nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒05‒09
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Inflation Targeting in Colombia, 2002-2012 By Franz Hamann; Marc Hofstetter; Miguel Urrutia
  2. Estimating a Small Open Economy DSGE Model with Indeterminacy: Evidence By Tingguo Zheng; Huiming Guo
  3. Working Paper 202 - Segmentation and efficiency of the interbank market and their implication for the conduct of monetary policy By Jacob Oduor; Moses Muse Sichei; Samuel Kiplangat Tiriongo; Chris Shimba
  4. Capital account liberalization and exchange rate flexibility: Scenarios for the Moroccan case By Ezzahid, Elhadj; Maouhoub, Brahim
  5. The Zero Lower Bound: Frequency, Duration, and Numerical Convergence By Alexander W. Richter; Nathaniel A. Throckmorton
  6. Dealing with the ECB's triple mandate ? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  7. Fiscal and Monetary Policies in Complex Evolving Economies By Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
  8. Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China By Yoshino, Naoyuki; Kaji, Sahoko; Tamon, Asonuma
  9. The Efficiency of Private E-Money-Like Systems: The U.S. Experience with State Bank Notes By Warren E. Weber
  10. Search-for-Yield in Canadian Fixed-Income Mutual Funds and Monetary Policy By Sermin Gungor; Jesus Sierra
  11. E-Money: Efficiency, Stability and Optimal Policy By Jonathan Chiu; Tsz-Nga Wong
  12. Globalization and Monetary Policy Comovement: Evidence from G-7 Countries By Arpita Chatterjee
  13. Banking Union : a solution to the euro zone crisis By Maylis Avaro; Henri Sterdyniak
  14. The Price of Euro: Evidence from Sovereign Debt Markets By Erik Makela
  15. De Facto Currency Baskets of China and East Asian Economies: The Rising Weights By Ying Fang; Shicheng Huang; Linlin Niu
  16. How to measure the unsecured money market? The Eurosystem’s implementation and validation using TARGET2 data By Luca Arciero; Ronald Heijmans; Richard Heuver; Marco Massarenti; Cristina Picillo; Francesco Vacirca
  17. Money Demand in China and Time-varying Cointegration By Haomiao Zuo; Sung Y. Park
  18. What does the Yield Curve imply about Investor Expectations? By Eric Gaus; Arunima Sinha
  19. Model-Free Evaluation of Directional Predictability in Foreign Exchange Markets By Jaehun Chung; Yongmiao Hong
  20. A Policy Model to Analyze Macroprudential Regulations and Monetary Policy By Sami Alpanda; Gino Cateau; Césaire Meh
  21. Labor Market Participation, Unemployment and Monetary Policy By Alessia Campolmi; Stefano Gnocchi
  22. Dealing with Financial Crises: How Much Help from Research? By Marco Pagano
  23. Aggregate and Household Demand for Money: Evidence from Public Opinion Survey on Household Financial Assets and Liabilities By Hiroshi Fujiki; Cheng Hsiao
  24. A New Forecasting Model for USD/CNY Exchange Rate By Zongwu Cai; Linna Chen; and Ying Fang

  1. By: Franz Hamann; Marc Hofstetter; Miguel Urrutia
    Abstract: After decades using monetary aggregates as the main instrument of monetary policy and having different varieties of crawling peg exchange rate regimes, Colombia adopted a full-fledged inflation-targeting (IT) regime in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. We examine the experience of the Colombian Central Bank over the last decade, a period of consolidation and innovation of its IT strategy. We study the increasing number of instruments used by the CB, including systematic foreign exchange interventions, announcements, and, sporadically, macro-prudential policies, capital controls, and changes in reserve requirements, among others. The study also examines some political economy dimensions that help explain the behavior of the CB during this period. To guide the discussion, we estimate a small-scale open-economy-policy-model. Classification JEL: E02, E32, E42, E43, E52, E58, E61, F31, F33, F42.
    Date: 2014–05
  2. By: Tingguo Zheng; Huiming Guo
    Abstract: Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output.
    Keywords: Small open economy, DSGE model, Indeterminacy, Monetary policy
    JEL: C5 E4 E5 F4
    Date: 2013–10–14
  3. By: Jacob Oduor; Moses Muse Sichei; Samuel Kiplangat Tiriongo; Chris Shimba
    Abstract: This paper assesses the role that bank segmentation plays in the efficiency of the interbank market and the extent to which segmentation and inefficiency of the interbank market impedes the effectiveness of monetary policy. Using a unique (not public) Kenyan daily dataset for the period June 2003 to September 5 2012 obtained from the Central Bank of Kenya (CBK), and utilizing network framework and event studies, the findings show that the Kenyan interbank market is incomplete, segmented and inefficient and this impedes monetary policy effectiveness in the short run particularly during periods of liquidity volatility. Evidence however shows that monetary policy is still effective in the long run, notwithstanding inefficiencies at the interbank market. However, this should not be any consolation for monetary policy makers since monetary policy is intended to work in the short to medium term. To improve the efficiency of the interbank and its role as a channel of transmitting monetary policy in such underdeveloped interbank markets like Kenya, monetary authorities must broaden the product tenors, increase the number of currencies traded, link the interbank with other money market segments and address counterparty risks.
    Date: 2014–04–29
  4. By: Ezzahid, Elhadj; Maouhoub, Brahim
    Abstract: This paper explores the links between gradual capital account liberalization and the exchange rate regime in Morocco where the process of economic and financial openness is relatively advanced. Using a game theory model with two economic agents, that are monetary authorities and domestic firms, we explore the best choice concerning the exchange rate regime for Morocco in a context characterised by increasing openness especially of capital account. The results show that welfare under a flexible exchange rate regime is higher compared to welfare under a fixed exchange rate regime. The analysis also shows that the flexible exchange rate will improve competitiveness. However, flexibility will undermine price stability. --
    Keywords: capital account liberalization,exchange rate regime,competitiveness,inflation,Morocco
    JEL: F31 F32
    Date: 2014
  5. By: Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: When monetary policy faces a zero lower bound (ZLB) constraint on the nominal interest rate, a minimum state variable (MSV) solution may not exist even if the Taylor principle holds when the ZLB does not bind. This paper shows there is a clear tradeoff between the expected frequency and average duration of ZLB events along the boundary of the convergence region---the region of the parameter space where our policy function iteration algorithm converges to an MSV solution. We show this tradeoff with two alternative stochastic processes: one where monetary policy follows a 2-state Markov chain, which exogenously governs whether the ZLB binds, and the other where ZLB events are endogenous due to discount factor or technology shocks. We also show that small changes in the parameters of the stochastic processes cause meaningful differences in the decision rules and where the ZLB binds in the state space.
    Keywords: Monetary policy; zero lower bound; convergence; minimum state variable solution; policy function iteration
    JEL: E31 E42 E58
    Date: 2014–05
  6. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert; Fabien Labondance (Atelier de recherche sur la politique économique et la gestion des entreprises (ARPEGE))
    Abstract: The prevailing consensus on the role of central banks has eroded. The pursuit of the goal of price stability only is now insufficient to ensure macroeconomic and financial stability. A new paradigm emerges in which central banks should ensure price stability, growth and financial stability. Recent institutional developments of the ECB go in this direction since it will be in charge of the micro-prudential supervision. In addition, the conduct of monetary policy in the euro area shows that the ECB also remained attentive to the evolution of economic growth. But if the ECB implements its triple mandate, the question of the proper relationship between these missions still arises. Coordination between the different actors in charge of monetary policy, financial regulation and fiscal policy is paramount and is lacking in the current architecture. Besides, certain practices should be clarified. The ECB has played a role as lender of last resort (towards banks and, to a lesser extent, towards governements) although this mission was not allocated to the ECB. Finally, in this new framework, the ECB suffers from a democratic illegitimacy, reinforced by the increasing role it plays in determining the macroeconomic and financial balance of the euro area. It seems important that the ECB is more explicit with regard to its different objectives and that it fulfils the conditions for close cooperation with the budgetary authorities and financial regulators. Finally, we call for the ex nihilo creation of a supervisory body of the ECB, which responsibility would be to discuss and analyze the relevance of the ECB monetary policy.
    Date: 2014–05
  7. By: Giovanni Dosi; Giorgio Fagiolo; Mauro Napoletano; Andrea Roventini
    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 stylised facts concerning nancial 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 magnied by conservative monetary policies focused on inflation stabilisation only. Finally, the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
    Date: 2014–02–14
  8. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Tamon, Asonuma (Asian Development Bank Institute)
    Abstract: This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime—whether a basket peg or floating regime—from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.
    Keywords: exchange rate regime; exchange rate adjustment; Chinese exchange rate regime; dynamic adjustment; transition path
    JEL: E42 F33 F41 F42
    Date: 2014–04–29
  9. By: Warren E. Weber
    Abstract: In the United States prior to 1863 each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange. It finds that bank notes made transacting easier and were not subject to overissuance. However, counterfeiting of bank notes was widespread, bank notes were not perfectly safe, and notes of different banks did not exchange at par and rates of exchange were volatile. The paper also examines how bank notes were regulated and supervised and how that regulation and supervision affected the functioning of the system. The U.S. experience with state bank notes suggests that a privately-issued e-money system can operate efficiently but only with appropriate government intervention, regulation, and supervision to minimize counterfeiting and to promote safety and par exchange.
    Keywords: Bank notes, E-money, Financial services
    JEL: E E4 E41 E42 E5 E58
    Date: 2014
  10. By: Sermin Gungor; Jesus Sierra
    Abstract: This paper investigates the effects of monetary policy on the risk-taking behavior of fixed-income mutual funds in Canada. We consider different measures of the stance of monetary policy and investigate active variation in mutual funds’ risk exposure in response to monetary policy. We find evidence in support of a systematic link between monetary conditions and intertemporal variation in the risk-taking behavior of mutual funds. Specifically, following an expansionary monetary shift, funds actively increase default-risk exposure (i.e., search-for-yield). This is particularly evident in the post-crisis period where interest rates were kept low for a prolonged period of time.
    Keywords: Financial Institutions; Transmission of monetary policy
    JEL: G23 E52
    Date: 2014
  11. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: What makes e-money more special than cash? Is the introduction of e-money necessarily welfare enhancing? Is an e-money system necessarily stable? What is the optimal way to design an efficient and stable e-money scheme? This paper provides a first attempt to develop a micro-founded, dynamic, general-equilibrium model of e-money for investigating these policy issues. We first identify some superior features of e-money which help mitigate informational frictions and enhance social welfare in a cash economy. A model that features both trading frictions and two-sided platforms is then built and used to compare two potential e-money schemes: (i) public provision of e-money with decentralized adoption, and (ii) private monopolistic provision of e-money. We show that, in general, both public and private provision of e-money are inefficient, and we characterize the optimal incentive scheme by addressing four potential sources of inefficiency – market powers in goods trading, network externality, liquidity constraint and monopoly distortion in e-money issuance. We show that the welfare impact of e-money depends critically on whether cash is a viable alternative to e-money as a means of payment. When it is not (e.g., for online payments where usage of money is prohibitively costly), the adoption of e-money is always welfare enhancing, albeit not welfare maximizing. However, when cash is a viable alternative (e.g., in a coffee shop), introducing e-money can sometimes reduce social welfare. Moreover, a system with public provision and decentralized adoption is inherently unstable, while a planner or a private issuer can design a pricing scheme to restore stability. Lastly, we examine an alternative e-money scheme – a hypothetical set-up with public provision through a private platform. We also compare the impact of various provision schemes on central bank seigniorage income. While this scheme may or may not improve efficiency, it can always increase seigniorage income, even though there may exist better policy options such as imposing a cash reserve requirement or collecting a charter fee.
    Keywords: Bank notes, E-money, Payment clearing and settlement systems
    JEL: E E4 E42 E5 E58 L L5 L51
    Date: 2014
  12. By: Arpita Chatterjee (School of Economics, Australian School of Business, the University of New South Wales)
    Abstract: This paper empirically characterizes comovement in monetary policy of G-7 countries during 1980-2009. I estimate a Taylor rule for each country and use residual from the Taylor rules to estimate a dynamic latent factor model with common and Europe speci…c factors. I quantify importance of the G-7 factor in explaining comovement in residual variation of monetary policy and show that the G-7 factor is particularly important during a period of globalization (1988-2003). I estimate dynamics of importance of the G-7 factor using rolling sub-samples and show that trade-openness increases comovement in monetary policy in Europe.
    Keywords: Symmetry-breaking, Endogenous comparative advantage, Gains from trade, Education policy
    JEL: F11 E62
    Date: 2014–04
  13. By: Maylis Avaro (École normale supérieure de Cachan); Henri Sterdyniak (OFCE)
    Abstract: In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by 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 (EDGS). 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 issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues 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. Banks'solvency and ability to lend, would depend primarily 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 questionable. 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 from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB?
    Keywords: Banking union; European Construction
    Date: 2014–04
  14. By: Erik Makela (Department of Economics, University of Turku)
    Abstract: The objective of this paper is to figure out how the Economic and Monetary Union in Europe (EMU) has affected on its member’s sovereign risk-premiums and long-term government bond yields. In order to estimate the effect, this paper utilizes synthetic control method. Contrary to the popular belief, this paper finds that the majority of member countries did not receive economic gains from EMU in sovereign debt markets. Synthetic counterfactual analysis finds strong evidence that Austria, Belgium, France, Germany and Netherlands have paid positive and substantial euro-premium in their 10-year government bonds since the adoption of single currency. After the latest financial crisis, government bond yields have been higher in all member countries compared to the situation that would have been without monetary unification. This paper concludes that from the sovereign borrowing viewpoint, it would be beneficial for a country to maintain its own currency and monetary policy.
    Keywords: Synthetic Control Method, Monetary Union, Sovereign Risk, Government Bond Yield
    JEL: F34 E42 G15
    Date: 2014–04
  15. By: Ying Fang; Shicheng Huang; Linlin Niu
    Abstract: We employ a Bayesian method to estimate a�time-varying coefficient version of the de facto currency basket model of�Frankel and Wei (2007) for the RMB of China, using daily data from February�2005 to July 2011. We estimate jointly the implicit time-varying weights of�all 11 currencies in the reference basket announced by the Chinese�government. We find the dollar weight has been reduced and is sometimes�significantly smaller than one, but there is no evidence of systematic�operation of a currency basket with a�discernible�pattern of significant�weights on other currencies. During specific periods, the reduced dollar weight has not been switched to other major international currencies, but�instead to some East Asian currencies, which is hard to explain by trade�importance to or trade competition with China. We examine currency baskets�of these East Asian Economies, which include major international currencies�and the RMB in their baskets. We find an evident tendency of Malaysia and�Singapore to increase the weights of RMB in their own currency baskets, and�a continuously significant positive weight of RMB in the basket of Thailand.�These findings suggest that the occasionally positive weights of some East�Asian currencies in RMB currency basket reflects the positive RMB weights in�these East Asian currency baskets, as these East Asian economies have been�systematically placing greater weights on RMB under the new regime of RMB�exchange rate.
    Keywords: RMB currency basket, time-varying regressions, East Asia,�China, US
    JEL: F31 F41 C11
    Date: 2013–10–14
  16. By: Luca Arciero (Bank of Italy); Ronald Heijmans (De Nederlandsche Bank); Richard Heuver (De Nederlandsche Bank); Marco Massarenti (European Central Bank); Cristina Picillo (Bank of Italy); Francesco Vacirca (Bank of Italy)
    Abstract: This paper develops a methodology, based on Furfine (1999), for identifying unsecured interbank money market loans from the transaction data of the most important euro payment processing system TARGET2, for maturities ranging from one day (overnight) up to three months. The implementation has been verified with (i) interbank money market transactions executed on the e-MID Italian electronic trading platform and (ii) aggregated reporting by the EONIA panel banks. The Type2 (false negative) error for the best performing algorithm setup is 0.92%. We find aggregated interest rates very close to the EONIA but observe a high degree of heterogeneity across countries and market participants. The different stages of the global financial crisis and of the sovereign debt crises are clearly revealed in the interbank money market by significant drops in turnover. The results focus on three levels: euro-area, country group and country (Italy and the Netherlands).
    Keywords: euro interbank money market, Furfine, TARGET2, financial stability, EONIA
    JEL: E42 E44 E58 G01
    Date: 2014–04
  17. By: Haomiao Zuo; Sung Y. Park
    Abstract: Many studies analyze the money demand using a (fixed coefficient) cointegrating regression model, which may not be appropriate to deal with the money demand of a transition economy like China. This paper investigates this issue using a time-varying cointegration approach based on the quarterly data from 1996 to 2009. We find some interesting results: (i) the estimates of the income elasticities are between 0.60 and 0.75, which are comparable with the previous studies; (ii) the estimated interest rate elasticity supports the argument that the overall effect of the interest rate on the money holding is weak although there are some mild evidences that it has been strengthened in recent years; (iii) the substitution effect of equity asset dominates the wealth effect, especially, during the bullish market period. Our result is robust to the alternative choices of the scale or opportunity cost variables and shows that omission of the stock prices in the money demand function would possibly yield a misspecification problem.
    Keywords: Money demand; Time-varying coefficient ; Cointegration; Canonical cointegration regression; Chinese economy
    JEL: E41 C51
    Date: 2013–10–14
  18. By: Eric Gaus (Ursinus College); Arunima Sinha (Santa Clara Univerisity)
    Abstract: We find that investors' expectations of U.S. nominal yields, at different maturities and forecast horizons, exhibit significant time-variation during the Great Moderation. Nominal zero-coupon bond yields for the U.S. are used to fit the yield curve using a latent factor model. In the benchmark model, the VAR process used to characterize the conditional forecasts of yields has constant coefficients. The alternative class of models assume that investors use adaptive learning, in the form of a constant gain algorithm and different endogenous gain algorithms, which we propose here. Our results indicate that incorporating time-varying coefficients in the conditional forecasts of yields lead to large improvements in forecasting performance, at different maturities and horizons. These improvements are even more substantial during the Great Recession. We conclude that our results provide strong empirical motivation to use the class of adaptive learning models considered here, for modeling potential investor expectation formation in periods of low and high volatility, and the endogenous learning model leads to significant improvements over the benchmark in periods of high volatility. A policy experiment, which simulates a surprise shock to the level of the yield curve, illustrates that the conditional forecasts of yields implied by the learning models do significantly better at capturing the response observed in the realized yield curve, relative to the constant-coefficients model. Furthermore, the endogenous learning algorithm does well at matching the time-series patterns observed in expected excess returns implied by the Survey of Professional Forecasters.
    Keywords: Adaptive learning, Investor beliefs, Monetary policy, Excess returns
    JEL: E52 D83
    Date: 2014–04–10
  19. By: Jaehun Chung; Yongmiao Hong
    Abstract: We examine directional predictability in foreign exchange markets using a model-free statistical evaluation procedure. Based on a sample of foreign exchange spot rates and futures prices in six major currencies, we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns, but also the past history of interest rate differentials, suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates. This evidence becomes stronger when the direction of larger changes is considered. We further document that despite the weak conditional mean dynamics of foreign exchange returns, directional predictability can be explained by strong dependence derived from higher-order conditional moments such as the volatility, skewness and kurtosis of past foreign exchange returns. Moreover, the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability. We also examine the co-movements between two foreign exchange rates, particularly the co-movements of joint large changes. There exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials. Furthermore, both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes. Several sources can explain this directional predictability of joint changes, including the level and volatility of underlying currency returns.
    Date: 2013–10–14
  20. By: Sami Alpanda; Gino Cateau; Césaire Meh
    Abstract: We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
    Keywords: Economic models; Financial system regulation and policies
    JEL: E44 E32 E17
    Date: 2014
  21. By: Alessia Campolmi; Stefano Gnocchi
    Abstract: We incorporate a participation decision in a standard New Keynesian model with matching frictions and show that treating the labor force as constant leads to incorrect evaluation of alternative policies. We also show that the presence of a participation margin mitigates the Shimer critique.
    Keywords: Business fluctuations and cycles, Labour markets, Transmission of monetary policy
    JEL: E24 E32 E52
    Date: 2014
  22. By: Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR.; Università di Napoli "Federico II" and CSEF)
    Abstract: Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.
    Keywords: financial crisis, risk taking, systemic risk, financial regulation, monetary policy, politics
    JEL: G01 G18 G21 G28 H81 O16
    Date: 2014–05–03
  23. By: Hiroshi Fujiki; Cheng Hsiao
    Abstract: We use data from Public Opinion Surveys on Household Financial Assets and Liabilities from 1991 to 2002 to investigate the issues of unobserved heterogeneity among cross-sectional units and stability of Japanese aggregate money demand function. Conditions that permit individual data and aggregate data to be modeled under one consistent format are given. Alternative definitions of money are explored through year-by-year cross-sectional estimates of Fujiki-Mulligan (1996) household money demand model. We find that using M3 appears to be broadly consistent with time series estimates using the aggregates constructed from the micro data. The results appear to support the existence of a stable money demand function for Japan. The estimated income elasticity for M3 is about 0.68 and five year bond interest rate elasticity is about -0.124.
    Keywords: Demand for Money; Aggregation; Heterogeneity
    JEL: E41 C43
    Date: 2013–10–14
  24. By: Zongwu Cai; Linna Chen; and Ying Fang
    Abstract: This paper models the return series of USD/CNY exchange rate by considering the conditional mean and conditional volatility simultaneously. An index type functional-coefficient model is adopted to model the conditional mean part and a GARCH type model with a policy dummy variable is applied to the conditional volatility model. We show that the government policy indeed has an impact on the exchange rate dynamic. To evaluate the out-of-sample forecasting ability, a prediction interval is computed by employing nonparametric conditional quantile regression. Our method outperforms other popular models in terms of various criteria.
    Keywords: Nonlinearity; Functional-coefficient regression model; GARCH model; Index model; Quantile regression.
    Date: 2013–10–14

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