nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒11‒28
twenty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Good Governance of Monetary Policy in Canada: Lessons from the C.D. Howe Institute’s Shadow Council By Pierre Siklos; Matthias Neuenkirch
  2. Do federal reserve bank presidents have a regional bias? By Jung, Alexander; Latsos, Sophia
  3. A Neglected Inconsistency in Milton Friedman's AEA Presidential Address By James Forder
  4. The Role of Card Acceptance in the Transaction Demand for Money By Kim Huynh; Philipp Schmidt-Dengler; Helmut Stix
  5. Stability or upheaval? The currency composition of international reserves in the long run By Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
  6. Degree of price rigidity in LICs and implication for monetary policy By ALIDOU, Sahawal
  7. Robustness, validity, and significance of the ECB's asset quality review and stress test exercise By Steffen, Sascha
  8. Are rules and boundaries sufficient to limit harmful central bank discretion? Lessons from Europe By Orphanides, Athanasios
  9. Optimal monetary policy, asset purchases, and credit market frictions By Schabert, Andreas
  10. Economic erowth and monetary policy: Is there a new normal? By Plosser, Charles I.
  11. Effectiveness of the Easing of Monetary Policy in the Japanese Economy, Incorporating Energy Prices By Naoyuki Yoshino; Farhad Taghizadeh-Hesary
  12. Inflation, deflation, and uncertainty: What drives euro area option-implied inflation expectations and are they still anchored in the sovereign debt crisis? By Scharnagl, Michael; Stapf, Jelena
  13. Inflation Expectations and the Two Forms of Inattentiveness By Easaw, Joshy; Golinelli, Roberto
  14. Monetary Policy and Debt Fragility By Antoine Camous; Russell Cooper
  15. Counter-Cyclical Capital Buffers and Interest-Rate Policy as Complements – The Experience of South Africa By Roy Havemann
  16. Trade Dynamics in the Market for Federal Funds By Gara Afonso; Ricardo Lagos
  17. Bringing Financial Stability into Monetary Policy By Eric Leeper; James Nason
  18. Policy and Spillover Analysis in the World Economy: A Panel Dynamic Stochastic General Equilibrium Approach By Francis Vitek
  19. U.S. monetary policy and its global implications By Dudley, William
  20. Response of Stock Markets to Monetary Policy : An Asian Stock Market Perspective By Naoyuki Yoshino; Farhad Taghizadeh-Hesary; Ali Hassanzadeh; Ahmad Danu Prasetyo
  21. The low interest rate environment: Causes, effects and a way out By Matthes, Jürgen

  1. By: Pierre Siklos; Matthias Neuenkirch
    Abstract: The Bank of Canada should consider publicly disclosing the discussions and dissenting opinions of members of its interest-rate-setting committee, according to a new C.D. Howe Institute report. In “Good Governance of Monetary Policy in Canada: Lessons from the C.D. Howe Institute’s Shadow Council,” authors Pierre Siklos and Matthias Neuenkirch argue that the existing governance structure of the Bank is out of step with international practices that have spread quickly over the past decade.
    Keywords: Monetary Policy
    JEL: E52 E58
    Date: 2014–10
  2. By: Jung, Alexander; Latsos, Sophia
    Abstract: This paper examines whether the interest rate preferences of Federal Reserve Bank Presidents are subject to a regional bias. In order to evaluate the regional bias hypothesis, we augment individual Taylor rules for the Federal Reserve Bank Presidents (sample 1989 to 2006) with regional variables and test for their influence on the Presidents’ interest rate preferences. These preferences stem from FOMC (Federal Open Market Committee) transcripts. Estimates based on the augmented Taylor rules reveal that the preferences of some Federal Reserve Bank Presidents were not free of a regional bias. Augmented Taylor rules with inertia, however, show that this finding could also be due to the presence of an interest rate smoothing motive. JEL Classification: C12, C30, D72, E58
    Keywords: augmented Taylor rule, interest rate preferences, real-time data, regional bias, SUR model
    Date: 2014–09
  3. By: James Forder
    Abstract: Friedman (1968) - his famous Presidential Address to the American Economic Association - contains an elementary error right at the heart of what is usually supposed to be the paper's crucial argument.  That is the argument to the effect that during an inflation, changing expectations shift in Phillips curve.  It is suggested that the fact of this mistake, and of its having gone all-but unnoticed are points of historical interest.  Further reflections, drawing on the arguments of Forder (2014) Macroeconomics and the Phillips curve myth, are suggested.
    Keywords: Phillips, Friedman, Expectations
    JEL: B22 E31
    Date: 2014–09–17
  4. By: Kim Huynh; Philipp Schmidt-Dengler; Helmut Stix
    Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.
    Keywords: Bank notes, E-Money, Econometric and statistical methods, Financial services
    JEL: C C3 C35 C8 C83 E E4 E41
    Date: 2014
  5. By: Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
    Abstract: We investigate whether the role of national currencies as international reserves was fundamentally altered by the shift from fixed to flexible exchange rates (what we call the “upheaval hypothesis”), a view that gained adherents following the collapse of the Bretton Woods System. We extend standard data on the currency composition of foreign reserves backward and forward in time to test whether there was a shift in the determinants of reserve currency shares around the breakdown of Bretton Woods. We find evidence in favor of this hypothesis. The effects of inertia and the credibility of policies on international reserve currency choice have become stronger post-Bretton Woods, while those associated with network effects have weakened. We also show that negative policy interventions designed to discourage international use of a currency have been easier to implement than positive interventions to encourage international use. These findings speak to current discussions of the prospects of currencies, like the euro and the renminbi, seen to be seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it. JEL Classification: F30, N20
    Keywords: currency composition, fixed vs. floating exchange rates, international reserves, structural change
    Date: 2014–08
  6. By: ALIDOU, Sahawal
    Abstract: Using semi-aggregate data on price and a methodology based on dummy indicator, we assess price rigidity in Ghana and discuss its implications for monetary policy. Price features in Ghana are compared to that of South Africa which is a similar country both in terms of economic structure and monetary policy framework. Our results suggest higher price rigidity in South Africa than in Ghana. Therefore, the same monetary policy is likely to have ceteris paribus, more real effects in South Africa and more nominal effects in Ghana.
    Keywords: Price rigidity, monetary policy, frequency of price changes
    JEL: E31 E52
    Date: 2014–06
  7. By: Steffen, Sascha
    Abstract: As we are moving toward a eurozone banking union, the European Central Bank (ECB) is going to take over the regulatory oversight of 128 banks in November 2014. To that end, the ECB conducted a comprehensive assessment of these banks, which included an asset quality review (AQR) and a stress test. The fundamental question is how accurately will the financial condition of these banks have been assessed by the ECB when it commences its regulatory oversight? And, can the comprehensive assessment lead to a full repair of banks' balance sheets so that the ECB takes over financially sound banks and is the necessary regulation in place to facilitate this? Overall, the evidence presented in this paper based on the design of the comprehensive assessment as well as own stress test exercises suggest that the ECB's assessment might not comprehensively deal with the problems in the financial sector and risks may remain that will pose substantial threats to financial stability in the eurozone.
    Keywords: Stress Test,Comprehensive Assessment,Asset Quality Review,European Central Bank,European Banking Authority,Single Supervisory Mechanism
    Date: 2014
  8. By: Orphanides, Athanasios
    Abstract: Marvin Goodfriend's (2014) insightful, informative and provocative work explains concisely and convincingly why the Fed needs rules and boundaries. This paper reviews the broader institutional design problem regarding the effectiveness of the central bank in practice and confirms the need for rules and boundaries. The framework proposed for improving the Fed incorporates key elements that have already been adopted in the European Union. The case of ELA provision by the ECB and the Central Bank of Cyprus to Marfin-Laiki Bank during the crisis, however, suggests that the existence of rules and boundaries may not be enough to limit harmful discretion. During a crisis, novel interpretations of the legal authority of the central bank may be introduced to create a grey area that might be exploited to justify harmful discretionary decisions even in the presence of rules and boundaries. This raises the question how to ensure that rules and boundaries are respected in practice.
    Keywords: Rules,discretion,central bank mandates,ECB,Central Bank of Cyprus,ELA
    JEL: E58 E61
    Date: 2014
  9. By: Schabert, Andreas
    Abstract: This paper examines how credit market frictions affect optimal monetary policy and if there is a role for central bank asset purchases. We develop a sticky price model where money serves as the means of payment and ex-ante identical agents borrow/lend among each other. The credit market is distorted as borrowing is constrained by available collateral. We show that the central bank cannot implement the first best allocation and that optimal monetary policy mainly aims at stabilizing prices when only a single instrument is available. The central bank can however mitigate the credit market distortion in a welfare-enhancing way by purchasing loans at a favorable price, which relies on rationing the supply of money. JEL Classification: E4, E5, E32
    Keywords: borrowing constraints, central bank asset purchases, money rationing, nominal rigidities, optimal monetary policy
    Date: 2014–10
  10. By: Plosser, Charles I. (Federal Reserve Bank of Philadelphia)
    Abstract: The George Washington University and Princeton University's Griswold Center for Economic Policy Studies Philadelphia, PA President Charles Plosser gives his views on the debate about a new normal for economic growth in the U.S. economy. He will also discuss the question of future productivity growth and highlight research in this area.
    Keywords: Economic growth; Monetary policy; Stagnation; Productivity growth; Innovation;
    Date: 2014–11–13
  11. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary
    Abstract: Japan has reached the limits of conventional macroeconomic policy. In order to overcome deflation and achieve sustainable economic growth, the Bank of Japan (BOJ) recently set an inflation target of 2% and implemented an aggressive monetary policy so this target could be achieved as soon as possible. Although prices started to rise after the BOJ implemented monetary easing, this may have been for other reasons, such as higher oil prices. Oil became expensive as a result of the depreciated Japanese yen and this was one of the main causes of the rise in inflation. This paper shows that quantitative easing may not have stimulated the Japanese economy either. Aggregate demand, which includes private investment, did not increase significantly in Japan with lower interest rates. Private investment displays this unconventional behavior because of uncertainty about the future and because Japan’s population is aging. We believe that the remedy for Japan’s economic policy is not to be found in monetary policy. The government needs to implement serious structural changes and growth strategies.
    Keywords: Easing of Monetary Policy, the Japanese economy, energy price, Bank of Japan, aging population
    JEL: E47 E52 Q41 Q43
    Date: 2014–11
  12. By: Scharnagl, Michael; Stapf, Jelena
    Abstract: We tackle two questions in this paper: In the sovereign debt crisis, what moves the euro area inflation outlook and has the firm anchoring of medium to long-term inflation expectations been touched? Deriving densities from a new data set on options on the euro area harmonized index of consumer prices provides us with the full distribution of inflation expectations. The daily data set allows us to analyze effects of monetary policy announcements and macro news in a time varying event study framework despite the short sample period from 2009 to 2013. Due to renewed fears of deflation we compare option-implied and statistical density functions to gain insight into deflation risk. Inflation expectations show a decreasing mean but growing uncertainty especially since the intensification of the sovereign debt crisis in mid-2011. Around the same time the influence of monetary policy announcements on inflation expectations diminished. Tail events such as deflation although still contained became more probable. The impact of macroeconomic news to explain inflation probabilities overall decreased and shifted towards countries more affected by the crisis. Concerning the anchoring of inflation expectations the paper provides a twofold result: The mean and low sensitivity to actual news speak for anchored inflation expectations whereas the growing uncertainty reveals market participants concerns about possible extreme inflation or deflation outcomes in the future.
    Keywords: Inflation expectations,Deflation,Options,Monetary policy,Financial crisis
    JEL: C58 E31 E44 G13
    Date: 2014
  13. By: Easaw, Joshy (Cardiff Business School); Golinelli, Roberto
    Abstract: The purpose of the present paper is to investigate the structure and dynamics of professionals' forecast of inflation. Recent papers have focused on their forecast errors and how they may be affected by informational rigidities, or inattentiveness. In this paper we extend the existing literature by considering a second form of inattentiveness. While showing that both types of inattentiveness are closely related, we focus on the inattentiveness that forecasters face when undertaking multi-period forecast and, thereby, the expected momentum of inflation. Using number survey-based data for the US and UK, we establish a new structure for the professional's forecast error with direct implications for the persistence of real effects
    Keywords: Expectations; Information Rigidity; Survey Forecasts
    JEL: E3 E4 E5
    Date: 2014–10
  14. By: Antoine Camous; Russell Cooper
    Abstract: The valuation of government debt is subject to strategic uncertainty, stemming from investors' sentiments. Pessimistic lenders, fearing default, bid down the price of debt. This leaves a government with a higher debt burden, increasing the likelihood of default and thus confirming the pessimism of lenders. This paper studies the interaction of monetary policy and debt fragility. It asks: do monetary interventions mitigate debt fragility? The answer depends in part on the nature of monetary policy, particularly the ability to commit to future state contingent actions. With commitment to a state contingent policy, the monetary authority can indeed overcome strategic uncertainty. Under discretion, debt fragility remains.
    JEL: E42 E58 E63 F33
    Date: 2014–10
  15. By: Roy Havemann
    Abstract: Counter-cyclical capital buffers are increasingly popular new "macroprudential" tools. However, there is limited empirical evidence on both the intended and unintended consequences of using these buffers. During the pre-crisis period (2002--2007), South Africa increased capital adequacy ratios to curb rapid credit extension, and so provides a useful test case. Using a new data set from that period, this paper extends a standard large-scale macroeconomic model to include capital adequacy ratios as a policy lever. It is found that a 1 percentage point shock to the capital adequacy ratio has similar effects to an interest-rate shock of between 0.3 and 0.4 percentage points. These results are in line with those in other jurisdictions. The econometric results are only indicative -- if actively used as a tool, counter-cyclical capital buffers may have their own complexities, including asymmetric impacts and endogeneity problems. Monetary policy issues, such as signalling, time inconsistency, expectation and communication challenges also apply, reducing the usefulness of proactive macroprudential policy. Nevertheless, macroprudential policies have an important complementary role to play
    Keywords: macroprudential, counter-cyclical capital buffer, macro modelling.
    JEL: E58 G18 C53
    Date: 2014
  16. By: Gara Afonso; Ricardo Lagos
    Abstract: We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.
    JEL: E4 E43 E5 E52 E58 G21 G28
    Date: 2014–08
  17. By: Eric Leeper (Indiana University); James Nason (North Carolina State University)
    Keywords: Financial frictions, incomplete markets, crises, new Keynesian, natural rate, monetary transmission mechanism
    JEL: E3 E4 E5 E6 G2 N12
    Date: 2014–11
  18. By: Francis Vitek
    Abstract: This paper develops a structural macroeconometric model of the world economy, disaggregated into forty national economies. This panel dynamic stochastic general equilibrium model features a range of nominal and real rigidities, extensive macrofinancial linkages, and diverse spillover transmission channels. A variety of monetary policy analysis, fiscal policy analysis, spillover analysis, and forecasting applications of the estimated model are demonstrated. These include quantifying the monetary and fiscal transmission mechanisms, accounting for business cycle fluctuations, and generating relatively accurate forecasts of inflation and output growth.
    Keywords: Spillovers;Monetary policy;Monetary transmission mechanism;Fiscal policy;Business cycles;Economic forecasting;General equilibrium models;Panel analysis;Monetary policy analysis; Fiscal policy analysis; Spillover analysis; Forecasting; World economy; Panel dynamic stochastic general equilibrium model; Bayesian econometrics
    Date: 2014–10–30
  19. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Central Bank of the United Arab Emirates, Abu Dhabi, United Arab Emirates.
    Keywords: dual mandate; emerging market economies (EMEs); Treasury Inflation-Protected Securities (TIPS); (PCE) deflator
    JEL: E52 F43
    Date: 2014–11–13
  20. By: Naoyuki Yoshino (Asian Development Bank Institute (ADBI)); Farhad Taghizadeh-Hesary; Ali Hassanzadeh; Ahmad Danu Prasetyo
    Abstract: We estimate the response of Asian stock market prices to exogenous monetary policy shocks using a vector error correction model. In our paper, monetary policy transmits to stock market price through three routes : money by itself, exchange rate, and inflation. Our result points to the fact that stock prices increase persistently in response to an exogenous easing monetary policy. Variance deposition results show that, after 10 periods, the forecast error variance of beyond 53% of the Tehran Stock Exchange Price Index (TEPIX) can be explained by exogenous shocks to the US dollar–Iranian rial exchange rate, while this ratio for exogenous shocks to Iranian real gross domestic product was only 17%. We argue that such evidence can be accounted for by an endogenous response of the stock prices to the monetary policy shocks.
    Keywords: Asian stock market, monetary policy shocks, Variance Decomposition
    JEL: E44 G10 G12
    Date: 2014–09
  21. By: Matthes, Jürgen
    Abstract: The very expansive and unconventional monetary policy of the ECB reduced the tensions of the Euro debt crisis at the price of persistently very low interest rates. While the ECB was right to act at the peak of the crisis, the risks of the low-interest rate environment become increasingly obvious. Private savings suffer from very low yields, which is particularly detrimental for long-term retirement savings. Moreover, financial stability risks could arise, as ultra-low interest rates can cause a search for yield among investors. Banks and life insurance companies are exposed to reduced interest profits respectively lower yields. While life insurance companies can cope with a shorter period of low interest rates, a longer period, however, poses challenges, as contracts with guaranteed interest rates have to be served. Therefore, it is a positive sign that the economic conditions for an interest rate turnaround have improved significantly since 2012 and are expected to improve further. Economic activity is clearly on an upward trend which is expected to continue despite current uncertainties. Significant structural reforms have been implemented in most stressed Euro countries which will most likely increase growth potentials soon (as already appears to be the case in Spain). Due to a stronger economy fears of deflation should only be a temporary phenomenon. Stress indicators and fundamentals in the banking sector have also improved on the back of (late but eventually decisive) policy measures and will continue to do so in the course of the ECB's pending stress test. Public and private indebtedness should be manageable in an environment where a sustainable moderate economic growth and more normal inflation are present. These are the conditions which characterize the baseline scenario assumed here. (...)
    Keywords: Europische Zentralbank,Geldpolitik,Inflation
    Date: 2014

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