nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒01‒19
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Inflation Targeting In Emerging Markets: The Global Experience By John B. Taylor
  2. Forward Guidance By Lars E.O. Svensson
  3. Determinacy and Learnability of Equilibrium in a Small Open Economy with Sticky Wages and Prices By Eurilton Araújo
  4. Monetary Policy, Financial Conditions, and Financial Stability By Tobias Adrian; Nellie Liang
  5. Rupee Depreciation: Its Causes and Cure By Raj, Madhusudan
  6. The retail bank interest rate pass-through: The case of the euro area during the financial and sovereign debt crisis By Darracq Pariès, Matthieu; Moccero, Diego; Krylova, Elizaveta; Marchini, Claudia
  7. Commodity price shocks and inflation within an optimal monetary policy framework: the case of Colombia By Luis Eduardo Arango; Ximena Chavarro; Eliana González
  8. Hot money and quantitative easing: the spillover effect of U.S. monetary policy on Chinese housing, equity and loan markets By Ho, Steven Wei; Zhang, Ji; Zhou, Hao
  9. Constrained Discretion and Central Bank Transparency By Bianchi, Francesco; Melosi, Leonardo
  10. Post-Crisis Slow Recovery and Monetary Policy By Daisuke Ikeda; Takushi Kurozumi
  11. Effectiveness and transmission of the ECB’s balance sheet policies By Jef Boeckx; Maarten Dossche; Gert Peersman
  12. Japanese Repo and Call Markets Before, During, and Emerging from the Financial Crisis By Ichiro Fukunaga; Naoya Kato
  13. "Why Raising Rates May Speed the Recovery" By Jan Kregel
  14. Inflation Experience and Inflation Expectations: Spatial Evidence By Refet Gürkaynak; Gulserim Ozcan; Marcel Fratzscher
  15. Unprecedented actions: the Federal Reserve’s response to the global financial crisis in historical perspective By Mishkin, Frederic S.; White, Eugene
  16. Unit of Account, Medium of Exchange, and Prices By Young Sik Kim; Manjong Lee
  17. The international monetary and financial system: a capital account perspective By Borio, Claudio; James, Harold; Shin, Hyun Song
  18. MRO bidding in the presence of LTROs: an empirical analysis of the pre-crisis period By Vogel, Edgar
  19. Nominal Term Structure and Term Premia. Evidence from Chile By Ceballos, Luis; Naudon, Alberto; Romero, Damian
  20. A Keynesian factor in monetary policy: the Economic Growth Incentive Method (EGIM) By De Koning, Kees
  21. Banking panics and protracted recessions By Sanches, Daniel R.
  22. Liquidity regulation and bank behavior By Bonner, C.
  23. The scapegoat theory of exchange rates: the first tests By Marcel Fratzscher; Dagfinn Rime; Lucio Sarno; Gabriele Zinna
  24. On the effectiveness of devaluations in emerging and developing countries By Carl Grekou
  25. An Overview of Macroprudential Policy Tools By Stijn Claessens
  26. Is Europe Overbanked? By Marco Pagano; ESRB Advisory Scientific Committee
  27. Within- and cross-country price dispersion in the euro area By Reiff, Adam; Rumler, Fabio

  1. By: John B. Taylor (Stanford University)
    Abstract: This paper assesses the emerging market experience with inflation targeting in recent years. It places this experience in the broader context of global monetary policy. It shows that a shift away from rules based policy by many developed country central banks has adversely affected the inflation targeting performance of the emerging market countries. First, it has created direct economic spillovers, which have blurred the good effects of inflation targeting. Second, it has led to policy spillovers in which emerging market central banks have been driven to deviate from their inflation targeting rules. The implication of this research is that emerging market countries should stick to the type of inflation targeting they adopted a decade or more ago with macroprudential policy simply focused on getting the overall risk environment right.
    Date: 2014–10
  2. By: Lars E.O. Svensson
    Abstract: Forward guidance about future policy settings, in the form of a published policy-rate path, has for many years been a natural part of normal monetary policy for several central banks, including the Reserve Bank of New Zealand and the Swedish Riksbank. The Swedish and New Zealand experience of a published policy-rate path is examined, especially to what extent the market has anticipated the path (the predictability of the path) and to what extent market expectations line up with the path after publication (the credibility of the path). The recent Swedish experience is very dramatic. In particular, it shows a case with a large discrepancy between a high and rising Riksbank path and a low and falling market path, with the market path providing a good forecast of the future policy rate. The discrepancy is explained by the Riksbank’s leaning against the wind in recent years and related circumstances. The New Zealand experience is less dramatic, but shows cases where the market implements either a substantially tighter or easier policy than intended by the RBNZ. There are also cases of the market being ahead of the RBNZ and the RBNZ later following the market.
    JEL: E52 E58 G14
    Date: 2014–12
  3. By: Eurilton Araújo
    Abstract: If the central bank attempts to minimize a welfare loss function in a small-open economy model with nominal wage and price rigidities, it has been argued that a monetary policy rule that responds to consumer price index (CPI) inflation performs better than rules that react to competing inflation measures. From the viewpoint of determinacy and learnability of rational expectations equilibrium (REE), this paper suggests that a rule that responds to CPI inflation does not significantly increase the central bank's ability to promote the convergence of an economy to a determinate and learnable REE nor improves the speed of this convergence when compared with rules that react to contending inflation measures
    Date: 2014–12
  4. By: Tobias Adrian (Federal Reserve Bank of New York (E-mail:; Nellie Liang (Board of Governors of the Federal Reserve System (E-mail:
    Abstract: In the conduct of monetary policy, there exists a risk-return tradeoff between financial conditions and financial stability, which complements the traditional inflation-real activity tradeoff of monetary policy. The tradeoff exists even if monetary policy does not target financial stability considerations independently of its inflation and real activity goals, as the buildup of financial vulnerabilities from persistent accommodative monetary policy when the economy is close to potential increases risks to future financial stability. We review monetary policy transmission channels and financial frictions that give rise to this tradeoff between financial conditions and financial stability, within a monitoring program across asset markets, banking firms, shadow banking, and the nonfinancial sector. We focus on vulnerabilities that affect monetary policies' risk- return tradeoff including (i) pricing of risk, (ii) leverage, (iii) maturity and liquidity mismatch, and (iv) interconnectedness and complexity. We also discuss the extent to which structural and time-varying macroprudential policies can counteract the buildup of vulnerabilities, thus mitigating monetary policy's risk-return tradeoff.
    Keywords: risk taking channel of monetary policy, monetary policy transmission, monetary policy rules, financial stability, financial conditions, macroprudential policy
    JEL: E52 G01 G28
    Date: 2014–12
  5. By: Raj, Madhusudan
    Abstract: Indian currency rupee is depreciating rapidly against the US dollar and other foreign currencies. This paper analyses the major causes of this depreciation. It also discusses its cures.
    Keywords: Rupee, RBI, Regime uncertainty, Inflation, Depreciation, Fractional reserve banking, Central bank.
    JEL: E41 E42 E51 E52 E58
    Date: 2014–07–01
  6. By: Darracq Pariès, Matthieu; Moccero, Diego; Krylova, Elizaveta; Marchini, Claudia
    Abstract: This paper analyses the cross-country heterogeneity in retail bank lending rates in the euro area and presents newly developed pass-through models that account for the riskiness of borrowers, the balance sheet constraints of lenders and sovereign debt tensions affecting interest rate-setting behaviour. Country evidence for the four largest euro area countries shows that downward adjustments in policy rates and market reference rates have translated into a concomitant reduction in bank lending rates. In the case of Spain and Italy, however, sovereign bond market tensions and a deteriorating macroeconomic environment have put upward pressure on composite lending rates to non-financial corporations and households. At the same time, model simulations suggest that higher lending rates have propagated to the broader economy by depressing economic activity and inflation. As a response to increasing financial fragmentation, the ECB has introduced several standard and non-standard monetary policy measures. These measures have gone a long way towards alleviating financial market tensions in the euro area. However, in order to ensure the adequate transmission of monetary policy to financing conditions, it is essential that the fragmentation of euro area credit markets is reduced further and the resilience of banks strengthened where needed. Simulation analysis confirms that receding financial fragmentation could help to boost economic activity in the euro area in the medium term. JEL Classification: J64
    Keywords: bank lending rates, DSGE models, financial fragmentation, monetary policy, pass-through models
    Date: 2014–09
  7. 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. Classification JEL: E43, E58.
    Date: 2014–12
  8. By: Ho, Steven Wei (Tsinghua University); Zhang, Ji (Tsinghua University); Zhou, Hao (Tsinghua University)
    Abstract: We study a factor-augmented vector autoregression model to estimate the effects of changes in U.S. monetary policy, as well as changes in U.S. policy uncertainty, on the Chinese economy. We find that since the Great Recession, a decline in the U.S. policy rate would result in a significant increase in Chinese regulated interest rates, and rise in Chinese housing investment. One possible reason for this is the substantial inflow of hot money into China. Responses of Chinese variables to U.S. shocks at the zero lower bound are different from that in normal times, which suggest structural changes in both the Chinese economy and the U.S. monetary policy transmission mechanism. Moreover, an increase in U.S. policy uncertainty negatively impacts Chinese stock and real estate market during normal times, but not at the zero lower bound.
    JEL: C3 E4 E5 F3
    Date: 2014–11–01
  9. By: Bianchi, Francesco (Duke University); Melosi, Leonardo (Federal Reserve Bank of Chicago)
    Abstract: We develop and estimate a general equilibrium model in which monetary policy can deviate from active inflation stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian learning to infer its likely duration. Under constrained discretion, only short deviations occur: Agents are confident about a prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists, agents’ beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced, uncertainty follows a reverse path. For the U.S. transparency lowers uncertainty and increases welfare.
    Keywords: Bayesian learning; reputation; uncertainty; expectations; Markov-switching models; impulse response
    JEL: C11 D83 E52
    Date: 2014–07–01
  10. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takushi Kurozumi (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In the aftermath of the recent financial crisis and subsequent recession, slow recoveries have been observed and slowdowns in total factor productivity (TFP) growth have been measured in many economies. This paper develops a model that can describe a slow recovery resulting from an adverse financial shock in the presence of an endogenous mechanism of TFP growth, and examines how monetary policy should react to the financial shock in terms of social welfare. It is shown that in the face of the financial shocks, a welfare-maximizing monetary policy rule features a strong response to output, and the welfare gain from output stabilization is much more substantial than in the model where TFP growth is exogenously given. Moreover, compared with the welfare-maximizing rule, a strict inflation or price-level targeting rule induces a sizable welfare loss because it has no response to output, whereas a nominal GDP growth or level targeting rule performs well, although it causes high interest-rate volatility. In the presence of the endogenous TFP growth mechanism, it is crucial to take into account a welfare loss from a permanent decline in consumption caused by a slowdown in TFP growth.
    Keywords: Financial shock, Endogenous TFP growth, Slow recovery, Monetary policy, Welfare cost of business cycle
    JEL: E52 O33
    Date: 2014–12
  11. By: Jef Boeckx (Research Department, NBB); Maarten Dossche (Research Department, NBB, ECB); Gert Peersman (Ghent University)
    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 turn out to be 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 blance sheet, euro area, VAR
    JEL: C32 E30 E44 E51 E52
    Date: 2014–12
  12. By: Ichiro Fukunaga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Naoya Kato (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We empirically investigate the relationship between the Japanese general collateral (GC) repurchase agreement (repo) and uncollateralized call rates before, during, and emerging from the recent financial crisis. Unlike the US and many other countries, the Japanese GC repo rate has been higher than the uncollateralized call rate, despite the former being secured by collateral. Moreover, during the financial crisis, the Japanese GC repo rate rose, whereas the US Treasury GC repo rate decreased. The results of our empirical analysis suggest that segmentation between the Japanese repo and call markets is a key factor explaining these features. The analysis also reveals how much changes in the policy target rate and the current account balances at the Bank of Japan, institutional changes in the payment system, and various policy and market events affected both the repo and call rates.
    Keywords: repurchase agreement (repo), call markets, monetary policy implementation, financial crisis, market segmentation, vector error correction model, threshold ARCH
    JEL: E43 E52 E58 G01 G12
    Date: 2014–12
  13. By: Jan Kregel
    Abstract: Criticisms of the Federal Reserve's "unconventional" monetary policy response to the Great Recession have been of two types. On the one hand, the tripling in the size of the Fed's balance sheet has led to forecasts of rampant inflation in the belief that the massive increase in excess reserves might be spent on goods and services. And even worse, this would represent an attempt by government to inflate away its high levels of debt created to support the solvency of financial institutions after the September 2008 collapse of asset prices. On the other hand, it is argued that the near-zero short-term interest rate policy and measures to flatten the yield curve (quantitative easing plus "Operation Twist") distort the allocation and pricing in the credit and capital markets and will underwrite another asset price bubble, even as deflation prevails in product markets. Both lines of criticism have led to calls for a return to a more conventional policy stance, and yet there is widespread agreement that this would have a negative impact on the economy, at least in the short-term. However, since the analyses behind both lines of criticism are mistaken, it is probable that the analyses of the impact of the risks of return to more normal policies are also in error.
    Date: 2014–12
  14. By: Refet Gürkaynak (Bilkent University); Gulserim Ozcan (Bilkent University); Marcel Fratzscher
    Abstract: Understanding inflation expectations is an integral part of understanding asset pricing and real economic decisions. We study the role of inflation experience in the formation of inflation expectations by investigating whether and to what extent inflation expectations of different forecasters are affected by the inflation they observe in the area they are residing in. In particular, we focus on the expectations of professional forecasters from different countries of euro area inflation and ask whether their forecast errors are correlated with the observed inflation in the forecaster’s country at the time the expectation was formed. We find that forecasters perceive the world to be more spatially correlated than it actually is: higher inflation in the home country leads to abnormally—in the rational expectations sense--higher expectations of future euro area inflation that result in more pronounced and forecastable forecast errors. This has important implications for asset pricing in internationally diversified portfolios and correlations of international asset prices.
    Date: 2014
  15. By: Mishkin, Frederic S. (Columbia University); White, Eugene (Rutgers University)
    Abstract: Interventions by the Federal Reserve during the financial crisis of 2007-2009 were generally viewed as unprecedented and in violation of the rules---notably Bagehot’s rule---that a central bank should follow to avoid the time-inconsistency problem and moral hazard. Reviewing the evidence for central banks’ crisis management in the U.S., the U.K. and France from the late nineteenth century to the end of the twentieth century, we find that there were precedents for all of the unusual actions taken by the Fed. When these were successful interventions, they followed contingent and target rules that permitted pre- tive actions to forestall worse crises but were combined with measures to mitigate moral hazard.
    JEL: E58 G01 N10 N20
    Date: 2014–10–01
  16. By: Young Sik Kim (epartment of Economics & SIRFE, Seoul National University, Seoul, South Korea); Manjong Lee (Department of Economics, Korea University, Seoul, South Korea)
    Abstract: The separation of a unit of account (UoA) from a medium of exchange (MoE) in the commodity-money system is investigated by considering explicitly a seller¡¯s choice with regard to posting price in terms of either an MoE or a UoA. If the likelihood of debasement of MoE or its rate is high enough and agents are sufficiently risk averse, there exists a monetary equilibrium in which price is quoted in terms of a UoA. Further, a UoA-posting equilibrium yields the flexible nominal price, whereas an MoE-posting equilibrium yields the sticky one. This suggests that in the fiat-money system where MoE and UoA are integrated, price would not be flexibly adjusted.
    Keywords: debasement, medium of exchange, unit of account, nominal price rigidity
    JEL: E31 E42 F33
    Date: 2014
  17. By: Borio, Claudio (Bank of International Settlements); James, Harold (Princeton University); Shin, Hyun Song (Bank of International Settlements)
    Abstract: In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its “excess financial elasticity”. And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis.
    JEL: E40 E43 E44 E50 E52 F30 F40
    Date: 2014–10–01
  18. By: Vogel, Edgar
    Abstract: Using individual data from the Eurosystem’s liquidity providing tenders for the pre-crisis period we investigate banks’ joint bidding behaviour in Main Refinancing Operation (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We offer two main findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to “other” MROs. Moreover, MRO participants which also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as substitutes and bid strategically. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Even more striking, banks which participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that “short” banks, with potentially large net liquidity needs after the LTRO bid more aggressively. Other counterparties with liquidity needs in that particular operation are forced, as a best response reaction, to bid also at higher rates. Although size plays a considerable role for bidding behaviour, the conclusions are valid for banks of different size. JEL Classification: D44, D53, D84, E43, E50, G10, G21
    Keywords: central bank operations, monetary policy, open market operations, repo auctions, strategic bidding
    Date: 2014–12
  19. By: Ceballos, Luis; Naudon, Alberto; Romero, Damian
    Abstract: The downward trend exhibited in Chile’s nominal term structure since 2003 has been a common pattern shared by other developed and developing economies. To understand the behavior of the nominal yield curve in Chile, we rely on an affine dynamic term structure model (DTMS) which allows to decompose the term structure into the expected short-term premium (related to the monetary policy expectation) and a term premia. We show that most of the fall of long-term interest rates as well as its dynamics are related to the term premia rather than the expected short-term interest rate. With this, we report that the term premia is driven primarily by nominal uncertainty, i.e. the uncertainty for expected inflation and the US term premia.
    Keywords: Term premium; Chile; Yield curve; Risk neutral rates
    JEL: E31 E43 E52 G12 H63
    Date: 2014–12
  20. By: De Koning, Kees
    Abstract: In the U.S. over the past 17 years competition among banks to provide home mortgages has failed. The reason is that there is a finite need for new housing starts at around 1.8 million homes per year and that there is a finite need for funds if house prices are to move in line with the CPI inflation index. In 1997 new home mortgage funds of $125,260 were allocated for each new home, with a median house price level of $145,900. The turning point was already reached in 1998 and in 2006 home mortgage funds per new home had grown to $574,550. In 2006 on basis of the CPI index for new homes, not 1.8 million but nearly 5.5 million new homes could have been build; way above the need. Over the period 1998-2007 the economic value of the output achieved with the money input had dropped considerably and the indebtedness of new mortgagees had increased dramatically. Both were a cause of a slow down in economic growth. The funding bubble burst in 2007. The actions taken by the Federal Reserve saved the banks- bar one- and other financial institutions, but the Fed did not address the financial plight of individual households. Quantitative easing bought up $2.4 trillion of past government debt, which helped lower long-term interest rates. What was not considered was to give a cash injection to individual households to be repaid out of future tax revenues. Such tax advance should not be personalized but repaid to the Fed out of future general tax revenues over a period of say 10 years: the Economic Growth Incentive Method. A Keynesian factor can be introduced into monetary policies. The U.S. has gone through a six-year adjustment period since the beginning of 2008 in order to get back to economic growth. The Eurozone has not achieved the same result. The EGIM method would be very helpful for the Eurozone countries.
    Keywords: Keynesian factor in monetary policy; Economic Growth Incentive Method (EGIM); U.S. home mortgages;money input-new housing starts output relationship, money efficiency index; U.S government debt; Federal Reserve response to financial crisis
    JEL: E44 E52 E58 E62 G21
    Date: 2015–01–05
  21. By: Sanches, Daniel R. (Federal Reserve Bank of Philadelphia)
    Abstract: This paper develops a dynamic theory of money and banking that explains why banks need to hold an illiquid portfolio to provide socially optimal transaction and liquidity services, opening the door to the possibility of equilibrium banking panics. Following a widespread liquidation of banking assets in the event of a panic, the banking portfolio consistent with the optimal provision of transaction and liquidity services during normal times cannot be quickly reestablished, resulting in an unusual loss of wealth for all depositors. This negative wealth effect stemming from the liquid portion of the consumers' portfolio is strong enough to produce a protracted recession. A key element of the theory is the existence of a dynamic interaction between the ability of banks to offer transaction and liquidity services and the occurrence of panics.
    Keywords: Banking Panics; Medium Of Exchange; Random Matching; Transaction Services; Liquidity Insurance
    JEL: E32 E42 G21
    Date: 2014–12–22
  22. By: Bonner, C.
    Abstract: In response to the 2007-08 financial crisis, the Basel Committee on Banking Supervision proposed two liquidity standards to reinforce banks’ resilience to liquidity risks. The purpose of this thesis is to analyze the impact of liquidity regulation on bank behavior. The first of four main chapters analyzes the development of global liquidity standards, their objectives as well as their interaction with capital standards. The analysis suggests that regulating capital is associated with declining liquidity buffers. The interaction of liquidity regulation and monetary policy, the view that regulating capital also addresses liquidity risks as well as a lack of supervisory momentum were important factors hampering the harmonization of liquidity regulation. Chapter 3 takes a wide view on the impact of liquidity regulation on banks' liquidity management. The key question is whether the presence of liquidity regulation substitutes banks' incentives to hold liquid assets. The cross-country analysis suggests that most bank-specific and country-specific determinants of banks’ liquidity buffers are substituted by liquidity regulation while a bank's disclosure requirements become more important. The complementary nature of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation. Chapter 4 zooms in on one of the key questions regarding the interaction of the LCR with monetary policy transmission. The analysis shows that a liquidity requirement causes short-term and long-term interest rates as well as demand for long-term loans to increase. However, banks do not seem able to pass on the increased funding costs in the interbank market to their private sector clients. Rather, a liquidity requirement seems to decrease banks' interest margins, which might require central banks to use a representative real economy interest rate as additional target for monetary policy implementation. Chapter 5 is motivated by the European sovereign debt crisis and analyzes the impact of preferential regulatory treatment on banks’ demand for government bonds. The analysis suggests that preferential treatment in liquidity and capital regulation increases banks' demand for government bonds beyond their own risk appetite. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. The thesis concludes with an epilogue on liquidity stress testing.
    Date: 2014
  23. By: Marcel Fratzscher (DIW Berlin and Humboldt University); Dagfinn Rime (BI Norwegian Business School); Lucio Sarno (Cass Business School); Gabriele Zinna (Bank of Italy)
    Abstract: The scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as scapegoats to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.
    Keywords: scapegoat; exchange rates; economic fundamentals; survey data.
    JEL: F31 G10
    Date: 2014–10
  24. By: Carl Grekou
    Abstract: In this paper, we address the issue of devaluations' effectiveness by investigating to what extent a nominal devaluation leads to a real depreciation. Beyond the traditional factors identified by the literature, we pay particular attention to the size of the nominal devaluation and to the initial misalignment of the real exchange rate. Using a sample of 57 devaluation episodes (in 40 developing and emerging countries) and relying on panel data techniques, we evidence that the existence of a sizeable overvaluation of the real exchange rate is a prerequisite to ensure that nominal devaluations will have an expected effect in terms of real depreciations. Furthermore, our results put forward a potential nonlinear relationship between the size of the devaluation and the effectiveness of the nominal adjustment: devaluations operate more efficiently when the magnitude of the nominal adjustment is lower.
    Keywords: Bayesian model averaging; Currency devaluations; Macroeconomic policies; Real exchange rates’ misalignments.
    JEL: C1 E6 F3 F41
    Date: 2014
  25. By: Stijn Claessens
    Abstract: Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.
    Keywords: Macroprudential policies and financial stability;Monetary policy;Procyclicality of financial system;Financial intermediation;Other systemic risk tools;Financial stability, financial intermediation, externalities, market failures, procyclicality, systemic risks
    Date: 2014–12–11
  26. By: Marco Pagano; ESRB Advisory Scientific Committee
    Abstract: This paper is after a difficult question: has banking grown too much in Europe? The difficultly of the question lies in the words “too much”, which require a normative answer. The authors took a stance on how much is “too much”, based on the needs of the real economy in Europe. To tackle the question, they take an approach similar to that of a doctor treating a patient who seems overweight. They were not the first doctors that the European banking system has consulted in recent years. Their patient had just taken a potent medicine (the CRD IV package) and had prescriptions for more (BRRD, SSM, SRM, and possibly structural reform). Indeed, the patient has grown tired of this medicinal onslaught: he has “therapy fatigue”. But, in the authors' view, more is needed. Some therapies could have a higher dosage; others have not been tried at all. Pagano et al. thought that a course of new treatments will brighten the prognosis: helping the European banking system to make a speedy and lasting recovery from its current bloated state. This publication was originally published by ESRB – European Systemic Risk Board as Reports of the Advisory Scientific Committee No. 4/June 2014 “Is Europe Overbanked?”. It was presented during the mBank-CASE Seminar no 132 "Is Europe overbanked?". This report was written by a group of the ESRB’s Advisory Scientific Committee, chaired by Marco Pagano and assisted by Sam Langfield. In addition, the ASC group comprised Viral Acharya, Arnoud Boot, Markus Brunnermeier, Claudia Buch, Martin Hellwig, Andr´e Sapir and Ieke van den Burg.
    Keywords: Money Supply, Credit, Money multipliers, Central Banks and Their Policies, Mergers; Acquisitions, Restructuring, Corporate governance
    JEL: E51 E58 G34
    Date: 2014–11
  27. By: Reiff, Adam; Rumler, Fabio
    Abstract: Using a comprehensive data set on retail prices across the euro area, we analyse within- and cross-country price dispersion in European countries. First, we study price dispersion over time, by investigating the time-series evolution of the coefficient of variation, calculated from price levels. Second, since we find that cross-sectional price dispersion by far dominates price dispersion over time, we study price dispersion across space and investigate the role of geographical barriers (distance and national borders). We find that (i) prices move together more closely in locations that are closer to each other; (ii) cross-country price dispersion is by an order of magnitude larger than within-country price dispersion, even after controlling for product heterogeneity; (iii) a large part of cross- country price differences can be explained by different tax rates, income levels and consumption intensities. In addition, we find some indication that price dispersion in the euro area has declined since the inception of the Monetary Union. JEL Classification: E31, F41
    Keywords: border effect, international relative prices, price dispersion
    Date: 2014–11

This nep-mon issue is ©2015 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.