nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒02‒02
39 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. When is Lift-off? Evaluating Forward Guidance from the Shadow By Matthias Neuenkirch; Pierre L. Siklos
  2. How Stale Central Bank Interest Rate Projections Affect Interest Rate Uncertainty By Detmers, Gunda-Alexandra; Nautz, Dieter
  3. Does Central Bank Staff Beat Private Forecasters? By Jung, Alexander; El-Shagi, Makram; Giesen, Sebastian
  4. Central Banking after the Crisis By Frederick S. Mishkin
  5. Tapering talk : the impact of expectations of reduced federal reserve security purchases on emerging markets By Eichengreen, Barry; Gupta, Poonam
  6. Towards a “New” Inflation Targeting Framework: The Case of Uruguay By Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
  7. Conditions for a Beneficial Monetary Union under Suboptimal Monetary Policy By Groll, Dominik
  8. Estimating monetary policy rules when the zero lower bound on nominal interest rates is approached By Konstantin Kiesel; Maik Wolters
  9. Issues for Renminbi Internationalization: An Overview By Eichengreen, Barry; Kawai, Masahiro
  10. A Monetary Analysis of Balance Sheet Policies By Markus Hoermann; Andreas Schabert
  11. Financial innovations, money demand, and the welfare cost of inflation By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  12. Optimal monetary policy responses and welfare analysis within the highfrequency New-Keynesian framework By Sacht, Stephen
  13. Effects of Monetary Policy on the REIT Returns - Evidence from the United Kingdom By I.Fatnassi; S.Chawechi; Z.Ftiti; A.Ben Maatoug
  14. Macro-Prudential Policy and the Conduct of Monetary Policy By Denis Beau; Christophe Cahn; Laurent Clerc; Benoît Mojon
  15. China, the Dollar Peg and U.S. Monetary Policy By Tervala, Juha
  16. Exchange Rate and Price Dynamics at the Zero Lower Bound By Kaufmann, Daniel; Bäurle, Gregor
  17. A Vector Error Correction Model for the Relationship between Public Debt and Inflation in Germany By Andreas Nastansky; Alexander Mehnert; Hans Gerhard Strohe
  18. Efficient CPI-Based Taylor Rules in Small Open Economies By Rodrigo Caputo; Luis Oscar Herrera
  19. Does Expansionary Monetary Policy Cause Asset Price Booms? Some Historical and Empirical Evidence By Michel Bordo; John Lando-Lane
  20. ECB monetary policy surprises: identification through cojumps in interest rates By Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias
  21. Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed By Joseph E. Gagnon; Brian Sack
  22. Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes By Mirdala, Rajmund
  23. Monetary Policy at the Zero Lower Bound: The Chilean Experience By Luis F. Céspedes; Javier García-Cicco; Diego Saravia
  24. Measuring the stance of monetary policy in conventional and unconventional environments By Leo Krippner
  25. The Interest Rate Pass-Through in the Euro Area During the Global Financial Crisis By Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver
  26. What Can Break-Even Inflation Rates Tell Us about the Anchoring of Inflation Expectations in the Euro Area? By Lemke, Wolfgang; Strohsal, Till
  27. Interventions and Inflation Expectations in an Inflation Targeting Economy By Pablo Pincheira
  28. Global Dynamics at the Zero Lower Bound By Nathaniel Throckmorton; Benjamin Keen; Alexander Richter; William Gavin
  29. The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts By Knüppel, Malte; Schultefrankenfeld, Guido
  30. Are there Asymmetric Effects of Monetary Policy in India? By Khundrakpam, Jeevan Kumar
  31. Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests By Chen, Wenjuan; Bettendorf, Timo
  32. Optimal Monetary Policy in the Presence of an Informal Sector and Firm-Level Credit Constraints By Ahmed, Waqas; Khan, Sajawal; Rehman, Muhammad
  33. Monetary Policy and Macro-Prudential Regulation: The Risk-Sharing Paradigm By Atif Mian
  34. The ECB's Unconventional Monetary Policies: Have they lowered market borrowing costs for banks and governments? By SZCZERBOWICZ, Urszula
  35. Measuring the Slowly Evolving Trend in US Inflation with Professional Forecasts By James M. Nason; Gregor W. Smith
  36. Liquidity in the Liquidity Crisis: Evidence from Divisia Monetary Aggregates in Germany and the European Crisis Countries By El-Shagi, Makram; Kelly, Logan; Kelly, Logan
  37. How Much Do Official Price Indexes Tell Us About Inflation? By Jessie Handbury; Tsutomu Watanabe; David E. Weinstein
  38. International Liquidity and Exchange Rate Dynamics By Xavier Gabaix; Matteo Maggiori
  39. Liquidity Regulation, the Central Bank, and the Money Market By Scheubel, Beatrice; Körding, Julia

  1. By: Matthias Neuenkirch; Pierre L. Siklos
    Abstract: Monetary policy decisions are typically taken after a committee has deliberated and voted on a proposal. However, there are well-known risks associated with committee-based decisions. In this paper we examine the record of the shadow Monetary Policy Council in Canada. Given the structure of the committee, how decision-making takes place, as well as the voting arrangements, the MPC does not face the same information cascades and group polarization risks faced by actual decision-makers in central bank monetary policy councils. We find a considerable diversity of opinion about the recommended future path of interest rates inside the MPC. Beginning with the explicit forward guidance provided by the Bank of Canada market determined forward rates diverge considerably from the recommendations implied by the MPC. There is little evidence that the Bank and the MPC coordinate their future views about the interest rate path. However, it is difficult to explain the basis on which median voter inside the MPC, as well as doves and hawks on the committee, change their views about future changes in policy rates. This implies that there remain challenges in understanding the evolution of future interest rate paths over time.
    Keywords: Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules
    JEL: E43 E52 E58 E61 E69
    Date: 2014
  2. By: Detmers, Gunda-Alexandra; Nautz, Dieter
    Abstract: The Reserve Bank of New Zealand guides interest rate expectations of financial markets by projections of future short-term rates that are updated only once a quarter. As a consequence, projections become stale when time evolves and new information enters the market. This paper investigates the dynamic impact of probably outdated interest rate projections on the expectations management of central banks. Confirming the stabilizing effect of fresh central bank announcements, we show that interest rate uncertainty increases with the time elapsing since the recent interest rate projection. In contrast, we find that stale projections may hamper central bank communication. In fact, interest rate uncertainty increases when the market perceives the projections to be outdated. --
    JEL: E52 E58 G14
    Date: 2013
  3. By: Jung, Alexander; El-Shagi, Makram; Giesen, Sebastian
    Abstract: This paper assesses the relative performance of central bank staff forecasts and of private forecasters for inflation and output. We show that the Federal Reserve (Fed), and less so the European Central Bank (ECB), has a significant information advantage concerning inflation and output forecasts. Using recently developed tests for conditional predictive ability and forecast stability for the US, we find that the driving forces behind the narrowing of the information advantage of Greenbook forecasts have coincided with the Great Moderation. --
    JEL: C53 E37 E52
    Date: 2013
  4. By: Frederick S. Mishkin
    Abstract: This paper explores where central banking is heading after the recent financial crisis. First it discusses the central bank consensus before the crisis and then outlines the key facts learned from the crisis that require changes in the way central banks conduct their business. Finally, it discusses four main areas in which central banks are altering their policy frameworks: 1) the interaction between monetary and financial stability policies, 2) nonconventional monetary policy, 3) risk management, and 4) fiscal dominance and monetary policy.
    Date: 2013–12
  5. By: Eichengreen, Barry; Gupta, Poonam
    Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Macroeconomic Management
    Date: 2014–01–01
  6. By: Matias Escudero; Martin Gonzalez-Rozada; Martin Sola
    Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.
    Keywords: dynamic stochastic general equilibrium models, financial frictions, monetary policy, reserve requirements, inflation targeting, non-conventional policy instruments
    JEL: E52 E58
    Date: 2014–01
  7. By: Groll, Dominik
    Abstract: The New Keynesian DSGE literature has come to the consensus that, from the perspective of business cycle stabilization, countries are worse off in terms of welfare by forming a monetary union. This consensus, however, is based on the assumption of monetary policy being optimal. Using a standard two-country model, this paper shows that under suboptimal monetary policy, countries may gain in welfare by forming a monetary union, highlighting an important inherent benefit of fixing the exchange rate. Whether countries benefit from a monetary union depends primarily on the degree of price stickiness and how monetary policy is conducted: If prices are rather sticky and if monetary policy is not very aggressive towards inflation, forming a monetary union is beneficial. In contrast, asymmetries in the degree of price stickiness between countries are not of any importance for a monetary union to be welfare-enhancing or not. --
    JEL: F41 F33 E52
    Date: 2013
  8. By: Konstantin Kiesel; Maik Wolters
    Abstract: Monetary policy rule parameters estimated with conventional estimation techniques can be severely biased if the estimation sample includes periods of low interest rates. Nominal interest rates cannot be negative, so that censored regression methods like Tobit estimation have to be used to achieve unbiased estimates. We use IV-Tobit regression to estimate monetary policy responses for Japan, the US and the Euro area. The estimation results show that the bias of conventional estimation methods is sizeable for the inflation response parameter, while it is very small for the output gap response and the interest rate smoothing parameter. We demonstrate how IV-Tobit estimation can be used to study how policy responses change when the zero lower bound is approached. Further, we show how one can use the IV-Tobit approach to distinguish between desired policy responses, that the central bank would implement if there was no zero lower bound, and the actual ones and provide estimates of both
    Keywords: monetary reaction function, zero lower bound, IV-Tobit estimator, censored regressions, non-linearity
    JEL: E52 E58 E65
    Date: 2014–01
  9. By: Eichengreen, Barry (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: This paper provides an overview of the potential international role of the renminbi (RMB). Reviewing the current state, the paper finds that much progress has been made on RMB settlements for trade involving the People’s Republic of China (PRC) and on RMB-denominated bond issuance in Hong Kong, China, but that RMB internationalization is still limited due to capital account controls. It argues that a high degree of RMB internationalization requires significant capital account liberalization, which in turn would call for greater exchange rate flexibility so that the central bank can enjoy monetary policy autonomy. This, however, would pose a challenge for PRC authorities as hasty capital account liberalization could expose its financial markets to the risk of crisis. The paper also emphasizes the importance of institutional reforms to make the RMB a truly international reserve currency.
    Keywords: renminbi; yuan; international monetary policy; currency internationalization; foreign exchange; capital account liberalization; financial market
    JEL: F31 F32 F33 F41
    Date: 2014–01–21
  10. By: Markus Hoermann; Andreas Schabert
    Abstract: We augment a standard macroeconomic model to analyze the effects and limitations of balance sheet policies. We show that the central bank can stimulate real activity by changing the size or the composition of its balance sheet, when interest rate policy is ineffective. Specifically, the central bank can stabilize the economy by increasing money supply against eligible assets even when the policy rate is at the zero lower bound. By changing the composition of its balance sheet, it can affect interest rates and, for example, neutralize increases in firms' borrowing costs, which is not possible under a single instrument regime. We further analyze the limitations of balance sheet policies and show that they are particularly useful under liquidity demand shocks.
    Keywords: Unconventional monetary policy, collateralized lending, quantitative easing, liquidity premium, zero lower bound
    JEL: E32 E52 E58
    Date: 2013–12–29
  11. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: In the 1990s, the empirical relation between money demand and interest rates began to fall apart. We analyze to what extent improved access to money markets can explain this break-down. For this purpose, we construct a microfounded monetary model with a money market, which provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that improved access to money markets can explain the behavior of money demand very well. Furthermore, we show that, by allocating money more efficiently, better access to money markets decrease the welfare cost of inflation substantially.
    Keywords: Monetary economics
    JEL: E52 E58 E59
    Date: 2014–01
  12. By: Sacht, Stephen
    Abstract: In this we investigate the welfare effects of optimal monetary policy measurements within a high-frequency New-Keynesian model i.e. under variation of the period length. Our results indicate that the policy maker faces a higher welfare loss on a higher relative to a lower frequency of the agents' decision making. While overall inertia in the model increases, we show that the more the pass-through of output gap movements into inflation rate dynamics is dampened on a higher frequency, this amplifies the trade-off of the central bank in case of a cost-push shock. This is caused by the impact of so-called frequency-dependent persistence effects, which mimic the impact of the increase in the amount of market days on the dynamics of the model. This result is less severe in the optimal monetary policy regime under Commitment because of a time-invariant history dependence effect with respect to the period length. --
    Keywords: Hybrid New-Keynesian model,high-frequency modelling,optimal monetary policy,frequency-dependent persistence
    JEL: C61 C63 E32 E52
    Date: 2014
  13. By: I.Fatnassi; S.Chawechi; Z.Ftiti; A.Ben Maatoug
    Abstract: In this paper, we analyse whether a monetary policy based on three main variables (inflation, money supply, and output gap) has a nonlinear impact on real estate investment trust (REIT) markets. In addition, we extend our analysis to examine whether these monetary policy components impact the possibility of boom and bust regimes occurring in the market. Empirically, we propose different Markov-switching model variants to determine the nonlinear time-varying impact of monetary policy on the REIT market. Our results show the monetary policy environment is supposed to affect, on one hand, the REIT returns and, on another hand, the possibility of boom and bust markets. We prove that expansionary monetary policy has an impact only in the case of boom market. However, an increase in the inflation rate decreases the probability in remaining in the bust regime. As consequence, we have already outlined several monetary transmission mechanisms that show house prices to have important effects on aggregate demand. Our results confirm that REIT markets are not efficient.
    Keywords: Monetary policy, REIT, Boom and Bust, Nonlinear,Markov-switching
    Date: 2014–01–06
  14. By: Denis Beau; Christophe Cahn; Laurent Clerc; Benoît Mojon
    Abstract: In this paper, we analyse the interactions between monetary and macro-prudential policies and the circumstances under which such interactions call for their coordinated implementation. We start with a review of the interdependencies between monetary and macro-prudential policies. Then, we use a DSGE model incorporating financial frictions, heterogeneous agents and housing, which is estimated for the euro area over the period 1985 -2010, to identify the circumstances under which monetary and macro-prudential policies may have compounding, neutral or conflicting impacts on price stability. We compare inflation dynamics across four “policy regimes” depending on: (a) the monetary policy objectives – that is, whether the policy instrument, the short-term interest rate factors in financial stability considerations by leaning against credit growth; and (b) the existence, or not, of an authority in charge of a financial stability objective through the implementation of macroprudential policies that can “lean against credit” without affecting the short-term interest rate. Our main result is that under most circumstances, macro-prudential policies have either a limited or a stabilizing effect on inflation.
    Date: 2013–12
  15. By: Tervala, Juha
    Abstract: I examine the transmission of expansionary U.S. monetary policy in case where developing countries-including China-peg their currencies to the dollar. I evaluate the value of the dollar peg as a fraction of consumption that households would be willing to pay for the dollar peg to remain as well off under the dollar peg as under a flexible exchange rate. The value of the dollar peg is positive for the dollar bloc because the U.S. can no longer improve its terms of trade at the dollar bloc's expense. This provides a rationale for fixing the exchange rate. If the expenditure switching effect is weak, the peg is harmful to the U.S., providing a rationale for criticism of China's exchange rate policy.
    Keywords: Dollar peg; dollar bloc; monetary policy; open economy macroeconomics; beggar-thy-neighbor
    JEL: E32 E52 F30 F41 F44
    Date: 2014–01–27
  16. By: Kaufmann, Daniel; Bäurle, Gregor
    Abstract: In this paper, we analyse nominal exchange rate and price dynamics after risk shocks with short-term interest rates constrained by the zero lower bound (ZLB). We show with a stylized theoretical model that temporary risk shocks may lead to permanent shifts of the exchange rate and the price level if a central bank anchors long-run inflation expectations. In line with this theoretical prediction, we find empirical evidence for Switzerland, that the responses of the exchange rate and the price level to a temporary risk shock are permanent. Our theoretical discussion shows that adopting a credible long-run price level target rather than a long-run inflation target avoids these permanent shifts of the exchange rate and the price level. --
    JEL: C32 E31 E52
    Date: 2013
  17. By: Andreas Nastansky; Alexander Mehnert; Hans Gerhard Strohe
    Abstract: In the paper, the interaction between public debt and inflation including mutual impulse response will be analysed. The European sovereign debt crisis brought once again the focus on the consequences of public debt in combination with an expansive monetary policy for the development of consumer prices. Public deficits can lead to inflation if the money supply is expansive. The high level of national debt, not only in the Euro-crisis countries, and the strong increase in total assets of the European Central Bank, as a result of the unconventional monetary policy, caused fears on inflating national debt. The transmission from public debt to inflation through money supply and long-term interest rate will be shown in the paper. Based on these theoretical thoughts, the variables public debt, consumer price index, money supply m3 and long-term interest rate will be analysed within a vector error correction model estimated by Johansen approach. In the empirical part of the article, quarterly data for Germany from 1991 by 2010 are to be examined.
    Keywords: Beveridge-Nelson Decomposition, Public Debt, Inflation, Money Supply, Vector Error Correction Model
    JEL: C32 E31 E51 H63
    Date: 2014–01
  18. By: Rodrigo Caputo; Luis Oscar Herrera
    Abstract: In a standard New-Keynesian model for a small open economy, we derive the efficient CPI inflationbased Taylor rule. We conclude that the natural rate of interest, based on CPI inflation, must be directly linked to the foreign interest rate, as well as to domestic productivity shocks. In this way this rule ensures that the real ex-ante CPI interest rate moves in the face of domestic and foreign shocks so as to induce efficient movements in consumption. The empirical evidence, on the other hand, shows that inflation-targeting central banks respond to movements in the foreign interest rate (Fed funds rate), besides reacting to expected CPI inflation and to the domestic output gap.
    Date: 2013–07
  19. By: Michel Bordo; John Lando-Lane
    Abstract: In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with asset price booms. Using a panel of up to 18 OECD countries from 1920 to 2011 we estimate the impact that loose monetary policy, low inflation, and bank credit has on house, stock and commodity prices. We review the historical narratives on asset price booms and use a deterministic procedure to identify asset price booms for the countries in our sample. We show that “loose” monetary policy – that is having an interest rate below the target rate or having a growth rate of money above the target growth rate – does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or “easy” credit.
    Date: 2013–12
  20. By: Winkelmann, Lars; Bibinger, Markus; Linzert, Tobias
    Abstract: We propose a new monetary policy surprise measure based on cojumps in tick-data of a short and long term interest rate. We extend a recently proposed test for cojumps to distinguish policy announcements that shift the short and long end of the yield curve in the same direction (level shift) and policy announcements that shift both ends in opposite directions (rotation). Through level shifts and rotations we identify the source of a policy surprise in a standard Taylor-rule context. Empirical evidence on 133 ECB policy announcements from 2001 to 2012 suggest that markets perceptions about ECB policy preferences has been remarkably stable. --
    JEL: E58 C14 C58
    Date: 2013
  21. By: Joseph E. Gagnon (Peterson Institute for International Economics); Brian Sack (D. E. Shaw Group)
    Abstract: The amount of assets held by the Federal Reserve has dramatically increased since 2009. It recently crossed $4 trillion and will likely peak at about $4.5 trillion. This increase is the result of the Fed's large-scale asset purchase programs, which were intended to support economic growth. However, these purchases have created unprecedented amounts of liquidity in the financial system. Gagnon and Sack doubt that the Fed can smoothly conduct monetary policy along the lines of the previous operating framework in this environment of high liquidity. Instead of reducing bank reserves to achieve a target level for the federal funds rate, they propose a new operating framework that would allow the Fed to maintain an elevated balance sheet along with abundant liquidity in the financial system. They argue that the Fed should set the rate at which it will offer overnight reverse repurchase agreements as its policy instrument, with the interest rate paid on bank reserves set at the same level. The federal funds rate would become just one of the various overnight interest rates determined by the market in the normal transmission of monetary policy.
    Date: 2014–01
  22. By: Mirdala, Rajmund
    Abstract: Responsiveness of exchange rates to external price shocks as well as their ability to serve as a traditional vehicle for a transmission of these shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. To provide more rigorous insight into the problem of exchange rate pass-through to the domestic prices in countries with different exchange rate arrangements we estimate models for two subsequent periods 2000-2007 and 2000-2012. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.
    Keywords: exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function
    JEL: C32 E31 F41
    Date: 2013–12
  23. By: Luis F. Céspedes; Javier García-Cicco; Diego Saravia
    Abstract: In this paper we analyze the effects of the Term Liquidity Program (FLAP) implemented by the Central Bank of Chile in response to the financial crisis of 2008-9. We find that the announcement related to this policy significantly reduced nominal yields in the policy horizon of two years. These results suggest that the credibility goal of this unconventional policy (i.e. to convey the message that the monetary policy rate was to remain at its lower bound for a prolonged period of time) was achieved. We also analyze how the usage of that facility by banks affected the credit they supply. We find that banks that borrowed from this facility increase commercial and consumer loans, relative to those that did not, but mortgage credit was not significantly affected. In other words, this additional source of short-term borrowing was used mainly to finance short-term lending.
    Date: 2013–12
  24. By: Leo Krippner
    Abstract: This article introduces an idea for summarizing of the stance of monetary policy with quantities derived from a class of yield curve models that respect the zero lower bound constraint for interest rates. The “economic stimulus measure” aggregates the current and estimated expected path of interest rates relative to the neutral interest rate from the yield curve model. Unlike shadow short rates, economic stimulus measures are consistent and comparable across conventional and unconventional monetary policy environments, and are less subject to variation with modelling choices, as I demonstrate with two and three factor models estimated with different data sets. Full empirical testing of the inter-relationships between ES measures and macroeconomic data remains a topic for future work.
    Keywords: Unconventional monetary policy; zero lower bound; shadow short rate; term structure model
    JEL: E43 E52 G12
    Date: 2014–01
  25. By: Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver
    Abstract: This paper uses panel vector autoregressive models and simulations of an estimated DSGE model to explore the reaction of Euro area banks to the global financial crisis. We focus on their interest rate setting behavior in response to standard macroeconomic shocks. Our main empirical finding is that the pass through from changes in the money market rate to retail bank rates became significantly less complete during the crisis. Model simulations show that this result can be well explained by a significant increase in the frictions that the banks business is subject to. --
    JEL: E40 E43 E52
    Date: 2013
  26. By: Lemke, Wolfgang; Strohsal, Till
    Abstract: We assess whether euro area inflation expectations, as measured by break-even inflation rates (BEIRs), have remained anchored during the financial crisis. Since autumn 2008, the volatility of BEIRs has increased considerably. We treat observed BEIRs as a sum of `genuine BEIRs' and additional `noise' components, the latter picking up influences related to market illiquidity or demand-supply imbalances, but not reflecting genuine inflation expectations and inflation risk premia. We estimate a bivariate VAR with short-term and long-term BEIRs, allowing for measurement noise in both. Anchoring of inflation expectations is analyzed by means of the pass-through of shocks from shorter to longer-term expectations. We find that, according to the pass-through results, inflation expectations remained well-anchored during the crisis period. Moreover, measurement noise accounts for up to 30% of the increase in volatility of BEIRs. --
    JEL: E31 E52 C32
    Date: 2013
  27. 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. Our results indicate, on the one hand, that the intervention program carried out in 2008 had a significant, but relatively short-lived, impact on the distribution of inflation expectations at long horizons. On the other hand, the intervention carried out in 2011 shows no relevant impact on the distribution of inflation expectations in Chile. A daily analysis using break-even inflation rate as a proxy for inflation expectations is roughly consistent with these results. Our analysis also suggests that the interventions did have an impact on daily exchange rate returns, especially on the day after the announcements of the intervention programs.
    Date: 2013–07
  28. By: Nathaniel Throckmorton (Indiana University Bloomington); Benjamin Keen (University of Oklahoma); Alexander Richter (Auburn University); William Gavin (Federal Reserve Bank of St. louis)
    Abstract: This article presents global solutions to standard New Keynesian models to show how economic dynamics change when the nominal interest rate is constrained at its zero lower bound (ZLB). We focus on the canonical New Keynesian model without capital, but we also study the model with capital, with and without investment adjustment costs. Our solution method emphasizes accuracy to capture the expectational effects of hitting the ZLB and returning to a positive interest rate. We find that the response to a technology shock has perverse consequences when the ZLB binds, even when a discount factor shock drives the interest rate to zero. Although we do not model the large scale asset purchases used by the Fed since 2009, our results suggest that the economy may have trouble recovering if the interest rate remains at zero. Given the perverse dynamics at the ZLB, we evaluate how monetary policy affects the likelihood of encountering the ZLB. We find that the probability of hitting the ZLB depends importantly on the monetary policy rule. A policy rule based on a dual mandate, such as the one proposed by Taylor (1993), is more likely to cause ZLB events when the central bank places greater emphasis on the output gap.
    Date: 2013
  29. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically. --
    JEL: C12 C53 E58
    Date: 2013
  30. By: Khundrakpam, Jeevan Kumar
    Abstract: The paper attempts to analyse asymmetric effects of monetary policy in India using quarterly data from 1996-97Q1 to 2011-12Q4. It finds that an unanticipated hike and an unanticipated cut in policy rate have a symmetric impact of on real GDP growth, but differentially impact the components of real aggregate demand. While the impact on real investment is symmetric, it is asymmetric on real private and government consumption in that while an unanticipated cut in policy rate leads to their increase, an unanticipated hike in policy rate has no impact on them. The impact on inflation is also symmetric. An anticipated policy rate change also has a negative impact on real GDP growth as well as on the components of real aggregate demand, except for real government consumption. However, there are ranges where anticipated policy rate changes become neutral to components of aggregate demand and, thus, on inflation, ranging from 6.25 per cent to 7.0 per cent.
    Keywords: Monetary Policy, Asymmetry, Inflation, Policy Rate
    JEL: C32 C51 E31 E52
    Date: 2013–12
  31. By: Chen, Wenjuan; Bettendorf, Timo
    Abstract: There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. We find strong evidence of explosive behavior in the nominal Sterling-dollar exchange rate. However, this explosive behavior should not be simply interpreted as evidence of rational bubbles, as we show that it might be driven by the relative prices of traded goods. --
    JEL: C01 F31 G12
    Date: 2013
  32. By: Ahmed, Waqas; Khan, Sajawal; Rehman, Muhammad
    Abstract: We analyze, in this paper, the optimality of pro-cyclical monetary policy in the presence of informal sector. Our findings suggest that monetary tightening only in case of severe shock with high leverage ratio and that conventional monetary policy favors both the formal and informal sectors irrespective of the severity of the shocks and hence the whole economy if the size of informal sector is significantly large. Furthermore, fixing exchange rate is better policy option if objective is to defend the employment or domestic consumption from falling when negative shock hits the economy. We can not found any disproportionate impact of policies on informal sector. This may be due to static nature of the model and it might be possible that dynamics of responses of the two sectors to shocks differ significantly.
    Keywords: Informal Sector, Credit Constraints, Exchange Rate, Monetary Policy
    JEL: E52 F0 F4 O17 O23
    Date: 2013
  33. By: Atif Mian
    Abstract: How should monetary policy and macro-prudential regulation respond to the dangers of financial bubbles? I argue that bubbles - and their collapse - become a serious problem when there is inadequate risk-sharing. Neither monetary policy nor traditional macro-prudential regulation is designed to deal with this risk-sharing problem. Monetary policy has little hope of either accurately anticipating bubbles or dealing effectively with their consequences. Traditional approaches to macroprudential regulation are unlikely to succeed as they are based on the false premise that risk can always be quantified up front. I propose considering "ex-ante flexible contracting" as a longer-term response to the financial stability question.
    Date: 2013–12
  34. By: SZCZERBOWICZ, Urszula
    Abstract: This paper evaluates the impact of the European Central Bank's (ECB) unconventional policies on bank and government borrowing costs. We employ event-based regressions to assess and compare the effects of asset purchases and exceptional liquidity announcements on the money markets, covered bond markets, and sovereign bond markets. The results show that (i) exceptional liquidity measures (3-year loans to banks and setting the ECB deposit rate to zero) significantly reduced persistent money market tensions and that (ii) asset purchases were the most effective in lowering the refinancing costs of banks and governments in the presence of high sovereign risk. In particular, we show how the interdependence between sovereign and bank risk amplifies the effectiveness of the ECB's asset purchases: bank-covered bond purchases diminish sovereign spreads while sovereign bond purchases reduce covered bond spreads.
    Date: 2014–01
  35. By: James M. Nason; Gregor W. Smith
    Abstract: Much research studies US inflation history with a trend-cycle model with unobserved components. A key feature of this model is that the trend may be viewed as the Fed’s evolving inflation target or long-horizon expected inflation. We provide a new way to measure the slowly evolving trend and the cycle (or inflation gap), based on forecasts from the Survey of Professional Forecasters. These forecasts may be treated either as rational expectations or as adjusting to those with sticky information. We find considerable evidence of inflation-gap persistence and some evidence of implicit sticky information. But statistical tests show we cannot reconcile these two widely used perspectives on US inflation and professional forecasts, the unobserved-components model and the sticky-information model.
    Keywords: US inflation, professional forecasts, sticky information, Beveridge-Nelson
    JEL: E31 E37
    Date: 2014–01
  36. By: El-Shagi, Makram; Kelly, Logan; Kelly, Logan
    Abstract: While there has been some debate over the usefulness of monetary aggregates, there has been surprisingly little discussion of the actual implications for liquidity. In this paper, we provide an approximation of the liquidity development in six Euro area countries from 2003 to 2012. We show that properly measured monetary aggregates contain significant information about liquidity risk. --
    JEL: C43 E40 G01
    Date: 2013
  37. By: Jessie Handbury (University of Pennsylvania); Tsutomu Watanabe (University of Tokyo); David E. Weinstein (Columbia University and NBER)
    Abstract: Official price indexes, such as the CPI, are imperfect indicators of inflation calculated using ad hoc price formulae different from the theoretically well-founded inflation indexes favored by economists. This paper provides the first estimate of how accurately the CPI informs us about “true” inflation. We use the largest price and quantity dataset ever employed in economics to build a Törnqvist inflation index for Japan between 1989 and 2010. Our comparison of this true inflation index with the CPI indicates that the CPI bias is not constant but depends on the level of inflation. We show the informativeness of the CPI rises with inflation. When measured inflation is low (less than 2.4% per year) the CPI is a poor predictor of true inflation even over 12-month periods. Outside this range, the CPI is a much better measure of inflation. We find that the U.S. PCE Deflator methodology is superior to the Japanese CPI methodology but still exhibits substantial measurement error and biases rendering it a problematic predictor of inflation in low inflation regimes as well.
    Date: 2013–10
  38. By: Xavier Gabaix; Matteo Maggiori
    Abstract: We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.
    JEL: E2 E42 E44 F31 F32 F41 F42 G11 G15 G20
    Date: 2014–01
  39. By: Scheubel, Beatrice; Körding, Julia
    Abstract: As reliance on excessively short-term wholesale funding has been one of the major causes for the 2007-2009 financial crisis, recent advances in global liquidity regulation try to curb the excessive reliance on short-term wholesale funding without being clear on how such an approach will affect the overall equilibrium on money markets. In particular, liquidity regulation may interfere with the central bank's influence on short-term money market rates. This paper tries to fill the gap in understanding the interaction between the money market, the central bank, and the regulator. Importantly, it shows that the existence of a central bank can be welfare-improving when the market equilibrium is driven by collateral constraints and asymmetric information. Regulation can be welfare-improving in the presence of an externality and also in case of collateral constraints, but reduces activity on the unsecured market. This implies that in case of collateral constraints the regulator can lead to a complete crowding out of the unsecured market which leads to an increased central bank intermediation need. --
    JEL: E42 H12 L51
    Date: 2013

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