nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒02‒11
28 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. International Spillovers of Monetary Policy: US Federal Reserve's Quantitative Easing and Bank of Japan's Quantitative and Qualitative Easing By Kawai, Masahiro
  2. The transmission of monetary policy operations through redistributions and durable purchases By Vincent Sterk; Silvana Tenreyro
  3. Unconventional monetary policy in an open economy By Gieck, Jana
  4. Trilemma, not dilemma: financial globalisation and Monetary policy effectiveness By Georgiadis, Georgios; Mehl, Arnaud
  5. Mortgages and monetary policy By Carlos Garriga; Finn E. Kydland; Roman Šustek
  6. Exchange Rate Dynamics under Financial Market Frictions By Cristina Terra; Hyunjoo Ryou
  7. Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the U.S. By Pang, Ke; Siklos, Pierre L.
  8. Optimal monetary policy response to endogenous oil price fluctuations By Arnoud Stevens
  9. Switching to Exchange Rate Flexibility? The Case of Central and Eastern European Inflation Targeters By Andrej Drygalla
  10. Rehypothecation By Andolfatto, David; Martin, Fernando M.; Zhang, Shengxing
  11. Differences in monetary policies between two hypothetical closed economies:one which is concerned with avoiding a large negative output gap and the other which is not By Gunaratna, Thakshila
  12. Transparency and deliberation within the FOMC: a computational linguistics approach By Stephen Hansen; Michael McMahon; Andrea Prat
  13. The Power of Forward Guidance Revisited By Alisdair McKay; Emi Nakamura; Jón Steinsson
  14. "The Repeal of the Glass-Steagall Act and the Federal Reserve's Extraordinary Intervention during the Global Financial Crisis" By Yeva Nersisyan
  15. Output Gap Uncertainty and Real-Time Monetary Policy By Francesco Grigoli; Alexander Herman; Andrew Swiston; Gabriel Di Bella
  16. A Volatility and Persistence-Based Core Inflation By Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
  17. Nominal GDP Targeting for Developing Countries By Pranjul Bhandari; Jeffrey A. Frankel
  18. Limited Nominal Indexation of Optimal Financial Contracts By Meh, Césaire A.; Quadrini, Vincenzo; Terajima, Yaz
  19. Estimating US fiscal and monetary interactions in a time varying VAR By Eddie Gerba; Klemens Hauzenberger
  20. Is there any relationship between the rates of interest and profit in the U.S. economy? By Ivan Mendieta-Muñoz
  21. The net stable funding ratio requirement when money is endogenous By Kauko, Karlo
  22. Global liquidity regulation - Why did it take so long? By Clemens Bonner; Paul Hilbers
  23. Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test By Efrem Castelnuovo; Luca Fanelli
  24. Preferences for fair prices, cursed inferences, and the nonneutrality of money By Erik Eyster; Kristóf Madarász; Pascal Michaillat
  25. Bitcoin and the PPP Puzzle By Calebe de Roure; Paolo Tasca
  26. The international transmission of credit bubbles: theory and policy By Alberto Martin; Jaume Ventura
  27. Tracking the Exchange Rate Management in Latin America By César Carrera
  28. The evil force of borrowing and the weakness of Quantitative Easing By De Koning, Kees

  1. By: Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: This paper assesses the impact of unconventional United States (US) and Japanese monetary policies on emerging economies, and explores policy coordination issues to promote macroeconomic and financial stability in developed and emerging economies. The paper first considers a theoretical framework that allows us to analyze the impact of one country's monetary policy on other economies. There are two important theoretical predictions. One is that the greater the positive impact of monetary policy easing on a country's real output, the less its beggar-thy-neighbor impact on other countries. The other is that news on future changes in monetary policy can affect exchange rates and stock prices today as financial markets are inherently forward looking. The paper then examines the impact of the US Fed's QE policy on emerging economies, including the introduction of QE, the expectation of its tapering, and the anticipation of an eventual hike in the interest rate. It also discusses the implications of "Abenomics," particularly qualitative and quantitative easing (QQE) by the Bank of Japan (BOJ), for Asian emerging economies. It finds that the impact of BOJ QQE has been positive and, in contrast to US QE1, has not created negative consequences for emerging economies. The paper finally explores policy implications for both developed and emerging economies and suggests policies to be adopted at the country, regional and global levels, emphasizing the importance of communication among central banks and with the market and the need to strengthen global financial safety nets.
    Keywords: monetary policy; quantitative and qualitative easing; monetary policy spillover and coordination; us federal reserve; bank of japan
    JEL: E52 E58 F41 F42
    Date: 2015–01–23
  2. By: Vincent Sterk; Silvana Tenreyro
    Abstract: A large literature has documented statistically significant effects of monetary policy on economic activity. The central explanation for how monetary policy transmits to the real economy relies critically on nominal rigidities, which form the basis of the New Keynesian (NK) framework. This paper studies a different transmission mechanism that operates even in the absence of nominal rigidities. We show that in an OLG setting, standard open market operations (OMO) carried by central banks have important revaluation effects that alter the level and distribution of wealth and the incentives to work and save for retirement. Specifically, expansionary OMO lead households to front-load their purchases of durable goods and work and save more, thus generating a temporary boom in durables, followed by a bust. The mechanism can account for the empirical responses of key macroeconomic variables to monetary policy interventions. Moreover, the model implies that different monetary interventions (e.g., OMO versus helicopter drops) can have different qualitative effects on activity. The mechanism can thus complement the NK paradigm. We study an extension of the model incorporating labor market frictions.
    JEL: E1 E31 E32 E52 E58
    Date: 2013–11
  3. By: Gieck, Jana
    Abstract: The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument.
    Keywords: Unconventional Monetary Policy,Quantitative Easing,Asset Swaps,Open Economy DSGE,Currency Wars,Policy Coordination
    JEL: E02 E44 E52 G21 G28
    Date: 2014
  4. By: Georgiadis, Georgios (European Central Bank); Mehl, Arnaud (European Central Bank)
    Abstract: We investigate whether the classic Mundell-Flemming "trilemma" has morphed into a "dilemma" due to financial globalisation. According to the dilemma hypothesis, global financial cycles determine domestic financial conditions regardless of an economy's exchange rate regime and monetary policy autonomy is possible only if capital mobility is restricted. We find that global financial cycles indeed reduce domestic monetary policy effectiveness in more financially integrated economies. However, we also find that another salient feature of financial globalisation has the opposite effect and amplifies monetary policy effectiveness. Economies increasingly net long in foreign currency experience larger valuation effects on their external balance sheets in response to exchange rate movements triggered by monetary policy impluses. Overall, we find that the net effect of financial globalisation since the 1990s has been to amplify monetary policy effectiveness in the typical advanced and emerging market economy. Specifically, our results suggest that the output effect of a tightening in monetary policy has been stronger by 40% due to financial globalisation. Insofar as valuation effects can only play out if an economy's exchange rate is flexible, the choice of the exchange rate regime remains critical for monetary policy autonomy under capital mobility and in the presence of global financial cycles. Thus, our results suggest that the classic trilemma remains valid.
    JEL: E52 F30 F41
    Date: 2015–01–01
  5. By: Carlos Garriga; Finn E. Kydland; Roman Šustek
    Abstract: Mortgage loans are a striking example of a persistent nominal rigidity. As a result, under incomplete markets, monetary policy affects decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. Observed debt levels and payment to income ratios suggest the role of such loans in monetary transmission may be important. A general equilibrium model is developed to address this question. The transmission is found to be stronger under adjustable- than fixed-rate contracts. The source of impulse also matters: persistent inflation shocks have larger effects than cyclical fluctuations in inflation and nominal interest rates.
    Keywords: mortgages; debt servicing costs; monetary policy; transmission mechanism; housing investment
    JEL: E32 E52 G21 R21
    Date: 2013–12–05
  6. By: Cristina Terra; Hyunjoo Ryou (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper extends Dornbusch's overshooting model by proposing a generalized interest parity condition (GIP), which captures a sluggish adjustment on the asset market. The exchange rate model under the GIP is able to reproduce the delayed overshooting and the hump-shaped response to monetary shocks of both nominal and real exchange rates. Fur- thermore, we present empirical results for OECD member countries which fit the theoretical predictions.
    Keywords: Exchange rates; Interest rate parity; Overshooting; Purchasing power parity puzzle; Monetary policy
    JEL: E52 F31 F41 F47
    Date: 2015
  7. By: Pang, Ke (BOFIT); Siklos, Pierre L. (BOFIT)
    Abstract: Relying on quarterly data since 1998 we estimate, for China and the U.S., small scale econometric models that economize on the number of variables employed and yet are rich enough to provide useful insights about spillover effects between the two countries under different maintained assumptions about the exogeneity of the macroeconomic relationship between them. We conclude that inflation in China responds to credit shocks. Indeed, the monetary transmission mechanism in China resembles that of the US even if the channels through which monetary policy affects their respective economies differ. We also find that the monetary policy stance of the PBOC was helpful in mitigating the impact of the global financial crisis of 2008-9. Finally, spillovers from the US to China are significant and originate from both through the real and financial sectors of the US economy.
    Keywords: spillovers; monetary policy in China; dynamic factor models; credit
    JEL: C32 E52 E58
    Date: 2015–01–18
  8. By: Arnoud Stevens (Research Department, NBB)
    Abstract: Should the central bank seek to identify the underlying causes of oil price hikes in determining appropriate policy responses to them? Most likely not. Within a calibrated new-Keynesian model of Oil-Importing and Oil-Producing Countries, I derive the Ramsey policy and analyze optimal monetary policy responses to different sources of oil price fluctuations. I find that oil-specific demand and supply shocks call for similar policy responses, given the low substitutability of oil in production and the incompleteness of international asset markets.
    Keywords: Oil Prices, Optimal Monetary Policy, Ramsey Approach,Welfare Analysis
    JEL: E52 E61 Q43
    Date: 2015–01
  9. By: Andrej Drygalla
    Abstract: This paper analyzes changes in the monetary policy in the Czech Republic, Hungary, and Poland following the policy shift from exchange rate targeting to inflation targeting around the turn of the millennium. Applying a Markovswitching dynamic stochastic general equilibrium model, switches in the policy parameters and the volatilities of shocks hitting the economies are estimated and quantified. Results indicate the presence of regimes of weak and strong responses of the central banks to exchange rate movements as well as periods of high and low volatility. Whereas all three economies switched to a less volatile regime over time, findings on changes in the policy parameters reveal a lower reaction to exchange rate movements in the Czech Republic and Poland, but an increased attention to it in Hungary. Simulations for the Czech Republic and Poland also suggest their respective central banks, rather than a sound macroeconomic environment, being accountable for reducing volatility in variables like inflation and output. In Hungary, their favorable developments can be attributed to a larger extent to the reduction in the size of external disturbances.
    Keywords: Trade facilitation, Export diversification, International trade agreements, WTO
    JEL: F13 F14 F17
    Date: 2015–01
  10. By: Andolfatto, David (Federal Reserve Bank of St. Louis); Martin, Fernando M. (Federal Reserve Bank of St. Louis); Zhang, Shengxing (London School of Economics)
    Abstract: Rehypothecation refers to the practice of re-using (selling or pledging as collateral) an asset that has already been pledged as collateral for a loan. We develop a dynamic general equilibrium monetary model where an “asset shortage” motivates the rehypothecation of assets. We find that in high inflation-high interest rate economies, rehypothecation improves economic welfare, but that there is generally too much of it. We find that regulatory constraints that limit the practice can improve economic welfare.
    Keywords: rehypothecation; money; collateral
    JEL: E4 E5
    Date: 2014–12–13
  11. By: Gunaratna, Thakshila
    Abstract: This research is focused on the effect of varying output gap target bounds on monetary policy. Here, a mathematical theory known as the ‘Viability Theory’ is employed to approach this problem in the context of satisficing policies, as discussed by Nobel Prize winning Herbert Simon, [see Simon (1955)]. A closed economy’s monetary policy problem of controlling inflation is considered to be this sort of satisficing policy problem. The viability theory is used to form viability kernels (using VIKAASA), which are a collection of points from which evolutions can start and remain within a certain constraint set K given some restricted controls, [see Krawczyk and Kim(2009)]. Using VIKAASA one can build such kernels for various exogenously defined constraint sets K and policy instruments. This study contributes in filling a gap of knowledge about what the viable economic states are if the output gap is targeted. The main results of this research show that, when smaller than historically acceptable output gaps are targeted, the central banks should avoid high level inflation at extreme positive output gaps, while at lower output gap limits very small inflation should also be avoided. The former prescription should be realised by having higher level interest rates and the latter by having lower level interest rates. Early interest rates adjustments are always recommended for central banks to avoid extreme situations.
    Keywords: Viability theory; Viability kernels; Monetary policy problem
    JEL: C63 E52 E58
    Date: 2014–10–17
  12. By: Stephen Hansen; Michael McMahon; Andrea Prat
    Abstract: How does transparency, a key feature of central bank design, affect the deliberation of monetary policymakers? We exploit a natural experiment in the Federal Open Market Committee in 1993 together with computational linguistic models (particularly Latent Dirichlet Allocation) to measure the effect of increased transparency on debate. Commentators have hypothesized both a beneficial discipline effect and a detrimental conformity effect. A difference-in-differences approach inspired by the career concerns literature uncovers evidence for both effects. However, the net effect of increased transparency appears to be a more informative deliberation process.
    Keywords: monetary policy; deliberation; FOMC; transparency; career concerns
    JEL: D78 E52 E58
    Date: 2014–06
  13. By: Alisdair McKay; Emi Nakamura; Jón Steinsson
    Abstract: In recent years, central banks have increasingly turned to "forward guidance" as a central tool of monetary policy, especially as interest rates around the world have hit the zero lower bound. Standard monetary models imply that far future forward guidance is extremely powerful: promises about far future interest rates have huge effects on current economic outcomes, and these effects grow with the horizon of the forward guidance. We show that the power of forward guidance is highly sensitive to the assumption of complete markets. If agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to far future promises about interest rates. As a consequence, the ability of central banks to combat recessions using small changes in interest rates far in the future, is greatly reduced relative to the complete markets benchmark. We show that the effects of precautionary savings motives can be captured by a simplified version of our model that generates discounting in the representative agent's Euler equation. This discounted Euler equation can be easily included in standard business cycle models.
    JEL: E21 E40 E50
    Date: 2015–01
  14. By: Yeva Nersisyan
    Abstract: Before the global financial crisis, the assistance of a lender of last resort was traditionally thought to be limited to commercial banks. During the crisis, however, the Federal Reserve created a number of facilities to support brokers and dealers, money market mutual funds, the commercial paper market, the mortgage-backed securities market, the triparty repo market, et cetera. In this paper, we argue that the elimination of specialized banking through the eventual repeal of the Glass-Steagall Act (GSA) has played an important role in the leakage of the public subsidy intended for commercial banks to nonbank financial institutions. In a specialized financial system, which the GSA had helped create, the use of the lender-of-last-resort safety net could be more comfortably limited to commercial banks. However, the elimination of GSA restrictions on bank-permissible activities has contributed to the rise of a financial system where the lines between regulated and protected banks and the so-called shadow banking system have become blurred. The existence of the shadow banking universe, which is directly or indirectly guaranteed by banks, has made it practically impossible to confine the safety to the regulated banking system. In this context, reforming the lender-of-last-resort institution requires fundamental changes within the financial system itself.
    Keywords: Banks; Central Banking; Deregulation; Federal Reserve; Financial Crises; Glass-Steagall Act; Lender of Last Resort; Minsky; Regulation; Securitization; Shadow Banking
    JEL: B50 E50 E58 G10 G18
    Date: 2015–01
  15. By: Francesco Grigoli; Alexander Herman; Andrew Swiston; Gabriel Di Bella
    Abstract: Output gap estimates are subject to a wide range of uncertainty owing to data revisions and the difficulty in distinguishing between cycle and trend in real time. This is important given the central role in monetary policy of assessments of economic activity relative to capacity. We show that country desks tend to overestimate economic slack, especially during recessions, and that uncertainty in initial output gap estimates persists several years. Only a small share of output gap revisions is predictable ex ante based on characteristics like output dynamics, data quality, and policy frameworks. We also show that for a group of Latin American inflation targeters the prescriptions from typical monetary policy rules are subject to large changes due to output gap revisions. These revisions explain a sizable proportion of the deviation of inflation from target, suggesting this information is not accounted for in real-time policy decisions.
    Date: 2015–01–23
  16. By: Tito Nícias Teixeira da Silva Filho; Francisco Marcos Rodrigues Figueiredo
    Abstract: Intuitively core inflation is understood as a measure of inflation where noisy price movements are avoided. This is typically achieved by either excluding or downplaying the importance of the most volatile items. However, some of those items show high persistence, and one certainly does not want to disregard persistent price changes. The non-equivalence between volatility and (the lack of) persistence implies that when one excludes volatile items relevant information is likely to be discarded. Therefore, we propose a new type of core inflation measure, one that takes simultaneously into account both volatility and persistence. The evidence shows that such measures far outperform those based on either volatility or persistence. The latter have been advocated in the literature in recent years.
    Keywords: Inflation persistence;Oil prices;Commodity price fluctuations;Consumer price indexes;Brazil;Inflation measurement;Econometric models;Core inflation, inflation, persistence, volatility, triple weighted
    Date: 2015–01–21
  17. By: Pranjul Bhandari; Jeffrey A. Frankel
    Abstract: The revival of interest in nominal GDP (NGDP) targeting has come in the context of large advanced economies. We consider the case for NGDP targeting for mid-sized developing countries, in light of their susceptibility to supply shocks and terms of trade shocks. For India, in particular, one major exogenous supply shock is the monsoon rains. NGDP targeting splits the impact of supply shocks automatically between inflation and real GDP growth. In the case of annual inflation targeting (IT), by contrast, the full impact of an adverse supply shock or terms of trade shock is felt as a loss in real GDP alone. NGDP targeting automatically accommodates supply shocks as most central banks with discretion would do anyway, while retaining the advantage of anchoring expectations as rules are designed to do. We outline a simple theoretical model and derive the condition under which an NGDP targeting regime would dominate other regimes such as annual IT for achieving objectives of output and price stability. We go on to estimate for the case of India the parameters needed to ascertain whether the condition holds, particularly the slope of the aggregate supply curve. Estimates suggest that the condition may indeed hold.
    JEL: E5 F41
    Date: 2015–01
  18. By: Meh, Césaire A.; Quadrini, Vincenzo; Terajima, Yaz
    Abstract: We study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic and Ueda 1997. More constrained firms sign contracts that are less indexed to inflation and, as a result, their investment is more sensitive to nominal price shocks. We also find that the overall degree of nominal indexation increases with price uncertainty. An implication of this is that economies with higher inflation uncertainty are less vulnerable to a price shock of a given magnitude. The micro predictions of the model are tested empirically using macro and firm-level data from Canada.
    Keywords: Inflation uncertainty; Nominal indexation; Optimal contracts
    JEL: E21 E31 E44 E52
    Date: 2015–01
  19. 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: 2014
  20. By: Ivan Mendieta-Muñoz
    Abstract: This paper studies the empirical relationship between the Federal funds effective rate and the rate of profit or profit-to-capital ratio in the U.S. economy. The linkages between these two variables are studied: 1) at business-cycle frequencies using various filters and employing cross-correlation, regression and simulation analysis; and 2) using Vector Autoregressive models that unveil the dynamic interactions between the variables. The different empirical results reveal that positive shocks in the fed funds interest rate generate negative responses of the rate of profit, thus corroborating previous findings that show that a tight monetary policy is associated with lower aggregate profitability levels.
    Keywords: Fed funds effective real rate; rate of profit; U.S. economy; aggregate profitability
    JEL: E22 E40 E43
    Date: 2014–12
  21. By: Kauko, Karlo (Bank of Finland Research)
    Abstract: The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt.
    Keywords: net stable funding ratio; endogenous money; liquidity regulation
    JEL: E51 G21 G28
    Date: 2015–01–26
  22. By: Clemens Bonner; Paul Hilbers
    Abstract: The purpose of this paper is to assess the history of global liquidity regulation until the revised Basel III proposals in 2013 and to analyze the interaction of capital regulation and banks' liquidity buffers. Our analysis suggests that regulating capital is associated with declining liquidity uffers. The interaction of liquidity regulation and monetary policy as well as the view that regulating capital also addresses liquidity risks were important factors hampering harmonized liquidity regulation. It appears that crisis-related supervisory momentum is an important factor behind most agreements on regulatory harmonization. In line with that, the drying up of funding and the subsequent liquidity problems during the 2007-08 financial crisis played a large role in the development of the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
    Keywords: Regulation; Policy; Liquidity; Banks
    JEL: G18 G21 E42
    Date: 2015–01
  23. By: Efrem Castelnuovo (University of Padova); Luca Fanelli (University of Bologna)
    Abstract: We propose a novel identification-robust test for the null hypothesis that an estimated new-Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot-driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross-equation restrictions (CER) that the new Keynesian system places on its reduced form solution under determinacy. If the CER are not rejected, sunspot-driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second-step and invert an Anderson and Rubin-type test for the orthogonality restrictions (OR) implied by the system of Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite sample performance of the suggested identification-robust two-steps testing strategy by some Monte Carlo experiments and then apply it to a new-Keynesian AD/AS model estimated with actual U.S. data. In spite of some evidence of weak identification as for the ÒGreat ModerationÓ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness occurred in the late 1970s. Our identification-robust full-information confidence set for the structural parameters computed on the ÒGreat ModerationÓ regime turn out to be more precise than the intervals previously reported in the literature through Òlimited informationÓ methods.
    Keywords: Confidence set, Determinacy, Identification failures, Indeterminacy, Misspecification, new-Keynesian business cycle model, VAR system.
    JEL: C31 C22 E31 E52
    Date: 2014–07
  24. By: Erik Eyster; Kristóf Madarász; Pascal Michaillat
    Abstract: This paper explains the nonneutrality of money from two assumptions: (1) consumers dislike paying prices that exceed some fair markup on firms’ marginal costs; and (2) consumers under infer marginal costs from available information. After an increase in money supply, consumers underappreciate the increase in nominal marginal costs and hence partially misattribute higher prices to higher markups; they perceive transactions as less fair, which increases the price elasticity of their demand for goods; firms respond by reducing markups; in equilibrium, output increases. By raising perceived markups, increased money supply inflicts a psychological cost on consumers that can offset the benefit of increased output.
    Keywords: nonneutrality of money; fairness; cursedness; markups
    JEL: E10 E3 E31 E40
    Date: 2015–02
  25. By: Calebe de Roure; Paolo Tasca
    Abstract: This paper approaches the PPP puzzle by using the Bitcoin/US Dollar exchange rate. The use of the virtual currency as macroeconomic laboratory allows us to remove frictions that previously impeded the empirical demonstration of the law of one price. We show that price adjustments are still far from perfect due to information asymmetry between agents. Nevertheless, the real exchange rate is stationary and adjusts by 81% within one day. Finally, because of the different speed of information spread, good market arbitrage takes place in the Bitcoin economy but not in the US economy. Thus, we conclude that in a frictionless economy the PPP holds and the speed of arbitrage for the good market depends on the speed of information spread among agents.
    Keywords: bitcoin; purchase power parity; silk road
    JEL: J1
    Date: 2014–07–30
  26. By: Alberto Martin; Jaume Ventura
    Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal.
    Keywords: financial globalization, international capital flows, exchange rates, interest rates, asset bubbles, capital controls
    JEL: E32 E44 O40
    Date: 2015–01
  27. By: César Carrera (Banco Central de Reserva del Perú)
    Abstract: The exchange rate is one of the most important prices in any open economy. Tracking deviations from its long-run value may provide important information for policymakers. One way to track such deviations is to compute the distribution of exchange-rate observed values and compare them with those of Benford’s law. I document such cases for 15 Latin American countries, for the two most widely traded currencies. Latin American countries are small open economies that are characterized for having different degrees of dollarization and intervention in the forex market. This is an alternative view of how these characteristics play a role with respect to an implied equilibrium exchange rate.
    Keywords: Exchange rate, Forex, Benford’s law
    JEL: C16 F31 F41
    Date: 2015–01
  28. By: De Koning, Kees
    Abstract: The U.S. housing market crash in 2007-2008 was not caused overnight by an over-supply of new homes that could not be sold. It was caused by the new money flows into mortgages ever since 1998. What changed in 1998 was that mortgage funds were not only used for building new homes at a price in line with CPI inflation, but the volume of such funds injected allowed the housing stock to appreciate in price over and above the CPI inflation level. In 1998 still only 16.3% of funds provided were used to increase the housing stock prices over CPI inflation, while 83.7% was used to build new homes. By 2004 and 2006 the percentage allocated to housing stock prices had grown to 68% of all new mortgage funds injected in the housing market. Such poor allocation of funds had two effects. It lowered the efficiency of money used as economic growth only occurs as a consequence of economic activities: the building of new homes. Secondly for those households that needed to borrow funds to enter the housing market, the inflated house prices required a higher and higher percentage of incomes to be allocated for an acquisition, leaving less disposable income for other consumption. Median incomes generally only grow at or slightly above CPI levels. Banks, Fannie Mae and Freddy Mac showed no restraint in volume control, while the fragmented banking supervision authorities also did not see the need to interfere to manage the volume of lending. No single individual household could possibly control the volume of such lending. In 2007 the bubble burst when the liquidity for mortgage-backed securities dried up. The consequences were dramatic. Overfunding turned into underfunding. Over the period 2006-2013 22.1 million households faced foreclosure proceedings over their home loans. This equals more than one out of every six U.S. households. 5.8 million homes were repossessed, affecting one out of every 8-mortgage holder. Over the period January 2008- October 2009 7.8 million Americans lost their jobs. In 2013 the real median household income was 8% lower than the 2007 pre-recession level of $56,435. Notwithstanding the lowering of interest rates to historically its lowest level, individual households reduced their mortgage portfolio by $1.2 trillion over the period 2008-third quarter 2014. The U.S. government (Federal, State and local) saw its tax revenues drop by $1.5 trillion or 29% over the period 2007-2009. The main action of the Federal Reserve apart from lowering interest rates was its program of Quantitative Easing. At the end of 2014 it had $2.461 trillion of U.S. government debt on its books and another $1.737 trillion in mortgage bonds. Prevention through volume control measures on the lending side would have been the most effective method to avoid the recession and all its consequences. However this did not happen. The experience of lower interest rates combined with QE can only be described as having a very slow impact. The reason was and is that individual households were hit where it hurts most: in their disposable income levels. A different type of QE could have been applied, which directly would have addressed such income levels. It is based on paying out a fixed amount per household by the Fed over a period of two to three years and repayment would be made out of future tax revenues over a ten year period. In this paper this method has been called: the Economic Growth Incentive Method (EGIM). The poorer households would have benefitted the most from such measure. QE in its current form has benefitted the banks and the wealthier individual households.
    Keywords: Quantitative Easing, U.S. housing market, housing stock inflation,economic growth, individual households, mortgage borrowing, Fannie Mae, Freddy Mac, banking supervision, over and underfunding, foreclosure, unemployment, government tax revenues, economic growth incentive method.
    JEL: E21 E24 E3 E32 E5 E52 E58 G21 G28
    Date: 2015–02–07

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