nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒01‒31
25 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global dollar credit: links to US monetary policy and leverage By Robert N McCauley ; Patrick McGuire ; Vladyslav Sushko
  2. Monetary Policy and Global Equilibria in an Economy with Capital By Tim Hursey ; Alexander Wolman ; Andreas Hornstein
  3. Conservatism and Liquidity Traps By Nakata, Taisuke ; Schmidt, Sebastian
  4. The inflation targeting policy in Tunisia? Between perception and reality By Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
  5. Spillovers of US unconventional monetary policy to Asia: the role of long-term interest rates By Ken Miyajima ; Madhusudan Mohanty ; James Yetman
  6. Can Inflation Forecast and Monetary Policy Path be Really Useful? The Case of Czech Republic By Magdalena Szyszko ; Karolina Tura
  7. Fragmentation in the euro overnight unsecured money market By Hoffmann, Peter ; Manganelli, Simone ; Garcia de Andoain, Carlos
  8. The Federal Reserve's Financial Stability Agenda : a speech at the Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution, Washington, D.C., December 3, 2014 By Brainard, Lael
  9. Monetary policy and banks in the euro area: the tale of two crises By Lucrezia Reichlin
  10. An Equilibrium Foundation of the Soros Chart By Takashi Kano ; Hiroshi Morita
  11. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By WAKI Yuichiro ; Richard DENNIS ; FUJIWARA Ippei
  12. Exchange rate risk and local currency sovereign bond yields in emerging markets By Blaise Gadanecz ; Ken Miyajima ; Chang Shu
  13. The Possible Trinity: Optimal interest rate,exchange rate, and taxes on capital flows in a DSGE model for a Small Open Economy By Guillermo Escudé
  14. Monetary Integration in SADC: Assessment of Policy Coordination and Real Effective Exchange Rate Stability By Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
  15. Monetary dialogue 2009–2014 : Looking backward, looking forward By Eijffinger, S.C.W.
  16. Exploring the Nexus Between Macro-Prudential Policies and Monetary Policy Measures: Evidence from an Estimated DSGE Model for the Euro Area By Giacomo Carboni ; Christoffer Kok ; Matthieu Darrak Paries
  17. Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the future By Domanski, Dietrich ; Moessner, Richhild ; Nelson, William R.
  18. TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area By Gabriel Fagan ; Paul McNelis
  19. Effects of the U.S. quantitative easing on the Peruvian economy By Carrera, César ; Pérez-Forero, Fernando ; Ramírez-Rondán, Nelson
  20. Credit policy in times of financial distress By Costas Azariadis
  21. Nominal Idiosyncratic Shocks and Optimal Monetary Policy By Eisei Ohtaki
  22. International Spillovers of Large-Scale Asset Purchases By Sami Alpanda ; Serdar Kabaca
  23. Monetary Policy and Investment Dynamics: Evidence from Disaggregate Data By Givens, Gregory ; Reed, Robert
  24. A Survey on the Effects of Sterilized Foreign Exchange Intervention By Mauricio Villamizar-Villegas ; David Perez-Reyna
  25. Inflation and Inflation Uncertainty in Turkey By dogru, bulent

  1. By: Robert N McCauley ; Patrick McGuire ; Vladyslav Sushko
    Abstract: Banks and bond investors have extended $9 trillion of US dollar credit to non-bank borrowers outside the United States. This has relevance for the discussion of global liquidity and global monetary policy transmission. This paper contributes to this policy discussion by analysing the links between US monetary policy, including unconventional monetary policy, leverage and flows into bond funds, on the one hand, and dollar credit extended to non-US borrowers, on the other. We find that prior to the crisis, banks drew on low funding rates and low-cost leverage to extend dollar credit to non-US orrowers. After the Federal Reserve announced its large-scale bond purchases in 2008, however, bond investors responded to compressed long-term rates by buying dollar bonds from non-US borrowers. The balance of dollar credit transmission has shifted from global banks to global bond investors.
    Keywords: US dollar, offshore credit, interest rate differentials, leverage, bond fund flows, policy rates, term premium, unconventional monetary policy
    Date: 2015–01
  2. By: Tim Hursey (University of Pennsylvania ); Alexander Wolman (Federal Reserve Bank of Richmond ); Andreas Hornstein (Federal Reserve Bank of Richmond )
    Abstract: Short-term interest rates in the United States have been near their lower bound since late 2008. Treasury rates out to a two-year maturity have been close to zero since mid-2011, and over this same period, inflation has been declining. This combination of low interest rates and declining inflation has lead some observers to point to the "perils of Taylor rules," for example, Bullard (2010), when a monetary policy that actively targets a positive inflation rate leads to an outcome with much lower inflation, and possibly even deflation. The possibility of equilibria with persistent deviations of inflation from the target set by the policy maker has been investigated for model economies without state variables. Quantitative representations of the U.S. economy as embodied by DSGE models include as an essential element capital accumulation. In this paper we study the possibility for persistent low inflation outcomes for a monetary model with capital.
    Date: 2014
  3. By: Nakata, Taisuke (Board of Governors of the Federal Reserve System (U.S.) ); Schmidt, Sebastian (European Central Bank )
    Abstract: Appointing Rogoff's (1985) conservative central banker improves welfare if the economy is subject to large contractionary shocks and the policy rate occasionally falls to the zero lower bound (ZLB). In an economy with occasionally binding ZLB constraints, the anticipation of future ZLB episodes creates a trade-off between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. A conservative central banker mitigates this deflationary bias away from the ZLB, improving allocations both at and away from the ZLB through expectations.
    Keywords: Discretion; inflation conservatism; inflation targeting; liquidity traps; zero lower bound
    JEL: E52 E62
    Date: 2014–11–12
  4. By: Kadria, Mohamed ; Ben Aissa, Mohamed Safouane
    Abstract: In this paper, we tried to examine and provide a clear answer on the possibility of the Central Bank of Tunisia to adopt the inflation targeting (IT) monetary policy. But the transition to the new optimum monetary framework remains a challenge in itself and requires the filling of certain pre-conditions. To do this, we first started by clarifying the conduct of monetary policy in Tunisia and the institutional and structural pre-requisites progress to make in adoption view of this new strategy, which allows more inflation mastering in a context of crisis and post-revolution. Regarding the transmission mechanisms, we conducted an empirical study of dynamic structural VAR models to conclude whether there is a stable and predictable relationship between monetary policy instruments and inflation, which is considered as a strong technical condition in favor of IT.
    Keywords: Inflation targeting, transmission mechanisms, structural VAR, Tunisia.
    JEL: C3 E5
    Date: 2014
  5. By: Ken Miyajima ; Madhusudan Mohanty ; James Yetman
    Abstract: This paper reviews the role of long-term interest rates in international monetary transmission and related policy challenges in the wake of exceptionally easy US monetary policy. It employs a panel VAR model to examine the impact of a very low US term premium on relatively small open Asian economies. The results show that unconventional US monetary policy spills over to Asia mainly through low domestic bond yields and rapid growth of domestic bank credit. Financial integration does not appear to reduce the control of national monetary authorities over short-term policy rates. However, it does compromise control over long-term rates that are key determinants of economic activity. In light of the results, the paper reviews potential policy options to deal with volatile term and risk premiums.
    Keywords: Asian economies, international monetary transmission, long term interest rates, monetary policy, risk premium
    Date: 2014–12
  6. By: Magdalena Szyszko (Wyzsza Szkola Bankowa w Poznaniu, Poland ); Karolina Tura (Uniwersytet Ekonomiczny w Poznaniu, Poland )
    Abstract: Producing and revealing inflation forecasts is believed to be the best way of implementing a forward-looking monetary policy. The article focuses on inflation forecast targeting (IFT) at the Czech National Bank (CNB) in terms of its efficiency in shaping consumers’ inflation expectations. The goal of the study is to verify accuracy of the inflation forecasts, and their influence on inflation expectations. The research is divided into four stages. At the first stage central bank credibility is examined. At the second stage – accuracy of the inflation forecasts. The next step covers a qualitative analysis of IFT implementation. Finally the existence of the interdependences of inflation forecast, optimal policy paths and inflation expectations are analyzed. Credibility of the central bank, accuracy of the forecast and decision-making procedures are the premises for the existence of relationship between forecasts and expectations. The research covers July 2002 - end of 2013. Its methodology includes the qualitative analysis of decision-making of the CNB, quantitative methods (Kia and Patron formula, MAE forecasts errors, quantification of expectations, non-parametric statistics). The results show the existence of interdependences between inflation forecasts and expectations of moderate strength. The preconditions of such interdependences are partially fulfilled. The research opens the field for cross-country comparisons and for quantification of IFT implementation.
    Keywords: inflation forecasts, inflation forecast targeting, policy path, inflation expectations
    JEL: E52 E58 E61
    Date: 2014–12
  7. By: Hoffmann, Peter ; Manganelli, Simone ; Garcia de Andoain, Carlos
    Abstract: This paper examines the degree of fragmentation in the Euro overnight unsecured money market during the period June 2008 – August 2013 using interbank loans constructed from payments data. After controlling for cross-country differences in bank risk, we document several episodes of significant market fragmentation. While non-standard measures such as the provision of long-term liquidity were successful in reducing tensions, considerable signs of market fragmentation remained at the end of the sample period. JEL Classification: G1, E5
    Keywords: financial integration, monetary policy implementation, money markets, sovereign debt crisis
    Date: 2014–12
  8. By: Brainard, Lael (Board of Governors of the Federal Reserve System (U.S.) )
    Date: 2014–12–03
  9. By: Lucrezia Reichlin (London Business School and CEPR )
    Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to the banking sector, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector by showing that banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP and kept them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises.
    Keywords: Economic recessions; Financial system; ECB policies; Bank behavior
    JEL: E44 E58 G21
    Date: 2013–07
  10. By: Takashi Kano ; Hiroshi Morita
    Abstract: The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is its near random-walk behavior sharing a common stochastic trend with the monetary base differential, which is augmented by the excess reserves, between Japan and the United States. In this paper, we develop a simple two-country incomplete-market model equipped with a specification of domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent I(1) component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate.
  11. By: WAKI Yuichiro ; Richard DENNIS ; FUJIWARA Ippei
    Abstract: This paper considers the optimal degree of discretion in monetary policy when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank's actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant "constrained discretion" to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds must be set in a history-dependent way. The optimal degree of discretion varies over time with the severity of the time-inconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, our numerical experiment suggests that no-discretion is a transient phenomenon, and that some discretion is granted eventually.
    Date: 2015–01
  12. By: Blaise Gadanecz ; Ken Miyajima ; Chang Shu
    Abstract: In this paper we consider the role of exchange rate risk in influencing local currency sovereign bond yields in emerging market economies (EMEs). We explicitly account for exchange rate expectations and uncertainty around them, as measured by exchange rate volatility. The analysis points to an important influence of exchange rate risk: when exchange rate volatility increases, investors require a larger yield compensation for holding EME local currency sovereign bonds. The impact of exchange rate volatility has become more important since May 2013, when investors realised that the Federal Reserve may reduce the scale of its asset purchases sooner than previously expected.
    Keywords: emerging markets, exchange rate risk, local currency sovereign bond yields
    Date: 2014–12
  13. By: Guillermo Escudé (Central Bank of Argentina )
    Abstract: A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.
    Keywords: DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy
    JEL: E58 O24
    Date: 2014–08
  14. By: Mulatu F. Zerihun, Marthinus C. Breitenbach and Francis Kemegue
    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
  15. By: Eijffinger, S.C.W. (Tilburg University, School of Economics and Management )
    Abstract: When comparing the transparency of the ECB now with the transparency of the ECB about one decade ago, we notice that transparency still can be improved in a few ways. In particular the disclosure related to the ways decisions are reached and the disclosure on its policy (what is the envisioned path of policy?) could be improved. We call for action and in particular we suggest to release minutes and voting records, while also engaging in more explicit and concrete forward guidance. At the same time, we call for a reflection on the institutional setup of the ECB. This is less urgent than the reform with respect to transparency, but in the medium term a necessary exercise. We believe that also in the 8th term of the European Parliament, the Monetary Dialogue will have a role in spurring the debate and possibly influencing the ECB, as it has done in the past.
    Date: 2015
  16. By: Giacomo Carboni ; Christoffer Kok (European Central Bank ); Matthieu Darrak Paries
    Abstract: The financial crisis highlighted the importance of systemic risks and of policies that can be employed to prevent and mitigate them. Several recent initiatives aim at establishing institutional frameworks for macro-prudential policy. As this process advances further, substantial uncertainties remain regarding the transmission channels of macro-prudential instruments as well as the interactions with other policy functions, and monetary policy in particular. This paper provides an overview and some illustrative model simulations using an estimated DSGE model for the euro area of the macroeconomic interdependence between macro-prudential instruments and monetary policy.
    Date: 2014
  17. By: Domanski, Dietrich (Bank for International Settlements ); Moessner, Richhild (Bank for International Sentiments ); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.) )
    Abstract: During the 2007-2010 financial crisis, central banks accumulated a vast amount of experience in acting as lender of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the emergency liquidity assistance since 2007 has largely adhered to Bagehot's dictums of lending freely against good collateral to solvent institutions at a penalty rate. But there were many exceptions to these rules. Those exceptions illuminate the situations where the lender of last resort role of central banks is most difficult. They also highlight key challenges in designing lender of last resort policies going forward.
    Keywords: Banking crisis; central bank liquidity; lender of last resort
    JEL: E58 F31 N10
    Date: 2014–05–14
  18. By: Gabriel Fagan (Institute for International Integration Studies, Trinity College Dublin ); Paul McNelis (Graduate School of Business Administration, Fordham University, New York )
    Abstract: This paper examines how membership of a monetary union affects macroeconomic adjustment of Euro Area countries to sudden stops.We focus on a key difference between a standard peg and a monetary union: the availability of external financing from the common centralbank via the TARGET system. For this purpose, we use a modified version of the Mendoza (2010) model which incorporates central bankfinancing, based on an empirical analysis of TARGET flows. Our results show that the availability of such financing greatly mitigates thecollapse in GDP, consumption and investment during sudden stops (relative to a regime in which such financing is not available). However,a welfare analysis shows that TARGET financing only results in modest welfare gains in the affected country, since it exacerbates thetendency towards over-borrowing, leading to an increased incidence of sudden stop episodes.Length: 68 pages
    Keywords: Sudden stops, Target Balances, European Monetary Union
    JEL: E52 E62 F41
    Date: 2014–12
  19. By: Carrera, César (Banco Central de Reserva del Perú ); Pérez-Forero, Fernando (Banco Central de Reserva del Perú ); Ramírez-Rondán, Nelson (Banco Central de Reserva del Perú )
    Abstract: Emerging economies were largely affected because of FED's quantitative easing (QE) policies. This paper assesses the impact of these measures in terms of key macroeconomic variables for a small open economy (SOE) such as Peru. We identify QE policy shocks in a SVAR with Block Exogeneity (Zha, 1999) and we impose a mixture of zero and sign restrictions (Arias et al., 2014). In addition, following Pesaran and Smith (2014), we implement a counterfactual exercise in order to gauge the differences between two scenarios: with and without QE policies. Overall, we find that QE policies had significant effects over financial variables such as aggregate credit and the exchange rate. On the other hand, we find small but significant effects over inflation and output in the medium run.
    Keywords: Quantitative Easing, Structural Vector Autoregressions, Sign Restrictions, Counterfactual analysis
    JEL: E43 E51 E52 E58
    Date: 2014–12
  20. By: Costas Azariadis (Washington University and Federal Reserve Bank of St. Louis )
    Abstract: This essay evaluates two central bank policy tools, capital requirements and lending of last resort, designed to avert financial panics in the context of endowment economics with complete markets and limited borrower commitment. Credit panics are self-fulfilling shocks to expected credit conditions which cause transitions from an optimal but fragile steady state to a suboptimal state with zero unsecured credit. The main findings are: (i) Countercyclical reserve policies protect the optimum equilibrium against modest shocks but are powerless against large shocks. (ii) If we ignore private information and central banks inefficiencies, this class of models bears out Bagehot’s 1873 claim in Lombard Street: panics are averted if central banks stand ready to lend at a rate somewhat above the one associated with the optimal state.
    Keywords: bank panics; last resort; capital requirements; credit conditions
    JEL: E52 E58 E44
    Date: 2013–07
  21. By: Eisei Ohtaki
    Abstract: This article considers an overlapping generations model with nominal idiosyncratic shocks. Such shocks are described as if they are exogenous nominal taxes/subsidies and cause nondegenerate ex-post distributions of money. We then show that the optimal money growth rate exists and is greater than one.
  22. By: Sami Alpanda ; Serdar Kabaca
    Abstract: This paper evaluates the international spillover effects of large-scale asset purchases(LSAPs) using a two-country dynamic stochastic general-equilibrium model with nominal and real rigidities, and portfolio balance effects. Portfolio balance effects arise from imperfect substitution between short- and long-term bond portfolios in each country, as well as between domestic and foreign bonds within these portfolios. We show that LSAPs lower both domestic and foreign long-term yields, and stimulate economic activity in both countries. International spillover effects become larger as the steady-state share of long-term U.S. bond holdings increases in the rest-of-the-world portfolio, as the elasticity of substitution between short- and long-term bonds decreases, or as the elasticity of substitution between domestic and foreign bonds increases. We also find that U.S. asset purchases that generate the same output effect as U.S. conventional monetary policy have larger international spillover effects. This is because portfolio balance effects appear to be stronger under unconventional policy, and foreigners’ U.S. bond holdings are heavily weighted toward long-term bonds.
    Keywords: International topics; Transmission of monetary policy; Economic models
    JEL: E52 F41
    Date: 2015
  23. By: Givens, Gregory ; Reed, Robert
    Abstract: We use disaggregated data on the components of private fixed investment (PFI) to estimate industry-level responses of real investment and capital prices to unanticipated monetary policy. The response functions derive from a restricted large-scale VAR estimated over 1959-2007. Our results point to significant cross-sector heterogeneity in the behavior of PFI prices and quantities. For assets belonging to the equipment category of fixed investment, we find that quantities rather than prices absorb most of the fallout from a policy shock. By contrast, the price effects tend to be higher and the output effects lower for nonresidential structures.
    Keywords: Investment, Monetary policy, Disaggregate data, VAR
    JEL: E22 E32 E52
    Date: 2015–01–20
  24. By: Mauricio Villamizar-Villegas ; David Perez-Reyna
    Abstract: In this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions. We identify three main strands of literature: 1) that which advocates the use of sterilized interventions; 2) that which deems sterilized interventions futile; and 3) that which requires some market friction in order for sterilized interventions to be effective. We contribute to the literature in three important ways. First, by reviewing new theoretical models that have surfaced within the last decade. Second, by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct. And third, by only focusing on sterilized operations, which allows us to sidestep the effects induced by changes in the stock of money supply. Additionally, the models that we present comprise both a macro and micro-structure approach so as to provide a comprehensive view of the theory behind exchange rate intervention. Classification JEL: E52, E58, F31.
    Date: 2015–01
  25. By: dogru, bulent
    Abstract: Abstract: In this study, the relationship between inflation and inflation uncertainty is analyzed using Granger causality tests with annual inflation series covering the time period 1923 to 2012 for Turkish Economy. Inflation uncertainty is measured by Exponential Generalized Autoregressive Conditional Heteroskedastic model. Econometric findings suggest that although in long run the Friedman's hypothesis that high inflation increases inflation uncertainty is strongly supported, in short run the Holland hypothesis proposing that the increase in the inflation uncertainty decreases inflation is also supported for Turkish Economy. We also make analyses for subsample periods selected due to the major policy changes in Turkish economic history. The causality between inflation and inflation uncertainty in these subsample periods is mixed and depends on time period analyzed.
    Keywords: Inflation Uncertainty, Conditional Variance, Granger Causality, Exponential Generalized Autoregressive Conditional Heteroskedastic Model
    JEL: C4 C40 E40
    Date: 2014

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