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on Monetary Economics |
| By: | Bernd Hayo (University of Marburg); Matthias Neuenkirch (University of Trier) |
| 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- |
| Keywords: | Central Bank Communication, Financial Market Participants, Information Processing, Interest Rate Decisions, Newswire Services, Reliability, Survey. |
| JEL: | D83 E52 E58 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201423&r=mon |
| By: | M. Neuenkirch, P. Siklos (LCERPA) |
| Abstract: | Monetary policy decisions are typically taken after a committee has deliberated and voted on a proposal. However, there are well-known risks associated with committee-based decisions. In this paper we examine the record of the shadow Monetary Policy Council in Canada. Given the structure of the committee, how decision-making takes place, as well as the voting arrangements, the MPC does not face the same information cascades and group polarization risks faced by actual decision-makers in central bank monetary policy councils. We find a considerable diversity of opinion about the recommended future path of interest rates inside the MPC. Beginning with the explicit forward guidance provided by the Bank of Canada market determined forward rates diverge considerably from the recommendations implied by the MPC. There is little evidence that the Bank and the MPC coordinate their future views about the interest rate path. However, it is difficult to explain the basis on which median voter inside the MPC, as well as doves and hawks on the committee, change their views about future changes in policy rates. This implies that there remain challenges in understanding the evolution of future interest rate paths over time. |
| Keywords: | Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules |
| JEL: | E43 E52 E58 E61 E69 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wlu:lcerpa:wm0066&r=mon |
| By: | Gilles Dufrénot (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, CEPII, Banque de France, Aix-Marseille School of Economics); Anwar Khayat (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS) |
| Abstract: | This paper provides evidence that the European Central Bank (ECB) has adjusted its interest rate since 1999 nonlinearly according to the macroeconomic and financial environment in the euro zone. Its policy function is described by a Taylor rule with regime shifts implying that the stance of reaction to the inflation-gap and output-gap has varied according to the credit risk in the private and sovereign bond markets, the monetary base and past levels of inflation, output and the shocks affecting the European economies. We provide evidence of regimes corresponding to low to high levels of inflation with the possibility of a situation near a zero low bound (ZLB) for the interest rate. We study the implications of such a rule for the economy in a simple new-Keynesian framework and show that it is consistent with several stable long-run steady states equilibria among which one that is consistent with the recent situation of a near liquidity trap in the euro area. We also find that around this liquidity trap steady state the equilibrium is locally determinate for most plausible parameter values. We discuss the issue of moving from a situation of low nominal interest rate to a policy that have been more typically implemented in the past by relying on an analysis of the impact of shocks (supply and demand) to the economy. |
| Keywords: | Nonlinear Taylor rules; multiple steady state equilibria; Euro area. |
| JEL: | C54 E52 E58 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1408&r=mon |
| By: | Jérôme Creel (OFCE); Mathilde Viennot; Paul Hubert |
| Abstract: | This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes. |
| Keywords: | transmission channels; unconventional monetary policy; pass-through |
| JEL: | E51 E58 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sg18u8h&r=mon |
| 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,Cost Channel |
| JEL: | E32 E44 E52 E58 G28 |
| Date: | 2014–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:95230&r=mon |
| By: | Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan) |
| Abstract: | This paper re-examines the empirical evidence on the potency of Japanese monetary policy in the 1990s by comparing the estimated impacts of various proxies of monetary policy shocks on the macro economy. My empirical results demonstrate that the surprise target changes as a proxy of monetary policy shocks had impacts on real output and financial variables over the period 1990–2001. I also show that the estimated effects of identified monetary policy shocks depend on whether the shocks are anticipated or not; The monetary policy effects on the economy are underestimated when the empirical models fail to control for the market expectation for monetary policy stance. |
| Keywords: | Monetary policy, Surprise target changes, Vector autoregression model, Japan |
| JEL: | E52 E58 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-10&r=mon |
| By: | Sumru Altug (Department of Economics, Koc University, CEPR); Cem Cakmakli (Department of Economics, Koc University, Department of Quantitative Economics, University of Amsterdam) |
| Abstract: | In this paper, we study the evolution of inflation expectations for two key emerging economies, Brazil and Turkey, using a reduced form model in a state-space framework, where the level of inflation is modeled explicitly. We match the survey-based inflation expectations and inflation targets set by the central banks of Brazil and Turkey with the predictions implied by the model in a statistically coherent way. Confronting these expectations with inflation targets leads to a statistical measure of the discrepancy between inflation expectations and the target inflation. The results indicate that inflation expectations are anchored more closely the inflation target set by the Central Bank for Brazil. By contrast, there is more evidence that inflation expectations deviate significantly from the target inflation set by the Central Bank for Turkey. |
| Keywords: | Inflation targeting, survey-based inflation expectations, forecasting, state space model. |
| JEL: | E31 E37 C32 C51 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1413&r=mon |
| By: | Ross Kendall; Tim Ng (Reserve Bank of New Zealand) |
| Abstract: | The Taylor Rule is often used to describe simply how central banks adjust short-term interest rates in response to economic conditions. We use this approach to analyse monetary policy in New Zealand, Australia, and the United States since the early 1990s. We find that the response of monetary policy to changing economic conditions is similar in New Zealand and Australia. Robust results could not be found for the United States, and in recent years it has become even more difficult to do so as the Federal Reserve has been constrained by the zero lower bound on nominal interest rates. |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2013/04&r=mon |
| By: | Yýlmaz Akyüz (South Centre) |
| Abstract: | The ultra-easy monetary policy has not been very effective in easing the debt overhang and stimulating spending – hence, the crisis is taking too long to resolve, entailing unnecessary losses of income and jobs and aggravating inequality. But it has generated financial fragility at home and abroad, exposing developing countries to a new boom-bust cycle. Tapering does not yet signal a return to monetary tightening and normalization of the Fed’s balance sheet. Besides, the policy rates are pledged to remain at historical lows for some time to come. Thus, ultra-easy money is still with us. But the markets have already started pricing-in the normalization of monetary policy and this is the main reason for the rise in long-term rates and the turbulence in emerging economies. The crisis has in effect demolished the myth that South has decoupled from the economic vagaries of the North and major emerging economies have become new global engines. Policy response to a deepening of the current financial turbulence in the South should depart from past practices. Emerging economies should avoid using their reserves to finance large and persistent outflows of capital and seek, instead, to involve private lenders and investors in crisis resolution. This may call for exchange restrictions and temporary debt standstills. |
| Keywords: | Monetary policy, quantitative easing, tapering, emerging markets |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tek:wpaper:2014/3&r=mon |
| By: | Peter Tulip (Reserve Bank of Australia) |
| Abstract: | Low interest rates in the United States have recently been accompanied by large fiscal stimulus. However, discussions of monetary policy have neglected this fiscal activism, leading to over-estimates of the costs of the zero lower bound and, hence, of the appropriate inflation target. To rectify this, I include countercyclical fiscal policy within a large-scale model of the US economy. I find that fiscal activism can substitute for a high inflation target. An increase in the inflation target is not warranted, despite increased volatility of macroeconomic shocks, so long as fiscal policy behaves as it has recently. |
| Keywords: | fiscal policy; zero bound; inflation target |
| JEL: | E52 E62 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2014-02&r=mon |
| By: | Masahiko Shibamoto (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Masato Shizume (Institute for Monetary and Economic Studies, Bank of Japan) |
| Abstract: | A veteran finance minister, Takahashi Korekiyo, brought an early recovery for Japan from the Great Depression of the 1930s by prescribing a combination of expansionary fiscal, exchange rate, and monetary policies. To explore the comprehensive transmission mechanism of Takahashi's macroeconomic policy package, including the expectation channel, we construct a structural vector auto-regression (S-VAR) model with three state variables (output, price, and the inflation expectations) and three policy variables (fiscal balance, exchange rate, and money stock). Our analysis reveals that the exchange rate adjustment undertaken as an independent policy tool had the strongest effect, and that changes in people's expectations played a significant role for escaping from the Great Depression. During the second half of 1931, in particular, speculation on Japan's departure from the gold standard and the inflation that was likely to follow reversed the existing expectations: instead of expecting deflation, people began to expect inflation, months ahead of the actual departure from the gold standard. As a whole, the choice of the level of the exchange rate was crucial for changing people's expectations as well as promoting exports. |
| Keywords: | Great depression, Japanese economy, Macroeconomic policy, Expectation, Vector auto-regressive model, Commodity futures |
| JEL: | E52 E63 N15 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-12&r=mon |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/6g0gsihsjmn5snc9pb0hlas97&r=mon |
| By: | Mauro Napoletano (OFCE); Andrea Roventini (Department of economics); Giovanni Dosi (Laboratory of Economics and Management); Giorgio Fagiolo (Laboratory of Economics and Management (LEM)); Tania Treibich |
| 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 forms, 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 stylised facts concerning financial dynamics and banking crises. Simulation results suggest that the most appropriate policy mix to stabilise the economy requires unconstrained counter-cyclical fiscal policies, where automatic stabilisers 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 ination stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases. |
| Keywords: | Agent based model; fiscal policy; monetary policy; banking crises; income inequality; austerity policies; disequilibrium dynamics |
| JEL: | C63 E32 E6 E52 G21 O4 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p6go0e900&r=mon |
| By: | Prasad, Eswar (Asian Development Bank Institute) |
| Abstract: | This paper evaluates the prospects for the renminbi’s role as an international currency and the implications for global financial markets. Although the People’s Republic of China (PRC) does not have either an open capital account or a flexible exchange rate, the renminbi has attained considerable traction as an international currency on account of the PRC’s rising shares of global trade and gross domestic product. Through bilateral swaps that the People's Bank of China has established with other central banks, the renminbi is also becoming more prominent in international finance. However, the renminbi is unlikely to become a major reserve currency in the absence of capital account convertibility, a flexible exchange rate, and better-developed financial markets. The renminbi’s rising prominence—if it is accompanied by significant economic reforms within the PRC—could add to the stability of Asian and global financial systems. |
| Keywords: | renminbi internationalization; reserve currency; capital account convertibility; exchange rate flexibility; currency swaps |
| JEL: | E50 F30 F40 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0469&r=mon |
| By: | Meixing Dai; Moïse Sidiropoulos; Eleftherios Spyromitros |
| Abstract: | This paper examines monetary and fiscal interactions in a framework where the government worries about political costs of low institutional quality and central bank opacity acts as a disciplinary device leading the government to reduce distortionary taxes and public expenditures. Greater opacity could thus lower the reactions of inflation expectations and inflation but increase those of the output gap to supply shocks and the target of public expenditures, and would be beneficial in terms of less macroeconomic volatility. Under the least favourable assumptions on the effect of corruption, i.e. ‘sanding-the-wheels’ effect or weak ‘greasing-the-wheels’ effect, we have shown that there is a fiscal disciplining effect of central bank opacity in a game framework where the government is a Stackelberg leader. Imperfect transparency could increase corruption only if the ‘greasing-the-wheels’ effect is relatively large. These results could be reinforced by the presence of grand corruption. |
| Keywords: | Central bank opacity, fiscal disciplining effect, distortions, institutional quality, corruption. |
| JEL: | D73 E52 E58 E61 E63 H50 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2014-04&r=mon |
| By: | Frederic Teulon |
| Abstract: | The euro area is experiencing a sovereign debt crisis; as a result, the foundations of its monetary union have been shattered. This crisis, which is an extension of an international financial crisis, shows that the European Union is not an optimum currency area. Robert Mundell’s work remains an indispensable reference on this subject: a monetary union among greatly different countries and propelled by considerably weak solidarity is problematic. In the present context, the possibilities are limited for permanently improving the situation, for transforming sovereign debts into sustainable ones, and for regaining a higher level of growth. Experience seems to show that a single currency cannot accommodate national budgetary policies and that national policies are hindered by the existence of a single currency in a context of asymmetries. Eventually, a scenario where the euro area would collapse becomes highly probable. This paper puts forward a model of debt sustainability and discusses eight related proposals. |
| Keywords: | European Monetary Union; European Central Bank (EBC); Eurozone; Stability growth pact; Financial crisis; Fiscal policy and debt sustainability; Optimal currency area; Sovereign debt |
| JEL: | E42 E44 G38 |
| Date: | 2014–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-196&r=mon |
| By: | Bluhm, Marcel; Faia, Ester; Krahnen, Jan Pieter |
| Abstract: | This paper makes a conceptual contribution to the e ffect of monetary policy on financial stability. We develop a microfounded network model with endogenous network formation to analyze the impact of central banks' monetary policy interventions on systemic risk. Banks choose their portfolio, including their borrowing and lending decisions on the interbank market, to maximize profit subject to regulatory constraints in an asset-liability framework. Systemic risk arises in the form of multiple bank defaults driven by common shock exposure on asset markets, direct contagion via the interbank market, and firesale spirals. The central bank injects or withdraws liquidity on the interbank markets to achieve its desired interest rate target. A tension arises between the bene ficial effects of stabilized interest rates and increased loan volume and the detrimental effects of higher risk taking incentives.We fi nd that central bank supply of liquidity quite generally increases systemic risk. -- |
| Keywords: | network formation,contagion,central banks' interventions |
| JEL: | C63 D85 G01 G28 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:46&r=mon |
| By: | Willy Chetwin; Amy Wood (Reserve Bank of New Zealand) |
| Abstract: | Estimates of neutral interest rates play a useful role in thinking about monetary policy. This note explores the concept of a neutral interest rate and provides some simple empirical illustrations of the trend decline in neutral rates, here and abroad, over the last couple of decades. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2013/07&r=mon |
| By: | Christophe Blot (OFCE); Jérôme Creel (OFCE); Fabien Labondance (Atelier de recherche sur la politique économique et la gestion des entreprises (ARPEGE)); Francesco Saraceno (OFCE); Paul Hubert |
| Abstract: | This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz’s “conventional wisdom” that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the “leaning against the wind” monetary policy approach. |
| Keywords: | Price stability; Financial stability; DCC-GARCH; VAR |
| JEL: | C32 E31 E44 E52 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4oqi4ibn&r=mon |
| By: | Burns, Andrew; Kida, Mizuho; Lim, Jamus Jerome; Mohapatra, Sanket; Stocker, Marc |
| Abstract: | As the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. This paper assesses the implications of a normalization of policy and activity in high-income countries for financial flows and crisis risks in developing countries. In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, the risk of more abrupt adjustments remains significant, especially if increased market volatility accompanies the unwinding of unprecedented central bank interventions. According to simulations, abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months. Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows. |
| Keywords: | Debt Markets,Emerging Markets,Currencies and Exchange Rates,Banks&Banking Reform,Economic Theory&Research |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6830&r=mon |
| By: | Gael Price (Reserve Bank of New Zealand) |
| Abstract: | The sectoral core factor model of inflation is one of many series that the Reserve Bank uses to help interpret inflation developments. This Analytical Note explains the model and outlines some modifications that have led to revisions to the published historical series. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2013/06&r=mon |
| By: | Henri Sterdyniak (OFCE); Maylis Avaro |
| Abstract: | The banking union emerged from the June 2012 European Council as a new project expected to help and solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? The banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, establishing common mechanisms to solve banking crises, and encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme. Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other are related to the EU specificity (is the banking union a step towards more federalism?), the more stringent are related to structural choices regarding the European banking system. The banks' solvency and their ability to lend would primarily depend on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionnable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking activity from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed because they would not be allowed to run risky activity. Can European peoples leave such strategic choices in the hands of the ECB? |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4srjesb4&r=mon |
| By: | Cheung, Yin-Wong (Asian Development Bank Institute) |
| Abstract: | The People’s Republic of China (PRC) has been quite aggressive recently in promoting the international use of its currency, the renminbi. Historical experience suggests that an active offshore market is essential for a global currency. Indeed, anecdotal evidence affirms the role of offshore markets in pushing the renminbi currency to the world. One should not, however, overplay the contribution of offshore markets. While offshore markets offer the opportunities to experiment with the global use of the currency, the overseas acceptance of the renminbi is ultimately determined by both internal and external economic forces, and geopolitical factors. With its relatively small size, the offshore renminbi is not likely to pressure the PRC and alter its financial liberalization policy. A well-organized offshore renminbi market will complement the PRC’s renminbi internationalization policy, but it is not possible to raise the currency’s global status beyond the level justified by its economic and political attributes. |
| Keywords: | renminbi; yuan; international monetary policy; currency internationalization; offshore currency market; onshore currency market; foreign exchange; financial centers |
| JEL: | F33 |
| Date: | 2014–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0472&r=mon |
| By: | Katrin Rabitsch (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | A large literature has related the failure of interest rate parity in the foreign exchange market to the existence of a time-varying risk premium. Nevertheless, most modern open economy DSGE models imply a (near) perfect interest rate parity condition. This paper presents a stylized two-country incomplete-markets model in which countries have strong precautionary motives because they face international liquidity constraints, the presence of which successfully generates a time-varying risk premium: the country that has accumulated debt after experiencing relative worse times has stronger precautionary motives and its asset carries a risk premium. |
| Keywords: | Uncovered Interest Rate Parity, Incomplete Market, Precautionary Savings, Time-Varying Risk Premium |
| JEL: | F31 F41 G12 G15 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp171&r=mon |
| By: | Miles Parker; Benjamin Wong (Reserve Bank of New Zealand) |
| Abstract: | Exchange rate changes affect prices in New Zealand. Using data from the last 25 years, this note illustrates how the inflation responses have differed depending on what caused the exchange rate to move. |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbans:2014/01&r=mon |
| By: | L. Randall Wray |
| Abstract: | This paper explores the intellectual history of the state, or chartalist, approach to money, from the early developers (Georg Friedrich Knapp and A. Mitchell Innes) through Joseph Schumpeter, John Maynard Keynes, and Abba Lerner, and on to modern exponents Hyman Minsky, Charles Goodhart, and Geoffrey Ingham. This literature became the foundation for Modern Money Theory (MMT). In the MMT approach, the state (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social, legal unit of account--a money--used for measuring the obligation. This approach does not require the preexistence of markets; indeed, it almost certainly predates them. Once the authorities can levy such obligations, they can name what fulfills any obligation by denominating those things that can be delivered; in other words, by pricing them. MMT thus links obligatory payments like taxes to the money of account as well as the currency. This leads to a revised view of money and sovereign finance. The paper concludes with an analysis of the policy options available to a modern government that issues its own currency. |
| Keywords: | Modern Money Theory; Chartalism; State Money; Knapp; Innes; Schumpeter; Keynes; Minsky; Goodhart; Ingham; Sovereign Currency |
| JEL: | B1 B3 B15 B22 B25 B52 E40 E50 E62 H5 H60 N1 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_792&r=mon |
| By: | Gabriel Chodorow-Reich |
| Abstract: | Unconventional monetary policy affects financial institutions through their exposure to real project risk, the value of their legacy assets, their temptation to reach for yield, and their choice of leverage. I use high frequency event studies to show the introduction of unconventional policy in the winter of 2008-09 had a strong, beneficial impact on banks and especially on life insurance companies, consistent with the positive effect on legacy asset prices dominating any impulse for additional risk taking. Subsequent policy announcements had minor effects on these institutions. The interaction of low nominal interest rates and administrative costs led money market funds to waive fees, producing a possible incentive to reach for higher returns to reduce waivers. I find some evidence of high cost money market funds reaching for yield in 2009-11, but little thereafter. Private defined benefit pension funds with worse funding status or shorter liability duration also seem to have reached for higher returns beginning in 2009, but again the evidence suggests such behavior dissipated by 2012. Overall, in the present environment there does not seem to be a trade-off between expansionary policy and the health or stability of the financial institutions studied. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:156866&r=mon |
| By: | Roberto Rigobon (Massachusetts Institute of Technology); Brent Neiman (University of Chicago); Alberto Cavallo (MIT) |
| Abstract: | We use a novel dataset of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds perfectly within currency unions for thousands of goods sold by each of the retailers, implying good-level real exchange rates equal to one. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that it is the common currency per se, rather than the lack of nominal volatility, that results in the lack of cross-country differences in the prices of these goods. Second, we use a novel decomposition to show that most of the cross-sectional variation in good-level real exchange rates reflects differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. In fact, international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1357&r=mon |
| By: | Federico GIRI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali) |
| Abstract: | The aim of this paper is to assess the impact of the interbank market on the business cycle fluctuations. We build a DSGE model with heterogeneous households and banks. Two kind of banks are in the model: Deficit banks which are net borrowers on the interbank market and they provide credit to the real economy. The surplus bank are net lender and they could choose to provide interbank lending or purchase government bonds.;The portfolio choice of the surplus bank is affected by an exogenous shock that modifies the riskiness of the interbank lending thus allowing us to capture the collapse of the interbank market and the fl y to quality mechanism underlying the 2007 financial crisis.;The main result is that an interbank riskiness shock seems to explain part of the 2007 downturn and the rise of the interest rate on the credit market just after the financial turmoil. |
| Keywords: | Bayesan estimation, DSGE model, financial frictions, interbank market |
| JEL: | E30 E44 E51 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wpaper:398&r=mon |
| By: | Eugenio Caverzasi |
| Abstract: | The aim of this paper is to develop a structural explanation of the subprime mortgage crisis, grounded on the combination of two apparently incompatible financial theories: the financial instability hypothesis by Hyman P. Minsky and the theory of capital market inflation by Jan Toporowski. Our thesis is that, once the evolution of the financial market is taken into account, the financial Keynesianism of Minsky is still a valid framework to understand the events leading to the crisis. |
| Keywords: | Hyman Minsky; Financial Instability Hypothesis; Jan Toporowski; Capital Market Inflation; Financialization; Financial Crisis; Subprime Mortgage Crisis |
| JEL: | B2 B5 E44 G01 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_796&r=mon |
| By: | Hans Dewachter (National Bank of Belgium, Research Department; Center for Economic Studies, University of Leuven; CESifo); Leonardo Iania (National Bank of Belgium, Research Department; Louvain School of Management (UCL)); Marco Lyrio (Insper Institute of Education and Research) |
| Abstract: | We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons. |
| Keywords: | Macro-finance model, Yield curve, Expectations hypothesis |
| JEL: | E43 E44 E47 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201403-254&r=mon |
| By: | Alp Simsek (Massachusetts Institute of Technology); Anton Korinek (Johns Hopkins University and IMF) |
| Abstract: | We investigate the role of debt market policies in mitigating liquidity traps driven by household leverage. When borrowers engage in deleveraging, the interest rate needs to fall to induce lenders 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, households' borrowing and saving decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante restrictions on leverage to mitigate prospective deleveraging. Ex-post policies to write down debt also generate positive demand externalities. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:1369&r=mon |