nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒10‒03
seventeen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The international monetary and financial system: a capital account historical perspective By Claudio Borio; Harold James; Hyun Song Shin
  2. Banks, Liquidity Management, and Monetary Policy By Bianchi, Javier; Bigio, Saki
  3. Monetary Policy and Inflation Dynamics in Asset Price Bubbles By Daisuke Ikeda
  4. Response of Stock Markets to Monetary Policy: An Asian Stock Market Perspective By Yoshino, Naoyuki; Taghizadeh-Hesary, Farhad; Hassanzadeh, Ali; Prasetyo, Ahmad Danu
  5. Monetary Policy Rules in the Countries of the Customs Union By Yulia Vymyatnina; Evgeniya Goryacheva
  6. Monetary policy, financial conditions, and financial stability By Adrian, Tobias; Liang, J. Nellie
  7. The impact of yuan internationalization on the euro-dollar exchange rate By Agnès Bénassy-Quéré; Yeganeh Forouheshfar
  8. The Economic Outlook By Plosser, Charles I.
  9. Cross-country Transmission Effect of the U.S. Monetary Shock under Global Integration By Yoshiyuki Fukuda; Yuki Kimura; Nao Sudo; Hiroshi Ugai
  10. Confidence Erosion and Herding Behavior in Bond Markets: An Essay on Central Bank Communication Strategy By Koichiro Kamada; Ko Miura
  11. What Can We Learn From Revisions to the Greenbook Forecasts? By Tara M. Sinclair; Jeff Messina; Herman Stekler
  12. Employment, hours and optimal monetary policy By Maarten DOSSCHE; Vivien LEWIS; Céline POILLY
  13. Collaterals and Growth Cycles with Heterogeneous Agents By Stefano Bosi; Mohanad Ismaël; Alain Venditti
  14. Exchange Rate Populism By Sainan Huang; Cristina Terra;
  15. The scarcity value of Treasury collateral: Repo market effects of security-specific supply and demand factors By D'Amico, Stefania; Fan, Roger; Kitsul, Yuriy
  16. Three Arrows of “Abenomics†and the Structural Reform of Japan : Inflation Targeting Policy of the Central Bank, Fiscal Consolidation, and Growth Strategy By Naoyuki Yoshino; Farhad Taghizadeh-Hesary
  17. Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU By António Afonso; Luís Martins

  1. By: Claudio Borio; Harold James; Hyun Song Shin
    Abstract: In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its "excess financial elasticity". And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis.
    Keywords: excess financial elasticity, banking glut, current account, capital account, financial cycle, financial crises
    Date: 2014–08
  2. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis); Bigio, Saki (Columbia University)
    Abstract: We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock.
    Keywords: Monetary policy; Liquidity; Capital requirements
    JEL: E44 E51 E52 G1
    Date: 2014–09–08
  3. By: Daisuke Ikeda (Bank of Japan)
    Abstract: This paper integrates an asset price bubble and agency costs in firms' price-setting decisions into a monetary DSGE framework. Amplified by nominal wage rigidities, an asset price bubble causes an inefficiently excessive boom. Inflation, however, remains moderate in the boom, because a loosening in financial tightness lowers the agency costs and adds downward pressure on inflation. Stabilizing inflation makes the excessive boom even excessive in the short run. The optimal monetary policy calls for monetary tightening to restrain the boom at the cost of greater volatility in inflation.
    Keywords: Optimal monetary policy; Asset price bubbles
    JEL: E44 E52
    Date: 2013–02–28
  4. By: Yoshino, Naoyuki (Asian Development Bank Institute); Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Hassanzadeh, Ali (Asian Development Bank Institute); Prasetyo, Ahmad Danu (Asian Development Bank Institute)
    Abstract: We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes: money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar–Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks.
    Keywords: asian stock market; monetary policy shocks; vector error correction model
    JEL: E44 G10 G12
    Date: 2014–09–05
  5. By: Yulia Vymyatnina; Evgeniya Goryacheva
    Abstract: Using monthly and quarterly data for 2000 – 2012 for Belarus, Kazakhstan and Russia we estimate monetary policy rules for these countries. The aim of our study is to find out similarities and differences in monetary policy practices in these countries in order to evaluate potential problems in switching to unified macroeconomic policy that is envisaged within the Common Economic Area. We analyze official statements of the Central Banks, dynamics of major macroeconomic indicators, estimate modified monetary policy rules and conclude that Kazakhstan and Russia have similar monetary policy, while Belarus will have to change most of its practices in case the unified monetary policy is introduced in the Common Economic Area.
    Keywords: Customs Union, Common Economic Area, monetary policy rules, inflation, Russia, Belarus, Kazakhstan
    JEL: E52 F42
    Date: 2014–08–29
  6. By: Adrian, Tobias (Federal Reserve Bank of New York); Liang, J. Nellie
    Abstract: In the conduct of monetary policy, there exists a risk-return trade-off between financial conditions and financial stability, which complements monetary policy’s traditional trade-off between inflation and real activity. The trade-off exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, because risks to future financial stability are increased by the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential. We review monetary policy transmission channels and financial frictions that give rise to this trade-off between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policy’s risk-return trade-off, including 1) pricing of risk, 2) leverage, 3) maturity and liquidity mismatch, and 4) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy’s risk-return trade-off.
    Keywords: risk-taking channel of monetary policy; monetary policy transmission; monetary policy rules; financial stability; financial conditions; macroprudential policy
    JEL: E52 G01 G28
    Date: 2014–09–01
  7. By: Agnès Bénassy-Quéré (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, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Yeganeh Forouheshfar (Université Paris-Dauphine - Université Paris-Dauphine)
    Abstract: We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China; yuan; exchange-rate regime; euro-dollar
    Date: 2013–02
  8. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: President Charles Plosser gives his views on the economy and shares some thoughts about the stance of monetary policy. He also counters the view that rates cannot be raised because the labor market has not "completely" healed and discusses what he thinks are two major risks with this strategy.
    Keywords: Economic outlook; Monetary policy;
    Date: 2014–09–06
  9. By: Yoshiyuki Fukuda (Bank of Japan); Yuki Kimura (Bank of Japan); Nao Sudo (Bank of Japan); Hiroshi Ugai (Bank of Japan)
    Abstract: Monetary policy shocks in the United States are considered a significant cause of economic fluctuations in other countries. We study empirically how the spillover effects of such shocks have changed as a result of the recent deepening of global integration. We consider shocks to the Federal Funds rate and examine how domestic production in a number of advanced, Latin American, and Asian countries were affected by these shocks during the 1990s and 2000s. We show that contractionary U.S. monetary policy shocks reduced domestic production in most of the sampled countries during the 1990s. During the 2000s, by contrast, the adverse effects were moderated. To explore the reasons behind the weakened spillover effects, we construct a DSGE model and examine the theoretical implications of the recent changes in economic structure, including global integration. In addition, we estimate response of trade and financial variables as well as policy instruments to U.S. monetary policy shocks. Our model combined with the empirical exercises suggests that, despite being enhanced by deepened trade integration, spillover effects may be decreasing due to a decline in the relative importance of the U.S. economy, and to regime switches in domestic monetary and exchange rate policy in non-U.S. countries. Though we empirically find a sign of short-run financial contagion during the 2000s, its effect upon the real economy was minor, possibly reflecting its low persistence.
    Keywords: U.S. Monetary Policy; Spillover Effect; Financial and Trade Linkages
    Date: 2013–11–26
  10. By: Koichiro Kamada (Bank of Japan); Ko Miura (Bank of Japan)
    Abstract: This paper examines the distinctive behavior of long-term interest rates observed after the Bank of Japan's introduction of quantitative and qualitative monetary easing, by focusing on changes in traders' confidence and herding behavior. When participants in bond markets lose confidence in their outlook for future interest rates, their investment decision depends heavily on the developments of market prices. This often leads to herding behavior among traders and destabilizes market prices: demand fuels further demand, or supply fuels further supply. This study develops a theoretical model and employs it for stochastic simulations to show that volatility of bond prices and trading volumes is affected by a number of factors, such as investors' confidence in the financial environment, the usefulness or value of information available in the market, and the market liquidity of bonds. In addition, the model is fitted to actual data to specify the driving forces underlying the changes in long-term interest rate volatility observed in 2013. The analysis shows that the key to understanding the developments in long-term interest rates during this period lies in how traders interpreted information flows in the market, especially the announcement by the Bank of Japan regarding its policy change, and in capturing the extent to which their confidence was weakened or strengthened by those information flows. The findings of the analysis highlight the importance of formulating a communication strategy as part of the conduct of monetary policy and the challenges in implementing such a strategy.
    Date: 2014–04–11
  11. By: Tara M. Sinclair (Department of Economics/Institute for International Economic Policy, George Washington University); Jeff Messina (Department of Economics/Institute for International Economic Policy, George Washington University); Herman Stekler (Department of Economics, George Washington University)
    Abstract: Although there have been many evaluations of the Fed Greenbook forecasts, we analyze them in a different dimension. We examine the revisions of these forecasts in the context of fixed event predictions to determine how new information is incorporated in the forecasting process. This analysis permits us to determine whether there was an underutilization of information. There is no evidence of forecast smoothing, but rather that the revisions were sometimes in the wrong direction.
    Keywords: Federal Reserve; Forecast Evaluation; Forecast Revisions
    JEL: C5 E2 E3
    Date: 2014
  12. By: Maarten DOSSCHE; Vivien LEWIS; Céline POILLY
    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 steady-state 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 a instrument to dampen inefficient hours fluctuations.
    Date: 2014–06
  13. By: Stefano Bosi (EPEE - Université d'Evry-Val d'Essonne); Mohanad Ismaël (University of Birzeit - University of Birzeit); Alain Venditti (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM), EDHEC Business School - Département Comptabilité, Droit, Finance et Economie)
    Abstract: We investigate the effects of collaterals and monetary policy on growth rate dynamics in a Ramsey economy where agents have heterogeneous discount factors. We focus on the existence of business-cycle fluctuations based on self-fulfilling prophecies and on the occurrence of deterministic cycles through bifurcations. We introduce liquidity constraints in segmented markets where impatient (poor) agents without collaterals have limited access to credit. We find that an expansionary monetary policy may promote economic growth while making endogenous fluctuations more likely. Conversely, a regulation reinforcing the role of collaterals and reducing the financial market imperfections may enhance the economic growth and stabilize the economy.
    Keywords: collaterals; heterogeneous agents; balanced growth; endogenous fluctuations; stabilization policies
    Date: 2014–02
  14. By: Sainan Huang; Cristina Terra; (Université de Cergy-Pontoise, THEMA and ESSEC School Business; Université de Cergy-Pontoise, THEMA; )
    Abstract: East Asian and Latin American economies present opposite exchange rate electoral cycles: exchange rates tend to be more depreciated before and appreciated after elections among East Asian economies, while the opposite is true in Latin America. We propose a explanation for these empirical findings where the driving force of the opposite exchange rate populism in these two regions is their difference in the relative size of tradable and non-tradable sectors, coupled with the distributive effect of exchange rates. In a setup where policy-makers differ in their preference bias towards non-tradable and tradable sectors, the exchange rate is used a noisy signal of the incumbent's type in an uncertain economic environment. The mechanism behind the cycle is engendered by the incumbent trying to signal he is median voter's type, biasing his policy in favor of the majority of the population before elections.
    Date: 2014
  15. By: D'Amico, Stefania (Federal Reserve Bank of Chicago); Fan, Roger (Federal Reserve Bank of Chicago); Kitsul, Yuriy (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the special collateral repo market, forward agreements are security-specific, which may magnify demand and supply effects. We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the repo rates of all outstanding U.S. Treasury securities. We find an economically and statistically significant scarcity premium. This scarcity effect is quite persistent, passes through to Treasury market prices, and explains a significant portion of the flow-effects of LSAP programs, providing additional evidence for the scarcity channel of QE. Through the same mechanism, the Fed's reverse repo operations could alleviate potential shortages of high-quality collateral.
    Keywords: Treasury bonds; repo contracts; supply-demand factors; liquidity; Large Scale Asset Purchase programs; Treasury auctions
    JEL: C23 E43 G12 G19
    Date: 2014–05–05
  16. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary
    Abstract: “Abenomics†refers to the economic policies advocated by Prime Minister Shinzo Abe who became prime minister of Japan for a second time when his party, the Liberal Democratic Party, won an overwhelming majority at the general election in December 2012. Abenomics has “three arrows†: (i) aggressive monetary policy, (ii) fiscal consolidation, and (iii) growth strategy. The Japanese economy faces an aging population and expanding social welfare expenses. No other country has experienced Japan’s rapid growth of retired people. In this paper we will explain these three aspects of Abenomics and the current state of the Japanese economy, and examine what further remedies may be required if Japan is to recover from its long-term deflation. We look at such proposals as hometown investment trust funds and postponing of the retirement age through the introduction of a flexible wage rate system.
    Keywords: Abenomics, Japan, aging population, the Japanese economy, retired people, long-term deflation, a flexible wage rate system
    JEL: E52 E62 G21
    Date: 2014–08
  17. By: António Afonso; Luís Martins
    Abstract: This paper provides new insights about the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data for 14 European Union countries over the period 1970-2012. Different measures for assessing fiscal consolidations based on the changes in the cyclically adjusted primary balance were calculated. A similar ad-hoc approach was used to compute monetary expansions, in order to include them in the assessment of non-Keynesian effects for different budgetary components. Panel Fixed Effects estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer and expenditure-based consolidations contribute positively for its success, whilst the opposite is the case for tax-based ones.
    Keywords: fiscal consolidation, monetary expansion non-Keynesian effects, panel data, probit
    JEL: C23 E21 E5 E62 H5 H62
    Date: 2014–07

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