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on Monetary Economics |
| By: | Matthias Neuenkirch (University of Trier); Peter Tillmann (University of Giessen) |
| Abstract: | The personalities of central bankers moved center stage during the recent financial crisis. Some central bankers even gained “superstar” status. In this paper, we evaluate the pivotal role of superstar central bankers by assessing the difference an outstanding governor makes to economic performance. We employ school grades given to central bankers by the financial press. A superstar central banker is one receiving the top grade. In a probit estimation we first relate the grades to measures of economic performance, institutional features, and personal characteristics. We then employ a nearest neighbor matching approach to identify the central bankers which are closest to those receiving the top grade and compare the economic performance across both groups. The results suggest that a superstar governor indeed matters: a topgraded central banker faces a significantly more favorable output-inflation trade-off than his peers. |
| Keywords: | Central banking, inflation expectations, monetary policy, nearest neighbor matching |
| JEL: | E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201354&r=mon |
| By: | David, Cobham |
| Abstract: | This paper examines the performance of monetary policy under the new framework established in 1997 up to the end of the Labour government in May 2010. Performance was relatively good in the years before the crisis, but much weaker from 2008. The new framework largely neglected open economy issues, while the Treasury’s EMU assessment in 2003 can be interpreted in different ways. inflation targeting in the UK and elsewhere may have contributed in some way to the eruption and depth of the financial crisis from 2008, but UK monetary policy responded in a bold and innovative way. Overall, the design and operation of monetary policy were much better than in earlier periods, but there remains scope for significant further evolution. |
| Keywords: | monetary policy, central bank independence, European Monetary Union, house prices, financial crisis, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:458&r=mon |
| By: | Ivrendi, Mehmet; Yildirim, Zekeriya |
| Abstract: | This paper investigates both the effects of domestic monetary policy and external shocks on fundamental macroeconomic variables in six fast growing emerging economies: Brazil, Russia, India, China, South Africa and Turkey - denoted hereafter as BRICS_T. The authors adopt a structural VAR model with a block exogeneity procedure to identify domestic monetary policy shocks and external shocks. Their research reveals that a contractionary monetary policy in most countries appreciates the domestic currency, increases interest rates, effectively controls inflation rates and reduces output. They do not find any evidence of the price, output, exchange rates and trade puzzles that are usually found in VAR studies. Their findings imply that the exchange rate is the main transmission mechanism in BRICS_T economies. The authors also find that that there are inverse J-curves in five of the six fast growing emerging economies and there are deviations from UIP (Uncovered Interest Parity) in response to a contractionary monetary policy in those countries. Moreover, world output shocks are not a dominant source of fluctuations in those economies. -- |
| Keywords: | monetary policy,inflation,international trade,exchange rate,SVAR |
| JEL: | E52 E63 F14 F31 C51 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:201361&r=mon |
| By: | Pilar Abad (University Rey Juan Carlos and University of Barcelona); Helena Chuliá (Faculty of Economics, University of Barcelona) |
| Abstract: | In this paper we investigate the response of bond markets to euro area and US monetary policy shocks. Specifically, we analyze the effect of unexpected changes in interest rates implemented by the European Central Bank (ECB) and the Federal Open Market Committee (FOMC) not only on the returns, but also on the volatility and the integration of European government bond markets. For all three characteristics our results show that the response to monetary policy surprises varies across groups of countries (EMU EU-15 central, EMU EU-15 peripheral, non-EMU EU-15 and non-EMU new EU). We also find that the effects of monetary policy announcements on the level of integration are more pronounced than those on returns and volatility. Finally, our results paint a complex picture of the effects of monetary policy news releases on the level of integration. The effect of ECB monetary policy surprises differs across old and new European Union members, while the effect of FOMC monetary policy surprises differs across EMU and non-EMU members. |
| Keywords: | Monetary policy announcements; Bond market integration; Interest rate surprises. JEL classification: E44; F36; G15. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201325&r=mon |
| By: | Evans, Olaniyi |
| Abstract: | This study examines the monetary model of exchange rate in Nigeria, using an Autoregressive Distributed Lag (ARDL) approach over the period 1998Q1 to 2012Q2. The estimation results show that there is long run relationship among variables of the monetary model of exchange rate for Nigeria. That is, the estimated coefficients of the money supply, income and interest rate differentials support the monetary exchange rate model. As well, the stability test of CUSUM shows that there exists a significant and stable monetary model of exchange rate determination for Nigeria. Therefore, this study recommends that market participants in the foreign exchange market may monitor and forecast future exchange rate movements using the money supplies, incomes and interest rates variables. |
| Keywords: | monetary model, exchange rate, Autoregressive Distributed Lag, money supply, income and interest rate differentials |
| JEL: | E4 E43 E47 E52 G1 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52457&r=mon |
| By: | Dong He; Robert N McCauley |
| Abstract: | We review extant work on the transmission of monetary policy, both conventional and unconventional, of the major advanced economies to East Asia through monetary policy reactions, integrated bond markets and induced currency appreciation. We present new results on the growth of foreign currency credit, especially US dollar credit, as a transmission mechanism. Restrained growth of dollar credit in Korea contrasts with very rapid growth on the Chinese mainland and in Hong Kong SAR. |
| Keywords: | global liquidity, Taylor rule, monetary policy, bond markets, exchange rates, foreign currency debt, dollarisation, macroprudential policy, capital controls |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:431&r=mon |
| By: | Pablo Pincheira |
| Abstract: | In this paper we explore the role that exchange rate interventions may play in determining inflation expectations in Chile. To that end, we consider a set of nine deciles of inflation expectations coming from the survey of professional forecasters carried out by the Central Bank of Chile. We consider two episodes of preannounced central bank interventions during the sample period 2007-2012. |
| Keywords: | Exchange rates, inflation expectations, inflation targeting, interventions |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:427&r=mon |
| By: | John B Taylor |
| Abstract: | This paper examines two explanations for the recent spate of complaints about cross-border monetary policy spillovers and calls for international monetary policy coordination, a development that contrasts sharply with the monetary system in the 1980s, 1990s and until recently. The first explanation holds that deviations from rules-based policy at several central banks created incentives for other central banks to deviate from such policies. The second explanation either does not see deviations from rules or finds such deviations benign; it characterises recent unusual monetary policies as appropriate, explains the complaints as an adjustment to optimal policies, and downplays concerns about interest rate differentials and capital controls. Going forward, the goal for central banks should be an expanded rulesbased system similar to that of the 1980s and 1990s, which would operate near an international cooperative equilibrium. International monetary policy coordination – at least formal discussions of rules-based policies and the issues reviewed here – would help central banks get such equilibrium. |
| Keywords: | Monetary policy spillovers, unconventional monetary policy, international policy coordination |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:437&r=mon |
| By: | Carlos Garriga; Finn E. Kydland; Roman Sustek |
| Abstract: | Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates |
| JEL: | E32 E52 G21 R21 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19744&r=mon |
| By: | Mark Setterfield |
| Abstract: | This paper discusses central banks’ use of the interest rate as the instrument of monetary policy, in light of a reconsideration of macroeconomic theory induced by the financial crisis and Great Recession. Three main guiding principles for the future conduct of interest rate policy are identified: beware real effects; beware positive feedbacks; and beware discontinuities. The paper also reflects on the use of policy targets as a “quasi-instrument” of stabilization policy. |
| Keywords: | Interest rates, monetary policy, central banking, New Consensus, Post Keynesian Economics |
| JEL: | E12 E43 E52 E58 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:tri:wpaper:1320&r=mon |
| By: | Menzie D Chinn |
| Abstract: | I discuss how the unconventional monetary policy measures implemented over the past several years – quantitative and credit easing, and forward guidance – can be analysed in the context of conventional models of asset prices, with particular reference to exchange rates. I then discuss alternative approaches to interpreting the effects of such policies, and review the empirical evidence. Finally, I examine the ramifications for thinking about the impact on exchange rates and asset prices of emerging market economies. I conclude that although the implementation of unconventional monetary policy measures may introduce more volatility into global markets, in general it will support global rebalancing by encouraging the revaluation of emerging market currencies. |
| Keywords: | Balance sheet, money supply, portfolio balance, forward guidance, yield curve, spreads, signaling, capital flows, rebalancing |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:436&r=mon |
| By: | Nyamongo, Esman; Ndirangu, Lydia Ndirangu2 |
| Abstract: | The objective of this study is to analyze the effects of financial innovation in the banking sector on the conduct of monetary policy in Kenya during 1998-2012. The country has witnessed a number of financial innovations during this period. The study focuses on whether these wave of financial innovations have impacted on the transmission mechanism of monetary policy, and if so how. The results show that the innovations have improved the monetary policy environment in Kenya as the proportion of the unbanked population has declined coupled with gradual reduction in currency outside banks. However, the period post 2007 when the country has experienced the fastest pace of financial innovation, is associated with instability in the money multiplier, income velocity of money and the money demand. However, recent trends point towards stabilization pointing to the need for further examination establish whether indeed the break in trend is of structural or transitory in nature. A structural break raises questions on the credibility of the current monetary targeting framework in use in Kenya, in view of which a more flexible framework should be adopted. Overall, the results show that financial innovation has had positive outcomes and seems to improve the interestrate channel of monetary policy transmission. |
| Keywords: | Monetary policy, excess liquidity, Kenya, financial innovation |
| JEL: | E00 E02 E5 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52387&r=mon |
| By: | Pau Rabanal (IMF); Dominic Quint (Free University Berlin) |
| Abstract: | In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policies can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policies always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policies may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:604&r=mon |
| By: | Kirsanova, Tatiana; Leith, Campbell; Chen, Xiaoshan |
| Abstract: | Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the ‘Great Moderation’ arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000. |
| Keywords: | Bayesian Estimation, Interest Rate Rules, Optimal Monetary Policy, Great Moderation, Commitment, Discretion, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:480&r=mon |
| By: | Hugh Rockoff |
| Abstract: | O.M.W. Sprague was America’s leading expert on financial crises when America was debating establishing the Federal Reserve. His History of Crises under the National Banking Act is one of the most enduring legacies of the National Monetary Commission; a still frequently cited classic. Since the Commission recommended a central bank, and its recommendation after some modifications became the Federal Reserve System, it might be assumed that Sprague was a strong supporter of establishing a central bank. But he was not. Initially, Sprague favored more limited reforms, a position that he did not abandon until the Federal Reserve became a fait accompli. Here I discuss the sources of Sprague’s opposition to a central bank and the relationship of that opposition to his understanding of the history and structure of the American banking system at the turn of the nineteenth century. |
| JEL: | B26 N1 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19758&r=mon |
| By: | Erick Lahura; Marco Vega |
| Abstract: | Asymmetric effects of Central Bank foreign exchange (forex) intervention have not been extensively studied in the literature, even though in practice Central Bank's motives for purchasing and for selling foreign currency may differ. This paper studies asymmetric effects of Central Bank interventions under the premise that policy authorities view depreciations and appreciations as having asymmetric implications. Using undisclosed intraday data for Peru from 2009 to 2011, this paper shows that Central Bank interventions in the foreign exchange market have a signifcant and asymmetric effect on interbank exchange rates. Specifically, central bank intervention is more effective in reducing the interbank exchange rate than in raising it. |
| Keywords: | exchange rate, foreign exchange market, intervention |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:430&r=mon |
| By: | Eliphas Ndou; Nombulelo Gumata; Ncube, Mthuli; Eric Olson |
| Abstract: | This paper investigates the policy trade-off between inflation volatility and output volatility, also referred to as the Taylor curve. In so doing, the paper assesses whether the Taylor curve has shifted over time, how demand and supply shocks affect the volatilities of inflation and the output gap, and the optimality of monetary policy using the Taylor principle. We use multivariate GARCH estimation. The results show that the Taylor curve has shifted over the sample period and shifted inwards under the inflation-targeting regime relative to prior regimes. Furthermore, the results indicate that economic growth performance is superior in periods in which the Taylor curve relationship holds. The effects of demand and supply shocks on both conditional volatilities are transitory. In policy terms, the inward shift of the Taylor curve and evidence based on the Taylor principle suggests optimal monetary policy settings or conduct during the inflation-targeting regime relative to earlier regimes. |
| Date: | 2013–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:adb:adbwps:992&r=mon |
| By: | Athanasios Orphanides |
| Abstract: | Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment, fiscal sustainability and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness in maintaining price stability and contributing to crisis management. |
| Keywords: | Global financial crisis, monetary policy, real-time output gap, fiscal dominance, financial stability, central bank independence |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:435&r=mon |
| By: | Ranaldo, Angelo; Reynard, Samuel |
| Abstract: | This paper explains the effects of monetary policy surprises on long-term interest rates and stock prices in terms of changes in expected inflation, real interest rate and dividend growth, and relates these effects to markets’ perceptions of economic shocks and Fed’s information set. We analyze stock and bond futures price co-movements and relate them to Treasury Inflation-Protected Securities (TIPS) data. The sign of long-term interest rate reactions is mostly driven by changes in expected inflation. The sign of stock price reactions is mostly driven by changes in expected dividend growth, but it is also sometimes determined by changes in expected real rates. The co-movements of long-term interest rates and stock prices are determined by the co-movements of expected inflation and dividend growth. The majority of Fed’s interest rate surprises are expected to be followed by negative co-movements between inflation and output. This can be due to relatively more frequent “inflation” or “supply” shocks together with Fed’s private information. Most Fed’s actions are perceived as reactions to economic shocks rather than true policy shocks. |
| JEL: | E52 E58 E43 E44 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2013:22&r=mon |
| By: | Fisher, Richard W. (Federal Reserve Bank of Dallas) |
| JEL: | E52 |
| Date: | 2013–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:141&r=mon |
| By: | Glenn Rudebusch (Federal Reserve Bank of San Francisco); Michael Bauer (Federal Reserve Bank of San Francisco) |
| Abstract: | When the policy rate is constrained by the zero lower bound (ZLB), a new set of tools is needed to answer crucial questions about monetary policy, regarding the impact of the ZLB, expected lift-off, and the appropriateness of the policy stance. We document the shortcomings of affine dynamic term structure models (DTSMs) at the ZLB, and the benefits of shadow rate DTSMs. Using these we are able to appropriately answer the questions of interest: First, over recent years U.S. monetary policy has become increasingly constrained by the zero bound. Second, we estimate that in December 2012 the expected duration of the period of near-zero policy rates was 33 months, in line with survey-based and private-sector forecasts. Third, incorporating macroeconomic information in ZLB models is beneficial, improving inference about future policy, and allowing us to derive model-based Taylor rules and the resulting policy prescriptions. We find that in December 2012 the stance of monetary policy was in line with the desired stance based on simple policy rules. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:691&r=mon |
| By: | Morten L. Bech; Todd Keister |
| Abstract: | In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets — central bank reserves — it is important to understand how this regulation may impact the efficacy of central banks’ current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented. |
| Keywords: | Basel III, Liquidity regulation, LCR, Reserves, Corridor system, Monetary policy |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:432&r=mon |
| By: | Michael Rousakis (European University Institute) |
| Abstract: | This paper reconsiders the effects of expectations on economic fluctuations. It does so within a competitive monetary economy featuring producers and consumers with heterogeneous information about productivity. Agents' expectations are coordinated by a noisy public signal which generates non-fundamental, purely expectational shocks. Agents' expectations, however, have different implications for the economy. Hence, depending on how monetary policy is pursued, purely expectational shocks can behave like either demand shocks, as conventionally thought, or supply shocks - increasing output and employment yet lowering inflation. On the policy front, conventional policy recommendations are overturned: inflation stabilization is suboptimal, whereas output-gap stabilization is optimal. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:681&r=mon |
| By: | Alok Kumar (Department of Economics, University of Victoria) |
| Abstract: | The optimal infation rate and the relationship between inflation and unemployment are central issues in macroeconomics. It is widely accepted that inflation is a monetary phenomenon. However, there is little consensus with regard to unemployment. Economists differ widely in their view of labor markets and wage-setting mechanisms. The present paper develops a search-theoretic monetary model with imperfect labor markets. It studies the issue of the optimal inflation rate and the relationship between inflation and unemployment under four widely used wage-setting mechanisms: search and matching, wage posting, union bargaining, and efficiency wage. It finds that a higher inflation rate reduces output and employment under all wage setting mechanisms. The Friedman rule is not optimal under any wage setting mechanism except wage posting. |
| Keywords: | search-theoretic monetary model, inflation, unemployment, Friedman Rule, search and matching, wage posting, unions, efficiency wage |
| JEL: | E40 E30 |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicddp:1303&r=mon |
| By: | MacDonald, Ronald; Nagayasu, Jun |
| 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 modelate, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:525&r=mon |
| By: | Dennis, Richard |
| 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 bene.t 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, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:514&r=mon |
| By: | Giovanni Di Bartolomeo; Patrizio Tirelli; Nicola Acocella |
| Abstract: | We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in�flation rates. In fact these are justi�fied by the Phelps argument that monetary fi�nancing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of fi�scal outlays. We also contradict the view that the Ramsey policy should minimize in�ation volatility and induce near-random walk dynamics of public debt in the long-run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 fi�nancial crisis. |
| Keywords: | Trend infl�ation, monetary and fi�scal policy, Ramsey plan |
| JEL: | E52 E58 J51 E24 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:263&r=mon |
| By: | Michael, Hatcher |
| Abstract: | This paper presents a DSGE model in which long run inflation risk matters for social welfare. Aggregate and welfare effects of long run inflation risk are assessed under two monetary regimes: inflation targeting (IT) and price-level targeting (PT). These effects differ because IT implies base-level drift in the price level, while PT makes the price level stationary around a target price path. Under IT, the welfare cost of long run inflation risk is equal to 0.35 percent of aggregate consumption. Under PT, where long run inflation risk is largely eliminated, it is lowered to only 0.01 per cent. There are welfare gains from PT because it raises average consumption for the young and lowers consumption risk substantially for the old. These results are strongly robust to changes in the PT target horizon and fairly robust to imperfect credibility, fiscal policy, and model calibration. While the distributional effects of an unexpected transition to PT are sizeable, they are short-lived and not welfare-reducing. |
| Keywords: | inflation targeting, price-level targeting, inflation risk, monetary policy, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:450&r=mon |
| By: | Jun, Nagayasu |
| Abstract: | This paper evaluates the forward premium puzzle using the Euro exchange rate. Unlike previous studies, our analysis utilizes time-varying parameter methods and is based on two approaches for evaluation of the puzzle; the traditional approach analyzing the sensitivity of interest rate differentials to the forward premium, and the other looking into deviations from the covered interest rate parity (CIRP) condition. Then we provide evidence that the forward premium puzzle indeed became more prominent around the time of the recent crisis periods such as the Lehman Shock and the Euro crisis. This is also shown to be consistent with a deterioration in the CIRP. |
| Keywords: | forward premium puzzle, risk premium, time-varying parameters, financial crises, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:490&r=mon |
| By: | Kirsanova, Tatiana; le Roux, Stephanus |
| Abstract: | This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the UK. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intra-period leadership, we demonstrate that the past policy in the UK is better explained by optimal policy under discretion than under commitment. We estimate policy objectives of both policy makers. We demonstrate that fiscal policy plays an important role in identifying the monetary policy regime. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:479&r=mon |
| By: | Santiago García-Verdú; Miguel Zerecero |
| Abstract: | In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions that occurred in periods of great stress for the Mexican economy. The aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event-style microstructure approach. We use the bid-ask spreads as a measure of liquidity and of orderly conditions. In general, our results show no indication of an effect in the opposite direction from the one intended for the first intervention and are fairly conclusive regarding a significant reduction on the bid-ask spread for the second intervention. |
| Keywords: | foreign exchange rate, central bank interventions, microstructure |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:429&r=mon |
| By: | Issiaka Coulibaly; Blaise Gnimassoun |
| Abstract: | This paper aims at studying the sustainability of current accounts in Sub-Saharan Africa and determining whether this sustainability depends on the exchange rate regime. Relying on a formal theoretical framework and recent panel cointegration techniques, our findings show that current accounts have been globally sustainable in Sub-Saharan Africa countries over the 1980-2011 period. However, this sustainability has been lower for countries operating a fixed exchange rate regime or belonging to a monetary union. We also find that the difference in the level of sustainability could be explained by a higher persistence in the current account adjustment of countries operating under rigid exchange rate regimes. |
| Keywords: | Current account, Exchange rate regime, Panel cointegration tests, Sub-Saharan Africa |
| JEL: | F31 F33 C33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-42&r=mon |
| By: | Jang, Tae-Seok; Okano, Eiji |
| Abstract: | In this paper, we examine the effects of foreign productivity shocks on monetary policy in a symmetric open economy. Our two-country model incorporates the New Keynesian features of price stickiness and monopolistic competition based on the cost channel of Ravenna and Walsh (2006). In particular, in response to asymmetric productivity shocks, firms in one country achieve a more efficient level of production than those in another economy. Because the terms of trade are directly affected by changes in both economies’ output levels, international trade creates a transmission channel for inflation dynamics in which a deflationary spiral in foreign producer prices reduces domestic output. When there is a decline in economic activity, the monetary authority should react to this adverse situation by lowering the key interest rate. The impulse response function from the model shows that a productivity shock can cause a real depreciation of the exchange rate when economies are closely integrated through international trade. |
| Keywords: | cost channel; new Keynesian model; productivity shocks; terms of trade; two-country model |
| JEL: | E24 E31 J3 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:029&r=mon |
| By: | Devereux, Michael B; Senay, Ozge; Sutherland, Alan |
| Abstract: | Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions. |
| Keywords: | Nominal stability, Financial Globalization, Country Portfolios, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:507&r=mon |
| By: | Florackis, Chris; Kontonikas, Alexandros; Kostakis, Alexandros |
| Abstract: | We develop an empirical framework that links micro-liquidity, macro-liquidity and stock prices. We provide evidence of a strong link between macro-liquidity shocks and the returns of UK stock portfolios constructed on the basis of micro-liquidity measures between 1999-2012. Specifically, macro-liquidity shocks, which are extracted on the meeting days of the Bank of England Monetary Policy Committee relative to market expectations embedded in 3-month LIBOR futures prices, are transmitted in a differential manner to the cross-section of liquidity-sorted portfolios, with liquid stocks playing the most active role. We also find that there is a significant increase in shares’ trading activity and a rather small increase in their trading cost on MPC meeting days. Finally, our results emphatically document that during the recent financial crisis the shocks-returns relationship has reversed its sign. Interest rate cuts during the crisis were perceived by market participants as a signal of deteriorating economic prospects and reinforced “flight to safety” trading. |
| Keywords: | Liquidity Shocks, Monetary Policy, Market Micro-Structure, Stock Returns, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:485&r=mon |
| By: | Bruce White (The Treasury) |
| Abstract: | This paper surveys the evolution of macroeconomic policy, in the New Zealand context, from the beginning of the end of the Great Inflation of the 1970s/1980s, through to the current recovery from the Great Recession brought on by the Global Financial Crisis. The 30 or so years since the late 1970s is divided into four periods: the run-up to the mid-1984 currency crisis; the period of reform from that point until the early 1990s; the subsequent extended period of non-inflationary growth in the 1990s and into the 2000s (punctuated by the Asian Financial Crisis in 1997/98); and the GFC and the years since. The paper reviews macroeconomic policy and developments across each of these periods in relation to fiscal policy, monetary policy, exchange rate policy and prudential supervision, all of which at various times have been used with macroeconomic objectives in mind. The paper concludes with some observations on where macro policy appears to be headed, suggesting that is towards achieving some re-integration of its individual components. |
| Keywords: | Macroeconomy; fiscal policy; monetary policy; exchange rate policy; macro-prudential policy; prudential supervision |
| JEL: | E52 E62 E63 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:13/30&r=mon |
| By: | Bouoiyour, Jamal; Selmi, Refk |
| Abstract: | How does inflation uncertainty interact with inflation rate? The purpose of this article is to assess this question in Egypt in a wavelets transform framework. We investigate the direction of causality in the relationship inflation-inflation uncertainty by combining component GARCH model, wavelets decomposition and scale-by-scale nonlinear causality test. We find a strong evidence in favor of Friedman-ball hypothesis in both time domain and the different frequencies. This study succeeds to resolve the inconsistencies and to point a robust nonlinear effect of inflation on inflation uncertainty, which is more intense at high frequency bands than at low ones. We attribute this result to the complexity in predicting how strongly and how quickly prices will respond to monetary policy, the asymmetry between inflation booms and recessions, the incidence of exogenous shocks, the co-movement of permanent shocks with inflation and the downward expectations of monetary authorities. |
| Keywords: | Inflation, inflation uncertainty, GARCH, wavelets, nonlinear causality. |
| JEL: | C1 C6 E3 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52414&r=mon |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin) |
| Abstract: | This paper explores the relationship between Milton Friedman’s work and the work on Divisia monetary aggregation, originated by William A. Barnett. The paradoxes associated with Milton Friedman’s work are largely resolved by replacing the official simple-sum monetary aggregates with monetary aggregates consistent with economic index number theory, such as Divisia monetary aggregates. Demand function stability becomes no more of a problem for money than for any other good or service. Money becomes relevant to monetary policy in all macroeconomic traditions, including New Keynesian economics, real business cycle theory, and monetarist economics. Research and data on Divisia monetary aggregates are available for over 40 countries throughout the world from the online library within the Center for Financial Stability’s (CFS) program, Advances in Monetary and Financial Measurement. This paper supports adopting the standards of monetary data competency advocated by the CFS and the International Monetary Fund (2008, pp. 183-184). |
| Keywords: | Divisia monetary aggregates, demand for money, monetarism, index number theory. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201312&r=mon |
| By: | Ronald, MacDonald |
| Abstract: | In this paper we take on the role of a ‘virtual consultant’ to a potentially independent Scotland. What should the exchange rate regime of an independent Scotland look like? We argue that the current proposal of the Scottish government to remain part of the sterling zone is doomed to failure, both because it falls short of a full political and monetary union and because it fails to recognize the reality of the Scottish economy post independence. We argue that the only tenable solution for an independent Scotland is to have a separate currency and for this currency to have some flexibility against Scotland’s main trading partners. One option offered here is managed float or crawl against a basket of currencies. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:484&r=mon |
| By: | Eric Young (University of Virginia); Alessandro Rebucci (Inter-American Development Bank); Christopher Otrok (University of Missouri/St Louis Fed) |
| Abstract: | In the aftermath of the global financial crisis, a new policy paradigm has emerged in which old-fashioned policies such as capital controls and other government distortions have become part of the standard policy toolkit (the so-called macro-prudential policies). On the wave of this seemingly unanimous policy consensus, a new strand of theoretical literature contends that capital controls are welfare enhancing and can be justified rigorously because of second-best considerations. Within the same theoretical framework adopted in this fast-growing literature, we show that a credible commitment to support the exchange rate in crisis times always welfare-dominates prudential capital controls as it can achieve the unconstrained allocation. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:641&r=mon |
| By: | Blake, Andrew P.; Kirsanova, Tatiana; Yates, Tony |
| Abstract: | This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely. |
| Keywords: | Time Consistency, Discretion, Multiple Equilibria, Policy Delegation, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:481&r=mon |
| By: | Reinhold Heinlein; Hans-Martin Krolzig |
| Abstract: | We study the exchange rate effects of monetary policy in a balanced macroeconometric two-country model for the US and UK. In contrast to the empirical literature on the 'delayed overshooting puzzle', which consistently treats the domestic and foreign countries unequally in themodelling process, we consider the full model feedback, allowing for a thorough analysis of the system dynamics. The consequential inevitable problem of model dimensionality is tackled in this paper by invoking the approach by Aoki (1981) commonly used in economic theory. Assuming country symmetry in the long-run allows to decouple the two-country macro dynamics of country averages and country differences such that the cointegration analysis can be applied to much smaller systems. Secondly the econometric modelling is general-to-specific, a graph-theoretic approach for the contemporaneous effects combined with an automatic general-to-specific model selection. The resulting parsimonious structural vector equilibrium correction model ensures highly significant impulse responses, revealing a delayed overshooting of the exchange rate in the case of a Bank of England monetary shock but suggests an instantaneous response to a Fed shock. Altogether the response is more pronounced in the former case. |
| Keywords: | Two-country model; Cointegration; Structural VAR; Gets Model Selection; Monetary Policy; Exchange Rates |
| JEL: | C22 C32 C50 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1321&r=mon |
| By: | Nikolay Ushakov (National Research University Higher School of Economics) |
| Abstract: | Higher wage flexibility of new hires is introduced as an extension of the baseline model in Gali (2010), combining the New Keynesian monetary analysis framework with labor market frictions. It was shown that the possibility of higher wage flexibility of new hires has an implication forcrucial labor market decisions made by households and firms,as well as on the form of social welfare loss function that is used to evaluate alternative monetary policies. Obtained extension allows one to conduct normative monetary policy analysis for different scenarios of degrees of higher wage flexibility fornew hires. Optimal monetary policy in the presence of higher wage flexibility of new hires is characterized by a higher incentive to make inflation more stable and by less incentive to facilitate adjustment of real wages in response to real shocks. Thus, the possibility of higher wage flexibility of new hires provides support toward more strict inflation targeting in the presence of nominal price and wage rigidities |
| Keywords: | Relative wage flexibility of new hires, optimal monetary policy, New Keynesian framework, search and matching in the labor market, unemployment |
| JEL: | E32 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hig:wpaper:44/ec/2013&r=mon |
| By: | David J. Stockton (Peterson Institute for International Economics) |
| Abstract: | Janet Yellen, who will serve as the 15th chair of the Board of Governors of the Federal Reserve System after her likely confirmation in December 2013, faces some formidable challenges as the economy and financial system continue to recover from the long-lasting effects of the global financial crisis and the accompanying Great Recession. Stockton lists five key challenges: (1) exercise caution in further scaling back the Fed’s third round of large-scale asset purchases, known as quantitative easing (QE3); (2) attend to the dual mandate of the Federal Reserve—the twin objectives of achieving maximum sustainable employment and stable prices; (3) improve integration of financial stability considerations into the monetary policy framework; (4) further improve the Fed’s communications and transparency; and (5) effectively lead the regulatory mission of the Federal Reserve. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb13-30&r=mon |
| By: | Yuliy Sannikov (Princeton University); Markus Brunnermeier (Princeton University) |
| Abstract: | This paper provides a theory of money, whose value depends on the functioning of the intermediary sector, and a unified framework for analyzing the interaction between price and financial stability. Households that happen to be productive in this period finance their capital purchases with credit from intermediaries. Less productive household save by holding deposits with intermediaries (inside money) or outside money. Intermediation involves risk-taking, and intermediaries' ability to lend is compromised when they suffer losses. After an adverse productivity shock, credit and inside money shrink, and the value of (outside) money increases, causing deflation that hurts borrowers. An accommodating monetary policy in downturns can mitigate these destabilizing adverse feedback eects. Lowering short-term interest rates increases the value of long-term bonds, recapitalizes the intermediaries by redistributes wealth. While this policy helps the economy ex-post, ex-ante it can lead to excessive risk-taking by the intermediary sector. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:620&r=mon |
| By: | Krupkina, Anna (BOFIT); Ponomarenko , Alexey (BOFIT) |
| Abstract: | We estimate money demand models for certain monetary aggregates across different institutional sectors (a novelty for the Russian case). Our results comprise a collection of money demand equations that include different combinations of explanatory variables. Comparing the validity of these models on the basis of statistical criteria is virtually implausible. Therefore we suggest the simultaneous employment of a whole set of such models and illustrate the approach by presenting the distribution of monetary overhangs calculated on the basis of the estimated models. |
| Keywords: | monetary aggregates; money demand; households; non-financial corporations |
| JEL: | C22 D14 D22 E41 |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_031&r=mon |
| By: | Reinhold Heinlein; Hans-Martin Krolzig |
| Abstract: | This note aims to identify the stable long-run relationships as well as unstable driving forces of the world economy using an aggregated approach involving the four largest currency blocks. The small global macromodel encompasses aggregated quarterly US, UK, Japanese and Euro Area data for the post-Bretton-Woods era. Three stable long-run relationships are found: output growth, the global term spread and an inflation climate measure. The common stochastic trend of the global economy is found to be dominated by real short-term interest rate shocks, reflecting the strong increase of the global real rates during the Volcker disinflation period as a dominating event of the last 40 years of macro history. |
| Keywords: | Cointegration; Real interest rates; Volcker disinflation; Multi-country model; Divisia index |
| JEL: | C32 C50 C82 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1322&r=mon |