nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒11‒01
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Adaptive Learning, Heterogeneous Expectations and Forward Guidance By Eric Gaus
  2. UNITED STATES MONETARY POLICY IN THE POST-BRETTON WOODS ERA Did it cause the Crash of 2008? By Yanis Varoufakis
  3. Delayed Overshooting: It’s an 80s Puzzle. By Seong-Hoon Kim; Seongman Moon; Carlos Velasco
  4. The Responses of the Prime Rate to a Change in Policies of the Federal Reserve By Joseph Friedman; Yochanan Shachmurove
  5. Decaying expectations: what inflation forecasts tell us about the anchoring of inflation expectations By Aaron Mehrotra; James Yetman
  6. Rethinking Pro-Growth Monetary Policy in Africa: Monetarist versus Keynesian Approach By Christian Lambert Nguena
  7. Optimal Macroprudential Policy By Junichi Fujimoto; Ko Munakata; Koji Nakamura; Yuki Teranishi
  8. Toward a New Understanding of Monetary Policy By Friedman, Benjamin Morton
  9. So far apart and yet so close: Should the ECB care about inflation differentials? By Zsolt Darvas; Guntram B. Wolff
  10. A Comparative Analysis of Macroprudential Policies By Yaprak Tavman
  11. Central Bank Currency Swaps and the International Monetary System By Christophe Destais
  12. The Monetary Approach to Exchange Rate Determination: A geometric analysis Creation Date: 1981 By K.W. Clements
  13. The Bank of France and the Open-Market instrument: an impossible wedding? By Nicolas Barbaroux
  14. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Jonas E. Arias; Dario Caldara; Juan F. Rubio-Ramírez
  15. The Price of Stability. The balance sheet policy of the Banque de France and the Gold Standard (1880-1914). By G. Bazot; M. D. Bordo; E. Monnet
  16. Price level targeting with strategic fiscal policy and the value of fiscal leadership By Yuting Bai
  17. QE and the bank lending channel in the United Kingdom By Butt, Nick; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  18. Does Inflation Targeting Outperform Alternative Policies during Global Downturns? By Renée A. Fry-McKibbin; Chen Wang
  19. Money Cycles. By Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
  20. Financial Crisis, Unconventional Monetary Policy and International Spillovers By Qianying Chen; Andrew Filardo; Dong He; Feng Zhu
  21. Reforming U.S. Dollar LIBOR: The Path Forward : a speech at the Money Marketeers of New York University, New York, New York, September 4, 2014 By Powell, Jerome H.
  22. Interactions between Monetary Policy and Fiscal Policy By António Afonso; Raquel Balhote
  23. Portfolio Rebalancing Following the Bank of Japan's Government Bond Purchases: Empirical Analysis Using Data on Bank Loans and Investment Flows By Masashi Saito; Yoshihiko Hogen
  24. Commodity Currencies vs Fiat Money; Automaticity vs Embedment By Kenneth Hermele
  25. The optimal supply of liquidity and the regulations of money substitutes: a Baumol-Tobin approach By Benjamin Eden
  26. On Central Bank Interventions in the Mexican Peso/Dollar Foreign Exchange Market By Santiago García-Verdú; Miguel Zerecero
  27. Disagreement in households' inflation expectations and its evolution By Shusaku Nishiguchi; Jouchi Nakajima; Kei Imakubo
  28. Can Financial Stability be Maintained in Developing Countries after the Global Crisis: The Role of External Financial Shocks? By Hasan Comert; Mehmet Selman Colak
  29. The Euroization of Bank Deposits in Eastern Europe By Brown, Martin; Stix, Helmut
  30. Trends in and Challenges for the Money Market in Japan -- Results of the Tokyo Money Market Survey (August 2012) -- By Financial Markets Department
  31. "Non-Legal-Tender Paper Money: The Structure and Performance of Maryland’s Bills of Credit, 1767-1775" By Jim Celia; Farley Grubb
  32. Targeting Long Rates in a Model with Segmented Markets By Carlstrom, Charles T.; Fuerst, Timothy S.; Paustian, Matthius
  33. The Role of Money During the Recession in Australia in 1990-92 Creation Date: 1993 By E.J. Weber
  34. Can interest rate spreads stabilize the euro area? By Michał Brzoza-Brzezina; Jacek Kotłowski; Kamil Wierus
  35. Balance of Payments: Monetary or monetarist approach Creation Date: 1980 By G.L. Murray
  36. Developing an underlying inflation gauge for China By Marlene Amstad; Ye Huan; Guonan Ma
  37. Private Shareholding and Public Interest: An Analysis of an Eclectic Group of Central Banks By Jannie Rossouw
  38. The Pound of Money of Account in Basle During the Late Middle Ages Creation Date: 1995 By E.J. Weber

  1. By: Eric Gaus (Ursinus College)
    Abstract: In a model of the New Keynesian Phillips Curve with two E-stable solutions we demonstrate through simulations that forward guidance can ensure the economy settles on the low persistence equilibrium. While market participants use sample autocorrelation learning, the Central Bank uses least squares learning of the MSV solution. Central bank policy is a simple inflation target that is enforced based on policy makers expectations. Monetary policy on its own is not enough to ensure that the low persistence equilibrium obtains.
    Keywords: adaptive learning, forward guidance, heterogeneous expectations
    JEL: E52 D83
    Date: 2014–10–01
  2. By: Yanis Varoufakis (Department of Economics, National and Kapodistrian University of Athens, and Lyndon B. Johnson School of Public Affairs, University of Texas at Austin.)
    Abstract: The Crash of 2008 is often blamed on the Fed’s overly ‘loose’ monetary policy after 2001 (see Taylor, 2009, 2010). In short, the argument goes, American monetary policy was too ‘loose’ for four years between 2002 and 2006; and too ‘tight’ once the Fed realised that it was presiding over an unsustainable boom. This paper argues that the causes of 2008 and its aftermath (i.e. the stuttering ‘recovery’ once financial markets were successfully stabilised) run much deeper than ‘suboptimal’ monetary policy by the Fed. It argues that, by the end of the 1970s, the Bretton Woods system had been replaced with a ‘brave new’ global surplus recycling mechanism in which Wall Street and the rest of the West’s large private banks featured prominently. These developments engendered a new form of ‘private money’ over which the Federal Reserve had decreasing control. Thus, if the Fed did indeed lose control over the effective money supply it lost it not because of any ‘deviation’ from Taylor-rule-based central banking but, rather, because of a major shift in the global role of finance. To understand why the Fed lost much of its influence over the aggregate money supply we first need to understand how this new form of private money had become an indispensible aspect of the aforementioned recycling mechanism. Wall Street’s generation of private money was, in fact, functional to the recycling of global surpluses upon which the ‘Great Moderation’ was founded. This put the Fed in an impossible dilemma: Should it re-assert its control over the effective money supply at the expense of ending the illusion of the Great Moderation? Or should it stick to Taylor-rule like central banking? This paper argues that the Fed opted for the latter. The paper is structured as follows. Sections 1 and 2 offer a non-technical analysis of the arguments outlined above. Section 3 turns to the post-2008 period and asks; Given that the official sector stabilised financial markets, why has recovery proved so tepid? The answer Section 3 provides is an extension of the analysis in Sections 1&2 regarding the true causes of the Fed’s loss of control over the effective money supply well before the Crash of 2008. Along the same lines, it presents a particular critique of the Fed’s Quantitative Easing policy. Section 4 concludes. In addition to its four main sections, the paper offers three analytical appendices. Appendix 1 presents empirical evidence of the Fed’s loss of control over the effective money supply. Appendix 2 supports these observations with a fully dynamic game theoretical analysis of the Fed’s conundrum during the 1980-2008 period. Lastly, Appendix 3 focuses on the unrealistic assumptions under which Quantitative Easing might spearhead recovery
    Keywords: Federal Reserve, Central Bank Games, Financial Crisis, Taylor Rule, Monetary Policy, Quantitative Easing
    JEL: C72 E42 E44 E51 E52 E58 F02 F33
  3. By: Seong-Hoon Kim (University of St Andrews); Seongman Moon (Universidad Carlos III de Madrid); Carlos Velasco (Universidad Carlos III de Madrid)
    Abstract: We re-investigate the delayed overshooting puzzle. We find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold in the other periods considered. (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch’s overshooting hypothesis.
    Keywords: delayed overshooting, UIP, Dornbusch overshooting hypothesis, Volcker, monetary policy regime
    JEL: F31 E52 E65
    Date: 2014–05–01
  4. By: Joseph Friedman (Department of Economics, Temple University); Yochanan Shachmurove (City College of New York)
    Abstract: This paper studies the reactions of commercial banks to the changes in monetary policy tools in mid-1994, when the Federal Reserve Bank altered its policy implicitly targeting the Federal Funds Rate (FFR). Prior to 1994, the FFR had affected, with a considerable lag, the Prime Rate. However, after the move by the Fed in 1994, commercial banks responded immediately by changing their Prime lending rate to the Federal Funds Rate plus a three-percent spread. Based on the response of commercial banks, it is evident that a more transparent monetary policy can, in fact, more effectively achieve its underlying objectives.
    Keywords: Federal Fund Rate, Prime Rate, Federal Reserve Bank, Monetary Policy, Commercial Banks, Vector Auto Regression (VAR), Vector Error Correction (VEC), Interest Rate Targeting, Unit Root Tests, Granger Causality, Variance Decomposition
    JEL: C15 C32 C58 E00 E4 E5 G00 G2 G38
    Date: 2014–09
  5. By: Aaron Mehrotra; James Yetman
    Abstract: Well anchored inflation expectations are considered to be a reflection of credible monetary policy. In the past, anchoring has been assessed using either long-run inflation surveys or break-even inflation rates on financial assets with long maturities. But neither of these is ideal. Here we propose an alternative measure of inflation anchoring that makes full use of readily available, multiple-horizon, fixedevent forecasts. We show that a model where forecasts are assumed to diverge away from a long-run anchor towards actual inflation as the forecast horizon shortens fits the data well. It also provides simple estimates of the degree to which inflation expectations are anchored. Based on our estimation results we argue that inflation expectations have become more tightly anchored over time in both inflation targeting economies and in those following other regimes. However, inflation targeting regimes have seen a greater change along three dimensions: the level of the anchor has fallen further; the tightness of anchoring has increased more; and the relationship between the anchor and actual inflation outcomes has weakened to a greater degree.
    Keywords: Inflation expectations, decay function, inflation targeting
    Date: 2014–09
  6. 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
  7. By: Junichi Fujimoto (National Graduate Institute for Policy Studies); Ko Munakata (Bank of Japan); Koji Nakamura (Bank of Japan); Yuki Teranishi (Keio University and CAMA, ANU)
    Abstract: This paper introduces financial market frictions into a standard New Keynesian model through search and matching in the credit market. Under such financial mar- ket frictions, a second-order approximation of social welfare includes a term involv- ing credit, in addition to terms for inflation and consumption. As a consequence, the optimal monetary and macroprudential policies must contribute to both finan- cial and price stability. This result holds for various approximated welfares that can change corresponding to macroprudential policy variables. The key features of opti- mal policies are as follows. The optimal monetary policy requires keeping the credit market countercyclical against the real economy. Commitment in monetary and macro- prudential policy, rather than approximated welfare, justifies history dependence and pre-emptiveness. Appropriate combinations of macroprudential and monetary policy achieve perfect financial and price stability.
    Keywords: optimal macroprudential policy; optimal monetary policy; financial market friction
    JEL: E44 E52 E61
    Date: 2014–09
  8. By: Friedman, Benjamin Morton
    Date: 2013
  9. By: Zsolt Darvas; Guntram B. Wolff
    Abstract: Inflation rates can differ across regions of monetary unions. We show that in the euro area, the US, Canada, Japan and Australia, inflation rates have been substantially and persistently different in different regions. Differences were particularly substantial in the euro area. Inflation differences can reflect normal adjustment processes such as price convergence or the Balassa-Samuelson effect, or can reflect the different cyclical position of regions. But they can also be the result of economic distortions resulting from segmented markets or unsustainable demand and credit developments fueled by low real interest rates. In normal times, the European Central Bank cannot influence such developments with its single interest rate instrument. However, unconventional policy measures can have different effects on different countries depending on the chosen instrument, and should be used to reduce fragmentation and ensure the proper transmission of monetary policy. The new macro prudential policy tools are unlikely to be practical in addressing inflation divergences. It is crucial to keep the average inflation rate close to two percent so that inflation differentials are possible without deflation in some parts of the euro area, which in turn might endanger area-wide financial stability and price stability.
    Date: 2014–09
  10. By: Yaprak Tavman
    Abstract: The global financial crisis has clearly shown that macroeconomic stability is not sufficient to guarantee the stability of the financial system. Hence, the recent policy debate has focused on the effectiveness of macroprudential tools and their interaction with monetary policy. This paper aims to contribute to the macroprudential policy literature by presenting a formal comparative analysis of three macroprudential tools: (i) reserve requirements, (ii) capital requirements and (iii) a regulation premium. Utilizing a New Keynesian general equilibrium model with Önancial frictions, we find that capital requirements are the most effective macroprudential tool in mitigating the negative effects of the financial accelerator mechanism. Deriving welfare-maximizing monetary and macroprudential policy rules, we also conclude that irrespective of the type of the shock affecting the economy, use of capital requirements generates the highest welfare gains.
    Keywords: financial crises, monetary policy, macroprudential tools, financial system regulation
    JEL: E44 E58 G21 G28
    Date: 2014–06
  11. By: Christophe Destais
    Abstract: Central bank currency swaps (CBCS) allow central banks to provide foreign currency liquidity to the commercial banks in their jurisdictions. Since the end of 2007, these swaps have emerged as a de facto key feature of the international monetary system (IMS), with the US Federal Reserve (FED) having extensive recourse to them during the financial crisis, and their exploitation by the People’s Bank of China (PBOC) to help internationalizing the renminbi. This trend was further confirmed in the second half of 2013 with (i) the signing of two swaps agreements between the PBOC and the Bank of England (BOE) and the European Central Bank (ECB), and (ii) the little remarked decision by six major western central banks including the US FED, announced on October 31st 2013, to make permanent previously temporary swap lines. Currency swaps combined with the unlimited and exclusive power of central banks to create money can match the volatility of international capital flows. They have proved very effective and extremely helpful during the recent financial crisis. However, so far, central bank swaps have not been associated with conditionality, and are more precarious than alternative institutional arrangements, such as the International Monetary Fund (IMF) or regional financial agreements (RFA). Large scale use of CBCS can render central banks subject to significant counterparty risk. The huge powers that are bestowed upon central banks as a result of CBCS have triggered questions about the possibility of institutionalizing, and therefore limiting, this new tool. This might be a step too far, since most countries link sovereignty and money creation, and would never agree to have their hands tied. However, in our view, an internationally agreed set of principles would enable a fairer and perhaps more efficient exploitation of this instrument. These principles should include a commitment to transparency. They should encourage long-lasting agreements in order to foster stability, as well as the inclusion of provisions that require commercial banks to soundly manage their foreign liquidity risk. They should also encourage international currency issuers not to unfairly exclude potential CBCS beneficiaries.
    Keywords: Central Banks;International Monetary System;Foreign Currency Liquidity Risk;Financial Instability;International Monetary Fund;US dollar;Renminbi
    JEL: F33 F42 G01 G15
    Date: 2014–09
  12. By: K.W. Clements
  13. By: Nicolas Barbaroux (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,Université Jean Monnet, Saint-Etienne, F-42000, France)
    Abstract: In the aftermath of the sovereign debt criss, open-market interventions prevailed within the central bank’s policy answers known under the label unconventional monetary policy measures. During interwar period, France was an isolated case, among the leading countries, by everlastingly rejecting open-market operations in its monetary policy toolset. The present study analyzes the French monetary policy history by explaining why Bank of France had been so old-fashioned in monetary policymaking for too long time. Moreover, the article provides an explanation of the latter point by raising five major arguments of explanation : (1) the irrelevancy of the French interwar monetary reforms which enabled the Bank of France to conduct open-market operations per se; (2) the French conservatism throughout the insiders’ view from the Bank of France leaders (not only governors and deputy governors, but also the General Council’s members at the head of the French central bank); (3) the legacy of a metallist vision, embodied by Charles Rist, within the French economists of that time (4) the negative public opinion regarding open-market operations which were seen as being an inflationist public debt financing instrument and lastly (5) the unfair competition that occurred between the discounting operations and the open-market operations in the Bank of France’s balance sheet.
    Keywords: Open-market, Monetary policy, Central banking
    JEL: N B22
    Date: 2014
  14. By: Jonas E. Arias; Dario Caldara; Juan F. Rubio-Ramírez
    Abstract: In this paper, we identify monetary policy shocks in structural vector autoregressions (SVARs) by imposing sign and zero restrictions on the systematic component of monetary policy while leaving the remaining equations in the system unrestricted. As in Uhlig (2005), no restrictions are imposed on the response of output to a monetary policy shock. We find that an exogenous increase in the federal funds rate leads to a persistent decline in output and prices. Our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions, but are instead consistent with agnostic identification schemes. The analysis is robust to various specifications of the systematic component of monetary policy widely used in the literature.
    Date: 2014–10
  15. By: G. Bazot; M. D. Bordo; E. Monnet
    Abstract: Under the classical gold standard (1880-1914), the Bank of France maintained a stable discount rate while the Bank of England changed its rate very frequently. Why did the policies of these central banks, the two pillars of the gold standard, differ so much? How did the Bank of France manage to keep a stable rate and continuously violate the “rules of the game”? This paper tackles these questions and shows that the domestic asset portfolio of the Bank of France played a crucial role in smoothing international shocks and in maintaining the stability of the discount rate. This policy provides a striking example of a central bank that uses its balance sheet to block the interest rate channel and protect the domestic economy from international constraints (Mundell’s trilemma).
    Keywords: gold standard, Bank of France, discount rate, central banking, money market.
    JEL: D41 E30 B41
    Date: 2014
  16. By: Yuting Bai
    Abstract: This paper investigate the stabilization bias that arises in a model of non-cooperative monetary and fiscal policy stabilisation of the economy, when monetary authority implements price level targeting but fiscal policy remains benevolent. We demonstrate the gain in welfare improvement depends on the level of steady state debt. If the steady state level of the government debt is low, then the monetary price level targeting unambiguously leads to social welfare gains, even if the fiscal authority acts strategically and faces different objectives and has incentives to pursue its own benefit and therefore offsets some or all of monetary policy actions. Moreover, if the fiscal policymaker is able to conduct itself as an intra-period leader, the social welfare gain of the monetary price level targeting regime can be further improved. However, if the economy has a high steady state debt level, the gain of the price level targeting is outweighed by the loss arising from the conflicts between the policy makers, and leads to a lower social welfare than under cooperative discretionary inflation targeting.
    Keywords: Monetary and fiscal policy interactions, distortionary taxes, discretionary policy, LQ RE models
    JEL: E31 E52 E58 E61 C61
    Date: 2014
  17. By: Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE) provided a boost to bank lending in the United Kingdom, in addition to the effects on asset prices, demand and inflation focused on in most other studies. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks' balance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty’ deposits), then the traditional BLC is diminished. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies which suggest that QE boosted aggregate demand and inflation via portfolio rebalancing channels.
    Keywords: Monetary policy; bank lending channel; quantitative easing
    JEL: E51 E52 G20
    Date: 2014–09–19
  18. By: Renée A. Fry-McKibbin; Chen Wang
    Abstract: This article examines the performance of inflation targeters during the 2007-2012 downturn compared to those without this policy. Propensity score matching methods are used to compare the policy regimes, where during a downturn the more successful policy results in higher inflation and output growth, lower unemployment, and a better fiscal position. The analysis is conducted separately for developed and emerging countries. Inflation targeting tends to insulate developed countries, but is much less conclusive for the emerging countries during downturns. These results are opposite to those found for normal economic periods which are inconclusive for developed countries, but beneficial for emerging countries. Most concerning for emerging countries is that inflation targeters experience lower GDP growth in downturns. Both developed and emerging countries need to evaluate their choice of monetary regime by taking into account the tradeoff between low and stable inflation during normal periods with growth during downturns.
    Keywords: Inflation, Inflation targeting, Financial crisis, Propensity score matching
    JEL: E31 E52 E58
    Date: 2014–10
  19. By: Andrew Clausen (The University of Edinburgh); Carlo Strub (University of St. Gallen)
    Abstract: Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own. We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity. Agents spend their money too quickly – a “hot potato effect of inflation”. We show that inflation can stimulate inefficiently high aggregate output.
    Date: 2014–09–22
  20. By: Qianying Chen (International Monetary Fund); Andrew Filardo (Bank for International Settlements); Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Feng Zhu (Bank for International Settlements)
    Abstract: This paper studies the effects of unconventional monetary policies in the major advanced economies. We first examine the cross-border financial market impact of central bank announcements of asset purchase programmes based on event studies. We find marked effects, as expansionary balance sheet policies influence the prices of a broad range of emerging market assets, raising equity prices, lowering government and corporate bond yields and compressing CDS spreads. We then study the economic impact of US quantitative easing on both emerging and advanced economies, based on an estimated global vector error-correcting macroeconomic (VECM) model, which takes into account trade and financial linkages. We focus on the effects of reductions in US term and corporate spreads, and in US market volatility. The estimated effects are sizeable and differ across economies. First, US QE measures which help to lower market volatility and reduce corporate spreads appear to have had far greater impact than lowering term spreads, as Blinder (2012) suggested. Second, such measures have prevented a prolonged recession and severe deflation in the advanced economies. Third, the impact on emerging economies has varied but is generally stronger than in the US and other advanced economies. US QE measures contributed to overheating in Brazil, China and other emerging economies in 2010 and 2011, but supported recovery in 2009 and 2012. The sign and size of QE effects differ across economies, implying that their costs and benefits are unevenly distributed.
    Keywords: Announcement Effects, Emerging Economies, Financial Markets, Global VECM, International Spillovers, Quantitative Easing, Unconventional Monetary Policy
    JEL: E43 E44 E52 E65 F42 F47
    Date: 2014–09
  21. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–09–04
  22. By: António Afonso; Raquel Balhote
    Abstract: Using a panel data set of 14 EU countries from 1970 to 2012, we study the type of monetary and fiscal policies of both authorities, and assess how they are influenced by certain economic variables and events (the Maastricht Treaty, the Stability and Growth Pact, the Euro and crises). Results show that inflation has a significant impact on monetary policy, and that governments raise their primary balances when facing increases in debt. Another goal is to characterise the type of interactions established between central banks and national governments, i.e. if their policies complement one another, or whether there is a more dominant one. Still, our results point to the lack of evidence concerning central banks’ response to fiscal policy.
    Keywords: interactions, monetary policy, fiscal policy, reaction functions.
    JEL: E52 E62 E63 H62
    Date: 2014–07
  23. By: Masashi Saito (Bank of Japan); Yoshihiko Hogen (Bank of Japan)
    Abstract: This paper organizes facts and conducts an empirical analysis related to the portfolio rebalancing effect of government bond purchases by the Bank of Japan (BOJ). Our analysis uses data on bank loans and investment flows that are classified by type of entity, primarily taken from the Flow of Funds Accounts Statistics. Following the introduction of Quantitative and Qualitative Monetary Easing (QQE) by the BOJ in April 2013, entities other than the BOJ, as a group, have increased loans and investment in equities, mutual funds, and corporate bonds in Japan, while reducing their holdings of Japanese government bonds. Such portfolio rebalancing is mainly led by domestic banks and nonresidents. Meanwhile, so far, insurance companies, corporate pension funds, and public pensions have not reduced government bond holdings when the BOJ purchased government bonds. In addition to changes in financial and economic conditions, such as 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 have played a role in the increase in bank loans observed during the QQE period.
    Keywords: portfolio rebalancing; government bond purchases; Quantitative and Qualitative Monetary Easing (QQE); Flow of Funds Accounts Statistics
    JEL: E52 E58 G11 G2 H63
    Date: 2014–06–19
  24. By: Kenneth Hermele (Lund University, Human Ecology Division, Department of Human Geography.)
    Abstract: Commodity currencies have been stood against fiat money in the discourses on the history of money, implying a development from primitive forms of money – which needed anchor in a real commodity to gain acceptance, for instance gold, silver or copper – to a more sophisticated monetary regime based solely on confidence and trust. This paper argues that the idea of a gradual replacement of the former form of money by the latter is an ahistoric construct: commodity and fiat monies have replaced each other over the millennia, and the latest craze for commodity currency was as recent as the 1920’s when numerous European currencies were based on gold. More fundamentally, money is here viewed as a social relationship, where the anchoring of money in commodities over the centuries may be seen either as strengthening the social contract between the regent and the people, or as undermining it by reducing the space of politics at the expense of automatic regulators. With the break-through of democracy in the early 20th century, the benefits of automaticity were increasingly questioned, and finally abandoned in the 1930’s. In this light, the Bretton Woods regime (1945-1970), although based on dollar-gold convertibility, is not to be interpreted as a commodity currency system but rather as one where politics took the lead over market forces, ushering post-WWII Europe, North America and Japan into a stage of embedded liberalism. It is customary to pin the demise of this era to the misuse of the USA of its de facto international currency monopoly, but the crucial shift was rather the advent of neoliberal political domination of the 1980’s which disembedded markets from politics once again, not the over-reach of the USA. The tying of the hands of politics, and thus of democracy, of disembedding the markets, took another leap forward with the convergence criteria established by the EU as a precondition for joining the euro zone. The paper concludes that just as the embedding of the markets post-WWII grew out of the interwar years’ dismal economic, social, political and military experiences, so, too, a re- embedment of markets may take its point of departure in the economic, social and political catastrophes following the financial crisis of 2008, and the difficulty of dealing with its consequences which have beset the euro zone countries ever since. If such a trend begins to take hold, it is argued, it is the political embedding of markets which we should focus on, not the tying of currencies to a commodity anchor.
    Keywords: commodity currency, gold standard, fiat money, automaticity, embedded liberalism, Bretton Woods, disembedment, minting monopoly, seigniorage, social contract, mercantilism
  25. By: Benjamin Eden (Vanderbilt University)
    Abstract: I use the Baumol-Tobin approach to examine the following propositions: (a) The optimal supply of liquidity requires a government loan program in addition to paying interest on reserves held by banks, (b) The adoption of the optimal policy will crowd out private credit arrangement and will thus shrink the financial sector and (c) regulations aimed at eliminating money substitutes may be redundant if the optimal policy is adopted but otherwise may improve welfare.
    JEL: E0 E5
    Date: 2014–01–10
  26. By: Santiago García-Verdú; Miguel Zerecero
    Abstract: In recent years the Bank of Mexico has made a series of rules-based interventions in the peso/dollar foreign exchange market. We assess the effectiveness of two specific interventions. These were the "Dollar auctions with minimum price", active between October 2008 and April 2010, and the "Dollar auctions without minimum price", implemented from March to September, 2009. Broadly speaking, the aims of these two interventions were, respectively, to provide liquidity and to promote orderly conditions in the foreign exchange market. For our analysis, we follow the framework implemented by Dominguez (2003) and Dominguez (2006), an event study microstructure approach. We use the bid-ask spreads as a measure of liquidity and, also, of orderly conditions. In general, our results show no indication of an effect in the bid-ask spread for the first intervention, and are fairly conclusive regarding a significant reduction in it for the second intervention, yet, it is important to consider the limitations of our estimation methodology.
    Keywords: foreign exchange rate, central bank interventions, microstructure.
    JEL: E5 F31
    Date: 2014–08
  27. By: Shusaku Nishiguchi (Bank of Japan); Jouchi Nakajima (Bank of Japan); Kei Imakubo (Bank of Japan)
    Abstract: One of the aspects characterizing inflation expectations is the degree of disagreement or dispersion in such expectations, and dispersion in households' inflation expectations is quite substantial. In phases in which inflation expectations alter, the shape of the distribution of inflation expectations, which reflects the dispersion, may change even when other measures of inflation expectations such as the mean and the median remain unchanged. This article examines how the distribution of households' medium-horizon inflation expectations in Japan evolves over time using the Opinion Survey on the General Public's Views and Behavior. The analysis shows that during the episode of rising prices since 2013 the expectations distribution has displayed notable changes that were not observed in the phase of rising prices in 2008.
    Date: 2014–03–27
  28. By: Hasan Comert (Department of Economics, METU); Mehmet Selman Colak (Central Bank of Republic of Turkey)
    Abstract: In the recent global turmoil, even though some developing economies were severely affected, in general, developing countries survived the crisis with less damage than advanced countries. The majority of developing countries did not experience a financial system collapse. What are the main factors behind the solid performance of many developing countries in the recent crisis? This paper argues that the main reason is the fact that developing countries did not face a strong financial account shock, especially in the form of capital reversals, during this period. In comparison to past developing country crises of the 80s and 90s, the financial account shocks in the global crisis were much more moderate. To a great extent, the fact that advanced countries could not fully serve their roles as safe havens in the global crisis explains why developing economies were not tested by destructive financial shocks in the recent crisis. Furthermore, developing countries enjoyed greater autonomy and legitimacy in implementing expansionary monetary and fiscal policies without much fear of the bigger financial shocks in an environment in which international cooperation partially meet the need for an international lender of last resort through swap operations and credit lines. If the developed countries, essentially European Union (EU) and the US, start serving fully their safe haven roles and the returns in the developed countries become much more attractive, developing countries may face larger external financial shocks. Even large reserves, flexible exchange rate regimes, healthy balance sheets on the papers and some so-called other strong fundamentals would not be enough to avoid financial collapses.
    Keywords: Developing Countries, Recent Global Crisis, Financial Flows and Financial Markets.
    JEL: E52 E58 F32 F31 G15
    Date: 2014–09
  29. By: Brown, Martin; Stix, Helmut
    Abstract: In Eastern Europe a substantial share of bank deposits are denominated in foreign currency. Deposit euroization poses key challenges for monetary policy and financial sector supervision. On the one hand, it limits the effectiveness of monetary policy interventions. On the other hand, it increases financial sector fragility by exposing banks to currency risk or currency induced credit risk. Policymakers disagree on whether Eastern European countries should tackle deposit euroization with “dedollarization” policies or should rather strive to adopt the Euro as their legal tender. Assessing the potential effectiveness of “dedollarization” policies requires a clear understanding of which households hold foreign currency deposits and why they do so. Based on survey data covering 16,375 households in ten countries in 2011 and 2012, we provide the first household-level analysis of deposit euroization in Eastern Europe. We examine how households’ preferences for and holding of foreign currency deposits are related to individual expectations about monetary conditions and network effects. We also examine to what extent monetary expectations, network effects and deposit euroization are the legacy of past financial crises or the outflow of current policies and institutions in the region. Our findings suggest that deposit euroization in Eastern Europe can be partly tackled by prudent monetary and economic decisions by today’s policymakers. The preferences of households for Euro deposits are partly driven by their distrust in the stability of their domestic currency, which in turn is related to their assessment of current policies and institutions. However, our findings also suggest that a stable monetary policy may not be sufficient to deal with the hysteresis of deposit euroization across the region. First, we confirm that the holding of foreign currency deposits has become a “habit” in the region. Second, we find that deposit euroization is still strongly influenced by households’ experiences of financial crises in the 1990s.
  30. By: Financial Markets Department (Bank of Japan)
    Abstract: In August 2012, the Financial Markets Department of the Bank of Japan conducted the third Tokyo Money Market Survey to identify developments in the Japanese money market and confirm how a number of market-related issues were being addressed. This paper's review is based on the results of the survey.
    Date: 2013–05–15
  31. By: Jim Celia; Farley Grubb (Department of Economics,University of Delaware)
    Abstract: Maryland’s non-legal-tender paper money emissions between 1765 and 1775 are reconstructed to determine the quantities outstanding and their redemption dates, providing a substantial correction to the literature. Over 80 percent of this paper money’s current market value was expected real asset present value and under 20 percent was liquidity premium. It was primarily a real barter asset and not a fiat currency. The liquidity premium was positively related to the amount of paper money per capita in circulation. This paper money traded below face value only due to time-discounting and not depreciation. Past scholars have simply confused time-discounting with depreciation.
    Keywords: asset money, bills of credit, commodity money, fiat money, land banks, legal tender, liquidity premium, paper money, zero-coupon bonds, 1764 Currency Act
    JEL: E31 E42 E51 N11 N21 N41
    Date: 2014
  32. By: Carlstrom, Charles T. (Federal Reserve Bank of Cleveland); Fuerst, Timothy S. (University of Notre Dame); Paustian, Matthius (Bank of England)
    Abstract: This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to having the central bank respond to the term premium, eg., including the term premium in the Taylor rule. Third, a policy that directly targets the term premium sterilizes the real economy from shocks originating in the financial sector. A term premium peg can have signifi cant welfare effects.
    Keywords: Agency costs; CGE models; optimal contracting
    JEL: C68 E44 E61
    Date: 2014–10–15
  33. By: E.J. Weber
  34. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski; Warsaw School of Economics); Kamil Wierus (Narodowy Bank Polski)
    Abstract: Since the creation of the euro area significant interest rate spreads have arisen between euro area countries, both for public and private debt. We check whether these spreads could be made to work towards the goal of providing more stability to the euro area. In particular we focus on reducing the imbalances that arose between the core and peripheral members of the euro area in the first decade of its existence. The idea is that stable positive spreads in peripheral countries could have decreased domestic demand, preventing the boom-bust cycles that plagued these economies. They could also prevent such developments in the future. We find that spreads on real interest rates of 0.6 to 5.5 percentage points would have been necessary to stabilize external positions of the four peripheral euro area member countries.
    Keywords: Euro area, imbalances, current account, panel estimation
    JEL: E32 E43 E52
    Date: 2014
  35. By: G.L. Murray
  36. By: Marlene Amstad; Ye Huan; Guonan Ma
    Abstract: 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 Peopleâ??s Bank of China in modelling inflation.
    Date: 2014–10
  37. By: Jannie Rossouw
    Abstract: Although the title seems to be a contradictio in terminis, this paper shows that there are a small eclectic number of central banks with private shareholders. This paper reviews this selected group of central banks on which surprisingly little has been published. The first challenge is to identify these central banks, as no “generally accepted†or standardised list of such central banks exists, and very little has been published that identifies or compares them.
    Keywords: central banks, central bank shareholding, institutional structure of central banks, recapitalisation of the Bank of Italy, shareholders
    JEL: E02 E40 E49 E50 E58
    Date: 2014
  38. By: E.J. Weber

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