nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒02‒08
twelve papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. The effect of the zero lower bound, forward guidance and unconventional monetary policy on interest rate sensitivity to economic news in Sweden By Richhild Moessner; Jakob de Haan; David-Jan Jansen
  2. Monetary Policy, Bond Risk Premia, and the Economy By Peter N. Ireland
  3. Exchange rate regimes and inflation: Evidence from India. By Mohanty, Biswajit; Bhanumurthy, N.R.
  4. Targeting nominal GDP or prices: Guidance and expectation dynamics By Mitra , Kaushik; Honkapohja, Seppo
  5. What We Know About Monetary Policy Transmission in the Czech Republic: Collection of Empirical Results By Oxana Babecka Kucharcukova; Michal Franta; Dana Hajkova; Petr Kral; Ivana Kubicova; Anca Podpiera; Branislav Saxa
  6. Four Lectures on Central Banking By Arthur Grimes
  8. The Role of Foreign Banks in Monetary Policy Transmission: Evidence from Asia during the Crisis of 2008-9 By Bang Nam Jeon; Ji Wu
  9. Heterogeneity and Biases in Inflation Expectations of Japanese Households By Ueno, Yuko; Namba, Ryoichi
  10. Monetary part of Abenomics: a simplified model By Krouglov, Alexei
  11. The Price-Price Phillips Curve in Small Open Economies and Monetary Unions: Theory and Empirics By Andrea Vaona
  12. Asymmetric exchange-rate exposure in BRIC countries By Dranev Yury; Maxim Babushkin

  1. By: Richhild Moessner; Jakob de Haan; David-Jan Jansen
    Abstract: We study whether the sensitivity of Swedish interest rates to economic news was affected by the zero lower bound and the Riksbank.s monetary policies. Our results suggest that the sensitivity of interest rate swaps to Swedish macroeconomic news was reduced at the effective zero lower bound at short maturities but not at longer maturities. We also find that the sensitivity of interest rate swaps to this news was not significantly affected at any maturity by forward guidance. Finally, we conclude that the sensitivity of interest rate swaps to news was not significantly affected at any maturity by unconventional monetary policy.
    Keywords: Unconventional monetary policy; central bank communication; forward guidance; zero lower bound; interest rate swaps
    JEL: E52 E58
    Date: 2014–01
  2. By: Peter N. Ireland (Boston College)
    Abstract: This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.
    Keywords: term structure, risk premia, monetary policy, macroeconomic performance
    JEL: E32 E43 E44 E52 G12
    Date: 2014–02–01
  3. By: Mohanty, Biswajit (Department of Business Economics, Delhi University); Bhanumurthy, N.R. (National Institute of Public Finance and Policy)
    Abstract: Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a `policy discipline effect'- restricting money supply growth, and a `credibility effect'- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.
    Keywords: Exchange rate regime ; Inflation ; Money Supply ; ARDL Model ; India
    JEL: E52 F33 F41
    Date: 2014–01
  4. By: Mitra , Kaushik (University of Saint Andrews); Honkapohja, Seppo (Bank of Finland)
    Abstract: We examine global dynamics under infinite-horizon learning in New Keynesian models where monetary policy practices either pricelevel or nominal GDP targeting and compare these regimes to inflation targeting. These interest-rate rules are subject to the zero lower bound. Robustness of the three rules in learning adjustment are compared using criteria for the domain of attraction of the targeted steady state, volatility of inflation and output and sensitivity to the speed of learning parameter. Performance of price-level and nominal GDP targeting significantly improves if the additional guidance in these regimes is incorporated in private agents’ learning.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2014–01–15
  5. By: Oxana Babecka Kucharcukova; Michal Franta; Dana Hajkova; Petr Kral; Ivana Kubicova; Anca Podpiera; Branislav Saxa
    Abstract: This paper concentrates on describing the available empirical findings on monetary policy transmission in the Czech Republic. Besides the overall impact of monetary policy on inflation and output, it is useful to study its individual channels, in particular the interest rate channel, the exchange rate channel, and the wealth channel. The results confirm that the transmission of monetary impulses to the real economy works in an intuitive direction and to an intuitive extent. Our analyses show, however, that the global financial and economic crisis might have somewhat slowed and weakened the transmission. We found an indication of such a change in the functioning of the interest rate channel, where elevated risk premiums played a major role.
    Keywords: Bayesian, monetary policy transmission, time-varying parameters, VAR model.
    JEL: C11 C32 E44 E52 E58
    Date: 2013–10
  6. By: Arthur Grimes (Motu Economic and Public Policy Research and the University of Auckland)
    Abstract: These four lectures on central banking topics were presented in London between September and December 2013. The lectures were delivered as part of Arthur Grimes’ NZ-UK Link Foundation Visiting Professorship, based at the University of London’s School of Advanced Study. They followed his stepping down as Chair of the Reserve Bank of New Zealand in September 2013 after ten years in that role. The four lecture topics (and the institution at which they were delivered) are: Inflation Targeting: 25 Years’ Experience of the Pioneer (Bank of England); A Floating Exchange Rate is the Worst Exchange Rate Regime (except for all the others that have been tried) (University College London); How Prudent are Macroprudential Policies? (London School of Economics); Responsibility and Accountability in the Financial Sector (Institute of Advanced Legal Studies). A key theme across all four lectures is the importance of ensuring that central bank policies and actions are time consistent. Time consistency requires that a central bank can commit to implementing the policies that it says it will implement. For instance, if a central bank commits to delivering low inflation, it will not use its powers to deliver other goals at the expense of low inflation. Similarly, if it commits not to bail out banks in the event of failure, then it (and other official bodies) will not bail out a failed bank.
    Keywords: Central banking; inflation targeting; exchange rate systems; macroprudential policy; microprudential policy
    JEL: E52 E58 H81
    Date: 2014–02
  7. By: Wojciech Charemza; Carlos Diaz; Svetlana Makarova
    Abstract: Empirical evaluation of macroeconomic uncertainties and their use for probabilistic forecasting are investigated. A new weighted skew normal distribution which parameters are interpretable in relation to monetary policy outcomes and actions is proposed. This distribution is fitted to recursively obtained forecast errors of monthly and annual inflation for 38 countries. It is found that this distribution fits inflation forecasts errors better than the two-piece normal distribution, which is often used for inflation forecasting. The new type of ‘fan charts’ net of the epistemic (potentially predictable) element is proposed and applied for UK and Poland.
    Keywords: macroeconomic forecasting, inflation, uncertainty, monetary policy, non-normality, density forecasting
    JEL: C54 E37 E52
    Date: 2014–01
  8. By: Bang Nam Jeon (Drexel University and Hong Kong Institute for Monetary Research); Ji Wu (Southwestern University of Finance and Economics)
    Abstract: Since the 1997-8 Asian financial crisis, the level of foreign bank penetration has increased steadily in Asian banking markets. This paper examines the impact of foreign banks on the monetary policy transmission mechanism in emerging Asian economies during the period from 2000 to 2009, with a specific focus on the global financial crisis of 2008-9. We present consistent evidence that, on the whole, an increase in foreign bank penetration weakened the effectiveness of the monetary policy transmission mechanism in the host emerging Asian countries during crisis periods. We also investigate various conditions and environments, including the type of monetary policy shocks, the severity of shocks upon parent banks in global crisis, the dependence of parent banks on the wholesale funding market, the country of origin of foreign banks, and entry modes, under which the effectiveness of monetary policy transmission is reduced more severely due to the increasing presence of foreign banks in the emerging Asian banking markets.
    Keywords: Foreign Bank Penetration, Monetary Policy Transmission, Asian Banking
    JEL: E44 F43 G21
    Date: 2014–01
  9. By: Ueno, Yuko; Namba, Ryoichi
    Abstract: This study examines the formation of the inflation expectations of Japanese households using a micro-level dataset of forecast errors of expected inflation rates. The Japanese have recently come to be interested in policies that intend to positively influence the inflation expectations of households and firms. The effectiveness of these policies depends on the mechanism of expectation formation. Thus, whether expectations are formed adaptively or rationally, or whether expectations are homogeneous or heterogeneous, are important factors influencing policy effectiveness. In this study, we carefully examine the formation of inflation expectations of Japanese households by using a micro-level dataset of the “Consumer Confidence Survey” of the Japanese government. We observe that inflation expectations are stably biased upwards and are distributed in a dispersed way. We find that the “asymmetric loss function model,” in which households incur asymmetric loss from either over estimation or underestimation of the future inflation rate, can explain the observed bias to a certain extent. Further, the relationships between expectations and age show a stable asymmetric inverted-U shape notwithstanding the survey period. The a symmetric loss function can also explain this shape, indicating that mid-aged consumers tend to show strong asymmetries in error aversion.
    Date: 2014–01
  10. By: Krouglov, Alexei
    Abstract: Presented is a simplified mathematical model that describes dynamics developing on financial market after the liquidity pumping. The model is used to examine theoretical and practical implications of the monetary component of Abenomics. Based on the theoretical considerations, proposed is a somewhat practical suggestion how to increase the efficiency of Abenomics’ monetary policy.
    Keywords: monetary policy; Abenomics; mathematical model
    JEL: C61 E32 E44
    Date: 2014–02–03
  11. By: Andrea Vaona
    Abstract: This paper extends the efficiency wages/partially adaptive expectations Phillips curve, otherwise known as the price-price Phillips curve, from a closed economy context to an open economy one with both commodity trade and capital mobility. We also consider the case of a monetary union (a country) with two member states (regions). The theoretical results are a priori ambiguous. However, in the first place, on resorting to plausible numerical simulations, economic openness increases the reactiveness of inflation to the unemployment rate. In regard to a monetary union, the national unemployment multiplier in the aggregate Phillips curve decreases with the weight of the member state in aggregate employment and increases with that in output. Secondly, we show in two empirical applications that our calibration can provide informative priors for models to be estimated thanks to the Kalman filter
    Keywords: efficiency wages, unemployment, Phillips curve, inflation, adaptive expectations, Kalman filter
    JEL: E3 E20 E40 E50 F15 F41 C22
    Date: 2014–01
  12. By: Dranev Yury (National Research University Higher School of Economics); Maxim Babushkin (Ernst&Young)
    Abstract: This work contributes to the literature on exchange-rate exposure in emerging markets. We studied datasets of exchange-listed companies from four BRIC countries and discovered that exchange rate movements in the US dollar and euro affected more than 10% of these firms between 2003 and 2013. The most interesting finding of this research is that stock returns behaved differently with increasing and decreasing currency rates. For capturing the asymmetric relationship of stock and exchange rate movements, we applied a nonlinear dynamic model, which significantly improved our results compared to the empirical findings of simple versions of the Adler Dumas (1984) and Jorion (1990) models. We studied determinants of exposure to positive and negative currency movements separately. Although significant determinants in both cases were mostly similar, their weights were different. For example, the ratio of export sales was asymmetrically correlated to exchange rate exposures for all countries except Russia. For a better understanding of the sources of asymmetry in exchange rate exposure, we separately studied the positive and negative coefficients of currency exposure from the non-asymmetric model. This was never done before and natural in a way that determinants should affect positive and negative currency exposures differently. We found evidence of the contrasting impact of export sales and foreign debt in both cases.
    Keywords: exchange rate exposure, currency markets, stock returns, asymmetric model, emerging markets.
    JEL: G15 G17
    Date: 2014

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