nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒01‒10
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. A limited central bank By Charles I. Plosser
  2. The stimulative effect of forward guidance By Gavin, William T.; Keen, Benjamin D.; Richter, Alexander; Throckmorton, Nathaniel
  3. Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy By Michael W. Klein; Jay C. Shambaugh
  4. Inflation targeting, flexible exchange rates, and macroeconomic performance since the Great Revolution By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj; Nordvig, Jens
  5. Asset Allocation and Monetary Policy: Evidence from the Eurozone By Harald Hau; Sandy Lai
  6. Mortgages and monetary policy By Garriga, Carlos; Kydland, Finn E.; Šustek, Roman
  7. The national economic outlook and monetary policy By Charles I. Plosser
  8. Monetary Policy in Korea through the lense of Taylor Rule in DSGE model By Tae Bong Kim
  9. A probability-based stress test of Federal Reserve assets and income By Christensen, Jens H.E.; Lopez, Jose A.; Rudebusch, Glenn D.
  10. Investigating the Relationship between Currency Substitution, Exchange Rate and Inflation in Nigeria: An Autoregressive Distributed Lag (ARDL) Approach. By Adeniji, Sesan
  11. Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit By Dong He; Robert N McCauley
  12. Modeling yields at the zero lower bound: are shadow rates the solution? By Christensen, Jens H.E.; Rudebusch, Glenn D.
  13. Asymmetric Effects of Monetary Policy in the U.S. and Brazil By Ioannis Pragidis; Periklis Gogas; Benjamin Miranda Tabak
  14. Assessing monetary policy By Charles I. Plosser
  15. Institutional quality, the cyclicality of monetary policy and macroeconomic volatility By Duncan, Roberto
  16. Inflation, Credit, and Indexed Unit of Account By Hyung Sun Choi; Ohik Kwon; Manjong Lee
  17. Reconsidering EXIT By Charles I. Plosser
  18. Real Exchange Rate Misalignment in the cfa franc zone after the cfa franc devaluation of January 1994 By Kuikeu, Oscar
  19. Forward guidance By Charles I. Plosser
  20. Trade, Unemployment, and Monetary Policy By Matteo Cacciatore
  21. International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia By Philip Lane
  22. Estimation of Keynesian Exchange Rate Model of Pakistan by Considering Critical Events and Multiple Cointegrating Vectors By Hina, Hafsa; Qayyum, Abdul
  23. Economic conditions and monetary policy By Charles I. Plosser
  24. Supervisory transparency in the European banking union By Christopher Gandrud; Mark Hallerberg
  25. Expanding Beyond Borders : The Yen and the Yuan By Paola Subacchi

  1. By: Charles I. Plosser
    Abstract: Cato Institute's 31st Annual Monetary Conference — Was The Fed a Good Idea? November 14, 2013, Washington, D.C.> President Charles I. Plosser proposes setting limits on the Federal Reserve so that it can better fulfill what he believes is its essential role. He considers restrictions on the types of assets the Fed can buy to limit its interference with markets. He also touches on the Fed's governance and accountability and ways to implement policies that limit discretion and improve outcomes.
    Keywords: Federal Reserve System ; Monetary policy
    Date: 2013–11–13
  2. By: Gavin, William T. (Federal Reserve Bank of St. Louis); Keen, Benjamin D. (University of Oklahoma); Richter, Alexander (Auburn University); Throckmorton, Nathaniel (Indiana University)
    Abstract: This article quantifies the stimulative effect of central bank forward guidance—the public announcement of the intended path for monetary policy in the future—when the nominal interest rate is stuck at its zero lower bound (ZLB). We use a global solution to a conventional nonlinear New Keynesian model to show how the forward guidance horizon impacts the stimulative effect. Forward guidance enters our model as news shocks to the monetary policy rule, which commits the central bank to a lower policy rate than its policy rule suggests. The success of forward guidance depends on whether households expect the economy to recover. When households expect a recovery, forward guidance about a future expansionary monetary policy shock lowers the expected nominal interest rate and increases current consumption. A longer forward guidance horizon strengthens this effect, but at a decreasing rate.
    Keywords: Monetary Policy; Forward Guidance; Zero Lower Bound; Global Solution Method
    JEL: E31 E42 E58 E61
    Date: 2013–12–24
  3. By: Michael W. Klein (Fletcher School, Tufts University, and NBER (E-mail:; Jay C. Shambaugh (George Washington University and NBER (E-mail:
    Abstract: A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies.
    Keywords: Exchange Rate Regimes, Trilemma, Monetary Policy, Capital Controls
    JEL: F3 F33 F42 E42 E58
    Date: 2013–12
  4. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics); Nordvig, Jens (Nomura Securities)
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? Analyzing the sample of all OECD countries, we answer this question in the affirmative: Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other regimes. This includes in particular countries with fixed exchange rate regimes, but also countries with flexible exchange rates without IT. The result holds in the full sample; it holds when we exclude the so-called peripheral Eurozone countries (Greece, Italy, Ireland, Portugal, and Spain); and it holds when we exclude all Eurozone countries. It is, in other words, a robust empirical finding. We demonstrate that part of the explanation for this difference in growth performance is found in differences in export performance during the initial years of the crisis, which in turn is explained by real exchange rate depreciations. However, this cannot explain the entire difference in performance between countries with flexible and fixed exchange rates in the aftermath of the Great Recession. IT seems also to confer other benefits on the countries above and beyond the effect from currency depreciation.
    Keywords: Inflation targeting; flexible exchange rates; economic growth; OEDC; Great Recession
    JEL: E42 E58 O43
    Date: 2013–12–21
  5. By: Harald Hau (University of Geneva and Swiss Finance Institute and Hong Kong Institute for Monetary Research); Sandy Lai (The University of Hong Kong)
    Abstract: The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by either real short-term interest rates or Taylor rule residuals varied substantially across countries in the period between 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy conditions to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with lower real interest rates shift their portfolio investment out of the money market and into the riskier equity market. This produces the strongest equity price increase in countries where domestic institutional investors hold a large share of the countries' stock market capitalization.
    Keywords: Monetary Policy, Asset Price Inflation, Risk Seeking, Taylor Rule Residuals
    JEL: G11 G14 G23
    Date: 2013–11
  6. By: Garriga, Carlos (Federal Reserve Bank of St. Louis); Kydland, Finn E. (University of California–Santa Barbara); Šustek, Roman (Queen Mary, University of London)
    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.
    Keywords: Mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment.
    JEL: E32 E52 G21 R21
    Date: 2013–12–05
  7. By: Charles I. Plosser
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia to the Greater Johnstown Cambria County Chamber of Commerce, Johnstown, PA ; President Charles I. Plosser provides his economic outlook and views on monetary policy. He discusses the recent decision of the Federal Open Market Committee (FOMC) to delay tapering the asset purchase program. Because the FOMC failed to adjust the pace of asset purchases at the FOMC’s September meeting, he believes the FOMC undermines the credibility of its own forward guidance.
    Keywords: Monetary policy ; Economic forecasting ; Regulatory reform
    Date: 2013–10–08
  8. By: Tae Bong Kim (Korea Development Institute)
    Abstract: This paper shows assessments on the monetary policy of Korea based on an estimated model. During the sample period of the in ation targeting scheme, the monetary policy discretion, which is the monetary policy shock after the historical decomposition of the model, has been mostly in ationary while it was reducing the volatility of output growth and thus countercyclical. 3% target rate could have been achieved when the monetary policy shock's standard deviation was approximately half of its posterior estimate. Various degree of monetary policy stance has been simulated with the sample period. An aggressive monetary policy towards in ation stabilization would have generally led to the average level of in ation rate closer to its target rate but at the cost of higher volatilities of the output growth.
    Date: 2013
  9. By: Christensen, Jens H.E. (Federal Reserve Bank of San Francisco); Lopez, Jose A. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: To support the economy, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed’s associated interest rate risk — including potential losses to its Treasury securities holdings and declines in remittances to the Treasury. Unlike past examinations of this interest rate risk, we attach probabilities to alternative interest rate scenarios. These probabilities are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress test finds that the Fed’s losses are unlikely to be large and remittances are unlikely to exhibit more than a brief cessation.
    Keywords: term structure modeling; zero lower bound; monetary policy; quantitative easing
    JEL: E43 E52 E58 G12
    Date: 2013
  10. By: Adeniji, Sesan
    Abstract: Currency substitution is a widely spread phenomenon in developing countries with high level vagueness of its concept and causes. Therefore, this paper goes all out to examine the relationship that exists between currency substitution and some macroeconomic variables such as exchange rate, inflation and interest rate in Nigeria using Autoregressive Distributed Lag (ARDL) techniques over a period of 1970 – 2012. The result of the bound test procedure and other tools employed confirm that there is a stable and long-run relationship between currency substitution and the macroeconomic variables under consideration. The CUSUM and CUSUMSQ when also incorporated support these findings for the period. It is therefore suggest that effective and efficient policy control measure should be develop and implement to normalize exchange rate, inflation and interest rate.
    Keywords: Currency Substitution, Exchange Rate, Inflation, ARDL, CUSUM and CUMSUMQ.
    JEL: C12 E31 E41 F31
    Date: 2013–12–27
  11. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Robert N McCauley (Bank for International Settlements)
    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.
    Date: 2013–10
  12. By: Christensen, Jens H.E. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco)
    Abstract: Recent U.S. Treasury yields have been constrained to some extent by the zero lower bound (ZLB) on nominal interest rates. In modeling these yields, we compare the performance of a standard affine Gaussian dynamic term structure model (DTSM), which ignores the ZLB, and a shadow-rate DTSM, which respects the ZLB. We find that the standard affine model is likely to exhibit declines in fit and forecast performance with very low interest rates. In contrast, the shadow-rate model mitigates ZLB problems significantly and we document superior performance for this model class in the most recent period.
    Keywords: term structure modeling; zero lower bound; monetary policy.
    JEL: E43 E52 E58 G12
    Date: 2013
  13. By: Ioannis Pragidis; Periklis Gogas; Benjamin Miranda Tabak
    Abstract: We empirically test the effects of anticipated and unanticipated monetary policy shocks on the growth rate of real industrial production and explicitly test for different types of asymmetries in monetary policy implementation for two major international economies, the U.S. and Brazil. We depart from the conventional method of VAR analysis to estimate unanticipated monetary shocks and instead we use a combination of other methods. We first identify the Taylor rule that best describes the reaction of both central banks and then we test both forward looking linear and nonlinear models concluding that a Logistic Smooth Transition Autoregressive (LSTAR) forward looking model of the Taylor rule best describes the US FED Funds rate while a linear Taylor rule with the inclusion of a dummy variable best describes the reaction of the Central Bank of Brazil (BCB). We then use in-sample forecast errors in order to derive or identify the unexpected monetary shocks for both countries. In line with Cover (1992), we use these shocks to explore any asymmetries in the conduct of monetary policy on the growth rate of real industrial production. We also find asymmetries between anticipated and unanticipated monetary shocks as well as between effects of positive and negative shocks
    Date: 2013–12
  14. By: Charles I. Plosser
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia. ; Global Interdependence Center's Fifth Annual Rocky Mountain Economic Summit, Jackson Hole, WY
    Keywords: Monetary policy ; Economic forecasting ; Regulatory reform
    Date: 2013–07–12
  15. By: Duncan, Roberto (Federal Reserve Bank of Dallas)
    Abstract: In contrast to industrialized countries, emerging market economies are characterized by proor acyclical monetary policies and high output volatility. This paper argues that those facts can be related to a long-run feature of the economy - namely, its institutional quality (IQL). The paper presents evidence that supports the link between an index of IQL (law and order, government stability, investment profile, etc.), and (i) the cyclicality of monetary policy, and (ii) the volatilities of output and the nominal interest rate. In a DSGE model, foreign investors that choose a portfolio of direct investment and lending to domestic agents, face a probability of partial confiscation which works as a proxy that captures IQL. The economy is hit by external shocks to demand for home goods and productivity shocks while its central bank seeks to stabilize inflation and output. In the long run, a lower IQL tends to discourage external liabilities. If there is a positive external demand shock, we observe an increase in output and real appreciation. The latter operates through two opposite channels. First, it directly increases the opportunity cost of leisure generating incentives to expand labor supply. Second, it reduces the real value of the debt denominated in foreign currency which stimulates consumption but contracts the labor supply. If the IQL is low, the economy attracts fewer loans for domestic consumers and shows a lower debt-to-consumption ratio in the steady state. This implies that the reduction of the real value of the debt caused by the real appreciation is smaller. Given this low wealth effect, the real appreciation leads to an expansion of the labor supply. Wages drop and inflation diminishes. The central bank reacts by cutting its policy rate to stabilize inflation and generates a negative comovement between output and the nominal interest rate (procyclical policy). As a corollary, negative correlations between policy rates and output are not necessarily an indicator of destabilizing polices even in the presence of demand shocks.
    JEL: E40 E50 E60 F30 F40
    Date: 2014–01–03
  16. By: Hyung Sun Choi (Department of Economics, Kyung Hee University, Seoul, Republic of Korea); Ohik Kwon (Department of Economics, Korea University, Seoul, Republic of Korea); Manjong Lee (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: A simple monetary model is constructed to study the implications of an indexed unit of account (Indexed-UoA). In an economy with an Indexed-UoA, credit trade friction attributed to inflation is resolved and there is no redistributional effect from unexpected inflation between debtors and creditors. However, in an economy without an Indexed-UoA, credit trades occur only if inflation is not too high and unexpected inflation renders debtors better off but creditors worse off. Adopting a medium of exchange as a unit of account is most apposite for a low-inflation economy, whereas introducing an alternative Indexed-UoA enhances welfare in an economy where inflation undermines credit trades.
    Keywords: indexed unit of account, deferred payment, inflation, welfare
    JEL: E31 E42 E50
    Date: 2013
  17. By: Charles I. Plosser
    Abstract: Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, Monetary Policy in a Global Setting: China and the United States, Federal Reserve Bank of San Francisco, Federal Reserve Bank of St. Louis, and the National Institute for Fiscal Studies at Tsinghua University, April 16, 2013, Beijing, China
    Keywords: Financial crises ; Monetary policy ; Economic conditions
    Date: 2013–04–16
  18. By: Kuikeu, Oscar
    Abstract: In cfa franc zone, the exchange rate was devalued, in January 1994, in order to deal with the major macroeconomic imbalances that have affected the members during the 1980 decade. Thus, the aim of this paper is to assess the degree of over/undervaluation (namely real exchange rate misalignment) of the currency in the cfa franc zone since the cfa franc devaluation of January 1994.
    Keywords: equilibrium real exchange rate, cfa franc zone, cointegration, panel
    JEL: C33 F31
    Date: 2013–12–31
  19. By: Charles I. Plosser
    Abstract: Presented at the Stanford Institute for Economic Policy Research’s (SIEPR) Associates Meeting, Stanford, CA, February 12, 2013
    Keywords: Federal Open Market Committee ; Monetary policy ; Economic policy
    Date: 2013–02–12
  20. By: Matteo Cacciatore (HEC Montreal)
    Abstract: We study the effects of trade integration for the conduct of monetary policy in a two-country model with heterogeneous firms, endogenous producer entry, and labor market frictions. The model reproduces important empirical regularities related to international trade, namely synchronization of business cycles across trading partners and reallocation of market shares across producers. Three key results emerge. First, when trade linkages are weak, the optimal policy is inward-looking but requires significant departures from price stability both in the long run and over the business cycle. Second, as trade integration reallocates market share toward more productive firms, the need of positive inflation to correct long-run distortions is reduced. Third, increased business cycle synchronization implies that country-specific shocks have more global consequences. Welfare gains from cooperation are small relative to optimal non-cooperative policy, but sizable relative to historical Federal Reserve behavior. The constrained efficient allocation generated by optimal cooperative policy can still be achieved by appropriately designed inward-looking policy rules. However, sub-optimal (historical) policy implies inefficient fluctuations in cross-country demands that result in large welfare costs when trade linkages are strong.
    Date: 2013
  21. By: Philip Lane (Trinity College Dublin)
    Abstract: This paper provides an empirical review of the dynamics of international capital áows, with a focus on emerging Asia. Next, it outlines the various channels by which international capital flows affect domestic financial conditions in the host economies. Finally, it explores the implications for the design of policy frameworks that can deliver macro-financial stability.
    Keywords: international capital flows, financial stability, emerging Asia
    JEL: E42 E58 F32 F36
    Date: 2013–12
  22. By: Hina, Hafsa; Qayyum, Abdul
    Abstract: This study employs the Mundell and Fleming (1963) traditional flow model of exchange rate to examine the long run behavior of rupee/US $ for Pakistan economy over the period 1982:Q1 to 2010:Q2.This study investigates the effect of output levels, interest rates and prices and different shocks on exchange rate. Hylleberg, Engle, Granger, and Yoo (HEGY) (1990) unit root test confirms the presence of non-seasonal unit root and finds no evidence of biannual and annual frequency unit root on the level of series. Johansen and Juselious (1988,1992) likelihood ratio test indicates three long-run cointegrating vectors. Cointegrating vectors are uniquely identified by imposing structural economic restrictions of purchasing power parity (PPP), uncovered interest parity (UIP) and current account balance. Finally, the short-run dynamic error correction model is estimated on the bases of identified cointegrated vectors. The speed of adjustment coefficient indicates that 17 percent of divergence from long-run equilibrium exchange rate path is being corrected in each quarter. US war on Afghanistan has significant impact on rupee in short run because of high inflows of US aid to Pakistan after 9/11.
    Keywords: Exchange Rate Determination, Keynesian Model, HEGY Seasonal Unit Root, Cointegration, Error Correction Model, Pakistan
    JEL: C3 C32 C5 F3 F31
    Date: 2013
  23. By: Charles I. Plosser
    Abstract: Presented at the Economic Development Company and Economic Development Finance Corporation of Lancaster County Annual Meeting, March 6, 2013, Lancaster, PA
    Keywords: Monetary policy ; Economic conditions
    Date: 2013–03–06
  24. By: Christopher Gandrud; Mark Hallerberg
    Abstract: Bank supervisors should provide publicly accessible, timely and consistent data on the banks under their jurisdiction. Such transparency increases democratic accountability and leads to greater market efficiency. There is greater supervisory transparency in the United States compared to the member states of the European Union. The US supervisors publish data quarterly and update fairly detailed information on bank balance sheets within a week. By contrast, based on an attempt to locate similar data in every EU country, in only 11 member states is this data at least partially available from supervisors, and in no member state is the level of transparency as high as in the US. Current and planned European Union requirements on bank transparency are either insufficient or could be easily sidestepped by supervisors. A banking union in Europe needs to include requirements for greater supervisory transparency.
    Date: 2014–01
  25. By: Paola Subacchi (Asian Development Bank Institute (ADBI))
    Abstract: As all eyes are on the strategy and policy measures of the People’s Republic of China (PRC) to push the international use of the yuan, this paper turns to the internationalization of the Japanese yen and compares it with what the PRC is doing. There are some fundamental differences in the regional context and in the pattern of regional integration, and these distinguish the PRC’s current strategy from the Japanese experience in the 1980s. The yen’s development as an international currency, and the comparison with the PRC’s strategy, highlight the importance of regional integration as a way to overcome network externalities and market inertia. Using an analytical framework that assesses both the range of different roles (the scope) and geographical scale (the domain) of a currency in the global market, the paper suggests that economic fundamentals alone, albeit essential, are not sufficient to warrant a fully fledged scope and global domain of the currency. The paper concludes by suggesting that in the next decade the PRC yuan will become Asia’s leading currency due to the PRC’s deep economic integration in the region, and that the Japanese yen’s function as an international asset and store of value can be further enhanced if Tokyo’s competitiveness as a leading international financial center is improved.
    Keywords: the internationalization of the Japanese yen, the internationalization of the Chinese yuan, China, Japan, Currency Internationalization, International currency
    JEL: E42 E44 F33
    Date: 2013–12

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