nep-mon New Economics Papers
on Monetary Economics
Issue of 2014‒12‒08
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. ECB Monetary Operations and the Interbank Repo Market By Dunne, Peter G.; Fleming, Michael J.; Zholos, Andrey
  2. Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates By Eric T. Swanson; John C. Williams
  3. Parallel currencies in historical perspective By Von dem Berge, Lukas
  4. The Revived Bretton Woods System's First Decade By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
  5. Friedman Redux: External Adjustment and Exchange Rate Flexibility By Atish R. Ghosh; Mahvash Saeed Qureshi; Charalambos G. Tsangarides
  6. Central bank macroeconomic forecasting during the global financial crisis: the European Central Bank and Federal Reserve Bank of New York experiences By Alessi, Lucia; Ghysels, Eric; Onorante, Luca; Peach, Richard; Potter, Simon
  7. Employment, hours and optimal monetary policy By Dossche, Maarten; Lewis, Vivien; Poilly, Céline
  8. Assessing the macroeconomic effects of inflation targeting: Evidence from OECD Economies By BEN ROMDHANE, Ikram; MENSI, Sami
  9. Do the International Monetary and Financial Systems Need More than Short-Term Cosmetics Reforms? By Sau, Lino
  10. Pre-crisis credit standards: monetary policy or the savings glut? By A. Penalver
  11. Does the Clarity of Inflation Reports Affect Volatility in Financial Markets? By Ales Bulir; Martin Cihak; David-Jan Jansen
  12. Financial Frictions and Optimal Monetary Policy in a Small Open Economy By Jesús A. Bejarano; Luisa F. Charry
  13. The relevance of international spillovers and asymmetric effects in the Taylor rule By Beckmann, Joscha; Belke, Ansgar; Dreger, Christian
  14. Effectiveness of the Easing of Monetary Policy in the Japanese Economy, Incorporating Energy Prices By Naoyuki Yoshino; Farhad Taghizadeh-Hesary
  15. Monetary Policy as an Optimum Currency Area Criterion By Dominik Groll
  16. Vector Autoregressions with Parsimoniously Time Varying Parameters and an Application to Monetary Policy By Laurent Callot; Johannes Tang Kristensen
  17. Monetary Policy Regime Shifts Under the Zero Lower Bound: An Application of a Stochastic Rational Expectations Equilibrium to a Markov Switching DSGE Model By IIBOSHI Hirokuni
  18. Term premia implications of macroeconomic regime changes By Carboni, Giacomo
  19. Is there a threat of self-reinforcing deflation in the euro area? A view through the lens of the Phillips curve By Wieland, Volker; Wolters, Maik
  20. Macroeconomic policy in Brazil: inflation targeting, public debt structure and credit policies By Fernando López Vicente; José María Serena Garralda
  21. Banks, Liquidity Management and Monetary Policy By Javier Bianchi; Saki Bigio
  22. One currency, one price? Euro changeover-related inflation in Estonia By Meriküll, Jaanika; Rõõm, Tairi
  23. The financial and macroeconomic effects of OMT announcements By Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
  24. The Neutral Rate of Interest in Canada By Rhys R. Mendes
  25. Reforming the architecture of EMU: Ensuring stability in Europe By Jakob de Haan; Jeroen Hessel; Niels Gilbert
  26. In lands of foreign currency credit, bank lending channels run through? The effects of monetary policy at home and abroad on the currency denomination of the supply of credit By Ongena, Steven; Schindele, Ibolya; Vonnák, Dzsamila
  27. Inflation Experience and Inflation Expectations: Dispersion and Disagreement Within Demographic Groups By Johannsen, Benjamin K.
  28. Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka By Manuk Ghazanchyan
  29. Bank capital, the state contingency of banks' assets and its role for the transmission of shocks By Kühl, Michael
  30. Macroeconomic Policy Games By Bodenstein, Martin; Guerrieri, Luca; LaBriola, Joe

  1. By: Dunne, Peter G. (Central Bank of Ireland); Fleming, Michael J. (Reserve Bank of New York); Zholos, Andrey (Barclays Capital)
    Abstract: We examine the relationship between monetary policy operations and interbank trading of funds using sovereign bonds as collateral. We first establish that, in the pre-crisis period, there are important but rather weak relations between these funding sources and that this relationship varies within maintenance periods and at the end of the year. Oficial funding conditions did not meaningfully constrain repo market activity in the 2003-05 period but, in the immediate pre-crisis period, rate increases led to a sharp contraction in repo activity. Focusing on the crisis period, we identify potentially benign substitution effects between official auctions and repo market activity but our empirical analysis shows that positive innovations in the cost of official funding, due to aggressive bidding, and a limited allotment response, encouraged increased use of the interbank repo market. The analysis informs a discussion of the merits of returning to variable rate operations.
    Keywords: Repo, Funding, Liquidity, Monetary Policy, Reserve Management.
    JEL: E43 E44 E52 E53 G12 G14
    Date: 2014–08
  2. By: Eric T. Swanson; John C. Williams
    Abstract: The federal funds rate has been at the zero lower bound for over four years, since December 2008. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we measure the effects of the zero lower bound on interest rates of any maturity by comparing the sensitivity of those interest rates to macroeconomic news when short-term interest rates were very low to that during normal times. We find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to news throughout 2008-10, suggesting that monetary and fiscal policy were likely to have been about as effective as usual during this period. Only beginning in late 2011 does the sensitivity of these yields to news fall closer to zero. We offer two explanations for our findings: First, until late 2011, market participants expected the funds rate to lift off from zero within about four quarters, minimizing the effects of the zero bound on medium- and longer-term yields. Second, the Fed's unconventional policy actions seem to have helped offset the effects of the zero bound on medium- and longer-term rates.
    JEL: E43 E52 E62
    Date: 2014–09
  3. By: Von dem Berge, Lukas
    Abstract: [Introduction ...] To make the topic accessible to a bachelor thesis, and prevent the discussion from becoming too superficial, only a few representative parallel currency systems will be considered here. The second and third chapter will begin with a discussion of parallel currencies and currency competition throughout ancient, medieval, and modern Europe. Comparing the monetary history of Ancient Greece and Rome will illustrate the virtues of competing parallel currencies. A discussion of imaginary money in medieval Europe will show that separation of the functions of money is a common feature of monetary history. The fourth chapter will look into flexible domestic exchange rates in China and Japan between the 17th and 19th century. The Chinese experience will demonstrate parallel currencies ability to discover the boundaries of optimum currency areas, while the Japanese case will show how separating the functions of money can help protect agents from the detrimental effects of debasements. In the fourth chapter, the introduction of parallel paper currencies in America, such as the continentals and greenbacks, will be considered. These issues usually failed due to a lack of trust in the issuing authorities, illustrating the difficulties of introducing a weak parallel currency. Finally, the fifth chapter will discuss the role of stable and indexed parallel currencies as tools of monetary reform during hyperinflations - namely, the rentenmark in the German hyperinflation of 1932 and the tax pengö in the Hungarian hyperinflation of 1945/46. The conclusion will discuss the differences and communalities between the historical episodes. Last but not least, some tentative conclusions regarding the relevance of historical experience for the introduction of parallel currencies in the Eurozone will be drawn.
    Date: 2014
  4. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: The revived Bretton Woods framework we proposed in 2003 remains a useful way to understand the international financial system. We document that the system survived the 2008 crisis. Looking forward, we argue that the system will continue to evolve as we expected. China is likely to graduate from the periphery to the center in the next few years. This graduation process could be smooth or associated with recurrent financial crises. During this transition the magnitude of net capital outflows from the periphery will continue to depress real interest rates in industrial countries at every phase of the business cycle. Finally, recent policy initiatives suggest that India is poised to replace China as the dominant periphery country.
    JEL: F21 F3 F43
    Date: 2014–09
  5. By: Atish R. Ghosh; Mahvash Saeed Qureshi; Charalambos G. Tsangarides
    Abstract: Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do. We argue that this is because they use composite (or aggregate) exchange rate regime classifications, which often mask very heterogeneous bilateral relationships between countries. Constructing a novel dataset of bilateral exchange rate regimes that differentiates by the degree of exchange rate flexibility, as well as by direct and indirect exchange rate relationships, for 181 countries over 1980–2011, we find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment. Our results are supported by several “natural experiments†of exogenous changes in bilateral exchange rate regimes.
    Keywords: Flexible exchange rates;Exchange rate adjustments;Exchange rate regimes;Balance of trade;Current account balances;external dynamics, exchange rate regimes, global imbalances
    Date: 2014–08–08
  6. By: Alessi, Lucia; Ghysels, Eric; Onorante, Luca; Peach, Richard; Potter, Simon
    Abstract: This paper documents macroeconomic forecasting during the global financial crisis by two key central banks: the European Central Bank and the Federal Reserve Bank of New York. The paper is the result of a collaborative effort between staff at the two institutions, allowing us to study the time-stamped forecasts as they were made throughout the crisis. The analysis does not exclusively focuses on point forecast performance. It also examines methodological contributions, including how financial market data could have been incorporated into the forecasting process. JEL Classification: C53, E37
    Keywords: forecast evaluation, mixed frequency data sampling
    Date: 2014–07
  7. By: Dossche, Maarten; Lewis, Vivien; Poilly, Céline
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex ‘wage curve’ linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as an instrument to dampen inefficient hours fluctuations. JEL Classification: E30, E50, E60
    Keywords: employment, hours, optimal monetary policy, wage curve
    Date: 2014–08
  8. By: BEN ROMDHANE, Ikram; MENSI, Sami
    Abstract: With the numerous monetary policy reforms undertaken during the 1990s, inflation targeting emerged as one of the possible solutions. The macroeconomic performance of this regime has attracted the attention of recent research, yet no final consensus on its role is reached. The aim of this paper is to contribute to this debate through a panoply of mixed results proven by the recent literature. Empirically, the purpose of this study is to assess the impact of inflation targeting on inflation and output based on a panel of 30 OECD countries over the period 1980_2012, using the “differences-in- differences” approach of Ball and Sheridan (2005). Our results indicate that inflation targeting helps to improve macroeconomic performance of targeters OECD countries more than non- targeters in terms of average inflation and volatility. Our findings corroborate previous studies like those of Wu (2004), Ball and Sheridan (2005) and Manai,O (2014). However, our results point to an insignificant impact of this regime on output consistent with Gonçalves- Salles (2008) and Ftiti & Essadi (2013). However, our results contrast those of S-Hebbel (2007) and Ftiti J. Goux (2011) which assume that there is no difference between targeters and non-targeters OECD countries.
    Keywords: Inflation targeting, Performance, Macroeconomic Dimensions, Monetary Policy, Panel Analysis.
    JEL: E52 E58 G21
    Date: 2014–11–21
  9. By: Sau, Lino (University of Turin)
    Abstract: The storm that has rocked our world has opened an interesting debate among economists and policy makers concerning with the need of a new international monetary and financial architecture. The monetary and financial regime that has been in force since the collapse of Bretton Woods (B-W), encourages indeed the persistence of unsustainable dynamics which spawn increasingly serious crises and it is unable of imparting an acceptable macro-economic discipline device to the world's economy. It became apparent that the global role of a key currency along with the deregulation of financial markets (neo-liberal paradigm) have acted as underlying conditions for the US financial crisis up to present situation and the following contagion to Europe. In this paper I point out the inadequacy of the institutional arrangements underlying the international monetary and financial regimes and I outline the relevance to the current debate of Keynes original plan, suggested rightly 70 years ago, that never born.
    Date: 2014–10
  10. By: A. Penalver
    Abstract: This paper presents a theoretical model of how banks set their credit standards. It examines how a monopoly bank sets its monitoring intensity in order to manage credit risk when it makes long duration loans to borrowers who have private knowledge of their project's stochastic profitability. In contrast to standard models, it has a recursive structure and a general equilibrium. The bank loan contract considered specifies the interest rate, the monitoring intensity and a profitability covenant. Within this class of contract, the bank chooses the terms which maximise steady-state profits subject to the constraint that it must have as many deposits as loans. The model is then used to consider whether the reduction in credit standards and credit spreads observed before the financial crisis could have been caused by low official interest rates or a positive deposit shock. The model rejects a risk-taking channel of monetary policy and endorses the savings glut hypothesis.
    Keywords: credit standards, credit risk, monitoring, risk-taking channel, savings glut.
    JEL: G21
    Date: 2014
  11. By: Ales Bulir; Martin Cihak; David-Jan Jansen
    Abstract: We study whether clarity of central bank inflation reports affects return volatility in financial markets. We measure clarity of reports by the Czech National Bank, the European Central Bank, the Bank of England, and Sveriges Riksbank using the Flesch-Kincaid grade level, a standard readability measure. We find some evidence, mainly for the euro area, of a negative relationship between clarity and market volatility prior to and during the early stage of the global financial crisis. As the crisis unfolded, there is no longer robust evidence of a negative connection. We conclude that reducing noise using clear reports is possible but not without challenges, especially in times of crisis.
    Keywords: Inflation;Central banks;Public information;Capital market volatility;Financial markets;central bank communication, clarity, financial markets, inflation reports, volatility
    Date: 2014–09–24
  12. By: Jesús A. Bejarano; Luisa F. Charry
    Abstract: In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing.
    Keywords: Financial frictions, optimal interest rate rules, interest rate spreads, welfare, small open economy, second order approximation
    JEL: E44 E50 E52 E58 F41
    Date: 2014–11–13
  13. By: Beckmann, Joscha; Belke, Ansgar; Dreger, Christian
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, for instance international dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule in the main industrial countries. The inclusion of international spillovers and, even more, nonlinear dynamics improves the explanatory power of standard Taylor reaction functions. Deviations from Taylor rates tend to be smaller and their negative trend can be eliminated.
    Keywords: Taylor rule,international spillovers,monetary policy interaction,smooth transition models
    JEL: E43 F36 C22
    Date: 2014
  14. 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
  15. By: Dominik Groll
    Abstract: Whether countries benefit from forming a monetary union depends critically on the way monetary policy is conducted. This is mainly because monetary policy determines whether and to what extent a flexible nominal exchange rate fosters or hampers macroeconomic stabilization, even if monetary policy does not target the nominal exchange rate explicitly
    Keywords: Monetary union, macroeconomic stabilization, welfare analysis, optimum currency area theory, trade openness
    JEL: F33 F41 E52
    Date: 2014–11
  16. By: Laurent Callot (VU University Amsterdam, the Tinbergen Institute and CREATES); Johannes Tang Kristensen (University of Southern Denmark and CREATES)
    Abstract: This paper proposes a parsimoniously time varying parameter vector autoregressive model (with exogenous variables, VARX) and studies the properties of the Lasso and adaptive Lasso as estimators of this model. The parameters of the model are assumed to follow parsimonious random walks, where parsimony stems from the assumption that increments to the parameters have a non-zero probability of being exactly equal to zero. By varying the degree of parsimony our model can accommodate constant parameters, an unknown number of structural breaks, or parameters with a high degree of variation. We characterize the finite sample properties of the Lasso by deriving upper bounds on the estimation and prediction errors that are valid with high probability; and asymptotically we show that these bounds tend to zero with probability tending to one if the number of non zero increments grows slower than squareroot T. By simulation experiments we investigate the properties of the Lasso and the adaptive Lasso in settings where the parameters are stable, experience structural breaks, or follow a parsimonious random walk.We use our model to investigate the monetary policy response to inflation and business cycle fluctuations in the US by estimating a parsimoniously time varying parameter Taylor rule.We document substantial changes in the policy response of the Fed in the 1980s and since 2008.
    Keywords: Parsimony, time varying parameters, VAR, structural break, Lasso
    JEL: C01 C13 C32 E52
    Date: 2014–11–04
  17. By: IIBOSHI Hirokuni
    Abstract: I extend a simple new Keynesian model with the Markov-switching-type Taylor rule introduced by Davig and Leeper (2007 ) by incorporating the constraint of the zero lower bound (ZLB), using the concept and algorithms of the stochastic rational expectations equilibrium proposed by Billi (2013). According to the calibration, when an economy does not face the ZLB constraint, there is no gap in the fluctuation of output and inflation between stochastic expectations and perfect foresight because of the linear policy functions. In contrast, once negative aggregate demand shocks make the nominal interest rate hit the ZLB under stochastic expectations, unlike perfect foresight, intensifying uncertainty plays an important role in further declines of the output and price level even in response to the same shock, regardless of the monetary policy regime adopted. The calibration also indicates the possibility that the steady states of a model, in the absence of the ZLB, are underestimated in periods of deflation, since the means often used as estimates of the steady states are biased downward from these. The analysis sheds light on an exit strategy from the zero interest rate policy, since a passive policy regime reduces the expected interest rate and induces both the expected output and the inflation to increase under the ZLB.
    Date: 2014–11
  18. By: Carboni, Giacomo
    Abstract: Term premia are shown to provide crucial information for discriminating among alternative sources of change in the economy, and namely shifts in the variance of structural shocks and in monetary policy. These sources have been identified as competing explanations for time-varying features of major industrial economies during the 80s and 90s. While hardly distinguishable through the lens of standard DSGE models, lower non-policy shock variances and tighter monetary policy regimes imply higher and lower term premia, respectively. As a result, moving to tighter monetary policy alone cannot explain the U.S. improved macroeconomic stability in the 80s and 90s: term premia would have shifted downwards, a fact inconsistent with the evidence of higher premia from early 80s onwards, where term premia are derived following Cochrane and Piazzesi (2005). Conversely, favourable shifts in non-policy innovation variance imply movements in term premia which are at least qualitatively consistent with historical patterns. JEL Classification: E43, E52
    Keywords: DSGE models, regime switching, term premia
    Date: 2014–07
  19. By: Wieland, Volker; Wolters, Maik
    Abstract: The recent decline in euro area inflation has triggered new calls for additional monetary stimulus by the ECB in order to counter the threat of a self-reinforcing deflation and recession spiral. This note reviews the available evidence on inflation expectations, output gaps and other factors driving current inflation through the lens of the Phillips curve. It also draws a comparison to the Japanese experience with deflation in the late 1990s and the evidence from Japan concerning the output-inflation nexus at low trend inflation. The note concludes from this evidence that the risk of a self-reinforcing deflation remains very small. Thus, the ECB best await the impact of the long-term refinancing operations decided in June that have the potential to induce substantial monetary accommodation once implemented for the first time in September.
    Date: 2014
  20. By: Fernando López Vicente (Banco de España); José María Serena Garralda (Banco de España)
    Abstract: Macroeconomic policy in Latin America underwent significant changes in the late nineties. Brazil is an outstanding example: inflation targeting was introduced in 1999 and a new fiscal policy framework was set up in 2000 with the Fiscal Responsibility Law. However, two elements of the Brazilian economy constrained the apparently state-of-the-art macroeconomic policy framework: the composition of public debt and the structure of the banking system. This paper discusses why macroeconomic policies were restricted by those factors and how they have evolved differently. The structure of public debt, characterised by indexation, short-term maturities and short US dollar positions, imposed significant constraints on macroeconomic policies during the 2000s. Nevertheless, these vulnerabilities were gradually overcome and the composition of public debt has remained stable in the aftermath of the global financial crisis. At the same time, the structure of the banking system was characterised by credit segmentation and high interest spreads, and these characteristics are still present today. These features have become key elements in understanding current macroeconomic developments, credit dynamics and the economic policy stance.
    Keywords: public debt, central banking, credit policies, Brazil.
    JEL: H30 E58 E63
    Date: 2014–10
  21. By: Javier Bianchi; Saki Bigio
    Abstract: We develop a new framework to study the implementation of monetary policy through the banking system. Banks finance illiquid loans by issuing deposits. Deposit transfers across banks must be settled using central bank reserves. Transfers are random and therefore create liquidity risk, which in turn determines the supply of credit and the money multiplier. We study how different shocks to the banking system and monetary policy affect the economy by altering the trade-off between profiting from lending and incurring greater liquidity risk. We calibrate our model to study quantitatively why banks have recently increased their reserve holdings but have not expanded lending despite policy efforts. Our analysis underscores an important role of disruptions in interbank markets, followed by a persistent credit demand shock.
    JEL: E0 E4 E51 E52 G01 G1 G11 G18 G20 G21
    Date: 2014–09
  22. By: Meriküll, Jaanika; Rõõm, Tairi
    Abstract: This paper studies euro changeover-related inflation using disaggregated price level data. The difference-in-differences approach is used and the control group for the treatment country, Estonia, is built from 12 euro area countries. The Nielsen Company disaggregated price data are employed at product, brand and shop-type level. The results indicate that while the overall inflationary effect of euro adoption was modest, the effects were significantly different across various market segments. Changeover-related inflation was higher for products that were relatively cheaper than the euro area average. Inflationary effects were stronger in smaller shops. JEL Classification: D49, P46, E58
    Keywords: consumer behaviour, currency changeovers, euro, market concentration
    Date: 2014–09
  23. By: Altavilla, Carlo; Giannone, Domenico; Lenza, Michele
    Abstract: This study evaluates the macroeconomic effects of Outright Monetary Transaction (OMT) announcements by the European Central Bank (ECB). Using high-frequency data, we find that OMT announcements decreased the Italian and Spanish 2-year government bond yields by about 2 percentage points, while leaving unchanged the bond yields of the same maturity in Germany and France. These results are used to calibrate a scenario in a multi-country model describing the macro-financial linkages in France, Germany, Italy, and Spain. The scenario analysis suggests that the reduction in bond yields due to OMT announcements is associated with a significant increase in real activity, credit, and prices in Italy and Spain with relatively muted spillovers in France and Germany. JEL Classification: E47, E58, C54
    Keywords: event study, multi-country vector autoregressive model, news, Outright Monetary Transactions
    Date: 2014–08
  24. By: Rhys R. Mendes
    Abstract: A measure of the neutral policy interest rate can be used to gauge the stance of monetary policy. We define the neutral rate as the real policy rate consistent with output at its potential level and inflation equal to target after the effects of all cyclical shocks have dissipated. This is a medium- to longer-run concept of the neutral rate. Under this definition, the neutral rate in Canada is determined by the longer-run forces that influence savings and investment in both the Canadian and global economies. Structural forces have likely reduced the neutral rate by more than a percentage point since the mid-2000s. The Bank’s estimates of the real neutral policy rate currently stand in the 1 to 2 per cent range, or 3 to 4 per cent in nominal terms. The current gap between the policy rate and the neutral rate reflects policy stimulus in response to significant excess supply and in the face of continuing headwinds. As long as these headwinds persist, a policy rate below neutral will be required to maintain inflation sustainably at target.
    Keywords: Interest rates, Transmission of monetary policy
    JEL: E40 E42 E43 E50 E52 E58
    Date: 2014
  25. By: Jakob de Haan; Jeroen Hessel; Niels Gilbert
    Abstract: This paper analyses the reforms in the architecture of EMU since the eruption of the euro crisis in 2010. We describe major weaknesses in the original set-up of EMU, such as lack of fiscal discipline, diverging financial cycles and competitiveness positions, and a lack of crisis instruments. These weaknesses appeared against the background of a strong increase in financial integration and financial imbalances since the Maastricht treaty was signed. European policymakers have addressed all weaknesses in the EMU architecture in some way or the other, which is a major achievement. Yet, the effectiveness of the new framework will crucially depend on strict implementation. We discuss whether in the longer run the current balance between policy coordination and risk sharing can be improved upon.
    Keywords: Economic and Monetary Union; Financial Cycles; Financial crisis; European debt crisis
    JEL: E44 E58 F36 G15 G21
    Date: 2014–11
  26. By: Ongena, Steven; Schindele, Ibolya; Vonnák, Dzsamila
    Abstract: We analyze the differential impact of domestic and foreign monetary policy on the local supply of bank credit in domestic and foreign currencies. We analyze a novel, supervisory dataset from Hungary that records all bank lending to firms including its currency denomination. Accounting for time-varying firm-specific heterogeneity in loan demand, we find that a lower domestic interest rate expands the supply of credit in the domestic but not in the foreign currency. A lower foreign interest rate on the other hand expands lending by lowly versus highly capitalized banks relatively more in the foreign than in the domestic currency.
    Keywords: Bank balance-sheet channel,monetary policy,foreign currency lending
    JEL: E51 F3 G21
    Date: 2014
  27. By: Johannsen, Benjamin K. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using consumption data from the Consumer Expenditure Survey, I document persistent differences across demographic groups in the dispersion of household-specific rates of inflation. Using survey data on inflation expectations, I show that demographic groups with greater dispersion in experienced inflation also disagree more about future inflation. I argue that these results can be rationalized from the perspective of an imperfect information model in which idiosyncratic inflation experience serves as a signal about aggregate inflation. These empirical regularities pose a challenge to several other popular models of the expectations formation process of households.
    Keywords: Inflation; expectations; inflation experience
    Date: 2014–10–22
  28. By: Manuk Ghazanchyan
    Abstract: In this paper we examine the channels through which innovations to policy variables— policy rates or monetary aggregates—affect such macroeconomic variables as output and inflation in Sri Lanka. The effectiveness of monetary policy instruments is judged through the prism of conventional policy channels (money/interest rate, bank lending, exchange rate and asset price channels) in VAR models. The timing and magnitude of these effects are assessed using impulse response functions, and through the pass-through coefficients from policy to money market and lending rates. Our results show that (i) the interest rate channel (money view) has the strongest Granger effect (helps predict) on output with a 0.6 percent decrease in output after the second quarter and a cumulative 0.5 percent decline within a three-year period in response to innovations in the policy rate; (ii) the contribution from the bank lending channel is statistically significant (adding 0.2 percentage point to the baseline effect of policy rates) in affecting both output and prices but with a lag of about five quarters for output and longer for prices; and (iii) the exchange rate and asset price channels are ineffective and do not have Granger effects on either output or prices.
    Keywords: Monetary policy;Sri Lanka;Monetary transmission mechanism;Monetary aggregates;Vector autoregression;Econometric models;Monetary Policy, Central Bank Policies, Financial Markets, Sri Lanka
    Date: 2014–10–22
  29. By: Kühl, Michael
    Abstract: The role of bank capital as a propagation channel of shocks is strongly pronounced in recent macroeconomic models. In this paper, we show how the evolution of bank capital depends on the share of non-state-contingent assets in banks' balance sheets and present the consequences for macroeconomic dynamics. State-contingent securities impact on banks' balance sheets through changes in their returns (and their prices), both of which depend on the current state of the economy. Nonstate-contingent assets are signed before shocks are realized and their repayment is guaranteed. For this reason they insulate banks' balance sheets from recent economic activity in the absence of defaults. Our results show that non-state-contingent assets in banks' balance sheets attenuate the amplification of shocks resulting from financial frictions in the banking sector.
    Keywords: bank capital,state-contingent assets,non-state-contingent assets,monetary policy,financial frictions
    JEL: E44 E58 E61
    Date: 2014
  30. By: Bodenstein, Martin (National University of Singapore); Guerrieri, Luca (Board of Governors of the Federal Reserve System (U.S.)); LaBriola, Joe (University of California, Berkeley)
    Abstract: Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations.
    Keywords: Optimal policy; strategic interaction; welfare analysis; monetary policy cooperation; marcroprudential regulation
    JEL: E44 E61 F42
    Date: 2014–09–23

This nep-mon issue is ©2014 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.