nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒06‒14
27 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Is India Ready for Flexible Inflation-Targeting? By Sen Gupta, Abhijit; Sengupta, Rajeswari
  2. Monetary rules: theory and practice By Plosser, Charles I.
  3. Monetary policy, long real yields and the financial crisis By Moretti, Laura
  4. Monetary/Fiscal Policy Mix and Agents' Beliefs By Francesco Bianchi; Cosmin Ilut
  5. An Equilibrium Foundation of the Soros Chart By Kano, Takashi; Morita, Hiroshi
  6. Monetary policy options for mitigating the impact of the global financial crisis on emerging market economies. By Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
  7. The changing dynamics of US inflation persistence: A quantile regression approach By Tillmann, Peter; Wolters, Maik H.
  8. Paths to a Reserve Currency : Internationalization of the Renminbi and Its Implications By Yiping Huang; Daili Wang; Gang Fan
  9. The Relationship between Inflation Targeting and Exchange Rate Pass-Through in Turkey with a Model Averaging Approach By Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
  10. A Time-Varying Approach of the US Welfare Cost of Inflation By Stephen M. Miller; Luis F. Martins; Rangan Gupta
  11. Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China By Naoyuki Yoshino; Sahoko Kaji; Tamon Asonuma
  12. Financial stability and monetary policy: happy marriage or untenable union? By Williams, John C.
  13. Monetary Policy Transmission during Financial Crises: An Empirical Analysis By Tatjana Dahlhaus
  14. Macroprudential Policy Implementation in a Heterogeneous Monetary Union By Margarita Rubio
  15. The Benefits and Costs of Renminbi Internationalization By Liqing Zhang; Kunyu Tao
  16. Monetary policy effects on bank risk taking By Abbate, Angela; Thaler, Dominik
  17. Monetary Regimes and EU Accession: Comparing Bulgaria and Romania By Nikolay Nenovsky; Kiril Tochkov; Camélia Turcu
  18. The Rise of the “Redback†and the People’s Republic of China’s Capital Account Liberalization : An Empirical Analysis of the Determinants of Invoicing Currencies By Hiro Ito; Menzie Chinn
  19. International Reserves: Facing Model Uncertainty By Sona Benecka; Lubos Komarek
  20. Optimum and Adequate Level of International Reserves By Gerencia Técnica
  21. Inflation Expectations and How it Explains the Inflationary Impact of Oil Price Shocks: Evidence from the Michigan Survey By Benjamin Wong
  22. The Financial and Macroeconomic Effects of OMT Announcements By Carlo Altavilla; Domenico Giannone; Michèle Lenza
  23. The zero lower bound and endogenous uncertainty By Plante, Michael D.; Richter, Alexander; Throckmorton, Nathaniel
  24. News, Housing Boom-Bust Cycles, and Monetary Policy By Birol Kanik; Wei Xiao
  25. Inflation Targeting and Banking System Soundness: A Comprehensive Analysis By Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
  26. Consideration on the single currency seen from a competitiveness perspective By Iordan-Constantinescu, Nicolae; Dusa, Silvia
  27. Carrying the (paper) burden: A portfolio view of systemic risk and optimal bank size By Bos J.W.B.; Lamers M.A.J.; Purice V.

  1. By: Sen Gupta, Abhijit; Sengupta, Rajeswari
    Abstract: In this paper we analyze whether the current macroeconomic environment in India is suitable for implementation of inflation targeting as a monetary policy strategy, in light of the recommendation of the Urjit Patel Committee Report. Our results indicate that historically the Reserve Bank of India has given more importance to inflation compared to output growth and exchange rate changes in its monetary policy conduct and that in recent times there has been an increased emphasis on monetary independence thereby comfortably placing the RBI on a path to move towards flexible inflation targeting. However we also find factors, which are traditionally outside the control of monetary policy do exert a strong impact on aggregate prices in India thereby making the choice of nominal anchor a tricky one. Furthermore, the success of monetary policy in containing inflation is found to be crucially contingent on an appropriate fiscal policy as well.
    Keywords: Reserve Bank of India, Monetary Policy, Taylor Rule, Financial trilemma, Inflation, Nominal anchor, Fiscal deficit
    JEL: E43 E52 E58
    Date: 2014–06–04
  2. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: Frameworks for Central Banking in the Next Century Policy Conference, Hoover Institution, Stanford, CA President Plosser discusses his views on the benefits of a systematic, rule-like approach to monetary policy. He gave related remarks on May 28, 2014, at the 2014 Bank of Japan–Institute for Monetary and Economic Studies Conference.
    Keywords: Monetary policy; Forecasts; John Taylor;
    Date: 2014–06–02
  3. By: Moretti, Laura
    Abstract: This paper investigates the role of monetary policy in the collapse in the long-term real interest rates in the decade before the onset of the financial crisis using a sample of five advanced economies (United States, United Kingdom, the euro area, Sweden and Canada). The results from an estimated panel VAR with monthly data show that, while monetary policy shocks had negligible effects on long-term real interest rates, shocks to the long-term real interest rates had a one-to-one effect on the short nominal rate. --
    Keywords: monetary policy,long-term real interest rates,panel VAR
    JEL: E43 E52 E58
    Date: 2014
  4. By: Francesco Bianchi; Cosmin Ilut
    Abstract: We reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the '60s and the '70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the '70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early '80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the '60s and the '70s and for the break in the persistence and volatility of inflation.
    JEL: C11 E31 E58
    Date: 2014–06
  5. By: Kano, Takashi; Morita, Hiroshi
    Abstract: The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is its near random-walk behavior sharing a common stochastic trend with the monetary base differential, which is augmented by the excess reserves, between Japan and the United States. In this paper, we develop a simple two-country incomplete-market model equipped with a specification of domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent I(1) component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate.
    Keywords: Japanese yen/U.S. dollar exchange rate, Soros chart, Random walk, Bayesian analysis
    JEL: E31 E37 F41
    Date: 2014–05–29
  6. By: Dąbrowski, Marek A.; Śmiech, Sławomir; Papież, Monika
    Abstract: Though the hypothesis that exchange rate regimes fully predetermine monetary policy in the face of external shocks hardly finds any advocates on theoretical ground it has crept in the most of empirical research. This study adopts a more discerning empirical approach that looks at monetary policy tools used in order to accommodate the recent financial crisis. We investigated the GDP growth in 45 emerging market economies in the most intense phase of the crisis and found out that there is no clear difference in the growth performance between countries at the opposite poles of the exchange rate regime spectrum. Depreciation cum international reserve depletion outperforms the other policy options, especially the rise in the interest rate spread. We discovered certain complementarities between the information on the policy option and on exchange rate regime. Taking into account non-Gaussian settings, we decided to use quantile regression, which provide in addition, more complete picture of relationship between the covariates and the distribution of the GDP growth.
    Keywords: Global financial crisis, Emerging market economies, Monetary policy, Exchange rate regime, Quantile regressions
    JEL: C21 E52 F31 F41
    Date: 2013–02–24
  7. By: Tillmann, Peter; Wolters, Maik H.
    Abstract: We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution. --
    Keywords: inflation persistence,quantile regressions,structural breaks,unit root test,monetary policy,Federal Reserve
    JEL: E31 E37 E58 C22
    Date: 2014
  8. By: Yiping Huang (Asian Development Bank Institute (ADBI)); Daili Wang; Gang Fan
    Abstract: In this paper we try to address the question of what could help make the renminbi a reserve currency. In recent years, the authorities in the People’s Republic of China (PRC) have made efforts to internationalize its currency through a two-track strategy : promotion of the use of the renminbi in the settlement of cross-border trade and investment, and liberalization of the capital account. We find that if we use only the quantitative measures of the economy, the predicted share of the renminbi in global reserves could reach 12%. However, if institutional and market variables are included, the predicted share comes down to around 2%, which is a more realistic prediction. By reviewing experiences of other reserve currencies, we propose a three-factor approach for the PRC authorities to promote the international role of the renminbi : (i) increasing the opportunities of using renminbi in the international community, which requires relatively rapid growth of the PRC economy and continuous liberalization of trade and investment; (ii) improving the ease of using renminbi, which requires depth, sophistication, and liquidity of financial markets; and (iii) strengthening confidence of using renminbi, which requires more transparent monetary policy making, a more independent legal system, and some political reforms. In general, we believe that the renminbi’s international role should increase in the coming years, but it will take a relatively long period before it plays the role of a global reserve currency.
    Keywords: liberalization of the capital account, renminbi internationalization, global reserve currency, three-factor approach, transparent monetary policy
    JEL: F30 F33 F36 F42
    Date: 2014–05
  9. By: Ferhat Arslaner; Dogan Karaman; Nuran Arslaner; Suleyman Hilmi Kal
    Abstract: Turkey, as an emerging economy, has a unique experience regarding to the relationship between the rate of inflation and the exchange rate. As opposed to developed countries, the effects of exchange rate fluctuations are felt significantly on inflation dynamics and these fluctuations also influence many other macroeconomic variables via different channels with different magnitudes in developing countries. Therefore, the main concern of the paper, which is to evaluate the exchange rate pass-through (ERPT), has an important role in the success of inflation targeting regime. Using correlation coefficients between exchange rates and inflation differentials, single equation regressions, vector auto-regressions (VAR) and Markov switching regression methods; the determinants of ERPT to producer and consumer prices are quantitatively analyzed between January 1986 and August 2013. Error correction models are used to estimate the exchange rate pass-through. According to the estimation results, it is found that, similar to other developing countries, there is a substantial degree of ERPT for Turkey the greater part of which is realized almost instantaneously. Comparing to the studies on industrial countries, it is found that ERPT is higher but there are additional transmission channels just like the other emerging economies. The higher degree of ERPT in Turkey is found in those studies conducted for industrialized countries implies that there are additional transmission channels for Turkey. ERPT for producer price-index-based inflation is found to be higher than for consumer-price-index-based inflation. We also found that the degree of ERPT increases as the data frequency falls. We also determined an asymmetry in pricing behavior : while exchange rates increase, this increase is passed on to prices, yet decreases in exchange rates. Estimation results also indicate that the main factors contributing to high pass-through are past currency crises and the high degree of openness of the economy. These factors are the basis for the indexation behavior of agents. Although, the aforementioned factors are the main determinants of the degree of exchange rate pass-through, the persistency and the volatility of exchange rates can significantly affect the short run dynamics of the pass-through. The results also imply that, even if the pass-through slows down due to changing pattern of exchange rates, in order to achieve a low and stable inflation in the long run, fundamental factors that exacerbate the link between exchange rates and prices should change. Another crucial point is that according to Markov switching regression results of ERPT coefficients of domestic prices, the exchange rate pass-through coefficients vary significantly between different states.
    Keywords: Monetary Policy, Inflation Targeting, Exchange Rate Pass-Through, Vector Autogression, Markov Switching Regression
    JEL: C22 C87 E30 E31 E59
    Date: 2014
  10. By: Stephen M. Miller (University of Nevada, Las Vegas and University of Connecticut); Luis F. Martins (ISCTE-IUL); Rangan Gupta (University of Pretoria)
    Abstract: Money demand specifications exhibits instability, especially for long spans of data. This paper reconsiders the welfare cost of inflation for the US economy using a flexible time-varying cointegration methodology to estimate the money demand function. We find evidence that the time-varying cointegration estimation provides a better fit of the actual data than a time-invariant estimation and that the throughout unitary income elasticity only exists for the log-log form over the entire sample period. Our estimate of the welfare cost of inflation for a 10-percent inflation rate lies in the range of 0.025 to 0.75 percent of GDP and averages 0.27 percent. When we plug in the actual inflation rate series over the sample period, we find that the welfare cost of inflation lies in the range of 0.009 to 0.33 percent of GDP. In sum, our findings fall well within the ranges of existing studies of the welfare cost of inflation. Finally, the interest elasticity of money demand shows substantial variability over our sample period.
    Keywords: Money Demand Function, Welfare cost of inflation, Time-varying cointegration
    JEL: C32 E52 G10
    Date: 2014–05
  11. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Sahoko Kaji; Tamon Asonuma
    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, PRC, China, dollar-peg regime, basket-peg regime, floating regime, general equilibrium model
    JEL: E42 F33 F41 F42
    Date: 2014–04
  12. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the Deutsche Bundesbank Conference, Eltville am Rhein, Germany, June 5, 2014
    Date: 2014–06–05
  13. By: Tatjana Dahlhaus
    Abstract: This paper studies the effects of a monetary policy expansion in the United States during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (“normal” and high financial stress) depends on a financial conditions index. Employing a quarterly data set over the period 1970Q1 to 2009Q2 containing 108 U.S. macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption, and investment than it has during “normal” times. Differences in effects among the regimes seem to originate from non-linearities in the credit channel.
    Keywords: Econometric and statistical methods, Financial markets, Transmission of monetary policy
    JEL: C11 C32 E32 E44 G01
    Date: 2014
  14. By: Margarita Rubio
    Abstract: I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore how macroprudential policies should be conducted in a heterogeneous monetary union. I consider four types of cross-country heterogeneity: asymmetric shocks, di¤erent loan-to-value ratios (LTV), different proportion of borrowers, and mortgage contract heterogeneity (…xed and variable rates). As a macroprudential tool, I propose a Taylor-type rule for the LTV which responds to deviations in output and house prices. This policy can be applied at a national or union level. Results show that asymmetries matter for the implementation of macroprudential policies, especially when the heterogeneity delivers di¤erences in economic and …nancial volatilities. A centralized macroprudential policy is preferred if there is an asymmetric shock, to balance out the cross-country di¤erent …nancial volatilities. For the mortgage contract heterogeneity, the economy is better o¤ with a decentralized policy that compensates the lack of effectiveness of monetary policy in the …xed-rate country. For the LTV asymmetry and the di¤erent proportion of borrowers, conducting the macroprudential policy at a national or union level produces similar welfare gains.
    Keywords: Macroprudential, Housing market, LTV, monetary union, Â…nancial stability
    Date: 2014
  15. By: Liqing Zhang; Kunyu Tao
    Abstract: Despite the increasing recognition that the renminbi (RMB) may eventually become a key global currency, several important questions remain to be answered. This paper analyzes the benefits and costs of the RMB becoming an international currency. The benefits include reduced exchange risk, promotion of the development of the financial market, and expansion of firms in the People’s Republic of China. The costs include general costs, which complicate monetary policy and exchange rate policy, and several transitional risks. We argue that the benefits of RMB internationalization should surpass its costs, particularly in the long run, and provide comprehensive policy choices for a sustainable process of RMB internationalization
    Keywords: RMB, renminbi internationalization, International currency, financial market, PRC, transitional risks
    JEL: F42 F31 F36
    Date: 2014–05
  16. By: Abbate, Angela; Thaler, Dominik
    Abstract: The contribution of this paper is twofold. First, we provide empirical evidence on the existence of a risk-taking channel in the US economy. By identifying a Bayesian VAR through sign restrictions, we find that an expansionary monetary policy shock causes a persistent increase in proxies for bank risk-taking behaviour. We then develop a New Keynesian model with a risk-taking channel, where low levels of the risk free rates induce banks to extend credit to riskier borrowers. Conditional on calibration values, the simulated responses of key banking sector variables is compatible with the transmission mechanism observed in the data.
    Keywords: Bank Risk; Monetary policy; DSGE Models; Bayesian Analysis
    JEL: E12 E44 E58 C11
    Date: 2014
  17. By: Nikolay Nenovsky (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique; LE STUDIUM LE STUDIUM - 3D avenue de la Recherche scientifique 45071 Orléans Cedex 2 FR, Centre National de la Recherche Scientifique); Kiril Tochkov (TCU Texas Christian University - Department of Economics Texas Christian University TCU Box 298510 Fort Worth, TX 76129, USA FR, University of Texas Christian); Camélia Turcu (LEO Laboratoire d'économie d'Orleans - bat. A Rue de Blois - BP 6739 45067 ORLEANS CEDEX 2 FR, Centre National de la Recherche Scientifique)
    Abstract: This paper traces the origins of the different monetary regimes adopted in Bulgaria and Romania in 1996-97 and examines their performance during the EU accession. The findings indicate that the constraints of the currency board in Bulgaria shifted economic activity towards the private sector, while the discretionary policies in Romania turned public finances into both a contributor and a response mechanism to economic imbalances. While the prospects of EU accession initially enhanced the performance of the monetary anchors, the implicit insurance of EU membership increased moral hazard and led to a rapid rise in private and public debt. The paper also explores the historical parallels between the monetary regimes of Bulgaria and Romania in 1996-97 and 1925-1940.
    Keywords: Post-communist transition, Monetary regimes, EU accession, Moral hazard, Interwar monetary history
    Date: 2013
  18. By: Hiro Ito (Asian Development Bank Institute (ADBI)); Menzie Chinn
    Abstract: We investigate the determinants of currency choice for trade invoicing in a cross-country context while focusing on the link between capital account liberalization and its impact on the use of the renminbi (RMB). We find that while countries with more developed financial markets tend to invoice less in the US dollar, countries with more open capital accounts tend to invoice in either the euro or their home currency. These results indicate that financial development and financial openness are among the keys to challenging the US dollar dominance in general, and to internationalizing the RMB for the People’s Republic of China (PRC). Our model also suggests that the share of the RMB in export invoicing should have been higher than the actually observed share of less than 10%. The underperformance of RMB export invoicing can be attributed to the inertia in the choice of currency for trade invoicing; once a currency is used for trade invoicing or settlements, it becomes difficult for traders to switch from one currency to another. This same phenomenon was also observed in the cases of the Japanese yen and the euro at their inceptions as international currencies. Our model predicts that the share of RMB invoicing for the PRC’s exports will rise to above 25% in 2015 and above 30% in 2018, whether or not the PRC implements drastic financial liberalization. As the near future path of RMB use is also expected to be inertial, these forecasts are probably at the upper end of the actual path of RMB export invoicing.
    Keywords: Capital account liberalization, renminbi (RMB), PRC, export invoicing currency
    JEL: F32 F41
    Date: 2014–04
  19. By: Sona Benecka; Lubos Komarek
    Abstract: The abundant literature on the competing motives for holding international reserves stresses different factors, giving rise to a problem called model uncertainty. In this paper we search for the most important determinants of reserve holdings using data for 104 countries in 1999–2010 and evaluate their importance using Bayesian model averaging (BMA). We enrich the ongoing empirical discussion by examining the role of financial globalization and monetary policy and by introducing new variables and searching for alternatives to the traditional ones. The results confirm that trade openness and the broad-money-to-GDP ratio are the key determinants with a positive link to the level of reserves. On the other hand, financial development seems to lower the need for reserves.
    Keywords: Bayesian model averaging, determinants, international reserves
    JEL: C23 E58 F41
    Date: 2014–03
  20. By: Gerencia Técnica
    Abstract: When managing international reserves, central banks generally face the problem of determining what their optimum or adequate level is. A critical review of some methodologies for calculating the optimum amount of reserves is presented in this document. Also, a combination of international liquidity indicators is shown to shed light on the proper level of international reserves, based on a method recently proposed by the International Monetary Fund (IMF). Different exercises are used to illustrate the high sensitivity of the optimum level or reserves when feasible variations in the models’ parameters are considered. In addition, these models rely on the questionable assumption that the country has a level of short term external liabilities that is independent of the level of reserves. These factors significantly limit the practical usefulness of these models in assessing the adequate level of international reserves
    Keywords: International reserves, optimum level.
    JEL: E58 F32
    Date: 2014–05–13
  21. By: Benjamin Wong
    Abstract: Analysis of the Michigan Survey data confirms U.S. inflation expectations are not perfectly anchored in the event of an oil price shock. Two key results emerge through counterfactual analysis. First, better anchoring of inflation expectations can ameliorate the mild inflation impact which occurs 10 to 12 months after an oil price shock. Second, an initial large burst of inflation from an oil price shock always occurs regardless whether inflation expectations are anchored or not. Therefore, while better anchoring of inflation expectations can lead to better inflation outcomes, these gains can be limited.
    Keywords: Oil price shocks, Michigan Survey, Inflation expectations
    JEL: C32 D84 E31
    Date: 2014–06
  22. By: Carlo Altavilla; Domenico Giannone; Michèle Lenza
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT)announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMTannouncements decreased the Italian and Spanish 2-year government bond yields by about 2percentage points, while leaving unchanged the bond yields of the same maturity in Germany andFrance. These results are used to calibrate a scenario in a multi-country model describing the macrofinanciallinkages in France, Germany, Italy, and Spain. The scenario analysis suggests that thereduction in bond yields due to OMT announcements is associated with a significant increase in realactivity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany.
    Keywords: outright monetary transactions; event study; news; multi-country vector autoregressive model
    JEL: E47 E58
    Date: 2014–06
  23. By: Plante, Michael D. (Federal Reserve Bank of Dallas); Richter, Alexander (Auburn University); Throckmorton, Nathaniel (Indiana University)
    Abstract: This paper documents a strong negative correlation between macroeconomic uncertainty and real GDP growth since the Great Recession. Prior to that event the correlation was weak, even when conditioning on recessions. At the same time, many central banks reduced their policy rate to its zero lower bound (ZLB), which we contend contributed to the strong correlation between macroeconomic uncertainty and real GDP growth. To test that theory, we use a model where the ZLB occasionally binds. The model roughly matches the correlation in the data—away from the ZLB the correlation is weak but strongly negative when the ZLB binds.
    Keywords: monetary policy; uncertainty; economic activity; zero lower bound
    JEL: E32 E47 E58
    Date: 2014–05–21
  24. By: Birol Kanik; Wei Xiao
    Abstract: We explore the possibility that a housing market boom-bust cycle may arise when public beliefs are driven by news shocks. News, imperfect and noisy by nature, may generate expectations that are overly optimistic or pessimistic. Over-optimism easily leads to excessive accumulation of housing assets, and creates a housing boom that is not based on fundamentals. When the news is found false or inaccurate, investors revert their actions, and a downturn in the housing market follows. By altering agents’ net worth conditions, a housing cycle can have significant repercussions in the aggregate economy. In this paper, we construct a dynamic general equilibrium model that can give rise to a news-driven housing boom-bust cycle, and we consider how monetary policies should respond to it.
    Keywords: Business cycle; News; Monetary policy.
    JEL: E3 E4 E5
    Date: 2014
  25. By: Dimas M. Fazio; Benjamin M. Tabak; Daniel O. Cajueiro
    Abstract: Several specialists and authorities blame inflation targeting (IT) regime for not responding to the increasing systemic risk and the development of asset bubbles. Nevertheless, we employ a database with commercial banks from 71 countries between 1998 and 2012, and we present evidence that: banks from IT countries: (i) are, on average, more stable; (ii) have sounder systemically important banks; and (iii) are less affected in times of global liquidity shortage. These results are in line with the existence of a price stability channel towards financial stability. Our conclusions are robust to whether we compare banks from countries that have the same legal origins, whether we control for the responsibility of bank supervision being delegated to other bodies rather than the Central Bank
    Date: 2014–02
  26. By: Iordan-Constantinescu, Nicolae; Dusa, Silvia
    Abstract: Competitiveness is a concept referred to as a sine qua non condition of growth, at both micro and macroeconomic level. But there are few approaches looking at the single currency as an instrument of competitiveness measuring and promotion. The single currency represents a right step in the development of the integration process, contributing decisively to the accomplishment of the single market by enabling fluid and efficient financial relations among states, institutions and persons, but also by promoting and asserting the EU objectives of competitiveness and so acting as a binder for a sustainable and healthy development. The adoption of the single currency represents a step towards getting an increased level of competitiveness in national and international relations, as the conditions for joining the single currency imposed both to the member and candidate states to implement programs synergic with those included in their own strategies of competitiveness and subsequently they were presumed to accomplish objectives provided for by such strategies. Even if in the present and immediate periods euro and the euro zone will be subject to strong domestic and international pressure, we are convinced that the single currency will survive such trials and the necessary lessons will be learned, first of all by a more attentive consideration of competitiveness as the proper foundation for the existence and functioning of a healthy and strong single currency!
    Keywords: competitiveness, economic growth, euro, convergence , monetary policy, sustainability
    JEL: E52 F36 O52 P16
    Date: 2014–04
  27. By: Bos J.W.B.; Lamers M.A.J.; Purice V. (GSBE)
    Abstract: We examine the relationship between bank size and financial stability by viewing the supervisor of a banking system as an investor holding a portfolio of banks. Based on this view, we investigate the role of large banks in determining the systemic risk in this portfolio. Our results, based on book data of U.S. banks and Bank Holding Companies, indicate that the largest banks are consistently overrepresented in the current portfolio compared with the minimum variance portfolio. Moreover, the risk level of the portfolio can be reduced by limiting concentration without sacrificing returns.
    Keywords: Optimization Techniques; Programming Models; Dynamic Analysis; Financial Markets and the Macroeconomy; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;
    JEL: C61 E44 E63 G21
    Date: 2014

This nep-mon issue is ©2014 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.