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

  1. Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation By Bucher, Monika; Hauck, Achim; Neyer, Ulrike
  2. Is monetary policy overburdened? By Orphanides, Athanasios
  3. Lessons learned for monetary policy from the recent crisis By Michael D. Bordo
  4. Banking, Liquidity and Bank Runs in an Infinite Horizon Economy By Mark Gertler; Nobuhiro Kiyotaki
  5. International Reserves Before and After the Global Crisis: Is There No End to Hoarding? By Joshua Aizenman; Yin-Wong Cheung; Hiro Ito
  6. Identifying the Effects of Simultaneous Monetary Policy Shocks. Fear of Floating under Inflation targeting By Mauricio Villamizar
  7. Quantitative Assessment of Inflation Pressure during a Transition to Inflation Targeting By Halit Aktürk; Diana N. Weymark
  8. Labor market slack and monetary policy By Rosengren, Eric S.
  9. Parameter Uncertainty and Inflation Dynamics in a Model with Asymmetric Central Bank Preferences By Laban K. Chesang; Ruthira Naraidoo
  10. Reserve Bank of India’s Policy Dilemmas: Reconciling Policy Goals in Times of Turbulence By Carrasco, Bruno; Mukhopadhyay, Hiranya
  11. Asset Price Bubbles and Monetary Policy in a Small Open Economy By Martha López
  12. Monetary policy in times of financial stress By Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
  13. A Monetary Union requires a Banking Union By Hans Geeroms; Pawel Karbownik
  14. Financial Stress Indicator Variables and Monetary Policy in South Africa By Leroi Raputsoane
  15. Reputation and Liquidity Traps By Nakata, Taisuke
  16. Transitory interest-rate pegs under imperfect credibility By Alex Haberis; Richard Harrison; Matt Waldron
  17. The Power of International Reserves: the impossible trinity becomes possible By Layal Mansour
  18. Estimating the European Central Bank's "Extended Period of Time" By Bletzinger, Tilman; Wieland, Volker
  19. Assessing the economic recovery By Rosengren, Eric S.
  20. Sovereign Debt Booms in Monetary Unions By Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita
  21. Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy By Federico Etro; Lorenza Rossi
  22. Central Bank Purchases of Private Assets By Stephen Williamson
  23. Rational Bias in Inflation Expectations By Robert G. Murphy; Adam Rohde
  24. Commitment versus Discretion in a Political Economy Model of Fiscal and Monetary Policy Interaction By David Miller
  25. The Single Supervisory Mechanism - Panacea or Quack Banking Regulation? Preliminary assessment of the evolving regime for the prudential supervision of banks with ECB involvement By Tröger, Tobias
  26. QE Auctions of Treasury Bonds By Song, Zhaogang; Zhu, Haoxiang
  27. Enhancing Markets (i.e. Economies) Transmissionability to Optimize Monetary Policies’ Effect By Joshua Ioji Konov
  28. The Solution is Full Reserve / 100% Reserve Banking. By Musgrave, Ralph S.
  29. Minsky Perpective on the Macroprudential Policy By Oğuz Esen; Ayla Oğuş Binatlı
  30. Inflation Dynamics During the Financial Crisis By Jae Sim; Raphael Schoenle; Egon Zakrajsek; Simon Gilchrist

  1. By: Bucher, Monika; Hauck, Achim; Neyer, Ulrike
    Abstract: This paper shows that depending on the distribution of banks' uncertain liquidity needs and on how monetary policy is implemented, frictions in the interbank market may reinforce the effectiveness of monetary policy. These frictions imply that with its lending and deposit facilities the central bank has an additional effective instrument at hand to impose an impact on bank loan supply. While lowering the rate on the lending facility has, taken for itself, an expansionary effect, lowering the rate on the deposit facility has a contractionary effect. This result has interesting implications for monetary policy implementation at the zero lower bound. --
    Keywords: interbank market,monetary policy,monetary policy implementation,zero lower bound,loan supply
    JEL: E52 E58 G21
    Date: 2014
  2. By: Orphanides, Athanasios
    Abstract: Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central Bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness to preserve price stability and contribute to crisis management. --
    Keywords: Global financial crisis,monetary policy real-time output gap,fiscal dominance,financial stability,central bank independence
    JEL: E50 E52 E58
    Date: 2013
  3. By: Michael D. Bordo
    Abstract: “Most people would say that Europe is still sort of coming out of the financial crisis that we had 5 years ago, which was probably the worst since the Great Depression of 1930s. Now just to keep things in context, at the time people were saying that it was going to be worse than the Great Depression, but it was not. It was big, but it was actually not that big compared to some of the crises, especially compared to what happened in the 1930s.” writes prof. Michael Bordo in the newly published mBank – CASE Seminar Proceedings No. 130. He discusses the lessons learned from the history of previous financial crises for the monetary policy, focusing mainly on the recent experience of the United States (and namely its Federal Reserve), where the current crisis began. He argues that the crisis of 2007-2008 was not as devastating as is commonly believed, and - more importantly – claims that the Fed’s policy during the crisis, based on lessons learn from the Great Depression, not only “did not exactly fit the facts of the recent crisis”, but may in fact have “exacerbated the crisis and may have led to serious problems which could contribute to the next (one)”.
    Keywords: Financial sector, Global/Multiregional, Crisis, credit crisis, financial crisis, banking sector, Fed
    Date: 2014
  4. By: Mark Gertler (New York University (E-mail:; Nobuhiro Kiyotaki (Princeton University (E-mail:
    Abstract: We develop a variation of the macroeconomic model of banking in Gertler and Kiyotaki (2011) that allows for liquidity mismatch and bank runs as in Diamond and Dybvig (1983). As in Gertler and Kiyotaki, because bank net worth fluctuates with aggregate production, the spread between the expected rates of return on bank assets and deposits fluctuates countercyclically. However, because bank assets are less liquid than deposits, bank runs are possible as in Diamond and Dybvig. Whether a bank run equilibrium exists depends on bank balance sheets and an endogenous liquidation price for bank assets. While in normal times a bank run equilibrium may not exist, the possibility can arise in a recession. We also analyze the effects of anticipated bank runs. Overall, the goal is to present a framework that synthesizes the macroeconomic and microeconomic approaches to banking and banking instability.
    Keywords: Financial Intermediation, Liquidity Mismatch, Financial Accelerator, Rollover Risk
    JEL: E44 G21
    Date: 2014–08
  5. By: Joshua Aizenman; Yin-Wong Cheung; Hiro Ito
    Abstract: We evaluate the impact of the global financial crisis (GFC) and recent structural changes in the patterns of hoarding international reserves (IR). We confirm that the determinants of IR hoarding evolve with developments in the global economy. During the pre-GFC period of 1999-2006, gross saving is associated with higher IR in developing and emerging markets. The negative impact of outward direct investment on IR accumulation is consistent with the recent trend of diverting international assets from the international reserve account into tangible foreign assets; the "Joneses' effect" lends support to the regional rivalry in hoarding IR as a motivation; and commodity price volatility induces precautionary buffer hoarding. During the 2007–2009 GFC period, previously significant variables become insignificant or display the opposite effect, probably reflecting the frantic market conditions driven by financial instability. Nevertheless, the propensity to import and gross saving continue to display strong and even larger positive effects on IR holding. The results from the 2010–2012 post-GFC period are dominated by factors that had been mostly overlooked in earlier decades. While the negative effect of swap agreements and the positive effect of gross saving on IR holdings are in line with our expectations, we find a change in the link between outward direct investment and IR in the pre- and post-crisis period. The macro-prudential policy tends to complement IR accumulation. Developed countries display different demand behaviors for IRs -- higher gross saving is associated with lower IR holding, possibly reflecting high-income countries' tendency to deploy their savings in the global capital markets. The presence of sovereign wealth funds motivates developed countries to hold a lower level of IR. Our predictive exercise affirms that an emerging market economy with insufficient IR holdings in 2012 tends to experience exchange rate depreciation against the U.S. dollar when many emerging markets were adjusted to the news of tapering quantitative easing (QE) in 2013.
    JEL: F3 F31 F32 F36
    Date: 2014–08
  6. By: Mauricio Villamizar
    Abstract: Many central banks, particularly in the developing world, aim for exchange rate stability as a macroeconomic goal. However, most are reluctant to relinquish monetary policy autonomy, so they end up operating through both interest rate and foreign exchange interventions. But the use of multiple policy instruments does not necessarily equip monetary authorities with better tools to achieve their targets. On the contrary, their effects can potentially offset each other. Using daily data from the Central Bank of Colombia during the period of 1999-2012, I study the effects of simultaneous policies by first deriving new measures of monetary shocks and then determining their impact on economic activity. The main findings indicate that (i) while interest rate interventions have a significant impact on real and nominal variables, foreign exchange interventions tend to have limited effects; and (ii) empirical anomalies, such as the price puzzle, are eliminated when properly accounting for the systematic responses of policy.
    Keywords: Central bank intervention, simultaneous policies, monetary shocks, price puzzle, monetary policy trilemma, foreign exchange intervention.
    JEL: E31 E43 E52 E58 F31
    Date: 2014–08–04
  7. By: Halit Aktürk (Meliksah University, Department of Economics, Kayseri, Turkey); Diana N. Weymark (Vanderbilt University, Department of Economics, Nashville, TN, USA)
    Abstract: This study provides a detailed quantitative analysis of a transition to inflation targeting with a focus on the role of expectations. We investigate the impact of the Turkish central bank’s inflation reduction programs on inflation in Turkey from 1996 to 2005. Over this period there was a transition from non-targeting to semi-formal targeting, and then, finally, to full-fledged inflation targeting. In order to analyze the effectiveness of Turkish monetary policy quantitatively, a structural model of the Turkish economy that allows for structural breaks is estimated under the alternative assumptions of rational expectations and adaptive learning. Using these estimates, counterfactual experiments are conducted to obtain ex ante and ex post inflation pressure measures which characterize, respectively, the pre-policy and post-policy inflationary environment. To evaluate the impact of the central bank’s disinflation program on its credibility, we introduce an index of monetary policy credibility that is new to the literature. The inflation pressure indices indicate that there was no significant difference between the inflationary environments in the 2002-2005 periods as compared to the 1996-2001 periods. However, the monetary policy effectiveness index shows that the semi-formal inflation targeting program that was implemented from 2002-2005 was considerably more successful in reducing inflation than the policies in the previous period had been. Surprisingly, the index of monetary policy credibility suggests that the improvement in inflation control was not accompanied by a significant improvement in the central bank’s credibility.
    Keywords: inflation pressure, transition, counterfactual, monetary policy
    JEL: E50 E52 E58
    Date: 2013
  8. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech to the Boston Economic Club, Federal Reserve Bank of Boston President Eric Rosengren called for a "patient approach" to removing the Fed's accommodative monetary policy, given the high numbers of U.S. workers who want full-time work but are currently working part time. He also cited the still-high unemployment rate, and the very low inflation rate.
    Date: 2014–02–26
  9. By: Laban K. Chesang (Department of Economics, University of Pretoria); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: This paper exploits the Lucas’ (1973) signal extraction model to study the effect of uncertainty in the output-inflation trade-off on inflation, using a monetary model with asymmetric central bank preferences over inflation and output. We show that the implication of the uncertainty is two-fold: firstly, it causes the interaction of output and volatility of monetary policy to influence inflation movements so that, higher volatility in monetary policy causes inflation to rise. Secondly, as suggested in an optimal rule, it causes output to contract by less whenever inflation increases above the target, and to expand by less whenever inflation is below the target. We also find that the Reserve Bank’s asymmetric aversion to inflation stabilization explains inflation movements significantly, and that the monetary authority seems to penalize more for inflationary rather than deflationary pressures. Overall, the Bank’s deflationary bias would allow for a relatively flat output-inflation trade-off, which could be helpful for economic stability.
    Keywords: Monetary policy, Asymmetric preferences, Inflation, Uncertainty
    JEL: E31 E52 E58 E61
    Date: 2014–08
  10. By: Carrasco, Bruno (Asian Development Bank); Mukhopadhyay, Hiranya (Asian Development Bank)
    Abstract: This paper reviews some of the more critical policy dilemmas facing the Reserve Bank of India (RBI) in its pursuit of inflation stabilization and balanced growth objectives. The challenge in meeting these objectives further increased in the mid-2000s with the advent of large capital flows into the country and with RBI’s role in preserving financial stability. The paper argues, drawing on several empirical results including Taylor rule estimation and nonparametric regression, that there is no simple policy solution to apply in different states of the market and reviews policy decisions undertaken by RBI against the backdrop of a disequilibrium framework where credit markets may be demand or supply constrained. Superimposing two capital flow regimes into this framework leads to identification of episodes where a hawkish (anti-inflationary) stance can give way to a dovish(pro-growth) stance.
    Keywords: India; monetary policy dilemmas; central bank; RBI policies; price stability; financial stability; Taylor rule; credit market disequilibrium
    JEL: E50 E52 E58
    Date: 2014–03–01
  11. 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. Classification JEL: E32, R40, E47, E52.
    Date: 2014–08
  12. By: Alexandros Kontonikas; Charles Nolan; Zivile Zekaite
    Abstract: Some studies argue that the Fed reacts to financial market developments. Using data covering the period 1985:Q1 - 2008:Q4 and employing an augmented Taylor rule specification, we re-examine that conjecture. We find that evidence in favour of such a reaction is largely driven by the Fed’s behaviour during the 2007-2008 financial crisis.
    Keywords: Monetary Policy; Taylor Rule; Financial Crisis
    JEL: E52 E58 G01
    Date: 2014–07
  13. By: Hans Geeroms (Professor at KULeuven and College of Europe, Research Associate at CES); Pawel Karbownik (Deputy Director at the EU Economic Department of the Polish MFA)
    Abstract: This paper argues that a monetary union requires a banking union. While the USA developed both during a time span of two centuries, the EMU was created in the course of two decades and remains unfinished as the economic pillar is largely missing. The financial crisis and the Eurocrisis have shown that a genuine banking union is even more needed for the Eurozone than a budget or a fiscal union to let the euro survive.
    Keywords: banking Union, ECB, EMU, monetary policy, eurozone
    JEL: E10 E42 E44 E52 E58 E61 E63
    Date: 2014–06
  14. By: Leroi Raputsoane
    Abstract: This paper analyses the relationship between financial stress indicator variables and monetary policy in South Africa with emphasis on how robust these variables are related to the monetary policy interest rate. The financial stress indicator variables comprise a set of variables from the main segments of the South African financial market that include the bond and equity securities markets, the commodities market and the foreign exchange rate market. The empirical results show that the set of financial stress indicator variables from the bond and equity securities markets as well as those from credit markets and property markets are robustly associated with the monetary policy interest rate, while the set of financial stress indicator variables from commodities markets and the foreign exchange rate market are weakly associated with the monetary policy interest rate.
    Keywords: Financial stress indicator variables, Monetary policy
    JEL: C32 C51 E52 E61 G01 G10
    Date: 2014
  15. By: Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Can the central bank credibly commit to keeping the nominal interest rate low for an extended period of time in the aftermath of a deep recession? By analyzing credible plans in a sticky-price economy with occasionally binding zero lower bound constraints, I find that the answer is yes if contractionary shocks hit the economy with sufficient frequency. In the best credible plan, if the central bank reneges on the promise of low policy rates, it will lose reputation and the private sector will not believe such promises in future recessions. When the shock hits the economy sufficiently frequently, the incentive to maintain reputation outweighs the short-run incentive to close consumption and inflation gaps, keeping the central bank on the originally announced path of low nominal interest rates.
    Keywords: Credible policy; forward guidance; reputation; sustainable plan; time consistency; trigger strategy; zero lower bound
    JEL: E32 E52 E61 E62 E63
    Date: 2014–06–17
  16. By: Alex Haberis (Bank of England); Richard Harrison (Bank of England; Author-Workplace-Name: Centre for Macroeconomics (CFM)); Matt Waldron (Bank of England)
    Abstract: In this paper we show that the macroeconomic effects of a transient interestrate peg can be significantly dampened when the peg is perceived to be imperfectly credible by the private sector. By doing so, we provide a solution to what has become known as the "forward guidance puzzle". This is the finding that pegging nominal interest rates to a specific value or path for an extended, yet finite, period of time in New Keynesian models generates macroeconomic responses that are implausibly large. This puzzle has been of interest because several central banks have implemented "forward guidance" which has been interpreted by some as a promise to hold the policy rate lower than had been previously expected: a so-called lower-for-longer (LFL) policy. The New Keynesian models that these central banks routinely use for policy analysis would predict that LFL policies generate very large effects. The possibility that LFL policies might be imperfectly credible arises from their potential to be time inconsistent . Indeed, using an ad-hoc loss function for the central bank we show that it may have an incentive to renounce the LFL policy along the full commitment path. We examine cases in which the degree of imperfect credibility is exogenous and in which it is endogenously related to the state of the economy via the policymaker's incentive to renounce. Allowing for endogenous imperfect credibility tends to dampen the response of macroeconomic variables to an LFL policy announcement by more than under exogenous imperfect credibility.
    Keywords: New Keynesian model, monetary policy, zero lower bound
    JEL: E12 E17 E20 E30 E42 E52
    Date: 2014–07
  17. By: Layal Mansour (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I (UCBL))
    Abstract: This aim of the present paper is to measure first, the degree of trilemma indexes: exchange rate stability, monetary independence capital account openness while taking into account the increase of hording IR ratio over GDP, over External Debt and over Short Term External Debt. The evolution of the trilemma indexes shows that countries applying de facto flexible Exchange Rate Regime (ERR) take advantage of the IR and become able to adopt a managed ERR that consist of achieving the three trilemma indexes simultaneously without renouncing to anyone of them. We found that different IR ratio could have different interpretations and different directions of monetary policies, where external debt should be taken into consideration in such study while using the IR. As for country that is applying a de facto fixed exchange rate regime, the IR (different ratio) do not play any role in changing the patter of the Mundell trilemma and do not intervene in monetary authority policies. This paper treats as well the normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth. We found different results from country to another, while taking different ratios of measuring IR, concluding that the impact of IR on the output volatility could change due to the level of external debt and adopted exchange rate regime.
    Keywords: Monetary policy; International Reserve; External Debts; Impossible Trinity; Managed Exchange Rate; Quadrilemma; Output Volatilily
    Date: 2014
  18. By: Bletzinger, Tilman; Wieland, Volker
    Abstract: On July 4, 2013 the ECB Governing Council provided more specific forward guidance than in the past by stating that it expects ECB interest rates to remain at present or lower levels for an extended period of time. As explained by ECB President Mario Draghi this expectation is based on the Council’s medium-term outlook for inflation conditional on economic activity and money and credit. Draghi also stressed that there is no precise deadline for this extended period of time, but that a reasonable period can be estimated by extracting a reaction function. In this note, we use such a reaction function, namely the interest rate rule from Orphanides and Wieland (2013) that matches past ECB interest rate decisions quite well, to project the rate path consistent with inflation and growth forecasts from the survey of professional forecasters published by the ECB on August 8, 2013. This evaluation suggests an increase in ECB interest rates by May 2014 at the latest. We also use the Eurosystem staff projection from June 6, 2013 for comparison. While it would imply a longer period of low rates, it does not match past ECB decisions as well as the reaction function with SPF forecasts. --
    Date: 2013
  19. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech at UMass Boston, Boston Fed President Eric Rosengren illustrated how unusually weak this recovery has been, which emphasizes the need for continued accommodative monetary policy.
    Date: 2013–11–04
  20. By: Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita
    Abstract: We propose a continuous time model to investigate the impact of inflation credibility on sovereign debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal debt. In equilibrium, debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of debt accumulation. This rationalizes the sovereign debt booms that are often experienced by low inflation credibility countries upon joining a currency union.
    Date: 2014
  21. By: Federico Etro (Department of Economics, University Of Venice Cà Foscari); Lorenza Rossi (Department of Economics, University Of Pavia)
    Abstract: We reconsider the New Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing this reduces the level of nominal rigidities needed to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, derived with the linear quadratic approach, becomes less aggressive, and the welfare gains from commitment to the optimal monetary policy decrease.
    Keywords: New Keynesian Phillips Curve, Real rigidities, Sticky prices, Optimal monetary policy, Inflation, Endogenous entry
    JEL: E3 E4 E5
    Date: 2014
  22. By: Stephen Williamson (Washington University in St. Louis)
    Abstract: A model is constructed in which consumers and banks have incentives to fake the quality of collateral. Conventional central banking policy can exacerbate these problems, in that lower nominal interest rates make asset prices higher, which makes faking collateral more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages can increase welfare by bypassing incentive problems associated with private banks, increasing asset prices, and relaxing collateral constraints. However, this may exacerbate incentive problems in the mortgage market.
    Date: 2014
  23. By: Robert G. Murphy (Boston College); Adam Rohde (Charles River Associates)
    Abstract: This paper argues that individuals may rationally weight price increases for food and energy products differently from their expenditure shares when forming expectations about price inflation. If food and energy price inflation exhibits a sufficient degree of persistence and wage adjustment is not too sluggish, we show that it is rational to put more weight on inflation in these sectors than their expenditure shares in the Consumer Price Index would warrant. We develop a simple dynamic model of the economy in which individuals are partly backward looking and use the model to illustrate this finding. We then test the prediction of the model using data on expected inflation from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Our results show that the weights implied by the model for constructing expectations of inflation differ from the expenditure weights of food and energy prices in the Consumer Price Index. In particular, we find that food price inflation is weighted more heavily and energy price inflation is weighted less heavily. But importantly, we cannot reject the hypothesis that these weights reflect rational behavior in forming expectations about inflation. Our analysis validates concerns sometimes raised by policymakers as to whether expectations might not be well anchored with respect to commodity price shocks. As a consequence, policy may need to be calibrated carefully to prevent such shocks from becoming embedded in expected inflation.
    Keywords: Inflation Expectations, Core Inflation, Food and Energy Prices, Anchored Expectations
    JEL: E30 E31 E52 E58
    Date: 2014–08–01
  24. By: David Miller (Federal Reserve Board)
    Abstract: Price commitment results in lower welfare. I explore the consequences of price commitment by pairing an independent monetary authority issuing nominal bonds with a fiscal authority whose endogenous spending decisions are determined by a political economy model. Without price commitment, nominal bonds are backed by a new form of endogenous commitment that overcomes time inconsistency to make tax smoothing possible. With price commitment, nominal bonds will be used for both tax smoothing and wasteful spending. Price commitment eliminates monetary control over fiscal decisions. I show that the combination observed in advanced economies of a politically distorted fiscal authority and an independent monetary authority with nominal bonds and without price commitment is the solution to a constrained mechanism design problem that overcomes time inconsistency and results in the highest welfare.
    Date: 2014
  25. By: Tröger, Tobias
    Abstract: This paper analyzes the evolving architecture for the prudential supervision of banks in the euro area. It is primarily concerned with the likely effectiveness of the SSM as a regime that intends to bolster financial stability in the steady state. By using insights from the political economy of bureaucracy it finds that the SSM is overly focused on sharp tools to discipline captured national supervisors and thus underincentives their top-level personnel to voluntarily contribute to rigid supervision. The success of the SSM in this regard will hinge on establishing a common supervisory culture that provides positive incentives for national supervisors. In this regard, the internal decision making structure of the ECB in supervisory matters provides some integrative elements. Yet, the complex procedures also impede swift decision making and do not solve the problem adequately. Ultimately, a careful design and animation of the ECB-defined supervisory framework and the development of inter-agency career opportunities will be critical. The ECB will become a de facto standard setter that competes with the EBA. A likely standoff in the EBA’s Board of Supervisors will lead to a growing gap in regulatory integration between SSM-participants and other EU Member States. Joining the SSM as a non-euro area Member State is unattractive because the current legal framework grants no voting rights in the ECB’s ultimate decision making body. It also does not supply a credible commitment opportunity for Member States who seek to bond to high quality supervision. --
    Keywords: prudential supervision,banking union,regulatory capture,political economy of bureaucracy,Single Supervisory Mechanism (SSM),European Central Bank (ECB),European Banking Authority (EBA)
    JEL: G21 G28 H77 K22 K23 L22
    Date: 2013
  26. By: Song, Zhaogang (Board of Governors of the Federal Reserve System (U.S.)); Zhu, Haoxiang (MIT Sloan School of Management)
    Abstract: The Federal Reserve (Fed) uses a unique auction mechanism to purchase U.S. Treasury securities in implementing its quantitative easing (QE) policy. In this paper, we study the outcomes of QE auctions and participating dealers' bidding behaviors from November 2010 to September 2011, during which the Fed purchased $780 billion Treasury securities. Our data include the transaction prices and quantities of each traded bond in each auction, as well as dealers' identities. We find that: (1) In QE auctions the Fed tends to exclude bonds that are liquid and on special, but among included bonds, purchase volumes gravitate toward more liquid bonds; (2) The auction costs are low on average: the Fed pays around 0.7 cents per $100 par value above the secondary market ask price on auction dates; (3) The heterogeneity of Fed's costs across bonds relates to their liquidity and specialness, suggesting that dealers respond to both valuation and information uncertainties; (4) Dealers exhibit strong heterogeneity in their participation, trading volumes, and profits in QE auctions; (5) Auction bidding variables forecast bond returns only one day after the auction, suggesting that dealers have price-relevant information but the information decays quickly.
    Keywords: Auction; quantitative easing; Federal Reserve; treasury bond; specialness
    JEL: G12 G13
    Date: 2014–06–16
  27. By: Joshua Ioji Konov (Freelance, Chicago, USA)
    Abstract: Monetary Policies of expanding liquidity through bottom low interest rate; stimulus packages, quantitative easing, etc should be transmissible to the entire market (i.e. economy) for best performance. However, current markets (i.e. economies) do not posses enough market security to provide the transmissionability to reach adequate market development (i.e. economic growth). This paper theoreticizes that by mitigating of A) the shady business practices of B) vague personal corporate liability and C) contract laws, D) vague insurance and bonding laws, E) inadequate 1) intellectual property laws, 2) environmental protection and 3) consumer protection laws, etc market marginalization in fact will enhance the market security, and improve the transmissionability and the effectiveness of the monetary policies to boost market development (i.e. economic growth).
    Keywords: Monetary Policies, Market Economics, Transmissionability
    JEL: A1 D01 D5 P48 K0
    Date: 2013
  28. By: Musgrave, Ralph S.
    Abstract: Section 1 of this work argues the case for full reserve banking. Section 2 explains the flaws in a large number of arguments put AGAINST full reserve, and section 3 explains the flaws in a few arguments put IN FAVOUR of full reserve.
    Keywords: Banking; full reserve; 100% reserve.
    JEL: E32 E4 E41 E42 G01 G21 G24 H5
    Date: 2014–08–14
  29. By: Oğuz Esen (Izmir University of Economics, Department of Economics); Ayla Oğuş Binatlı (Izmir University of Economics, Department of Economics)
    Abstract: The recent global financial crisis has underlined the need to go beyond the microprudential perspective to financial instability and move in a macroprudential direction. There is a growing consensus among policymakers and academics that macroprudential policy should be adopted. Through these changes, policymakers appear to be moving in a direction broadly consistent with Minsky’s view.The theoretical framework of macroprudential policy can be found in Minsky’s financial instability theory. Emerging economies, including Turkey, have adopted macroprudential tools to prevent and mitigate system wide risks. This paper offers a Minsky perspective on macroprudential policy and evaluates macroprudential tools through an examination of the Turkish experience as a case study.
    Keywords: Macroprudential policy, Minsky, Reserve Requirement
    JEL: E58 E60 G01
    Date: 2013
  30. By: Jae Sim (Federal Reeserve Board); Raphael Schoenle (Brandeis University); Egon Zakrajsek (Federal Reserve Board); Simon Gilchrist (Boston University)
    Abstract: Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms' financial conditions on their price-setting behavior during the "Great Recession" that surrounds the financial crisis. The evidence indicates that during the height of the crisis in late 2008, firms with "weak" balance sheets increased prices significantly relative to industry averages, whereas firms with "strong" balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks. We explore the implications of these empirical findings within a general equilibrium framework that allows for customer markets and departures from the frictionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks.
    Date: 2014

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