nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒11‒07
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Are US Inflation Expectations Re-Anchored? By Dieter Nautz; Till Strohsal; ;
  2. Three Scenarios for Interest Rates in the Transition to Normalcy By Cooke, Diana A.; Gavin, Michael K.
  3. Central Bank Purchases of Private Assets By Williamson, Stephen D.
  4. Monetary policy stress in EMU during the moderation and the global crisis By Pawel Gajewski
  5. Euro Area monetary policy shocks: impact on financial asset prices during the crisis? By C.Jardet; A. Monks
  6. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine Ben Cheikh; Christophe Rault
  7. ECB Policy Responses between 2007 and 2014: a chronological analysis and a money quantity assessment of their effects By Carlos Rodriguez; Carlos A. Carrasco
  8. Euro area Inflation as a Predictor of National Inflation Rates By Antonella Cavallo; Antonio Ribba
  9. The effects of global monetary policy and Greek debt crisis on the dynamic conditional correlations of currency markets By Costas Karfakis; Theodore Panagiotidis
  10. Labor Market Dynamics and Monetary Policy : a speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 22, 2014 By Yellen, Janet L.
  11. The Bank of France and the Open-Market instrument: an impossible wedding? By Nicolas Barbaroux
  12. Financial frictions and the reaction of stock prices to monetary policy shocks By Ozdagli, Ali K.
  13. Macroeconomic Dynamics Near the ZLB: A Tale of Two Countries By S. Borağan Aruoba; Pablo Cuba-Borda; Frank Schorfheide
  14. Economic Policy Uncertainty and Inflation Expectations. By K. Istrefi; A. Piloiu
  15. The Federal Reserve and the Global Economy : a speech at the Per Jacobsson Foundation Lecture, 2014 Annual Meetings of the International Monetary Fund and the World Bank Group, Washington, D.C., October 11, 2014 By Fischer, Stanley
  16. Navigating toward normal: the road back to the future for monetary policy By Williams, John C.
  17. The Role of the Business Cycle in Exchange Rate Pass-Through: The Case of Finland By Nidhaleddine Ben Cheikh; Christophe Rault
  18. The Evolution of the Federal Reserve Swap Lines since 1962 By Bordo, Michael D.; Humpage, Owen F.; Schwartz, Anna J.
  19. Benchmark tipping in the global bond market By Lawrence Kreicher; Robert N McCauley; Philip Wooldridge
  20. Global liquidity, money growth and UK inflation By Michael Ellington; Costas Milas
  21. Limited Asset Market Participation and the Optimal Fiscal and Monetary Policies By Lorenzo Menna; Patrizio Tirelli
  22. Assessing the Effectiveness of Date-Based Forward Guidance at the Zero Lower Bound with a Non-Gaussian Affine Term-Structure Model By Tsz-Kin Chung; Cho-Hoi Hui; Ka-Fai Li
  23. Time-Varying Persistence in US Inflation By Massimiliano Caporin; Rangan Gupta
  24. The Role of Interbank Relationships and Liquidity Needs By Craig, Ben R.; Fecht, Falko; Tumer-Alkan, Gunseli
  25. An independent Scotland’s currency options redux: Assessing the costs and benefits of currency choice By Ronald MacDonald; Research Fellow CESifo Policy Group Munich
  26. Surprise! Euro area inflation has fallen By Marianna Riggi; Fabrizio Venditti
  27. Money in the Production Function By Jonathan Benchimol
  28. Implementation of open market operations in a time of transition By Potter, Simon M.
  29. Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements By Paul Luk; David Vines
  30. Monetary Policy in Oil Exporting Economies By Drago Bergholt
  31. US Inflation Dynamics on Long Range Data By Vasilios Plakandaras; Periklis Gogas; Rangan Gupta; Theophilos Papadimitriou
  32. Bitcoin as money? By Lo, Stephanie; Wang, J. Christina
  33. Shock transmission through international banks: the Italian case By Marianna Caccavaio; Luisa Carpinelli; Giuseppe Marinelli; Enrico Sette
  34. Introductory Remarks : a speech at the Federal Reserve/Conference of State Bank Supervisors Community Banking Research Conference, St. Louis, Missouri, September 23, 2014 By Powell, Jerome H.
  35. Interest rate control during normalization By Potter, Simon M.

  1. By: Dieter Nautz; Till Strohsal; ;
    Abstract: Anchored inflation expectations are of key importance for monetary policy. If long-terminflation expectations arewell-anchored, they should be unaffected by short-termeconomic news. This letter introduces newsregressions with multiple endogenous breaks to investigate the de- and re-anchoring of US inflation expectations. We confirm earlier evidence on the de-anchoring of expectations driven by the outbreak of the crisis. Our results indicate that expectations have not been re-anchored ever since.
    Keywords: Anchoring of Inflation Expectations, Break-Even Inflation Rates, News-Regressions, Multiple Structural Break Tests
    JEL: E31 E52 E58 C22
    Date: 2014–10
  2. By: Cooke, Diana A. (Federal Reserve Bank of St. Louis); Gavin, Michael K. (Federal Reserve Bank of St. Louis)
    Abstract: This article develops time-series models to represent three alternative, potential monetary policy regimes as monetary policy returns to normal. The first regime is a return to the high and volatile inflation rate of the 1970s. The second regime, the one that most Federal Reserve officials and business economists expect, is a return to the credible low inflation policy that characterized the U.S. economy from 1983 to 2007, a period that has come to be known as the Great Moderation. The third regime is one in which policymakers decide to keep policy interest rates at or near zero for the foreseeable future. Japanese data are used to estimate this regime. These time-series models include four variables, per capita GDP growth, CPI inflation, the policy rate and the 10-year bond rate. These models are used to forecast the U.S. economy from 2008 through 2013 and represent the possible outcomes for interest rates that may follow the return of monetary policy to normal. Here, normal depends on the policy regime that follows the liftoff of the federal funds rate target that is expected in mid-2015.
    Keywords: Exit strategy; Credibility; Interest rate policy
    JEL: E43 E47 E52 E58 E65
    Date: 2014–10–03
  3. By: Williamson, Stephen D. (Federal Reserve Bank of St. Louis)
    Abstract: A model is constructed in which consumers and banks have incentives to fake the quality of collateral. Conventional monetary easing can exacerbate these problems, in that the mispresentation of collateral becomes more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal policy, not by mitigating incentive problems in asset markets.
    Keywords: monetary policy; fiscal policy
    JEL: E31 E5 E58
    Date: 2014–10–01
  4. By: Pawel Gajewski (University of Lodz, Faculty of Economics and Sociology)
    Abstract: This paper re-examines the problem of monetary policy stress in the EMU, both prior to the crisis as well as after its outbreak. It aims to (firstly) reconfirm that monetary policy during the great moderation (i.e. until late 2008) was responsible for fuelling the process of imbalance accumulation in the EMU, and (secondly) to determine to what extent the stress was caused by macroeconomic divergences. We employ a forward-looking Taylor-type monetary policy reaction function with realtime forecasted data to mimic the ECB monetary policy during the great moderation. The estimated coefficients are subsequently used to create counterfactual series of ruleconsistent country-specific interest rates and compute monetary policy stress in EMU individual member states. The results confirm that peripheral countries were exposed to risks emerging from excessively low interest rates, while the “core” countries had to live with too-high interest rates, and the stress was generally stronger in the former case. Interestingly, the bulk of it was non-fundamental, i.e. not caused by inflation and output gap differentials between countries. There are several potential sources of this stress and we show that missed forecasts were making an important contribution and they were mainly responsible for pushing the interest rate below its rule-consistent level.
    Keywords: monetary stress, crisis, Taylor rule, EMU
    JEL: C22 E52 E58
    Date: 2014–08
  5. By: C.Jardet; A. Monks
    Abstract: We use high-frequency intraday interest rate data to measure euro area monetary policy shocks on the days of ECB interest rate announcements between 2002 and 2013. In line with Gürkaynak et al. (2005), we look at monetary policy shocks along two time dimensions: one related to the current level of short-term interest rates and a second related to expectations for the future path of these rates. We undertake regression analysis in order to determine the impact of monetary policy shocks on euro-denominated financial asset prices and confirm that shocks related to the future path of monetary policy are an important driver, particularly for longer-term bond yields. We find that this relationship has changed for certain asset classes since the onset of the crisis, notably the sovereign bonds of stressed euro area countries. These findings highlight the changed nature of the monetary policy transmission mechanism for some euro area countries during the sovereign debt crisis.
    Keywords: Monetary policy, ECB, Transmission mechanism, financial crisis.
    JEL: E43 E52 E58 E61 E65
    Date: 2014
  6. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: This paper provides an update on the exchange rate pass-through (ERPT) estimates for 12 Euro area (EA) countries. First, based on quarterly data over the 1990-2012 period, our study does not find a significant heterogeneity in the degree of pass-through across the monetary union members, in contrast to previous empirical studies. As we use a longer time span for the post-EA era than existing studies, this is not surprising, since the process of monetary union has entailed some convergence towards more stable macroeconomic conditions across Euro Area (EA) Member States. Second, when assessing the stability of pass-through elasticities we find very weak evidence of a decline around the inception of the Euro in 1999. However, our results reveal that a downtrend in ERPT estimates became apparent starting from the beginning of the 1990s. This observed decline was synchronous to the shift towards reduced inflation regimes in our sample of countries. Finally, we notice that the distinction between “peripheral” and “core” EA economies in terms of pass-through has significantly decreased over the last two decades.
    Keywords: Exchange Rate Pass-Through, Import Prices, Euro area
    JEL: E31 F31 F40
    Date: 2014–08–01
  7. By: Carlos Rodriguez; Carlos A. Carrasco (University of the Basque Country (UPV/EHU))
    Abstract: In this paper, we analyse the ECB policy measures in place since the outbreak of the financial crisis. First, we discuss the categorisation of the measures implemented by the ECB. Second, we study the phases of the crises and the concrete policy responses. Third, we conduct a comparative analysis of the ECB and the FED responses at the beginning of the crises with regard to the financial system structure, the determinants of the balance sheet size and composition, the risk absorbed, and the exit strategy involved. Finally, we discuss the effectiveness of the ECB’s monetary policy from a traditional monetarist perspective during the entire period, by analysing its impact on monetary aggregates and the money multiplier.
    Keywords: ECB, unconventional monetary policy, money multiplier, monetary aggregates, European crises
    JEL: E52 E58 F15 N14
    Date: 2014–09–01
  8. By: Antonella Cavallo; Antonio Ribba
    Abstract: The stability of inflation differentials is an important condition for the smooth working of a currency area, such as the European Economic and Monetary Union. In the presence of stability, changes in national inflation rates, while holding Euro-area inflation fixed contemporaneously, should be only transitory. If this is the case, the rate of inflation of the whole area can also be interpreted as a predictor, at least in the long run, of the different national inflation rates. However, in this paper we show that this condition is satisfied only for a small number of countries, including France and Italy. Better convergence results for inflation differentials are, instead, found for the USA. Some policy implications are drawn for the Eurozone.
    Keywords: Inflation Differentials; Euro area; Structural Cointegrated VARs; Permanent-transitory Decompositions;
    JEL: E31 C32
    Date: 2013–10
  9. By: Costas Karfakis (Department of Economics, University of Macedonia, Greece); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece)
    Abstract: This study examines first the effects of financial market turmoil in the fall of 2008 on the conditional correlations between three exchange rate returns (USD/EUR, JPY/USD, USD/GBP), and then the effects of quantitative easing programs and Greek debt crisis on the entire distribution of estimated correlations. The dynamic correlations have sharply increased during the period that followed the collapse of Lehman Brothers, indicating a financial contagion across currency markets. The quantitative easing programs of the Federal Reserve and the Bank of England have affected the conditional correlations between the currency pairs. Finally, the Greek debt crisis has emerged as the most significant covariate of the quantile regressions..
    Keywords: Currency markets, quantitative easing, GARCH, dynamic conditional correlation, quantile regression.
    JEL: C32 F31 G15
    Date: 2014–09
  10. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–08–22
  11. By: Nicolas Barbaroux (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I (UCBL))
    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
    Date: 2014
  12. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston)
    Abstract: This paper reveals and tests a new theoretical implication of the credit channel of monetary policy: as financial frictions (monitoring or auditing costs) increase, the reaction of stock prices to monetary policy shocks decreases. Correspondingly, towards the end of the Enron accounting scandal, the stock prices of firms sharing the same auditor as Enron responded by about 50 to 60 basis points less than other firms to a 10 basis point reduction in the federal funds target rate. This effect is particularly strong among more opaque firms for which financial statements likely provide a more important monitoring tool.
    Keywords: financial constraints; stock market; credit channel; monetary policy
    JEL: E44 E52 G12 G32
    Date: 2014–07–29
  13. By: S. Borağan Aruoba (Department of Economics, University of Maryland); Pablo Cuba-Borda (Department of Economics, University of Maryland); Frank Schorfheide (Department of Economics, University of Pennsylvania)
    Abstract: We propose and solve a small-scale New-Keynesian model with Markov sunspot shocks that move the economy between a targeted-inflation regime and a deflation regime and fit it to data from the U.S. and Japan. For the U.S. we find that adverse demand shocks have moved the economy to the zero lower bound (ZLB) in 2009 and an expansive monetary policy has kept it there subsequently. In contrast, Japan has experienced a switch to the deflation regime in 1999 and remained there since then, except for a short period. The two scenarios have drastically different implications for macroeconomic policies. Fiscal multipliers are about 20% smaller in the deflationary regime, despite the economy remaining at the ZLB. While a commitment by the central bank to keep rates near the ZLB doubles the fiscal multipliers in the targeted-inflation regime (U.S.), it has no effect in the deflation regime (Japan).
    Keywords: DSGE Models, Government Spending Multiplier, Japan, Multiple Equilibria, Nonlinear Filtering, Nonlinear Solution Methods, Sunspots, U.S., ZLB
    JEL: C5 E4 E5
    Date: 2012–09–10
  14. By: K. Istrefi; A. Piloiu
    Abstract: Theory and evidence suggest that in an environment of well-anchored expectations, temporary economic news or shocks should not affect agents' expectations of inflation in the long term. Our estimated structural VARs show that both long- and short-term inflation expectations are sensitive to policy-related uncertainty shocks. While economic activity contracts, long-term inflation expectations raise in response to such shocks. These results suggest that observed uncertainty about the stance and perceived effectiveness of policy raises concerns about future inflation and entails additional risks to central banks' hard-won inflation credibility.
    Keywords: Policy uncertainty; central banks; inflation expectations; structural VAR.
    JEL: E02 E31 E58 E63 P16
    Date: 2014
  15. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–10–11
  16. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to Business and Community Leaders, Las Vegas, Nevada, October 9, 2014
    Date: 2014–10–09
  17. By: Nidhaleddine Ben Cheikh; Christophe Rault
    Abstract: In this paper we investigate whether exchange rate pass-through (ERPT) responds nonlinearly to economic activity along the business cycle. Using quarterly data spanning the period 1975:1 to 2011:1, we explore the existence of nonlinearities in ERPT to CPI inflation for the Finnish economy. Within a logistic smooth transition framework, our investigations reveal a strong regime-dependence of pass-through, depending positively on economic activity. Besides, point estimates indicate that the long-run pass-through coefficient is equal to 0.15% (weakly significant) when GDP growth is below a threshold of 3%. However, when the Finnish economy’s growth rate speeds up - above the threshold of 3% - ERPT elasticity increases to 0.47%. These results provide some useful guidance on how policymakers should act over different phases of the business cycle. More specifically, monetary policy should factor in the nonlinear mechanism of ERPT over the business cycle in order to prevent exchange rate movements from fueling a continuous inflationary process.
    Keywords: Exchange rate pass-through, Inflation, Business cycle, Smooth Transition Regression models
    JEL: C22 E31 F31
    Date: 2014–06–01
  18. By: Bordo, Michael D. (Rutgers University); Humpage, Owen F. (Federal Reserve Bank of Cleveland); Schwartz, Anna J. (Federal Reserve Bank of Cleveland)
    Abstract: In this paper, we describe the evolution of the Federal Reserve’s swap lines from their inception in 1962 as a mechanism to forestall claims on US gold reserves under Bretton Woods to their use during the Great Recession as a means of extending emergency dollar liquidity. We describe the Federal Reserve’s successes and failures. We argue that swaps calm crisis situations by both supplementing foreign countries’ dollar reserves and by signaling central-bank cooperation. We show how swaps exposed the Federal Reserve to conditionality and raised fears that they bypassed the Congressional appropriations process.
    Keywords: Swap lines; Federal Reserve; Bretton Woods; Intervention; Mexico; Lender of last resort
    JEL: F3 N2
    Date: 2014–10–02
  19. By: Lawrence Kreicher; Robert N McCauley; Philip Wooldridge
    Abstract: We analyse the turnover of fixed income derivatives in seven currencies to test the hypothesis that market participants increasingly use contracts based on private rather than government rates to hedge and to take positions. In the US dollar money market, private benchmarks long ago displaced government benchmarks. In the bond markets, evidence from organised exchanges and the Triennial Central Bank survey on over-the-counter (OTC) markets suggests that the benchmark is tipping from government bond futures to private interest rate swaps. The global financial crisis seems only to have interrupted this process in the US dollar bond market, the European sovereign bond strains may have accelerated it in the euro bond market; and the policy to clear centrally OTC trades does not seem to be impeding it. Cross-sectional analysis of 35 bond markets identifies bond market size and GDP per capita as key determinants of the existence of government bond futures. Based on these results, one may expect uccessful introduction of government bond futures in China and Brazil even as such contracts continue to lose ground in today's major markets.
    Keywords: Benchmark, safe assets, government bond futures, interest rate swaps, US Treasury bonds, German bunds, Japanese government bonds, UK gilts
    Date: 2014–10
  20. By: Michael Ellington (University of Liverpool Management School, UK); Costas Milas (University of Liverpool Management School, UK)
    Abstract: This paper examines the inflationary impact of domestic and global liquidity conditions on UK inflation through the lens of monetary aggregates. To do so, we rely on standard linear models as well as non-linear models that allow for regime switching behaviour in terms of a contained regime (when domestic money growth is relatively concealed) versus an uncontained regime (when domestic money growth is unusually unconcealed). We find that global liquidity yields inflationary pressures in the UK over and above the impact of domestic money growth, spare capacity and money disequilibria (the latter accounting for the property sector and financial asset markets). All effects are regime-switching as they depend on whether domestic money growth is contained within or exceeds threshold boundaries. Finally, broad (M4) money has greater explanatory power than divisia money in modelling UK inflation.
    Date: 2014–10
  21. By: Lorenzo Menna; Patrizio Tirelli
    Abstract: In the workhorse DSGE model, the optimal steady state inflation rate is near to zero or slightly negative and inflation is almost completely stabilized along the business cycle (Schmitt-Grohè and Uribe, 2011). We reconsider the issue, allowing for agent heterogeneity in the access to the market for interest bearing assets. We show that inflation reduces inequality and that LAMP can justify relatively high optimal inflation rates. When we calibrate the share of constrained agents to fit the wealth Gini index for the US, the optimal inflation rate is well above 2%. The optimal response to shocks is also a¤ected. Rather than using public debt to smooth tax distortions, the Ramsey planner front loads tax rates and reduces public debt variations in order to limit the redistributive e¤ects of debt service payments.
    Keywords: trend in�ation, monetary and �scal policy, Ramsey plan, Limited Asset Market Participation.
    JEL: E52 E58 J51 E24
    Date: 2014–10
  22. By: Tsz-Kin Chung (Tokyo Metropolitan University); Cho-Hoi Hui (Hong Kong Monetary Authority); Ka-Fai Li (Hong Kong Monetary Authority)
    Abstract: Using a non-Gaussian affine term-structure model, this paper evaluates the effectiveness of the date-based forward guidance at the zero lower bound. The model extracts the expected dynamics of two state variables (the short-term interest rate and its mean) embedded in the entire Treasury yield curve. Using simulations and an event study, we find that the model's dynamics were significantly altered by the first announcement of date-based forward guidance in August 2011 and speculation about tapering in May 2013. The model offers a probabilistic approach in assessing the market's perception towards the Federal Reserve's projections of the federal funds rate.
    JEL: E43 E43 E52 E58
    Date: 2014–08
  23. By: Massimiliano Caporin (Department of Economics and Management “Marco Fanno ”, University of Padova); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: The persistence property of inflation is an important issue for not only economists, but, especially for central banks, given that the degree of inflation persistence determines the extent to which central banks can control inflation. Also, not only is the level of inflation persistence that is important in economic analyses, but also the question of whether the persistence varies over time, for instance, across business cycle phases, is equally pertinent, since assuming constant persistence across states of the economy, is sure to lead to misguided policy decisions. Against this backdrop, we extend the literature on long-memory models of inflation persistence for the US economy over the monthly period of 1876:2-2014:5, by developing an autoregressive fractionally integrated moving average-generalized autoregressive conditional heteroskedastic (ARFIMA-GARCH) model, with a time-varying memory coefficient which varies across expansions and recessions. In sum, we find that, inflation persistence does vary across recessions and expansions, with it being significantly higher in the former than in the latter. As an aside, we also show that, persistence of inflation volatility however, is higher during expansions than in recessions. Understandably, our results have important policy implications.
    Keywords: Persistence, US Inflation Rate, Time-Varying Long Memory
    JEL: C12 C13 C22 C51 E31 E52
    Date: 2014–10
  24. By: Craig, Ben R. (Federal Reserve Bank of Cleveland); Fecht, Falko (Frankfurt School of Finance and Management); Tumer-Alkan, Gunseli (VU University Amsterdam)
    Abstract: In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank’s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank’s (ECB) weekly repo auctions. The bids measure each bank’s willingness to pay for liquidity since they had variable rate tenders with a “pay-your-bid” price. Controlling for bank characteristics and the daily fulfillment of reserve requirements, we find that banks with a more diversified borrowing structure in the interbank market bid significantly less aggressively and pay a lower price for liquidity in the ECB’s main refinancing operations. These findings suggest that incentives to diversify bank liquidity risk dominate the benefits of private information. When the network position of the bank is taken into account, we find that central lenders in the money market bid more aggressively in the auctions.
    Keywords: Interbank markets; liquidity; relationship lending; networks
    JEL: D44 D85 E58 G21 L14
    Date: 2014–10–17
  25. By: Ronald MacDonald; Research Fellow CESifo Policy Group Munich
  26. By: Marianna Riggi (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Between 2013 and 2014, following the recession triggered by the sovereign debt crisis, euro-area inflation decreased sharply. Although a fall in the inflation rate was to be expected, given the severity of the recession, professional forecasters failed to anticipate it. A possible explanation for this forecast failure lies in a break in the cyclicality of inflation, which was unaccounted for in forecasting models. We probe this explanation in the context of a simple backward-looking Phillips curve and find that the sensitivity of inflation to the output gap has recently increased. We rationalize this result through a structural model, in which a steepening of the Phillips curve arises either from lower nominal rigidities (a decrease in the average duration of prices) or from fewer strategic complementarities in price-setting due to a reduction in the number of firms in the economy.
    Keywords: inflation, Phillips curve, structural break, strategic complementarities
    JEL: E31 E37 C53
    Date: 2014–09
  27. By: Jonathan Benchimol (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, PhD Program - ESSEC Business School)
    Abstract: This paper proposes a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where real money balances enter the production function. By using a Bayesian analysis, our model shows that money is not an omitted input to the production process and rejects the decreasing returns to scale hypothesis. Our simulations suggest that money plays a negligible role in the dynamics of output and inflation, despite its inclusion in the production function. In addition, we introduce the flexible-price real money balances concept.
    Keywords: Money in the production function; DSGE; Bayesian estimation.
    Date: 2013–02–01
  28. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks before the Japan Center for Economic Research, Tokyo, Japan.
    Keywords: Large-scale asset purchases (LSAPs); System Open Market Account (SOMA); Term Deposit Facility (TDF); interest on excess reserves (IOER)
    JEL: E52
    Date: 2014–10–25
  29. By: Paul Luk (Oxford University and Hong Kong Institute for Monetary Research); David Vines (Oxford University and Centre for Applied Macroeconomic Analysis and Australian National University and Centre for Economic Policy Research)
    Abstract: We present a microfounded two-country model of global imbalances and debt deleveraging. A sustained rise in saving in one country can lead to a worldwide fall in interest rates and an accumulation of debt in the other country. When a subsequent deleveraging shock occurs, interest rates are forced down further. In the presence of a zero bound to interest rates, the deleveraging country may face a combination of a large fall in output, deflation, a rise in real interest rates and real exchange rate appreciation. Such exchange rate appreciation will intensify the loss in output, magnify the deflation and further tighten the deleveraging constraint.
    Keywords: Global Imbalances, Debt Deleveraging, Liquidity Trap, Real Exchange Rate Number: 202014
    JEL: E5 F3
    Date: 2014–08
  30. By: Drago Bergholt
    Abstract: How should monetary policy be constructed when national income depends on oil exports? I set up a general equilibrium model for an oil exporting small open economy to analyze this question. Fundamentals include an oil sector and domestic non-oil firms – some of which are linked to oil markets via supply chains. In the model, the intermediate production network implies transmission of international oil shocks to all domestic industries. The presence of wage and price rigidities at the sector level leads to non-trivial trade-offs between different stabilization tar- gets. I characterize Ramsey-optimal monetary policy in this environment, and use the framework to shed light on i) welfare implications of the supply chain channel, and ii) costs of alternative policy rules. Three results emerge: First, optimal policy puts high weight on nominal wage stability. In contrast, attempts to target impulses from the oil sector can be disastrous for welfare. Second, while oil sector activities contribute to macroeconomic fluctuations, they do not change the nature of optimal policy. Third, operational Taylor rules with high interest rate inertia can approximate the Ramsey equilibrium reasonably well.
    Keywords: Monetary policy, oil exports, small open economy, Ramsey equilibrium, DSGE
    JEL: E52 F41 Q33 Q43
    Date: 2014–07
  31. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace); Periklis Gogas (Department of Economics, Democritus University of Thrace); Rangan Gupta (Department of Economics, University of Pretoria); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace)
    Abstract: In this paper we evaluate inflation persistence in the U.S. using long range monthly and annual data. The importance of inflation persistence is crucial to policy authorities and market participants, since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks. Departing from classic econometric approaches found in the relevant literature, we evaluate persistence through the nonparametric Hurst exponent within both a global and a rolling window framework. Moreover, we expand our analysis to detect the potential existence of chaos in the data generating process, in order to enhance the robustness of conclusions. Overall, we find that inflation persistence is high from 1775 to 2013 for the annual dataset and from February 1876 to May 2014 in monthly frequency, respectively. Especially from the monthly dataset, the rolling window approach allows us to derive that inflation persistence has reached to historically high levels in the post Bretton Woods period and remained there ever since.
    Keywords: Inflation, Persistence, Hurst exponent, Detrended Fluctuation Analysis, Lyapunov exponent
    JEL: E31 E60 C14
    Date: 2014–10
  32. By: Lo, Stephanie (Harvard University); Wang, J. Christina (Federal Reserve Bank of Boston)
    Abstract: The spectacular rise late last year in the price of Bitcoin, the dominant virtual currency, has attracted much public attention as well as scholarly interest. This policy brief discusses how some features of Bitcoin, as designed and executed to date, have hampered its ability to perform the functions required of a fiat money––as a medium of exchange, unit of account, and store of value. Furthermore, we document how various forms of intermediaries have emerged and evolved within the Bitcoin network, particularly noting the convergence toward concentrated processing, both on and off the blockchain. We argue that much of this process would have been predicted by established theories of financial intermediation, and we consider the theories’ implication for the future evolution of intermediaries serving users of Bitcoin or alternative virtual currencies. We then compare Bitcoin with other innovations to facilitate payment services, from competing alternative digital currencies to electronic payment protocols. We conclude with a broad consideration of the major factors that will likely shape the future development of Bitcoin versus other alternative payment systems. We predict that Bitcoin’s lasting legacy will be the innovations it has spurred to payment technology, although the payment system will remain dominated by large processors because of economies of scale.
    Keywords: money; medium of exchange; liquidity; speculative bubble
    JEL: E41 E42 E51 G12 G21
    Date: 2014–09–04
  33. By: Marianna Caccavaio (Banca d'Italia); Luisa Carpinelli (Banca d'Italia); Giuseppe Marinelli (Banca d'Italia); Enrico Sette (Banca d'Italia)
    Abstract: This paper studies what impact liquidity shocks have on liquid assets and domestic and cross-border lending. In particular, we look for differences across banks depending on their international exposure and we account for the effects of the sovereign debt crisis and the ECBÂ’s non-conventional monetary policy measures. Our main findings are that liquid assets are important drivers of lending adjustment to liquidity risk and that this effect is significant for domestic lending but not for foreign lending even considering the characteristics of the destination market. Differences in banksÂ’ international exposure play a limited role in the way liquidity shocks are transmitted. Creation-Date: 2014-09
    Keywords: liquidity shock, cross-border lending, international banks
    JEL: G20 G21
  34. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2014–09–23
  35. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the SIFMA Conference on Securities Financing Transactions, New York City.
    Keywords: overnight reverse repurchase agreement (ON RRP); System Open Market Account (SOMA); interest on excess reserve balances (IOER); large-scale asset purchases (LSAPs); aggregate cap
    JEL: E52
    Date: 2014–10–07

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