nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒03‒30
eighteen papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Self-Monitoring or Reliance on Newswire Services: How Do Financial Market Participants Process Central Bank News? By Bernd Hayo; Matthias Neuenkirch
  2. Exit Strategies and Their Impact on the Euro Area - A Model Based View By Ansgar Belke
  3. The role of the "Maximizing Output Growth Inflation Rate" in monetary policy By Dominique Pepin
  4. Monetary and macroprudential policy in an estimated DSGE model of the Euro Area By Quint, Dominic; Rabanal, Pau
  5. Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market By Ander Perez; Ali Ozdagli; Filippo Ippolito
  6. Interest Rates Rigidities and the Fisher Equation By Belanger, Gilles
  7. Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification By Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer
  8. The Federal Reserve: inside monetary policy By Williams, John C.
  9. Finding Stability in a Time of Crisis: Lessons of East Asia for Eastern Europe By Paul D. McNelis
  10. Monetary policy and growth with trend inflation and financial frictions By Olmos, Lorena; Sanso Frago, Marcos
  11. Inflation expectation dynamics: the role of past present and forward looking information By Paul Hubert; Mirza Harun
  12. Perspectives on the U.S. economy and monetary policy By Plosser, Charles I.
  13. A Model of Monetary Exchange in Over-the-Counter Markets By Shengxing Zhang; Ricardo Lagos
  14. Liquidity Trap and Excessive Leverage By Anton Korinek; Alp Simsek
  15. Money in modern macro models: A review of the arguments By Seitz, Franz; Schmidt, Markus A.
  16. Effects of Commodity Price Shocks on Inflation: A Cross Country Analysis By Atsushi Sekine; Takayuki Tsuruga
  17. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  18. Housing Markets, Regulations and Monetary Policy By Xiaojin Sun; Kwok Ping Tsang

  1. By: Bernd Hayo; Matthias Neuenkirch
    Abstract: We study how financial market participants process news from four major central banks—the Bank of England (BoE), the Bank of Japan (BoJ), the European Central Bank (ECB), and the Federal Reserve (Fed), using a novel survey of 450 financial market participants from around the world. Our results indicate that, first, respondents rely more on newswire services to learn about central bank events than on self-monitoring. In general, the Fed is watched most closely, followed by the ECB, the BoE, and the BoJ. Second, we estimate ordered probit models to relate the two different types of central bank watching to the perceived importance of central bank events and the reliability of media coverage. Our results indicate that financial agents have to rely on newswire services to appropriately cope with a globalised market environment and digest news. However, when respondents consider an event particularly important, they tend to self-monitor it, especially when the event is taking place in their home region.
    Keywords: Central Bank Communication, Financial Market Participants, Information Processing, Interest Rate Decisions, Newswire Services, Reliability, Survey
    JEL: D83 E52 E58
    Date: 2014
  2. By: Ansgar Belke
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyses exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Fed’s exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Keywords: Federal funds rate; exit strategies; global spillovers; international policy coordination; sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014–01
  3. By: Dominique Pepin (CRIEF)
    Abstract: The paper discusses the role of monetary policy when potential output depends on the inflation rate. If the intention of the central bank is to maximize actual output growth, then it has to be credibly committed to a strict inflation targeting rule, and to take the MOGIR (the Maximizing Output Growth Inflation Rate) as the target.
    Date: 2014–03
  4. By: Quint, Dominic; Rabanal, Pau
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and ?nancial frictions, and hence both monetary and macroprudential policy can play a role. We ?nd that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their e¤ects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. --
    Keywords: Monetary Policy,EMU,Basel III,Financial Frictions
    JEL: C51 E44 E52
    Date: 2014
  5. By: Ander Perez (Universitat Pompeu Fabra); Ali Ozdagli (Federal Reserve Bank of Boston); Filippo Ippolito (Universitat Pompeu Fabra)
    Abstract: This paper studies the importance of bank lending to firms for the transmission of monetary policy to the real economy. We employ a novel dataset that enables us to measure bank-dependence of firms accurately, and show that the stock prices of bank-dependent firms are significantly more responsive to monetary policy shocks, controlling for firm leverage and financial constraints. We explore the channels through which this effect occurs, and find that bank dependent firms that borrow from financially distressed banks display a much stronger sensitivity to monetary policy shocks. This finding is consistent with an active bank lending channel, according to which the strength of a bank's balance sheets matters for monetary policy transmission. We also show that bank dependent firms that hedge against interest rate risk display a much lower sensitivity to monetary policy shocks, consistent with an interest rate channel that operates via the pass-through of interest rates, associated with the widespread use of floating-rates in bank loans and credit line agreements. Taken together, these results suggest that bank lending to firms plays an important role in the transmission of monetary policy, but that there is significant heterogeneity across bank dependent firms in their reaction to monetary policy shocks.
    Date: 2013
  6. By: Belanger, Gilles
    Abstract: The literature on nominal interest rates rigidity does not fully address its macroeconomic implications. How nominal interest rates rigidity would interact with the Fisher equation is simple, yet the implications are surprising. If nominal rates cannot catch up to real rates, the Fisher effect becomes inverted in the short term: big enough credit crunches bring deflation and central banks must lower interest rates to stimulate inflation. The paper shows that nominal interest rates rigidity is sufficient to characterize the little we know about inflation. It also shows that, unlike for other products, the pricing of loans is influenced by past negotiated loans, generating rigidity.
    Keywords: Interest Rate Rigidity, Inflation, Monetary Policy.
    JEL: E31 E43 E52
    Date: 2014–02–25
  7. By: Bluedorn, John C.; Bowdler, Christopher; Koch, Christoffer (Federal Reserve Bank of Dallas)
    Abstract: We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much stronger dynamic effects and greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy’s effects with those of changes in expected macrofundamentals. In fact, estimates from identified monetary policy changes lead to a reversal of U.S. states’ ranking by credit’s sensitivity to policy. We also extend Romer and Romer (2004)’s identification scheme, and expand the time and balance sheet coverage of the U.S. banking sample.
    Keywords: Monetary Transmission; Lending Channel; Monetary Policy Identification; Banking
    JEL: E44 E50 G21
    Date: 2014–03–01
  8. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Speech to Seattle University Albers School of Business, Seattle, Washington, March 5, 2014
    Date: 2014–03–05
  9. By: Paul D. McNelis (Fordham University and Hong Kong Institute for Monetary Research)
    Abstract: This paper examines the options of small open economies in Eastern Europe pegged to the Euro, in a time of crisis. Specifically, should Bosnia and Herzegovina, Bulgaria, Latvia and Lithuania move to full Euro area accession, as Estonia, Slovakia, and Slovenia have done, or follow the examples of Poland, the Czech Republic, and Hungary and opt out of the Euro area? This paper argues that going forward to full monetary union offers benefits over a pure fixed exchange-rate regime. Specifically, the experience of Hong Kong at the time of the Asian crisis in the late 1990's, illustrates the benefits of a credible currency link during a time of crisis.
    JEL: E52 E62 F41
    Date: 2014–03
  10. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: This paper studies the effects that conventional and unconventional monetary policies generate when endogenous growth, trend inflation and financial frictions are considered in a New Keynesian macroeconomic model. Financial variables play a key role in the determination of the steady state growth rate, given the value of the trend inflation. Calibrating the model following Gertler and Karadi (2011), long-run growth rate, welfare, normalized investment and financial wealth are maximized when trend inflation is 1.7% while leverage, external finance premium and marginal gain of the financial intermediaries are minimized. Finally, unconventional policies could extend their impact to the long run.
    Keywords: New Keynesian DSGE models, endogenous growth, financial frictions, trend inflation, unconventional monetary policy
    JEL: E31 E44 E58 O42
    Date: 2014
  11. By: Paul Hubert; Mirza Harun
    Abstract: Assuming that private agents need to learn inflation dynamics to form their inflation expectations and that they believe a hybrid New-Keynesian Phillips Curve (NKPC) is the true data generating process of inflation, we aim at establishing the role of forward-looking information in inflation expectation dynamics. We find that longer term expectations are crucial in shaping shorter-horizon expectations. Professional forecasters put a greater weight on forward-looking information presumably capturing beliefs about the central bank inflation target or trend inflation while lagged inflation remains significant. Finally,the NKPC-based inflation expectations model fits well for professional forecasts in contrast to consumers.
    Keywords: survey expectations; inflation; new keynesian; Philipps curve
    JEL: E31
    Date: 2014–03
  12. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Monetary Policy and Banks and the Rise of Global Protectionism; Global Interdependence Center; Banque de France; Paris, France President Charles Plosser offers his views on growth, unemployment, and inflation expectations. He also discusses why the Fed faces a communications challenge with the economy so close to the unemployment threshold of 6.5 percent. He gave similar remarks on March 6 in London.
    Keywords: Economy; Monetary policy; Economic conditions;
    Date: 2014–03–10
  13. By: Shengxing Zhang (New York University); Ricardo Lagos (New York University)
    Abstract: We develop a model of monetary exchange in over-the-counter (OTC) markets and use it to study the effects of inflation on asset prices, as well as on standard measures of financial liquidity, such as the size of bid-ask spreads, trade volume, and the incentives of dealers to supply immediacy, both by choosing to participate in the market-making activity, and by holding asset inventories on their own account.
    Date: 2013
  14. By: Anton Korinek (John Hopkins University and NBER); Alp Simsek (MIT and NBER)
    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.
    Keywords: Leverage, liquidity trap.
    JEL: E32 E44
    Date: 2014–03
  15. By: Seitz, Franz; Schmidt, Markus A.
    Abstract: This paper provides an overview of the role of money in modern macro models. In particular, we are focussing on New Keynesian and New Monetarist models to investigate their main findings and most significant shortcomings in considering money properly. As a further step, we ask about the role of financial intermediaries in this respect. In dealing with these issues, we distinguish between narrow and broad monetary aggregates. We conclude that for theoretical as well as practical reasons a periodic review of the definition of monetary aggregates is advisable. Despite the criticism brought forward by the recent New Keynesian literature, we argue that keeping an eye on money is important to monetary policy decision-makers in order to safeguard price stability as well as, as a side-benefit, ensure financial market stability. In a nutshell: money still matters. -- Das Papier gibt einen Überblick über die Rolle monetärer Variablen in modernen Makromodellen. Im Mittelpunkt stehen Neukeynesianische und Neumonetaristische Modelle. Ihre Hauptergebnisse werden dargestellt, wobei ein spezieller Fokus darauf gelegt wird, welche Bedeutung monetäre bzw. Liquiditätsvariablen spielen. Darüber hinaus wird untersucht, welche Rolle Finanzintermdediären in dieser Hinsicht zukommt. Insgesamt wird dabei zwischen engen und bereiten Geldmengenaggregaten unterschieden und auch die (theoretische und praktische) Adäquanz traditioneller Geldmengendefinitionen hinterfragt. Wir schlussfolgern, dass es trotz der vielfältigen Kritik an geldmengenorientierten Ansätzen für die Geldpolitik essenziell ist, Geldmengenentwicklungen zu analysieren, soll Preisstabilität und Finanzstabilität erreicht bzw. gesichert werden.
    Keywords: money,New Keynesian model,New Monetarist model,financial intermediaries
    JEL: E51 E52 E58
    Date: 2014
  16. By: Atsushi Sekine; Takayuki Tsuruga
    Abstract: Using local projections, this paper investigates eects of commodity price shocks on in ation. We estimate impulse responses of the consumer price indexes (CPIs) to a commodity price shock, based on a monthly panel consisting of 120 countries. Our results from the local projections suggest that the CPIs are almost fully adjusted within a year in response to a commodity price shock and thus eects of commodity price shocks are transitory. We then explore the possibility that the responses of the CPIs may be dependent on the in ation regimes. Based on the smooth transition autoregressive models that use the past in ation rate as a transition variable, we nd that commodity price shocks have more persistent eects on in ation in the low in ation regime than in the high in ation regime. Our analysis also shows that, in the high in ation regime, there are (i) stabilizing roles of the exchange rate on consumer prices; and (ii) large dierences in price responses between developed and developing countries. However, these eects are not detected in the low in ation regime. Our ndings suggest that business cycle factors may play an important role in understanding eects of commodity price shocks on the CPIs.
    Keywords: Labor demand; Commodity prices, in ation, pass-through, local projections, smooth transition autoregressive models
    JEL: E31 E37 Q43
  17. By: M. Ege Yazgan (Istanbul Bilgi University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation targeting (IT) regime. During the low-inflation IT regime, inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels. Overall, IT in Turkey, which was successful in lowering and maintaining inflation at acceptable levels, also appears to be associated with faster convergence in inflation rates at the expense of slower convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey.
    JEL: E31 F41
    Date: 2014–03
  18. By: Xiaojin Sun; Kwok Ping Tsang
    Abstract: We apply the linearized present value model, which allows the log rent-price ratio to be decomposed into the expected present value of all future real interests rates, real housing premia, and real rent growth, to the housing market in 23 U.S. metropolitan areas from 1978 to 2011. Based on the indirect inference bias-corrected VAR estimates, we show that variation in the pricing error accounts for half of volatility of log rent-price ratio, and the remaining volatility is mainly contributed by the expected future real interest rates. In addition, a change in the real interest rate has an immediate impact on the fundamental house price, and the impact is significantly larger for more regulated housing markets.
    Keywords: The Present Value Model, Rent-Price Ratio, House Price, Housing Supply Regulations
    Date: 2013

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