nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒10‒22
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Relevance of International Spillovers and Asymmetric Effects in the Taylor Rule By Joscha Beckmann; Ansgar Belke; Christian Dreger
  2. Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence By Max Gillman; Michal Kejak; Giulia Ghiani
  3. Monetary analysis and the global financial cycle: an Asian central bank perspective By Andrew Filardo; Hans Genberg; Boris Hofmann
  4. Inflation Targeting in New Zealand: The 1987 Reserve Bank Questionnaire and Related Documents By Brian Silverstone
  5. Rethinking Pro-Growth Monetary Policy in Africa: Monetarist versus Keynesian Approach By Christian Lambert Nguena
  6. Money Market Operations in Fiscal 2013 By Financial Markets Department
  7. Monetary and macroprudential policy with foreign currency loans By Michał Brzoza-Brzezina; Marcin Kolasa; Krzysztof Makarski
  8. The Determinants of the Benchmark Interest Rates in China: A Discrete Choice Model Approach By Hyeongwoo Kim; Wen Shi
  9. The Euro Changeover in Estonia: implications for inflation By Tairi Rõõm; Katri Urke
  10. Monetary Policy in Advanced Economies: Some Challenges for Emerging Economies By Rodrigo Vergara
  11. Equilibria Under Monetary and Fiscal Policy Interactions with Distortionary Taxation By Gliksberg, Baruch
  12. A policy model to analyze macroprudential regulations and monetary policy By Sami Alpanda; Gino Cateau; Cesaire Meh
  13. Rare Disasters and Exchange Rates By Emmanuel Farhi; Xavier Gabaix
  14. Trends in the Money Market in Japan -- Results of the Tokyo Money Market Survey (August 2013) -- By Financial Markets Department
  15. Does U.S. Monetary Policy Affect Crude Oil Future Price Volatility? An Empirical Investigation By Alessandra Amendola; Vincenzo Candila; Antonio Scognamillo
  16. Quantifying the Beauty Contest: Density Inflation-Forecasts of Professional Japanese Forecasters By TAKEDA Yosuke
  17. Can Macroeconomists Get Rich Forecasting Exchange Rates? By Costantini, Mauro; Cuaresma, Jesus Crespo; Hlouskova, Jaroslava
  18. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: A Fact Finding Analysis Using the Flow of Funds Accounts Statistics By Masashi Saito; Yoshihiko Hogen; Shusaku Nishiguchi
  19. Recent Developments in Electronic Money in Japan (2012) By Payment and Settlement Systems Department
  20. International Transmission of Credit Shocks: Evidence from Global Vector Autoregression Model By Ludmila Fadejeva; Martin Feldkircher; Thomas Reininger

  1. By: Joscha Beckmann; Ansgar Belke; Christian Dreger
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, for instance international dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule in the main industrial countries. The inclusion of international spillovers and, even more, nonlinear dynamics improves the explanatory power of standard Taylor reaction functions. Deviations from Taylor rates tend to be smaller and their negative trend can be eliminated.
    Keywords: Taylor rule, international spillovers, monetary policy interaction, smooth transition models
    JEL: E43 F36 C22
    Date: 2014
  2. By: Max Gillman; Michal Kejak; Giulia Ghiani
    Abstract: The paper sets out theory and evidence for the equilibrium determination of the nominal interest rate. We test the cash-in-advance economy using US postwar data and find cointegration of the interest rate, inflation, unemployment and the money supply, using either M2 or M1 monetary aggregates, and the Federal Funds rate or the three month Treasury bill rate. Results are consistent both with a persistent monetary liquidity effect in the cointegrating vector coefficients and also a long run quantity theoretic relation. We identify three Markov-switching regimes similar to NBER contractions, expansions, and the "unconventional" period. Dropping money indicates model misspecification.
    Date: 2014–10–02
  3. By: Andrew Filardo; Hans Genberg; Boris Hofmann
    Abstract: EM Asia has seen a transformation of its monetary policy environment over the past 2 decades. By far, the most relevant change has been the maturing of its financial systems and the growing relevance of the global financial cycle: financial inclusion has spread, financial markets have deepened and financial globalisation has linked domestic markets closer to international markets. One consequence of the maturing of the financial systems has been the weakening of the traditional case for the monetarist view of the roles of monetary and credit aggregates in the conduct of monetary policy: velocity has been unstable in ways similar to that in the advanced economies decades earlier; yet, longer-term monetary growth correlations with inflation are evident. In addition, the maturing of the financial systems has elevated concerns of financial stability, as both a source of shocks and as something central banks have a responsibility for. These developments have been further complicated by monetary policy spillovers from the advanced economies. The challenge now is how best to integrate mandates for financial stability into monetary policy frameworks, both conceptually and practically. Moreover, the exchange rate choice is particularly relevant in EM Asia. While managed exchange rate regimes in EM Asia have been implemented with mixed success, the risks associated with the choice can be seen through the lens of aggregates based on central bank balance sheets. The size and growth of central bank balance sheets suggest an ongoing build-up in risks. All this points to the need to consider alternatives to conventional inflation targeting frameworks. This paper lays out a policy framework based on a multi-pillar monetary policy approach as a potentially attractive alternative for EM Asia. The three pillars are based on economic, financial and exchange rate stability, respectively. This framework not only offers an alternative conceptual framework but also implies institutional reforms to ensure central banks take a longer term perspective when setting policy.
    Keywords: central bank mandates, financial cycle, financial inclusion, globalisation, managed exchange rates, monetary analysis, monetary policy frameworks, emerging Asia
    Date: 2014–09
  4. By: Brian Silverstone (University of Waikato)
    Abstract: New Zealand is acknowledged widely as the first country to implement a formal monetary policy agreement specifying an explicit inflation target. This agreement, signed in March 1990 between the Minister of Finance and the Governor of the Bank, was implemented under Section 9 of the Reserve Bank of New Zealand Act 1989. By 2014, inflation targeting agreements had been established, in several forms, in more than 25 countries. During the evolving 1984-1989 price stability and inflation targeting deliberations in New Zealand, a survey of Reserve Bank economists in early 1987 included the question 'Should the Bank have an explicitly-stated desired inflation time path?' This paper is primarily a record of the background and responses to this question. It also includes the original documents and related material.
    Keywords: inflation targeting; monetary policy; New Zealand; Reserve Bank of New Zealand
    JEL: E31 E52 E58
    Date: 2014–09–30
  5. By: Christian Lambert Nguena (Association of African Young Economists)
    Abstract: The relative positive economic growth experienced by most African countries in the recent decade has come with insufficient demand stimulation. The concern of poverty at the forefront of economic policy, the need for inclusive growth and sustainable development, inter alia, brings forward the inevitable question of the monetary policy responsibility. Accordingly, the monetarist theory that focuses on price stability inherently neglects the demand stimulation aspect of economic prosperity. Since the mid 1980s, the monetarist school driven by its central aim of fighting inflation and maintaining credibility in markets and economic agents has been priority for monetary authorities (especially in Africa). To this effect, while good results in terms of inflation targeting has been achieved in many African countries; economic growth has sometimes been low. Hence, in light of the above, using a statistical and theoretical debate method, the Credible Monetary Policy (CMP)1 paradox is traceable to Africa. Accordingly, with the promising economic environment in Africa, we recommend the promotion of a monetary policy oriented toward improving economic growth under the constraint of price stability. In light of the above view, there are some note worthy signs such the recent decision by the two CFA zone central banks to either maintain interest rates at a low level or reduce it despite tightening measures of monetary policy taken by the European Central Bank (ECB) earlier in the year. In the same vein, the central bank of South Africa has maintained its policy of low interest rates with an objective of economic expansion. Since, the 2008 financial crisis, the consolidation of the Federal Reserve’s declared final objective of lowering interest rates and making emergency loans is an eloquent example to reassure African central banks in the choice of the pro-growth monetary policy option.
    Keywords: Pro growth monetary policy, CMP paradox, Financing enterprises, African central bank
    JEL: C23 C33 E52 E58
    Date: 2013–05
  6. By: Financial Markets Department (Bank of Japan)
    Abstract: During fiscal 2013 (April 1, 2013 to March 31, 2014), the Bank of Japan pursued extremely powerful monetary easing under quantitative and qualitative monetary easing and significantly increased the amount outstanding of the monetary base through purchases of a wide range of assets, including large-scale purchases of Japanese government bonds (JGBs).
    Date: 2014–08–12
  7. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Marcin Kolasa (National Bank of Poland, Warsaw School of Economics); Krzysztof Makarski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions where housing loans can be denominated in domestic or foreign currency. We calibrate the model for Poland - a typical small open economy with a large share of foreign currency loans (FCL) - and use it to conduct a series of simulations. They show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.
    Keywords: foreign currency loans, monetary and macroprudential policy, DSGE models with banking sector
    JEL: E32 E44 E58
    Date: 2014
  8. By: Hyeongwoo Kim; Wen Shi
    Abstract: This paper empirically investigates the determinants of key benchmark interest rates in China using an array of constrained ordered probit models for quarterly frequency data from 1987 to 2013. Specifically, we estimate the behavioral equation of the People's Bank of China that models their decision-making process for revisions of the benchmark deposit rate and the lending rate. Our findings imply that the PBC's policy decisions are better understood as responses to changes in inflation and money growth, while output gaps and the exchange rate play negligible roles. We also implement in-sample fit analyses and out-of-sample forecast exercises. These tests show robust and reasonably good performances of our models in understanding dynamics of these benchmark interest rates.
    Keywords: Monetary Policy; People's Bank of China; Ordered Probit Model; Deposit Rate; Lending Rate; In-Sample Fit; Out-of-Sample Forecast
    JEL: E52 E58
    Date: 2014–09
  9. By: Tairi Rõõm; Katri Urke
    Abstract: Estonia changed over from the kroon to the euro in January 2011. This paper analyses the inflationary effect of this event. The analysis is based on the Harmonised Indices of Consumer Prices. The difference-in-differences method is employed where the treated group is Estonia and the control group consists of the other EU member states. The estimation results imply that the inflationary impact of the euro changeover was either insignificant or small in magnitude, depending on which treatment period is considered. The acceleration in inflation mostly occurred in the second half of 2010, during the six-month period prior to the adoption of the euro. Although the actual effect of the euro changeover on inflation was modest, most Estonian citizens felt that the introduction of the new currency increased consumer prices considerably.
    Keywords: euro, currency changeover, consumer prices, inflation
    JEL: D49 P46 E58
    Date: 2014–10–10
  10. By: Rodrigo Vergara
    Date: 2014–10
  11. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper studies how the presence of an income tax changes the properties of general equilibrium models. It fi�nds that relative to the previous literature [following Leeper (1991)] a new area of determinacy exists where a passive �fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self �financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the passive �fiscal-passive monetary regime. In this regime, �scal limits bring about a Tobin effect and nominal prices are determined according to the quantity theory of money.
    Keywords: Distorting Taxes; Dynamic Laffer Curve; Equilibrium Determinacy;
    JEL: C60 E60 H60
  12. By: Sami Alpanda; Gino Cateau; Cesaire Meh
    Abstract: We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
    Keywords: macroprudential policy, DSGE, real-fi?nancial linkages
    Date: 2014–09
  13. By: Emmanuel Farhi; Xavier Gabaix
    Abstract: We propose a new model of exchange rates, which yields a theory of the forward premium puzzle. Our model is frictionless, has complete markets, and works for an arbitrary number of countries. Each country's exposure to disaster risk varies over time according to a mean-reverting process. Risky countries command high risk premia: they feature a depreciated exchange rate and a high interest rate. As their risk premium mean reverts, their exchange rate appreciates. Therefore, currencies of high interest rate countries appreciate on average. We calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate, the forward premium puzzle regression coefficients, and near-random walk exchange rate dynamics. A signature prediction of the model is that when a country's riskiness increases, its currency depreciates and put premia on this currency increase. The implied negative correlation between exchange rate movements and put premia is borne out by the data.
    Date: 2014–01
  14. By: Financial Markets Department (Bank of Japan)
    Abstract: In August 2013, the Financial Markets Department of the Bank of Japan (the Bank) conducted the fourth Tokyo Money Market Survey (August 2013) to recognize developments in the Japanese money market. Since 2008, this series of surveys had been conducted every other year until 2012. However, to better meet the needs of market participants and observe market trends more precisely, the Bank decided to conduct the survey annually beginning with the 2013 survey. At the same time, it reviewed the items contained in the survey to streamline the questions asked of respondents. The survey includes a full range of questions in even-numbered years, but in odd-numbered years -- as was in 2013 -- the Bank intends to reduce the scope of items surveyed, barring major changes in the market environment.
    Date: 2014–02–28
  15. By: Alessandra Amendola; Vincenzo Candila; Antonio Scognamillo
    Abstract: Modeling crude oil volatility is of substantial interest for both energy researchers and policy makers. Many authors emphasize the link between this volatility and some exogenous economic variables. This paper aims to investigate the impact of the U.S. Federal Reserve monetary policy on crude oil future price (COFP) volatility. By means of the recently proposed generalized autoregressive conditional heteroskedasticity-mixed data sampling (GARCH-MIDAS) model, the Effective Federal Fund Rate (EFFR) - as a proxy of the monetary policy - is plugged into the mean-reverting unit GARCH(1,1) model. Strong evidence of an inverse relation between the EFFR and COFP volatility is found. This means that an expansionary monetary policy is associated with an increase of the COFP volatility. Conjecturing that the unusual behavior of the COFP in 2007-2008 was driven by a monetary policy shock, we test the presence of mildly explosive behavior in the prices. The sup Augmented Dickey-Fuller test (SADF) confirms the presence of a bubble in the COFP series that started in October 2007 and ended in October 2008. We expect that the COFP-EFFR association could be affected by such a bubble. Therefore, we apply the same experimental set-up to two sub-samples - before and after October 2007. Interestingly, the results show that EFFR influence on COFP volatility is greater in the aftermath of the bubble.
    Keywords: Volatility, GARCH-MIDAS, Bubbles, Futures, Crude Oil.
    JEL: C22 C58 E30 Q43
    Date: 2014
  16. By: TAKEDA Yosuke
    Abstract: The paper aims at quantifying the higher-order expectations that Keynes (1936) compared to the beauty contest, applying a measure of relative entropy to the Japanese ESP Forecast Survey data during the deflationary period. We conclude that during the deflationary period from June 2009 to April 2010 and from April 2010 to February 2011, professional Japanese forecasters faced the Keynesian beauty contest, in which average expectations dominate agents’ expectations.
    Date: 2014–05
  17. By: Costantini, Mauro (Brunel University); Cuaresma, Jesus Crespo (Vienna University of Economics and Business); Hlouskova, Jaroslava (Institute for Advanced Studies, Vienna)
    Abstract: We provide a systematic comparison of the out-of-sample forecasts based on multivariate macroeconomic models and forecast combinations for the euro against the US dollar, the British pound, the Swiss franc and the Japanese yen. We use profit maximization measures based on directional accuracy and trading strategies in addition to standard loss minimization measures. When comparing predictive accuracy and profit measures, data snooping bias free tests are used. The results indicate that forecast combinations help to improve over benchmark trading strategies for the exchange rate against the US dollar and the British pound, although the excess return per unit of deviation is limited. For the euro against the Swiss franc or the Japanese yen, no evidence of generalized improvement in profit measures over the benchmark is found.
    Keywords: Exchange rate forecasting, Forecast combination, Multivariate time series models, Profitability
    JEL: C53 F31 F37
    Date: 2014–09
  18. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan); Shusaku Nishiguchi (Bank of Japan)
    Abstract: After the Bank of Japan (BOJ) introduced Quantitative and Qualitative Monetary Easing in April 2013, the BOJ's government bond purchases increased by a large amount, and entities other than the BOJ, as a group, increased loans and investment in equities, mutual funds, and corporate bonds, while reducing their holdings of government bonds. The extent of portfolio rebalancing differs across entities: we observe rebalancing for domestic banks and the overseas sector; in contrast, so far no rebalancing for insurance companies, corporate pension funds, and public pensions can be observed. In addition to changes in the balance sheet conditions of domestic banks and loan demand faced by domestic banks, purchases of government bonds with a longer remaining maturity by the BOJ likely have played a role in the increase in bank loans by domestic banks.
    Date: 2014–06–19
  19. By: Payment and Settlement Systems Department (Bank of Japan)
    Abstract: The total numbers of cards issued and terminals for electronic money continue increasing in Japan. Although the rates of increase have slowed somewhat compared to a while ago, they still remain at high levels. While the environment for the use of electronic money expands in this manner, the growth of value and volume of transactions settled using electronic money has recently accelerated slightly. The value and volume of transactions settled per card have continued their moderate growth, and combined with the increase in the number of cards issued, contribute to the increases in the total value and volume of transactions settled. The results of a recent opinion survey in Japan suggest that electronic money is being increasingly used as a settlement instrument for relatively small-value payments. However, the degree of diffusion varies (1) not only in the range of payment values, but also by (2) region, (3) age and (4) households. One of the characteristics is that especially in payments of JPY 1,000 or less, marked differences are observed among the regions. This possibly reflects differences in (a) the environment for the use of electronic money by region and (b) the availability of opportunities for using electronic money by age group. Despite these differences, on the whole, it would be safe to assume that electronic money is being increasingly used as a convenient retail payment instrument in Japan.
    Date: 2012–12–21
  20. By: Ludmila Fadejeva; Martin Feldkircher; Thomas Reininger
    Abstract: In this paper, we examine international transmission of the negative credit supply shock, which originated in the euro area and the US. We use the multi-country global vector autoregression (GVAR) approach with trade and bilateral banking exposures as weights, and identify five structural shocks via sign restrictions. Special focus of this research is on CESEE – a region that shares strong financial linkages with the euro area. Our main results are as follows. First, US-specific shocks account for a significant share in explaining the deviations from growth trends in output and total credit in both the euro area and the US; second, compared to a domestic aggregate demand shock, the economic downturn caused by the credit supply shock in the US and the euro area can bring more harm in the long run, yet the international spillover of the former is stronger; third, the transmission of euro area shocks to emerging Europe is faster and more pronounced compared to US shocks; fourth, there is strong heterogeneity in responses of emerging Europe to shocks in the euro area and the US.
    Keywords: credit shock, global vector autoregressions, sign restrictions
    JEL: C32 F44 E32 O54
    Date: 2014–09–25

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