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on Monetary Economics |
| By: | Bauer, Michael D. (Federal Reserve Bank of San Francisco); Rudebusch, Glenn D. (Federal Reserve Bank of San Francisco) |
| Abstract: | Previous macro-finance term structure models (MTSMs) imply that macroeconomic state variables are spanned by (i.e., perfectly correlated with) model-implied bond yields. However, this theoretical implication appears inconsistent with regressions showing that much macroeconomic variation is unspanned and that the unspanned variation helps forecast excess bond returns and future macroeconomic fluctuations. We resolve this contradiction—or “spanning puzzle”—by reconciling spanned MTSMs with the regression evidence, thus salvaging the previous macro-finance literature. Furthermore, we statistically reject “unspanned” MTSMs, which are an alternative resolution of the spanning puzzle, and show that their knife-edge restrictions are economically unimportant for determining term premia. |
| Keywords: | yield curve; term structure models; macro-finance; unspanned macro risks; monetary policy |
| JEL: | E43 E44 E52 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2015-01&r=mon |
| By: | Oscar Jorda (Federal Reserve Bank of San Francisco and University of California, Davis); Moritz Schularick (University of Bonn and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); Alan M. Taylor (University of California, Davis and National Bureau of Economic Research and Centre for Economic Policy Research) |
| Abstract: | Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era. |
| Keywords: | Financial Crises, Monetary Policy, Leverage, Credit, House Prices, Local Projections, Instrumental Variables |
| JEL: | C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:312014&r=mon |
| By: | Mariano Kulish (School of Economics, Australian School of Business, the University of New South Wales); James Morley (School of Economics, Australian School of Business, the University of New South Wales); Tim Robinson (Melbourne Institute of Applied Economics and Social Research, University of Melbourne) |
| Abstract: | Motivated by the use of forward guidance, we propose a method to estimate DSGE models in which the central bank holds the policy rate fixed for an extended period. Private agents’ beliefs about how long the fixed-rate regime will last influences, among other observable variables, current output, inflation and interest rates of longer maturities. We estimate the shadow policy rate and construct counterfactual scenarios to quantify the severity of the zero lower bound constraint. Using the Smets and Wouters (2007) model, we find that the expected duration of the zero interest rate policy has been around 2 years, that the shadow rate has been around -3 per cent and that the zero lower bound has imposed a significant output loss. |
| Keywords: | zero lower bound, forward guidance |
| JEL: | E52 E58 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-32a&r=mon |
| By: | Giovanni Caggiano (University of Padova); Efrem Castelnuovo (University of Padova); Gabriela Nodari (University of Verona) |
| Abstract: | We employ a nonlinear VAR to document the asymmetric reaction of real economic activity to uncertainty shocks. An uncertainty shock occurring in recessions triggers an abrupt and deep drop followed by a quick rebound and a temporary overshoot. The same shock hitting in expansions induces a milder slowdown, a longer-lasting recovery, and no overshoot. The employment of linear models is shown to offer a distorted picture of the timing and the severity of heightened uncertainty. Monetary policy responds quite aggressively during bad times, and more mildly during booms. Counterfactual simulations point to monetary policy ineffectiveness during the first months after the shock, especially in recessions, and to policy effectiveness in the medium-term, especially during expansions. This holds true considering as policy tools both the federal funds rate and a long-term interest rate. Our results call for microfounded models admitting nonlinear effects of uncertainty shocks. |
| Keywords: | Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy, forward guidance. |
| JEL: | C32 E32 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0188&r=mon |
| By: | Jagjit S. Chadha; Alex Waters |
| Abstract: | We estimate a macro-finance yield curve model for both the nominal and real forward curve for the UK from 1993 to 2008. Our model is able to accommodate a number of key macroeconomic variables and allows us to estimate the instantaneous response of the yield curve and so gauge the impact of Quantitative Easing on forward rates. We find that 10 year nominal interest rates on average are lower by 46 basis points which can largely be explained by three main channels: portfolio balance; liquidity premium and signalling but there is no sizeable impact on real interest rates. |
| Keywords: | Term Structure of Interest Rates; Monetary Policy; Quantitative Easing |
| JEL: | E43 E44 E47 E58 E65 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1418&r=mon |
| By: | Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui |
| Abstract: | The euro zone crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. At the level of the whole euro zone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. The paper gives a new evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and eurobonds issuance. Three main results are obtained. Facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Implementation of eurobonds as a tool to partly mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 60% of GDP. Furthermore, eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire euro zone with stabilized current account imbalances. However, the settlement of a European Debt Agency in charge of the issuance of the eurobonds would face strong political obstacles. |
| Keywords: | Eurozone Crisis, Sustainable Adjustments, Exchange Rate Misalignments, Eurobonds, Interest Rate. |
| JEL: | C23 F31 F32 F37 F41 E12 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2015-03&r=mon |
| By: | Alejandro Rodríguez Arana (Department of Economics, Universidad Iberoamericana, Mexico City. Mexico) |
| Abstract: | When the central bank minimizes a quadratic loss function depending upon the inflation gap and the output gap, a negative association between the variance of inflation and the variance of output emerges. The variance of output will be higher the greater is the preference of the central bank for stabilizing inflation. The use of certain ad-hoc interest rate rules analyzed in the literature may break the described negative relation. Central banks could reduce both variances. Data mainly from the US suggests that central banks use adhoc interest rate rules more than the minimization of the quadratic loss function. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:uic:wpaper:0814&r=mon |
| By: | Auer, Raphael |
| Abstract: | Import competition from China is pervasive in the sense that for many good categories, the competitive environment that US firms face in these markets is strongly driven by the prices of Chinese imports, and so is their pricing decision. This paper quantifies the effect of the government-controlled appreciation of the Chinese renminbi vis-à-vis the USD from 2005 to 2008 on the prices charged by US domestic producers. In a panel spanning the period from 1994 to 2010 and including up to 519 manufacturing sectors, import price changes of Chinese goods pass into US producer prices at an average rate of 0.7, while import price changes that can be traced back to exchange rate movements of other trade partners only have mild effects on US prices. Further analysis points to the importance of trade integration, variable markups, and demand complementarities on the one side, and to the importance of imported intermediate goods on the other side as drivers of these patterns. Simulations incorporating these microeconomic findings reveal that a substantial revaluation of the renminbi would result in a pronounced increase of aggregate US producer price inflation. |
| Keywords: | China; exchange rate pass-through; inflation; monetary policy; price complementarities |
| JEL: | E31 E37 F11 F12 F14 F15 F16 F40 L16 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10344&r=mon |
| By: | Bingbing Dong (University of Virginia) |
| Abstract: | This paper examines the role of money in understanding the behavior of asset prices and whether and how monetary policy should react to asset prices such as stock prices and equity premiums. To do so, I introduce money via the form of transaction cost into a production economy with limited stock market participation where agents with lower inter-temporal elasticity of substitution (IES), called non-stockholders, have no access to stock market. In addition to facilitating transactions of consumption goods, money also redistributes wealth by countercyclically transferring resources from stockholders to non-stockholders, the main role of non-state contingent bonds. The benchmark model resolves quantitatively the risk premium puzzle and the risk-free return puzzle, matches macroeconomic behavior such as volatilities of output, consumption and investment, and is in line with empirically documented facts about money growth, inflation and asset prices in literature. This model is then used to evaluate alternative policies for money growth rates. I find that monetary policies are welfare improving for both stockholders and non-stockholders if they reduce equity premiums in the economy. These policies include a lower expected money growth, a pro-cyclical money growth rate, and growth rates of money being positively reacting to equity prices or equity premiums, all of which enhance the precautionary saving role of money. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:881&r=mon |
| By: | Farhi, Emmanuel; Gabaix, Xavier |
| Abstract: | We propose a new model of exchange rates, based on the hypothesis that the possibility of rare but extreme disasters is an important determinant of risk premia in asset markets. The probability of world disasters as well as each country's exposure to these events is time-varying. This creates joint fluctuations in exchange rates, interest rates, options, and stock markets. The model accounts for a series of major puzzles in exchange rates: excess volatility and exchange rate disconnect, forward premium puzzle and large excess returns of the carry trade, and comovements between stocks and exchange rates. It also makes empirically successful signature predictions regarding the link between exchange rates and telltale signs of disaster risk in currency options. |
| Keywords: | disaster risk; forward premium puzzle; international macro-finance puzzles; risk-reversals; uncovered interest rate parity |
| JEL: | G12 G15 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10334&r=mon |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | We show that banks' cash flow exposure to interest rate risk, or income gap, plays a crucial role in their lending behavior following monetary policy shocks. In a first step, we show that the sensitivity of bank profits to interest rates increases significantly with their income gap, even when banks use interest rate derivatives. In a second step, we show that the income gap also predicts the sensitivity of bank lending to interest rates, both for commercial & industrial loans and for mortgages. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile. We conclude that banks' exposure to interest rate risk is an important determinant of the bank-level intensity of the lending channel. |
| Keywords: | bank lending; interest rate risk; monetary policy |
| JEL: | E44 E52 G21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10300&r=mon |
| By: | Liang Wang (University of Hawaii at Manoa) |
| Abstract: | This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous price dispersion, which is generated by sellers posting prices and buyers costly searching for low prices. We identify three channels through which inflation affects welfare. The interaction of real balance channel and price posting channel generates a welfare cost, at 10% annual inflation, equal to 3.23% of steady state consumption; if either channel is shut down, the welfare cost decreases to less than 0.15%. Search channel reduces welfare cost by more than 50%. The aggregate effect of inflation on welfare is nonmonotonic. |
| Keywords: | Nash Bargaining, Competitive Search, Indivisibility, Multiplicity, Uniqueness |
| JEL: | D51 E40 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:201429&r=mon |
| By: | Dong He (International Monetary Fund); Paul Luk (Hong Kong Baptist University and Hong Kong Institute for Monetary Research); Wenlang Zhang (Hong Kong Monetary Authority) |
| Abstract: | The use of international currencies in the global financial system is not symmetric: while a few currencies have been primarily used as investing currencies, a few others have mostly served as funding currencies; only a handful have a better balance functioning as both investing and funding currencies. This paper develops a three-currency model to study the determinants of the demand for assets and liabilities denominated in an international currency, and attempts to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be very attractive to investors from high-income economies and fund-raisers from emerging market economies. |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012015&r=mon |
| By: | Marco Airaudo; Salvatore Nisticò; Luis-Felipe Zanna |
| Abstract: | We explore the stability properties of interest rate rules granting an explicit response to stock prices in a New-Keynesian DSGE model populated by Blanchard-Yaari non-Ricardian households. The constant turnover between long-time stock holders and asset-poor newcomers generates a financial wealth channel where the wedge between current and expected future aggregate consumption is affected by the market value of financial wealth, making stock prices non-redundant for the business cycle. We find that if the financial wealth channel is sufficiently strong, responding to stock prices enlarges the policy space for which the rational expectations equilibrium is both determinate and learnable (in the E-stability sense of Evans and Honkapohja, 2001). In particular, the Taylor principle ceases to be necessary and also mildly passive policy responses to inflation lead to determinacy and E-stability. Our results appear to be more prominent in economies characterized by a lower elasticity of substitution across differentiated products and/or more rigid labor markets. |
| Date: | 2015–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/16&r=mon |
| By: | Eddie Gerba; Klemens Hauzenberger |
| Abstract: | We contribute to the growing empirical literature on monetary and fiscal interactions by applying a sign restriction identification scheme to a structural TVP-VAR in order to disentangle and evaluate the policy shocks and policy transmissions. This in turn allows us to study the Great Recession in a consistent fashion. Four facts stand out from our findings. We observe significant differences in the endogenous responses to shocks in particular between the Volcker period and the Great Recession, and find that monetary policy reacts more aggressively during Volcker chairmanship and fiscal policy during the Great Recession to stabilize the economy. Second, impulse responses confirm that there is a high degree of interactions between monetary and fiscal policies over time. Third, in the forecast error variance decomposition we find that while government revenues largely influence decisions on government spending, government spending does not influence tax decisions. Fourth and final, our analysis of the fiscal transmission channel reveals that tax cuts, because of their crowding-in effects, are more effective in expanding output than government spending rises, since the tax multiplier is higher and more persistent. In light of the current recession and the zero lower bound of the interest rate, tax cuts can, by providing the right incentives to the private sector, result in high and very persistent growth in output if private agent expectations regarding the length and the financing structure of the fiscal expansion are delicately managed jointly by the two authorities. |
| Keywords: | time varying parameter VAR; sign restrictions; Markov-Chain Monte Carlo; US economic structure; fiscal transmission channel |
| JEL: | C11 C32 C52 E61 E63 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:56393&r=mon |
| By: | Samuel Wills |
| Abstract: | This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking inflation. Recession is avoided by a Taylor rule that accommodates changes in the natural level of output, which closely approximates optimal policy. Central banks have an incentive to exploit oil revenues by appreciating the terms of trade, creating “Dutch disease” and a deflationary bias which is overcome by committing to future policy. |
| Keywords: | natural resources; oil; optimal monetary policy; small open economy; news shock |
| JEL: | E52 E62 F41 O13 Q30 Q33 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58104&r=mon |
| By: | Leonardo Melosi (Federal Reserve Bank of Chicago) |
| Abstract: | We develop a DSGE model in which the policy rate signals to price setters the central bank's view about macroeconomic developments. The model is estimated with likelihood methods on a U.S. data set that includes the Survey of Professional Forecasters as a measure of price setters' inflation expectations. The estimated model with signaling effects delivers large and persistent real effects of monetary disturbances, even though the average duration of price contracts is fairly short. While the signaling effects do not substantially alter the transmission of technology shocks, they bring about deflationary pressures in the aftermath of positive demand shocks. In the 1970s, the Federal Reserve's disinflation policy, which was characterized by gradual increases in the policy rate, was counterproductive because it ended up signaling inflationary shocks. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:830&r=mon |
| By: | Ryota Nakatani (Bank of Japan) |
| Abstract: | Is there any factor that is not analyzed in the literature but is important for preventing currency crises? What kind of shock is important as a trigger of a currency crisis? Given the same shock, how does the impact of a currency crisis differ across countries depending on the degree of each country’s structural vulnerability? To answer these questions, this paper analyzes currency crises both theoretically and empirically. In the theoretical part, I argue that exports are an important factor to prevent currency crises that has not been frequently analyzed in the existing theoretical literature. Using the third generation model of currency crises, I derive a simple and intuitive formula that captures an economy’s structural vulnerability characterized by the elasticity of exports and repayments for foreign currency denominated debt. I graphically show that the possibility of currency crisis equilibrium depends on this structural vulnerability. In the empirical part, I use unbalanced panel data comprising 51 emerging countries from 1980 to 2011. The results obtained here are consistent with the prediction of the theoretical models. First, I found that monetary tightening by the central banks can have a significant effect on exchange rates. Second, I found that both productivity shocks in the real sector and shocks to a country’s risk premium in the financial markets affect exchange rate dynamics, while productivity shocks appeared more quantitatively important during the Asian currency crisis. Finally, the structural vulnerability of the country plays a statistically significant role for propagating the effects of the shock. |
| Keywords: | Currency Crisis; Foreign Currency Debt; Exports; Productivity Shock; Risk Premium; Monetary Policy; Elasticity |
| JEL: | E22 E4 E5 F1 F3 F4 G15 G2 O43 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:043&r=mon |
| By: | Sohrab Rafiq |
| Abstract: | This paper explores the effect of U.S. unconventional monetary policy (QE2) on a group of frontier developing economies (FDEs) in Asia. This paper finds that spillovers emanating from the U.S. on FDEs in Asia have been small. The relative insulation of emerging Asia from the global financial cycle can likely be attributed to the presence of managed capital accounts coupled with shallow financial markets. Should U.S. monetary policy begin to normalize the direct first-round impact on developing Asia is likely to be small. |
| Date: | 2015–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/18&r=mon |
| By: | Lien Laureys |
| Abstract: | When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool’s composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexibleprice allocation is no longer constrained-efficient even when the standard Hosios (1990) condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. Although optimal price inflation is no longer zero, strict inflation targeting is shown to stay close to the optimal policy. |
| JEL: | N0 R14 J01 F3 G3 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58006&r=mon |
| By: | Nkunde Mwase; Francis Y. Kumah |
| Abstract: | The economic literature has examined deposit dollarization in nominal terms, typically focusing on the ratio of foreign currency deposits to broad money. However, while private agent demand for foreign currency may remain unchanged in foreign currency terms, there could be large fluctuations in the dollarization ratio simply due to exchange rate movements. This paper proposes a new approach to measuring dollarization that removes these exchange rate effects, and demonstrates that beyond the variance of inflation and depreciation, the level of inflation and size of depreciation also matter for dollarization. While dollarization in nominal terms surged during the recent global financial crisis, there was a downward trend in real terms. Employing a set of econometric estimators, this paper investigates whether “real†dollarization during 2006–09 was associated with the crisis, and the role of initial macroeconomic conditions, quality of institutions, risk aversion, and prudential measures. We find that exchange rate appreciation and reductions in sovereign risk do moderate dollarization; but the results for global volatility have low statistical significance, perhaps because global shocks tend to preserve, to a large extent, relative attractiveness of foreign assets. Nonetheless, estimated impulse-response functions point to a large but short-lived positive impact of global volatility on dollarization, which could reflect economic agents heightened concerns about spillover effects of global uncertainty on the domestic economy. |
| Keywords: | Dollarization;Low-income developing countries;Global Financial Crisis 2008-2009;Exchange rate appreciation;Sovereign risk;Econometric models;deposit dollarization, financial crisis, GMM, impulse response, flight to quality. |
| Date: | 2015–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/12&r=mon |
| By: | Adam Hayes (Department of Economics, New School for Social Research) |
| Abstract: | This paper aims to identify the likely source(s) of value that cryptocurrencies exhibit in the marketplace using cross sectional empirical data examining 66 of the most used such 'coins'. A regression model was estimated that points to three main drivers of cryptocurrency value: the aggregate computational power employed in mining for units of the cryptocurrency; the rate of unit production; and the cryptologic algorithm used for the protocol. Bitcoin-denominated relative prices were used, avoiding much of the price volatility associated with the dollar price of Bitcoin. The resulting model can be used so better understand the drivers of value observed in cryptocurrencies. These findings may also have implications in understanding other assets such as commodity forms of money. |
| Keywords: | Bitcoin, cryptocurrencies, altcoins, asset pricing, money, payment systems, currency exchanges, quantitative analysis |
| JEL: | C3 C51 E42 E47 G12 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:new:wpaper:1406&r=mon |
| By: | Emanuele Bacchiocchi (University of Milano); Efrem Castelnuovo (University of Padova); Luca Fanelli (University of Bologna) |
| Abstract: | We employ a novel identification scheme to quantify the macroeconomic effects of monetary policy shocks in the United States. The identification of the shocks is achieved by exploiting the instabilities in the contemporaneous coefficients of the structural VAR (SVAR) and in the covariance matrix of the reduced-form residuals. Different volatility regimes can be associated with different transmission mechanisms of the identified structural shocks. We formally test and reject the stability of our impulse responses estimated with post-WWII U.S. data by working with a break in macroeconomic volatilities occurred in the mid-1980s. We show that the impulse responses obtained with our non-recursive identification scheme are quite similar to those conditional on a standard Cholesky-SVARs estimated with pre-1984 data. In contrast, recursive vs. non-recursive identification schemes return substantially different macroeconomic reactions conditional on Great Moderation data, in particular as for inflation and a long-term interest rate. Using our non-recursive SVARs as auxiliary models to estimate a small-scale new-Keynesian model of the business cycle with an impulse response function matching approach, we show that the instabilities in the estimated VAR impulse responses are informative as for the calibration of some key-structural parameters. |
| Keywords: | structural break, recursive and non-recursive VARs, identification, monetary policy shocks, impulse responses. |
| JEL: | C32 C50 E52 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0181&r=mon |
| By: | Angus Armstrong; Monique Ebell |
| JEL: | E6 |
| Date: | 2013–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58368&r=mon |
| By: | Fratto, Chiara; Uhlig, Harald |
| Abstract: | Why was there no deflation and what accounts for inflation after 2008? We use the prominent pre-crisis Smets-Wouters (2007) model to address this question. We find that due to price markup shocks alone inflation would have been 1%higher than observed and 0.5% higher that the long-run average. Their standard deviation is similar to its pre-crisis level. Price markup shocks were also responsible for the slow recovery of employment, though not for the initial drop. Monetary policy shocks predict an inflation rate 0.5% below average. Government expenditure innovations do not contribute much either to inflation or to employment dynamics |
| JEL: | E31 E32 E52 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10306&r=mon |
| By: | Silvana Tenreyro; Gregory Thwaites |
| Abstract: | We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding. |
| Keywords: | asymmetric effects of monetary policy; transmission mechanism |
| JEL: | E32 E52 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:58376&r=mon |
| By: | Alberto Petrucci (Department of Economics and Finance, LUISS Guido Carli University) |
| Abstract: | This paper studies the optimal inflation rate in a transactions costs model with illegal immigration. Although unauthorized immigrants use domestic money for making transactions and consume in the host country, their welfare does not enter the objective function of the Ramsey planner, because of their unofficial status. In this environment, the Friedman rule is nonoptimal, when only an income tax is available, as the inflation tax makes it possible to collect revenues from illegal immigrants, who are difficult to subject to taxation. When a consumption tax –that illegal immigrants have to pay when buying consumption goods in the host country– is also available, the zero inflation tax prescription is efficient only if the consumption-money ratio of domestic consumers is not greater than the illegal immigrants’ one. |
| Keywords: | Illegal immigration; Transaction costs technology; Optimal inflation tax; Income tax; Consumption tax. |
| JEL: | E62 H22 J22 O41 |
| URL: | http://d.repec.org/n?u=RePEc:lui:celegw:1502&r=mon |
| By: | Yuelin Liu (School of Economics, Australian School of Business, the University of New South Wales) |
| Abstract: | This paper develops a New Keynesian model with search frictions in which generated frictional unemployment is consistent with the time series of involuntary unemployment collected by the U.S. Bureau of Labor Statistics. Thus, it can shed light on the relevant impact of labor market frictions and policy interventions on the observed unemployment about which policy makers and the public are concerned. The data-consistent unemployment is achieved in the model via introduction of partial consumption insurance and an endogenous labor force participation channel. In particular, I find that allowing for endogenous labor force participation greatly improves the model fit for U.S. data. It appears that the price markup shock and matching efficiency shock are the two key driving forces of unemployment fluctuations. Monetary policy that stabilizes the participation gap can be welfare improving. |
| Keywords: | New Keynesian DSGE, Involuntary unemployment, Endogenous labor force participation, Search and matching, Bayesian inference |
| JEL: | C11 E24 E31 E32 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2014-41&r=mon |
| By: | Mele, Antonio (University of Surrey); Molnar, Krisztina (Dept. of Economics, Norwegian School of Economics and Business Administration); Santoro, Sergio (Bank of Italy) |
| Abstract: | We show that price level stabilization is not optimal in an economy where agents have incomplete knowledge about the policy implemented and try to learn it. A systematically more accommodative policy than what agents expect generates short term gains without triggering an abrupt loss of confi dence, since agents update expectations sluggishly. In the long run agents learn the policy implemented, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents suffer the corresponding welfare losses. However, these losses are outweighed by short term gains from the learning phase. |
| Keywords: | Price level stabilization; expectations. |
| JEL: | C62 D83 D84 E52 |
| Date: | 2014–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhheco:2015_001&r=mon |
| By: | Grossman, Richard; Rockoff, Hugh T |
| Abstract: | In this paper we trace the evolution of the lender of last resort doctrine—and its implementation—from the nineteenth century through the panic of 2008. We find that typically the most influential economists “fight the last war”: formulating policy guidelines that would have dealt effectively with the last crisis or in some cases the last two or three. This applies even to the still supreme voice among lender-of-last-resort theorists, Walter Bagehot, who wrestled with the how to deal with the financial crises that hit Britain between the end of the Napoleonic Wars and the panic of 1866. Fighting the last war may leave economists unprepared for meeting effectively the challenge of the next war. |
| Keywords: | Bagehot; Bank of England; central banks; lender of last resort; subprime crisis |
| JEL: | B0 N2 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10361&r=mon |
| By: | Alejandro Rodríguez Arana (Department of Economics, Universidad Iberoamericana, Mexico City. Mexico) |
| Abstract: | When the central bank minimizes a loss function depending upon the variability of inflation and the variability of output, the resultant interest rate policy rule is the so-called Taylor rule. In this context, the form and the parameters of the IS curve- whether this one is the old Keynesian function or a version of the Euler equation in output (the new IS)- are irrelevant in the determination of inflation and output. The solution of the model shows that the expected value of output is the natural one and the expected value of inflation is the target of the central bank. There is a tradeoff between the variances of these variables (inflation and output), nonetheless. Output and the real rate of interest will be more variable the more the central bank worries about the stability of inflation around its target. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:uic:wpaper:0714&r=mon |
| By: | Fratzscher, Marcel; Rieth, Malte |
| Abstract: | The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries. |
| Keywords: | bank bailout; banks; credit risk; heteroscedasticity; monetary policy; sovereigns; spillovers |
| JEL: | E52 E60 G10 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10370&r=mon |
| By: | Rachel A. Epstein; Martin Rhodes |
| Abstract: | European states have a long history of banking sector nationalism. Control over credit allocation is believed to contribute to economic development and competitiveness goals, insulation from external economic shocks, and control over monetary policy. This paper explains the potentially dramatic loss in domestic control over banks created by the European Banking Union (EBU). First, we argue that ongoing liberalization in the global and European economies has made banking sector protectionism both more costly and conflictual. Second, we contend that because many of the biggest banks have internationalized their operations, they now prefer centralized European regulation and supervision. Third, supporting a modified neofunctionalist argument, we find that behind the sometimes frenetic intergovernmental bargaining in 2012-14, it is primarily the European Commission and the European Central Bank that have pushed Banking Union ahead. Supranational institutions have argued, with some success, that they have unique capacity to solve collective action and prisoners’ dilemma problems. Contrary to accepted wisdom, Germany has not set or limited the Banking Union agenda to a great extent, in part because of its own internal divisions. Moreover, the Commission and the ECB have managed at critical junctures to isolate Germany to secure the country’s assent to controversial measures. |
| Keywords: | supranationalism; protectionism; regulation; fiscal policy; European Central Bank; European Commission |
| Date: | 2014–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:erp:kfgxxx:p0061&r=mon |
| By: | Bullard, James B. (Federal Reserve Bank of St. Louis) |
| Abstract: | St. Louis Fed President James Bullard evaluated FOMC forecasts for 2014 and discussed implications for monetary policy in 2015. During an event in Chicago, he noted that the FOMC has been surprised in the same way two years in a row regarding its forecasts. He said that the nature of the surprise pulls the FOMC in two different directions on monetary policy. |
| Date: | 2015–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlps:242&r=mon |
| By: | Baerg, Nicole Rae; Lowe, Will |
| Abstract: | Scholars often use Federal Open Market Committee (FOMC) votes to estimate the preferences of central bankers. However, rarely do committee members on the FOMC cast dissenting votes. This article demonstrates the usefulness of using what central bankers say in FOMC meetings rather than how they vote to better measure central bank preferences. Using automated text analysis tools and scaling methods, we develop a new measure of central bank preferences on the FOMC leading up to the financial crisis (2005 - 2008). |
| Keywords: | Central Banking, Federal Reserve Bank, Monetary Policy, Ideal Point Estimation, Textual Analysis |
| JEL: | E52 E58 |
| Date: | 2015–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:61534&r=mon |
| By: | Giovanni Pellegrino (University of Verona) |
| Abstract: | This paper investigates the interaction between uncertainty and monetary policy by estimating a non-linear VAR with US post-WWII data. The uncertainty indicator is treated both as an endogenous variable in the VAR and as the transition indicator discriminating "high" vs. "low" uncertainty states. The impact of monetary policy shocks in different phases of the "uncertainty cycle" is assessed via the computation of Generalized Impulse Response Functions. Monetary policy shocks are found to be less effective when uncertainty is high, with the peak reactions of a battery of real variables being about two-thirds milder than those conditional on an initially low level of uncertainty. The framework is then put at work to investigate the effects of uncertainty shocks in the presence of the Zero Lower Bound. The "drop and rebound" response of real variables to uncertainty shocks documented by Bloom (2009) is found to be present only if the policy rate is a long way from its ZLB. Conversely, an uncertainty shock occurring when the economy is near the ZLB triggers longer-lasting recessions and does not lead to any significant ÒreboundÓ. |
| Keywords: | Monetary policy shocks, Uncertainty shocks, non-linear Structural VAR, Interacted-VAR, Generalized impulse responses, Zero Lower Bound. |
| JEL: | C32 E32 E52 E61 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0184&r=mon |
| By: | Plakandaras, Vasilios (Democritus University of Thrace, Department of Economics); Gogas, Periklis (Democritus University of Thrace, Department of Economics); Gupta, Rangan (University of Pretoria, Department of Economics); Papadimitriou, Theophilos (Democritus University of Thrace, Department of Economics) |
| Abstract: | In this paper we evaluate inflation persistence in the U.S. using long range monthly and annual data. The importance of inflation persistence is crucial to policy authorities and market participants, since the level of inflation persistence provides an indication on the susceptibility of the economy to exogenous shocks. Departing from classic econometric approaches found in the relevant literature, we evaluate inflation persistence through the nonparametric Hurst exponent within both a global and a rolling window framework. Moreover, we expand our analysis to detect the potential existence of chaos in the data generating process, in order to enhance the robustness of our conclusions. Overall, we find that inflation persistence is high from 1775 to 2013 for the annual dataset and from February 1876 to May 2014 in monthly frequency, respectively. Especially from the monthly dataset, the rolling window approach allows us to derive that inflation persistence has reached to historically high levels in the post Bretton Woods period and remained there ever since. |
| Keywords: | Inflation; Persistence; Hurst exponent; Detrended Fluctuation Analysis; Lyapunov exponent |
| JEL: | C14 E31 E60 |
| Date: | 2015–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:duthrp:2014_012&r=mon |
| By: | Smith, Andrew Lee (Federal Reserve Bank of Kansas City); Keating, John W.; Kelly, Logan J.; Valcarcel, Victor J. |
| Abstract: | In late 2008, deteriorating economic conditions led the Federal Reserve to lower the federal funds rate to near zero and inject massive liquidity into the financial system through novel facilities. The combination of conventional and unconventional measures complicates the challenging task of characterizing the effects of monetary policy. We develop a novel method of identifying these effects that maintains the classic assumptions that a central bank reacts to output and the price level contemporaneously and may only affect these variables with a lag. A New-Keynesian DSGE model augmented with a representative financial structure motivates our empirical specification. The equilibrium model provides theoretical support for our choice of different series to replace variables that were popular in models of monetary policy but became problematic in the aftermath of the 2008 financial crisis. One of our most important innovations is to utilize the Divisia M4 index of money as the policy indicator variable. The model is bolstered by its ability to produce plausible responses to a monetary policy shock in samples that include or exclude the recent crisis period. |
| Keywords: | Monetary policy rules; Dynamic Stochastic General Equilibrium (DSGE) models; money; output puzzle; price puzzle; liquidity puzzle; financial crisis; Divisia; Identification assumptions; Structural Vector Autoregressions (SVARs) |
| JEL: | E3 E4 E5 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp14-11&r=mon |