nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒09‒25
nineteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The international monetary and financial system: its Achilles heel and what to do about it By Claudio Borio
  2. Systematic Monetary Policy and Communication By Plosser, Charles I.
  3. Operational targets and the yield curve: The euro area and Switzerland By Kedan, Danielle; Stuart, Rebecca
  4. Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy By Aruoba, S. Boragan
  5. Macroprudential Regulation and the Role of Monetary Policy By William Tayler; Roy Zilberman
  6. How does credit supply respond to monetary policy and bank minimum capital requirements? By Aiyar, Shekhar; Calomiris, Charles; Wieladek, Tomasz
  7. Inflation Expectations and Consumer Spending at the Zero Bound: Micro Evidence By Hibiki Ichiue; Shusaku Nishiguchi
  8. A Simple Interest Rate Model with Unobserved Components: The Role of the Interbank Reference Rate By Ichiro Muto
  9. On the Reliability of Japanese Inflation Expectations Using Purchasing Power Parity By Koichiro Kamada; Jouchi Nakajima
  10. Estimating Term Premia at the Zero Bound: An Analysis of Japanese, US, and UK Yields By Hibiki Ichiue; Yoichi Ueno
  11. On inflation and money demand in a portfolio model with shopping costs By Miguel Lebre de Freitas
  12. How Central Banks End Crises By Gary B. Gorton; Guillermo L. Ordoñez
  13. The Ramsey Steady State under Optimal Monetary and Fiscal Policy for Small Open Economies By Angelo Marsiglia Fasolo
  14. Credit spread variability in U.S. business cycles: the Great Moderation versus the Great Recession By Hylton Hollander; Guangling Liu
  15. The Effects of Settlement Methods on Liquidity Needs: Empirical Study based on Funds Transfer Data By Saiki Tsuchiya
  16. Simple Macroeconomic Policies and Welfare: a quantitative assessment By Eurilton Araújo; Alexandre B. Cunha
  17. Employment, hours and optimal monetary policy By Maarten Dossche; Vivien Lewis; Céline Poilly
  18. Are subjective distributions in inflation expectations symmetric? By Nikola Mirkov; Andreas Steinhauer
  19. Whenever and Wherever: The Role of Card Acceptance in the Transaction Demand for Money By Huynh, Kim P.; Schmidt-Dengler, Philipp; Stix, Helmut

  1. By: Claudio Borio
    Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the "excess saving" and "excess demand for safe assets" views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.
    Keywords: Interbank markets, networks, entropy, intermediation, systemic risk
    Date: 2014–08
  2. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: President Plosser gives his views on the economy and the FOMC's most recent policy decisions. He also explains how a detailed monetary policy report produced by the FOMC would lead to better decisions and better economic outcomes over the longer run.
    Keywords: Monetary policy; FOMC;
    Date: 2014–06–24
  3. By: Kedan, Danielle (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: When setting monetary policy, central banks seek to aect the entire term structure of interest rates. Most central banks with a price stability or in ation mandate do this by targeting a very short-term market rate. This Letter presents a comparative analysis of the correlation between policy rate changes and bond yields in the euro area, where the implicit target of monetary policy is the overnight rate, and Switzerland, where the target is a three- month rate. The analysis indicates that unanticipated policy rate changes by the European Central Bank and Swiss National Bank are signicantly and positively correlated with changes in German and Swiss government bond yields out to 6 years and 20 years, respectively.
    Date: 2014–06
  4. By: Aruoba, S. Boragan (Federal Reserve Bank of Minneapolis)
    Abstract: Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve’s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations – inflation expectations at any horizon from 3 to 120 months – and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast accuracy they are at par with or superior to some popular alternatives obtained from financial variables. Looking at the period 2008–2013, I conclude that the unconventional policies of the Federal Reserve kept long-run inflation expectations anchored and provided a large level of monetary stimulus to the economy.
    Keywords: Inflation expectations; Real interest rate; Unconventional policies;
    JEL: C22 E31 E43 E58
    Date: 2014–08–13
  5. By: William Tayler; Roy Zilberman
    Abstract: We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords and cast doubt on the desirability of conventional Taylor rules during periods of financial distress.
    Date: 2014
  6. By: Aiyar, Shekhar (International Monetary Fund); Calomiris, Charles (Columbia Business School); Wieladek, Tomasz (Bank of England)
    Abstract: We use data on UK banks’ minimum capital requirements to study the interaction of monetary policy and capital requirement regulation. UK banks were subject to both time-varying capital requirements and changes in interest rate policy. Tightening of either capital requirements or monetary policy reduces the supply of lending. Lending by large banks reacts substantially to capital requirement changes, but not to monetary policy changes. Lending by small banks reacts to both. There is little evidence of interaction between these two policy instruments. The differences in the responses of small and large banks, and the lack of interaction between capital requirement changes and monetary policy, have important policy implications. Our results confirm the theoretical consensus view that monetary policy should focus on price stability objectives and that capital requirement changes are a more effective tool to achieve financial stability objectives related to loan supply. We also identify important distributional consequences within the financial system of these two policy instruments. Finally, our findings do not corroborate theoretical models that raise concerns about complex interactions between monetary policy and macroprudential variation in capital requirements.
    Keywords: loan supply; capital requirements; monetary policy; macroprudential regulation
    JEL: E44 E51 E52 G18 G21
    Date: 2014–09–05
  7. By: Hibiki Ichiue (Bank of Japan); Shusaku Nishiguchi (Bank of Japan)
    Abstract: Standard theoretical models predict that higher inflation expectations generate greater current consumer spending at the zero lower bound of interest rates. However, a recent empirical study using US micro data finds negative results for this relationship. We use micro data for Japan, which has experienced low interest rates for a prolonged period, to estimate ordered probit models with a variety of controls. We find evidence supporting the prediction of standard models: survey respondents with higher expected inflation tend to indicate that their household has increased real spending compared with one year ago but will decrease it in the future. This relationship appears to be stronger for asset holders and older people.
    Keywords: Inflation expectations; Survey data; Monetary policy; Zero lower bound; Japan
    JEL: E20 E21 E30 E31 E50 E52
    Date: 2013–07–12
  8. By: Ichiro Muto (Bank of Japan)
    Abstract: In this study, we theoretically investigate the potential role of the reference rate in stabilizing or destabilizing an interbank market with an environment where individual banks cannot fully identify the nature of underlying shocks affecting their interbank transactions. We show that a noise-free reference rate based on a sufficient number of sample transactions can help to make the market interest rate less volatile, whereas the stabilizing effects of the reference rate are significantly reduced if the reported interest rates contain some noisy components. Nevertheless, by increasing the number of sample transactions reflected in the reference rate, the adverse effects of the noise can be mitigated (or eliminated) provided the noise is idiosyncratic to individual transactions. However, if the noise is common to multiple transactions, then the adverse effects of the noisy reference rate cannot be reduced simply by increasing the number of sample transactions. This suggests that the noise in the interest rates reported by just a few of large banks can end up making the entire market more volatile, thereby impairing the transmission mechanism of monetary policy.
    Keywords: Interbank Market; Reference Rate; LIBOR; Imperfect Information; Financial Stability; Transmission Mechanism of Monetary Policy
    JEL: E43 E44 G14
    Date: 2012–12–10
  9. By: Koichiro Kamada (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper shows how purchasing power parity (PPP) can be used to construct a measure for inflation expectations and discusses the properties of this measure from both a theoretical and an empirical perspective. Under the PPP hypothesis, inflation expectations in one country are equal to inflation expectations in another country plus the expected depreciation rate of the nominal exchange rate. Exploiting this formula, we calculate Japanese inflation expectations from the break-even inflation rates (BEI) and FX forward spreads for five countries (United States, United Kingdom, Australia, Canada, and Sweden). The resulting PPP-based measure of inflation expectations follows a trend that largely coincides with long-run developments in the Japanese BEI. However, we find that both levels of and variations in the new measure differ across the reference countries, and that a recent gap between the new measure and the Japanese BEI is not negligible from a short-run perspective. Consequently, there remain several issues that need to be addressed to assess the usefulness of this new formula.
    Keywords: BEI; Foreign exchange forward spread; Inflation expectations; Inflation-indexed bonds; PPP
    Date: 2013–09–20
  10. By: Hibiki Ichiue (Bank of Japan); Yoichi Ueno (Bank of Japan)
    Abstract: This paper estimates an affine term structure model (ATSM) and a shadow rate model (SRM) using Japanese, US, and UK data until March 2013. These models produce very different results, which are attributable to the ATSM's neglect of the zero lower bound (ZLB). The 10-year term premium estimated by the ATSM occasionally deviates from that estimated by the SRM by around 2 percentage points, and the deviation has recently widened in the US and the UK. The ATSM consistently overestimates the long-run level of the short rate, which appears to contribute to the tendency to underestimate the term premium.
    Keywords: Affine term structure model; Shadow rate model; Zero lower bound; Term premium; Monetary policy
    JEL: E43 E52 G12
    Date: 2013–05–08
  11. By: Miguel Lebre de Freitas (Universidade de Aveiro and NIPE)
    Abstract: In this paper, we investigate the conditions under which expected inflation might influence the money demand, using a microeconomic model where the transactions of the representative agent are facilitated by its holdings of money. We assume that the agent holds a real asset, along with a range of nominal assets, that may include domestic money, foreign money, domestic bonds and foreign bonds. In this model, the optimal choice between money and bonds is embedded in a portfolio choice between the real asset and risky assets (the Merton problem). We show that, as long as the agent is not constrained in her holdings of bonds, the demand for domestic money will not, in general, depend on expected inflation. The demand for money may however become a positive function of the inflation rate in case the agent is constrained in her holdings of foreign bonds. The only case in which the demand for domestic money may depend negatively on the inflation rate is when the agent faces a binding constraint in her holdings of domestic bonds.
    Keywords: Money Demand, Currency Substitution, Portfolio Theory
    JEL: E41 F41 G11
    Date: 2014
  12. By: Gary B. Gorton (Yale School of Management, National Bureau of Economic Research); Guillermo L. Ordoñez (Department of Economics, University of Pennsylvania, National Bureau of Economic Research)
    Abstract: To end a financial crisis, the central bank is to lend freely, against good collateral, at a high rate, according to Bagehot’s Rule. We argue that in theory and in practice there is a missing ingredient to Bagehot’s Rule: secrecy. Re-creating confidence requires that the central bank lend in secret, hiding the identities of the borrowers, to prevent information about individual collateral from being produced and to create an information externality by raising the perceived value of average collateral. Ironically, the participation of "bad" borrowers, with low quality collateral, in the central bank’s lending program is a desirable part of re-creating confidence because it creates stigma. Stigma is critical to sustain secrecy because no borrower wants to reveal his participation in the lending program, and it is limited by the central bank charging a high rate for its loans.
    Keywords: Central Bank, Discount Window, Financial Crisis, Confidence
    JEL: E32 E44 E58
    Date: 2014–09–02
  13. By: Angelo Marsiglia Fasolo
    Abstract: This paper describes the steady state allocations and prices for small open economies under optimal monetary and fiscal policy in a medium-scale DSGE model. The model encompasses the most common nominal and real rigidities normally found in the literature in a single framework. The Ramsey solution for the optimal monetary and fiscal policy is computed for a large space of the parameter set and for different combinations of fiscal policy instruments. Results show that, despite the large number of frictions in the model, optimal fiscal policy follows the usual results in the literature, with high taxes over labor income and low taxes (subsidies) on capital income. On the other hand, the choice of fiscal policy instruments is critical to characterize optimal monetary policy. Frictions associated with the small open economy framework do not play a critical role in characterizing the Ramsey planner's policy choices
    Date: 2014–07
  14. By: Hylton Hollander (Department of Economics, University of Stellenbosch); Guangling Liu (Department of Economics, University of Stellenbosch)
    Abstract: This paper establishes the prevailing financial factors that influence credit spread variability, and its impact on the U.S. business cycle over the Great Moderation and Great Recession periods. To do so, we develop a dynamic general equilibrium framework with a central role of financial intermediation and equity assets. Over the Great Moderation and Great Recession periods, we find an important role for bank market power (sticky rate adjustments and loan rate markups) on credit spread variability in the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as a main driving force of credit spread variability. Both the financial accelerator and bank capital channels play a significant role in propagating the movements of credit spreads. We observe a remarkable decline in the influence of technology and monetary policy shocks over three recession periods. From the demand-side of the credit market, the influence of LTV shocks has declined since the 1990 - 91 recession, while the bank capital requirement shock exacerbates and prolongs credit spread variability over the 2007 - 09 recession period. Across the three recession periods, there is an increasing trend in the contribution of loan markup shocks to the variability of retail credit spreads.
    Keywords: financial intermediation, credit spreads, financial frictions, great recession
    JEL: E32 E43 E44 E51 E52
    Date: 2014
  15. By: Saiki Tsuchiya (Bank of Japan)
    Abstract: The level of intraday liquidity needed for settlement varies according to settlement methods. This paper is an empirical study based on funds transfer data in Japan of the effects of the shift from deferred net settlement (DNS) to real time gross settlement (RTGS) with liquidity-saving features (LSF) on the liquidity for settlements of payments among financial institutions. The study has revealed the following: (1) The extent to which liquidity financial institutions put into their accounts for settlement has increased due to the shift to RTGS; (2) the level of the liquidity which was not used for settlements; (3) the liquidity-saving effects of the LSF in an accommodative monetary environment under the zero-interest rate policy; (4) the extent to which the liquidity-saving effects have increased by the uniform application of LSF to different types of transactions; and (5) the extent to which the collateral requirements have declined as a result of the reduction in transactions settled on a DNS basis.
    Date: 2013–02–25
  16. By: Eurilton Araújo; Alexandre B. Cunha
    Abstract: We quantitatively compare three macroeconomic policies in a cash-credit goods framework. The policies are: the optimal one; another one that fully smoothes out oscillations in output; and a simple one that prescribes constant values for tax and monetary growth rates. As often found in the related literature, the welfare gains or losses from changing from a given policy to another are small. We also show that the simple policy dominates the one that leads to constant output
    Date: 2014–08
  17. By: Maarten Dossche (National Bank of Belgium, Research Department); Vivien Lewis (Center for Economic Studies, KU Leuven, Belgium); Céline Poilly (University of Lausanne, HEC-DEEP Switzerland)
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex ‘wage curve’ linking wages to hours. Since the steadystate real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as an instrument to dampen inefficient hours fluctuations.
    Keywords: employment, hours, wage curve, optimal monetary policy
    JEL: E30 E50 E60
    Date: 2014–09
  18. By: Nikola Mirkov; Andreas Steinhauer
    Abstract: We conducted an anonymous survey in December 2013 asking around 200 economists worldwide to provide an interval (a to b) of average inflation in the US expected "over the next two years". The respondents were also instructed to give a probability of inflation being higher or lower than the mid-interval (a+b)/2. The aggregate distribution of inflation expectations we obtain closely resembles the outcome of the Survey of Professional Forecasters for 1Q2014. More importantly, we find that the subjective probability mass on either side of the mid-interval is not statistically different from 0.5, which means that the subjective distributions are symmetric. Our results align well with several papers evaluating the Survey of Professional Forecasters or similar data sets and finding no significant departures from symmetry.
    Keywords: Inflation expectations, subjective probability distributions
    JEL: C42 E31
    Date: 2014–09
  19. By: Huynh, Kim P.; Schmidt-Dengler, Philipp; Stix, Helmut
    Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.
    Keywords: Bank notes; Econometric and statistical methods; E-money; Financial services.
    JEL: E41 C35 C83
    Date: 2014–08–22

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