce financial assets. We show these financial market supply shocks decrease both the natural rates of output and interest. The implication is that an optimizing central bank with real time data on only inflation, output, interest rate spreads and monetary aggregates will respond positively to the growth rate of monetary aggregates which signal movement in the natural rate from these financial shocks. This simple rule is implementable by central banks as it makes the policy instrument a function of only observables and does not require precise knowledge of the model or the parameters. The key is the use of the Divisia monetary aggregate which provides a parameter- and estimation- free approximation to the the true monetary aggregate. We show policy rules reacting to the Divisia monetary aggregate have well-behaved determinacy properties - satisfying a novel Taylor principle for monetary aggregates. Finally, we conclude with a minimax robust policy prescription given the uncertainty surrounding parameters driving the financial and other structural shocks.
    Keywords: Monetary Aggregates, Optimal Monetary Policy, Taylor Rules, Financial Sector
    JEL: C43 E32 E41 E44 E51 E52 E58 E60
    Date: 2013–10
  5. By: Antoine Martin; James McAndrews; Ali Palida; David Skeie
    Abstract: Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing.
    Keywords: Federal Open Market Committee ; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements
    Date: 2013
  6. By: Marcello Pericoli (Bank of Italy)
    Abstract: The no-arbitrage affine Gaussian term structure model is used to analyse the impact of macroeconomic surprises on the nominal and the real term structure in the euro area and in the United States. We find that nominal rates are affected by surprises in economic growth, the labour market and the economic outlook in the United States, and above all by surprises in inflation in the euro area. As far as real rates are concerned, we find that they are not affected by macroeconomic surprises in the United States, but they are by surprises in inflation and monetary policy in the euro area. Inflation expectations in both areas are not systematically influenced by monetary policy surprises. In the United States forward inflation risk premia became sizeable around the start of the financial crisis at the end of the last decade and increased considerably just before the adoption of the first unconventional monetary policy measures in March 2009. By contrast, in the euro area forward inflation risk premia remained unchanged even after the adoption of the unconventional monetary policy measures in October 2008 and May 2010. In both areas long-term inflation expectations have been well anchored over the past years.
    Keywords: inflation risk premium, affine term structure, Kalman filter, macroeconomic and monetary surprises
    JEL: C02 G10 G12
    Date: 2013–09
  7. By: Isabelle SALLE; Marc-Alexandre SENEGAS; Murat YILDIZOGLU
    Abstract: This paper revisits the benefits of explicitly announcing an inflation target for the con- duct of monetary policy in the framework of an agent-based model (ABM). This framework offers a flexible tool for modeling heterogeneity among individual agents and their bounded rationality, and to emphasize, on this basis, the role of learning in macroeconomic dynamics. We consider that those three features (heterogeneity, bounded rationality, and learning) are particularly relevant if one desires to question the rationale for the monetary authorities to be transparent about the inflation target, and to achieve credibility. Indeed, the inflation targeting’s potential role in anchoring inflation expectations and stabilizing the inflation and the economy can be analyzed more realistically if we do not assume a representative agent framework based on substantial rationality in behaviors and expectations. Our results show that a dynamic loop between credibility and success can arise, and stabilize inflation, but only in the case of a learning environment that corresponds to a moderate degree in heterogeneity regarding the behavior and decisions of individual agents. In a more general way, we analyze, using this ABM, different assumptions about the nature of the economic volatility, and the degree of disclosure of the target.
    Keywords: Monetary Policy, Inflation Targeting, Credibility, Expectations, Agent-Based Model.
    JEL: C61 C63 E52 E58
    Date: 2013
  8. By: Bacchetta, P.; Benhima, K.; Kalantzis, Y.
    Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modeling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.
    Keywords: China, exchange rate policy and international reserves.
    JEL: E58 F31 F41
    Date: 2013
  9. By: Gilberto Tadeu Lima; Mark Setterfield, Jaylson Jair da Silveira
    Abstract: Drawing on an extensive empirical literature that suggests persistent and time-varying heterogeneity in inflation expectations, this paper embeds two inflation forecasting heuristics – one based on the current rate of inflation, the second anchored to the official inflation target – in a simple macrodynamic model. Decision makers switch between these forecasting heuristics based on satisficing evolutionary dynamics. We show that convergence towards an equilibrium consistent with the level of output and rate of inflation targeted by policy makers is achieved regardless of whether or not the satisficing evolutionary dynamics that guide the choices agents make between inflation forecasting strategies are subject to noise. We also show that full credulity – a situation where all agents eventually use the forecasting heuristic based on the target rate of inflation – is neither a necessary condition for realization of the inflation target, nor an inevitable consequence of the economy’s achievement of this target. These results demonstrate that uncertainty in decision making resulting in norm-based inflation expectations that are both heterogeneous and time-varying need not thwart the successful conduct of macroeconomic policy.
    Keywords: Inflation targeting; macroeconomic stability; heterogeneous expected inflation; satisficing evolutionary dynamics
    JEL: C73 E12 E52
    Date: 2013–10–01
  10. By: Linda S. Goldberg
    Abstract: International financial linkages, particularly through global bank flows, generate important questions about the consequences for economic and financial stability, including the ability of countries to conduct autonomous monetary policy. I address the monetary autonomy issue in the context of the international policy trilemma: Countries seek three typically desirable but jointly unattainable objectives—stable exchange rates, free international capital mobility, and monetary policy autonomy oriented toward, and effective at, achieving domestic goals. I argue that global banking entails some features that are distinct from the broad issues of capital market openness captured in existing studies. In principle, if global banks with affiliates in foreign markets can reduce frictions in international capital flows, then the macroeconomic policy trilemma could bind tighter and interest rates will exhibit more co-movement across countries. However, if the information content and stickiness of the claims and services provided are enhanced relative to a benchmark alternative, then global banks can weaken the trilemma rather than enhance it. The result is a prediction of heterogeneous effects on monetary autonomy, tied to the business models of the global banks and whether countries are investment or funding locations for those banks. Empirical tests of the trilemma support this view that global bank effects are heterogeneous and that the primary drivers of monetary autonomy are exchange rate regimes.
    Keywords: Monetary policy ; International economic integration ; Foreign exchange rates ; Capital movements ; Banks and banking, International ; Flow of funds
    Date: 2013
  11. By: Richard Dennis
    Abstract: This paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model. Taking the Smets-Wouters model as the central bank’s approximating model, the paper’s main findings are as follows. First, a central bank’s credibility can have large consequences for how policy responds to shocks. Second, central banks that have low credibility can benefit from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time-consistent. Third, even relatively small departures from perfect credibility can produce important declines in policy performance. Finally, as a technical contribution, the paper develops a numerical procedure to solve the decision-problem facing an imperfectly credible policymaker that seeks robustness.
    Keywords: Imperfect Credibility, Robust Policymaking, Time-consistency
    JEL: E58 E61 C63
    Date: 2013–10
  12. By: Ales Bulir; Jaromir Hurnik; Katerina Smidkova
    Abstract: We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new ­Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.
    Keywords: Inflation targeting, Kalman filter, modeling, monetary policy communication.
    JEL: E17 E31 E32 E37
    Date: 2013–06
  13. By: Ronald MacDonald (Adam Smith Business School, University of Glasgow); Jun Nagayasu (Faculty of Engineering, Information and Systems, University of Tsukuba)
    Abstract: Using survey expectations data and Markov-switching models, this paper evaluates the characteristics and evolution of investors’ forecast errors about the yen/dollar exchange rate. Since our model is derived from the uncovered interest rate parity (UIRP) condition and our data cover a period of low interest rates, this study is also related to the forward premium puzzle and the currency carry trade strategy. We obtain the following results. First, with the same forecast horizon, exchange rate forecasts are homogeneous among different industry types, but within the same industry, exchange rate forecasts differ if the forecast time horizon is different. In particular, investors tend to undervalue the future exchange rate for long term forecast horizons; however, in the short run they tend to overvalue the future exchange rate. Second, while forecast errors are found to be partly driven by interest rate spreads, evidence against the UIRP is provided regardless of the forecasting time horizon; the forward premium puzzle becomes more significant in shorter term forecasting errors. Consistent with this finding, our coefficients on interest rate spreads provide indirect evidence of the yen carry trade over only a short term forecast horizon. Furthermore, the carry trade seems to be active when there is a clear indication that the interest rate will be low in the future.
    Keywords: Currency forecast errors, uncovered interest parity, forward premium puzzle, carry trade, Markov-switching model
    JEL: F3
    Date: 2013–10
  14. By: Wataru Tamura (The University of Tokyo)
    Abstract: This paper examines optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy modeled in this paper is subject to two types of shocks that determine the efficient level of output and firms’ desired mark-ups. To minimize the welfare-reducing output gap and price dispersion among firms, the central bank controls firms’ incentives and expectations by using a monetary instrument and by disclosing information on the fundamentals. This paper shows that the optimal policy comprises the partial disclosure of information and the adjustment of the monetary instrument contingent on the disclosed information. Under this optimal policy, public information is formed by the weighted difference of the two shocks in order to induce a negative correlation between their conditional expectations, while monetary policy should offset the detrimental effect of such a disclosure policy on price stabilization.
    Date: 2013–10
  15. By: Giuseppe Cappelletti (Bank of Italy); Lucia Esposito (Bank of Italy)
    Abstract: This paper studies the interaction between monetary and fiscal authorities while investors are coordinating on a speculative attack. The authorities want to achieve specific targets for output and inflation but also to avoid a regime change (i.e. sovereign default). They use the traditional policy instruments. The model examines the informational role of simultaneous implementation of monetary and fiscal policies in coordination environments. While endogenous information generated by the intervention of one policy maker has been shown to lead to multiple equilibria, we show that if the actions chosen by the central bank and the government not only deliver information to the markets but also influence the fundamentals of the economy, when the authorities have a strong incentive to preserve the status quo over other objectives, then there is no equilibrium in which investors' strategies depend monotonically on their private information on fundamentals.
    Keywords: global games, complementarities, signaling, self-fulfilling expectations, multiple equilibria, crises, regime change, policy interactions
    JEL: C7 D8 E5 E6 F3
    Date: 2013–09
  16. By: Nombulelo Gumata, Alain Kabundi and Eliphas Ndou
    Abstract: This paper investigates the di¤erent channels of transmission of monetary policy shock in South Africa in a data-rich environment. The analysis contains 165 quarterly variables observed from 1990Q1 to 2012Q2. We use a Large Bayesian Vector Autoregressive model, which can easily accommodate a large cross-section of variables without running out of degree of freedom. The benefit of this framework is its ability to handle different channels of transmission of monetary policy simultaneously, instead of using different models. The model includes five channels of transmission: credit, interest rate, asset prices, exchange rate, and expectations. The results show that all channels seem potent, but their magnitudes and importance differ. The results indicate that the interest rate channel is the most important transmitter of the shock, followed by the exchange rate, expectation, and credit channels. The asset price channel is somewhat weak.
    Keywords: Bayesian VAR, Monetary policy transmission; Balance sheets, large
    JEL: C11 C13 C33 C53
    Date: 2013
  17. By: Judit Krekó (Magyar Nemzeti Bank (central bank of Hungary)); Csaba Balogh (Magyar Nemzeti Bank (central bank of Hungary)); Kristóf Lehmann (Magyar Nemzeti Bank (central bank of Hungary)); Róbert Mátrai (Magyar Nemzeti Bank (central bank of Hungary)); György Pulai (Magyar Nemzeti Bank (central bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: This paper provides an overview of the impact of unconventional central bank instruments, the relevant international experiences and the room for application in Hungary. The use of unconventional instruments may be justified by the existence of financial market friction, turmoil, failure or constraint, when instruments that change the size and/or composition of central bank balance sheets may be more efficient in achieving monetary policy objectives than traditional interest rate policy. Empirical analyses found the unconventional instruments applied in developed countries successful in easing market tensions, increasing market liquidity and reducing yields. Although they proved to be unsuccessful in providing a boost to economic growth, they were able to mitigate the fall in lending and output. Vulnerable emerging countries with a lower credit rating and high external debt have much less room for manoeuvre to apply non-conventional instruments. Even liquidity providing instruments, which are otherwise considered the least risky, may result in exchange rate depreciation and flight of capital during a crisis. The interventions that involve risk taking by the government may add to market concerns about fiscal sustainability. Due to Hungary’s vulnerability, high country risk premium and large foreign exchange exposure, most of the instruments applied in other countries would entail financial stability risks at home. In theory, the sharp reduction in the supply of bank credit could provide sound justification for the use of unconventional central bank instruments in Hungary. It should be noted, however, that insufficient credit supply is mainly attributable to a lack of willingness by banks to lend, which can be less influenced by the Bank, rather than to any lack of capacity to lend. In addition to banks’ high risk aversion, uncertain macroeconomic environment and economic policy measures affecting the banking sector also decreased willingness to lend, which is beyond the authority of the central bank. Therefore, these instruments at most may have a role in preventing a possible future deterioration in banks’ lending capacity from becoming an obstacle to lending in a turbulent period.
    Keywords: monetary policy, unconventional tools, financial intermediation
    JEL: E44 E52 E58 E61
    Date: 2013
  18. By: Volz, Ulrich
    Abstract: This paper scrutinises the state of RMB internationalisation and its likely progress over the coming years and discusses its implications for currency co-operation in East Asia. As part of its internationalisation, the RMB is gradually delinked from the dollar, which will effectively put an end to the East Asian dollar standard that has shaped the region's financial architecture over the last three decades and that has provided a relatively high degree of intra-regional exchange rate stability. Because of the close trade and investment ties that have developed across the region, the East Asian countries, especially the ASEAN countries which are striving to create an ASEAN Economic Community, will continue to manage their exchange rates and stabilise their currencies against one another to facilitate cross-border investment and commerce. But instead of a replacing of the dollar standard with an RMB standard we are likely to see some rather loose and informal exchange rate co-operation in East Asia based on currency baskets, with China herself moving towards a managed exchange rate system guided by a currency basket. --
    Keywords: RMB internationalisation,key currencies,Chinese economy,East Asian monetary co-operation,currency baskets
    JEL: E58 F33
    Date: 2013
  19. By: Blaise Gnimasoun; Valérie Mignon
    Abstract: This paper aims at studying current-account imbalances by paying a particular attention to exchange-rate misalignments. We rely on a nonlinear model linking the persistence of current-account imbalances to the deviation of the exchange rate to its equilibrium value. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we show that persistence of current-account imbalances strongly depends on currency misalignments. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members.
    Keywords: current-account imbalances, current-account persistence, exchange-rate misalignments, panel smooth transition regression models
    JEL: F32 F31 C33
    Date: 2013
  20. By: Senbeta, Sisay Regassa
    Abstract: Firms in most low-income countries depend almost entirely on imported capital and intermediate inputs. As a result, the availability and cost of foreign exchange play a crucial role on the macroeconomic performance of these countries. In this study we introduce foreign exchange constraints that importing ?rms face and the foreign exchange reserve management problem of the central banks in such economies into a small open economy New Keynesian model. We calibrated the model to the Ethiopian economy. Our simulation experiments show that given the foreign exchange constraints and the standard monetary policy rule, contractionary monetary policy leads to expansion in output and consumption and contraction in employment. This e¤ect is more pronounced if the duration of price stickiness for the imported goods is short relative to that of the domestically produced goods which seems to be the case for countries like Ethiopia. This result, to the minimum, reminds us that one needs to be cautious about the e¤ectiveness of conventional macroeconomic policies when applied to low-income countries.
    Date: 2013–09
  21. By: Chien-Yu Huang (School of Economics, Southwest University of Finance and Economics, China); Juin-Jen Chang (Institute of Economics, Academia Sinica, Taipei, Taiwan); Lei Ji (School of Economics, Shanghai School of Economics and Finance, China)
    Abstract: In this paper we explore the effects of monetary policy on the number of firms, firm market size, ination and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance (CIA) constraints on two distinct types of R&D investment - in-house R&D and entry investment. This allows us to match empirical evidence and provides novel implications to the literature. We show that if in-house R&D (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the the number of rms and ination, but decreases the rm size and economic growth. By contrast, if entry investment (variety expansion-type R&D) is subject to the CIA constraint, these variables adversely respond to such a monetary policy. Besides, our model generates rich transitional dynamics in response to a change in monetary policy, when R&D/entry is restricted by a cash constraint.
    Keywords: CIA constraints on R&D, endogenous market structure, monetary policy, economic growth
    JEL: O30 O40 E41
    Date: 2013–09
  22. By: Massimiliano Affinito (Bank of Italy)
    Abstract: This paper tests the hypothesis of liquidity hoarding in the Italian banking system during the 2007-2011 global financial crisis. According to this hypothesis, in periods of crisis, interbank markets stop working and central banks’ interventions are ineffective because banks hoard the liquidity injected rather than channelling it on to other banks and the real economy. The test uses monthly data at banking-group level for all intermediaries operating in Italy between January 1999 and August 2011. This is the first paper to use micro data to analyse the relationship between single banks’ positions vis-à-vis the central bank and the interbank market. The results show that the Italian interbank market functioned well even during the crisis, and, contrary to widespread conjecture, the liquidity injected by the Eurosystem was intermediated among banks and towards the real economy. This finding is robust to the use of several estimation methods and data on the different segments of the money market.
    Keywords: liquidity, financial crisis, central bank refinancing, interbank market
    JEL: G21 E52 C30
    Date: 2013–09
  23. By: Gabriele Camera (Economic Science Institute, Chapman University); YiLi Chien (Research Division, Federal Reserve Bank of St. Louis)
    Abstract: We examine two monetary models with periodic interactions in centralized and decentralized markets: the cash-in-advance model and the model in Lagos and Wright (2005). Given conformity of preferences, technologies and shocks, both models reduce to a single di?erence equation. In stationary equilibrium, such equations coincide when the price distortion present in one model, due to Nash bargaining, is replicated in the other using a tax on cash revenues. In that case, the quantitative implications for the welfare cost of in?ation in each model are also comparable. Di?erences in the model’s performance reduce to di?erences in the pricing mechanism assumed to govern those transactions that must be settled with the exchange of cash.
    Keywords: cash-in-advance, matching, microfoundations, money, in?ation
    JEL: E1 E4 E5
    Date: 2013
  24. By: Olivier Armantier; John Sporn
    Abstract: During the Great Recession, the Federal Reserve implemented several novel programs to address adverse conditions in financial markets. Three of these temporary programs relied on an auction mechanism: the Term Auction Facility, the Term Securities Lending Facility, and the disposition of the Maiden Lane II portfolio. These auctions differed from one another in several dimensions: their objectives, rules, and the financial asset being traded. The object of this paper is to document, compare, and provide a rationale for the mechanics of the different auctions implemented by the Federal Reserve during the Great Recession.
    Keywords: Financial crises ; Auctions ; Recessions ; Federal Reserve System
    Date: 2013
  25. By: Otaviano Canuto; Matheus Cavallari
    Keywords: Finance and Financial Sector Development - Debt Markets Banks and Banking Reform Private Sector Development - Emerging Markets Finance and Financial Sector Development - Currencies and Exchange Rates Economic Theory and Research Macroeconomics and Economic Growth
    Date: 2013–05

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