nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒06‒22
35 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Transparency and deliberation within the FOMC: A computational linguistics approach By Stephen Eliot Hansen; Michael McMahon; Andrea Prat
  2. Monetary Policy Surprises, Credit Costs and Economic Activity By Mark Gertler; Peter Karadi
  3. Can Monetary Policy Cause the Uncovered Interest Parity Puzzle? By Cheolbeom Park; Sookyung Park
  4. Evaluating Asset-Market Effects of Unconventional Monetary Policy: A Cross-Country Comparison By Rogers, John H.; Scotti, Chiara; Wright, Jonathan H.
  5. Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59 By Carlson, Mark A.; Wheelock, David C.
  6. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jerome Creel; Paul Hubert; Mathilde Viennot
  7. Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads By Hännikäinen, Jari
  8. The Transmission of Monetary Policy Operations through Redistributions and Durable Purchases By Vincent Sterk; Silvana Tenreyro
  9. Monetary Policy and Real Borrowing Costs at the Zero Lower Bound By Gilchrist, Simon; Lopez-Salido, J. David; Zakrajsek, Egon
  10. Scotland’s Currency Options By Angus Armstrong; Monique Ebell
  11. The Determinants of Inflation in Vietnam: VAR and SVAR Approaches By Tuan Anh Phan
  12. Mortgages and Monetary Policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  13. Assessing the Effects of the Zero-Interest-Rate Policy through the Lens of a Regime-Switching DSGE Model By Chen, Han
  14. Forecasting exchange rates better than the random walk thanks to machine learning techniques By Christophe Amat; Tomasz Michalski; Gilles Stoltz
  15. Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different? By Tuan Anh Phan
  16. Pushing on a string: US monetary policy is less powerful in recessions By Silvana Tenreyro; Gregory Thwaites
  17. The impact of foreign banks on monetary policy transmission during the global financial crisis of 2008-2009: Evidence from Korea By Jeon, Bang Nam; Lim, Hosung; Wu, Ji
  18. Debt Deflation Effects of Monetary Policy By Lin, Li; Tsomocos, Dimitrios P.; Vardoulakis, Alexandros
  19. Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico? By De Pooter, Michiel; Robitaille, Patrice; Walker, Ian; Zdinak, Michael
  20. Demand for M2 at the Zero Lower Bound: The Recent U.S. Experience By Judson, Ruth; Schlusche, Bernd; Wong, Vivian
  21. The Risk Channel of Monetary Policy By DeGroot, Oliver
  22. Interactions between CNY and CNH Money and Forward Exchange Markets By David Leung; John Fu
  23. Money and Foreign Trade in Ricardo (1809-1811) and in Ricardo (1817) By de Boyer des Roches, Jérôme
  24. Inflation Dynamics and Business Cycles By Suleyman Hilmi Kal; Nuran Arslaner; Ferhat Arslaner
  25. How the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates By Hancock, Diana; Passmore, Wayne
  26. Breaking the Kareken and Wallace Indeterminacy Result By Timothy Kam; Pere Gomis-Porqueras; Christopher J. Waller
  27. Networks in labor markets and welfare costs of inflation By Marcelo Arbex; Dennis O'Dea
  28. Nowcasting U.S. Headline and Core Inflation By Knotek, Edward S.; Zaman, Saeed
  29. Capital Controls and Recovery from the Financial Crisis of the 1930s By Kris James Mitchener; Kirsten Wandschneider
  30. Revisiting the Role of Inflation Environment in the Exchange Rate Pass-Through: A Panel Threshold Approach By Nidhaleddine Ben Cheikh; Waël Louhichi
  31. Money demand in Ireland, 1933-2012 By Gerlach, Stefan.; Stuart, Rebecca
  32. The Price Impact of Joining a Currency Union: Evidence from Latvia By Alberto Cavallo; Brent Neiman; Roberto Rigobon
  33. Structural Vector Autoregressions with Smooth Transition in Variances - The Interaction Between U.S. Monetary Policy and the Stock Market By Helmut Lütkepohl; Aleksei Netsunajev; ;
  34. Shock Transmission through International Banks – Evidence from France By Bussière, M.; Camara, B.; Castellani, F.-D.; Potier, V.; Schmidt, J.
  35. Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs By Li, Canlin; Wei, Min

  1. By: Stephen Eliot Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: Monetary policy, deliberation, FOMC, transparency, career concerns
    JEL: E52 E58 D78
    Date: 2014–05
  2. By: Mark Gertler; Peter Karadi
    Abstract: We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism.
    JEL: E3 E4 E5
    Date: 2014–06
  3. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Sookyung Park (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: Using a typical open macroeconomic model, we show that the UIP puzzle becomes more pronounced when the monetary policy rule is stricter against inflation. To determine the empirical validity of our model, we examine (the Taylor-rule-type) monetary policy rules and the slope coefficient in the regression of future exchange rate returns on interest rate differentials before and after the recent global financial crisis. We find that all economies that reduced the reaction of the policy interest rate to inflation in response to the crisis have positive slope coefficients in the UIP regressions after the crisis. Iceland has put greater weight on inflation in the policy rule after the crisis, and the UIP puzzle has become more severe there after the crisis, which is also consistent with our model. Moreover, economies for which we cannot find clear break evidence for the reaction to inflation in the monetary policy rule do not show a clear directional change in the slope coefficient of the UIP regression.
    Keywords: Interest rate, Exchange rate, Monetary policy rule, Uncovered interest
    JEL: F31 F41 F47
    Date: 2014
  4. By: Rogers, John H. (Board of Governors of the Federal Reserve System (U.S.)); Scotti, Chiara (Board of Governors of the Federal Reserve System (U.S.)); Wright, Jonathan H. (Johns Hopkins University)
    Abstract: This paper examines the effects of unconventional monetary policy by the Federal Reserve, Bank of England, European Central Bank and Bank of Japan on bond yields, stock prices and exchange rates. We use common methodologies for the four central banks, with daily and intradaily asset price data. We emphasize the use of intradaily data to identify the causal effect of monetary policy surprises. We find that these policies are effective in easing financial conditions when policy rates are stuck at the zero lower bound, apparently largely by reducing term premia.
    Keywords: Large scale asset purchases; quantitative easing; zero bound; term premium
    Date: 2014–03–07
  5. By: Carlson, Mark A. (Federal Reserve Bank of St. Louis); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: The 1950s are often pointed to as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed’s ability to conduct an independent monetary policy. The Fed was forced to cooperate with the Treasury in the 1930s, and fully ceded monetary policy to Treasury financing requirements during World War II. Nonetheless, the Fed retained a policy tool in the form of reserve requirements, and from the mid-1930s to 1951, changes in required reserve ratios were the primary means by which the Fed responded to expected inflation. The inability of the Fed to maintain a credible commitment to low interest rates in the face of increased government spending and rising inflation led to the Fed-Treasury Accord of March 1951. Following the Accord, the external pressures on the Fed diminished significantly, which enabled the Fed to focus primarily on macroeconomic objectives. We conclude that a successful outcome requires not only a good understanding of how to conduct policy, but also a conducive environment in which to operate.
    Keywords: Federal Reserve; monetary policy; reserve requirements; Fed-Treasury Accord; inflation
    JEL: E52 E58 N12
    Date: 2014–06–01
  6. By: Jerome Creel (OFCE - Sciences Po, and ESCP Europe); Paul Hubert (OFCE - Sciences Po); Mathilde Viennot (ENS Cachan)
    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: 2013–12–01
  7. By: Hännikäinen, Jari
    Abstract: This paper re-examines the out-of-sample predictive power of interest rate spreads when the short-term nominal rates have been stuck at the zero lower bound and the Fed has used unconventional monetary policy. Our results suggest that the predictive power of some interest rate spreads have changed since the beginning of this period. In particular, the term spread has been a useful leading indicator since December 2008, but not before that. Credit spreads generally perform poorly in the zero lower bound and unconventional monetary policy period. However, the mortgage spread has been a robust predictor of economic activity over the 2003–2014 period.
    Keywords: business fluctuations; forecasting; interest rate spreads; monetary policy; zero lower bound; real-time data
    JEL: C53 E32 E44 E52 E58
    Date: 2014–06–18
  8. By: Vincent Sterk (University College London (UCL), Department of Economics; Centre for Macroeconomics (CFM)); Silvana Tenreyro (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM))
    Abstract: A large literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    JEL: E1 E31 E32 E52 E58
    Date: 2013–12
  9. By: Gilchrist, Simon (Department of Economics, Boston University and NBER); Lopez-Salido, J. David (Board of Governors of the Federal Reserve System (U.S.)); Zakrajsek, Egon (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
    Keywords: Unconventional monetary policy; LSAPs; forward guidance; term premia; corporate bond yields; mortgage interest rates
    Date: 2013–12–19
  10. By: Angus Armstrong (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM)); Monique Ebell (National Institute of Economic and Social Research (NIESR); Centre for Macroeconomics (CFM))
    Abstract: The objective of this paper is to consider which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency union, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important.
    Keywords: monetary policy
    JEL: E52
    Date: 2013–10
  11. By: Tuan Anh Phan (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper employs Vector Autoregressive (VAR) and Structural VAR (SVAR) models to analyse VietnamÕs inflation determinants using quarterly data from 1996 to 2012. The results suggest that: (i) the inflation responses to monetary policy shocks are plausible and similar to standard monetary transmission in advanced economies; (ii) the policy interest rate plays an important role to inflation variation, which differs with what have been found in previous studies for Vietnam; and (iii) shocks to output and prices in trading partners have strong effects on inflation in Vietnam, while international oil and rice prices seem not to systematically affect VietnamÕs inflation. Moreover, the State Bank of Vietnam does use monetary policy tools to ease down the inflationary pressure caused by foreign factors.
    JEL: E52 E2
    Date: 2014–05
  12. By: Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara (UCSB)); Roman Šustek (Queen Mary, School of Economics and Finance)
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: Mortgages, debt servicing costs, monetary policy, transmission mechanism, housing investment
    JEL: E32 E52 G21 R21
    Date: 2013–12
  13. By: Chen, Han (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Standard dynamic stochastic general equilibrium (DSGE) models assume a Taylor rule and forecast an increase in interest rates immediately after the 2007-2009 economic recession given the predicted output and inflation, contradictory to the extended period of near-zero interest rate policy (ZIRP) conducted by the Federal Reserve. In this paper, I study two methods of modeling the ZIRP in DSGE models: the perfect foresight rational expectations model and the Markov regime-switching model, which I develop in this paper. In this regime-switching model, I assume that, in one regime, the policy follows a Taylor rule, while, in the other regime, it involves a zero interest rate. I also construct the optimal filter to estimate this regime-switching DSGE model with Bayesian methods. I fit those modified DSGE models to the U.S. data from the third quarter of 1987 to the third quarter of 2010, and then, starting from the fourth quarter of 2010, I simulate the U.S. economy forward with and without the ZIRP intervention. I compare the predicted paths of the macro variables, and I find that the ZIRP intervention has a significant effect. The estimated regime-switching model I develop implies a substantial stimulative effect (on average a 0.12% increase in output growth rate and a 0.9% increase in inflation accumulatively over 20 quarters if ZIRP is kept for 6 quarters). The actual path from the fourth quarter of 2010 onward is closer to the predicted path derived from the regime-switching model than that generated by the perfect foresight model. The perfect foresight model generates an explosive and spurious rise in inflation. Therefore, the regime-switching model I propose is more appropriate to assess the effectiveness of the ZIRP, which is effective in stimulating the economy.
    Keywords: Regime switching; zero interest rate policy; unconventional monetary policy
    Date: 2014–05–21
  14. By: Christophe Amat (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959); Tomasz Michalski (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959); Gilles Stoltz (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: Simple exchange rate models based on economic fundamentals were shown to have a difficulty in beating the random walk when predicting the exchange rates out of sample in the modern floating era. Using methods from machine learning -- adaptive sequential ridge regression with discount factors -- that prevent overfitting in-sample for better and more stable forecasting performance out-of-sample we show that fundamentals from the PPP, UIRP and monetary models consistently improve the accuracy of exchange rate forecasts for major currencies over the floating period era 1973--2013 and are able to beat the random walk prediction giving up to 5% improvements in terms of the RMSE at a 1 month forecast. ''Classic'' fundamentals hence contain useful information about exchange rates even for short forecasting horizons - and the Meese and Rogoff [1983] puzzle is overturned. Such conclusions cannot be obtained when rolling or recursive OLS regressions are used as is common in the literature.
    Keywords: exchange rates; forecasting; machine learning; purchasing power parity; uncovered interest rate parity; monetary exchange rate models
    Date: 2014–06–10
  15. By: Tuan Anh Phan (Crawford School of Public Policy, The Australian National University)
    Abstract: This paper compares the output composition of the monetary policy transmission mechanism in Australia to those for the Euro area and the United States. Four Vector Autoregressive (VAR) models are used to estimate the contributions of private consumption and investment to output reactions resulting from nominal interest rate shocks for the period 1982Q3-2007Q4. The results suggest that the investment channel plays a more important role than the consumption channel in Australia, while the contributions of the two channels are indistinguishable in the Euro area and the U.S. The difference between Australia and the Euro area comes from differences in housing investment responses, whereas Australia is different to the U.S. mainly because it has a lower share of household consumption in total demand.
    JEL: E52 E2
    Date: 2014–05
  16. By: Silvana Tenreyro (London School of Economics (LSE), Centre for Economic Performance (CEP); Centre for Macroeconomics (CFM)); Gregory Thwaites (Centre for Macroeconomics (CFM))
    Abstract: We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend exibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to diferences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.
    Keywords: asymmetric effects of monetary policy, transmission mechanism, recession, durable goods, local projection methods
    JEL: E32 E52
    Date: 2013–10
  17. By: Jeon, Bang Nam (School of Economics); Lim, Hosung (Economic Research Institute); Wu, Ji (Department of Economics)
    Abstract: This paper examines the impact of foreign banks on the monetary policy transmission mechanism in the Korean economy during the period from 2000 to 2012, with a specific focus on the lending behavior of banks with different types of ownership. Using the bank-level panel data of the banking system in Korea, we present consistent evidence on the buffering impact of foreign banks, especially foreign bank branches including U.S. bank branches, on the effectiveness of the monetary policy transmission mechanism in Korea from the bank-lending channel perspective during the period of the global financial crisis of 2008-2009. One of the underlying reasons for the buffering effect of foreign bank branches is the existence of internal capital markets operated by multinational banks to overcome capital market frictions faced when the foreign banks finance their loans.
    Keywords: foreign banks; monetary policy transmission; financial crisis
    JEL: E52 G01 G21
    Date: 2014–05–01
  18. By: Lin, Li (International Monetary Fund); Tsomocos, Dimitrios P. (University of Oxford); Vardoulakis, Alexandros (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper assesses the role that monetary policy plays in the decision to default using a General Equilibrium model with collateralized loans, trade in fiat money and production. Long-term nominal loans are backed by collateral, the value of which depends on monetary policy. The decision to default is endogenous and depends on the relative value of the collateral to face value of the loan. Default results in foreclosure, higher borrowing costs, inefficient investment and a decrease in total output. We show that pre-crisis contractionary monetary policy interacts with Fisherian debt-deflation dynamics and can increase the probability that a crisis occurs.
    Keywords: Default; collateral; debt deflation
    Date: 2014–05–07
  19. By: De Pooter, Michiel (Board of Governors of the Federal Reserve System (U.S.)); Robitaille, Patrice (Board of Governors of the Federal Reserve System (U.S.)); Walker, Ian (Board of Governors of the Federal Reserve System (U.S.)); Zdinak, Michael (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financial market-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better anchored over the past decade in all three countries, as a testament to the improved credibility of the central banks in these countries when it comes to keeping inflation low. That said, one-year inflation compensation in the far future displays some sensitivity to at least one macroeconomic data release per country. However, the impact of these releases is small and it does not appear that investors systematically alter their expectations for inflation as a result of surprises in monetary policy, consumer prices, or real activity variables. Finally, long-run inflation expectations in Brazil appear to have been less well anchored than in Chile and Mexico.
    Keywords: Inflation targeting; survey expectations; inflation compensation; Nelson-Siegel model; macro news suprises; Brazil; Chile; Mexico
    Date: 2014–03–19
  20. By: Judson, Ruth (Board of Governors of the Federal Reserve System (U.S.)); Schlusche, Bernd (Board of Governors of the Federal Reserve System (U.S.)); Wong, Vivian (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, we re-examine the relationship between money and interest rates with a focus on the past few years, when the opportunity cost of M2 has dropped below zero. Until the late 1980s, a stable relationship between monetary aggregates and the opportunity cost of holding money--measured as the spread between the three-month Treasury bill yield and the deposit-weighted average return on M2 assets--existed, and played an integral role in the conduct of monetary policy (e.g., Moore et al.(1990)). This relationship broke down in the early 1990s, when M2 velocity increased beyond the range that could be explained by movements in M2 opportunity cost. As of the mid-2000s, a new relationship was emerging, but was still statistically unstable. In late 2008, the opportunity cost of holding money dropped precipitously and has remained at its zero lower bound. Standard money-demand theory indicates that in such cases the interest elasticity of money demand should rise sharply. Reviewing the evidence to date, we fail to find support for such a rise through 2011, but we observe a notable change in the relationship over the most recent quarters. We conjecture that the more recent shifts, however, could be due to the effects of regulatory and monetary policy changes rather than a fundamental shift in the relationship between money and opportunity cost. Further work is needed to determine the contribution of these regulatory and monetary policy factors.
    Keywords: Money demand; M2; zero lower bound; opportunity cost
    Date: 2014–01–24
  21. By: DeGroot, Oliver (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines how monetary policy affects the riskiness of the financial sector's aggregate balance sheet, a mechanism referred to as the risk channel of monetary policy. I study the risk channel in a DSGE model with nominal frictions and a banking sector that can issue both outside equity and debt, making banks' exposure to risk an endogenous choice, and dependent on the (monetary) policy environment. Banks' equilibrium portfolio choice is determined by solving the model around a risk-adjusted steady state. I find that banks reduce their reliance on debt finance and decrease leverage when monetary policy shocks are prevalent. A monetary policy reaction function that responds to movements in bank leverage or to movements in credit spreads can incentivize banks to increase their use of debt finance and increase leverage, ceteris paribus, increasing the riskiness of the financial sector for the real economy.
    Keywords: Financial intermediation; portfolio choice; debt and equity; monetary policy; risk-adjusted steady state
    Date: 2014–04–09
  22. By: David Leung (Hong Kong Monetary Authority); John Fu (Hong Kong Monetary Authority)
    Abstract: We analysed the interactions between the RMB deliverable forward markets in Mainland China and Hong Kong. In order to broaden our perspective, we reference this to the Eurodollar market from the late 1950s to early 1980s. Our findings suggest that onshore regulations, notably the Regulation Q interest rate ceiling, were effective in containing spillovers between the Eurodollar market and the US domestic market. For the CNH market, we found evidence that cross-market spillovers between the Mainland and CNH markets became two-way in 2013, but were more limited and mostly not significant in earlier years. It was found that onshore-to-offshore spillovers were larger than spillovers in the opposite direction in most cases. This probably reflects the fact that the CNH market, though rapidly growing, is small compared to the Mainland market, and possibly more subject to onshore influences. Looking ahead, the Mainland market is expected to continue to play a leading role in onshore-offshore money and foreign exchange market interactions since these markets will be ultimately dominated by the monetary policy stance of the onshore authorities.
    JEL: F30 G1 G12 G15 Q
    Date: 2014–06
  23. By: de Boyer des Roches, Jérôme
    Abstract: Over the past two centuries, the connection David Ricardo made between money and foreign trade was widely commented on the basis of the 1809-1811 writings, notably the High Price of Bullion, Proof of the Depreciation of Bank Notes, of the 1816 Proposals for an Economical and Secure Currency, proposals taken again in the chapter twenty seven “On Currency and Banks” of the 1817 Principles of Political economy an Taxation, and of the 1823 Plan for a National Bank. On the other hand, the chapter seven “On Foreign Trade” of the 1817 Principles was mostly ignored with the exception of J.W. Angell (1926), F.W. Taussig (1927), K. Kojima (1951), M. Blaug (1976), J. de Boyer (1992) et G. Faccarello (2013) who did pay attention to it. Yet, according to Ricardo, the concept of comparative advantage cannot be understood without studying the international distribution of precious metals, and the determination of the natural prices of wine and cloth. In other words, the determination of relative prices includes monetary mechanisms. However the chapter seven of the Principles did not simply resume the 1809-1811 Ricardo’s monetary ideas. Here, Ricardo used arguments he had criticized seven years before. Furthermore, he reconsidered the link between value of money and exchange rate. The aim of this paper is to present and compare Ricardo’s monetary and foreign exchange analysis in the writings of 1809-1811 on one side, and in the chapter seven of his 1817 book on the other side. By means of a numerical example, the second section recalls the main features of the 1809-1811 analysis. According to Ricardo, the value of money in two trading countries must be equal for the foreign exchange equilibrium to be reached. Several notions such as the price specie flow mechanism, the quantity theory and the criticism of Thornton’s gold point mechanism are emphasized in this section. The third section presents the theory of the comparative advantage developed in chapter seven of the Principles; more than half of this text is consecrated to monetary components. Emphasis is placed on the foreign exchange market, the price specie flow between countries, and also the dynamics of money prices and wages that led to international specialization. The fourth section studies first the disconnection established by Ricardo in chapter seven of the Principles between the values of currencies and exchange rates, and second then his comments relative to the bullionist controversy; these comments close the chapter. The fifth section provides some precisions on (1) the "magic numbers" – i.e. 80, 90, 120, 100 -, (2) on the assumptions made to obtain the money prices - i.e. £45, £50, £50, £45 -, so that the terms of trade/exchange are not indeterminate contrary to an opinion inherited from John Stuart Mill, (3) finally on the consequences of an “improvement in making” English wine. Our research provides the following conclusions. First, Ricardo’s statement of the comparative advantage theory involves the monetary theory, specifically it presupposes the validity of the quantity theory. The specie inflow (outflow) in one country drops (increases) the value of money in this country. Secondly, according to the comparative advantage theory, “England would give the produce of the labour of 100 (English) men, for the produce of the labour of 80 (Portuguese)” (Ricardo, 1817, p; 135). It entails that the money price of the produce of 80 Portuguese men is equal to the money price of the produce of 100 English. It means that the money price of the produce of a given quantity of labour is 25% higher in Portugal than in England; i.e. that the value of a given quantity of money is 20% lower in Portugal than in England. Third, the specie flow between countries is not described with Hume’s price specie flow mechanism, but with Thornton’s gold points mechanism. Fourth, fixed exchange rate under gold standard does not involve gold has the same value in various countries. The symmetrical changes, in two countries, in the quantities of money, that lead to symmetrical changes in the values of money, do not modify the market prices of gold in any of these countries. To conclude, the seventh chapter of the Principles does not support Ricardo’s monetary view at the time of the Bullion Committee.
    Keywords: Comparative advantage; Foreign Trade; Money; Specie flow mechanism; Gold points; Ricardo;
    JEL: B12 E4 F1
    Date: 2014–05
  24. By: Suleyman Hilmi Kal; Nuran Arslaner; Ferhat Arslaner
    Abstract: This paper aims to investigate whether the effect of inflation expectations, exchange rate, money supply, industrial production and import prices on inflation depends on business cycle. For this purpose, a two states Markov Switching Auto Regression model with time varying transition probabilities to a generic inflation model is implemented for the period 2003-2013. In the model the states are assigned whether output gap is positive or negative. The inflation forecasting in-sample and out-of-sample is also utilized by adopting mean squared error and Diebold Mariano test to measure explanatory and forecasting power of our model. Our main finding provides that the determinants of inflation have different dynamics during boom periods as compared to recessions.
    Keywords: Inflation; Output Gap; Markov Switching Autoregressions; Business Cycles
    JEL: C32 E30 E31 E37 E58
    Date: 2014–03
  25. By: Hancock, Diana (Board of Governors of the Federal Reserve System (U.S.)); Passmore, Wayne (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We conduct an empirical analysis of the Federal Reserve's large-scale asset purchases (LSAPs) on MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.
    Keywords: Monetary policy; QE1; QE2; QE3; LSAP; MBS; mortgages
    Date: 2014–02–06
  26. By: Timothy Kam; Pere Gomis-Porqueras; Christopher J. Waller
    Abstract: In this paper we study the endogenous choice to accept fiat objects as media of exchange, the fundamentals that drive their acceptance, and their implications for their bilateral nominal exchange rate. To this end, we consider a small open economy where agents have no restrictions on what divisible fiat currency can be used to settle transactions (i.e. no currency control). We build on Li, Rocheteau and Weill (2013) and allow both fiat currencies to be counterfeited at some fixed costs. The two currencies can coexist, even if one of the currencies is dominated by the other in rate of return. This is driven by an equilibrium outcome in which private information and threats of counterfeiting imposes an equilibrium liquidity constraint on currencies in circulation. Thus, threats of counterfeiting help to pin down a determinate nominal exchange rate, and, to break the Kareken-Wallace indeterminacy result in an environment without ad-hoc currency controls. Finally, we show that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rate.
    Date: 2013–11
  27. By: Marcelo Arbex (Department of Economics, University of Windsor); Dennis O'Dea (Department of Economics, University of Washington)
    Abstract: We study the welfare costs of inflation in a monetary general equilibrium model with networks in the labor market. Unemployment results when individuals are unsuccessful in hearing about job opportunities, either directly or through their peers. Inflation affects the consumption-leisure choice differently depending on job network structure; inflation hits harder in more connected networks. In these networks, people consume more and enjoy more leisure, leading to higher welfare. Inflation reduces consumption and hurts households more, when labor markets are more effective.
    Keywords: Social networks, Labor market frictions, Inflation, Welfare costs of inflation
    JEL: D85 E31 E40 J64
    Date: 2014–06
  28. By: Knotek, Edward S. (Federal Reserve Bank of Cleveland); Zaman, Saeed (Federal Reserve Bank of Cleveland)
    Abstract: Forecasting future inflation and nowcasting contemporaneous inflation are difficult. We propose a new and parsimonious model for nowcasting headline and core inflation in the U.S. price index for personal consumption expenditures (PCE) and the consumer price index (CPI). The model relies on relatively few variables and is tested using real-time data. The model’s nowcasting accuracy improves as information accumulates over the course of a month or quarter, and it easily outperforms a variety of statistical benchmarks. In head-to-head comparisons, the model’s nowcasts of CPI infl ation outperform those from the Blue Chip consensus, with especially significant outperformance as the quarter goes on. The model’s nowcasts for CPI and PCE inflation also significantly outperform those from the Survey of Professional Forecasters, with similar nowcasting accuracy for core inflation measures. Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.
    Keywords: inflation; nowcasting; forecasting; real-time data; professional forecasters; Greenbook.
    JEL: C53 E3 E37
    Date: 2014–05–01
  29. By: Kris James Mitchener; Kirsten Wandschneider
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in- differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    JEL: E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  30. By: Nidhaleddine Ben Cheikh; Waël Louhichi
    Abstract: This paper sheds new light on the role of inflation regime in explaining the extent of exchange rate pass-through (ERPT) into import prices. In order to classify his sample of 24 developing countries by regimes of inflation, Barhoumi [(2006), “Differences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation”, Economic Modeling, 23 (6), 926-951.] chose an arbitrary threshold of 10% to split sample between high and low inflation regimes. For more accuracy, our study proposes to use a panel threshold framework where a grid search is used to select the appropriate threshold value. In a larger panel-data set including 63 countries over the period 1992-2012, we find that there are two thresholds points that are well identified by the data, allowing us to split our sample into three inflation regimes. When estimating the ERPT for each group of countries, we point out a strong regime-dependence of pass-through to inflation environment, that is, the class of countries with higher inflation rates experiences the higher degree of ERPT.
    Keywords: Exchange Rate Pass - Through, Import Prices, Panel Threshold
    JEL: C23 E31 F31 F40
    Date: 2014–06
  31. By: Gerlach, Stefan. (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: Using annual data from several sources, we study the evolution of M1, M2, income, prices and long and short interest rates in Ireland over the period 1933-2012. We find cointegration and that prices, income and interest rates are weakly exogenous. While the estimates for M2 are stable and close to our priors, for M1 we obtain very low price elasticities, and a relatively high income elasticity, and detect parameter instability. We estimate a short-run M2 demand function that passes a number of diagnostic tests, although the standard errors of the regressions is large.
    Keywords: Ireland, historical statistics, long time series, money, income, prices.
    JEL: E3 E4 N14
    Date: 2014–03
  32. By: Alberto Cavallo; Brent Neiman; Roberto Rigobon
    Abstract: Does membership in a currency union matter for prices and for a country's real exchange rate? The answer to this question is critical for thinking about the implications of joining (or exiting) a common currency area. This paper is the first to use high-frequency good-level data to demonstrate that the answer is yes, at least for an important subset of consumption goods. We consider the case of Latvia, which recently dropped its pegged exchange rate and joined the euro zone. We analyze the prices of thousands of differentiated goods sold by Zara, the world's largest clothing retailer. Price dispersion between Latvia and euro zone countries collapsed swiftly following entry to the euro. The percentage of goods with nearly identical prices in Latvia and Germany increased from 6 percent to 89 percent. The median size of price differentials declined from 7 percent to zero.
    JEL: E3 F3 F4
    Date: 2014–06
  33. By: Helmut Lütkepohl; Aleksei Netsunajev; ;
    Abstract: In structural vector autoregressive analysis identifying the shocks of interest via heteroskedasticity has become a standard tool. Unfortunately, the approaches currently used for modelling heteroskedasticity all have drawbacks. For instance, assuming known dates for variance changes is often unrealistic while more exible models based on GARCH or Markov switching residuals are dicult to handle from a statistical and computational point of view. Therefore we propose a model based on a smooth change in variance that is exible as well as relatively easy to estimate. The model is applied to a five-dimensional system of U.S. variables to explore the interaction between monetary policy and the stock market. It is found that previously used conventional identification schemes in this context are rejected by the data if heteroskedasticity is allowed for. Shocks identified via heteroskedasticity have a different economic interpretation than the shocks identified using conventional methods.
    Keywords: Structural vector autoregressions, heteroskedasticity, smooth transition VAR models, identification via heteroskedasticity
    JEL: C32
    Date: 2014–06
  34. By: Bussière, M.; Camara, B.; Castellani, F.-D.; Potier, V.; Schmidt, J.
    Abstract: As part of the International Banking Research Network, the Banque de France contribution to the research project on liquidity risk transmission concentrates on the “outward”' transmission of shocks affecting French banking groups. Using a rich dataset on their international positions, we analyze which balance sheet vulnerabilities contribute to the international transmission of aggregate liquidity risk shocks. The geographical breakdown of lending allows us to control for demand effects and to concentrate on the external adjustments to shocks affecting the supply of loans. We find that a higher capital ratio is associated with higher growth of lending abroad when aggregate liquidity conditions deteriorate. We find that our results are mainly driven by cross-border lending to the financial sector whereas local lending by foreign affiliates is hardly affected by the balance sheet shocks that the overall banking group is experiencing. We also investigate to what extent the identified effects differ depending on whether banks accessed public liquidity during the crisis and find that our baseline results are sensitive to the inclusion of central bank liquidity assistance.
    Keywords: International banking, liquidity risk, shock transmission.
    JEL: D24 F36 G21
    Date: 2014
  35. By: Li, Canlin (Board of Governors of the Federal Reserve System (U.S.)); Wei, Min (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.
    Keywords: No-arbitrage term structure models; Yield curve; Preferred habitat; Supply effects; Factor models; Large-scale asset purchases (LSAP); Agency mortgage-backed securities (MBS)
    Date: 2014–03–24

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