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on Monetary Economics |
| By: | Mara Pirovano (University of Antwerp, Faculty of Applied Economics; Catholic University of Leuven, Center of Economic Studies) |
| Abstract: | This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances. |
| Keywords: | DSGE model, capital inflows, financial frictions, liability dollarization, financial stability |
| JEL: | E44 E47 E52 F41 F47 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201311-246&r=mon |
| By: | Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of "indicator countries", providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies. |
| Keywords: | Inflation-targeting; foreign exchange interventions; Gaussian mixture model |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881359&r=mon |
| By: | Kurmas Akdogan |
| Abstract: | We explore the asymmetric behaviour of inflation around the target level for inflation-targeting emerging markets. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out-of-sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high, especially at long-horizons. |
| Keywords: | Inflation, forecasting, nonlinear adjustment |
| JEL: | C32 E37 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1342&r=mon |
| By: | Coenen, Günter; Warne, Anders |
| Abstract: | This paper employs stochastic simulations of the New Area-Wide Model - microfounded open-economy model developed at the ECB - to investigate the consequences of the zero lower bound on nominal interest rates for the evolution of risks to price stability in the euro area during the recent financial crisis. Using a formal measure of the balance of risks, which is derived from policy-makers' preferences about inflation outcomes, we first show that downside risks to price stability were considerably greater than upside risks during the first half of 2009, followed by a gradual rebalancing of these risks until mid-2011 and a renewed deterioration thereafter. We find that the lower bound has induced a noticeable downward bias in the risk balance throughout our evaluation period because of the implied amplification of deflation risks. We then illustrate that, with nominal interest rates close to zero, forward guidance in the form of a time-based conditional commitment to keep interest rates low for longer can be successful in mitigating downside risks to price stability. However, we find that the provision of time-based forward guidance may give rise to upside risks over the medium term if extended too far into the future. By contrast, time-based forward guidance complemented with a threshold condition concerning tolerable future inflation can provide insurance against the materialisation of such upside risks. -- |
| Keywords: | monetary policy,deflation,zero lower bound,forward guidance,DSGE modelling,euro area |
| JEL: | E31 E37 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfswop:201306&r=mon |
| By: | Ngoc-Sang Pham (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper considers an infinite-horizon monetary economy with collateralized assets. A Central BanK lends money to households by creating short- and long-term loans. Households can deposit or borrow money on both short- and long-term maturity loans. If households want to sell a financial asset, they are required to hold certain commodities as collateral. They face a cash-in-advance constraints when buying commodities and financial assets. Under Uniform or Sequential Gains to Trade Hypothesis, the existence of collateral monetary equilibrium is ensured. I also provide some properties of equilibria, including the liquidity trap. |
| Keywords: | Monetary economy, liquidity constraint, collateralized asset, infinite horizon, liquidity trap. |
| JEL: | D52 E5 C62 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:13055r&r=mon |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Inflation targeting countries with flexible exchange rates performed better during the global financial crisis and its aftermath than countries with a fixed exchange rate. Countries that maintained a hard fixed exchange rate throughout the past six years performed somewhat better than those that abandoned it. But, abandoning a hard fix during a crisis is itself evidence of the economic costs of fixed rates. It is particularly telling that no inflation targeting country with a flexible exchange rate abandoned its regime during the crisis. Policymakers in many countries are averse to volatile exchange rates—they have a "fear of floating." Gagnon's results strongly suggest that flexible exchange rates enable countries to weather crises better than fixed rates and that the benefits of flexible rates are not limited to large countries. Policymakers should replace their fear of floating with a fear of fixing. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-28&r=mon |
| By: | Pelin Ilbas (National Bank of Belgium, Research Department); Øistein Røisland (Norges Bank); Tommy Sveen (BI Norwegian Business School) |
| Abstract: | There are two main approaches to modelling monetary policy; simple instrument rules and optimal policy. We propose an alternative that combines the two by extending the loss function with a term penalizing deviations from a simple rule. We analyze the properties of the modified loss function by considering three different models for the US economy. The choice of the weight on the simple rule determines the trade-off between optimality and robustness. We show that placing some weight on a simple Taylor-type rule in the loss function, one can prevent disastrous outcomes if the model is not a correct representation of the underlying economy. |
| Keywords: | Model uncertainty, Optimal control, Simple rules |
| JEL: | E52 E58 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201311-245&r=mon |
| By: | Dewachter, Hans; Erdemlioglu, Deniz; Gnabo, Jean-Yves; Lecourt, Christelle |
| Abstract: | In this paper, we examine the intra-day effects of verbal statements and comments on the FX market uncertainty using two measures: continuous volatility and discontinuous jumps. Focusing on the euro-dollar exchange rate, we provide empirical evidence of how these two sources of uncertainty matter in measuring the short-term reaction of exchange rates to communication events. Talks significantly trigger large jumps or extreme events for approximately an hour after the news release. Continuous volatility starts reacting prior to the news, intensifies around the release time and stays at high levels for several hours. Our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe, and higher than normal. Disentangling the US and Euro area statements, we also find that abnormal levels of volatility are mostly driven by the communication of the Euro area officials rather than US authorities. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:leuven:urn:hdl:123456789/410258&r=mon |
| By: | Manthos D. Delis; Yiannis Karavias |
| Abstract: | Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk. |
| Keywords: | Banks; Optimal credit risk; Profit maximization; Monetary policy |
| URL: | http://d.repec.org/n?u=RePEc:not:notgts:13/03&r=mon |
| By: | Yoshimori Kurokawa; Jiaren Pang Author Name: Yao Tang |
| Abstract: | We construct a dynamic Ricardian model of trade with money and nominal ex- change rate. The model implies that the nominal wages of the trading countries are more likely to exhibit stronger positive comovements when the countries x their bi- lateral exchange rates. Panel regression results based on data from OECD countries from 1973 to 2012 suggest that countries in the European Monetary Union (EMU) ex- perienced stronger positive wage comovements with their main trade partners. When we restrict the regression to the subsample of the EMU countries, we nd a signif- icant increase in wage comovements after these countries joined the EMU in 1999 compared to the pre-euro era. In comparison, when the sample is restricted to the non-EMU countries, we nd no evidence that non-currency union pegs aected the wage comovements. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:tsu:tewpjp:2013-005&r=mon |
| By: | Mikhail Dmitriev; Jonathan Hoddenbagh |
| Abstract: | In the financial accelerator literature pioneered by Bernanke, Gertler and Gilchrist (1999) entrepreneurs are myopic and lenders suboptimally choose a safe rate of return on their loans. We derive the optimal lending contract for forward looking entrepreneurs and provide three main results. First, under the optimal contract we find that financial frictions do not amplify business cycle fluctuations. Second, we show that shocks to the variance of unobserved idiosyncratic productivity --- so-called ``risk shocks'' --- have little effect on the real economy under the optimal contract. Third, we find that amplification under the suboptimal contract depends on loose monetary policy: when interest rate setting follows a standard Taylor rule, the financial accelerator is significantly dampened or even reversed. |
| JEL: | E3 |
| Date: | 2013–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2013:pdm9&r=mon |
| By: | Yasuo Hirose; Atsushi Inoue |
| Abstract: | This paper examines how and to what extent parameter estimates can be biased in a dynamic stochastic general equilibrium (DSGE) model that omits the zero lower bound constraint on the nominal interest rate. Our experiments show that most of the parameter estimates in a standard sticky-price DSGE model are not biased although some biases are detected in the estimates of the monetary policy parameters and the steady-state real interest rate. Nevertheless, in our baseline experiment, these biases are so small that the estimated impulse response functions are quite similar to the true impulse response functions. However, as the probability of hitting the zero lower bound increases, the biases in the parameter estimates become larger and can therefore lead to substantial differences between the estimated and true impulse responses. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:toh:tergaa:308&r=mon |
| By: | Emmanuel Carré (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Jézabel Couppey-Soubeyran (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dominique Plihon (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Marc Pourroy (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne) |
| Abstract: | This paper provides a snapshot of the current state of central banking doctrine in the aftermath of the crisis, using data from a questionnaire produced in 2011 and sent to central bankers (from 13 countries plus the euro zone) and economists (31) for a report by the French Council of Economic Analysis to the Prime Minister. The results of our analysis of the replies to the questionnaire are twofold. First, we show that the financial crisis has led to some amendments of pre-crisis central banking. We highlight that respondents to the questionnaire agree on the general principle of a 'broader' view of central banking extended to financial stability. Nevertheless, central bankers and economists diverge or give inconsistent answers about the details of implementation of this 'broader' view. Therefore, the devil is once again in the details. We point out that because of central bankers' conservatism, a return to the status quo cannot be excluded. |
| Keywords: | Central banking; macroprudential policy; financial stability |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00881344&r=mon |
| By: | William R. Cline (Peterson Institute for International Economics); Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Five years after the Federal Reserve and Treasury allowed the investment bank Lehman Brothers to fail, while rescuing Bear Stearns, Fannie Mae, Freddie Mac, and AIG, their actions (or inaction) remain a focus of debate. Cline and Gagnon present evidence that federal officials, at least in hindsight, appear to have followed the dictum of Walter Bagehot that lending should be granted only to solvent entities. Lehman was insolvent—probably deeply so—whereas the other institutions arguably were solvent. The other institutions had abundant collateral to pledge, whereas what little collateral Lehman had to pledge was of questionable quality and scattered across many affiliated entities. While the Fed and Treasury had a sound reason to let Lehman fail, the shock to financial markets that ensued from its collapse sent the financial crisis into a new, more acute phase and may have contributed to the severity of the Great Recession. Therefore the lesson from Lehman is not only that Bagehot-type lender-of-last-resort action is as important as ever but also that it is critical to ensure an orderly resolution for a systemically important financial institution going bankrupt. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-21&r=mon |
| By: | Breuer, Sebastian; Klose, Jens |
| Abstract: | In early 2013 rumors about the Euro-appreciation gained momentum, which may lead to decreases in exports and increases in imports of the member states. Therefore, we investigate the impact of changes in the nominal Euro exchange rate vis-à-vis major currencies on export and import performance of nine different Euro-area-countries. To disentangle the true equilibrium elasticities SURE system error correction models (SSECM) are estimated for nominal exchange rate changes versus the rest of the world or other major currencies. To differentiate between price level changes and changes of the nominal exchange rate, a country's export and import equation is estimated using separately the nominal rate and the relative price/ unit labor cost as regressors. Results of Wald-tests indicate that assuming both variables to have the same influence on exports and imports is misleading. Whether the relative price/ unit labor costs elasticities are high or low depends crucially on which indicator is chosen, while the effect of nominal exchange rate changes can be estimated robustly for all countries in the sample. Especially France and Spain are hit by a Euro appreciation since their exports are highly exchange rate elastic. However, for France, this effect is at least partly offset by an also negative exchange rate elasticity of imports. -- |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:svrwwp:042013&r=mon |
| By: | Peter Conti-Brown (Stanford Law School's Rock Center for Corporate Governance); Simon Johnson (Peterson Institute for International Economics) |
| Abstract: | The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act increased the powers of the Board of Governors of the Federal Reserve System along almost all dimensions pertaining to the supervision and operation of systemically important financial institutions. The authors argue that in light of these changes, the process of considering and choosing governors should also be changed. In nominating and confirming new governors, the president and Congress should make greater efforts to appoint only highly qualified people familiar with both regulatory and monetary matters. They should ensure that governors can work effectively with staff and engage on an equal basis with the chair. This is a pressing matter given that within the next 12 months there may be as many as four appointments to the Board, reflecting an unusually high degree of turnover at a critical moment for the development of regulatory policy, including rules on equity capital funding for banks, the ratio of debt-to-equity (leverage) they are permitted, the funding structure of bank holding companies, and whether and how much banks should be allowed to engage in commodity-related activities. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-25&r=mon |
| By: | Grammatikos, Theoharry; Papanikolaou, Nikolaos I. |
| Abstract: | It is a common place that during financial crises, like the one started in 2007, authorities provide substantial financial support to some problem banks, whilst at the same time let several others to go bankrupt. Is this happening because some particular banks are considered important and big enough to save, whereas some others are perceived as being ‘Too-Small-To-Survive’? Is the size of banks the fundamental factor that makes authorities to treat them differently, or it is also that some banks perform poorly and are not capable of withstanding some considerable shocks whatsoever? Our study provides concrete answers to these questions thus filling part of the void in the existing literature. A short- and a long-run positive relationship between size and performance is documented regardless of the level of bank soundness (healthy vs. failed and assisted banks) under scrutiny. Importantly, we pose and lend support to the ‘Too-Small-To-Survive’ hypothesis according to which the impact of bank performance on failure probability strongly depends on size. Evidence shows that authorities tend not to save banks whose size is below some specific threshold. |
| Keywords: | CAMEL ratings; financial crisis; bank size; ‘Too-Small-To-Survive’ banks |
| JEL: | C23 D02 G01 G21 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51431&r=mon |
| By: | David Berger; Joseph S. Vavra |
| Abstract: | Time-variation in microdata matters empirically for aggregate dynamics: using confidential BLS data we document a robust positive relationship between aggregate exchange rate pass-through and the dispersion of item-level price changes. Furthermore, we find large time-variation in microeconomic dispersion. Ignoring this variation causes huge, time-varying bias when estimating pass-through. For example, constant pass-through specifications are overstated by 50 percent during the mid-1990s and understated by 200 percent during the 2008 trade-collapse. This purely empirical result arises naturally if items differ in their "responsiveness" to cost shocks. More responsive items should have greater price change dispersion and pass-through. We formally estimate price-setting models with alternative forms of heterogeneity and show only heterogeneous responsiveness explains our results. Interestingly, our evidence does not support "uncertainty" shocks as an explanation for countercyclical dispersion but does suggest promising alternatives. |
| JEL: | E10 E30 E31 F31 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19651&r=mon |
| By: | Tierney, Heather L.R. |
| Abstract: | The purpose of this paper is to examine the forecasting ability of sixty-two vintages of revised real-time PCE and core PCE using nonparametric methodologies. The combined fields of real-time data and nonparametric forecasting have not been previously explored with rigor, which this paper remedies. The contributions of this paper are on the three fronts of (i.) analysis of real-time data; (ii.) the additional benefits of using nonparametric econometrics to examine real-time data; and (iii.) nonparametric forecasting with real-time data. Regarding the analysis of real-time data revisions, this paper finds that the third quarter releases of real-time data have the largest number of data revisions. Secondly, nonparametric regressions are beneficial in utilizing the information provided by data revisions, which typically are just a few tenths in magnitude but are significant enough to statistically affect regression results. The deviations in window widths can be useful in identifying potential problematic time periods such as a large spike in oil prices. The third and final front of this paper regards nonparametric forecasting and the best performing real-time data release with the three local nonparametric forecasting methods outperforming the parametric benchmark forecasts. Lastly, this paper shows that the best performing quarterly-release of real-time data is dependent on the benchmark revision periods. For vintages 1996:Q1 to 2003:Q3, the second quarter real-time data releases produce the smaller RMSE 58% of the time and for vintages 2003:Q4 to 2011:Q2, the third quarter real-time data releases produce forecasts with smaller RMSE approximately 60% of the time. |
| Keywords: | Nonparametric Forecasting, Real-Time Data, Monetary Policy, Inflation Persistence |
| JEL: | C14 C53 E52 |
| Date: | 2013–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:51398&r=mon |
| By: | Angel Ubide (Peterson Institute for International Economics) |
| Abstract: | The evolving plan for a European banking union falls short of the ideal of an "ever closer union." In fact, the plan's focus on national resolution authorities and funds for insolvent financial institutions, a minimal euro area financing backstop, and costs imposed on creditors of failed banks, could lead to a looser, weaker, and more fragmented banking system. Some aspects of the plan of European leaders will improve the system's soundness, but other aspects could dampen lending in the near term and reduce economic growth. Ubide urges policymakers to focus on making the banking union stronger and more coherent. Troubled banks supervised by the European Central Bank should be covered by a European resolution authority and a European resolution fund to oversee bankruptcy, restructuring, and other reforms. To produce a more united, solid, and stable euro area, the European plan has to lower national barriers to banking, not raise them. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-23&r=mon |
| By: | Moura, Marcelo L.; Pereira, Fatima R.; Attuy, Guilherme de Moraes |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ibm:ibmecp:wpe_304&r=mon |