nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒04‒05
twenty-one papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Does the federal reserve staff still beat private forecasters? By El-Shagi, Makram; Giesen, Sebastian; Jung, Alexander
  2. Search-Based Models of Money and Finance: An Integrated Approach By Wright, Randall; Trejos, Alberto
  3. Keynesian inefficiency and optimal policy: a new monetarist approach By Williamson, Stephen D.
  4. Independent within—not of—Government: The Emergence of the Federal Reserve as a Modern Central Bank By Humpage, Owen F.
  5. Systematic policy and forward guidance By Plosser, Charles I.
  6. Macroprudential Regulation and the Role of Monetary Policy By Tayler, William; Zilberman, Roy
  7. Dealing with a liquidity trap when government debt matters: optimal time-consistent monetary and fiscal policy By Burgert, Matthias; Schmidt, Sebastian
  8. The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR By Arratibel, Olga; Michaelis, Henrike
  9. Inflation securities valuation with macroeconomic-based no-arbitrage dynamics By Gabriele Sarais; Damiano Brigo
  10. "A New Approach to Explaining the Value of Colonial Paper Money: Evidence from New Jersey, 1709-1775" By FARLEY GRUBB
  11. Inflation expectation dynamics:the role of past, present and forward looking information By Paul Hubert; Harun Mirza
  12. An Empirical Study of Trade Dynamics in the Fed Funds Market By Afonso, Gara M.; Lagos, Ricardo
  13. Scarce collateral, the term premium, and quantitative easing By Williamson, Stephen D.
  14. Financial conditions index and credit supply shocks for the euro area By Darracq Pariès, Matthieu; Maurin, Laurent; Moccero, Diego
  15. Two views of international monetary policy coordination By Bullard, James B.
  16. Changes in GDP’s measurement error volatility and response of the monetary policy rate: two approaches By Julian A. Parra-Polania; Carmiña O. Vargas
  17. Global corporate bond issuance: what role for US quantitative easing? By Lo Duca, Marco; Nicoletti, Giulio; Vidal Martinez, Ariadna
  18. Biophysical Limits of Monetary Systems Behavior By Ternyik, Stephen I.
  19. Tinker, taper, QE, bye ? the effect of quantitative easing on financial flows to developing countries By Lim, Jamus Jerome; Mohapatra, Sanket; Stocker, Marc
  20. A high frequency assessment of the ECB securities markets programme By Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
  21. Search-Based Endogenous Illiquidity and the Macroeconomy By Wei Cui; Sören Radde

  1. By: El-Shagi, Makram; Giesen, Sebastian; Jung, Alexander
    Abstract: The aim of this paper is to assess whether the findings of Romer and Romer (2000) on the superiority of staff forecasts are still valid today. The paper uses both latest available econometric techniques as well as conventional tests. Several tests for forecast rationality show that a necessary condition for good forecast performance is satisfied both for Greenbook and private forecasts, as measured by the Survey of Professional Forecasters (SPF). Tests for forecast accuracy and the encompassing test confirm the superiority of Greenbook forecasts for inflation and output using an extended sample (1968 to 2006). The relative forecast performance is, however, not robust in the presence of large macroeconomic shocks such as the Great Moderation and oil price shocks. Other econometric tests show that a relative better forecast performance by staff is observed when there is increased uncertainty. Staff’s better knowledge about the Fed’s future interest rate path also plays an important role in this respect. JEL Classification: C53, E37, E52, E58
    Keywords: forecast performance, forecast rationality, forecast stability, greenbook forecasts, of professional forecasters, survey
    Date: 2014–02
  2. By: Wright, Randall (Federal Reserve Bank of Minneapolis); Trejos, Alberto (University of Michigan)
    Abstract: Many applications of search theory in monetary economics use the Shi-Trejos-Wright model, hereafter STW, while applications in finance use Duffie-Gârleanu-Pederson, hereafter DGP. These approaches have much in common, and both claim to be about liquidity, but the models also differ in a fundamental way: in STW agents use assets as payment instruments when trading goods; in DGP there are no gains from exchanging goods, but agents trade because they value assets differently with goods serving as payment instruments. We develop a framework nesting the two. This clarifies the connection between the literatures, and generates new insights and applications. Even in the special cases of the baseline STW and DGP models, we provide propositions generalizing and strengthening what is currently known, and rederiving some existing results using more tractable arguments.
    Keywords: Search; Bargaining; Money; Finance
    JEL: E40 E44
    Date: 2014–03–19
  3. By: Williamson, Stephen D. (Washington University in St. Louis)
    Abstract: A simple model of monetary/labor search is constructed to study Keynesian indeterminacy and optimal policy. In the model, economic agents have trouble splitting the surplus from exchange appropriately, and we consider monetary and fiscal policies that correct this Keynesian inefficiency. A Taylor rule does not imply determinacy, nor does it support an efficient outcome, in general. Optimal policies yield an efficient and determinate allocation of resources, but equilibrium policy actions, wages, and prices are indeterminate at the optimum.
    JEL: E4 E5
    Date: 2013–06–19
  4. By: Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: Independence is the hallmark of modern central banks, but independence is a mutable and fragile concept, because the governments to whom central banks are ultimately responsible can have objectives that take precedence over price stability. This paper traces the Federal Reserve’s emergence as a modern central bank beginning with its abandonment of monetary policy for debt-management operations during the Second World War and through the controversies that led to the Treasury-Federal Reserve accord in 1951. The accord, however, did not end the Federal Reserve’s search for independence. After the accord, the Federal Reserve’s view of responsibilities "within" government led it to policies—even keel and foreign exchange operations—that complicated the System’s ability to conduct monetary policy.
    Keywords: Second World War; U.S. Treasury-Federal Reserve Accord; Even Keel
    JEL: E4 E5 E6 N1
    Date: 2014–03–27
  5. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Money Marketeers of New York University, Inc., Down Town Association, March 25, 2014, New York, NY President Charles Plosser discusses the relationship between systematic policy and forward guidance. He explains how understanding both practices can provide insights into effective monetary policy in normal and unusual times, or in extreme conditions when policy is constrained by the zero lower bound on nominal interest rates.
    Keywords: Monetary policy; Forward guidance; FOMC:
    Date: 2014–03–25
  6. By: Tayler, William; Zilberman, Roy
    Abstract: This paper examines the macroprudential roles of bank capital regulation and monetary policy in a Dynamic Stochastic General Equilibrium model with endogenous financial frictions and a borrowing cost channel. We identify various transmission channels through which credit risk, commercial bank losses, monetary policy and bank capital requirements affect the real economy. These mechanisms generate significant financial accelerator effects, thus providing a rationale for a macroprudential toolkit. Following credit shocks, countercyclical bank capital regulation is more effective than monetary policy in promoting financial, price and overall macroeconomic stability. For supply shocks, macroprudential regulation combined with a strong response to inflation in the central bank policy rule yield the lowest welfare losses. The findings emphasize the importance of the Basel III regulatory accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
    Keywords: Bank Capital Regulation; Macroprudential Policy; Basel III; Monetary Policy; Borrowing Cost Channel
    JEL: E32 E44 E52 E58 G28
    Date: 2014–04
  7. By: Burgert, Matthias; Schmidt, Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. JEL Classification: E31, E52, E62, E63, D11
    Keywords: deficit spending, discretion, monetary and fiscal policy, new Keynesian model, zero nominal interest rate bound
    Date: 2013–12
  8. By: Arratibel, Olga; Michaelis, Henrike
    Abstract: This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time. JEL Classification: C30, E44, E52, F41
    Keywords: Bayesian time-varying parameter VAR, exchange rate pass-through, monetary policy transmission
    Date: 2014–02
  9. By: Gabriele Sarais; Damiano Brigo
    Abstract: We develop a model to price inflation and interest rates derivatives using continuous-time dynamics that have some links with macroeconomic monetary DSGE models equipped with a Taylor rule: in particular, the reaction function of the central bank, the bond market liquidity, inflation and growth expectations play an important role. The model can explain the effects of non-standard monetary policies (like quantitative easing or its tapering) and shed light on how central bank policy can affect the value of inflation and interest rates derivatives. The model is built under standard no-arbitrage assumptions. Interestingly, the model yields short rate dynamics that are consistent with a time-varying Hull-White model, therefore making the calibration to the nominal interest curve and options straightforward. Further, we obtain closed forms for both zero-coupon and year-on-year inflation swap and options. The calibration strategy we propose is fully separable, which means that the calibration can be carried out in subsequent simple steps that do not require heavy computation. A market calibration example is provided. The advantages of such structural inflation modelling become apparent when one starts doing risk analysis on an inflation derivatives book: because the model explicitly takes into account economic variables, a trader can easily assess the impact of a change in central bank policy on a complex book of fixed income instruments, which is normally not straightforward if one is using standard inflation pricing models.
    Date: 2014–03
  10. By: FARLEY GRUBB (Department of Economics,University of Delaware)
    Abstract: A new approach to explaining the value of colonial paper money that relies on their distinctive character as bills of credit is presented. The market value of these bills is decomposed into their real asset present value and their liquidity premium value. This approach is applied to the newly reconstructed monetary data for colonial New Jersey. The real asset present value of New Jersey bills accounted for at least 80 percent, whereas the value of these bills as “money” accounted for at most 10 to 20 percent, of their market value. Colonial paper money was not primarily a fiat currency.
    Keywords: commodity money, currency depreciation, exchange rates, fiat currency, fiscal backing theory of money, land banks, money supply, present value, price inflation, purchasing power parity, quantity theory of money, Seven Year’s War, value of money, zero-interest bearer bonds
    JEL: E31 E42 E51 N11 N21 N41
    Date: 2014
  11. By: Paul Hubert (Ofce,Sciences-po); Harun Mirza (European Central Bank)
    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: 2014–07
  12. By: Afonso, Gara M. (Federal Reserve Bank of New York); Lagos, Ricardo (Federal Reserve Bank of Minneapolis)
    Abstract: We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.
    Keywords: Monetary policy; Federal funds market; Federal funds rates
    JEL: E42 E44 G21
    Date: 2014–03–17
  13. By: Williamson, Stephen D. (Washington University in St. Louis)
    Abstract: A model of money, credit, and banking is constructed in which the differential pledgeability of collateral and the scarcity of collateralizable wealth lead to a term premium — an upward-sloping nominal yield curve. Purchases of long-maturity government debt by the central bank are always a good idea, but for unconventional reasons. A floor system is preferred to a channel system, as a floor system permits welfare-improving asset purchases by the central bank.
    JEL: E4 E5
    Date: 2014–01–15
  14. By: Darracq Pariès, Matthieu; Maurin, Laurent; Moccero, Diego
    Abstract: We implement a two-step approach to construct a financing conditions index (FCI) for the euro area and its four larger member states (Germany, France, Italy and Spain). The method, which follows Hatzius et al. (2010), is based on factor analysis and enables to summarise information on financing conditions from a large set of financial indicators, controlling for the level of policy interest rates, changes in output and inflation. We find that the FCI tracks successfully both worldwide and euro area specific financial events. Moreover, while the national FCIs are constructed independently, they display a similar pattern across the larger euro area economies over most of the sample period and varied more widely since the start of the sovereign debt crisis in 2010. Focusing on the euro area, we then incorporate the FCI in a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads. The credit supply shock extracted with sign restrictions is estimated to have caused around one fifth of the decline in euro area manufacturing production at the trough of the financial crisis and a rise in bank lending spreads of around 30 basis points. We also find that adding the FCI to the VAR enables an earlier detection of credit supply shocks. JEL Classification: E17, E44, E50
    Keywords: credit supply shocks, euro area, factor models, financial conditions index, large dataset, sign restrictions, structural VAR
    Date: 2014–03
  15. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: March 27, 2014. Presentation. 17th Annual Asian Investment Conference, Hong Kong, China.
    Date: 2014–03–27
  16. By: Julian A. Parra-Polania; Carmiña O. Vargas
    Abstract: Using a stylized model in which output is measured with error, we derive the optimal policy response to the demand shock signal and to changes in the measurement error volatility from two different perspectives: the minimization of the expected loss (from which we derive the ‘standard’ policy) and the minimization of the maximum possible loss across all potential scenarios (from which we derive the ‘prudent’ or ‘robust’ policy). We find that: 1. the prudent policymaker reacts more aggressively to the shock signal than the standard one and 2. while the standard policymaker always mitigates her reaction if the measurement error volatility rises, the prudent one may even increase her response if her risk aversion is very high. When we incorporate forward-looking expectations, the second result is preserved but, in this case, the prudent policymaker is less aggressive than the standard one in responding to the shock signal. Classification JEL: D81, E52, E58
    Date: 2014–03
  17. By: Lo Duca, Marco; Nicoletti, Giulio; Vidal Martinez, Ariadna
    Abstract: The paper investigates the impact of US quantitative easing (QE) on global non-financial corporate bond issuance. It distinguishes between two QE instruments, MBS/GSE debt and Treasury bonds, and disentangles between two channels of transmission of QE to global bond markets, namely flow effects (purchases) and stock effects (holdings). We control for a number of domestic and global macro-financial factors. In particular, we control for weaknesses in crossborder and domestic banking which might have induced the corporate sector to issue more bonds. The results indicate that US QE had a large impact on corporate bond issuance, especially in emerging markets, and that flow effects (i.e. portfolio rebalancing) were the main transmission channel of QE. A counterfactual analysis shows that bond issuance in emerging markets since 2009 would have been halved without QE. JEL Classification: E52, E58, F42, G15
    Keywords: bond issuance, crisis management, emerging markets, Federal Reserve, monetary policy, quantitative easing, spill-overs, United States
    Date: 2014–03
  18. By: Ternyik, Stephen I.
    Abstract: The biophysical limits of the monetary production economy are being formally explored, concerning the root causes of cyclical crises. At the end of this brief methodical discussion, an open guess is presented for a further investigation to resolve the 'mystery' of monetary systems behavior.
    Keywords: money, production, time, energy, cybernetics, energetics, economic waves, cyclical crises
    JEL: B41
    Date: 2014–03
  19. By: Lim, Jamus Jerome; Mohapatra, Sanket; Stocker, Marc
    Abstract: This paper examines gross financial inflows to developing countries between 2000 and 2013, with a particular focus on the potential effects of quantitative easing policies in the United States and other high-income countries. The paper finds evidence for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels. Moreover, quantitative easing had an additional effect over and above these observable channels, which the paper argues cannot be attributed to either market expectations or changes in the structural relationships between inflows and observable fundamentals. The baseline estimates place the lower bound of the effect of quantitative easing at around 5 percent of gross inflows (for the average developing economy), which suggests that of the 62 percent increase in inflows during 2009-13 related to changing global monetary conditions, at least 13 percent of this was attributable to quantitative easing. The paper also finds evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than foreign direct investment to our measured effects from quantitative easing. Finally, the paper performs simulations that explore the potential effects of the withdrawal of quantitative easing on financial flows to developing countries.
    Keywords: Debt Markets,Emerging Markets,Economic Theory&Research,Currencies and Exchange Rates,Mutual Funds
    Date: 2014–03–01
  20. By: Ghysels, Eric; Idier, Julien; Manganelli, Simone; Vergote, Olivier
    Abstract: Policy impact studies often suffer from endogeneity problems. Consider the case of the ECB Securities Markets Programme: If Eurosystem interventions were triggered by sudden and strong price deteriorations, looking at daily price changes may bias downwards the correlation between yields and the amounts of bonds purchased. Simple regression of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that SMP interventions have been ineffective, or worse counterproductive. We use high frequency data on purchases of the ECB Securities Markets Programme and sovereign bond quotes to address the endogeneity issues. We propose an econometric model that considers, simultaneously, first and second conditional moments of market price returns at daily and intradaily frequency. We find that SMP interventions succeeded in reducing yields and volatility of government bond segments of the countries under the programme. Finally, the new econometric model is broadly applicable to market intervention studies. JEL Classification: E52, E44, G12, C58
    Keywords: component models, euro area crisis, high frequency data, SMP, unconventional monetary policy
    Date: 2014–02
  21. By: Wei Cui; Sören Radde
    Abstract: We endogenize asset liquidity in a dynamic general equilibrium model with search frictions on asset markets. In the model, asset liquidity is tantamount to the ease of issuance and resaleability of private financial claims, which is driven by investors' participation on the search market. Limited resaleability of private claims creates a role for liquid assets, such as government bonds or fiat money, to ease funding constraints. We show that liquidity and asset prices positively co-move. When the capacity of the asset market to channel funds to entrepreneurs deteriorates, the hedging value of liquid assets increases. Our model is thus able to match the flight to liquidity observed during recessions. Finally, we show that investors' search market participation is more intense in a constrained efficient economy.
    Keywords: endogenous asset liquidity, search frictions
    JEL: E22 E44 E58
    Date: 2014

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