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on Monetary Economics |
| By: | Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier) |
| Abstract: | In this paper, we study whether central bank communication has a positive effect on market participants’ perception of central banks’ (i) credibility, (ii) unorthodox measures, and (iii) independence. We utilise a survey of more than 500 financial market participants from around the world who answered questions in reference to the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed). We find that market participants believe that the Fed communicates best, followed by the BoE, ECB, and BoJ. Similar rankings are found on the issues of credibility, satisfaction with unconventional monetary policy, and possible deterioration in independence. Using ordered probit models, we show that central bank communication has a positive effect on how central banks are perceived and understood, as it enhances credibility, increases satisfaction with unorthodox measures, and fosters perceived independence of central banks. |
| Keywords: | Central Bank, Communication, Credibility, Financial Crisis, Financial Market Participants, Independence, Survey, Unconventional Monetary Policy |
| JEL: | E52 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201404&r=mon |
| By: | Bursian, Dirk; Fürth, Sven |
| Abstract: | In the aftermath of the financial crisis, the ECB has experienced an unprecedented deterioration in the level of trust. This raises the question as to what factors determine trust in central banking. We use a unique cross-country dataset which includes a rich set of socio-economic characteristics and supplement it with variables meant to reflect a country's macroeconomic condition. We find that besides individual socio-economic characteristics, macroeconomic conditions play a crucial role in the trust-building process. Our results suggest that agents are boundedly rational in the trust-building process and that current ECB market operations may even be beneficial for trust in the ECB in the long-run. -- |
| Keywords: | Central Banking,European Central Bank,Financial Crisis,Fiscal Crisis,Trust |
| JEL: | D1 E5 G21 H6 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:31&r=mon |
| By: | Issing, Otmar |
| Abstract: | The financial crisis which started in 2007 has caused a tremendous challenge for monetary policy. The simple concept of inflation targeting has lost its position as state of the art. There is a debate on whether the mandate of a central bank should not be widened. And, indeed, monetary policy has been very accommodative in the last couple of years and central banks have modified their communication strategies by introducing forward guidance as a new policy tool. This paper addresses the consequences of these developments for the credibility, the reputation and the independence of central banks. It also comments on the recent debate among economists concerning the question whether the ECB's OMT program is compatible with its mandate. -- |
| Keywords: | ECB,OMT,central banking |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:7&r=mon |
| By: | Arizmendi, Luis-Felipe |
| Abstract: | The purpose of this paper is to provide a new set of tools for policy makers at central banks. Based on the Garman-Kohlhagen formula for currency options, this research extends it with the Taylor-rule expression used for inflation targeting, thus obtaining the corresponding Call and Put options and higher-degree partial derivatives known as "Greeks" for key variables such as the policy target domestic interest rate and the output gap. |
| Keywords: | Inflation Targeting, Central bank policies, Exchange rates, Currency options. |
| JEL: | E4 E44 E58 F31 G13 |
| Date: | 2013–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52880&r=mon |
| By: | Bursian, Dirk; Roth, Markus |
| Abstract: | We examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way. -- |
| Keywords: | Optimal monetary policy,parameter uncertainty,Taylor rule |
| JEL: | E47 E52 E58 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:30&r=mon |
| By: | Jordi Galí; Tommaso Monacelli |
| Abstract: | We study the gains from increased wage flexibility and their dependence on exchange rate policy, using a small open economy model with staggered price and wage setting. Two results stand out: (i) the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate, and (ii) an increase in wage flexibility often reduces welfare, and more likely so in economies under an exchange rate peg or an exchange rate-focused monetary policy. Our findings call into question the common view that wage flexibility is particularly desirable in a currency union. |
| Keywords: | sticky wages, nominal rigidities, New Keynesian model, stabilization policies, exchange rate policy, currency unions, monetary policy rules |
| JEL: | E32 E52 F41 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:746&r=mon |
| By: | Ronny Mazzocchi |
| Abstract: | The outbreak of the financial crisis of 2007 has generated a lively debate on the real or alleged faults of the Federal Reserve (Fed). Some economists argue that in the period 2002-2005 the U.S. central bank has taken its target interest rate below the level implied by monetary pricinciples that had been followed for the previous 20 years. One can characterize this decision as a deviation from a policy rule such as a Taylor rule. This behavior determined the end of the Great Moderation and gave birth to the Great Recession. In this paper I challenge this view. I show how the deviations from the Taylor-ruleÕs hypothetical interest rate can be explained by the ambiguity on inflation indicators to use. I also explain how the Great Deviation was instead caused by an error in the estimate of one of the fundamental components of the Taylor rule, i.e. the natural rate of interest. Too expansionary mone- tary policy of the Fed was therefore not due to discretionary choices, but to a structural problem of the Taylor rule. Finally, I show how an adaptive rule based only on observable variables would have avoided the huge gap between short-term rates and natural rates |
| JEL: | E52 E58 G01 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpem:2013/16&r=mon |
| By: | Camera, Gabriele; Chien, YiLi |
| Abstract: | We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money - reduced-form vs. explicit role - neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money. -- |
| Keywords: | cash-in-advance,matching,microfoundations,money,inflation |
| JEL: | E1 E4 E5 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:33&r=mon |
| By: | G. LAMÉ (Insee) |
| Abstract: | This paper implements an affine term structure model that accommodates "unspanned" macro risks for the Euro area, i.e. distinct from yield-curve risks. I use an averaging-estimator approach to obtain a better estimation of the historical dynamics of the pricing factors, thus providing more accurate estimates of the term premium incorporated into the Eurozone's sovereign yield curve. I then look for episodes of the monetary cycle where long yields display a puzzling behavior vis-à-vis the short rate and its expected average path in contrast with the Expectation Hypothesis. The Euro-area bond market appears to have gone through its own "Greenspan conundrum" between January 1999 and August 2008. The term premium substantially contributed to these odd phenomena. |
| Keywords: | Affine term structure models, unspanned macro risks, monetary policy, expectation hypothesis, term premium |
| JEL: | C51 E43 E44 E47 E52 G12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpdeee:g2013-10&r=mon |
| By: | Ronny Mazzocchi |
| Abstract: | The turn of century long period of sustained growth with low and stable inflation let the economic profession and the public opinion to think that the right theoretical foundation for macroeconomic policy had been found. However the Great Crisis of 2008 indicates a spectac- ular failure of this framework in dealing with sources of macroeconomic instability and providing policy advise. Financial instability is the new challenge for monetary policy. Most of the recent research indicates that financial crises follow prolonged unwinding of investment-saving imbalances which are not contemplated by the standard theoretical framework. This paper draws a dynamic model where investment- saving imbalances are allowed to develop. It introduces different types of feedback interest-rate rules in order to provide some preliminary indications for the conduct of monetary policy. |
| JEL: | E21 E22 E31 E32 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpem:2013/15&r=mon |
| By: | Siekmann, Helmut; Wieland, Volker |
| Abstract: | This note reviews the legal issues and concerns that are likely to play an important role in the ongoing deliberations of the Federal Constitutional Court of Germany concerning the legality of ECB government bond purchases such as those conducted in the context of its earlier Securities Market Programme or potential future Outright Monetary Transactions. -- |
| Keywords: | ECB,OMT,fiscal policy,monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:4&r=mon |
| By: | Bel, K.; Paap, R. |
| Abstract: | Forecasts of key macroeconomic variables may lead to policy changes of governments, central banks and other economic agents. Policy changes in turn lead to structural changes in macroeconomic time series models. To describe this phenomenon we introduce a logistic smooth transition autoregressive model where the regime switches depend on the forecast of the time series of interest. This forecast can either be an exogenous expert forecast or an endogenous forecast generated by the model. Results of an application of the model to US inflation shows that (i) forecasts lead to regime changes and have an impact on the level of inflation; (ii) a relatively large forecast results in actions which in the end lower the inflation rate; (iii) a counterfactual scenario where forecasts during the oil crises in the 1970s are assumed to be correct leads to lower inflation than observed. |
| Keywords: | forecasting, inflation, nonlinear time series, regime switching |
| Date: | 2013–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:ems:eureir:40884&r=mon |
| By: | Camera, Gabriele; Gioffré, Alessandro |
| Abstract: | Monetary theorists have advanced an intriguing notion: we exchange money to make up for a lack of enforcement, when it is difficult to monitor and sanction opportunistic behaviors. We demonstrate that, in fact, monetary equilibrium cannot generally be sustained when monitoring and punishment limitations preclude enforcement - external or not. Simply put, monetary systems cannot operate independently of institutions - formal or informal - designed to monitor behaviors and sanction undesirable ones. This fundamental result is derived by integrating monetary theory with the theory of repeated games, studying monetary equilibrium as the outcome of a matching game with private monitoring. -- |
| Keywords: | Social norms,repeated games,cooperation,payment systems |
| JEL: | E4 E5 C7 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:32&r=mon |
| By: | L. Randall Wray; Xinhua Liu |
| Abstract: | This paper examines the fiscal and monetary policy options available to China as a sovereign currency-issuing nation operating in a dollar standard world. We first summarize a number of issues facing China, including the possibility of slower growth, global imbalances, and a number of domestic imbalances. We then analyze current monetary and fiscal policy formation and examine some policy recommendations that have been advanced to deal with current areas of concern. We next outline the sovereign currency approach and use it to analyze those concerns. We conclude with policy recommendations consistent with the policy space open to China. |
| Keywords: | China; Policy Space; Fiscal and Monetary Policy; Sectoral Balances Approach; Minsky; Sovereign Currency; Modern Money Theory; Middle-Income Trap; Financial Instability |
| JEL: | E2 E5 E6 F4 G2 G3 H5 H6 H7 H63 H72 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_783&r=mon |
| By: | Angeloni, Ignazio; Faia, Ester; Lo Duca, Marco |
| Abstract: | We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output. -- |
| Keywords: | bank runs,risk taking,monetary policy |
| JEL: | E5 G2 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:8&r=mon |
| By: | Mercedes Garcia-Escribano |
| Abstract: | This paper investigates the transmission of monetary policy by private banks in Brazil during the recent easing cycle. The analysis presented uses a panel dataset with information on lending by private banks in Brazil and concludes that monetary transmission through lending volumes was not impaired. Instead, the observed diminished lending appears to be related to supply and demand factors, as well as to the rapid expansion of public banks’ lending. |
| Keywords: | Monetary transmission mechanism;Brazil;Monetary policy;Business cycles;Credit expansion;Banks;Private sector;Loans;monetary transmission, monetary policy, credit growth |
| Date: | 2013–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/251&r=mon |
| By: | Bursian, Dirk; Faia, Ester |
| Abstract: | Trust in policy makers uctuates signi cantly over the cycle and a¤ects the transmission mechanism. Despite this it is absent from the literature. We build a monetary model embedding trust cycles; the latter emerge as an equilibrium phenomenon of a game-theoretic interaction between atomistic agents and the monetary authority. Trust a¤ects agentsstochastic discount factors, namely the price of future risk, and through this it interacts with the monetary trans- mission mechanism. Using data from the Eurobarometer surveys we analyze the link between trust and the transmission mechanism of macro and monetary shocks: empirical results are in line with theoretical ones. -- |
| Keywords: | trust evolutionary games,trust driven expectations,monetary transmission mechanism |
| JEL: | E0 E5 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:14&r=mon |
| By: | Hatcher, Michael C. (Cardiff Business School); Minford, Patrick (Cardiff Business School) |
| Abstract: | We survey recent literature comparing inflation targeting (IT) and price-level targeting (PT) as macroeconomic stabilization policies. Our focus is on New Keynesian models and areas which have seen significant developments since Ambler’s (2009) survey: the zero lower bound on nominal interest rates; financial frictions; and optimal monetary policy. Ambler’s main conclusion that PT improves the inflation-output volatility trade-off in New Keynesian models is reasonably robust to these extensions, several of which are attempts to address issues raised by the recent financial crisis. The beneficial effects of PT therefore appear to hang on the joint assumption that agents are rational and the economy New Keynesian. Accordingly, we discuss recent experimental and survey evidence on whether expectations are rational, as well as the applied macro literature on the empirical performance of New Keynesian models. In addition, we discuss a more recent strand of applied literature that has formally tested New Keynesian models with rational expectations. Overall the evidence is not conclusive, but we note that New Keynesian models are able to match a number of dynamic features in the data and that behavioural models of the macroeconomy are outperformed by those with rational expectations in formal statistical tests. Accordingly, we argue that policymakers should continue to pay attention to PT. |
| JEL: | E52 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2013/14&r=mon |
| By: | Christopher J. Erceg; Andrew Levin |
| Abstract: | In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during “normal times†(that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound. |
| Keywords: | Economic recession;United States;Labor markets;Unemployment;Monetary policy;labor force participation, unemployment, and monetary policy rules |
| Date: | 2013–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/245&r=mon |
| By: | Stéphane Auray (CREST-Ensai, Bruz, F-35170, France ; Université du Littoral Côte d’Opale, F-59375 Dunkerque, France ; CIRPEE, Canada); Aurélien Eyquem (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | We show that welfare can be lower under complete financial markets than under autarky in a monetary union with home bias, sticky prices and asymmetric shocks. Such a monetary union is a second-best environment in which the structure of financial markets affects risk-sharing but also shapes the dynamics of inflation rates and the welfare costs from nominal rigidities. Welfare reversals arise for a variety of empirically plausible degrees of price stickiness when the Marshall-Lerner condition is met. These results carry over a model with active fiscal policies, and hold within a medium-scale model, although to a weaker extent. |
| Keywords: | Monetary Union, Financial Markets Incompleteness, Sticky Prices, Fiscal and Monetary Policy |
| JEL: | E32 E63 F32 F41 F42 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1342&r=mon |
| By: | Matthieu Bussière; Gong Cheng; Menzie D. Chinn; Noëmie Lisack |
| Abstract: | Based on a dataset of 112 emerging economies and developing countries, this paper addresses two key questions regarding the accumulation of international reserves: first, has the accumulation of reserves effectively protected countries during the 2008-09 financial crisis? And second, what explains the pattern of reserve accumulation observed during and after the crisis? More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly if associated with a less open capital account. In the immediate aftermath of the crisis, countries that depleted foreign reserves during the crisis quickly rebuilt their stocks. This rapid rebuilding has, however, been followed by a deceleration in the pace of accumulation. The timing of this deceleration roughly coincides with the point when reserves reached their pre-crisis level and may be related to the fact that short-term debt accumulation has also decelerated in most countries over this period. |
| JEL: | F31 G01 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19791&r=mon |
| By: | Sanderson, Rohnn |
| Abstract: | Using the HICP (Harmonized Index of Consumer Prices) the author tests the series for the makeup of its dynamic components both before and after the start of stage three of the European Central Bank’s (ECB) monetary policy directive. While it appears ECB is meeting its stated objective, it is perhaps more important to address the composition of the lag and volatility of monetary policy to see how a policy change alters the fundamental dynamic structure of an economic system. The HICP data provides a good natural experiment for assessing structural change. This is important because while a policy may achieve its goal(s), in doing so it may alter the fundamental nature of how that system behaves, potentially causing the system to be more volatile or more sensitive to exogenous shocks in the future. Changes to the fundamental nature of a dynamic system can mean that future policies, that are similar to the present policies, could have very different impacts on that very same system in terms of both long run and short run effects. The paper finds that while the ECB may be meeting its stated objectives, it may be potentially increasing the degree and severity of future short run deflationary/inflationary cycles from similar policies in the future due to the type of random and deterministic components in the system. More data and further study is needed to determine the long-term affects of monetary policy in economic systems as many economic cycles are indeed very long. |
| Keywords: | dynamic systems, Hurst exponent, chaos, long-term memory, monetary policy |
| JEL: | C50 E40 G18 |
| Date: | 2013–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:52537&r=mon |
| By: | Engelbert Stockhammer (Kingston University) |
| Abstract: | Neoliberalism has not given rise to a sustained profit-led growth process, but to a finance-dominated accumulation regime in which growth relies either on financial bubbles and rising household debt (‘debt-driven growth’) or on net exports (‘export-driven growth’). The financial crisis that began in the market for derivatives on the US subprime mortgage market has translated into the worst recession since the 1930s. In Europe the crisis has been amplified by an economic policy architecture (the Stability and Growth Pact) that aimed at restricting the role of fiscal policy and insulating monetary policy and central banks from national governments. The crisis has thus led to a sharp economic divergence between core and peripheral countries. Contrary to the situation in the (export-driven) Germanic core of Europe, the crisis is escalating in the (debt-driven) southern countries of Europe. The paper interprets the policy regime as the outcome of national elites’ attempt to use European integration as a means to constrain nation states. The result is a policy regime that has fatally weakened nation states as regards their fiscal and monetary capacities without creating a European state. |
| Keywords: | Euro crisis, neoliberalism, European economic policy, European integration, financial crisis, sovereign debt crisis |
| JEL: | E02 E12 E5 E6 F5 P16 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp1401&r=mon |
| By: | Tröger, Tobias H. |
| Abstract: | This paper analyzes the evolving architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state. By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus underincentives their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical. The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA's Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States. Joining the SSM as a non-euro area Member State is unattractive because the current legal framework grants no voting rights in the ECB's ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision. -- |
| Keywords: | prudential supervision,banking union,regulatory capture,political economy of bureaucracy,Single Supervisory Mechanism (SSM),European Central Bank (ECB),European Banking Authority (EBA) |
| JEL: | G21 G28 H77 K22 K23 L22 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:27&r=mon |
| By: | Jaromir Benes; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula |
| Abstract: | This paper uses two of the IMF’s DSGE models to simulate the benefits of international fiscal and macroprudential policy coordination. The key argument is that these two policies are similar in that, unlike monetary policy, they have long-run effects on the level of GDP that need to be traded off with short-run effects on the volatility of GDP. Furthermore, the short-run effects are potentially much larger than those of conventional monetary policy, especially in the presence of nonlinearities such as the zero interest rate floor, minimum capital adequacy regulations, and lending risk that depends in a convex fashion on loan-to-value ratios. As a consequence we find that coordinated fiscal and/or macroprudential policy measures can have much larger stimulus and spillover effects than what has traditionally been found in the literature on conventional monetary policy. |
| Keywords: | Fiscal policy;Macroprudential Policy;Monetary policy;Stabilization measures;International cooperation;Economic models;Monetary Policy, Fiscal Policy, Macroprudential Policy, International Policy Coordination, International Spillovers, Nonlinearities, Fiscal Multipliers, Macrofinancial Linkages, Prudential Regulation |
| Date: | 2013–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/262&r=mon |
| By: | Bernanke, Ben S. (Board of Governors of the Federal Reserve System (U.S.)) |
| Date: | 2013–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:613&r=mon |
| By: | Bernanke, Ben S. (Board of Governors of the Federal Reserve System (U.S.)) |
| Date: | 2014–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgsq:637&r=mon |