nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒06‒07
twelve papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. A wedge in the dual mandate: monetary policy and long-term unemployment By Rudebusch, Glenn D.; Williams, John C.
  2. Quantitative Easing and the Loan to Collateral Value Ratio By Tatiana Damjanovic; Šar?nas Gird?nas
  3. The Renminbi and Exchange Rate Regimes in East Asia By Kawai, Masahiro; Pontines, Victor
  4. The Predictive Performance of Fundamental Inflation Concepts: An Application to the Euro Area and the United States By Stephen McKnight; Alexander Mihailov; Kerry Patterson; Fabio Rumler
  5. The Crisis of 1866 By Marc Flandreau; Stefano Ugolini
  6. "A Sustainable Monetary Framework for an Independent Scotland" By Philip Pilkington
  7. The economic recovery and monetary policy: the road back to ordinary By Williams, John C.
  8. The Transmission of Federal Reserve Tapering News to Emerging Financial Markets By Aizenman, Joshua; Binici, Mahir; Hutchison, Michael M
  9. The Macroeconomic Determinants of the US Term-Structure during the Great Moderation By Alessia Paccagnini
  10. What are the main drivers of the Bitcoin price? Evidence from wavelet coherence analysis By Ladislav Kristoufek
  11. Japanese SMEs and the Credit Guarantee System after the Global Financial Crisis By Nobuyoshi Yamori
  12. How does macroprudential regulation change bank credit supply? By Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis

  1. By: Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: In standard macroeconomic models, the two objectives in the Federal Reserve’s dual mandate—full employment and price stability—are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not affect price inflation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.
    Date: 2014–05
  2. By: Tatiana Damjanovic (Exeter); Šar?nas Gird?nas (Exeter)
    Abstract: We study monetary optimal policy in a New Keynesian model at the zero bound interest rate where households use cash alongside house equity borrowing to conduct transactions. The amount of borrowing is limited by a collateral constraint. When either the loan to value ratio declines or house prices fall, we observe a decrease in the money multiplier. We argue that the central bank should respond to the fall in the money multiplier and therefore to the reduction in house prices or the loan to collateral value ratio. We also find that optimal monetary policy generates a large and persistent fall in the money multiplier in response to the drop in the loan to collateral value ratio.
    Keywords: optimal monetary policy, zero lower bound, quantitative easing, money multiplier, loan to value ratio, collateral constraint, house prices
    JEL: E44 E51 E52 E58
    Date: 2014–05–17
  3. By: Kawai, Masahiro (Asian Development Bank Institute); Pontines, Victor (Asian Development Bank Institute)
    Abstract: With the rise of the People's Republic of China (PRC) as the world's largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB). Clearly the exchange rate policy of the PRC has significant implications for exchange rate regimes in emerging East Asia. This paper examines the behavior of the RMB exchange rate and the impact of RMB movements on those of other currencies in emerging East Asia during the period 2000–2014. We apply the Frankel–Wei regression model to identify changes in the RMB exchange rate regime over time and a modified version of the model, developed by the authors in their earlier paper, to estimate the RMB weight in an emerging East Asian economy's currency basket. We find that the US dollar continues to be the dominant anchor currency in the region, while the RMB has taken on increasing importance in the currency baskets of many East Asian economies in recent years. The paper also explores how monetary and currency cooperation—led by the PRC and Japan—can promote intra-East Asian exchange rate stability under the pressure of rising financial market openness in the PRC.
    Keywords: renminbi internationalization; prc; emerging economies; east asia; frankel-wei model
    JEL: F15 F31 F36 F41 O24
    Date: 2014–05–30
  4. By: Stephen McKnight (Centro de Estudios Económicos, El Colegio de México); Alexander Mihailov (Department of Economics, University of Reading); Kerry Patterson (Department of Economics, University of Reading); Fabio Rumler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: Does theory aid inflation forecasting? To date, the evidence suggests that there is no systematic advantage of theory-based models of inflation dynamics over their astructural counterparts. This study reconsiders the issue by developing a “semi-structural” forecasting procedure comprised of two key ingredients. First, a prediction for the cyclical component of inflation is obtained employing the concept of “fundamental inflation”. The latter is computed from a canonical two-country monetary model, either via estimation of the reduced-form parameters of the New Keynesian Phillips Curve by the generalized methods of moments, or via calibration of its structural parameters. The computation of fundamental inflation requires multistep forecasts for the model-implied cyclical inflation drivers, which we generate via respective auxiliary vector autoregressions. Second, a driftless random walk prediction is employed for the trend component of inflation, on which theory has little to say. Using quarterly data for both the United States and the Euro Area for the period 1970-2010, and rolling window re-estimation to accommodate gradual structural change, we find that such semi-structural inflation forecasts outperform conventional univariate forecasts at all examined horizons. Our results thus suggest that theory can indeed play an important role in forecasting inflation, when appropriately combined with relevant data-driven features.
    Keywords: fundamental inflation, New Keynesian Phillips Curve, inflation dynamics, predictive accuracy, money in the open economy, semi-structural forecasting
    JEL: C52 C53 E31 E37 F41 F47
    Date: 2014–05–29
  5. By: Marc Flandreau; Stefano Ugolini (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The collapse of Overend Gurney and the ensuing Crisis of 1866 was a turning point in British financial history. The achievement of relative stability was due to the Bank of England’s willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for maintaining the quality of bills in the market. We suggest that the Bank bolstered the resilience of the money market by monitoring leverage-building by money market participants and threatening exclusion from the discount window. When the Bank refused to bailout Overend Gurney in 1866 there was panic in the market. The Bank responded by lending freely and raising the Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency.
    Keywords: Bagehot, Bank of England, Lending of last resort, Supervision, Moral hazard, Discount, Overend Gurney Panic, Baring.
    JEL: E58 G01 N13
    Date: 2014–05–26
  6. By: Philip Pilkington
    Abstract: This September, voters in Scotland will decide whether to break away from the United Kingdom. If supporters of independence carry the day, pivotal choices that affect the scope of Scotland's economic sovereignty and its future relationship to the UK will need to be made, particularly with respect to the question of its currency. As the disaster in the eurozone makes clear, it is essential to get these arrangements right. In this policy brief, Philip Pilkington outlines a monetary framework designed to meet the macroeconomic challenges that would be faced by a newly separate Scotland. His conclusion: while it would be in Scotland's best interests to continue using the sterling in the short run, making the transition to issuing its own, freely floating currency would place the country on a more stable economic footing.
    Date: 2014–06
  7. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Association of Trade and Forfaiting in the Americas, San Francisco, May 22, 2014
    Keywords: Economic recovery;
    Date: 2014–05–22
  8. By: Aizenman, Joshua; Binici, Mahir; Hutchison, Michael M
    Keywords: Social and Behavioral Sciences
    Date: 2014–06–05
  9. By: Alessia Paccagnini
    Abstract: The aim of this paper is to study how the macroeconomic impulses can affect the term structure during the Great Moderation. As novelty in the research strategy, we create a term-structure using three latent factors of the yield curve. A Nelson-Siegel Model is implemented to estimate the latent factors which correspond to the level, the slope, and the curvature of the yield curve. As policy implication, the interpolated term structure suggests us how all the macro shocks impact on the overall yield curve, even if the impact has a different magnitude across maturities.
    Keywords: Term structure of interest rates, yield curve, VAR, Factor Model
    JEL: G12 E43 E44 E58
    Date: 2014–06
  10. By: Ladislav Kristoufek
    Abstract: Bitcoin has emerged as a fascinating phenomenon of the financial markets. Without any central authority issuing the currency, it has been associated with controversy ever since its popularity and public interest reached high levels. Here, we contribute to the discussion by examining potential drivers of Bitcoin prices ranging from fundamental to speculative and technical sources as well as a potential influence of the Chinese market. The evolution of the relationships is examined in both time and frequency domains utilizing the continuous wavelets framework so that we comment on development of the interconnections in time but we can also distinguish between short-term and long-term connections.
    Date: 2014–06
  11. By: Nobuyoshi Yamori (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: This paper provides a brief explanation of the Japanese public credit guarantee system and analyzes what role it played during the global financial crisis. The author conducted a questionnaire survey of small and medium-sized enterprises (SMEs) in Aichi Prefecture, the prefecture most seriously hit by the crisis, in collaboration with the Aichi-ken Credit Guarantee Corporation. Using the survey, which provides valuable information about the usage of the credit guarantee program, this paper finds that the credit guarantee system was effective in protecting the economy from collapsing. The system was so generous that now all SMEs want it to remain unchanged. However, as the generous system brings heavy financial burdens on the government and, more seriously, discourages firms and banks from improving their efficiencies, the author insists that reforms, such as limiting the target and the guarantee coverage, are inevitable.
    Keywords: Credit Guarantee System, Japan; Financial Crisis, Questionnaire, Small and Medium-sized Enterprises
    JEL: G01 G21 G28
    Date: 2014–05
  12. By: Anil K Kashyap; Dimitrios P. Tsomocos; Alexandros P. Vardoulakis
    Abstract: We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank’s leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.
    JEL: E44 G01 G21 G28
    Date: 2014–05

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