nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒08‒25
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. How Monetary Policy is Made: Two Canadian Tales By Pierre L. Siklos, Matthias Neuenkirch
  2. We Are All QE-sians Now By Takatoshi Ito
  3. New monetary policy tools: what have we learned? By Rosengren, Eric S.
  4. Reserve Requirement Policy over the Business Cycle By Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
  5. Asset Price Bubbles and Monetary Policy in a Small Open Economy By Martha López
  6. Monetary policy and forward guidance By Rosengren, Eric S.
  7. Monetary Policy Drivers of Bond and Equity Risks By Luis Viceira; Carolin Pflueger; John Campbell
  8. The Mystery of the Printing Press: Self-fulfilling debt crises and monetary sovereignty By Corsetti, Giancarlo; Dedola, Luca
  9. How to stabilize inflation without damaging employment: Strenghtening the power of unions. By Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
  10. Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy By Burgert, Matthias; Schmidt , Sebastian
  11. The Physicality of Monetary Agency By Ternyik, Stephen I.
  12. Forward Guidance or Cacophony By Gamze Demiray; Yasin Kursat Onder; Ibrahim Unalmis
  13. The Swiss franc's honeymoon By Rahel Studer-Suter; Alexandra Janssen
  14. A Threshold Vector Autoregression Model of Exchange Rate Pass-Through in Mexico By Abdul Aleem; Amine Lahiani
  15. Policymaking with a diversity of views By Rosengren, Eric S.
  16. The rise in home currency issuance By Hale, Galina; Jones, Peter; Spiegel, Mark M.
  17. Atypical behavior of credit: Evidence from a monetary VAR By Afanasyeva, Elena
  18. Bitcoin Versus Electronic Money By Sarah Rotman
  19. Inflation Targeting: A Comparative Empirical Analysis By Pınar Kaynak
  20. Global Inflation Dynamics in the Post-Crisis Period: What Explains the Twin Puzzle? By Christian Friedrich

  1. By: Pierre L. Siklos, Matthias Neuenkirch (Wilfrid Laurier University)
    Abstract: This paper examines the policy rate recommendations of the Bank of Canada’s Governing Council (GC) and the C.D. Howe Institute’s (CDHI) Monetary Policy Council (MPC) since 2003. We find, first, that differences in the median recommendations between the MPC and the GC are persistent but small (i.e., 25 bps). The median MPC recommendation is based on a higher steady state real interest rate. However, the response of the MPC and the GC to output and inflation shocks are, for the most part, comparable. Second, we are also able to examine the individual recommendations for the MPC. Estimates of the determinants of consensus inside the MPC or disagreement with the GC yield some useful insights. For example, disagreements are more likely when rates are proposed to rise than at other times. Equally interesting is the finding that the Bank of Canada conditional commitment on the overnight rate in 2009-10 has a relatively larger restricting impact on the MPC’s median recommendation than the GC’s target rate.
    Keywords: Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules.
    JEL: E43 E52 E58 E61 E69
    Date: 2014–03–01
  2. By: Takatoshi Ito (National Graduate Institute for Policy Studies, Graduate School of Public Policy, University of Tokyo, and NBER (E-mail: ))
    Abstract: The four major banks (BOJ, FRB, BOE and ECB) have adopted unconventional monetary policy, or broadly-defined quantitative easing (QE), in the last several years. The broadly-defined QE can be classified into comprehensive easing (CE) and pure-QE. The former is aimed at purchasing assets of dysfunctional markets and the latter is aimed at expanding monetary base to stimulate demands. The objective of this paper is three-fold. First, various QE adopted by four central banks are classified into CE and pure-QE. Second, the Bank of Japan (BOJ) is a harbinger for most QE measures in its earlier QE period of 2001-2006. Third, effects of BOJfs QE measures are empirically investigated with focus on the three possible transmission channels with monthly data since January 1999. The long-term interest rate tends to be lower and the yield curve tends to be flattened when the monetary base expands faster than nominal GDP. The yen vis-a-vis the US dollar tends to depreciate when the Japanese monetary base expands faster than the US monetary base. An impact of monetary base expansion on the inflation expectation is not confirmed. Findings are consistent with a view that QE is effective, by lowering the long-term interest rate and the currency depreciation.
    Keywords: Quantitative Easing, unconventional monetary policy, inflation targeting, inflation expectation, central bank balance sheet, zero interest rate policy
    JEL: E31 E43 E44 E52 E58
    Date: 2014–08
  3. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech at the Central Bank of Guatemala, Federal Reserve Bank of Boston President Eric Rosengren discussed “new” monetary policy tools (including forward guidance and large-scale asset purchases) and shared his opinion on how U.S. monetary policy could evolve.
    Date: 2014–06–09
  4. By: Pablo Federico (BlackRock (; Carlos A. Vegh (Johns Hopkins University and NBER (E-mail:; Guillermo Vuletin (The Brookings Institution (
    Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.
    Keywords: macroprudential, reserve requirement, monetary policy, exchange rate, business cycle
    JEL: E32 E50 F31 F41
    Date: 2014–08
  5. By: Martha López
    Abstract: In this paper we expanded the closed economy model by Bernanke and Gertler (1999) in order to account for the macroeconomic effects of an asset price bubble in the context of a small open economy model. During the nineties emerging market economies opened their financial accounts to foreign investment but it generated growing macroeconomic imbalances in these economies. Our goal in this paper is twofold: first we want to analyze if the conclusions of Bernanke and Gertler (1999) remain in the case of a small open economy. And second, we want to compare the results in terms of macroeconomic volatility of the model for a closed economy versus the model for a small open economy. Our results show that the conclusion about the fact that the Central Bank should not react to asset prices remains as in the case of a closed economy model, and that small open economies are more vulnerable to asset prices bubbles due to capital inflows and the exchange rate mechanism of the monetary policy. Therefore in small open economies the business cycle is deeper. Finally, in the face of a boom followed by a bust in an asset price bubble, macroeconomic volatility would be dampened if the monetary authority focus only on inflation.
    Keywords: Exogenous bubble, monetary policy, macroeconomic volatility, DSGE model.
    JEL: E32 R40 E47 E52
    Date: 2014–08–08
  6. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech at Husson University in Bangor, Maine, Federal Reserve Bank of Boston President Eric Rosengren advanced his view that monetary policy should remain highly accommodative until the economy is on more solid footing. He also explored the Fed's "forward guidance" challenges, and whether certain economic behaviors will return to pre‐crisis norms.
    Date: 2014–04–15
  7. By: Luis Viceira (Harvard Business School); Carolin Pflueger (University of British Columbia); John Campbell (Harvard University)
    Abstract: The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 1960-2011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more anti-inflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to an increase in the persistence of monetary policy interacting with continued shocks to the central bank's inflation target. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.
    Date: 2014
  8. By: Corsetti, Giancarlo; Dedola, Luca
    Abstract: Building on Calvo (1988), we develop a stochastic monetary economy in which government default may be driven by either self-fulfilling expectations or weak fundamentals, and explore conditions under which central banks can rule out the former. We analyze monetary backstops resting on the ability of the central bank to swap government debt for its monetary liabilities, whose demand is not undermined by fears of default. To be effective, announced interventions must be credible, i.e., feasible and welfare improving. Absent fundamental default risk, a monetary backstop is always effective in preventing self-fulfilling crises. In the presence of fundamental default risk and institutional constraints on the balance sheet of the central bank, a credible monetary backstop is likely to fall short of covering government's financial needs in full. It is thus effective to the extent that it increases the level of debt below which the equilibrium is unique.
    Keywords: Debt monetization; Lender of last resort; Seigniorage; Sovereign risk and default
    JEL: E58 E63 H63
    Date: 2013–02
  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: Burgert, Matthias; Schmidt , Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. --
    Keywords: Monetary Policy,Fiscal Policy,Deficit spending,Discretion,Zero nominal interest rate bound,New Keynesian model
    JEL: E31 E52 E62 E63 D11
    Date: 2013
  11. By: Ternyik, Stephen I.
    Abstract: The physicality of monetary agency is presented in 10 brief theses and 2 basic calculations or simple formulae/equations. Monetary reform is proposed to being guided by the measure of a natural index of clean energy; the text is composed for didactical purposes.
    Keywords: money, energy, cycles, crises, traps, sustainability
    JEL: B41
    Date: 2014–09
  12. By: Gamze Demiray; Yasin Kursat Onder; Ibrahim Unalmis
    Abstract: Until about more than a decade ago, central banks were traditionally run by individual governors. However that trend has changed and countries have started to establish monetary policy committees. Potential disadvantage of an individualistic committee (i.e., through voting) over collegial decision making is the possibility of confusing the markets by speaking with too many voices so the effects of central-bank's forward guidance are muted. This paper shows that a central bank run by a governor who is acting alone does a better job in terms of \forward guidance".
    Keywords: forward guidance, voting, communication
    JEL: E58 D71 D78
    Date: 2014
  13. By: Rahel Studer-Suter; Alexandra Janssen
    Abstract: To counter the sharp appreciation of the Swiss franc that set in in the wake of the European sovereign debt crisis, on September 6, 2011, the Swiss National Bank announced to enforce a minimum EUR/CHF exchange rate of CHF 1.20. We find that the simple, though elegant model for the exchange rate within a target zone proposed by Krugman (1991) describes the behavior of the Swiss franc since the inception of this lower bound. Being a prime example of a safe haven currency, the Swiss franc systematically appreciates when global market conditions tighten. But as Krugman's model predicts, the sensitivity of the Swiss franc exchange rate to state variables that indicate such risky times declines as it approaches its lower bound. In particular, the Swiss franc is well described as an S-shaped function of the option prices implied probability for EUR/CHF exchange rate realizations below the lower bound. This state variable not only indicates times of increased global risk, but also quantifies appreciation pressure on the Swiss currency at the lower bound. We conclude that the Swiss franc lower bound helps stabilizing the value of the Swiss currency.
    Keywords: Exchange rate target zone, safe haven currency, volatility smile
    JEL: E52 E58 F31 G01
    Date: 2014–08
  14. By: Abdul Aleem (Department of Mathematics and Statistics [Canada] - Dalhousie University, CEPN - Centre d'Economie Université Paris Nord - UFR de Sciences Economiques Paris XIII); Amine Lahiani (ESC Rennes School of Business - ESC Rennes School of Business, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: Considering nonlinearities in the exchange rate pass-through to domesticprices, this paper estimates exchange rate pass-through in Mexico. We examine responses of domestic prices to a positive one unit exchange rate shock by estimating a threshold vector autoregression (TVAR) model. A monthly rate of inflation of 0.79% acts as a threshold. The exchange rate pass-through to domestic prices is statistically significant above the threshold level of the inflation rate and statistically insignificant below it.
    Keywords: Exchange rate pass-through ; Prices ; Threshold vector autoregression
    Date: 2014
  15. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a forum at the American Economic Association's annual meeting in Philadelphia, Federal Reserve Bank of Boston President Eric Rosengren noted the diversity of views that flourish within the Federal Reserve. He spoke alongside fellow Reserve Bank Presidents from the New York, Minneapolis, and Philadelphia Reserve Banks, on a panel moderated by Stanley Fischer, Distinguished Fellow at the Council on Foreign Relations.
    Date: 2014–01–04
  16. By: Hale, Galina (Federal Reserve Bank of San Francisco); Jones, Peter (University of California, Berkeley); Spiegel, Mark M. (Federal Reserve Bank of San Francisco)
    Abstract: Using a large sample of private international bond issues, we document a substantial decline in the share of international bonds denominated in major reserve currencies over the last two decades, and an increase in bonds denominated in issuers’ home currencies. These secular trends appear to have accelerated notably after the global financial crisis. Observed increases in home currency foreign bond issuance was larger in countries with stable inflation and lower government debt, and in emerging markets that adopted explicit inflation targeting policies. We then present a model that demonstrates how the global financial crisis could have a persistent impact on home currency bond issuance. Firms that issue for the first time in their home currencies during disruptive episodes, such as the crisis, find their relative costs of issuance in home currencies remain lower after conditions return to normal, due to the increased depth of the home currency market. Empirically, we show that countries with more stable inflation and lower government debt were more likely to benefit from the opportunity to switch to home currency foreign bond issuance presented by the crisis.
    Keywords: bond; original sin; inflation targeting; debt; crisis; currency
    JEL: E52 F34 F36
    Date: 2014–07
  17. By: Afanasyeva, Elena
    Abstract: Credit boom detection methodologies (such as threshold method) lack robustness as they are based on univariate detrending analysis and resort to ratios of credit to real activity. I propose a quantitative indicator to detect atypical behavior of credit from a multivariate system - a monetary VAR. This methodology explicitly accounts for endogenous interactions between credit, asset prices and real activity and detects atypical credit expansions and contractions in the Euro Area, Japan and the U.S. robustly and timely. The analysis also proves useful in real time. --
    Keywords: Credit,Bayesian VAR,Conditional Forecasts
    JEL: C11 C13 C53 E51 E58
    Date: 2013
  18. By: Sarah Rotman
    Keywords: Fiscal and Monetary Policy Finance and Financial Sector Development - Currencies and Exchange Rates Private Sector Development - Emerging Markets Finance and Financial Sector Development - Debt Markets Private Sector Development - E-Business Macroeconomics and Economic Growth
    Date: 2014–01
  19. By: Pınar Kaynak (TOBB ETU, Center for Social Policy Research, Turkey)
    Abstract: The purpose of this paper is to make a comparison between how countries with inflation targeting (IT) fared compared to their non-IT peers in general during the period of 2003 and 2011, which is based on Kaynak (2012). The dataset, which is used in the analysis, has been provided through the database of International Financial Statistics (IFS) from the International Monetary Fund (IMF). First to detect the existing correlation between IT and economic performance outcomes Ordinary Least Squares (OLS) regression has been used. Second, to filter out business cycle fluctuations, Generalized Method of Moments (GMM) dynamic panel data estimator has been used. The results presented here is not necessarily at odds with the prescriptions of the standard IT literature. Despite the evidence demonstrates that IT countries have a better economic performance in general and in the global financial crisis in particular, it does not establish a causality relationship.
    Keywords: Inflation Targeting, Generalized Method of Moments, Causality
    JEL: C51 E52 E58
    Date: 2013
  20. By: Christian Friedrich
    Abstract: Inflation dynamics in advanced countries have produced two consecutive puzzles during the years after the global financial crisis. The first puzzle emerged when inflation rates over the period 2009-11 were consistently higher than expected, although economic slack in advanced countries reached its highest level in recent history. The second puzzle - still present today - was initially observed in 2012, when inflation rates in advanced countries were weakening rapidly despite the ongoing economic recovery. This paper specifies a global Phillips curve for headline inflation using inflation expectations by professional forecasters and a measure of economic slack at the global level over the period 1995q1-2013q3. Phillips curve data points in the period after the global financial crisis show a significantly different but consistent pattern compared to data points in the period before or during the crisis. In the next step, potential explanatory variables at the global level are assessed regarding their ability to improve the in-sample fit of the global Phillips curve. The analysis yields three main findings. First, the standard determinants can still explain a sizable share of global inflation dynamics. Second, household inflation expectations are an important addition to the global Phillips curve. And third, the fiscal policy stance helps explain global inflation dynamics. When taking all three findings into account, it is possible to closely replicate global inflation dynamics over the post-crisis period.
    Keywords: Fiscal Policy, Inflation and prices, International topics
    JEL: E E3 E31 E5 F F4 F41
    Date: 2014

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