nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒08‒09
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How Monetary Policy is made: Two Canadian Tales By Pierre L. Siklos; Matthias Neuenkirch
  2. Opening Remarks : a speech at the Federal Reserve Bank of Atlanta's 2014 Financial Markets Conference, Atlanta, Georgia, April 15, 2014 By Yellen, Janet L.
  3. Globalisation, pass-through and the optimal policy response to exchange rates By Michael B Devereux; James Yetman
  4. The Federal Reserve: Looking Back, Looking Forward : a speech at the Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania, January 3, 2014 By Bernanke, Ben S.
  5. A shadow policy rate to calibrate US monetary policy at the zero lower bound By Marco Jacopo Lombardi; Feng Zhu
  6. Swiss unconventional monetary policy: lessons for the transmission of quantitative easing By Christensen, Jens H.E.; Krogstrup, Signe
  7. Incorporating Financial Stability Considerations into a Monetary Policy Framework : a speech at the International Research Forum on Monetary Policy, Washington, D.C., March 21, 2014 By Stein, Jeremy C.
  8. The Renminbi and Exchange Rate Regimes in East Asia By Masahiro Kawai; Victor Pontines
  9. How to stabilize inflation without damaging employment: Strenghtening the power of unions. By Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
  10. Comments on "Market Tantrums and Monetary Policy": a speech at the 2014 U.S. Monetary Policy Forum, New York, New York, February 28, 2014 By Stein, Jeremy C.
  11. Non-linear effects of the U.S. Monetary Policy in the Long Run By Olmos, Lorena; Sanso Frago, Marcos
  12. Challenges for Monetary Policy Communication : a speech at the Money Marketeers of New York University, New York, New York, May 6, 2014 By Stein, Jeremy C.
  13. Financial crises and exchange rate policy By Luca Fornaro
  14. Reserve Requirements, Liquidity Risk and Credit Growth By Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pinar Ozlu
  15. An Estimated DSGE Model with a Deflation Steady State By Yasuo Hirose
  16. Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach By Mustafa Kilinc; Cengiz Tunc
  17. The Impact of Monetary Policy on Financing of Czech Firms By Ruslan Aliyev; Dana Hajkova; Ivana Kubicova
  18. Forecast Error Information and Heterogeneous Expectations in Learning-to-Forecast Experiments By Luba Petersen
  19. Banks, Sovereign Risk and Unconventional Monetary Policies By Stéphane Auray; Aurélien Eyquem; Xiaofei Ma
  20. The exit from non-conventional monetary policy: what challenges? By Philip Turner
  21. The impact of an exchange rate realignment on the trade balance: Euro vs. national currency - Some preliminary results with a/simmetrie model of the Italian economy By Alberto Bagnai; Christian Alexander Mongeau Ospina
  22. Rethinking the Aims of Prudential Regulation : a speech at the Federal Reserve Bank of Chicago Bank Structure Conference, Chicago, Illinois, May 8, 2014 By Tarullo, Daniel K.
  23. Euro Exchange Rate Forecasting with Differential Neural Networks with an Extended Tracking Procedure By Ortiz-Arango, Francisco; Cabrera-Llanos, Agustín I.; Venegas-Martínez, Francisco
  24. A consistent set of multilateral productivity approach-based indicators of price competitiveness By Fischer, Christoph; Hossfeld, Oliver
  25. Higher order beliefs and the dynamics of exchange rates By F. Pancotto; G. Pignataro; D. Raggi
  26. Credit Growth, Monetary Policy, and Economic Activity in a Three-Regime TVAR Model By Stefan Avdjiev; Zheng Zeng
  27. The impact of the 2008 crisis on UK prices: what we can learn from the CPI microdata By Dixon, Huw David; Luintel, Kul B; Tian, Kun
  28. A Conversation on Central Banking Issues : a speech at the 2014 Spring Membership Meeting, Institute for International Finance, London, United Kingdom, June 6, 2014 By Powell, Jerome H.

  1. By: Pierre L. Siklos; Matthias Neuenkirch
    Abstract: We examine policy rate recommendations of the Bank of Canada’s Governing Council (GC) and its shadow, the C.D. Howe Institute’s Monetary Policy Council (MPC). Individual recommendations of the MPC are observed but not those of the GC. Differences in the two committee’s recommendations are small but persistent. The MPC is more responsive to the output gap than its GC counterpart. Both committees respond similarly to inflation. Disagreement within the MPC and with the GC is more likely when rates are rising. Finally, the Bank’s forward guidance had a significant influence on the MPC’s views about the future inflation path.
    JEL: E43 E52 E58 E61 E69
    Date: 2014–07
  2. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–04–15
  3. By: Michael B Devereux; James Yetman
    Abstract: In this paper we examine how monetary policy should respond to nominal exchange rates in a New Keynesian open economy model that allows for a non-trivial role for sterilised intervention. The paper develops the argument against the backdrop of the evolving policy-making environment of Asian economies. Sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare. We show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass-through is high. However, increased financial internationalisation reduces the effectiveness of sterilised intervention, as the international policy trilemma becomes more relevant. Unsterilised intervention may also have a role to play, although the potential welfare gains from this are generally smaller. Most central banks in Asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates. But, over time, declining exchange rate pass-through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention. Given the limited effectiveness of unsterilised intervention, our model implies that the role of exchange rate movements in the optimal setting of monetary policy in Asia is decreasing.
    Keywords: globalisation; foreign exchange intervention; exchange rate pass-through
    Date: 2014–06
  4. By: Bernanke, Ben S. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–01–03
  5. By: Marco Jacopo Lombardi; Feng Zhu
    Abstract: The recent global financial crisis, the Great Recession and the subsequent implementation of a variety of unconventional policy measures have raised the issue of how to correctly measure the stance of monetary policy when policy interest rates reach the zero lower bound (ZLB). In this paper, we propose a new "shadow policy rate" for the US economy, using a large set of data representing the various facets of the US Federal Reserve's policy stance. Changes in term premia at various maturities and asset purchases by the Fed are key drivers of this shadow rate. We document that our shadow policy rate tracks the effective federal funds rate very closely before the recent crisis. More importantly, it provides a reasonable gauge of US monetary policy stance when the ZLB becomes binding. This facilitates the assessment of the policy stance against familiar Taylor rule benchmarks. Finally, we show that in structural vector autoregressive (VAR) models, the shadow policy rate helps identify monetary policy shocks that better reflect the Federal Reserve's unconventional policy measures.
    Keywords: unconventional monetary policy, zero lower bound, shadow policy rate, federal funds rate, dynamic factor model, monetary VAR
    Date: 2014–06
  6. By: Christensen, Jens H.E. (Federal Reserve Bank of San Francisco); Krogstrup, Signe (Swiss National Bank)
    Abstract: In August 2011, the Swiss National Bank engaged in unconventional monetary policy through an unprecedented expansion of bank reserves. As these actions did not involve any outright long-term asset purchases, this unique episode allows for novel insights on the transmission mechanism of central bank balance sheet expansions to interest rates. Analysis of the response of Swiss bond yields to announcements regarding this program suggests that expansion of reserves by itself can lower long-term yields through a portfolio balance effect.
    JEL: E43 E52 E58 G12
    Date: 2014–08–06
  7. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–03–21
  8. By: Masahiro Kawai (Asian Development Bank Institute (ADBI)); Victor Pontines
    Abstract: With the rise of the People’s Republic of China (PRC) as the world’s largest trading nation (measured by trade value) and second largest economic power (measured by GDP), its economic influence over the neighboring emerging economies in East Asia has also risen. The PRC introduced some exchange rate flexibility in July 2005, and in the wake of the global financial crisis has been pursuing a policy to internationalize its currency, the renminbi (RMB). Clearly the exchange rate policy of the PRC has significant implications for exchange rate regimes in emerging East Asia. This paper examines the behavior of the RMB exchange rate and the impact of RMB movements on those of other currencies in emerging East Asia during the period 2000–2014. We apply the Frankel–Wei regression model to identify changes in the RMB exchange rate regime over time and a modified version of the model, developed by the authors in their earlier paper, to estimate the RMB weight in an emerging East Asian economy’s currency basket. We find that the US dollar continues to be the dominant anchor currency in the region, while the RMB has taken on increasing importance in the currency baskets of many East Asian economies in recent years. The paper also explores how monetary and currency cooperation—led by the PRC and Japan—can promote intra-East Asian exchange rate stability under the pressure of rising financial market openness in the PRC.
    Keywords: Remminbi, China, PRC, exchange rate regime, East Asia, exchange rate policy, the Frankel–Wei model, Japan, financial market openness
    JEL: F15 F31 F36 F41 O24
    Date: 2014–05
  9. By: Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
    Abstract: The aim of this paper is to assess the impact of union bargaining power on inflation and employment in a case of efficiency bargaining, in a context of a strategic game between Central Bank and social partners.
    Keywords: monetary policy, employment, inflation, union bargaining power, efficiency bargaining.
    JEL: E24 E52 E58 J52
    Date: 2014
  10. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–02–28
  11. By: Olmos, Lorena; Sanso Frago, Marcos
    Abstract: We find non-linearities in the U.S. long-run relationships among trend inflation, growth rate and financial frictions. Moreover, our results show that mismeasurements of the natural rate of interest deviate the trend inflation from its target, which is especially clear when monetary policy reacts preventively against inflation deviations. The long-run growth rate, the trend inflation and the natural rate of interest, specified as time-varying, are jointly estimated over the period 1960:Q1-2013:Q2 by applying the Kalman filter, following mainly Laubach and Williams (2003).
    Keywords: Kalman Filter; Trend Inflation; Financial frictions; Growth
    JEL: C32 E31 E52
    Date: 2014
  12. By: Stein, Jeremy C. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–05–06
  13. By: Luca Fornaro
    Abstract: This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stopprone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that the appropriate exchange rate policy sustains the value of collateral and access to international credit markets during financial crises.
    Keywords: Financial crises, Monetary Policy, Sudden Stops, Exchange Rate Regime, Nominal Wage Rigidities, Pecuniary Externalities.
    JEL: G01 E44 E52 F32 F34 F41
    Date: 2014–07
  14. By: Koray Alper; Mahir Binici; Selva Demiralp; Hakan Kara; Pinar Ozlu
    Abstract: Many central banks in emerging economies have used reserve requirements (RR) to alleviate the trade-off between financial stability and price stability in recent years. Notwithstanding their widespread use, transmission channels of RR have remained largely as a black-box. In this paper, we use bank-level data to explore the interaction between RR and bank lending behavior. Our empirical findings suggest that short-term borrowing from the central bank is not a close substitute for deposits for banks. Bank lending behavior responds significantly to reserve requirements and liquidity positions. Our analysis allows us to identify a new channel that we name as the “liquidity channel”. The channel works through a decline in bank liquidity and loan supply due to an increase in reserve requirements.
    Keywords: Monetary Transmission Mechanism; Liquidity Risk; Bank Lending Channel; Turkey
    JEL: E44 E51 E52
    Date: 2014
  15. By: Yasuo Hirose
    Abstract: Benhabib, Schmitt-Grohé, and Uribe (2001) argue for the existence of a deflation steady state when the zero lower bound on the nominal interest rate is considered in a Taylor-type monetary policy rule. This paper estimates a medium-scale DSGE model with a deflation steady state for the Japanese economy during the period from 1999 to 2013, when the Bank of Japan conducted a zero interest rate policy and the inflation rate was almost always negative. Although the model exhibits equilibrium indeterminacy around the deflation steady state, a set of specific equilibria is selected by Bayesian methods. According to the estimated model, shocks to households’ preferences, investment adjustment costs, and external demand do not necessarily have an inflationary effect, in contrast to a standard model with a targeted-inflation steady state. An economy in the deflation equilibrium could experience unexpected volatility because of sunspot fluctuations, but it turns out that the effect of sunspot shocks on Japan’s business cycles is marginal and that macroeconomic stability during the period was a result of good luck.
    Keywords: Deflation, Zero interest rate, Japanese economy, Indeterminacy, Bayesian Estimation
    JEL: E31 E32 E52
    Date: 2014–07
  16. By: Mustafa Kilinc; Cengiz Tunc
    Abstract: This paper tries to identify the monetary policy shocks in Turkey during the explicit inflation targeting period starting from 2006 using a structural VAR approach. We model Turkey as a small open economy where domestic variables are affected by external factors like commodity prices and global demand but domestic variables do not affect external variables. We analyze the effects of four shocks on Turkish economy: two domestic shocks of interest rates and risk premium, and two external shocks of commodity prices and global demand. All shocks are found to have significant effects on main economic variables. Positive interest rate shocks appreciate the domestic currency and decrease the inflation whereas positive risk premium shocks cause a depreciation and an increase in inflation. Both of these shocks also cause a decrease in the domestic activity. Being an open and internationally integrated economy, Turkey is significantly affected by global shocks. A positive global demand innovation leads to an increase in global commodity prices, which together increase both the level of prices and economic activity in Turkey. Positive commodity price shocks also increase the inflation in Turkey.
    Keywords: Monetary Policy, Interest Rates, Risk Premium, Small Open Economy
    JEL: E43 E52 E58 F41
    Date: 2014
  17. By: Ruslan Aliyev; Dana Hajkova; Ivana Kubicova
    Abstract: This paper uses firm-level financial data for Czech firms and tests for the role of companies’ financial structure in the transmission of monetary policy. Our results indicate that higher short-term interest rates coincide with lower shares of total debt, short-term bank loans, and long-term debt. We find that firm-specific characteristics, such as size, age, collateral, and profit, affect the way in which monetary policy changes are reflected in the external financing decisions of firms. These findings indicate the presence of informational frictions in credit markets and hence provide some empirical evidence of the existence of broad credit and relationship lending channels in the Czech Republic.
    Keywords: Credit channel, Czech Republic, external finance, monetary policy transmission
    JEL: E44 E51 E52 G21 G32
    Date: 2014–06
  18. By: Luba Petersen (Simon Fraser University)
    Abstract: This paper explores the importance of accessible and focal information in influencing beliefs and attention in a learning-to-forecast laboratory experiment where subjects are incentivized to form accurate expectations about inflation and the output gap. We consider the effects of salient and accessible forecast error information and learning on subjects' forecasting accuracy and heuristics, and on aggregate stability. Experimental evidence indicates that, while there is considerable heterogeneity in heuristics used, subjects' forecasts can be best described by a constant-gain learning model where subjects respond to forecast errors. Salient forecast error information reduces subjects' overreaction to their errors and leads to greater forecast accuracy, coordination of expectations and macroeconomic stability. The benefits of this focal information are short-lived and diminish with learning.
    Keywords: experimental macroeconomics, laboratory experiment, monetary policy, expectations, learning to forecast, availability heuristic, focal points, communication, rational inattention
    JEL: C92 E2 E52 D50 D91
    Date: 2014–07
  19. By: Stéphane Auray (CREST-ENSAI, ULCO and CIRPEE); Aurélien Eyquem (Université Lumière Lyon 2); Xiaofei Ma (CREST-ENSAI et Université Lumière Lyon 2)
    Abstract: We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the Euro Area, the model performs satisfactorily in matching key business cycle facts on real, financial and fiscal time series. We then use the model to assess the effects of a large crisis and quantify the potential effects of alternative unconventional policies on the dynamics of GDP, sovereign default risk and public indebtedness. We show that quantitative monetary easing is more efficient in stimulating GDP, while qualitative monetary easing relieves financial tensions and sovereign risk more efficiently. In terms of welfare, in the short run, unconventional monetary policies bring sizable welfare gains for households, while the long term effects are much smaller
    Keywords: Recession, Interbank Market, Sovereign Default, Monetary Policy
    JEL: E44 F34 G15
    Date: 2014–03
  20. By: Philip Turner
    Abstract: Monetary policies pursued in response to the financial crisis have shown that changes in central bank balance sheets have major macroeconomic consequences. The New Classical Macroeconomics, which gained increasing sway from the late-1980s, had led to an exclusive focus on the policy rate and a neglect of balance sheet effects. Key financial market imperfections that had been demonstrated by earlier (or contemporaneous) advances in microeconomic theory were assumed away under the guise of Ricardian equivalence. Getting their balance sheets back to normal levels is important in order to preserve policy flexibility for the future, but will present central banks with formidable challenges. This task will require cooperation with Treasuries without surrendering monetary policy independence.As central banks pragmatically monitor market resilience, the financial dominance trap is to be avoided.
    Keywords: Central bank balance sheet, fiscal dominance, financial dominance, exit strategy
    Date: 2014–05
  21. By: Alberto Bagnai (Department of Economics, Gabriele d'Annunzio University); Christian Alexander Mongeau Ospina (a/simmetrie, Italian Association for the Study of Economic Asymmetries)
    Abstract: It is frequently claimed that the current EUR/USD exchange rate is too high and that a depreciation of the EUR against the USD would contribute to relieve the Eurozone economy from the current state of persistent crisis. Evidence provided by the a/simmetrie annual econometric model suggests that this claim is unsupported by the data, at least as far as the Italian economy is concerned. In fact, the size and sign of the trade elasticities show that the increases in net exports towards non-Eurozone countries, brought about by the depreciation of the euro, would be offset by an increase in net imports towards Eurozone countries, brought about by the increase in Italian domestic demand. To put it simply, in case of a depreciation of the EUR, the Italian economy would not only suffer a higher costs of energy (because of the depreciation vis-à-vis OPEC countries), but also spend in Germany much of the money it earned in the US, Japan, and the emerging countries, with a net effect likely to be almost zero or negative in the first three to four years.
    Keywords: Simulation methods, Trade forecasting and simulations, Foreign exchange, Current account adjustment, Comparative analysis of economic systems
    JEL: C53 F17 F31 F32 P51
    Date: 2014–06
  22. By: Tarullo, Daniel K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–05–08
  23. By: Ortiz-Arango, Francisco; Cabrera-Llanos, Agustín I.; Venegas-Martínez, Francisco
    Abstract: This paper is aimed at developing a new kind of non-parametrical artificial neural network useful to forecast exchange rates. To do this, we departure from the so-called Differential or Dynamic neural Networks (DNN) and extend the tracking procedure. Under this approach, we examine the daily closing values of the exchange rates of the Euro against the US dollar, the Japanese yen and the British pound. With our proposal, Extended DNN or EDNN, we perform the tracking procedure from February 15, 1999, to August 31, 2013, and, subsequently, the forecasting procedure from September 2 to September 13, 2013. The accuracy of the obtained results is remarkable, since the percentage of the error in the predicted values is within the range from 0.001% to 0.69% in the forecasting period.
    Keywords: Exchange rates, artificial neural network, differential neural network, tracking and forecasting.
    JEL: G17
    Date: 2014–08–01
  24. By: Fischer, Christoph; Hossfeld, Oliver
    Abstract: We propose a novel, multilaterally consistent productivity approach-based indicator to assess the international price competitiveness of 57 industrialized and emerging economies. It is designed to be a useful assessment tool for monetary policy authorities and, thereby, differs from previously proposed indicators, which are hardly applicable on a day-to-day basis. Special attention has been paid to an appropriate selection of price and productivity data in levels as opposed to indices, and to the treatment of country fixed effects when interpreting currency misalignments. The discussion of the results focuses on the larger economies of the sample. At the current juncture, and in contrast to the prevailing view, we find US price competitiveness to be above and China's price competitiveness to be below its derived benchmark. --
    Keywords: equilibrium exchange rates,productivity approach,price competitiveness,panel cointegration
    JEL: F31 C23
    Date: 2014
  25. By: F. Pancotto; G. Pignataro; D. Raggi
    Abstract: This paper investigates the role of higher order beliefs in the formation of exchange rates. Our model combines a standard macroeconomic dynamics for the exchange rates with a microeconomic specification of agents' heterogeneity and their interactions. The empirical analysis relies on a state space model estimated through Bayesian methods. We exploit data on macroeconomic fundamentals in a panel of subjective forecasts on the euro/dollar exchange rate. The equilibrium strategy on the optimization process of the predictors shows that higher order beliefs is the relevant factor in performing individual forecasting. Moreover public information, namely past exchange rates and fundamentals, plays a crucial role as a coordination device to generate expectations among agents on the basis of their forecasting abilities.
    JEL: D82 F41 C11
    Date: 2014–07
  26. By: Stefan Avdjiev; Zheng Zeng
    Abstract: We employ a threshold vector autoregression (TVAR) methodology in order to examine the nonlinear nature of the interactions among credit market conditions, monetary policy, and economic activity. We depart from the existing literature on the subject along two dimensions. First, we focus on a model in which the relevant threshold variable describes the state of economic activity rather than credit market conditions. Second, in contrast to the existing TVAR literature, which concentrates exclusively on single-threshold models, we allow for the presence of a second threshold, which is overwhelmingly supported by all relevant statistical tests. Our results indicate that the dynamics of the interactions among credit market conditions, monetary policy and economic activity change considerably as the economy moves from one phase of the business cycle to another and that single-threshold TVAR models are too restrictive to fully capture the nonlinear nature of those interactions. The impact of most shocks tends to be largest during periods of sub-par economic growth and smallest during times of moderate economic activity. By contrast, credit risk shocks have the largest impact when output growth is considerably above it long-term trend.
    Keywords: Threshold vector autoregression, regime switching, nonlinearity, business-cycle asymmetry, credit shock
    Date: 2014–06
  27. By: Dixon, Huw David (Cardiff Business School); Luintel, Kul B (Cardiff Business School); Tian, Kun (Cardiff Business School)
    Abstract: This paper takes the locally collected price-quotes used to construct the CPI index in the UK for the period 1996-2013 to explore the impact of the crisis on the pricing behavior of firms. We develop a time-series framework which is able to capture the link between macro- economic variables (in?ation and output) and the behavior of prices in terms of the frequency of price change, the dispersion of price levels and the dispersion of price-growth. Whilst these effects are present, they are small and do not have significant effects for monetary policy.
    Keywords: Price-spell; steady state; duration
    JEL: E50
    Date: 2014–06
  28. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–06–06

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