nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒03‒22
34 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Analysis of Monetary Policy Responses After Financial Market Crises in a Continuous Time New Keynesian Model By Bernd Hayo; Britta Niehof
  2. Federal Reserve Communications and Newswire Coverage By Matthias Neuenkirch
  3. The Effects of Monetary Policy on Stock Market Bubbles: Some Evidence By Jordi Gali; Luca Gambetti
  4. Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation By Bucher, Monika; Hauck, Achim; Neyer, Ulrike
  5. Effects of ECB balance sheet policy announcements on inflation expectations By Richhild Moessner
  6. European Monetary Policy in the Heterogeneous Currency Area and the Open Question of Convergence By Afflatet, Nicolas
  7. Search Frictions, Job Flows and Optimal Monetary Policy By Shoujian Zhang
  8. Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter? By Aurélien Leroy; Yannick Lucotte
  9. Inflation Expectations Spillovers between the United States and Euro Area By Aleksei Netšunajev; Lars Winkelmann; ;
  10. Monetary Policy and Tobin Taxes: A Welfare Analysis By Subramanian, Chetan; Shin, Jong Kook
  11. Monetary policy effectiveness in China: evidence from a FAVAR model By Fernald, John G.; Spiegel, Mark M.; Swanson, Eric T.
  12. Budget deficit, money growth and inflation: Empirical evidence from Vietnam By Khieu Van, Hoang
  13. A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions By John Keating; Logan Kelly; Andrew Lee Smith; Victor J. Valcarcel
  14. Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked? By Robert N McCauley; Catherine R Schenk
  15. Does Forecasts Transparency Affect Macroeconomic Volatility in Developing Countries ? Evidence From Quasi-Natural Experiments By Ummad Mazhar; Cheick Kader M'Baye
  16. Volatility Transmission of Overnight Rate along the Yield Curve in Pakistan By Mahmood, Asif
  17. The over-the-counter theory of the fed funds market: a primer By Afonso, Gara M.; Lagos, Ricardo
  18. Openness and Optimal Monetary Policy By Giovanni Lombardo; Federico Ravenna
  19. Making a land fit for a gold standard: monetary policy in Australia 1920-1925 By Selwyn Cornish; William Coleman
  20. Fiscal and monetary policies in complex evolving economies By Fagiolo G.; Treibich T.G.; Roventini A.; Napoletano M.; Dosi G.
  21. Grooming Classifications: Exchange Rate Regimes and Growth in Transition Economies By Petreski, Marjan
  22. Varying the Money Supply of Commercial Banks By Martin Shubik; Eric Smith
  23. An Alternative Way To Track The Hot Money In Turbulent Times By Ahmet Sensoy
  24. How Central Banks Learn the True Model of the Economy By Federico Ravenna
  25. Liquidity Trap and Excessive Leverage By Anton Korinek; Alp Simsek
  26. The Dynamics of Currency Crises---Results from Intertemporal Optimization and Viscosity Solutions By Christian Bauer; Philip Ernstberger
  27. Determinants of Global Liquidity Dynamics:a FAVAR approach By Marie-Louise Djigbenou
  28. The Transmission of Federal Reserve Tapering News to Emerging Financial Markets By Joshua Aizenman; Mahir Binici; Michael M. Hutchison
  29. Learning the Ramsey outcome in a Kydland & Prescott economy By Jasmina ARIFOVIC; Murat YILDIZOGLU
  30. International Financial Flows and the Irish Crisis By Philip R. Lane
  31. Economics at the Federal Reserve banks By Dudley, William
  32. International transmission of liquidity shocks between parent banks and their affiliates: the host country perspective By Małgorzata Pawłowska; Dobromil Serwa; Sławomir Zajączkowski
  33. U.S. Treasury Auction Yields Before and During Quantitative Easing: Market Factors vs.Auction Specific Factors By Catherine L. Mann; Oren Klachkin
  34. Looking at the other side of carry trades: Are there any safe haven currencies? By Virginie Coudert; Cyriac Guillaumin; Hélène Raymond

  1. By: Bernd Hayo (University of Marburg); Britta Niehof (University of Marburg)
    Abstract: We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent Financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting economic adjustment paths are similar to those of the theoretical model.
    Keywords: New Keynesian Model, Financial Crisis, Stochastic Differential Equation, Monetary Policy, Taylor Rule
    JEL: C02 C63 E44 E47 E52 F41
    Date: 2014
  2. By: Matthias Neuenkirch
    Abstract: In this paper, we explore the determinants of newswire coverage of Federal Reserve (Fed) communications. Our sample covers all 344 forward‐looking communications made in the period May 1999–May 2004. We find, first, that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by Chairman Greenspan than for testimony and speeches by other Fed members. Furthermore, communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered. However, the release of important macroeconomic news reduces the likelihood of newswire coverage. Second, speeches by regional Fed presidents are relatively less likely to be reported than speeches by Board members. Nevertheless, newswire coverage of Fed president speeches is more likely if central bank communication is stale. Finally, our results indicate that Ben Bernanke played a distinguished role even before his chairmanship.
    Keywords: Central Bank Communication; Federal Open Market Committee; Federal Reserve; Monetary Policy; Newswire Coverage
    JEL: D83 E52 E58
    Date: 2014–01–29
  3. By: Jordi Gali; Luca Gambetti
    Abstract: We estimate the response of stock prices to exogenous monetary policy shocks using a vector-autoregressive model with time-varying parameters. Our evidence points to protracted episodes in which, after a short-run decline, stock prices increase persistently in response to an exogenous tightening of monetary policy. That response is clearly at odds with the "conventional" view on the effects of monetary policy on bubbles, as well as with the predictions of bubbleless models. We also argue that it is unlikely that such evidence be accounted for by an endogenous response of the equity premium to the monetary policy shocks.
    JEL: E52 G12
    Date: 2014–03
  4. By: Bucher, Monika; Hauck, Achim; Neyer, Ulrike
    Abstract: This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. The frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at its disposal to impose an impact on bank loan supply. Lowering the rate on the deposit facility has, taken for itself, a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound. --
    Keywords: interbank market,monetary policy,monetary policy implementation,zero lower bound,loan supply
    JEL: E52 E58 G21
    Date: 2014
  5. By: Richhild Moessner
    Abstract: We investigate whether ECB balance sheet policy announcements in the wake of the global financial crisis have affected the ECB.s monetary policy credibility as measured by long-term inflation expectations, by looking at their effects on euro area inflation swap rates of maturities up to 10 years. We consider asset purchase programmes and long-term refinancing operations with maturities above 6 months. We find that these announcements only led to a slight increase in long-term inflation expectations. We therefore find no strong evidence to suggest that ECB balance sheet policy announcements have led to much higher long-term inflation expectations, suggesting that the monetary policy credibility of the ECB has not been harmed by these policies.
    Keywords: Monetary policy; central bank communication; balance sheet policies; inflation expectations
    JEL: E52 E58
    Date: 2014–03
  6. By: Afflatet, Nicolas
    Abstract: Divergent macro-economic developments within a currency area can lead to undesired distortions. That is why in the Eurozone much attention was drawn to the homogeneity of the currency area. However, at the beginning the Eurozone seemed to be too heterogeneous for a common currency. So many hopes relied on a convergent development under the common currency so that the single monetary policy would meet the needs of all member countries. Based on the Taylor rule this article shows that these needs differ a lot within the currency union. Stationarity tests investigate whether the differences in inflation and growth rates have diminished. In this case, the single monetary policy would rather meet the monetary needs of the member countries. On the one hand, (partially small) hints for convergence can be found for several countries. On the other hand divergent developments can be assessed for others. These results lead to the conclusion that the single monetary policy will not meet the needs of all member countries in the foreseeable future. This should cause some concerns. As a result, the member countries should orientate their policies on measures which contribute to the efficiency of the currency area. --
    Keywords: Taylor rule,convergence,divergence,time series tests,stationarity,currency area,single monetary policy
    Date: 2014–03
  7. By: Shoujian Zhang (University of St Andrews)
    Abstract: Job creation and job destruction are investigated in an economy featured by search frictions in both labour and goods markets. We show that both the unemployment rate and the endogenous job destruction rate increase when the inflation rate rises, because the demand declines due to the increase in the cost of holding money. Our numerical exercises suggest that the destruction of lower productivity jobs and the creation of higher productivity jobs may be inefficiently low under the zero nominal interest rate, which in turn causes the deviation of optimal long run monetary policy from the Friedman rule.
    Keywords: inflation, search frictions, money, welfare
    JEL: E24 E52
    Date: 2014–03–12
  8. By: Aurélien Leroy (Laboratoire d’Economie d’Orléans); Yannick Lucotte (ESG Management School; Department of Economics,)
    Abstract: This paper examines the implications of banking competition for the interest rate channel in the Eurozone over the period 2003-2010. Using an Error Correction Model (ECM) approach to measure the long-run and short-run relationships between money market rates, bank interest rates, and our competition proxy, namely, the Lerner index. We find that competition (i) reduces the bank lending interest rates, (ii) increases the long-term interest pass-through and (iii) speeds up the adjustment towards the long-run equilibrium in the short-run. Therefore, increased competition would improve the effectiveness of monetary policy transmission through the interest rate channel, and from this point of view should be fostered in the Eurozone. Because the 2007-2009 financial crisis has undoubtedly led to a modification of the monetary policy and an increase of the heterogeneity in the Eurozone, we control and extend our results by considering many other aspects than the market structures that can affect the interest rate pass-through. Even if we observe that other factors (economic heterogeneity, systemic risk, banking stability, and capitalization) matter for monetary policy transmission, bank competition remains a key determinant of the pass-through.
    Keywords: interest rate pass-through; bank competition; Lerner index; euro area countries; error-correction model
    JEL: C23 D4 E43 E52 G21 L10
    Date: 2014
  9. By: Aleksei Netšunajev; Lars Winkelmann; ;
    Abstract: We quantify spillovers of inflation expectations between the United States (US) and Euro Area (EA) based on break-even inflation (BEI) rates. In contrast to previous studies, we model US and EA BEI rates jointly in a structural vector autoregressive (SVAR) model. The SVAR approach allows to identify US and EA specific inflation expectations shocks. By modeling the heteroscedasticity of the data, we are able to test the identifying restrictions of structural shocks and analyze time-varying spillovers. Adjusted for BEI risk premia, our main result suggests that spillovers of inflation expectations increase during times of macroeconomic stress. We document a significant impact of the European sovereign debt crisis on US expectations. The finding contributes to the discussion about a weakening of inflation control by national central banks and speaks in favor of internationally coordinated policy actions, especially during crisis times.
    Keywords: International transmissions, break-even inflation, credibility of monetary policy, structural vector autoregressive (SVAR) analysis, identification through heteroskedasticity
    JEL: E31 F42 E52
    Date: 2014–03
  10. By: Subramanian, Chetan; Shin, Jong Kook
    Abstract: �This paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic aThis paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic and foreign goods.
    Keywords: Noise traders; Fixed exchange rates; Tobin taxes; Optimal monetary policy.
    JEL: E E42 E52 F41
    Date: 2014–03–08
  11. By: Fernald, John G. (Federal Reserve Bank of San Francisco); Spiegel, Mark M. (Federal Reserve Bank of San Francisco); Swanson, Eric T. (Federal Reserve Bank of San Francisco)
    Abstract: We use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. We incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis due to concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. We find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. In contrast to much of the literature, however, we find that changes in Chinese interest rates also have substantial impacts on economic activity and inflation, while other measures of changes in credit conditions, such as shocks to M2 or lending levels, do not once other policy variables are taken into account. Overall, our results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.
    Keywords: Measuring China’s economy; dynamic factor model; factor-augmented VAR; monetary policy
    JEL: C3 E4 E5
    Date: 2014–02
  12. By: Khieu Van, Hoang
    Abstract: This study empirically examines the nexus among budget deficit, money supply and inflation by using a monthly data set from January 1995 to December 2012 and a SVAR model with five endogenous variables, inflation, money growth, budget deficit growth, real GDP growth and interest rate. Since real GDP and budget deficit are unavailable on the monthly basis, we interpolate those series using Chow and Lin’s (1971) annualized approach from their annual series. Overall, we found that money growth has positive effects on inflation while budget deficit growth has no impact on money growth and therefore inflation. In addition, budget deficit is autonomous from shocks to other variables. The estimation results also reveal that the State Bank of Vietnam implemented tightening monetary policy in response to positive shocks to inflation by reducing money growth but the response was relatively slow because it took three months for the monetary authority to fully react to such shocks. Finally, interest rate was not an effective instrument for fighting inflation but it was significantly and positively influenced by inflation.
    Keywords: Inflation; Money Growth; Budget Deficit; Structural Vector Auto-regressive Model.
    JEL: E31 E58 E61
    Date: 2014–01–31
  13. By: John Keating (University of Kansas, Department of Economics, Lawrence, KS 66045); Logan Kelly (University of Wisconsin, Department of Economics, River Falls, WI 54022); Andrew Lee Smith (University of Kansas, Department of Economics, Lawrence, KS 66045); Victor J. Valcarcel (University of Wisconsin, Center for Economic Research, River Falls, WI 54022)
    Abstract: In their classic 1999 paper, "Monetary policy shocks: What have we learned and to what end?," Christiano, Eichenbaum, and Evans (CEE) investigate one of the most widely used methods for identifying monetary policy shocks of its time. Unfortunately, their approach is no longer viable, at least not in its original form. A major problem stems from the recent behavior of two key variables in their model, the Fed Funds rate and non-borrowed reserves. We develop a new identification scheme that remedies these difficulties but maintains the basic CEE framework. Our empirical specification is motivated by a standard New Keynesian DSGE model augmented by a simple financial structure. The model provides theoretical support for variables we use in place of certain variables that were used in the classic VAR approach outlined in CEE. One significant innovation is our use of Divisia M4, the broadest monetary aggregate currently available for the United States, as the policy indicator variable. We obtain four major empirical results that support the use of a properly measured broad monetary aggregate as the policy variable. First, policy shocks have significant effects on output and on the price level, even when an interest rate is included in our model -- contradicting the New-Keynesian argument that monetary aggregates are redundant. Second, we develop a model that is not subject to the output, price or liquidity puzzles common to this literature -- contradicting the view that using the interest rate as the policy indicator generally yields more reasonable responses than a monetary aggregate. Third, during normal conditions policy shocks from our Divisia-based model have similar effects on variables to those found in the Fed Funds model of monetary policy, and where there are differences our model with Divisia M4 obtains results that are more consistent with standard economic theory. Fourth, our preferred specification produces plausible responses to a monetary policy shock in samples that include or exclude the recent financial crisis.
    Keywords: Monetary Policy Rules, Output Puzzle, Price Puzzle, Liquidy Puzzle, Financial Crisis, Divisia Index Number, Dynamic Stochastic General Equilibrium (DSGE) Model
    JEL: E3 E4 E5
    Date: 2014–03
  14. By: Robert N McCauley; Catherine R Schenk
    Abstract: This paper analyses the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutsche mark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US Treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent, high prices for gold. However, had the US dollar return been based on US Treasury bond yields, the substitution account would have been solvent even without any gold backing.
    Keywords: Special Drawing Right, substitution account, reserve currency, foreign exchange reserves; International Monetary Fund
    Date: 2014–03
  15. By: Ummad Mazhar (Shaheed Zul kar Ali Bhutto Institute of Science and Technology - Shaheed Zul kar Ali Bhutto Institute of Science and Technology); Cheick Kader M'Baye (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I)
    Abstract: In this paper, we empirically investigate the link between forecasts transparency and macroeconomic volatility as measured by inflation and output growth volatility in developing economies. We adopt the quasi-random controlled experiments methodology that divides our sample of 49 developing countries into three categories on the basis of their forecasts transparency. The first category is composed of central banks that are completely opaque over our sample period. The second type of countries is constantly transparent about their forecasts over the period of study while the third category includes central banks that have recently started to disclose their forecasts. In contrast to the previous literature, we interestingly find that increasing forecasts transparency unambiguously leads to higher macroeconomic volatility in developing countries. Indeed, we find that both groups of countries that constantly disclose their forecasts and that have only recently started to disclose their forecasts experience an increase in their macroeconomic volatility compared to the remaining group of countries that are completely opaque. Our results however indicate that forecasts transparency may have some stabilizing effects if and only if it is practiced along with other forms of institutional transparency.
    Keywords: Forecasts transparency; monetary policy transparency; central banking; inflation volatility; output volatility
    Date: 2014–03–06
  16. By: Mahmood, Asif
    Abstract: This paper presented the empirical results of the volatility transmission of overnight rate along the yield curve in case of Pakistan. The results indicate that the volatility transmission of overnight repo rate is higher at the shorter end of the yield curve while lower at the longer end. These results are in line with both theoretical and empirical underpinning of the interest rates volatility transmission process found in other countries. Moreover, the results also suggest that the pass-through level of overnight volatility transmission to other market interest rates decreased after State Bank of Pakistan (SBP) adopted the interest rate corridor framework in August 2009. This indicates the enhancement of effective and smooth transmission of SBP policy rate changes to other market interest rates under the current framework. However, absence of any explicit desired level of operational target in the monetary policy framework of SBP still imparts higher volatility in interest rates when compared to other countries following the similar interest rate corridor framework.
    Keywords: monetary policy, volatility, yield curve, GARCH
    JEL: E4 E5 G1
    Date: 2014–03–09
  17. By: Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of New York)
    Abstract: We present a dynamic over-the-counter model of the fed funds market, and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the Discount Window lending rate, and the interest rate on bank reserves.
    Keywords: Fed funds market; search; bargaining; over-the-counter
    JEL: C78 D83 E44 G1
    Date: 2014–12–01
  18. By: Giovanni Lombardo; Federico Ravenna
    Abstract: We show that the composition of international trade has important implications for the optimal volatility of the exchange rate, above and beyond the size of trade flows. Using an analytically tractable small open economy model, we characterize the impact of the trade composition on the policy trade-off and on the role played by the exchange rate in correcting for price misalignments. Contrary to models where openness can be summarized by the degree of home bias, we find that openness can be a poor proxy of the welfare impact of alternative monetary policies. Using input-output data for 25 countries we document substantial differences in the import and non-tradable content of final demand components, and in the role played by imported inputs in domestic production. The estimates are used in a richer small-open-economy DSGE model to quantify the loss from an exchange rate peg relative to the Ramsey policy conditional on the composition of imports. We find that the main determinant of the losses is the share of non-traded goods in final demand.
    Keywords: International Trade, Exchange Rate Regimes, Non-tradable Goods, Optimal Policy
    JEL: E3 E42 E52 F41
    Date: 2014
  19. By: Selwyn Cornish; William Coleman
    Date: 2014–03
  20. By: Fagiolo G.; Treibich T.G.; Roventini A.; Napoletano M.; Dosi G. (GSBE)
    Abstract: In this paper we explore the effects of alternative combinations of fiscal and monetary policies under different income distribution regimes. In particular, we aim at evaluating fiscal rules in economies subject to banking crises and deep recessions. We do so using an agent-based model populated by heterogeneous capital- and consumption-good firms, heterogeneous banks, workers/consumers, a central bank and a government. We show that the model is able to reproduce a wide array of macro and micro empirical regularities, including stylized facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilize the economy requires unconstrained anti-cyclical fiscal policies, where automatic stabilizers are free to dampen business cycles fluctuations, and a monetary policy targeting also employment. Instead,discipline-guided fiscal rules such as the Stability and Growth Pact or the Fiscal Compact in the eurozone always depress the economy, without improving public finances, even when escape clauses in case of recessions are considered. Consequently, austerity policies appear to be in general self-defeating. Furthermore, we show that the negative effects of austere fiscal rules are magnified by conservative monetary policies focused on inflation stabilization only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Keywords: Computational Techniques; Simulation Modeling; Business Fluctuations; Cycles; Monetary Policy; Financial Crises; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
    JEL: C63 E32 E52 G01 G21
    Date: 2014
  21. By: Petreski, Marjan
    Abstract: The objective of this paper is to test the exchange rate regime – growth nexus in transition economies by looking if and how some inherent characteristics of the transition process might have affected the de-facto classifications of exchange rate regimes. 28 transition countries of Central and Eastern Europe and the Commonwealth of Independent States are investigated over 1991-2007 and three de facto classifications of exchange rate regimes are considered. As usual in the empirical literature, initially, the exchange rate regime effect on growth differs across classifications. However, further investigation suggests that the three classifications usually disagree around some inherent characteristics of the transition process, like the higher trade openness of the countries, the episodes of high inflation and the bank system reform and interest rate liberalization. Results indicate that high inflation likely determined disagreement in early transition, while trade openness and interest rate liberalization in late transition. After classifications have been cleaned of the disagreeing points, the final results, corrected for the potential selectivity bias, suggest that both pegs and intermediate regimes of all three classifications significantly outperform floats in terms of economic growth, the average effect being slightly lower for pegs.
    Keywords: exchange rate regime classifications; economic growth; transition economies
    JEL: E42 F31
    Date: 2014
  22. By: Martin Shubik (Cowles Foundation, Yale University); Eric Smith (Santa Fe Institute)
    Abstract: We consider the problem of financing two productive sectors in an economy through bank loans, when the sectors may experience independent demands for money but when it is desirable for each to maintain an independently determined sequence of prices. An idealized central bank is compared with a collection of commercial banks that generate profits from interest rate spreads and flow those through to a collection of consumer/owners who are also one group of borrowers and lenders in the private economy. We model the private economy as one in which both production functions and consumption preferences for the two goods are independent, and in which one production process experiences a shock in the demand for money arising from an opportunity for risky innovation of its production function. An idealized, profitless central bank can decouple the sectors, but for-profit commercial banks inherently propagate shocks in money demand in one sector into price shocks with a tail of distorted prices in the other sector. The connection of profits with efficiency-reducing propagation of shocks is mechanical in character, in that it does not depend on the particular way profits are used strategically within the banking system. In application, the tension between profits and reserve requirements is essential to enabling but also controlling the distributed perception and evaluation services provided by commercial banks. We regard the inefficiency inherent in the profit system as a source of costs that are paid for distributed perception and control in economies.
    Keywords: Commercial banking, Continuous time, Money supply
    JEL: C73 E51
    Date: 2014–03
  23. By: Ahmet Sensoy
    Abstract: During recent years, networks have proven to be an ecient way to characterize and investigate a wide range of complex financial systems. In this study, we first obtain the dynamic conditional correlations between filtered exchange rates (against US dollar) of several countries and introduce a time-varying threshold correlation level to dene dynamic strong correlations between these exchange rates. Then, using evolving networks obtained from strong correlations, we propose an alternative approach to track the hot money in turbulent times. The approach is demonstrated for the time period including the nancial turmoil of 2008. Other applications are also discussed.
    Keywords: hot money, capital ight, exchange rate, dynamic conditional correlation, networks, global nancial crisis
    JEL: C51 F31 F32 G10
    Date: 2014–01
  24. By: Federico Ravenna
    Abstract: Policy decisions affect economic outcomes, and the likelihood of observing a given state of the world. We investigate how policy choices affect learning of the true model of the economy when the policymaker’s model is mis-specified. We ask under what conditions can the central bank learn the correct specification of the model describing the economy, and what is the impact of exogenous shocks and of adopting an optimal monetary policy on the speed of learning. Slow learning can occur simply because identifying the correct model at standard confidence levels requires a long data sample. We show that neither real-time learning by the policymaker or the private sector, nor the adoption of an optimal policy, affect the speed of detection of model misspecification. Detection speed depends instead on the relative volatility of supply and demand shocks.
    Keywords: Learning, Optimal policy, Model misspecification
    JEL: E58
    Date: 2014
  25. By: Anton Korinek; Alp Simsek
    Abstract: We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' ex-ante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage.
    JEL: E32 E44
    Date: 2014–03
  26. By: Christian Bauer; Philip Ernstberger
    Abstract: We apply an infinite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend off speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.
    Keywords: intertemporal optimization; currency crises; policy design
    JEL: C61 E58 E61 F3
    Date: 2014
  27. By: Marie-Louise Djigbenou (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: Global liquidity, which consists of both monetary liquidity (quantitative easing and traditional policies) and funding liquidity, follows specific dynamics. The importance of these dynamics is reflected by the growing interest in international policy fora in the economic efects and determinants of this phenomenon. This paper contributes to this evolving policy debate by capturing the determinants of global liquidity dynamics. To this end, I employ a Factor-Augmented VAR model, with potential explanatory vari- ables based on Augmented-Taylor rules and private determinants. Using data from 1990 to 2011, I find that the factors representing real activity and financial stability are the main determinants of global liquidity dynamics. The impact of these factors is however heterogeneous across pre and post crisis periods.
    Keywords: Global liquidity, Ofcial liquidity, Funding liquidity, Quantitative easing, Monetary policy, Factor Model, Financial stability
    Date: 2014–03–04
  28. By: Joshua Aizenman; Mahir Binici; Michael M. Hutchison
    Abstract: This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the stronger group was more adversely exposed to tapering news than the weaker group. News of tapering coming from Chairman Bernanke is associated with much larger exchange rate depreciation, drops in the stock market, and increases in sovereign CDS spreads of the robust group compared with the fragile group. A possible interpretation is that tapering news had less impact on countries that received fewer inflows of funds in the first instance during the quantitative years and had less to lose in terms of repatriation of capital and reversal of carry-trade activities.
    JEL: F3 F36 G14
    Date: 2014–03
  29. By: Jasmina ARIFOVIC; Murat YILDIZOGLU
    Abstract: We study learning in the Kydland and Prescott environment. Our policy maker evaluates its potential strategies regarding the announced and the actual inflation rate using its mental model. This model is forward looking and adaptive at the same time. \r\nThere are two types of agents: Believers who set their inflation forecast equal to the announced inflation, and nonbelievers who form static optimal forecast coupled with a forecast error correction mechanism. Our results show that the economy can reach near Ramsey outcomes most of the time. In the absence of believers, the economies almost always converge to the Ramsey outcome. \r\nIn their experiments with human subjects, Arifovic and Sargent (2003) showed that experimental economies reach and stay close to the Ramsey outcome most of the time, giving support to the \'just do it\' policy recommendation. In light of the experimental findings, our model is of particular interest as it is the only agent-based or adaptive learning model that consistently selects the Ramsey outcome.
    Keywords: learning in the Kydland-Prescott environment, artificial neural networks, Ramsey outcome
    JEL: E50 C45 C72 D60
    Date: 2014
  30. By: Philip R. Lane (Trinity College Dublin)
    Abstract: This paper explores the contribution of international financial flows to the boom-bust-recovery cycle in Ireland. It finds that a nuanced interpretation is required, in that bank-intermediated debt inflows certainly contributed to the amplification of the property boom during 2003-2007 but that other types of international flows have played a stabilising role through a variety of mechanisms, with a new wave of inflows a key component of the current recovery phase.
    Keywords: international capital flows, euro crisis, Irish crisis
    JEL: E42 E60 F32 F33
  31. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the American Economic Association 2014 Annual Meeting, Philadelphia, Pennsylvania
    Keywords: Research Group; prudential policy; GSE reform; macroeconomic policy; triparty repo reform; reference rate reform; Markets Group; microeconomic policy
    JEL: E00
    Date: 2014–01–04
  32. By: Małgorzata Pawłowska (Narodowy Bank Polski and Warsaw School of Economics); Dobromil Serwa (Narodowy Bank Polski and Warsaw School of Economics); Sławomir Zajączkowski (Narodowy Bank Polski)
    Abstract: In this study we analyze how funding liquidity shocks affecting large international banks were transmitted to Polish subsidiaries and branches of these banks in recent years. We investigate differences in the effects of liquidity shocks on banks owned by both Polish and foreign institutions. All Polish banks reacted to liquidity shocks after Lehman Brothers failure; however, only Polish subsidiaries and branches of foreign parent banks adjusted their funding after liquidity shocks had taken place during the sovereign debt crisis of the Eurozone. Mortgage lending in foreign currencies was also affected by liquidity shocks during the crisis. Our results suggest that the intragroup links between banking institutions can serve both as an important channel for international transmission of liquidity shocks and as a stabilizing mechanism during liquidity crises.
    Keywords: liquidity shocks, international transmission, parent banks, affiliate banks, Poland
    JEL: E44 F34 G32
    Date: 2014
  33. By: Catherine L. Mann (International Business School, Brandeis University); Oren Klachkin (International Business School, Brandeis University)
    Abstract: We construct a dataset for every U.S. Treasury auction from 2003 to 2012. We find that market factors known before the auction -- FedFunds rate, S&P, VIX -- are all significant for the auction high-yield, but the relationships differ before vs. during QE and between Bond and Bills auctions. Auction-specific innovations matter for the auction high-yield. Bills auctions have a forecastable component based on information from the previous auction of that maturity. Bidder types may differ systematically. Indirect bidders in the Bond auctions may bid relatively ‘low’ compared to the average bid and Primary Dealers may bid ‘high’. These relationships differ before vs. during QE. These results suggest that quantitative easing implemented in the secondary market has affected the auction market for U.S. Treasury securities.
    Keywords: Federal Reserve, quantitative easing, foreign official, Dutch auction, US Treasury securities
    JEL: E43 E58 F34 F49
  34. By: Virginie Coudert; Cyriac Guillaumin; Hélène Raymond
    Abstract: We define “safe haven currencies” as those able to yield positive excess returns during crises and show that they are likely to have negative risk premia on the long-run. We try to identify them empirically by considering a sample of 26 currencies from advanced and emerging countries over a period spanning from 1999 to 2013. We first spot the currencies yielding negative mean excess returns over the long run and positive ones during crises; only the Japanese yen (JPY) and the US dollar (USD) meet these conditions. Second, we run a smooth transition regression (STR) of the Fama equation, in which we add the VIX as an explanatory and a transition variable, in order to capture the response of exchange rates over the global financial cycle. The results also point out to the USD and the JPY as the only candidates for a safe haven role; despite its long-run appreciation trend, the Swiss franc does not qualify for this role, as it tends to follow the downward movement of the euro during the recent financial turmoil.
    Keywords: Carry trades; safe haven currencies; financial cycle
    JEL: C32 G11 G15
    Date: 2014

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