nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒10‒13
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy as a Carry Trade By Marvin Goodfriend
  2. The Exchange Rate as an Instrument at Zero Interest Rates: The Case of the Czech Republic By Michal Franta; Tomas Holub; Petr Kral; Ivana Kubicova; Katerina Smidkova; Borek Vasicek
  3. Liquidity Traps and Monetary Policy: Managing a Credit Crunch By Buera, Francisco J.; Nicolini, Juan Pablo
  4. Homeownership, Informality and the Transmission of Monetary Policy By Ceyhun Elgin; Burak R. Uras
  5. Money Market Operations in Fiscal 2012 By Financial Markets Department
  6. Quantifying the Effects of Abandoning National Monetary Policy By Oliver HOLTEMÖLLER
  7. Structural Stability of the Generalized Taylor Rule By William Barnett; Evgeniya A. Duzhak
  8. Are Gap Models Policy Consistent? A Quarterly Prediction Model for Monetary Policy In Nigeria By Fred IKLAGA
  9. Optimal Monetary Policy Rules under Imperfect Commitment: Reconciling Theory with Evidence By KARA Hakan
  10. Developing an underlying inflation gauge for China By Marlene Amstad; Ye Huan; Guonan Ma
  11. "Endogenous Money and the Natural Rate of Interest: The Reemergence of Liquidity Preference and Animal Spirits in the Post-Keynesian Theory of Capital Markets" By Philip Pilkington
  12. Monetary Authorities and Exchange Rate Volatility: Turkey and other Cases By Harald SCHMIDBAUER; Ece DEMIREL
  13. Optimal Monetary Policy with Wealth Effect and Cost Channel By Roberta CARDANI
  14. Fear of Floating and Exchange Rate Pass-Through to Inflation in Egypt By Hoda SELIM
  15. One currency, one price? Euro Changeover related inflation in Estonia By Jaanika Meriküll; Tairi Rõõm
  16. Stability of Final Objective of the European Monetary Authorities By Frédérique SIBI
  17. Money-Income Granger-Causality in Quantiles By Tae-Hwy Lee; Weiping Yang
  18. Capital Flows During Quantitative Easing and Aftermath: Experiences of Asian Countries By Park, Donghyun; Ramayandi, Arief; Shin, Kwanho
  19. Modelling & Forecasting of Re/$ Exchange rate – An empirical analysis By Somesh Kumar Mathur; Surendra Babu
  20. Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility By MINELLA André; DE FREITAS Paulo Springer; GOLDFAJN Ilan; KFOURY MUINHOS Marcelo
  21. Macroeonomic Dynamics in Trinidad & Tobago: Implications for Monetary Policy in a Very Small Oil-Based Economy By WATSON Patrick
  22. European Monetary Union and Fiscal Policy Sustainability By Bodo HERZOG
  23. Dynamic Analysis of Macroeconomic Policies in an Asymmetric Monetary Uunion. Lessons for the EMU By Florina Cristina BADARAU
  24. Shifting Regimes in the Relationship between Interest Rates and Inflation: A Threshold Cointegration Approach By MILLION Nicolas
  25. The Role of Fiscal Stimulus and Monetary Easing in Indonesian Economy during Global Financial Crisis: Financial Computable General Equilibrium Approach By Iskandar SIMORANGKIR; Justina ADAMANTI

  1. By: Marvin Goodfriend (Friends of Allan Meltzer Professor of Economics, Tepper School of Business, Carnegie Mellon University (E-mail: marvingd@
    Abstract: Quantitative monetary policy at the zero interest bound should be understood as a gbond market carry trade.h Net interest earnings on the front end of the monetary carry trade should be retained-to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014, about $3 trillion of reserves paying 0.25% will finance (carry) a like quantity of security holdings averaging 10 years or more in maturity earning 2.5%. The Fed has long asserted independent authority to retain net interest income thought necessary as surplus capital against prospective exposures on its balance sheet. The Fed recognizes that the retention of net interest earnings to build up surplus capital incurs no resource cost for the Treasury or taxpayers. Yet, the Fed has chosen not to build up surplus capital against the carry trade exposure and risk on its balance sheet, jeopardizing the operational credibility of monetary policy for price stability.
    Keywords: bond market carry trade, Federal Reserve surplus capital, Federal Reserve Treasury remittances, inflation objective, interest on reserves, monetary policy at the zero interest bound, term premium
    JEL: E31 E43 E52 E58 E63
    Date: 2014–09
  2. By: Michal Franta; Tomas Holub; Petr Kral; Ivana Kubicova; Katerina Smidkova; Borek Vasicek
    Abstract: This study examines the use of the exchange rate by the Czech National Bank as a monetary policy instrument at the zero lower bound on interest rates. It provides a review of the economic literature on unconventional monetary policy instruments and particularly on the possibility of using the exchange rate. It explains the CNB’s reasons for further easing monetary policy and for choosing the exchange rate instrument and its specific level, and discusses its expected benefits in the case of the Czech Republic. It also explains why the CNB ultimately decided to transparently declare a one-sided exchange rate commitment with potentially unlimited foreign exchange interventions. The article concludes by assessing the impacts of the exchange rate weakening on the Czech economy to date, as compared to what the CNB had expected, and by describing the public debate of the CNB’s action and related changes in its communication strategy.
    Keywords: Asymmetric exchange rate commitment, deflation, exchange rate, foreign exchange interventions, inflation expectations, monetary policy, unconventional instruments, zero lower bound
    JEL: E31 E37 E58 F31
    Date: 2014–09
  3. By: Buera, Francisco J. (Federal Reserve Bank of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the prolonged period at the zero bound for the nominal interest rate, and the collapse in investment and low inflation in spite of the very large increases in liquidity adopted by the government. The policy implications are in sharp contrast to the prevalent view in most central banks, which is based on the New Keynesian explanation of the liquidity trap.
    Keywords: Liquidity trap; Credit crunch; Collateral constraings; Monetary policy; Ricardian equivalence;
    JEL: E44 E52 E58 E63
    Date: 2014–07–18
  4. By: Ceyhun Elgin; Burak R. Uras
    Date: 2014–09
  5. By: Financial Markets Department (Bank of Japan)
    Abstract: During fiscal 2012 (April 1, 2012 to March 31, 2013), the Bank of Japan continued to pursue powerful monetary easing through such measures as the virtually zero interest rate policy and purchases of financial assets.
    Date: 2013–06–19
  6. By: Oliver HOLTEMÖLLER
  7. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Evgeniya A. Duzhak (Zicklin School of Business, Baruch College, City University of New York)
    Abstract: This paper analyzes the dynamical properties of monetary models with regime switching. We start with the analysis of the evolution of inflation when policy is guided by a simple monetary rule where coe- cients switch with the policy regime. We rule out the possibility of a Hopf bifurcation and demonstrate the existence of a period doubling bifurca- tion. As a result, a small change in the parameters (e.g. a more active policy response) can lead to a drastic change in the path of in ation. We demonstrate that while the New Keynesian model with a current-looking Taylor rule is not prone to bifurcations, a hybrid rule exhibits the same pattern of period doubling bifurcations as the basic setup.
    Keywords: New Keynesian, Taylor Rule, regime switching, bifurcation analysis, structural stability.
    JEL: C14 C22 E37 E32
  8. By: Fred IKLAGA
  9. By: KARA Hakan
  10. By: Marlene Amstad; Ye Huan; Guonan Ma
    Abstract: The headline consumer price inflation (CPI) is often considered too noisy, narrowly defined, and/or slowly available for policymaking. On the other hand, traditional core inflation measures may reduce volatility but do not address other issues and may even exclude important information. This paper develops a new underlying inflation gauge (UIG) for China which differentiates between trend and noise, is available daily and uses a broad set of variables that potentially influence inflation. Its construction follows the works at other major central banks, adopts the methodology of a dynamic factor model that extracts the lower frequency components as developed by Forni et al. (2000) and draws on the experience of the People's Bank of China in modelling inflation. The paper is the first application of this type of dynamic factor model for inflation to any large emerging market economy. Our UIG for China is less noisy but still closely tracks the headline CPI. It does not suffer from the excess volatility reduction that plagues traditional core inflation measures and instead provides additional information. Finally, when forecasting the headline CPI, our UIG for China outperforms traditional core measures over different samples.
    Keywords: Inflation, Dynamic Factor Models, Core Inflation, Monetary Policy, Forecasting, China
    Date: 2014–09
  11. By: Philip Pilkington
    Abstract: Since the beginning of the fall of monetarism in the mid-1980s, mainstream macroeconomics has incorporated many of the principles of post-Keynesian endogenous money theory. This paper argues that the most important critical component of post-Keynesian monetary theory today is its rejection of the "natural rate of interest." By examining the hidden assumptions of the loanable funds doctrine as it was modified in light of the idea of a natural rate of interest--specifically, its implicit reliance on an "efficient markets hypothesis" view of capital markets--this paper seeks to show that the mainstream view of capital markets is completely at odds with the world of fundamental uncertainty addressed by post-Keynesian economists, a world in which Keynesian liquidity preference and animal spirits rule the roost. This perspective also allows us to shed new light on the debate that has sprung up around the work of Hyman Minsky, calling into question to what extent he rejected the loanable funds view of financial markets. When Minsky's theories are examined against the backdrop of the natural rate of interest version of the loanable funds theory, it quickly becomes clear that Minsky does not fall into the loanable funds camp.
    Keywords: Capital Markets; Financial Economics; Financial Market Theory; Macroeconomics; Monetary Economics; Monetary Theory
    JEL: E00 E12 E40 E43 E44
    Date: 2014–09
  13. By: Roberta CARDANI
  14. By: Hoda SELIM
  15. By: Jaanika Meriküll; Tairi Rõõm
    Abstract: This paper studies euro changeover-related inflation using disaggregated price level data. The difference-in-differences approach is used and the control group for the treatment country, Estonia, is built from 12 euro area countries. The Nielsen Company disaggregated price data are employed at product, brand and shop-type level. The results indicate that while the overall inflationary effect of euro adoption was modest, the effects were significantly different across various market segments. Changeoverrelated inflation was higher for products that were relatively cheaper than the euro area average. Inflationary effects were stronger in smaller shops.
    Keywords: euro, currency changeover, market concentration, consumer behaviour
    JEL: D49 P46 E58
    Date: 2014–10–10
  16. By: Frédérique SIBI
  17. By: Tae-Hwy Lee (Department of Economics, University of California Riverside); Weiping Yang (University of California, Riverside)
    Abstract: The causal relationship between money and income (output) has been an important topic and has been extensively studied. However, those empirical studies are almost entirely on Granger-causality in the conditional mean. Compared to conditional mean, conditional quantiles give a broader picture of an economy in various scenarios. In this paper, we explore whether forecasting conditional quantiles of output growth can be improved using money growth information. We compare the check loss values of quantile forecasts of output growth with and without using past information on money growth, and assess the statistical significance of the loss-differentials. Using U.S. monthly series of real personal income or industrial production for income and output, and M1 or M2 for money, we find that out-of-sample quantile forecasting for output growth is significantly improved by accounting for past money growth information, particularly in tails of the output growth conditional distribution. On the other hand, money-income Granger-causality in the conditional mean is quite weak and unstable. These empirical findings in this paper have not been observed in the money-income literature. The new results of this paper have an important implication on monetary policy, because they imply that the effectiveness of monetary policy has been under-estimated by merely testing Granger-causality in conditional mean. Money does Granger-cause income more strongly than it has been known and therefore information on money growth can (and should) be more utilized in implementing monetary policy.
    Keywords: Money-income Granger-causality, Conditional mean, Conditional quantiles, Conditional distribution
    JEL: C32 C5 E4 E5
    Date: 2014–09
  18. By: Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: A potentially important side effect of quantitative easing(QE) by the United States (US) Federal Reserve System (the Fed) is the expansion of capital flows into developing countries. As a result, there is widespread concern that QE tapering may trigger financial instability in those countries. The central objective of our paper is to empirically investigate this important issue by (1)examining the effect of QE on capital flows into developing Asia, and (2) analyzing the different factors which influence the effect of QE tapering on financial instability in order to identify the most significant factors. We find that QE1 had a bigger impact on capital flows than QE2 and QE3, and credit expansion and capital inflows magnified the effect of QE tapering on financial instability. While there is no evidence that macroprudential policies directly reduced the effect of QE tapering, they can nevertheless be useful preemptive measures.
    Keywords: Asia; capital flows; financial stability; global financial crisis; macroprudential measures; quantitative easing; tapering
    JEL: F32 F44 G01
    Date: 2014–09–01
  19. By: Somesh Kumar Mathur; Surendra Babu
    Abstract: To model the factors affecting rupee dollar exchange rateTheoreticallly justifying use of all right hand side variables affecting rupee dollar exchange rate. Using FGLS,VAR,Bounds Approach and ARIMA for estimating the relationships between rupee dollar exchangeThis study covers two main topics: first modelling, where we discussed about the importance of variables like capital inflows, order flows, central bank intervention in modelling exchange rate. We empirically estimated the coefficients of explanatory variables after overcoming autocorrelation and unit root problems. It was found that only variables order flow, forward premium, trade balance, money supply and output has significant effect on exchange rate. We also checked for any long term relationship between variables, found that only money supply and output has long run relationship with exchange rate. All significant variables shows very small impact on exchange rate except forward premium. Empirical relations between variables and exchange rate support the theoretical relations. Second forecasting of exchange rate, we forecasted exchange rate using VAR, OLS, ARIMA model for three different sample period. Evaluated the forecasting performance of models by graphs and by error statistics. We found that VAR model yield more accurate forecasts than the OLS and ARIMA as it has very low Theil’s U and RMSE for all periods. Using VAR model we also forecasted out of sample for periods from January 2014- June 2014.
    Keywords: India, Trade issues, Trade issues
    Date: 2014–10–01
  20. By: MINELLA André; DE FREITAS Paulo Springer; GOLDFAJN Ilan; KFOURY MUINHOS Marcelo
  21. By: WATSON Patrick
  22. By: Bodo HERZOG
  23. By: Florina Cristina BADARAU
  24. By: MILLION Nicolas
  25. By: Iskandar SIMORANGKIR; Justina ADAMANTI

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