nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒09‒29
seventeen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. What Caused the Great Recession? By Homburg, Stefan
  2. The changing dynamics of US inflation persistence: a quantile regression approach By Peter Tillmann; Maik Wolters
  3. Identifying Conventional and Unconventional Monetary Policy Shocks: A Latent Threshold Approach By Takeshi Kimura; Jouchi Nakajima
  4. Financial Crisis, Taylor Rule and the Fed By Saten Kumar
  5. In Old Chicago: Simons, Friedman and the Development of Monetary-Policy Rules By George Tavlas
  6. Welfare Analysis of Policy Measures for Financial Stability By Ko Munakata; Koji Nakamura; Yuki Teranishi
  7. On the Credibility of Inflation Targeting Regimes in Latin America By Rodrigo Mariscal; Andrew Powell; Pilar Tavella
  8. The credit counterparts of broad money By Gerald Steele
  9. Exchange Rate Predictability in a Changing World By Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J.
  10. "The ECB and the Single European Financial Market: A Proposal to Repair Half of a Flawed Design" By Mario Tonveronachi
  11. Does nominal rigidity mislead our perception of the exchange rate passthrough? By Olivier de Bandt; Tovonony Razafindrabe
  12. Downward Rigidity in Households' Price Expectations: An Analysis Based on the Bank of Japan's 'Opinion Survey on the General Public's Views and Behavior' By Koichiro Kamada
  13. Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy By Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
  14. Arch and Structural Breaks in United States Inflation By Russell, Bill
  15. Cross-border banking and global liquidity By Valentina Bruno; Hyun Song Shin
  16. Money Supply and the Credit Market in Early Modern Economies: The Case of Eighteenth-Century Lisbon By Leonor F. Costa,; M. Manuela Rocha,; Paulo Brito
  17. Understanding Exchange Rates Dynamics By Peter Martey Addo; Monica Billio; Dominique Guegan

  1. By: Homburg, Stefan
    Abstract: This paper examines five possible explanations for the Great Recession of 2008 and 2009, using data for the United States and the eurozone. Of these five hypotheses, four are not supported by the data, while the fifth appears reasonable.
    Keywords: Financial crisis; Great Recession; wealth effect; credit crunch; money demand; central bank
    JEL: E3 E4 G1
    Date: 2014–09
  2. By: Peter Tillmann; Maik Wolters
    Abstract: We examine both the degree and the structural stability of inflation persistence at different quantiles of the conditional inflation distribution. Previous research focused exclusively on persistence at the conditional mean of the inflation rate. As economic theory provides reasons for inflation persistence to differ across conditional quantiles, this is a potentially severe constraint. Conventional studies of inflation persistence cannot identify changes in persistence at selected quantiles that leave persistence at the median of the distribution unchanged. Based on post-war US data we indeed find robust evidence for a structural break in persistence at all quantiles of the inflation process in the early 1980s. While prior to the 1980s inflation was not mean reverting, quantile autoregression based unit root tests suggest that since the end of the Volcker disinflation the unit root can be rejected at every quantile of the conditional inflation distribution
    Keywords: inflation persistence, quantile regressions, structural breaks, unit root test, monetary policy, Federal Reserve
    JEL: E31 E37 E58 C22
    Date: 2014–08
  3. By: Takeshi Kimura (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper proposes a new estimation framework for identifying monetary policy shocks in both conventional and unconventional policy regimes using a structural VAR model. Exploiting a latent threshold modeling strategy that induces time-varying shrinkage of the parameters, we explore a recursive identification switching with a time-varying overidentification for the interest rate zero lower bound. We empirically analyze Japan's monetary policy to illustrate the proposed approach for modeling regime-switching between conventional and unconventional monetary policy periods, and find that the proposed model is preferred over a nested standard time-varying parameter VAR model. The estimation results show that increasing bank reserves lowers long-term interest rates in the unconventional policy periods, and that the impulse responses of inflation and the output gap to a bank reserve shock appear to be positive but highly uncertain.
    Keywords: Identification; Latent threshold models; Monetary policy; Time-varying parameter VAR; Zero lower bound
    JEL: C32 E52
    Date: 2013–05–02
  4. By: Saten Kumar (Department of Economics, Faculty of Business and Law, Auckland University of Technology)
    Abstract: We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation led them to hit the ZLB.
    Keywords: Ambiguity, Belief Function, Investment Bubble, Inference
    Date: 2014–02
  5. By: George Tavlas (Bank of Greece)
    Abstract: This paper examines the different policy rules proposed by Henry Simons, who, beginning in the mid-1930s, advocated a price-level stabilization rule, and by Milton Friedman, who, beginning in the late-1950s, advocated a rule that targeted a constant growth rate of the money supply. Although both rules shared the objective of eliminating the policy uncertainty emanating from discretion, they differed because of the different views of Simons and Friedman about the stability of secular relationships. Simons' rule relates to modern rules which emphasize the pursuit of price stability as representing optimal monetary policy.    
    Keywords: Milton Friedman, Henry Simons, monetary-policy rules
    Date: 2014
  6. By: Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Bank of Japan)
    Abstract: We introduce the financial market friction through the search and matching in the loan market into a dynamic stochastic general equilibrium (DSGE) model. We reveal that the second order approximation of social welfare includes the terms relating credit, such as credit market tightness, the volume of credit, and a loan separation rate, in addition to the inflation rate and the output gap under the financial market friction. Our analytical result justifies the reason why the optimal policy should take the credit variation into account. We introduce a monetary policy and other policy measures for the financial stability into the model. The optimal outcome is achieved through the monetary and other policy measures by taking into account not only price stability but also financial stability.
    Date: 2013–03–01
  7. By: Rodrigo Mariscal; Andrew Powell; Pilar Tavella
    Abstract: Inflation targeting has been adopted in a set of emerging economies, including eight countries in Latin America. The success of this regime may depend critically on the credibility of the target and the expectation that the authorities will take appropriate actions if the target is breached. This paper exploits a database of inflation expectations and attempts to measure whether, for a set of inflation targeters in Latin America, expectations are well anchored. A tighter anchoring of expectations is interpreted as a gain in credibility. Also considered are the effects on the credibility of the regime if the inflation target is breached. The results indicate that while inflation expectations have not been fully anchored over the whole sample period, credibility has risen, but at the same time the cost of breaching the target has grown.
    Keywords: Monetary Policy, Economic Development & Growth, Latin America, Inflation targeting, Credibility, Expectations
    Date: 2014–08
  8. By: Gerald Steele
    Abstract: Tautological structures bring clarity to arguments in macroeconomics: familiar structures relate to the circulation of money, the circular flow of real income, and the balance of international payments. Less familiar is a structure incorporating all aspects of macroeconomic policy interventions. The origins and use of the credit counterparts of broad money are examined in the context of the application of UK monetary policy in the period since 1945.
    Date: 2014
  9. By: Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J.
    Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.
    Keywords: Exchange Rate Forecasting, Taylor Rules, Time-Varying Parameters, Bayesian Methods,
    Date: 2014
  10. By: Mario Tonveronachi
    Abstract: The flaws of the Maastrict Treaty are a frequent object of commentary but, as yet, Europe remains unable—or, perhaps more accurately, unwilling—to address these flaws. The European project will remain unfinished and the ability of the European Central Bank to implement effective monetary policies will continue to be hobbled. As Mario Tonveronachi observes in this public policy brief, Europe has a currency union, but this does not mean that Europe has achieved a single financial market, an essential element for a functioning union. He reminds us that a single European market requires pricing in relation to common risk-free assets rather than in relation to a collection of individual idiosyncratic sovereign rates. And financial operators must have access to the same risk-free assets for trading and liquidity operations. The euro provides neither of these functions, and thus, while there has been a measure of convergence, a single financial market, and the financial integration it represents, remains unachieved.
    Date: 2014–09
  11. By: Olivier de Bandt; Tovonony Razafindrabe
    Abstract: Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we …nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that …rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.
    Keywords: Exchange rate pass-through, nominal rigidity, import price
    JEL: F31 E31 C23
    Date: 2014–09–01
  12. By: Koichiro Kamada (Bank of Japan)
    Abstract: This paper investigates the characteristics of households' inflation expectations using the micro-data of the Opinion Survey on the General Public's Views and Behavior conducted by the Bank of Japan. The results of the Kahn test indicate the existence of strong downward rigidity in households' price expectations. One consequence of this downward rigidity is that survey answers strongly react to shocks to inflation expectations in a high inflation environment, but only weakly in a low inflation environment. Furthermore, this downward rigidity may hide potential links between inflation expectations and other economic indicators and may produce spurious correlations between them. To overcome these problems, this paper adjusts the distribution of survey answers on inflation expectations for downward rigidity. Using this adjusted distribution, the paper examines the relationships between households' inflation expectations and their views on various economic issues. The main results are as follows. From the end of 2005 onward, a negative correlation between households' inflation expectations and their outlook for economic conditions can be observed. Regarding the activities of the Bank of Japan, the following relationships can be observed from 2006. First, the more strongly households are interested in the Bank's activities, the more stable are their inflation expectations. And second, the more confidence households have in the Bank, the more tightly are their inflation expectations anchored.
    Date: 2013–11–08
  13. By: Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
    Abstract: This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of nancial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks'strategic reactions to changes in funding costs, in risk perception and in the regulatory environment.The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms.
    Keywords: Collateral, productivity, small open economy
    Date: 2014–09
  14. By: Russell, Bill
    Abstract: United States Phillips curves are routinely estimated without accounting for the shifts in mean inflation. As a result we may expect the standard estimates of Phillips curves to be biased and suffer from ARCH. We demonstrate this is indeed the case. We also demonstrate that once the shifts in mean inflation are accounted for the ARCH is largely eliminated in the estimated model and the model defining expected rate of inflation in the New Keynesian model plays no significant role in the dynamics of inflation.
    Keywords: Philips curve, ARCH, structural breaks, inflation, markup,
    Date: 2013
  15. By: Valentina Bruno; Hyun Song Shin
    Abstract: We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
    Keywords: Cross-border banking flows, bank leverage, global banks
    Date: 2014–08
  16. By: Leonor F. Costa,; M. Manuela Rocha,; Paulo Brito
    Abstract: In this paper, we address the partial equilibrium functioning of the shortterm credit market in the Eighteenth-century Lisbon and its response to three major events: massive gold inflows from Brazil, a catastrophic destruction of capital caused by the 1755 earthquake and the enactment of a 5% legal ceiling on interest rates 1757. We build a time series for the market interest rate, and a regression shows money stock and real estates as two significant variables. Interest rates were affected negatively by the former and positively by the latter. We conclude that changes in the money stock tended to operate through the supply of loanable funds. The wealth effect, measured by the stock of real estate, operated over demand and tended to be the most significant effect among several other possible countervailing effects (e.g., the impact of wealth effects on supply, the informational effects of collaterals). The inflow of gold clearly generated a liquidity which by itself explained the downward trend in interest rates up until around 1780. However, the huge variations experienced by the stock of capital after the earthquake also explains the steadiness of interest rates in a period when the inflow of money started to recede. For the whole period during which the 5 % ceiling on interest rates was in force we do not find any evidence to confirm the existence of disequilibrium credit rationing: the notional interest rate predicted by our model was very close to the 5% legal ceiling.
    Keywords: Interest rates, credit markets, Brazilian gold, Lisbon earthquake. JEL classification : N13, N23, N43
    Date: 2014
  17. By: Peter Martey Addo (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, Università Ca' Foscari of Venice - Department of Economics, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Monica Billio (Università Ca' Foscari of Venice - Department of Economics); Dominique Guegan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: With the emergence of the chaos theory and the method of surrogates data, nonlinear approaches employed in analysing time series typically suffer from high computational complexity and lack of straightforward explanation. Therefore, the need for methods capable of characterizing time series in terms of their linear, nonlinear, deterministic and stochastic nature are preferable. In this paper, we provide a signal modality analysis on a variety of exchange rates. The analysis is achieved by using the recently proposed "delay vector variance" (DVV) method, which examines local predictability of a signal in the phase space to detect the presence of determinism and nonlinearity in a time series. Optimal embedding parameters used in the DVV analysis are obtain via differential entropy based method using wavelet-based surrogates. A comprehensive analysis of the feasibility of this approach is provided. The empirical results show that the DVV method can be opted as an alternative way to understanding exchange rates dynamics.
    Keywords: Nonlinearity analysis; exchange rates; surrogates; Delay vector variance (DVV) method; wavelets
    Date: 2013–02

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