nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒07‒21
24 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Transparency and Deliberation within the FOMC: a Computational Linguistics Approach By Stephen Hansen; Michael McMahon; Andrea Prat
  2. International spillovers from US forward guidance to equity markets By Richhild Moessner
  3. Purchasing power parity and the Taylor rule By Masao Ogaki; Bruce E. Hansen; Ippei Fujiwara; Hyeongwoo Kim
  4. Global liquidity trap By Yuki Teranishi; Nao Sudo; Tomoyuki Nakajima; Ippei Fujiwara
  5. Central bank independence and political pressure in the Greenspan era By Veurink, Jan Hessel; Kuper, Gerard H.
  6. The Eurosystem, the banking sector and the money market By Paul Mercier
  7. Monetary policy and real exchange rate dynamics in sticky-price models By Carvalho, Carlos; Nechio, Fernanda
  8. Dollar Hegemony and China’s Economy By Kai Liu
  9. Leaning Against Windy Bank Lending By Giovanni Melina; Stefania Villa
  10. Stability and Identification with Optimal Macroprudential Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  11. How do banks respond to increased funding uncertainty? By Robert A. Ritz; Ansgar Walther
  12. Coordination and Crisis in Monetary Unions By Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath
  13. The Yield Curve Information Under Unconventional Monetary Policies By Damián Romero; Luis Ceballos
  14. Monetary Policy Under Commodity Price Fluctuations By Roberto Chang
  15. One currency, two markets: the renminbi’s growing influence in Asia-Pacific By Chang Shu; Dong He; Xiaoqiang Cheng
  16. Global Finance Brief: Monetary Policy Shocks from the EU and US: Implications for Sub-Sharan Africa By Jeremy Kronick
  17. Banking Union: Time Is Not On Our Side By Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
  18. Sufficiency of an Outside Bank and a Default Penalty to Support the Value of Fiat Money: Experimental Evidence By Juergen Huber; Martin Shubik; Shyam Sunder
  19. Counterfactual Analysis in Macroeconometrics: An Empirical Investigation into the Effects of Quantitative Easing By M. Hashem Pesaran; Ron P Smith
  20. The Changing Nature of Real Exchange Rate Fluctuations. New Evidence for Inflation-Targeting Countries By Rodrigo Caputo; Gustavo Leyva; Michael Pedersen
  21. Monetary Exit and Fiscal Spillovers By Libich, Jan; Nguyen, Dat; Stehlik, Petr
  22. Forward and Spot Exchange Rates in a Multi-currency World By Tarek A. Hassan; Rui C. Mano
  23. Dynamic Scoring and Monetary Policy By Gliksberg, Baruch
  24. Financial stability in open economies By Yuki Teranishi; Ippei Fujiwara

  1. By: Stephen 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: Richhild Moessner
    Abstract: We quantify the international spillovers of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on international equity markets, considering equity indices of both advanced and emerging economies. We find that explicit FOMC policy rate guidance announcements at the zero lower bound led to higher equity prices in a number of advanced and emerging economies. Moreover, we find that equity indices of economies with lower sovereign ratings rose by more, consistent with the risk-taking channel of monetary policy.
    Keywords: Monetary policy; forward guidance; equity prices; international spillovers
    JEL: E52 E58
    Date: 2014–07
  3. By: Masao Ogaki; Bruce E. Hansen; Ippei Fujiwara; Hyeongwoo Kim
    Abstract: It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods.
    JEL: C32 E52 F31
    Date: 2013
  4. By: Yuki Teranishi; Nao Sudo; Tomoyuki Nakajima; Ippei Fujiwara
    Abstract: How should monetary policy respond to a global liquidity trap, where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect.
    JEL: E52 E58 F41
    Date: 2013
  5. By: Veurink, Jan Hessel; Kuper, Gerard H. (Groningen University)
    Abstract: This paper investigates whether political pressure from incumbent presidents influences the Fed?s monetary policy during the period that Alan Greenspan was the chairman of the United States Federal Reserve Board. A modified Taylor rule with time-varying coefficients will be used to test wellknown political-economic theories of Nordhaus (1975) and Hibbs (1987). The findings suggest that the Fed under Greenspan did not create election driven monetary cycles, but was less inflation avers with a Democratic president.
    Date: 2014
  6. By: Paul Mercier
    Abstract: Since October 2008, the credit granted by the Eurosystem to the Euro zone banking sector increased in a substantial way, as a result of the implementation of nonconventional measures, in particular the fact that the Eurosystem left to the banks the faculty to determine themselves the quantity of credit that they wished to obtain. This paper first recalls the foundations of the interbank money market and then analyses the evolution of the ?net liquidity needs? of the banking sector. It provided a clarification of the relation between the Eurosystem, the euro zone banking sector and the money market. In particular, it develops arguments against the myth of ?idle money parked with the Eurosystem?.
    Keywords: monetary policy implementation, central bank, central bank?s balance sheet, money market, liquidity deficit, excess liquidity
    Date: 2014–06
  7. By: Carvalho, Carlos (Departamento de Economia, Pontifícia Universidade Católica do Rio de Janeiro); Nechio, Fernanda (Federal Reserve Bank of San Francisco)
    Abstract: We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence – policy inertia or persistent policy shocks – is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.
    Keywords: real exchange rates; monetary policy; interest rate smoothing; PPP puzzle; persistence
    JEL: E0 F3 F41
    Date: 2014–07
  8. By: Kai Liu
    Abstract: This paper models the US dollar as a global currency and focuses on the effects of US money supply shock upon China’s economy. The special roles of US dollar as a global currency and the special institutional arrangements of China are investigated. Given a positive US money supply shock, both the inflation and real GDP of China will be below their steady state levels in the medium term; while for the US there is no inflation pressure. Welfare calculation shows that a positive 10% US money supply shock will result in a positive 1.25% welfare gain for China, a positive 0.06% welfare gain for US, but a 0.21% welfare loss for the rest of the world. Given that the US dollar’s hegemony is not weakened, the regime with liberalized capital accounts and an exchange rate peg to the US dollar for China is best for the Chinese households under the US money supply shock. However, when the US dollar is no longer the global reserve currency but instead a supranational reserve currency replaces it, then for China this regime is the worst kind of reform, no matter whether or not the dollar standard in international trade is maintained.
    Keywords: US dollar, global currency, capital control, exchange rate, business cycle
    JEL: E32 E42 E51 F31 F41 F44
    Date: 2014–06–04
  9. By: Giovanni Melina (City University London); Stefania Villa (University of Foggia)
    Abstract: Using a dynamic stochastic general equilibrium model with banking, this paper first provides evidence that, during the Great Moderation, monetary policy leaned against the wind blowing from the loan market in the US. It then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest-rate rule that features only a response to inflation. The source of business cycle fluctuations is crucial for the optimality of a leaning-against-the-wind policy. In fact, the pro-cyclical nature of lending creates a trade-off between inflation and financial stabilisation when supply shocks are prevalent.
    Keywords: lending relationships, augmented Taylor rule, Bayesian estimation, optimal policy.
    JEL: E32 E44 E52
    Date: 2014–07
  10. By: Jean-Bernard Chatelain (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE)
    Abstract: This paper investigates the identification, the determinacy and the stability of ad hoc, "quasi-optimal" and optimal policy rules augmented with financial stability indicators (such as asset prices deviations from their fundamental values) and minimizing the volatility of the policy interest rates, when the central bank precommits to financial stability. Firstly, ad hoc and quasi-optimal rules parameters of financial stability indicators cannot be identified. For those rules, non zero policy rule parameters of financial stability indicators are observationally equivalent to rule parameters set to zero in another rule, so that they are unable to inform monetary policy. Secondly, under controllability conditions, optimal policy rules parameters of financial stability indicators can all be identified, along with a bounded solution stabilizing an unstable economy as in Woodford (2003), with determinacy of the initial conditions of non-predetermined variables.
    Keywords: Identification; financial stability; monetary policy; optimal policy under Commitment; augmented Taylor rule
    Date: 2014–04
  11. By: Robert A. Ritz; Ansgar Walther
    Abstract: The 2007-9 .financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks behaviour during the crisis, including:(i) reductions in lending volumes, balance sheets, and profitability;(ii) more intense competition for retail deposits (including deposits turning into a .loss leader.);(iii) stronger lending cuts by more highly extended banks with a smaller deposit base;(iv) weaker pass-through from changes in the central bank.s policy rate to market interest rates; and(v) a binding .zero lower well as a rationale for unconventional monetary policy.
    Keywords: Bank lending, .financial crises, interbank market, interest rate pass-through, liquidity channel, loan-to-deposit ratio, loss leader, monetary policy, zero lower bound.
    JEL: D40 E43 E52 G21
    Date: 2014–06–05
  12. By: Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath
    Abstract: We characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    JEL: E0 F0
    Date: 2014–07
  13. By: Damián Romero; Luis Ceballos
    Abstract: This paper attempts to address the question of how unconventional monetary policies affected the market expectations in both the future paths of the monetary policy rate and economic growth implicit in interest rates in the period 2007-2013 for several developed and developing countries where these kind of policies were applied. The approach used in this paper is to compare the implicit expectations in the yield curve with market surveys and econometric models to see whether the first ones were affected. We conclude that in the period where unconventional monetary policies were applied, the yield curve provided relevant additional information to forecast the monetary policy rate and economic growth, especially in developed economies.
    Date: 2014–07
  14. By: Roberto Chang
    Date: 2013–12–09
  15. By: Chang Shu; Dong He; Xiaoqiang Cheng
    Abstract: This study presents evidence of the renminbi’s growing influence in the Asia-Pacific region. The CNH market – the offshore renminbi foreign exchange market in Hong Kong SAR – is found to exert an effect on Asian currencies that is distinct from that of the onshore (CNY) market. Changes in the RMB/USD rates in both markets have a statistically and economically significant impact on changes in Asian currency rates against the US dollar, even after controlling for other major currency moves and the transmission of China’s monetary policy to the region. The continuing growth of the offshore renminbi market suggests that the influence of the CNH market is rising, but how long the independent impact will last will likely depend on China’s progress in liberalising its capital account. The findings also suggest that China’s regional influence is increasingly transmitted through financial channels.
    Keywords: renminbi internationalisation, renminbi impact, offshore markets
    Date: 2014–03
  16. By: Jeremy Kronick (International Business School, Brandeis University)
    Abstract: Monetary policy transmission from the developed to the developing world.
    Keywords: monetary policy, development, real economic growth
    JEL: O23
    Date: 2014
  17. By: Adrien Béranger; Jézabel Couppey Soubeyran; Jézabel Laurence Scialom
    Abstract: This paper reviews the various mechanisms and rules that has been proposed to build a banking union in Europe. We argue that the banking union is a promising solution to the Eurozone crisis because it completes the unification of the Euro currency, forms a solution to both the financial and monetary fragmentation of the Euro area financial markets and helps breaking the vicious circle created by domestic banking system impairments and the sovereign debt crisis. We underline not only the shortcomings and hurdles to reach a fully-fledged banking union, and the hazards created by the inconsistencies between their phasing-in in the sequential schedule decided by states. To reduce the loopholes induced by the sequential approach, we propose to implement a rule of shared-bailout during the transition period that consist in a loss-sharing rule among countries hosting an entity of a bank group and indicted in the living wills of the systemic banking companies.
    Keywords: Eurozone, banking union, bank supervision, resolution
    JEL: G21 G28 H12 E58
    Date: 2014
  18. By: Juergen Huber (University of Innsbruck, Austria); Martin Shubik (Cowles Foundation, Yale University); Shyam Sunder (School of Management & Cowles Foundation, Yale University)
    Abstract: We present a model in which an outside bank and a default penalty support the value of fiat money, and experimental evidence that the theoretical predictions about the behavior of such economies, based on the Fisher-condition, work reasonably well in a laboratory setting. The import of this finding for the theory of money is to show that the presence of a societal bank and default laws provide sufficient structure to support the use of fiat money and use of the bank rate to influence inflation or deflation, although other institutions could provide alternatives.
    Keywords: Experimental gaming, Bank, Fiat money, Outside bank, General equilibrium
    JEL: C73 C91
    Date: 2014–07
  19. By: M. Hashem Pesaran (University of Southern California; Trinity College Cambridge); Ron P Smith (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: The policy innovations that followed the recent Great Recession, such as unconventional monetary policies, prompted renewed interest in the question of how to measure the effectiveness of such policy interventions. To test policy effectiveness requires a model to construct a counterfactual for the outcome variable in the absence of the policy intervention and a way to determine whether the differences between the realised outcome and the model-based counter-factual outcomes are larger than what could have occurred by chance in the absence of policy intervention. Pesaran & Smith propose tests of policy ineffectiveness in the context of macroeconometric rational expectations dynamic stochastic general equilibrium models. When we are certain of the specification, estimation of the complete system imposing all the cross-equation restrictions implied by the full structural model is more efficient. But if the full model is misspecified, one may obtain more reliable estimates of the counterfactual outcomes from a parsimonious reduced form policy response equation, which conditions on lagged values, and on the policy measures and variables known to be invariant to the policy intervention. We propose policy ineffectiveness tests based on such reduced forms and illustrate the tests with an application to the unconventional monetary policy known as quantitative easing (QE) adopted in the UK.
    Keywords: Counterfactuals, policy analysis, policy ineffectiveness test, macroeconomics, quantitative easing (QE).
    JEL: C18 C54 E65
    Date: 2014–06
  20. By: Rodrigo Caputo; Gustavo Leyva; Michael Pedersen
    Abstract: We assess the role of real and nominal shocks on the real exchange rate (RER) dynamics for a set of small open economies. In doing so, we estimate a SVAR model for five inflation targeting countries: Australia, Canada, Chile, Israel and Norway. In sharp contrast with the existing empirical evidence, we find that in most countries demand shocks tend to explain a small proportion of RER volatility for the period 1986-2011. In that period nominal shocks are relatively more important in explaining RER fluctuations. When we perform a subsample analysis, however, we can reconcile the empirical findings in the literature with our results. In particular, we conclude that the relative importance of demand shocks has been declining substantially over time. In contrast, the relative importance of nominal shocks, and in particular exchange rate shocks, increased importantly in the last decade.
    Date: 2014–07
  21. By: Libich, Jan; Nguyen, Dat; Stehlik, Petr
    Abstract: The aftermath of the Global financial crisis has seen two types of monetary policy concerns. Some economists (e.g. Paul Krugman) worry primarily about possible deflation caused by a secular stagnation. In contrast, others (e.g. John Taylor) worry about excessively high inflation caused by quantitative easing and monetization of fiscal imbalances. We show that some countries should fear both - deflation in the short term and high inflation in the long term - whereas some countries are unlikely to experience either. This is done in a game theoretic framework with dynamic leadership (stochastic revisions of actions). Such framework enables us to examine strategic monetary-fiscal interactions as well as policymakers' incomplete information about the economic recovery (such as during 2010-2014). Our empirical section then quantifies indices of monetary and fiscal leadership for high-income countries to assess their deflationary/inflationary prospects. It is shown, for example, that undesirable departures from price stability, both in the short term and long term, are much more likely in the United States and Japan than in Australia or New Zealand.
    Keywords: monetary-fiscal interactions; fiscal stress; deflation; active/passive policy regime; Game of chicken; asynchronous moves; dynamic leadership; stochastic timing; equilibrium selection
    JEL: E63
    Date: 2014–07–12
  22. By: Tarek A. Hassan; Rui C. Mano
    Abstract: We decompose violations of uncovered interest parity into a cross-currency, a between-time-and-currency, and a cross-time component. We show that most of the systematic violations are in the cross-currency dimension. By contrast, we find no statistically reliable evidence that currency risk premia respond to deviations of forward premia from their time- and currency-specific mean. These results imply that the forward premium puzzle (FPP) and the carry-trade anomaly are separate phenomena that may require separate explanations. The carry trade is driven by static differences in interest rates across currencies, whereas the FPP appears to be driven primarily by cross-time variation in all currency risk premia against the US dollar. Models that feature two symmetric countries thus cannot explain either of the two phenomena. Once we make the appropriate econometric adjustments we also cannot reject the hypothesis that the elasticity of risk premia with respect to forward premia in all three dimensions is smaller than one. As a result, currency risk premia need not be correlated with expected changes in exchange rates.
    JEL: F31 G12 G15
    Date: 2014–07
  23. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: I discuss the joint effects of government-taxes and interest-rates. A fiscal authority performs `exogenous' and `endogenous' changes to the income-tax rate and a monetary authority sets the nominal-interest. A wedge between rates of self-financing of tax cuts and the income-tax Laffer curve arrives from the monetary system. I find a new- regime that differs from conventional monetary-fiscal policy interactions. Dynamic scoring exercises show that in the new-regime monetary-policy markedly mitigates negative output effects caused by `exogenous tax actions' designed to reduce public-debt, altogether inducing signi.cant welfare gains. In contrast, where public-debt is at high levels, `exogenous tax cuts' induce welfare losses.
    Keywords: Distorting Taxes; Liquidity Constraints; Dynamic Laffer Curve; Global Analysis; Liquidity Traps; Sovereign Default;
    JEL: C60 E60 H20 H30 H60
    Date: 2014–03–24
  24. By: Yuki Teranishi; Ippei Fujiwara
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.
    JEL: E50 F41
    Date: 2013

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