nep-mon New Economics Papers
on Monetary Economics
Issue of 2013‒12‒06
23 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Even keel and the Great Inflation By Owen F. Humpage; Sanchita Mukherjee
  2. A note on central bank transparency and credibility in Poland By Tomasz Łyziak
  3. Monetary Transmission via the Central Bank Balance Sheet By Stefan Behrendt
  4. Fiscal Limits and Monetary Policy: Default vs. Inflation By Anna Sokolova
  5. Inflation Dynamics: The Role of Public Debt and Policy Regimes By Saroj Bhattarai; Jae Won Lee; Woong Yong Park
  6. Expectations and Monetary Policy: Experimental Evidence By Oleksiy Kryvtsov; Luba Petersen
  7. Central bank collateral, asset fire sales, regulation and liquidity By Bindseil, Ulrich
  8. The credibility of exchange rate pegs and bank distress in historical perspective: lessons from the national banking era By Scott Fulford; Felipe Schwartzman
  9. MIT and Money By Perry Mehrling
  10. How Flexible are the Inflation Targets? A Bayesian MCMC Estimator of the Long Memory Parameter in a State Space Model By Andersson, Fredrik N.G.; Li, Yushu
  11. Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework By Mattia Guerini
  12. Perceived Inflation Persistence By Monica Jain
  13. Inflation's Role in Optimal Monetary-Fiscal Policy By Eric M. Leeper; Xuan Zhou
  14. Monetary policy surprises, positions of traders, and changes in commodity futures prices By Nikolay Gospodinov; Ibrahim Jamali
  15. A U.S. economic update and perspective on monetary policy (with reference to Leslie W. Fisher) By Richard W. Fisher
  16. Imperfection Information, Optimal Monetary Policy and Informational Consistency By Levine, P.; Pearlman, J.; Yang, B.
  17. DGSE Model-Based Forecasting of Modeled and Non-Modeled Inflation Variables in South Africa By Rangan Gupta; Patrick Kanda; Mampho Modise; Alessia Paccagnini
  18. Some new evidence on the determinants of money demand in developing countries – A case study of Tunisia By Ben Salha, Ousama; Jaidi, Zied
  19. Financial stability: the role of the Federal Reserve System By Thomas C. Baxter, Jr.
  20. Determinants of Sovereign Bond Yield Spreads in the EMU. An Optimal Currency Area Perspective By Costantini, M.; Fragetta, M.; Melina, G.
  21. Coordinating monetary and macroprudential policies By Bianca De Paoli; Matthias Paustian
  22. The Bank of England and the British Economy 1890-1913 By N. H. Dimsdale
  23. Liquidity, moral hazard and bank crises By S.Chatterji; S.Ghosal

  1. By: Owen F. Humpage; Sanchita Mukherjee
    Abstract: Using IV-GMM techniques and real-time data, we estimate a forward looking, Taylor-type reaction function incorporating dummy variables for even-keel operations and a variable for foreign official pressures on the U.S. gold stock during the Great Inflation.We show that when the Federal Reserve undertook even-keel operations to assist U.S. Treasury security sales, the FOMC tended to delay monetary-policy adjustments and to inject small amounts of reserves into the banking system.The operations, however, did not contribute significantly to the Great Inflation, because they occurred during periods of both monetary ease and monetary tightness, at least in the FOMC’s view.Consequently, the average federal funds rate during months containing even-keel events was no different than the average federal funds rate in other months, suggesting that even keel had no effect on the thrust of monetary policy.We also show that prospective gold losses had no effect on the FOMC’s monetary-policy decisions in the 1960s and early 1970s.
    Keywords: Inflation (Finance)
    Date: 2013
  2. By: Tomasz Łyziak (Narodowy Bank Polski)
    Abstract: This note extends the study by Lyziak et al. (2007), providing up-to-date assessment of central bank transparency in Poland. We highlight the role of inflation projections prepared by the staff of the National Bank of Poland in building transparency of monetary policy. The results suggest that central bank inflation projections, published since 2004, have led to improvements in the predictability of interest rate decisions. The note updates also previous estimates of the degree of central bank credibility in Poland, using survey-based measures of inflation expectations formed by consumers, enterprises and financial sector analysts. It is confirmed that inflation expectations of enterprises and – especially – of financial sector analysts display a high degree of anchoring at the NBP inflation target, while consumer inflation expectations are driven mainly by developments in subjectively perceived inflation.
    Keywords: Transparency, Credibility, Expectations, Inflation Targeting, Poland.
    JEL: D84 E52 E58
    Date: 2013
  3. By: Stefan Behrendt (Friedrich Schiller University Jena, School of Economics and Business Admistration)
    Abstract: This paper estimates the effects of unconventional monetary policies on consumer as well as asset price inflation, economic activity and bank lending at the hand of a VAR analysis, covering episodes of balance sheet policies of 9 countries over the last 20 years. While recent episodes of unconventional monetary policies have been extensively analysed, this paper reduces deficiencies about long-run implications following central bank balance sheet policies in Scandinavian countries, Australia in the 1990s and Japan in the early 2000s. Results of this study are that balance sheet policies, in response to a collapse of asset price bubbles, can ensure a short run stabilisation of economic activity but are not able to lift the economy out of the ensuing deflationary slump alone. Additionally, they do not pose severe problems associated with inflation, as laid out in several theories such as the static monetarist interpretation of the quantity theory of money, or towards newly created asset price bubbles.
    Keywords: unconventional monetary policy, zero lower bound, money multiplier, VAR
    JEL: C32 E31 E44 E51 E52 E58
    Date: 2013–11–27
  4. By: Anna Sokolova (National Research University - Higher School of Economics, Myasnitskaya Street, 20, Moscow, Russia, 101000.)
    Abstract: In times of fiscal stress, governments fail to adjust fiscal policy in line with the requirements for debt sustainability. Under these circumstances, monetary policy impacts the probability of sovereign default alongside inflation dynamics. Uribe (2006) studies the relationship between inflation and sovereign defaults with a model in which the central bank controls a risky interest rate. He concludes that low inflation can only be maintained if the government sometimes defaults. This paper follows Uribe (2006) by examining monetary policy that controls a risky interest rate. However, it differs by the baseline assumption about the objectives of the central bank. In this paper, monetary policy is not pure inflation targeting: it is assumed that the central bank minimizes the probability of default under the upper restriction on inflation. An advantage of this framework is that it avoids the issue of zero risk premium, which exists in Uribe (2006), while at the same time allowing a study of the relationship between the constraints on monetary pol icy, the equilibrium default rate, and the risk premium. We show that monetary policy that controls the risky interest rate can mitigate default risks only when the upper limit on inflation is sufficiently high. The higher the agents believe the upper limit on inflation to be, the lower the equilibrium risk premium and probability of default are. Under a low default rate, constraints on inflation can only be fulfilled when fiscal shocks are either positive or small.
    Keywords: inflation, default, sovereign debt, monetary policy
    JEL: E61 E63 E52 F33
    Date: 2013
  5. By: Saroj Bhattarai; Jae Won Lee; Woong Yong Park
    Abstract: We investigate the roles of a time-varying inflation target and monetary and fiscal policy stances on the dynamics of inflation in a DSGE model. Under an active monetary and passive fiscal policy regime, inflation closely follows the path of the inflation target and a stronger reaction of monetary policy to inflation decreases the response of inflation to non-policy shocks. In sharp contrast, under an active fiscal and passive monetary policy regime, inflation moves in an opposite direction from the inflation target and a stronger reaction of monetary policy to inflation increases the response of inflation to non-policy shocks. Moreover, a higher level of government debt leads to a greater response of inflation while a weaker response of fiscal policy to debt decreases the response of inflation to non-policy shocks. These results are due to variation in the value of public debt that leads to wealth effects on households. Finally, under a passive monetary and passive fiscal policy regime, both monetary and fiscal policy parameters matter for inflation dynamics, but because of equilibrium indeterminacy, theory provides no clear answer on the overall behavior of inflation. We characterize these results analytically in a simple model and numerically in a quantitative model.
    Keywords: Time-varying inflation target, Inflation response, Public debt, Monetary and fiscal policy regimes, Monetary and fiscal policy stances, DSGE model
    JEL: E31 E52 E63
    Date: 2013–11
  6. By: Oleksiy Kryvtsov; Luba Petersen
    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 the 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 macroeconomic variance by roughly half.
    Keywords: Business fluctuations and cycles; Monetary policy implementation; Transmission of monetary policy
    JEL: C9 D84 E3 E52
    Date: 2013
  7. By: Bindseil, Ulrich
    Abstract: This paper analyses the potential roles of bank asset fire sales and recourse to central bank credit to ensure banks' funding liquidity and solvency. Both asset liquidity and central bank haircuts are modelled as power functions within the unit interval. Funding stability is captured as strategic bank run game in pure strategies between depositors. Asset liquidity, the central bank collateral framework and regulation determine jointly the ability of the banking system to deliver maturity transformation and financial stability. The model also explains why banks tend to use the least liquid eligible assets as central bank collateral and why a sudden non-anticipated reduction of asset liquidity, or a tightening of the collateral framework, can destabilize short term liabilities of banks. Finally, the model allows discussing how the collateral framework can be understood, beyond its essential aim to protect the central bank, as financial stability and non-conventional monetary policy instrument. JEL Classification: E42, G21
    Keywords: asset liquidity, bank run, central bank collateral framework, liquidity regulation, Unconventional monetary policy
    Date: 2013–11
  8. By: Scott Fulford; Felipe Schwartzman
    Abstract: We examine a period during the prevalence of the gold standard in the United States to provide evidence that speculation about a currency peg can have damaging effects on bank balance sheets. In particular, the defeat of the pro-silver candidate in the 1896 presidential election was associated with a large and permanent increase in bank leverage, with the initial impact most pronounced among states where banks held more specie in proportion to their assets and were, therefore, also more committed to paying out deposits in specie. Based on the cross-sectional pattern of changes in leverage observed in 1896, we construct a measure of the credibility of the gold standard spanning the entire sample period. Changes in this measure correlate with changes in aggregate bank leverage, suggesting that uncertainty about the monetary standard played an important role in the 1893 banking panic and its aftermath.
    Date: 2013
  9. By: Perry Mehrling (Barnard College, Columbia University)
    Abstract: The Treasury-Fed Accord of 1951 and the subsequent rebuilding of private capital markets, first domestically and then globally, provided the shifting institutional background against which thinking about money and monetary policy evolved within the MIT economics department. Throughout that evolution, a constant, and a constraint, was the conception of monetary economics that Paul Samuelson had himself developed as early as 1937, a conception that informed the decision to bring in Modigliani in 1962, as well as Foley and Sidrauski in 1965.
    Keywords: MIT, monetary economics, Paul Samuelson
    JEL: B22 E50
    Date: 2013–10
  10. By: Andersson, Fredrik N.G. (Department of Economics, Lund University); Li, Yushu (Department of Business and Management Science, Norwegian School of Economics)
    Abstract: Several central banks have adopted inflation targets. The implementation of these targets is flexible; the central banks aim to meet the target over the long term but allow inflation to deviate from the target in the short-term in order to avoid unnecessary volatility in the real economy. In this paper, we propose modeling the degree of flexibility using an AFRIMA model. Under the assumption that the central bankers control the long-run inflation rates, the fractional integration order captures the flexibility of the inflation targets. A higher integration order is associated with a more flexible target. Several estimators of the fractional integration order have been proposed in the literature. Grassi and Magistris (2011) show that a state-based maximum likelihood estimator is superior to other estimators, but our simulations show that their finding is over-biased for a nearly non-stationary time series. We resolve this issue by using a Bayesian Monte Carlo Markov Chain (MCMC) estimator. Applying this estimator to inflation from six inflation-targeting countries for the period 1999M1 to 2013M3, we find that inflation is integrated of order 0.8 to 0.9 depending on the country. The inflation targets are thus implemented with a high degree of flexibility.
    Keywords: fractional integration; inflation-targeting; state space model
    JEL: C32 E52
    Date: 2013–11–28
  11. By: Mattia Guerini (Sant'Anna School of Advanced Studies, Pisa)
    Abstract: The recent economic crisis gave proof of the fact that the Taylor rule is no more that good instrument as it was thought to be just ten years ago; this might be due to the fact that agents acting in the economy hold Heterogeneous Expectations (HE). In a recent paper Anufriev et al. (2013) suggest that a way to force stability on the economic system is to adopt a more aggressive Taylor rule. In the present paper a standard NK-DSGE is considered in order to investigate whether a Friedman k-percent monetary policy rule may be a valid instrument to counteract the instability created by the presence of HE in a framework à la Brock and Hommes (1997). The model here presented suggests that when such a money supply rule is adopted by the Central Bank, stability strongly depends on the intensity of choice, which represents the ability of the agents to switch toward the best available predictor.
    Keywords: Heterogeneous Expectations, Friedman Monetary Policy Rule, Macroeconomic Stability
    JEL: E37 E52 E58
    Date: 2013–11
  12. By: Monica Jain
    Abstract: The Survey of Professional Forecasters (SPF) has had vast influence on research related to better understanding expectation formation and the behaviour of macroeconomic agents. Inflation expectations, in particular, have received a great deal of attention, since they play a crucial role in determining real interest rates, the expectations-augmented Phillips curve and monetary policy. One feature of the SPF that has surprisingly not been explored is the natural way in which it can be used to extract useful measures of inflation persistence. This paper presents a new measure of U.S. inflation persistence from the point of view of a professional forecaster, referred to as perceived inflation persistence. It is built via the implied autocorrelation function that follows from the estimates obtained using a forecaster-specific state-space model. Findings indicate that perceived inflation persistence has changed over time and that forecasters are more likely to view unexpected shocks to inflation as transitory, particularly since the mid-1990s. When compared to the autocorrelation function for actual inflation, forecasters react less to shocks than the actual inflation data would suggest, since they may engage in forecast smoothing.
    Keywords: Inflation and prices; Econometric and statistical methods
    JEL: E31 E37
    Date: 2013
  13. By: Eric M. Leeper; Xuan Zhou
    Abstract: We study how the maturity structure of nominal government debt affects optimal monetary and fiscal policy decisions and equilibrium outcomes in the presence of distortionary taxes and sticky prices. Key findings are: (1) there is always a role for current and future inflation innovations to revalue government debt, reducing reliance on distorting taxes; (2) the role of inflation in optimal fiscal financing increases with the average maturity of government debt; (3) as average maturity rises, it is optimal to tradeoff inflation for output stabilization; (4) inflation is relatively more important as a fiscal shock absorber in high-debt than in low-debt economies; (5) in some calibrations that are relevant to U.S. data, welfare under the fully optimal monetary and fiscal policies can be made equivalent to the welfare under the conventional optimal monetary policy with passively adjusting lump-sum taxes by extending the average maturity of bond.
    JEL: E31 E52 E62 E63
    Date: 2013–11
  14. By: Nikolay Gospodinov; Ibrahim Jamali
    Abstract: Using futures data for the period 1990–2008, this paper finds evidence that expansionary monetary policy surprises tend to increase crude and heating oil prices, and contractionary monetary policy shocks increase gold and platinum prices. Our analysis uncovers substantial heterogeneity in the magnitude of this response to positive and negative surprises across different commodities and commodity groups. The results also suggest that the positions of futures traders for the metals and energy commodities strongly respond to monetary policy shocks. The adjustment of the net long positions of hedgers and speculators appears to be a channel through which the monetary policy shocks are propagated to commodity price changes.
    Date: 2013
  15. By: Richard W. Fisher
    Abstract: Remarks before the Australian Business Economists, Sydney, Australia, November 4, 2013 ; "Under these circumstances, it is no small wonder American businesses are not expanding and growing jobs at the pace we at the Fed would like to see. It is no small wonder that our economy is growing at a substandard pace compared to previous recoveries. It is no small wonder that the most expansive monetary policy the FOMC has ever engineered has been hampered from accomplishing what it set out to do. In short, while the Fed has been moving at the speed of a boomer in full run, the federal government of the United States has at best exhibited the adaptive alacrity of a koala (without being anywhere near as cute)."
    Date: 2013
  16. By: Levine, P.; Pearlman, J.; Yang, B.
    Abstract: This paper examines the implications of imperfect information (II) for optimal monetary policy with a consistent set of informational assumptions for the modeller and the private sector an assumption we term the informational consistency. We use an estimated simple NK model from Levine et al. (2012), where the assumption of symmetric II significantly improves the fit of the model to US data to assess the welfare costs of II under commitment, discretion and simple Taylor-type rules. Our main results are: first, common to all information sets we find significant welfare gains from commitment only with a zero-lower bound constraint on the interest rate. Second, optimized rules take the form of a price level rule, or something very close across all information cases. Third, the combination of limited information and a lack of commitment can be particularly serious for welfare. At the same time we find that II with lags introduces a ‘tying ones hands’ effect on the policymaker that may improve welfare under discretion. Finally, the impulse response functions under our most extreme imperfect information assumption (output and inflation observed with a two-quarter delay) exhibit hump-shaped behaviour and the fiscal multiplier is significantly enhanced in this case.
    Keywords: Imperfect Information; DSGE Model; Optimal Monetary Policy; Bayesian Estimation
    Date: 2013
  17. By: Rangan Gupta; Patrick Kanda; Mampho Modise; Alessia Paccagnini
    Abstract: Inflation forecasts are a key ingredient for monetary policymaking - especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, e.g. such as alternative measures of inflation that might be of interest to policymakers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4, and generate recursive forecasts over 2000Q1-2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and non-modeled) in comparison with forecasts reported by other models such as AR(1).
    Keywords: DSGE model, in ation, core variables, non-core variables
    JEL: C11 C32 C53 E27 E47
    Date: 2013–11
  18. By: Ben Salha, Ousama; Jaidi, Zied
    Abstract: The present paper aims at examining the money demand function in Tunisia during the period 1981-2011. Unlike previous conventional money demand studies, the major components of real income are considered in this paper. Using the ARDL bounds testing approach, results reveal evidence of cointegration between broad money demand and its determinants, namely final consumption expenditure, expenditure on investment goods, export expenditure and interest rate. In the long-run, final consumption expenditure represents the major money demand determinant. This finding is robust to a variety of alternative money demand specifications and estimation methods. The empirical investigation suggests also the stability of the broad money demand function during the sample period. We conclude that monetary policy in Tunisia should be based on a broad definition of money. Furthermore, the estimation of the money demand function must take into account the different expenditure components of real income.
    Keywords: Money demand, M2, expenditure components, ARDL, Tunisia.
    JEL: C22 E41 E52
    Date: 2013–11–01
  19. By: Thomas C. Baxter, Jr.
    Abstract: Remarks at the Future of Banking Regulation and Supervision in the EU Conference, Frankfurt, Germany.
    Keywords: European Central Bank ; Banks and banking, Central ; Federal Reserve System ; Federal Reserve Act ; Financial institutions - Law and legislation ; Financial Regulatory Reform (Dodd-Frank Act) ; Financial stability ; Financial crises
    Date: 2013
  20. By: Costantini, M.; Fragetta, M.; Melina, G.
    Abstract: In the light of the recent financial crisis, we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the European Monetary Union. While we find evidence for a level break in the cointegrating relationship, we do not find empirical support for a regime shift and hence for a change in the pricing of the determinants of sovereign spreads. Moreover, results show that (i) fiscal imbalances (namely expected government debt-to-GDP differentials) are the main long-run drivers of sovereign spreads; (ii) liquidity risks and cumulated inflation differentials have non-negligible weights; but (iii) all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an Optimal Currency Area (OCA). In particular, we establish (i) that results are overall driven by those countries not passing the OCA test; and (ii) that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness.
    Keywords: European monetary union; sovereign bond yield spreads; optimal currency areas; competitiveness gaps; euro area
    Date: 2013
  21. By: Bianca De Paoli; Matthias Paustian
    Abstract: The financial crisis has prompted macroeconomists to think of new policy instruments that could help ensure financial stability. Policymakers are interested in understanding how these should be set in conjunction with monetary policy. We contribute to this debate by analyzing how monetary and macroprudential policy should be conducted to reduce the costs of macroeconomic fluctuations. We do so in a model in which such costs are driven by nominal rigidities and credit constraints. We find that, if faced with cost-push shocks, policy authorities should cooperate and commit to a given course of action. In a world in which monetary and macroprudential tools are set independently and under discretion, our findings suggest that assigning conservative mandates (á la Rogoff [1985]) and having one of the authorities act as a leader can mitigate coordination problems. At the same time, choosing monetary and macroprudential tools that work in a similar fashion can increase such problems.
    Keywords: Monetary policy ; Financial stability ; Macroeconomics ; Financial market regulatory reform
    Date: 2013
  22. By: N. H. Dimsdale (The Queens College, University of Oxford)
    Abstract: The paper examines the behavior of the British economy 1890-1913 by using a newly assembled quarterly data set. This provides a basis for estimating a small macroeconomic model, which can be used to explore the relationship between the policy responses of the Bank of England and the course of the economy. It is one of the few papers to make use of UK quarterly data and seeks to extend the earlier work of Goodhart (1972). The paper goes on to look into the determinants of external and internal gold flows and relates these to an extensive historical literature. The outcome is compared with the traditional representation of the working of the gold standard, as set out in the well-known Interim Report of the Cunliffe Committee (1918). It is found that operation of the model accords in general with the view of the Committee. The views of the Committee were applicable to the pre 1914 gold standard, but less so to the restored interwar gold standard. The next question to be considered is how far the Bank observed ‘The Rules of the Game’ in the sense of relating the reserves of the commercial banks to the gold reserves held at the Bank. It is shown that the relationship between the Bank’s reserves and the reserves of the commercial banks was severely distorted by the massive gold movements of 1895-6. These flows were associated with US political conflicts over the monetization of silver. With the exception of this episode, the Bank is shown to have had a limited measure of discretion in operating the gold standard. The final question to be considered is whether a similar model can be estimated from US data and related to the views of Friedman and Schwartz.
    Date: 2013–10–30
  23. By: S.Chatterji; S.Ghosal
    Abstract: Bank crises, by interrupting liquidity provision, have been viewed as resulting in welfare losses. In a model of banking with moral hazard, we show that second best bank contracts that improve on autarky ex ante require costly crises to occur with positive probability at the interim stage. When bank payoffs are partially appropriable, either directly via imposition of …nes or indirectly by the use of bank equity as a collateral, we argue that an appropriately designed ex-ante regime of policy intervention involving conditional monitoring can prevent bank crises.
    Keywords: bank runs, contagion, moral hazard, liquidity, random, contracts, monitoring.
    JEL: G21 D82
    Date: 2013–11

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