nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒10‒17
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Unconventional Monetary Policy Shocks and the Spillovers to Emerging Markets By Peter Tillmann
  2. Inflation Targets Reconsidered: Comments on Paul Krugman By Guido Tabellini
  3. The Optimal Monetary Policy Rule For the European Central Bank By Paolo Gelain
  4. Ramsey Monetary Policy and GHG Emission Control By Barbara Annicchiarico; Fabio Di Dio
  5. Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design By Frank Hespeler
  6. A Bank Lending Channel of Monetary Policy in Spain: Evidence from Bank Balance Sheets By Rafaela PIZARRO-BARCELÓ
  7. The Macroeconomic Effects of Losing Autonomous Monetary Policy after the Euro Adoption in Poland By Krzysztof MAKARSKI; Michal GRADZEWICZ
  8. Inflation Stabilization and Default Risk in a Currency Union By Okano Eiji; Masashige Hamano; Pierre Picard
  9. Firms´ Entry, Monetary Policy and the International Business Cycle By Lilia CAVALLARI
  10. Multiplicity of monetary steady states By Ryoji Hiraguchi; Keiichiro Kobayashi
  11. Anchoring of Inflation Expectations in Light of Adverse Supply Shocks By Aguilar-Argaez Ana María; Cuadra Gabriel; Ramírez Claudia; Sámano Daniel    
  12. Effects of Labor Market Reform on the Efficiency of Monetary Policy By Alvaro AGUIAR; Ana Paula RIBEIRO
  13. Explaining exchange rate anomalies in a model with Taylor-rule fundamentals and consistent expectations By Lansing, Kevin J.; Ma, Jun
  14. Monetary Policy Rules in Practice: Evidence from Turkey and Israel By Ege YAZGAN; Hakan YILMAZKUDAY
  15. Monetary policy transmission mechanism in Poland What do we know in 2013? By Tomasz Łyziak; Mariusz Kapuściński; Ewa Stanislawska; Jan Przystupa; Ewa Wrobel; Anna Sznajderska
  16. Disagreement and Biases in Inflation Expectations of Japanese Households(in Japanese) By UENO Yuko; NAMBA Ryoichi
  17. What Makes a Commodity Currency? By Dongwon Lee; Yu-chin Chen
  18. Credit spread variability in U.S. business cycles: The Great Moderation versus the Great Recession By Hylton Hollander and Guangling Liu
  19. The effects of intraday foreign exchange market operations in Latin America: results for Chile, Colombia, Mexico and Peru By Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón; Santiago García-Verdú; Miguel Zerecero; Marco Vega; Erick Lahura; Ramon Moreno
  20. Stability Properties of the Nominal Income Targeting Rule in the Open Economy By Baotai WANG
  21. A GARCH Model of Inflation and Inflation Uncertainty in Iran By Mohammad Ali MORADI
  22. Testing the Hypothesis of Long-Run Money Neutrality in the Middle East By George B. TAWADROS
  23. Working Less and Bargain Hunting More: Macro Implications of Sales during Japan's Lost Decades By Nao Sudo; Kozo Ueda; Kota Watanabe; Tsutomu Watanabe
  24. Modelling of Structural Changes in Demand for Money Cointegration Relations By Hannu KOSKINEN
  25. Has the Fed Reacted Asymmetrically to Stock Prices By Søren HOVE RAVN
  26. An Empirical Study of Interest Rate Determination Rules By Keshab Raj Bhattarai

  1. By: Peter Tillmann (Justus-Liebig-University Giessen and Hong Kong Institute for Monetary Research)
    Abstract: Unconventional monetary policy such as Quantitative Easing (QE) is often considered to have considerable spillover effects on emerging market economies (EME). Aims at quantifying these effects so far mostly use high-frequency data around announcement dates, panels or VAR models. This paper proposes an alternative way to estimate the effects of QE on emerging markets that allows us to include macroeconomic, i.e. low-frequency, data together with announcement dates. A Qual VAR is estimated that integrates binary information of QE announcements with an otherwise standard VAR including US and emerging market variables. The model uncovers the Fed's latent, unobservable propensity for QE and generates impulse responses for EME variables to QE shocks. The results suggest that QE has strong effects on EME's financial conditions and plays a large role in explaining capital inflows, equity prices and exchange rates.
    JEL: E32 E44 F32
    Date: 2014–08
  2. By: Guido Tabellini
    Abstract: Paul Krugman has written a very timely paper. It discusses an old issue, that has become very relevant again. My comments address two questions. First, should inflation targeting be reconsidered? Here my answer is a clear and resounding yes. Inflation targeting performed very well in the fight against inflation and in stabilizing inflation expectations. But now, even leaving issues of financial stability aside, monetary policy is faced with different challenges. Second, which features of the inflation targeting framework should be changed? Here I argue that other aspects of the framework are more important than the numerical value of the target. In addressing these questions, I review Paul Krugman’s arguments, agreeing with many but not all of them.
    Date: 2014
  3. By: Paolo Gelain
  4. By: Barbara Annicchiarico (DEDI and CEIS, Università di Roma "Tor Vergata"); Fabio Di Dio (Sogei S.p.a. - IT Economia)
    Abstract: We study Ramsey monetary policy in a New Keynesian model embodying pollutant emissions and greenhouse gas emissions control policy. We find that the optimal response of inflation to technology shocks is crucially affected by the environmental regime adopted for emissions control.
    Keywords: Monetary Policy, Ramsey Problem, GHG Emission Control Policy
    JEL: E32 E52 Q58
    Date: 2014–09–24
  5. By: Frank Hespeler
  6. By: Rafaela PIZARRO-BARCELÓ
  7. By: Krzysztof MAKARSKI; Michal GRADZEWICZ
  8. By: Okano Eiji (Nagoya City University,); Masashige Hamano (Sophia University); Pierre Picard (University of Luxembourg)
    Abstract: By developing a class of dynamic stochastic general equilibrium models with nominal rigidities and assuming a two-country currency union with sovereign risk, we show that there is not necessarily a trade-off between the prevention of default risk and stabilizing inflation. Under optimal monetary and fiscal policy, comprising a de facto inflation stabilization policy, the tax rate as an optimal fiscal policy tool plays an important role in stabilizing inflation, although not completely because of the distorted steady state. Changes in the tax rate to minimize welfare costs via stabilizing inflation then improve the fiscal surplus, and because of this and the incompletely stabilized inflation, the default rate does not increase as much.
    Keywords: Sovereign Risk; European Crisis; Optimal Monetary Policy; Fiscal Theory of the Price Level; Currency Union
    JEL: E52 E60 F41 F47
    Date: 2014–09
  9. By: Lilia CAVALLARI
  10. By: Ryoji Hiraguchi; Keiichiro Kobayashi
    Abstract: In the Lagos-Wright model of money, monetary frictions alone cannot be a source of equilibrium multiplicity. However, the conclusion depends on the assumption that the agents always enter the centralized market after completing a transaction in the decentralized markets. In this paper, we investigate a monetary model in which the centralized market opens once, but the decentralized markets open twice in each period. We show that as the sellers money balances affect the buyers problem in the first decentralized market, there may be multiple stationary equilibria.
    Date: 2014–09
  11. By: Aguilar-Argaez Ana María; Cuadra Gabriel; Ramírez Claudia; Sámano Daniel    
    Abstract: In order to create an environment of low and stable inflation in Mexico it has been necessary to generate a framework for the conduction of monetary policy focused on price stability along with fiscal discipline. This paper describes some structural achievements to control inflation that have been attained in Mexico. In addition, it shows empirical evidence in favor of the anchoring of inflation expectations, particularly those for the medium and long term, being recently strengthened. Considering three episodes, within the period 2004-2012, in which inflation was subject to different supply shocks, it finds that during the episode in 2012 inflation expectations showed greater stability. Results show that the response from inflation expectations to supply shocks has diminished over time, up to values that are not significantly different from zero. This suggests a strengthening of the credibility of the Bank of Mexico's commitment to price stability.
    Keywords: inflation expectations, anchoring inflation expectations, cost-push shocks.
    JEL: E52 E58 E65
    Date: 2014–09
  12. By: Alvaro AGUIAR; Ana Paula RIBEIRO
  13. By: Lansing, Kevin J. (Federal Reserve Bank of San Francisco); Ma, Jun (University of Alabama)
    Abstract: We introduce a form of boundedly-rational expectations into a standard asset-pricing model of the exchange rate, where cross-country interest rate differentials are governed by Taylor-type rules. We postulate that agents augment a lagged-information random walk forecast with a term that relates to news about Taylor-rule fundamentals. We solve for a “consistent expectations equilibrium,” in which the coefficient on fundamental news in the agent’s forecast rule is pinned down using the moments of observable data. The forecast errors observed by the agent are close to white noise, making it di¢ cult for the agent to detect any misspecification. We show that the model generates volatility and persistence that is remarkably similar to that observed in monthly bilateral exchange rate data (relative to the U.S.) for Canada, Japan, and the U.K. over the period 1974 to 2012. Moreover, we show that regressions performed on model-generated data can deliver the well-documented forward premium anomaly whereby a high interest rate currency tends to appreciate, thus violating the uncovered interest rate parity condition.
    JEL: D83 D84 E44 F31 G17
    Date: 2014–09
  15. By: Tomasz Łyziak (Narodowy Bank Polski / Instytut Ekonomiczny); Mariusz Kapuściński (Narodowy Bank Polski / Instytut Ekonomiczny); Ewa Stanislawska (Narodowy Bank Polski); Jan Przystupa (National Bank of Poland, Institute for Market, Consumption and Business Cycles Research); Ewa Wrobel (National Bank of Poland and University of Warsaw); Anna Sznajderska (National Bank of Poland)
    Abstract: For a central bank knowledge of the monetary policy transmission mechanism is a prerequisite for achieving its final goal, i.e. price stability. Therefore, this area of analyses and research is of key importance for central banks, including Narodowy Bank Polski (NBP). Every two years since 2011, the Research Bureau of the Economic Institute at NBP, prepares a report on the functioning of the transmission mechanism in Poland. Our aim is to gather the results of the most recent studies and to present them in a non-technical manner. Though we remain within the New-Keynesian school, we treat the theoretical achievements – according to Mayer’s (1996) terminology – rather in terms of empirical-science theory than formalistic theory. Therefore, the studies presented in this report share a common empirical character and aim at finding the most complete answer to the question on the role of monetary policy for the main economic variables in Poland. In our analyses we employ a broad set of various modelling tools. Thus, following monetary transmission literature, we use structural vector autoregression models (SVAR) as they are an important tool of inference on stylized facts, main transmission channels and their effectiveness. To examine the strength and delays in the transmission mechanism and ways in which the central bank affects the economy, we use classic structural models, i.e. the new version of the structural monetary transmission model (MMT 2.0) and the model based on the Global Projection Models, adjusted for specific features of the Polish economy, called QMOTR. In contrast to the previously used models, the new ones explicitly treat equilibria of the main macroeconomic categories and allow for a higher degree of forward-lookingness. To assess the impact of the exchange rate on the real sector, we use another structural model, i.e. the natural exchange rate model, NATREX. Finally, to analyse interest rate pass-through we apply error correction models (ECM). As in the previous report (Demchuk et al., 2012), presentation of model results is preceded by an assessment of the structural features of the Polish economy, which are potentially important for the functioning of the monetary policy transmission.
    Date: 2014
  16. By: UENO Yuko; NAMBA Ryoichi
    Abstract: This study examines how Japanese consumers’ inflation expectations are formed by the use of micro-level dataset of the prediction error of expected inflation rate. Recently in Japan, the interest is growing in the policies that intend to work on the inflation expectations of consumers and firms. Effects of such policy depend on expectation formation mechanism of economic agents. In particular, whether expectations are rational or adaptive, homogenous or heterogenous is an important factor that affects its effectiveness. We examine underlying mechanism of Japanese consumers’ inflation expectations by analyzing the raw data of “Consumer Confidence Survey”. From the data, we find that both statistically significant upward bias and disagreement among households exist in a persistent manner. Our study shows that“Model of asymmetric cost of forecast error” is consistent with this upward bias, while a gap remains from the level of rational expectation. In addition, we offer the empirical evidence that expectation heterogeneity among various groups can be explained with their characteristics only to a limited extent. Among others, we find that the age effect on inflation expectations looks inverted U-shaped.
    Date: 2013–07
  17. By: Dongwon Lee (Department of Economics, University of California Riverside); Yu-chin Chen (Department of Economics, University of Washington)
    Abstract: The “commodity currency†literature highlights the robust exchange rate response to fluctuations in world commodity prices that occurs for major commodity exporters. The magnitude of this response, however, varies widely among countries. Our panel data analysis using 63 countries for 1980-2010 finds that, in accordance with theory, the long-run cointegrating relationship between the real exchange rate and commodity export prices depends on the nation’s export market structure, monetary policy choices and degree of trade and financial openness. We also show that the commodity price-exchange rate connection is much weaker in the short-run and for a group of oil-exporting countries. Given concerns for the Dutch disease or resource curse, our findings are of particular relevance for monetary policy-making and for globalization strategy in commodity-exporting developing economies.
    Keywords: Real exchange rate; Commodity prices; Panel cointegration; Commodity exports; Exchange rate regime; International reserves
    JEL: C32 C33 F31 F41 O13
    Date: 2014–09
  18. By: Hylton Hollander and Guangling Liu
    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
  19. By: Miguel Fuentes; Pablo Pincheira; Juan Manuel Julio; Hernán Rincón; Santiago García-Verdú; Miguel Zerecero; Marco Vega; Erick Lahura; Ramon Moreno
    Abstract: This paper analyses the effects of sterilised, intraday foreign exchange market operations (non-discretionary and discretionary) on foreign exchange returns and volatility in four inflation targeting economies in Latin America. The distribution of exchange rates during intervention and non-intervention days are first compared, and then event study regressions are used to estimate the impact of intervention (and macro surprises) on exchange rate returns and exchange rate volatility as well as on foreign exchange market turnover (in Colombia). In general, the results suggest that the impact of both non-discretionary and discretionary operations is at times significant but transitory. However, an analysis of Chile's experience suggests that the announcement effects of even non-discretionary programmes may be significant and persistent.
    Keywords: Exchange rate, central bank intervention, microstructure
    Date: 2014–09
  20. By: Baotai WANG
  21. By: Mohammad Ali MORADI
  22. By: George B. TAWADROS
  23. By: Nao Sudo; Kozo Ueda; Kota Watanabe; Tsutomu Watanabe
    Abstract: Standard New Keynesian models have often neglected temporary sales. In this paper, we ask whether this treatment is appropriate. In the empirical part of the paper, we provide evidence using Japanese scanner data covering the last two decades that the frequency of sales was closely related with macroeconomic developments. Specifically, we find that the frequency of sales and hours worked move in opposite directions in response to technology shocks, producing a negative correlation between the two. We then construct a dynamic stochastic general equilibrium model that takes households’ decisions regarding their allocation of time for work, leisure, and bargain hunting into account. Using this model, we show that the rise in the frequency of sales, which is observed in the data, can be accounted for by the decline in hours worked during Japan’s lost decades. We also find that the real effect of monetary policy shocks weakens by around 40% due to the presence of temporary sales, but monetary policy still matters.
    Keywords: Sales, monetary policy, lost decades, time use
    JEL: E3 E5
    Date: 2014–09
  24. By: Hannu KOSKINEN
  25. By: Søren HOVE RAVN
  26. By: Keshab Raj Bhattarai

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