nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒01‒14
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The (Home) Bias of European Central Bankers: New Evidence Based on Speeches By Hamza Bennani; Matthias Neuenkirch
  2. Superneutrality of Money under Open Market Operations By Homburg, Stefan
  3. Federal Reserve policy and Bretton Woods By Bordo, Michael D.; Humpage, Owen F.
  4. Comments on monetary policy and an annual Texas economic review By Fisher, Richard W.
  5. The international monetary and financial system: its Achilles heel and what to do about it By Borio, Claudio
  6. Monetary and macroprudential policy with foreign currency loans By Marcin Kolasa; Krzysztof Makarski; Michał Brzoza-Brzezina
  7. Monetary Policy Committee and Monetary Policy Conduct in Nigeria: A Preliminary Investigation By Ekor, Maxwell; Saka, Jimoh; Adeniyi, Oluwatosin
  8. The Federal Reserve engages the world (1970-2000): an insider's narrative of the transition to managed floating and financial turbulence By Truman, Edwin M.
  9. Monetary Shocks in Models with Inattentive Producers By Fernando Alvarez; Francesco Lippi; Luigi Paciello
  10. Central Banks Voting Records, Financial Crisis and Future Monetary Policy By Roman Horváth; Júlia Jonášová
  11. Monetary Policy Experience of Pakistan By Hanif, Muhammad Nadim
  12. Commodity price shocks and inflation within an optimal monetary policy framework: the case of Colombia By Luis Eduardo Arango; Ximena Chavarro; Eliana González
  13. The Effects Of Robo-Signing On The Economy And Unconventional Monetary Policy By Egor S. Malkov
  14. Model of the United States economy with learning MUSEL By Baumann, Ursel; Dieppe, Alistair; González Pandiella, Alberto; Willman, Alpo
  15. Monetary Policy of Quantitative Easing at the Central Bank’s High Interest Rates By BLINOV, Sergey
  16. Navigating constraints: the evolution of Federal Reserve monetary policy, 1935-59 By Carlson, Mark A.; Wheelock, David C.
  17. Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia By Kerry B. Hudson; Joaquin L. Vespignani
  18. The Evolution of the Federal Reserve Swap Lines since 1962 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  19. Are Prices Sticky in Large Developing Economies? An Empirical Comparison of China and India By Chong, Terence Tai Leung; Zhu, Tingting; Rafiq, M.S.
  20. Monetary Policy and Dark Corners in a stylized Agent-Based Model By Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
  21. Deflationary shocks and de-anchoring of inflation expectations By Fabio Busetti; Giuseppe Ferrero; Andrea Gerali; Alberto Locarno
  22. Requirements for Policy Rules for the Fed By John B. Taylor
  23. Payment Instruments and Collateral in the Interbank Payment System By Hajime Tomura
  24. Disentangling qualitative and quantitative central bank influence By Paul Hubert
  25. "Liquidity Preference and the Entry and Exit to ZIRP and QE" By Jan Kregel
  26. Why accounting matters: a central bank perspective By Schwarz, Claudia; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
  27. Working Paper - 211 - Bank Lending Channel of Monetary Policy Transmission in Zambia: Evidence from Bank-Level Data By AfDB AfDB
  28. Quantitative Easing in Joseph's Egypt with Keynesian Producers By Campbell, Jeffrey R.

  1. By: Hamza Bennani; Matthias Neuenkirch
    Abstract: Speeches are an important vehicle for central bankers to convey individual views on the preferred policy stance. In this paper, we employ an automated text linguistic approach to create an indicator that measures the tone of the 1,618 speeches delivered by members of the Governing Council (GC) during the period 1999M1-2014M4. We then relate this variable to euro-area and national macroeconomic forecasts. Our key findings are as follows. First, inflation and growth expectations have a positive and significant impact on the hawkishness of a speech. Second, the voiced preferences of national central bankers largely coincide with the level of independence their banks had at the time of the Maastricht Treaty. Third, country-specific macroeconomic conditions matter for speeches delivered inside the central banker's home country but not for those made abroad. Fourth, differences in central banker preferences are the key source of variation in their speeches before the financial crisis, whereas divergent national economic conditions are the main factor in the second part of the sample.
    Keywords: Central Bank Communication, European Central Bank, Governing Council, Monetary Policy, National Interests, Speeches
    JEL: E52 E58
    Date: 2014
  2. By: Homburg, Stefan
    Abstract: Monetary policy is superneutral in an overlapping generations model. Previous authors have argued that superneutrality does not hold in such a setting. However, the standard results rely on the counter-factual premise of helicopter money and are overturned if money creation through open market operations is taken into account.
    Keywords: Superneutrality, open market operations, seigniorage, monetary policy, overlapping generations
    JEL: E24 E43 E52
    Date: 2015–01
  3. By: Bordo, Michael D. (Rutgers University); Humpage, Owen F. (Federal Reserve Bank of Cleveland)
    Abstract: During the Bretton Woods era, balance-of-payments developments, gold losses, and exchange-rate concerns had little influence on Federal Reserve monetary policy, even after 1958 when such issues became critical. The Federal Reserve could largely disregard international considerations because the U.S. Treasury instituted a number of stopgap devices—the gold pool, the general agreement to borrow, capital restraints, sterilized foreign-exchange operations—to shore up the dollar and Bretton Woods. These, however, gave Federal Reserve policymakers the latitude to focus on the domestic objectives and shifted responsibility for international developments to the Treasury. Removing the pressure of international considerations from Federal Reserve policy decisions made it easier for the Federal Reserve to pursue the inflationary policies of the late 1960s and 1970s that ultimate destroyed Bretton Woods. In the end, the Treasury’s stopgap devices, which were intended to support Bretton Woods, contributed to its demise.
    JEL: F31 F33 N1
    Date: 2014–10–01
  4. By: Fisher, Richard W. (Federal Reserve Bank of Dallas)
    Abstract: Remarks before the Dallas Business Club, Dallas, TX, December 3, 2014.
    Date: 2014–12–03
  5. By: Borio, Claudio (Bank for International Settlements)
    Abstract: This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the “excess financial elasticity” of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets – the “excess saving” and “excess demand for safe assets” views, respectively. In particular, the excess financial elasticity view highlights financial rather than current account imbalances and a persistent expansionary rather than contractionary bias in the system. The failure to adjust domestic policy regimes and their international interaction raises a number of risks: entrenching instability in the global system; returning to the modern-day equivalent of the divisive competitive devaluations of the interwar years; and, ultimately, triggering an epoch-defining seismic rupture in policy regimes, back to an era of trade and financial protectionism and, possibly, stagnation combined with inflation.
    JEL: E40 E43 E44 E50 E52 F30 F40
    Date: 2014–10–01
  6. By: Marcin Kolasa (National Bank of Poland); Krzysztof Makarski (National Bank of Poland); Michał Brzoza-Brzezina (National Bank of Poland)
    Abstract: In a number of countries a substantial proportion of loans is denominated in foreign currency. In this paper we demonstrate how their presence affects the economy. To this end we construct a small open economy model with financial frictions where loans can be taken in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy but do not impact on the effectiveness of macroprudential policy. We also demonstrate that FCLs increase welfare when domestic interest rate shocks are strong and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a cyclical slowdown.
    Date: 2014
  7. By: Ekor, Maxwell; Saka, Jimoh; Adeniyi, Oluwatosin
    Abstract: The study provides an incisive but preliminary investigation into the activities of the monetary policy committee of the central bank of Nigeria and the implications for monetary policy, using the standard deviation measure of volatility and the ordinary least square method. The findings show that the ‘internal’ members and majority of the ‘external’ members have different preferences as shown in the voting patterns. Also, there has been reduction in inflation, money and stock markets volatilities since the operations of the committee became more visible. Furthermore, there is no structural break in both the money and stock markets in the period when the central bank started releasing the personal statements and voting pattern of the committee members. The policy implication of these results is that the transparency with which the monetary policy committee has operated since 2011 has boosted policy credibility due to the reduction in markets volatility. Nevertheless, there is need for the individual committee members to be more visible to the public through different platforms as this will further improve the central bank’s communications strategy.
    Keywords: Monetary policy committee decisions, voting, volatility
    JEL: E5
    Date: 2014
  8. By: Truman, Edwin M. (Peterson Institute for International Economics)
    Abstract: This paper traces the evolution of the Federal Reserve and its engagement with the global economy over the last three decades of the 20th century: 1970 to 2000. The paper examines the Federal Reserve’s role in international economic and financial policy and analysis covering four areas: the emergence and taming of the great inflation, developments in US external accounts, foreign exchange analysis and activities, and external financial crises. It concludes that during this period the US central bank emerged to become the closest the world has to a global central bank.
    Keywords: Federal Reserve; Federal Open Market Committee; inflation; macroeconomic policies; monetary policy; external balance; exchange rates; exchange market intervention; financial crises; third world debt crises; Mexican crisis; Asian financial crises
    JEL: E4 E42 F3 F31 F32 F33 F34 F5 F52 F53
    Date: 2014–10–01
  9. By: Fernando Alvarez; Francesco Lippi; Luigi Paciello
    Abstract: We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis’s (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non- negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
    JEL: E12 E5
    Date: 2014–12
  10. By: Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute for East and Southeast European Studies, Regensburg, Germany); Júlia Jonášová (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: We examine whether central banks’ voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, first, we examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, we examine the predictive power of voting records at longer time horizons, i.e., not only for the next monetary policy meeting. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy even at more distant time horizons.
    Keywords: voting records, financial crisis, central bank, monetary policy
    JEL: D78 E52 E58
    Date: 2014–12
  11. By: Hanif, Muhammad Nadim
    Abstract: Using monetary policy rate and/or changes in certain liquidity ratios, State Bank of Pakistan influences cost and/or availability of money and credit in the country to achieve (government announced) inflation target without being prejudice to real economic growth target. Earlier, SBP had been following monetary aggregate targeting to achieve its objectives. Reserve money had been used as an operational target. After weakening of broad money growth and inflation relation (as a result of financial sector reforms and restructuring), SBP transferred the operational target to the overnight money market repo rate. Various monetary conditions indicators are used to decide on the direction and magnitude of monetary policy stance. Budget deficit (with its financing mix), money supply (with its composition), local currency prices of imported goods, wheat support price, and expected (higher) inflation play an significant role in generating inflation while real income growth, and (international trade) openness help dampening it. Inflation in Pakistan has been found equals to rate of broad money growth minus the real output growth which simply shows inflation in Pakistan has mainly been a monetary phenomenon. Monetary policy has provided stable background for the economy as we saw standard deviations for inflation and broad money growth to be same during 1951-2010. Financial sector reforms and restructuring (after end 1980s) helped lower the (broad money growth and) inflation volatility in the country.
    Keywords: Monetary Policy
    JEL: E52
    Date: 2014–12–22
  12. By: Luis Eduardo Arango; Ximena Chavarro; Eliana González
    Abstract: A small open macroeconomic model, in which an optimal interest rate rule emerges to drive the inflation behavior, is used to model inflation within an inflation targeting framework. This set up is used to estimate the relationship between commodity prices shocks and the inflation process in a country that both export and import commodities. We found evidence of a positive, yet small, impact from food international price shocks to inflation. However, these effects are no longer observable once the sample is split in the periods before and after the boom. The lack of effect from oil and energy price shocks we obtain supports the recent findings in the literature of a substantial decrease in the pass-through from oil prices to headline inflation. Thus, our interpretation is that monetary authority has faced rightly the shocks to commodity prices. Inflation expectations are the main determinant of inflation during the inflation targeting regime. Commodity prices movements are to a great extent included in the information set to form expectations.
    Keywords: Commodity prices, inflation-targeting regime, optimal monetary policy, expectations.
    JEL: E43 E58
    Date: 2014–12–22
  13. By: Egor S. Malkov (National Research University Higher School of Economics)
    Abstract: As Akerlof and Shiller (2009) argue, corruption and bad faith played an important role in determining the severity of the recent recessions in the US. This paper studies the impact of robo-signing, which is a typical example of economic bad faith, on the economy and unconventional monetary policy during the last financial crisis. We modify the DSGE model by Gertler and Karadi (2011) by including the features of robo-signing. The paper concludes that banks’ bad faith magnifies the financial crisis through the transmission channel related to changes in the leverage of financial intermediaries and induces the central bank to conduct a more aggressive unconventional monetary policy. We suggest a theoretical framework for studying cases of economic bad faith during the last financial crisis, and provide a model that well fits the data.
    Keywords: robo-signing, unconventional monetary policy, bad faith, financial crisis.
    JEL: E44 E52 E58 G01 G21
    Date: 2014
  14. By: Baumann, Ursel; Dieppe, Alistair; González Pandiella, Alberto; Willman, Alpo
    Abstract: The model presented here is an estimated medium-scale model for the United States (US) economy developed to forecast and analyse policy issues for the US. The model is specified to track the deviation of the medium- run developments from the balanced-growth-path via an estimated CES production function for the private sector, where factor augmenting technical progress is not constrained to evolve at a constant rate. The short-run deviations from the medium run are estimated based on three optimising private sector decision making units: firms, trade unions and households. We assume agents optimise under limited-information model-consistent learning, where each agent knows the parameters related to his/her optimization problem. Under this learning approach the effect of a monetary policy shock on output and inflation is more muted but persistent than under rational expectations, but both specifications are broadly comparable to other US macro models. Using the learning version, we .find stronger expansionary effects of an increase in government expenditure during periods of downturns compared to booms. JEL Classification: C51, C6, E5
    Keywords: learning, macro model, open-economy macroeconomics, rational expectations
    Date: 2014–12
  15. By: BLINOV, Sergey
    Abstract: This paper investigates the possibility of conducting an unconventional monetary policy of Quantitative easing (QE) at high interest rates using the example and experience of Russia. The Central Bank of the Russian Federation has raised the key interest rate on six occasions during the 12 months of 2014 from 5.5% to 17%. The Central Bank has been coming in for criticism for such an increase. However, this criticism is unfair, as sometimes interest rate reduction or failure to raise interest rate result in adverse consequences. Luckily, interest rate is not the only and often far from being the most efficient tool of successful monetary policy. During the hardest phase of the most recent crisis, the central banks worldwide, for example, U.S. Federal Reserve System, resorted to another tool, i.e. Quantitative easing (QE), rather interest rates (which, by that time, had been virtually dropped down to zero). Some experts recognize those to be an important innovation devised by Ben Bernanke, Head of the U.S. Fed during 2006 - 2014. The Central Bank of Russia now has an opportunity of employing a still more innovative policy, i.e. to have “quantitative easing” at high interest rates rather than at zero rates. The experience of the «Golden Decade» (the decade of robust economic growth in Russia between September 1998 and September 2008) proves the efficiency of such monetary policy. The criterion for «sufficiency» of quantitative easing must be the growth rate of the real money supply. In June 2014, the real money supply decreased. That has happened for the first time since December 2009. It shows that there is a need for urgent action on the part of the Central Bank. To bring about steady economic growth, it is required that such quantitative easing be put in place as would make real money supply grow at a pace no slower than the target growth rate for GDP. According to preliminary estimate, the volume of necessary easing would be in the range between RUR 0.6 and 1.9 trillion. Such a program may make itself felt as soon as 3-4 months after its launch.
    Keywords: Monetary Policy, Central Banking, Interest Rates, Quantitative Easing (QE), Economic Growth, Money Supply
    JEL: E31 E32 E40 E43 E50 E51 E52 E58 E65 G01 N10 O11
    Date: 2014–12–19
  16. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: The 1950s are often cited as a decade in which the Federal Reserve operated a particularly successful monetary policy. The present paper examines the evolution of Federal Reserve monetary policy from the mid-1930s through the 1950s in an effort to understand better the apparent success of policy in the 1950s. Whereas others have debated whether the Fed had a sophisticated understanding of how to implement policy, our focus is on how the constraints on the Fed changed over time. Roosevelt Administration gold policies and New Deal legislation limited the Fed’s ability to conduct an independent monetary policy. The Fed was forced to cooperate with the Treasury in the 1930s, and fully ceded monetary policy to Treasury financing requirements during World War II. Nonetheless, the Fed retained a policy tool in the form of reserve requirements, and from the mid-1930s to 1951, changes in required reserve ratios were the primary means by which the Fed responded to expected inflation. The inability of the Fed to maintain a credible commitment to low interest rates in the face of increased government spending and rising inflation led to the Fed-Treasury Accord of March 1951. Following the Accord, the external pressures on the Fed diminished significantly, which enabled the Fed to focus primarily on macroeconomic objectives. We conclude that a successful outcome requires not only a good understanding of how to conduct policy, but also a conducive environment in which to operate.
    JEL: E52 E58 N12
    Date: 2014–10–01
  17. By: Kerry B. Hudson; Joaquin L. Vespignani
    Abstract: This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia’s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world’s largest economy.
    Keywords: Taylor Rule, Monetary Policy, Small Open Economy
    JEL: E40 E52 E50
    Date: 2014–12
  18. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: In this paper, we describe the evolution of the Federal Reserve’s swap lines from their inception in 1962 as a mechanism to forestall claims on U.S gold reserves under Bretton Woods to a means of extending emergency dollar liquidity during the Great Recession. We describe a number of consequences associated with swap operations. We argue, for example, that swaps calm crisis situations by both supplementing foreign countries’ dollar reserves and by signaling central-bank cooperation. We show how swaps exposed the Federal Reserve to conditionality and raised fears that they bypassed the Congressional appropriations process.
    JEL: F3 N2
    Date: 2014–12
  19. By: Chong, Terence Tai Leung; Zhu, Tingting; Rafiq, M.S.
    Abstract: This paper compares the role of macroeconomic and sector-specific factors in price movements for China and India, taking into account the features unique to developing economies. We find that fluctuations in the aggregated prices in China are more persistent than the underlying disaggregated prices. Compared to China, prices in India respond more promptly to macroeconomic and monetary policy shocks. We also show that the urban CPI in China responds more sharply than rural CPI when facing sector-specific shocks, while the opposite is true for India.
    Keywords: Disaggregated Prices; Persistence; Common Factors.
    JEL: E31 E32 E52
    Date: 2013–12–31
  20. By: Stanislao Gualdi; Marco Tarzia; Francesco Zamponi; Jean-Philippe Bouchaud
    Abstract: We generalise the stylised macroeconomic Agent-Based model introduced in "Tipping Points in Macroeconomic Agent Based Models" [JEDC 50, 29-61 (2015)], with the aim of investigating the role and efficacy of monetary policy of a 'Central Bank', that sets the interest rate such as to steer the economy towards a prescribed inflation and unemployment level. Our major finding is that provided its policy is not too aggressive (in a sense detailed in the paper) the Central Bank is successful in achieving its goals. However, the existence of different equilibrium states of the economy, separated by phase boundaries (or "dark corners"), can cause the monetary policy itself to trigger instabilities and be counter-productive. In other words, the Central Bank must navigate in a narrow window: too little is not enough, too much leads to instabilities and wildly oscillating economies. This conclusion strongly contrasts with the prediction of DSGE models.
    Date: 2015–01
  21. By: Fabio Busetti (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia); Andrea Gerali (Banca d'Italia); Alberto Locarno (Banca d'Italia)
    Abstract: A prolonged period of low inflation, particularly in a situation of monetary policy rates near the zero lower bound, can heighten the risk of inflation expectations de-anchoring from the central bank objective. The purpose of this paper is to assess the effects of a sequence of deflationary shocks, such as those that hit the euro area in 2013-14, on expected/realized inflation and output. To do so we consider a simple New Keynesian model where agents, rather than being endowed with rational expectations, have incomplete information about the working of the economy and form expectations through an adaptive learning process (in the sense that they behave like econometricians, using regressions to anticipate the future value of the variables of interest). The model is simulated with euro area data over the period 2014-16 under the assumption both of rational expectations and of learning. The main findings are the followings: (i) under learning, price dynamics in 2015-16 is on average 0.6 percentage points lower than in the case of fully rational agents, as inflation expectations are strongly affected by the repeated deflationary shocks; (ii) the learning process implies a (data-driven) de-anchoring of inflation expectations from the central bank target, which would be perceived by economic agents to fall to 0.8% at the end of 2016; (iii) output expectations would also be lower in the case of learning, resulting in a slower recovery of economic activity.
    Keywords: expected inflation, incomplete information, learning
    JEL: C51 E31 E52
    Date: 2014–11
  22. By: John B. Taylor (Stanford University)
    Abstract: This testimony reviews my analysis and evaluation of the legislation, "Requirements for Policy Rules for the Federal Open Market Committee" (Section 2 of The Federal Reserve Accountability and Transparency Act). The legislation takes account of research on the practical experiences with monetary policy. It incorporates different views about the instruments and transmission process while maintaining the principle that central bank decisions should be based on strategy or a rule with limits placed on discretion and excessive intervention in a transparent and accountable way. It builds on lessons learned from earlier legislative initiatives requiring reporting on the monetary policy instruments, including the requirement to report ranges for the monetary and credit aggregates which were removed from the Federal Reserve Act in 2000.
    Date: 2014–02
  23. By: Hajime Tomura (Graduate School of Economics, University of Tokyo)
    Abstract: This paper presents a three-period model to analyze the endoge- nous need for bank reserves in the presence of Treasury securities. The model highlights the fact that the interbank market is an over- the-counter market. It characterizes the large value payment system operated by the central bank as an implicit contract, and shows that the contract requires less liquidity than decentralized settlement of bank transfers. In this contract, bank reserves are the balances of liquid collateral pledged by banks. The optimal contract is equiva- lent to the floor system. A private clearing house must commit to a time-inconsistent policy to provide the contract.
    Date: 2014–12
  24. By: Paul Hubert (OFCE)
    Abstract: We aim at investigating how two different types of central bank communication affect the private inflation expectations formation process. The effects of ECB inflation projections and Governing Council members’ speeches on private inflation forecasts are identified through an Instrumental-Variables estimation using a Principal Component Analysis to generate valid instruments. We find that ECB projections have an effect on private current-year forecasts, while ECB speeches and the ECB rate impact next-year forecasts. When both communication types are interacted and go in the same direction, the inflation outlook signal tends to outweigh the policy path signal conveyed to private agents (and vice-versa).
    Keywords: European Central Bank; Monetary Policy; Central Bank Communication; ECB projections; Instrumental variables; Pincipal Component Analysis
    JEL: E52 E58
    Date: 2014–12
  25. By: Jan Kregel
    Abstract: The Fed's zero interest policy rate (ZIRP) and quantitative easing (QE) policies failed to restore growth to the US economy as expected (i.e., increased investment spending a la John Maynard Keynes or from an expanded money supply a la Ben Bernanke / Milton Friedman). Senior Scholar Jan Kregel analyzes some of the arguments as to why these policies failed to deliver economic recovery. He notes a common misunderstanding of Keynes's liquidity preference theory in the debate, whereby it is incorrectly linked to the recent implementation of ZIRP. Kregel also argues that Keynes's would have implemented QE policies quite differently, by setting the bid and ask rate and letting the market determine the volume of transactions. This policy note both clarifies Keynes's theoretical insights regarding unconventional monetary policies and provides a substantive analysis of some of the reasons why central bank policies have failed to achieve their stated goals.
    Date: 2014–11
  26. By: Schwarz, Claudia; Karakitsos, Polychronis; Merriman, Niall; Studener, Werner
    Abstract: This paper analyses how accounting frameworks can affect three important areas of responsibility of many central banks, namely monetary policy, financial stability and banking supervision. The identified effects of accounting rules and accounting information on the activities of a central bank are manifold. First, the effectiveness of monetary policy crucially hinges on the financial independence of a central bank, which can be evidenced, inter alia, by its financial strength. Using a new simulation of the financial results of the European Central Bank (ECB), this paper shows that the reported annual profit and financial buffers of a central bank can be significantly affected by accounting, profit distribution and loss coverage rules. Second, in respect of financial stability, the accounting frameworks applied by commercial banks can not only affect their behaviour, but also that of financial markets. Indeed, there is evidence that accounting frameworks amplified pro-cyclicality during the recent crisis, and thus posed risks to the stability of the financial system. This being so, the accounting frameworks of credit institutions have obvious implications for central banks’ analyses with regard to promoting financial stability. Finally, as regards banking supervision, regulatory reporting and key supervisory ratios are based on accounting data. Under the new regulatory framework for banks in the European Union (EU), bank supervisors are highly reliant on accounting data. This means that central banks, in their role as bank supervisors, need to understand the underlying accounting rules and should directly support the development and application of high-quality accounting frameworks. JEL Classification: E23, E25
    Keywords: accounting standards, banking supervision, central bank balance sheet, financial reporting, financial stability
    Date: 2014–05
  27. By: AfDB AfDB
    Date: 2014–12–30
  28. By: Campbell, Jeffrey R. (Federal Reserve Bank of Chicago)
    Abstract: This paper considers monetary and fiscal policy when tangible assets can be accumulated after shocks that increase desired savings, like Joseph's biblical prophecy of seven fat years followed by seven lean years. The model’s flexible-price allocation mimics Joseph’s saving to smooth consumption. With nominal rigidities, monetary policy that eliminates liquidity traps leaves the economy vulnerable to confidence recessions with low consumption and investment. Josephean Quantitative Easing, a fiscal policy that purchases either obligations collateralized by tangible assets or the assets themselves, eliminates both liquidity traps and confidence recessions by putting a floor under future consumption. This requires no commitment to a time-inconsistent plan.
    Keywords: Zero Lower Bound; Liquidity Trap; Confidence Recession; Storage; Equilibrium Multiplicity; Competitive Devaluation
    JEL: E12 E63
    Date: 2014–11–05

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