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

  1. The Macroeconomics of Trend Inflation By Guido Ascari; Argia M. Sbordone
  2. Evaluating unconventional monetary policies -why aren’t they more effective? By Yi Wen
  3. The fragility of two monetary regimes: The European Monetary System and the Eurozone By Paul De Grauwe; Yuemei Ji
  4. The Effects of Monetary Policy on Asset Prices Bubbles: Some Evidence By Jordi Galí; Luca Gambetti
  5. Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012 By Nikolay Markov; Thomas Nitschka
  6. The impact of unconventional monetary policy on the Italian economy during the sovereign debt crisis By Marco Casiraghi; Eugenio Gaiotti; Lisa Rodano; Alessandro Secchi
  7. Banks Exposure to Interest Rate Risk and The Transmission of Monetary Policy By Landier, Augustin; Sraer, David; Thesmar, David
  8. The Federal Reserve in times of economic crisis: Paths and choices since 2007 By Rüdiger, Sina
  9. The Impact of Different Types of Foreign Exchange Intervention: An Event Study Approach By Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
  10. Macroprudential Measures, Housing Markets and Monetary Policy By José A Carrasco-Gallego; Margarita Rubio
  11. Money Targeting, Heterogeneous Agents and Dynamic Instability By Giorgio Motta; Patrizio Tirelli
  12. The Zero Lower Bound: Frequency, Duration, and Determinacy By Alexander W. Richter; Nathaniel A. Throckmorton
  13. The Net Stable Funding Ratio and banks’ participation in monetary policy operations: some evidence for the euro area By Antonio Scalia; Sergio Longoni; Tiziana Rosolin
  14. Global Dynamics at the Zero Lower Bound By William T. Gavin; Benjamin D. Keen; Alexander W. Richter; Nathaniel A. Throckmorton
  15. Macroprudential and Monetary Policies: Implications for Financial Stability and Welfare By José A Carrasco-Gallego; Margarita Rubio
  16. The Development of Opacity in U.S. Banking By Gary Gorton
  17. Anchoring the yield curve using survey expectations By Carlo Altavilla; Raffaella Giacomini; Giuseppe Ragusa
  18. One Money, One Cycle? The EMU Experience By Martin Gächter; Aleksandra Riedl
  19. The connection between Wall Street and Main Street : measurement and implications for monetary policy By Barattieri, Alessandro; Eden, Maya; Stevanovi, Dalibor
  20. Money as a Unit of Account By Matthias Doepke; Martin Schneider
  21. Market Entries and Exits and the Nonlinear Behaviour of the Exchange Rate Pass-Through into Import Prices By Herger Nils
  22. Multifractal Analysis of the Algerian Dinar - US Dollar exchange rate By DIAF, Sami; TOUMACHE, Rachid
  23. When Cards and ATM’s are the only choice: A fortnight in Cyprus with no banking system, nor trust By Efthymiou, Leonidas; Michael, Sophia

  1. By: Guido Ascari (University of Oxford and University of Pavia); Argia M. Sbordone (Federal Reserve Bank of New York)
    Abstract: Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target inflation at a rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this Survey we show the importance of appropriately accounting for a low, positive trend inflation rate for the conduct of monetary policy. We first review empirical research on the evolution and dynamics of US trend inflation, and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. Then we construct a Generalized New Keynesian model (GNK) which accounts for a positive trend inflation rate and we show that in this model higher trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution in evaluating recent proposals of addressing the existing ZLB situation by raising the underlying rate of inflation.
    Keywords: Trend Inflation, Inflation Target, Inflation Persistence
    JEL: E31 E52
    Date: 2013–10
  2. By: Yi Wen
    Abstract: We use a general equilibrium finance model that features explicit government purchases of private debts to shed light on some of the principal working mechanisms of the Federal Reserve’s large-scale asset purchases (LSAP) and their macroeconomic effects. Our model predicts that unless private asset purchases are highly persistent and extremely large (on the order of more than 50% of annual GDP), money injections through LSAP cannot effectively boost aggregate output and employment even if inflation is fully anchored and the real interest rate significantly reduced. Our framework also sheds light on some long- standing financial puzzles and monetary policy questions facing central banks around the world, such as (i) the fight to liquidity under a credit crunch and debt crisis, (ii) the liquidity trap, (iii) the inverted yield curve, and (iv) the low inflation puzzle under quantitative easing.
    Keywords: Monetary policy ; Liquidity (Economics) ; Inflation (Finance)
    Date: 2013
  3. By: Paul De Grauwe (LSE; CEPS); Yuemei Ji (University College London)
    Abstract: We analyze the similarities and the differences in the fragility of the European Monetary System (EMS) and the Eurozone. We test the hypothesis that in the EMS the fragility arose from the absence of a credible lender of last resort in the foreign exchange markets while in the Eurozone it was the absence of a lender of last resort in the long-term government bond markets that caused the fragility. We conclude that in the EMS the national central banks were weak and fragile, and the national governments were insulated from this weakness by the fact that they kept their own national currencies. In the Eurozone the roles were reversed. The national central banks that became part of the Eurosystem were strengthened.
    Keywords: government bond markets, interbank money market, interest rate spread, Eurozone, EMS, fragility
    JEL: E42 E52 E58 F33
    Date: 2013–10
  4. 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, financial stability, inflation targeting, asset price booms
    JEL: E52 G12
    Date: 2013–10
  5. By: Nikolay Markov; Thomas Nitschka
    Abstract: This paper estimates Taylor rules using real-time inflation forecasts of the Swiss National Bank's (SNB) ARIMA model and real-time model-based internal estimates of the output gap since the onset of the monetary policy concept adopted in 2000. To study how market participants understand the SNB's behavior, we compare these Taylor rules to marketexpected rules using Consensus Economics survey-based measures of expectations. In light of the recent financial crisis, the zero-lower bound period and the subsequent massive Swiss franc appreciation, we analyze potential nonlinearity of the rules using a novel semi-parametric approach. First, the results show that the SNB reacts more strongly to its ARIMA inflation forecasts three and four quarters ahead than to forecasts at shorter horizons. Second, market participants have expected a higher inflation responsiveness of the SNB than found with the central bank's data. Third, the best fitting specification includes a reaction to the nominal effective Swiss franc appreciation. Finally, the semiparametric regressions suggest that the central bank reacts to movements in the output gap and the exchange rate to the extent that they become a concern for price stability and economic activity.
    Keywords: Taylor rules, real-time data, nonlinearity, semi-parametric-modeling
    JEL: E52 E58 C14
    Date: 2013
  6. By: Marco Casiraghi (Bank of Italy); Eugenio Gaiotti (Bank of Italy); Lisa Rodano (Bank of Italy); Alessandro Secchi (Bank of Italy)
    Abstract: We assess the impact on the Italian economy of the main unconventional monetary policies adopted by the ECB in 2011-2012 (SMP, 3-year LTROs and OMTs) by following a two-step approach. We evaluate their effects on money market interest rates, government bond yields and credit availability and then map them onto macroeconomic implications using the Bank of Italy quarterly model of the Italian economy. We find that the SMP and the OMTs have been effective in counteracting increases in government bond yields and that the LTROs have had a beneficial impact on credit supply and money market conditions. From a macroeconomic perspective, we find that the unconventional policies have had a large positive effect on the Italian economy, mainly through the credit channel, with a cumulative impact on GDP growth of 2.7 percentage points over the period 2012-2013. To conclude, while the policies did not prevent the Italian economy from falling into recession, they did avoid a more intense credit crunch and a larger output fall than those actually observed.
    Keywords: monetary policy, unconventional monetary measures
    JEL: E52 E58 E44
    Date: 2013–09
  7. By: Landier, Augustin; Sraer, David; Thesmar, David
    Abstract: We show empirically that banks' exposure to interest rate risk, or income gap, plays a crucial role in monetary policy transmission. In a first step, we show that banks typically retain a large exposure to interest rates that can be predicted with income gap. Secondly, we show that income gap also predicts the sensitivity of bank lending to interest rates. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile.
    Date: 2013–02
  8. By: Rüdiger, Sina
    Abstract: This paper studies the actions of the U.S. Federal Reserve Bank during the financial crisis from 2007-2012. Whereas the first two parts concentrate on asset bubble theory and the development of the housing bubble, the third part rates the performance of the Federal Reserve during the crisis. The chosen scoring model approach shows that the average performance of five specific measures taken by the Federal Reserve only ranks between fair and good. Comparing Stiglitz (2010) viewpoints with those of the Federal Reserve, this paper analyzes the federal funds rate, the bailout of AIG, the lending to Bear Stearns, the Term Auction Facility and the failure of Lehman Brothers. This paper argues that the resulting decisions were well intentioned but that the outcome was different from expectations because of missing regulations and restrictions. Furthermore, the structure of the Federal Reserve is examined and criticized. --
    Keywords: Federal Reserve,financial crisis,housing bubble,monetary policy
    JEL: E52 E58
    Date: 2013
  9. By: Juan José Echavarría; Luis Fernando Melo Velandia; Mauricio Villamizar
    Abstract: To date, there is still great controversy as to which exchange rate model should be used or which monetary channel should be considered, when measuring the effects of monetary policy. Since most of the literature relies on structural models to address identification problems, the validity of results largely turn on how accurate the assumptions are in describing the full extent of the economy. In this paper we compare the effect of different types of central bank interventions using an event study approach for the Colombian case during the period 2000-2012, without imposing restrictive parametric assumptions or without the need to adopt a structural model. We find that all types of interventions (international reserve accumulation options, volatility options and discretionary) have been successful according to the smoothing criterion. In particular, volatility options seemed to have the strongest effect. We find that results are robust when using different windows sizes and counterfactuals.
    Keywords: Central bank intervention, foreign exchange intervention mechanisms, event study. Classification JEL: E52, E58, F31.
    Date: 2013–10
  10. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: The recent financial crisis has raised the discussion among policy makers and researchers on the need of macroprudential policies to avoid systemic risks in financial markets. However, these new measures need to be combined with the traditional ones, namely monetary policy. The aim of this paper is to study how the interaction of macroprudential and monetary policies affect the economy. We take as a baseline a dynamic stochastic general equilibrium (DSGE) model which features a housing market in order to evaluate the performance of a rule on the loan-to-value ratio (LTV) interacting with the traditional monetary policy conducted by central banks. We find that, introducing the macroprudential rule mitigates the effects of booms on the economy by restricting credit. From a normative perspective, results show that the combination of monetary policy and the macroprudential rule is unambiguously welfare enhancing, especially when monetary policy does not respond to output and house prices and only to inflation.
    Keywords: Macroprudential, monetary policy, collateral constraint, credit,loan-to-value
  11. By: Giorgio Motta; Patrizio Tirelli
    Abstract: Following a seminal contribution by Bilbiie (2008), the Limited Asset Market Participation hypothesis has triggered a debate on DSGE models determinacy when the central bank implements a standard Taylor rule. We reconsider the issue here in the context of an exogenous money supply rule, documenting the role of nominal and real frictions in determining these results. A general conclusion is that frictions matter for stability insofar as they redistribute income between Ricardian and non-Ricardian households when shocks hit the economy. Finally, we extend the model to allow for the possibility that consumers who do not participate to the market for interest-bearing securities hold money. In this case endogenous monetary transfers between the two groups allow to smooth consumption differences and the model is determinate provided that the non-negativity constraint on individual money holdings is satisfied.
    Keywords: Rule of Thumb Consumers, DSGE, Determinacy, Limited Asset Market Participation, Money Targeting
    JEL: E52 E58
    Date: 2013–10
  12. By: Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, determinacy is not guaranteed even if the Taylor principle is satisfied when the ZLB does not bind. This paper shows the boundary of the determinacy region imposes a clear tradeoff between the expected frequency and average duration of ZLB events. We show this tradeoff using a global solution to a nonlinear New Keynesian model with two alternative stochastic processes?one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events arise endogenously due to technology shocks. In both cases, the household accounts for the possibility of going to and exiting the ZLB in expectation. We quantify the expectation al effect of the ZLB and show it depends on the parameters of the stochastic process.
    Keywords: Monetary policy; zero lower bound; determinacy; global solution method
    JEL: E31 E42 E58
    Date: 2013–10
  13. By: Antonio Scalia (Bank of Italy); Sergio Longoni (Bank of Italy); Tiziana Rosolin (Bank of Italy)
    Abstract: Based on a review of the analytical underpinnings of the effects of the NSFR on banks’ choices, this paper attempts to relate banks’ strategies to developments in the value of the ratio in the euro area. In spite of a not-so-near implementation date, the evidence is that the NSFR already matters for banks’ choices, and it might be more relevant as a decision variable than alternative leverage indicators. As part of a convergence process towards the 100 per cent threshold, we estimate that the ECB’s 3-year LTROs have raised the available stable funding by €429 billion as of June 2012 for the sample banks with a shortfall and that the NSFR may affect loans to the economy. In view of the phasing-in of the Basel III liquidity standards, the evidence suggests that, when evaluating non-standard monetary policy measures, central banks should also take into account their impact on the fulfilment of the NSFR and the possible cliff effects related to their expiration.
    Keywords: Basel III, liquidity regulation, central bank operations
    JEL: E5 G2
    Date: 2013–09
  14. By: William T. Gavin; Benjamin D. Keen; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: This article presents global solutions to standard New Keynesian models with a zero lower bound (ZLB) constraint on the nominal interest rate. Rather than focus on specific sequences of shocks, we provide the solution for all combinations of technology and discount factor shocks and a thorough explanation of how dynamics change across the state space. Our solution method emphasizes accuracy to capture important expectational effects of going to and returning from the ZLB, which commonly used solution methods based on specific sequences of shocks cannot capture. We focus on the New Keynesian model without capital, but we also study the model with capital, with and without capital adjustment costs. Capital adds another mechanism for intertemporal substitution, which strengthens the expectational effects of the ZLB and impacts dynamics even before the ZLB is hit. We also evaluate how monetary policy affects the likelihood of hitting the ZLB. A policy rule based on a dual mandate is more likely to cause ZLB events when the central bank places greater emphasis on output stabilization.
    Keywords: Monetary Policy; Zero Lower Bound; Global Solution Method
    JEL: E31 E42 E58 E61
    Date: 2013–10
  15. By: José A Carrasco-Gallego; Margarita Rubio
    Abstract: In this paper, we analyse the implications of macroprudential and monetary policies for business cycles, welfare, and .nancial stability. We consider a dynamic stochastic general equilibrium (DSGE) model with housing and collateral constraints. A macroprudential rule on the loan-to-value ratio (LTV), which responds to output and house price deviations, interacts with a traditional Taylor rule for monetary policy. From a positive perspective, introducing a macroprudential tool mitigates the effects of booms in the economy by restricting credit. However, monetary and macroprudential policies may enter in conflict when shocks come from the supply-side of the economy. From a normative point of view, results show that the introduction of this macroprudential measure is welfare improving. Then, we calculate the combination of policy parameters that maximizes welfare and find that the optimal LTV rule should respond relatively more aggressively to house prices than to output deviations. Finally, we study the efficiency of the policy mix. We propose a tool that includes not only the variability of output and inflation but also the variability of borrowing, to capture the effects of policies on financial stability: a three-dimensional policy frontier (3DPF). We find that both policies acting together unambiguously improve the stability of the system.
    Keywords: Macroprudential, monetary policy, welfare, financial stability, three-dimensional policy frontier, loan-to-value, Taylor curve
  16. By: Gary Gorton
    Abstract: An examination of U.S. banking history shows that economically efficient private bank money requires that information-revealing securities markets for bank liabilities be closed. That is, banks are optimally opaque, which is why they are regulated and examined. I show this by examining the transition from private bank notes, the predominant form of money before the U.S. Civil War, to demand deposits and show that markets endogenous closed. The opacity of bank money in the recent financial crisis is also briefly discussed.
    JEL: E32 E41 E42 E44 G01 G21
    Date: 2013–10
  17. By: Carlo Altavilla; Raffaella Giacomini (Institute for Fiscal Studies and UCL); Giuseppe Ragusa
    Abstract: The dynamic behavior of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates.
    Date: 2013–10
  18. By: Martin Gächter; Aleksandra Riedl
    Abstract: The authors examine whether the introduction of the euro had a significantly positive impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU) which might arise due to the lack of country-specific monetary policy shocks in the euro area. Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993{2011), the authors uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, the authors’ results substantially strengthen the conclusion by Frankel & Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verifed when controlling for the effect of increased trade linkages implied by entering a currency union. JEL classification: E02, E32, E58, F15, F33
    Keywords: Business cycles, EMU, endogeneity, optimum currency areas
    Date: 2013–09–25
  19. By: Barattieri, Alessandro; Eden, Maya; Stevanovi, Dalibor
    Abstract: This paper proposes a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a measure of the composition of assets, namely the share of credit to the non-financial sectors over the total credit market instruments. The aggregate Measure of Connectedness for the United States declines by about 27 percent in the period 1952-2009. The authors suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. They present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thereby dampening the credit channel transmission of monetary policy. The Measure of Connectedness is interacted with both a structural vector autoregressive model and a factor-augmented vector autoregressive model for the United States economy. The analysis establishes that the impulse responses to monetary policy shocks are dampened as the level of connection declines.
    Keywords: Debt Markets,Access to Finance,Emerging Markets,Financial Intermediation,Economic Theory&Research
    Date: 2013–10–01
  20. By: Matthias Doepke; Martin Schneider
    Abstract: We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of "currency areas" when there is variation in the intensity of trade within and across regions.
    JEL: E4 E5 F33
    Date: 2013–10
  21. By: Herger Nils (Study Center Gerzensee)
    Abstract: This paper develops an empirical framework giving rise to a nonlinear behaviour of the exchange rate pass-through (ERPT). Rather than shifts between low and high infl ation, the nonlinearity arises when large swings in the exchange rate trigger market entries and exits of importing firms. Switching regressions are used to distinguish between low and high pass-through regimes of the exchange rate into import prices. For the case of Switzerland, the corresponding results suggest that, though infl ation has been low and stable, the ERPT still doubles in value in times of a rapid appreciation of the Swiss Franc.
    Date: 2013–08
  22. By: DIAF, Sami; TOUMACHE, Rachid
    Abstract: Abstract : This article aims to study the scaling behavior of the Algerian Dinar - US Dollar exchange rate using multifractal time series analysis which stems from the fractal theory first implemented by Benoît Mandelbrot in early 1960. Investigating time series properties using this technique allows us to shed light on important characteristics omitted by traditional time series analyses and highlight the usefulness of local Hölder exponents in predicting crash patterns.
    Keywords: multifractal analysis, Dinar-Dollar exchange rate, Hölder exponents.
    JEL: C5 F31 G0
    Date: 2013–10–15
  23. By: Efthymiou, Leonidas; Michael, Sophia
    Abstract: The aim of this article is to offer some insights into the remarkable happenings that occurred in Cyprus during a two-week period (15 March – 28 March 2013) when the country was left with no banking system, subsisting solely on ATMs and cards. At the same time, we aim to provide some new perceptions into the role of ATMs, POSs and credit cards in critical economic situations where a bank run, bank insolvency, or bail-in are likely to happen. We adopt a ‘procedural approach’ and use the sequence of events method towards building up a ‘timeline analysis’. Our discussion suggests that for a number of reasons, the Cypriot bail-in case has breached the confidence of unsecured and secured depositors and investors on a global scale. Also, we suggest that during the preparations of the supposedly unexpected bail-in, which Cypriot MPs firstly rejected and then accepted the Eurogroup and IMF proposal, ATMs, POSs and credit cards have played a pre-arranged role, securing a controlled circulation of money and transactions with restrictions.
    Keywords: ATMs, Levy, bank-run, informal economy, cashless society, Cyprus
    JEL: N2 O33
    Date: 2013–06

This nep-mon issue is ©2013 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.