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on Monetary Economics |
| By: | Del Negro, Marco (Federal Reserve Bank of New York); Sims, Christopher A. |
| Abstract: | Using a simple general equilibrium model, we argue that it would be appropriate for a central bank with a large balance sheet composed of long-duration nominal assets to have access to, and be willing to ask for, support for its balance sheet by the fiscal authority. Otherwise its ability to control inflation may be at risk. This need for balance sheet support—a within-government transaction—is distinct from the need for fiscal backing of inflation policy that arises even in models where the central bank’s balance sheet is merged with that of the rest of the government. |
| Keywords: | central bank’s balance sheet; solvency; monetary policy |
| JEL: | E58 E59 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:701&r=mon |
| By: | John B. Taylor (Department of Economics, Stanford University) |
| Abstract: | This testimony before the Subcommittee on Monetary Policy and Trade of the United States House of Representatives reviews the conduct of the Federal Reserve before, during, and after the 2008 financial crisis. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:13103&r=mon |
| By: | Michael Bordo; Pierre Siklos |
| Abstract: | This paper examines the historical evolution of central bank credibility using both historical narrative and empirics for a group of 16 countries, both advanced and emerging. It shows how the evolution of credibility has gone through a pendulum where credibility was high under the classical gold standard before 1914 before being lost and not fully regained until the 1980s. This characterization does not, however, seem to apply to the monetary history in the emerging markets examined in the paper. Nevertheless, credibility in all the economies examined has been enhanced in recent decades thanks to the adoption of inflation targeting. However, the recent financial crisis and the call for central banks to focus more on financial stability relying on macro prudential regulation may pose significant challenges for central bank credibility. |
| JEL: | C32 C36 E31 E58 N10 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20693&r=mon |
| By: | Du, Chuan; Miles, David K |
| Abstract: | Banks’ behaviour can be influenced by both monetary policy and regulatory capital requirements. This paper explores the interaction between these two policy tools in promoting better lending decisions by banks. We develop and calibrate a model of bank lending to examine what an optimal combination of monetary policy and regulatory capital requirements might look like. We find that as prudential standards strengthen globally in the aftermath of the financial crises, it is likely that the that equilibrium level of central bank policy rates should be lower than they had been prior to the crisis. |
| Keywords: | capital requirements; macro prudential policy; monetary policy |
| JEL: | E52 E58 G21 G28 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10200&r=mon |
| By: | Gilchrist, Simon; López-Salido, J David; Zakrajsek, Egon |
| Abstract: | This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields. |
| Keywords: | corporate bond yields; forward guidance; LSPAs; mortgage interest rates; term premia; Unconventional monetary policy |
| JEL: | E43 E52 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9971&r=mon |
| By: | Ehrmann, M.; Pfajfar, D. (Tilburg University, Center For Economic Research); Santoro, E. |
| Abstract: | This paper studies the formation of consumers’ infl‡ation expectations using micro-level data from the Michigan Survey. It shows that beyond the well-established socio-economic determinants of infl‡ation expectations like gender, income or education also other characteristics like the household’s fi…nancial situation and its purchasing attitudes matter. Respondents with current or expected …financial difficulties, with pessimistic attitudes about major purchases, or who expect income to go down in the future have considerably higher forecast errors, are further away from professional forecasts and have a stronger updward bias in their expectations than other households. However, their bias shrinks by more than the one of the average household in response to increasing media reporting about in‡flation. |
| Keywords: | Suvey inflation expectations; news on inflation; Information Stickiness; Consumer attitudes |
| JEL: | C53 D84 E31 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:6078d0e3-07af-48a5-9e8b-6ffc387c1787&r=mon |
| By: | Buiter, Willem H. |
| Abstract: | This paper aims to provide a rigorous analysis of Milton Friedman’s famous parable of the ‘helicopter’ drop of money. A helicopter drop of money is a permanent/irreversible increase in the nominal stock of fiat base money with a zero nominal interest rate, which respects the intertemporal budget constraint of the consolidated Central Bank and fiscal authority/Treasury – the State. An example would be a temporary fiscal stimulus (say a one-off transfer payment to households, as in Friedman’s example), funded permanently through an increase in the stock of base money. It could also be a permanent increase in the stock of base money through an irreversible open market purchase by the Central Bank of non-monetary sovereign debt held by the public – that is, QE. The reason is that QE, viewed as an irreversible or permanent purchase of non-monetary financial assets by the Central Bank funded through an irreversible or permanent increase in the stock of base money, relaxes the intertemporal budget constraint of the State. Future taxes will have to be cut or public spending increased. There are three conditions that must be satisfied for helicopter money as defined here to always boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Only then will fiat base money be willingly held despite being dominated as a store of value by non-monetary assets with a positive risk-free nominal interest rate. Second, fiat base money is irredeemable: it is view as an asset by the holder but not as a liability by the issuer. This is necessary for helicopter money to work even in a pure liquidity trap, with risk-free nominal interest rates at zero for all maturities. Third, the price of money is positive. The paper shows that, when the State can issue unbacked, irredeemable fiat base money with a zero nominal interest rate, which can be produced at zero marginal cost and is held in positive amounts by households and other private agents despite the availability of risk-free securities carrying a positive nominal interest rate, there always exists a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, inflation below target, ‘lowflation’, ‘subflation’, liquidity traps and the deficient demand-driven version of secular stagnation are therefore unnecessary. They are policy choices. |
| Keywords: | central bank; helicopter money; liquidity trap; quantitative easing; seigniorage |
| JEL: | E2 E4 E5 E6 H6 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9998&r=mon |
| By: | Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of Business, Aichi Shukutoku University) |
| Abstract: | We develop a small open economy model with capital, sticky prices, and a simple form of financial frictions. We compare welfare levels under three alternative rules: a domestic inflation-based Taylor rule, a CPI inflation-based Taylor rule, and an exchange rate peg. We show that the superiority of an exchange rate peg over a domestic inflation-based Taylor rule becomes more pronounced under incomplete financial asset markets and more severe financial frictions. |
| Keywords: | Small open economy, DSGE, Welfare comparison, Incomplete financial market, Ramsey policy, Exchange rate regime |
| JEL: | E42 E44 E52 F31 F41 G15 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2014-39&r=mon |
| By: | Miller, Marcus; Zhang, Lei |
| Abstract: | Following the financial crisis of 2008/9, there has been renewed interest in what Greenwald and Stiglitz dubbed ‘pecuniary externalities’. Two that affect borrowers and lenders balance sheets in pro-cyclical fashion are described, along with measures that might help curb their destabilising effects. These ‘pecuniary externalities’ can be thought of as the unintended macroeconomic consequences of market conventions designed to check moral hazard. The issue of moral hazard is explicitly discussed in the context of a simple model of insurance, where there is no Arrow Debreu equilibrium to allocate risk efficiently; but there is a ‘noisy’ mixed-strategy Nash equilibrium. Our simple example is designed to reinforce the point made by Greenwald and Stiglitz (1986) – that when externalities are present, leaving things to the market may not be ‘constrained Pareto efficient’. While Central Bank policy may have shifted radically now that stability is an explicit objective of policy, the same cannot be said of the econometric models being used for macroeconomic forecasting – even those in Central Banks! |
| Keywords: | adverse selection; externalities; financial regulation; macro-prudential regulation; moral hazard |
| JEL: | E44 E58 G20 G21 G22 G28 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9974&r=mon |
| By: | John B. Taylor (Department of Economics, Stanford University) |
| Abstract: | This talk is the written version of remarks, given at a conference marking the retirement of Mervyn King from the Bank of England. It argues that economic performance deteriorated in recent years because of a change in policy rather than because of a shift in the tradeoff between inflation stability and output stability. |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:13105&r=mon |
| By: | Anella Munro |
| Abstract: | No-arbitrage implies a close link between exchange rates and interest returns, but evidence of that link has been elusive. This paper derives an exchange rate asset price model with consumption-risk adjustments. Interest rates and exchange rates reflect common risks which bias their reduced-form relationship. As markets become more complete, the model predicts increasing disconnect between exchange rates and observed interest rates, and between premia that price bonds and premia that price currency returns. When accounting for risk, the estimated interest rate - exchange rate relationship is considerably closer to theory for eight USD currency pairs. Exchange rates, risk and returns need to be jointly modeled. |
| Keywords: | Exchange rate, asset price, risk adjustment, uncovered interest parity, bond premium, currency premium |
| JEL: | F31 G12 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-73&r=mon |
| By: | Michael D. Bordo |
| Abstract: | This paper examines the Federal Reserve's actions before, during and after the 2008 financial crisis. It looks to the Great Contraction of 1929-1933 for historical context of the Federal Reserve’s actions. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:13111&r=mon |
| By: | Dudley, William (Federal Reserve Bank of New York) |
| Abstract: | Remarks at Bernard M. Baruch College, New York City. |
| Keywords: | energy prices; monetary policy normalization; lift-off; interest rate paid on excess reserves (IOER); overnight reverse repo repurchase facility (ON RRP); Taylor Rule; Fed put |
| JEL: | E20 G10 G18 |
| Date: | 2014–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsp:153&r=mon |
| By: | Stefano Bosi (EPEE, University of Evry); Mohanad Ismaël (University of Birzeit); Alain Venditti (Aix-Marseille University (Aix-Marseille School of Economics), CNRS-GREQAM, EHESS & EDHEC) |
| Abstract: | We investigate the effects of collaterals and monetary policy on growth rate dynamics in a Ramsey economy where agents have heterogeneous discount factors. We focus on the existence of business-cycle fluctuations based on self-fulfilling prophecies and on the occurrence of deterministic cycles through bifurcations. We introduce liquidity constraints in segmented markets where impatient (poor) agents without collaterals have limited access to credit. We find that an expansionary monetary policy may promote economic growth while making endogenous fluctuations more likely. Conversely, a regulation reinforcing the role of collaterals and reducing the financial market imperfections may enhance the economic growth and stabilize the economy. |
| Keywords: | Collaterals, heterogeneous agents, balanced growth, Endogenous fluctuations, stabilization policies |
| Date: | 2014–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1438&r=mon |
| By: | Christian Pierdzioch (Department of Economics, Helmut-Schmidt-University); Monique B. Reid (Department of Economics, University of Stellenbosch); Rangan Gupta (Department of Economics, University of Pretoria) |
| Abstract: | We use South African survey data to study whether short-term inflation forecasts are unbiased. Depending on how we model a forecaster’s information set, we find that forecasts are biased due to forecaster herding. Evidence of forecaster herding is strong when we assume that the information set contains no information on the contemporaneous forecasts of others. When we randomly allocate forecasters into a group of early forecasters who can only observe the past forecasts of others and late forecasters who can observe the contemporaneous forecasters of their predecessors, then evidence of forecaster herding weakens. Further, evidence of forecaster herding is strong and significant in times of high inflation volatility. In time of low inflation volatility, in contrast, forecaster anti-herding seems to dominate |
| Keywords: | inflation rate, forecasting, forecaster herding |
| JEL: | C53 D82 E37 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers226&r=mon |
| By: | Mulatu F. Zehirun (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.); Marthinus C. Breitenbach (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.); Francis Kemegue (Farmingham State University and University of Pretoria, Pretoria 0002) |
| Abstract: | This paper evaluates the strength of policy coordination in Southern African Development Community (SADC) as well as real effective exchange rate stability as indicative of sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting OCA conditions face more stable exchange rates. The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators, and real effective exchange rate (REER) equilibrium and misalignment analysis are carried out to arrive at the conclusions. The PMG model shows that there are common policy variables that influence REERs in the region. However, the REER equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further improvement of policy coordination in the region. The findings in this paper have important policy implications for economic stability and policy coordination as SADC proceeds with monetary integration. |
| Keywords: | Real Effective Exchange Rate, Monetary Integration, Policy Coordination, SADC |
| JEL: | C23 E63 F15 F31 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201473&r=mon |
| By: | Ghazanchyan, Manuk |
| 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: | Keywords: Monetary Policy, Central Bank Policies, Financial Markets, Sri Lanka |
| JEL: | D53 E52 E58 F41 |
| Date: | 2014–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59444&r=mon |
| By: | Erik Eyster (London School of Economics (LSE)); Kristof Madarasz (London School of Economics (LSE)); Pascal Michaillat (Economics Department London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | This paper proposes a model that explains the nonneutrality of money from two well-documented psychological assumptions. The model incorporates into the general-equilibrium monopolistic-competition framework of Blanchard and Kiyotaki [1987] the psychological assumptions that (1) consumers dislike paying a price that exceeds some “fair” markup on firms’ marginal costs, and (2) consumers do not know firms’ marginal costs and fail to infer them from prices. The first assumption in isolation renders the economy more competitive without changing any of its qualitative properties; in particular, money remains neutral. The two assumptions together cause money to be nonneutral: greater money supply induces lower monopolistic markups, higher hours worked, and higher output. Whereas an increase in money supply is expansionary, it decreases the fairness of transactions perceived by consumers to such an extent that it reduces overall welfare. The cost of inflation is a psychological one that derives from a mistaken belief by consumers that transactions have become less fair. In fact, it is this misperception that makes an increase in money supply expansionary: consumers misattribute the higher prices arising from higher money supply to higher markups; the misperception of higher markups angers them and makes their demand for goods more elastic; in response, monopolists reduce their markups, thus stimulating economic activity. Through a similar mechanism, an increase in technology induces higher output but higher monopolistic markups and lower hours worked. |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1430&r=mon |
| By: | Chen, Xiaoshan; Kirsanova, Tatiana; Leith, Campbell |
| Abstract: | We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck' and ‘good policy' played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates. |
| Keywords: | Great Recession; Financial Crisis; Zero Lower Bound; Discretion; Commitment; Great Moderation; Optimal Monetary Policy; Interest Rate Rules; Bayesian Estimation |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2014-11&r=mon |
| By: | Altavilla, Carlo; Giannone, Domenico |
| Abstract: | We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures undertaken by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using individual survey data, we analyse the changes in forecasting of bond yields around the announcement and implementation dates of non-standard monetary policies. The results indicate that bond yields are expected to drop significantly for at least one year after the announcement and the implementation of accommodative policies. |
| Keywords: | Forward Guidance; Large Scale Asset Purchases; Operation Twist; Quantitative Easing; Survey of Professional Forecasters; Tapering |
| JEL: | E58 E65 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10001&r=mon |
| By: | Pill, Huw; Reichlin, Lucrezia |
| Abstract: | This paper provides an appraisal of European Central Bank (ECB) policy from the beginning of the financial crisis to the summer of 2014. It argues that, as the crisis unfolded, ECB policy can be characterized as an attempt at finding a middle way between “monetary dominance” embedded in the Treaty and “fiscal dominance”. This middle course was pragmatic response to the challenges being faced but it failed to offer a stable solution to the underlying solvency issues, while permitting (or even creating) a damaging set of dislocations, notably a fragmentation of Euro financial markets, with damaging consequences on the real economy. We argue that since Draghi’s pledge to do “whatever it takes” to sustain the euro in July 2012, the ECB has attempted to construct a new institutional framework. We conclude that, although there are promising developments in some areas such as banking union, without a “new bargain” on how to deal with the debt overhang which is the legacy of the crisis, the euro area is under threat. |
| JEL: | E5 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10193&r=mon |
| By: | Aladangady, Aditya (Board of Governors of the Federal Reserve System (U.S.)) |
| Abstract: | This paper empirically identifies an important channel through which monetary policy affects consumer spending: homeowner balance sheets. A monetary loosening increases home values, thereby strengthening homeowner balance sheets and stimulating household spending due to a combination of collateral and wealth effects. The magnitude of these effects on a given household depends on local housing market characteristics such as local geography and regulation. Cities with the largest geographic and regulatory barriers to new construction see 3-4 percent responses in real house prices compared with unconstrained, elastic-supply cities where construction holds prices in check. Using non-public geocoded microdata from the Consumer Expenditures Survey, house price and consumption responses are compared across areas differing in local land availability and zoning laws to identify a marginal propensity to consume out of housing of 0.07. Homeowners with debt service ratios in the highest quartile have MPCs as high as 0.14 compared with negligible responses for those with low debt service ratios. This indicates a strong role for collateral effects, as opposed to pure wealth effects, in driving the relationship between home values and spending. I discuss the implications of these results for the aggregate effects and regional heterogeneity in responses to monetary shocks. |
| Keywords: | Consumption; housing; wealth effects; collateral; home equity; monetary policy |
| Date: | 2014–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2014-98&r=mon |
| By: | Giuseppe Ferrero (Bank of Italy); Marcello Miccoli (Bank of Italy); Sergio Santoro (Bank of Italy) |
| Abstract: | We analyse a simplified New-Keynesian model with an unobserved aggregate cost-push shock in which firms and the central bank have different information about the shock. We consider a linear policy rule where a pure inflation targeting central bank decides how much to react to the shock given its information. In this framework we show that monetary policy performs both an allocational and an informational role, the latter due to firms extracting information on the aggregate shock from the monetary policy tool. When the informational role is present, optimal monetary policy is more cautious, that is, it responds less to the shock than the perfect information benchmark. A more cautious reaction to the shock implies that firms make more effective use of their private information and the endogenous information coming from the aggregate price in order to make inferences about the shock. |
| Keywords: | imperfect information, endogenous information, learning, monetary policy |
| JEL: | D83 E52 E58 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_982_14&r=mon |
| By: | Fidelina B. Natividad-Carlos (School of Economics, University of the Philippines Diliman) |
| Abstract: | While exchange rate dynamics is an important topic in open economy macroeconomics, the standard tool commonly used to introduce exchange rate dynamics - the Dornbusch (1976) seminal paper along with phase diagram - is not well-suited for undergraduate students as most of them do not have yet a background on dynamic macroeconomic analysis. This paper attempts to provide a graphical device – a panel IS*-LM* diagram – which can be used to teach intermediate macroeconomics students about Dornbusch’s idea of exchange rate dynamics. In addition, it also attempts to bridge the gap between undergraduate teaching and graduate teaching of exchange rate dynamics by showing the correspondence between the economy’s adjustment path in the IS*-LM* diagram and that in the phase diagram. |
| Keywords: | undergraduate teaching, graduate teaching, exchange rates, exchange rate dynamics, sticky prices, interest parity, open economy macroeconomics, fiscal policy, monetary policy |
| JEL: | A23 F31 F41 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:phs:dpaper:201414&r=mon |
| By: | Michael D. Bordo |
| Abstract: | This review examines a collection of lectures given by Ben Bernanke on the Federal Reserve's actions during the 2008 financial crisis. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:13109&r=mon |
| By: | Mishra, Prachi; Montiel, Peter J; Pedroni, Peter; Spilimbergo, Antonio |
| Abstract: | This paper studies the transmission of monetary shocks to lending rates in a large sample of advanced, emerging, and low-income countries. Transmission is measured by the impulse response of bank lending rates to monetary policy shocks. Long-run restrictions are used to identify such shocks. Using a heterogeneous structural panel VAR approach, we find that there is wide variation in the response of bank lending rates to a monetary policy innovation across countries. Monetary policy shocks are more likely to affect bank lending rates in the theoretically expected direction in countries that have better institutional frameworks, more developed financial structures, and less concentrated banking systems. Low-income countries score poorly along all of these dimensions, and we find that such countries indeed exhibit much weaker transmission of monetary policy shocks to bank lending rates than do advanced and emerging economies |
| Keywords: | bank lending; monetary policy; structural panel VAR |
| JEL: | E5 O11 O16 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10230&r=mon |
| By: | William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Liting Su (Department of Economics, The University of Kansas) |
| Abstract: | While credit cards provide transaction services, as do currency and demand deposits, credit cards have never been included in measures of the money supply. The reason is accounting conventions, which do not permit adding liabilities, such as credit card balances, to assets, such as money. But economic aggregation theory and index number theory are based on microeconomic theory, not accounting, and measure service flows. We derive theory needed to measure the joint services of credit cards and money. The underlying assumption is that credit card services are not weakly separable from the services of monetary assets. Carried forward rotating balances are not included, since they were used for transactions services in prior periods. The theory is developed for the representative consumer, who pays interest for the services of credit cards during the period used for transactions. In the transmission mechanism of central bank policy, our results raise potentially fundamental questions about the traditional dichotomy between money and some forms of short term credit, such as checkable lines of credit. We do not explore those deeper issues in this paper, which focuses on measurement.. |
| Keywords: | credit cards, money, credit, aggregation theory, index number theory, Divisia index, risk, asset pricing. |
| JEL: | C43 E01 E3 E40 E41 E51 E52 E58 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:kan:wpaper:201407&r=mon |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick |
| Abstract: | This paper gives money a role in providing cheap collateral in a model of banking; this means that, besides the Taylor Rule, monetary policy can affect the risk-premium on bank lending to firms by varying the supply of M0 in open market operations, so that even when the zero bound prevails monetary policy is still effective; and fiscal policy under the zero bound still crowds out investment via the risk-premium. A simple rule for making M0 respond to credit conditions can substantially enhance the economy's stability. Both price-level and nominal GDP targeting rules for interest rates would combine with this to stabilise the economy further. With these rules for monetary control, aggressive and distortionary regulation of banks' balance sheets becomes redundant. |
| Keywords: | crises; DSGE model; financial frictions; fiscal multiplier; indirect inference; monetary policy; money supply; QE; zero bound |
| JEL: | C1 E3 E44 E52 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10250&r=mon |
| By: | M. Vari |
| Abstract: | This paper shows how interbank market fragmentation disrupts monetary policy implementation. Fragmentation is defined as the situation where some banks are cut from the interbank loan market. The paper incorporates fragmentation in an otherwise standard theoretical model of monetary policy implementation, where profit maximizing banks, subject to reserve requirements, borrow and deposit funds at a central bank. It shows that in the presence of fragmentation, excess liquidity arises endogenously and the interbank rate declines below the central bank main rate. The interbank rate is then unstable. The paper documents that this is what happened in the Euro-Area since 2008. The model is also well suited to analyze unconventional monetary policy measures. |
| Keywords: | Fragmentation, Excess liquidity, interbank market, TARGET2 imbalances. |
| JEL: | E42 E43 E52 E58 F32 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:529&r=mon |
| By: | Leith, Campbell; Liu, Ding |
| Abstract: | New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used interchangeably since, to a first order of approximation they imply an isomorphic Phillips curve and, if the steady-state is efficient, identical objectives for the policy maker and as a result in an LQ framework, the same policy conclusions. In this paper we compute time-consistent optimal monetary policy in bench-mark New Keynesian models containing each form of price stickiness. Using global solution techniques we find that the inflation bias problem under Calvo contracts is significantly greater than under Rotemberg pricing, despite the fact that the former typically significant exhibits far greater welfare costs of inflation. The rates of inflation observed under this policy are non-trivial and suggest that the model can comfortably generate the rates of inflation at which the problematic issues highlighted in the trend inflation literature emerge, as well as the movements in trend inflation emphasized in empirical studies of the evolution of inflation. Finally, we consider the response to cost push shocks across both models and find these can also be significantly different. The choice of which form of nominal inertia to adopt is not innocuous. |
| Keywords: | New Keynesian Model, Monetary Policy, Rotemberg Pricing, Calvo Pricing, In ation Bias, Time-Consistent Policy, |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:582&r=mon |
| By: | Walter Bazan-Palomino (Departamento de Economía - Pontificia Universidad Católica del Perú); Gabriel Rodriguez (Departamento de Economía - Pontificia Universidad Católica del Perú) |
| Abstract: | We present evidence from Peru that The New Keynesian Phillips Curve, Dynamic IS and Taylor Rule derived by GalÌ and Monacelli (2005) are unstable. The results from methodology of Bai and Perron (2003) suggest that the change of the policy rule (January-2006 and May-2009) induces a break in the ináation process (January-2008) and in the market equation (October-2008); the latter due to the existence of nominal frictions and incomplete information in the Peruvian economy. Moreover, Qu and Perron (2007) estimation rea¢ rms that there are breaks in the entire reduced system (May-2008 and May-2010). In both cases, the channel of expectations is strengthened since 2008 and it is related to changes in the monetary policy during those years. JEL Classification-JEL: C32, C51, E31 |
| Keywords: | Structural Breaks, New Keynesian Phillips Curve, Dynamic IS, Taylor Rule |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00384&r=mon |
| By: | JEF BOECKX; MAARTEN DOSSCHE; GERT PEERSMAN (-) |
| Abstract: | We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, stabilizes financial markets, and has a positive impact on economic activity and prices. The effects on bank lending and output are smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well-capitalized. |
| Keywords: | unconventional monetary policy, ECB balance sheet, euro area, VAR |
| JEL: | C32 E30 E44 E51 E52 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:14/887&r=mon |
| By: | Milan Marković |
| Abstract: | The aim of this research is understanding role of the National bank of Serbia in maintaining monetary stability. Monetary stability means the achievement of low and stable inflation rate. Through the instruments of monetary policy, the central bank seeks to achieve the inflation target, in order to save macroeconomic stability. The National bank of Serbia works proceeding from the fundamental determinants of the increase in the general price level in Serbia. Due to the highest inflation rates in the region, it is necessary to constantly review the role of the National bank of Serbia in regulating this disorder. |
| Keywords: | National Bank of Serbia, monetary policy, inflation |
| JEL: | E31 E52 E58 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:esb:casprv:2014-121&r=mon |
| By: | Wanyu Chung |
| Abstract: | What determines the currency denomination of international trade? This is the first paper to consider in theory and data how exporters' dependence on imported inputs affects their choice of invoicing currency. My model predicts that exporters more dependent on foreign currency-denominated inputs are more likely to use foreign currency for pricing. Using a novel dataset that covers all UK trade transactions with non-EU countries, I provide firm-level evidence by matching import and export data and relate exporters' invoicing currency choice to their import behavior. I find considerable support for the model's predictions, and these findings have strong implications for the variation of exchange rate pass-through across industries. |
| Keywords: | Invoicing Currency, Exchange Rate Pass-through, Trade in Intermediate Goods JEL Classification: F1, F31, F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:not:notgep:14/11&r=mon |
| By: | Michal Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Paolo Gelain (Norges Bank (Central Bank of Norway) and BI Norwegian Business School); Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics) |
| Abstract: | We study the implications of multi-period loans for monetary and macroprudential policy, considering several realistic modifications - variable vs. fixed loan rates, non-negativity constraint on newly granted loans, and possibility for the collateral constraint to become slack - to an otherwise standard DSGE model with housing and financial intermediaries. Our general finding is that multiperiodicity affects the working of both policies, though in substantially different ways. We show that multiperiod contracts make the monetary policy less effective, but only under fixed rate mortgages, and do not generate significant asymmetry to its transmission. In contrast, the effects of macroprudential policy do not depend much on the type of interest payments, but exhibit strong asymmetries, with tightening having stronger effects than easening, especially for short and medium maturities. |
| Keywords: | Multi-period contracts, Monetary policy, Macroprudential policy |
| JEL: | E44 E51 E52 |
| Date: | 2014–11–27 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2014_16&r=mon |
| By: | John B. Taylor |
| Abstract: | This testimony before the Committee on Financial Services before the United States House of Representatives discusses the effect unconventional and more discretionary monetary policy has had on the slow economic recovery following the 2007-2009 recession. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:14107&r=mon |
| By: | Uras, R.B. (Tilburg University, Center For Economic Research); Elgin, C. |
| Abstract: | Cross-country aggregate data exhibits a strong (positive) relationship between the size of the informal employment and aggregate homeownership rates. We investigate this empirical observation using a cash-in-advance model with housing markets and argue that the rate of inflation is important in explaining the nexus between informality and homeownership rates. Specifically, we uncover a novel monetary transmission mechanism and show that households with informal employment desire to economize on their short-term cash usage and avoid periodic rental payments when (i) informality is associated with constrained business investment finance, and (ii) inflation expectations are high. Our empirical and theoretical findings highlight an important interaction between the conduct of monetary policy and the performance of housing markets. |
| Keywords: | Cash-In-Advance,; Informality; Cross-Country Data;; Monetary Transmission. |
| JEL: | E26 E41 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:8e4ba433-9a16-4e06-8227-caae0856f78e&r=mon |