nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒02‒16
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The German Public and its Trust in the ECB: The Role of Knowledge and Information Search By Neuenkirch, Edith; Hayo, Bernd
  2. Cross sectional evidence on the relation between monetary policy, macroeconomic conditions and low-frequency inflation uncertainty By Hartmann, Matthias; Conrad, Christian
  3. Drifts, Volatilities and Impulse Responses Over the Last Century By Wang, Mu-Chun; Amir Ahmadi, Pooyan; Matthes, Christian
  4. Determinants of the Choice of Exchange Rate Regime in Resource-Rich Countries By Ruslan Aliyev
  5. The Efficiency of Private E-Money-Like Systems: The U.S. Experience with National Bank Notes By Warren E. Weber
  6. Lessons from the U.S. experience with quantitative easing By Rosengren, Eric S.
  7. A Survey on the Effects of Sterilized Foreign Exchange Intervention By Mauricio Villamizar-Villegas; David Perez-Reyna
  8. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By YuichiroWaki; Richard Dennis; Ippei Fujiwara
  9. Fundamentals and Exchange Rate Forecastability with Machine Learning Methods By Michalski , Tomasz; Amat , Christophe
  10. Bank Risk Taking, Credit Booms and Monetary Policy By Afanasyeva, Elena; Guentner, Jochen
  11. Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
  12. Employment, hours and optimal monetary policy By Dossche, Maarten; Lewis, Vivien; Poilly, Céline
  13. Forward Guidance in a Simple Model with a Zero Lower Bound By Illing, Gerhard; Siemsen, Thomas
  14. The Dynamics of Currency Crises - Results from Intertemporal Optimization and Viscosity Solutions By Bauer, Christian; Ernstberger, Philip
  15. Winners and Losers from the euro By Pedro Gomis-Porqueras; Laura Puzzello
  16. Rational Expectations and the Stability of Balanced Monetary Development By Böhm, Volker
  17. Smells Like Fiscal Policy? Assessing the Potential Effectiveness of the ECB s OMT Program By Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
  18. A Tacit Monetary Policy of the Gulf Countries: Is There a Remittances Channel? By Termos, Ali; Genc, Ismail H.; Naufal, George S
  19. Remarks at a panel discussion on “Monetary policy normalization: graceful exit or bumpy ride?” By Rosengren, Eric S.
  20. Pure Money for a Sound Economy By Schmidt, Sandra
  21. The macroeconomic effects of monetary policy: A new measure for the United Kingdom By Hürtgen, Patrick; Cloyne, James
  22. On the Stability of Money Demand By Lucas, Robert E.; Nicolini, Juan Pablo
  23. Deficits and Inflation; Are Monetary and Financial Institutions Worthy to Consider or Not? By Ishaq, Tahira; Mohsin, Dr Hassan
  24. The relevance of international spillovers and asymmetric effects in the Taylor rule By Joscha Beckmann; Ansgar Belke; Christian Dreger
  25. ECB Banking Supervision and beyond By Lannoo, Karel
  26. Are Capital Controls Prudential? An Empirical Investigation By Martin Uribe; Alessandro Rebucci; Andres Fernandez
  27. Dealing with a Liquidity Trap when Government Debt Matters: Optimal Time-Consistent Monetary and Fiscal Policy By Burgert, Matthias; Schmidt, Sebastian
  28. Implications of low inflation rates for monetary policy By Rosengren, Eric S.
  29. Lenders on the storm of wholesale funding shocks: Saved by the central bank? By Leo de Haan; Jan Willem van den End; Philip Vermeulen
  30. Understanding Financial Instability: Minsky Versus the Austrians By Van den Hauwe, Ludwig
  31. Monetary policy normalization: graceful exit or bumpy ride? By Rosengren, Eric S.
  32. The emerging market economies in times of taper-talk and actual tapering By Diez, Federico J.

  1. By: Neuenkirch, Edith; Hayo, Bernd
    Abstract: In this paper, we analyse the effects of objective and subjective knowledge about monetary policy, as well as the information search patterns, of German citizens on trust in the ECB. We rely on a unique representative public opinion survey of German households conducted in 2011. We find that subjective and factual knowledge, as well as the desire to be informed, about the ECB foster citizens trust. Specific knowledge about the ECB is more influential than general monetary policy knowledge. Objective knowledge is more important than subjective knowledge. However, an increasing intensity of media usage, especially newspaper reading, has a significantly negative influence on trust. We conclude that the only viable way for the ECB to generate more trust in itself is to spread monetary policy knowledge.
    JEL: D83 E52 E58
    Date: 2014
  2. By: Hartmann, Matthias; Conrad, Christian
    Abstract: In this study, we examine how the interaction between monetary policy and macroeconomic conditions affects inflation uncertainty in the long-term. The unobservable inflation uncertainty is quantified by means of the slowly evolving unconditional variance component of inflation in the framework of the semiparametric Spline-GARCH model (Engle and Rangel, 2008). For a cross section of 13 developed economies, we find that long-term inflation uncertainty is high if central bank governors are perceived as less inflation-averse, if the conduct of monetary policy is rather ad-hoc than rule-based and in economies with a low degree of central bank independence.
    JEL: E58 E65 E31
    Date: 2014
  3. By: Wang, Mu-Chun; Amir Ahmadi, Pooyan; Matthes, Christian
    Abstract: How much have the dynamics of US time series and in the particular the transmission of innovations to monetary policy instruments changed over the last century? The answers to these questions that this paper gives are "A lot." and "Probably less than you think.", respectively. We use vector autoregression with time-varying parameters and stochastic volatility to tackle these question. In our analysis we use variables that both influenced monetary policy and in turn were influenced by monetary policy itself, including bond market data (the difference between long-term and short-term nominal interest rates) and the growth rate of money.
    JEL: E31 E52 E43
    Date: 2014
  4. By: Ruslan Aliyev
    Abstract: This research studies the specific determinants of the choice of exchange rate regime in resource-rich countries. We run multinomial logit regressions for an unbalanced panel data set of 145 countries over the 1975-2004 period. We find that resource-rich countries are more likely to adopt a fixed exchange rate regime compared to resource-poor countries. Furthermore, we provide evidence that output volatility contributes to the likelihood of choosing a fixed exchange rate regime positively in resource-rich countries and negatively in resource-poor countries. We believe that in resource-rich countries a fixed exchange rate regime is mainly preferred due to its stabilization function in the face of turbulent foreign exchange inflows. Moreover, our results reveal that the role of democracy and independent central banks in choosing more flexible exchange rate regimes is stronger in resource-rich countries. In resource-rich countries that possess non-democratic institutions and non-independent central banks, the government is less accountable in spending natural resource revenues and fiscal dominance prevails. In this situation, fluctuations in natural resource revenues are more easily transmitted into the domestic economy and therefore a fixed exchange rate becomes a more favorable option.
    Keywords: monetary policy; exchange rate regime; natural resource-rich countries;
    JEL: E52 E58 Q3
    Date: 2014–12
  5. By: Warren E. Weber
    Abstract: Beginning in 1864, in the United States notes of national banks were the predominant medium of exchange. Each national bank issued its own notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with national bank notes. It examines historical evidence on how well the bank notes - a privately-issued currency system with multiple issuers - functioned with respect to ease of transacting, counterfeiting, safety, overissuance and par exchange (a uniform currency). It finds that bank notes made transacting easier and were not subject to overissuance. National bank notes were perfectly safe because they were insured by the federal government. Further, national bank notes were a uniform currency. Notes of different banks traded at par with each other and with greenbacks. This paper describes the mechanism that was put in place to achieve uniformity. The U.S. experience with national bank notes suggests that a privately-issued e-money system can operate efficiently but will require government intervention, regulation, and supervision to minimize counterfeiting, promote safety and provide the mechanism necessary for different media of exchange to exchange at par with each other.
    Keywords: Bank notes, E-Money, Financial services
    JEL: E41 E42 E58
    Date: 2015
  6. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to The Peterson Institute for International Economics and Moody's Investors Service's 8th Joint Event on Sovereign Risk and Macroeconomics, Frankfurt, Germany, February 5, 2015.
    Date: 2015–02–05
  7. 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.
    Keywords: Sterilized foreign exchange intervention, impossible trinity, portfolio balance channel, signaling channel, uncovered interest rate parity.
    JEL: E52 E58 F31
    Date: 2015–01–16
  8. By: YuichiroWaki (University of Queensland); Richard Dennis (University of Glasgow); Ippei Fujiwara (Keio University/ANU)
    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
  9. By: Michalski , Tomasz; Amat , Christophe
    Abstract: Simple exchange rate models based on economic fundamentals were shown to have a difficulty in beating the random walk when predicting the exchange rates out of sample in the modern floating era. Using methods from machine learning -- sequential adaptive ridge regression -- that prevent overfitting in-sample for better and more stable forecasting performance out-of-sample the authors show that fundamentals from the PPP, UIRP and monetary models consistently improve the accuracy of exchange rate forecasts for major currencies over the floating period era 1973-2013 and are able to beat the random walk prediction giving up to 5% improvements in terms of the RMSE at a 1 month forecast. "Classic'' fundamentals hence contain useful information about exchange rates even for short forecasting horizons -- and the Meese and Rogoff (1983) puzzle is overturned. Such conclusions cannot be obtained when rolling or recursive OLS regressions are used as is common in the literature.
    Keywords: exchange rates; forecasting; machine learning; purchasing power parity; uncovered interest rate parity; monetary exchange rate models
    JEL: C53 F31 F37
    Date: 2014–08–29
  10. By: Afanasyeva, Elena; Guentner, Jochen
    Abstract: This paper investigates the risk-taking channel of monetary policy on the asset side of banks' balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, e.g. their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Based on this evidence, we reformulate the costly state verification (CSV) contract, embed it in a dynamic general equilibrium model, and show that - consistent with our empirical finding - a monetary easing implies an expansion of bank lending for a given amount of borrower collateral. The model also predicts a delayed increase in borrowers' default risk.
    JEL: E44 E52 E32
    Date: 2014
  11. By: Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José-Luis
    Abstract: We analyze the impact of financial crises and monetary policy on the supply of wholesale funding liquidity, and also on the compositional supply effects through cross-border and relationship lending. For empirical identification, we draw on the proprietary bank-to-bank European interbank dataset extracted from Target2 and also exploit the Lehman and sovereign crisis shocks as well as the main Eurosystem non-standard monetary policy measures. The robust results imply that the crisis shocks lead to worse access, volumes and spreads (in both the overnight and longer-term maturities). The quantitative impact on interbank access and volume is stronger than on spreads. Liquidity supply restrictions are exacerbated for cross- border lending after the Lehman failure; for banks headquartered in periphery countries, the impact is quantitatively stronger in the sovereign debt crisis. Moreover, the interbank market - unlike other credit markets - allows to exploit the price dispersion from different lenders on identical credit contracts, i.e. overnight uncollateralized loans in the same morning for the same borrower. This price dispersion increases massively with the crisis, and even more for riskier borrowers. Cross-border and previous relationship lenders charge higher prices for identical contracts in the crisis. Importantly, this price dispersion substantially decreases when the Eurosystem promises unlimited access to liquidity at a fixed price in October 2008 and announces the 3-year LTRO in December 2011, with economically stronger effects for borrowers in weaker countries.
    Keywords: interbank liquidity,financial crises,monetary policy,credit supply,credit rationing,information asymmetry,euro area,financial globalization
    JEL: E44 E58 G01 G21 G28
    Date: 2014
  12. By: Dossche, Maarten; Lewis, Vivien; Poilly, Céline
    Abstract: We characterize optimal monetary policy in a New Keynesian search-and-matching model where multiple-worker firms satisfy demand in the short run by adjusting hours per worker. Imperfect product market competition and search frictions reduce steady state hours per worker below the efficient level. Bargaining results in a convex 'wage curve' linking wages to hours. Since the steady-state real marginal wage is low, wages respond little to hours. As a result, firms overuse the hours margin at the expense of hiring, which makes hours too volatile. The Ramsey planner uses inflation as a instrument to dampen inefficient hours fluctuations.
    Keywords: employment,hours,wage curve,optimal monetary policy
    JEL: E30 E50 E60
    Date: 2015
  13. By: Illing, Gerhard; Siemsen, Thomas
    Abstract: In this paper we present a simple framework to model central bank forward guidance in a liquidity trap. We analyze the role of long-run and short-run price stickiness under discretion and commitment in a straightforward and intuitive way. Despite the impact of price rigidity on welfare being non-linear, losses under discretion are lowest with perfectly flexible prices. We show why the zero lower bound may still be binding even long after the shock has gone and characterize conditions when a commitment to hold nominal rates at zero for an extended period is optimal. We then introduce government spending and show that under persistently low policy rates optimal government spending becomes more front-loaded, while pro-cyclical austerity fares worse than discretionary government spending.
    JEL: E40 E52 E58
    Date: 2014
  14. By: Bauer, Christian; Ernstberger, Philip
    Abstract: We apply an in nite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend o speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.
    JEL: E58 F30 C61
    Date: 2014
  15. By: Pedro Gomis-Porqueras; Laura Puzzello
    Abstract: This paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro using the synthetic control method. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. The Netherlands is estimated would have been as well off without the euro. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain these income effects. We find that early euro adopters with a business cycle more synchronized to that of the union, and more open to intra-union trade and migration lost less or gained more from the euro. A key role in the transmission of post-euro income losses across union members has been played by the integration of capital markets.
    Keywords: Monetary Union; Synthetic Control Method; Per Capita Income; euro
    JEL: C21 C23 E65 F33 N14
    Date: 2015–01–22
  16. By: Böhm, Volker
    Abstract: The expanding/contracting behavior of monetary macroeconomic models is largely driven by government deficits. Their monetary effects on inflation and monetary growth determine the real value of money (or of government debt) in the long run. Only positive stationary (constant) real values of money guarantees stationary positive levels of output and employment in the long run. Within a generalized class of nonlinear monetary macroeconomic models of the AS AD type derived from a microeconomic structure with OLG consumers, such economies generically have no stationary equilibria under perfect foresight/rational expectations when tax revenue is income dependent and endogenous (no lump sum taxes) and when the government follows a stationary spending rule. They usually have two balanced stochastic equilibria, an unstable one with positive levels of employment, output, and positive real value of money plus a stable nonmonetary one under hyperinflation (or a monetary bubble). Under the hypothesis of the model, only the stable ones are empirically observable. The paper shows that these properties are true for a large class of AS-AD models including those with a random budget policy rule whose deficit is zero on average. In contrast, such economies have positive stable balanced stationary equilibria if the government policy has a small strictly positive nonrandom demand component in all cases of uncertainty. Among other things, this confirms the long run effectiveness of deficit spending in random economies under rational expectations known from Keynesian theories. The results are derived using techniques from the theory of random dynamical systems which allows a complete theoretical and numerical analysis of the dynamics of random time series and their stability of the nonlinear stochastic model.
    JEL: E00 C02 E52
    Date: 2014
  17. By: Wollmershäuser, Timo; Hristov, Nikolay; Hülsewig, Oliver; Siemsen, Thomas
    Abstract: This paper explores the potential effectiveness of the ECB s Outright Monetary Transaction (OMT) program in safeguarding an appropriate monetary policy transmission. Since the program aims at manipulating bank lending rates by conducting sovereign bond purchases on secondary markets, a stable relationship between bank lending rates and government bond rates is of prime importance. Using vector autoregressive models with time varying parameters (TVP VAR) we evaluate the stability of this relationship by focusing on the reaction of bank lending rates to movements in government bond rates over the period 2003 2013. Our results suggest that the potential success of OMTs in restoring the monetary transmission mechanism is limited as the link between bank lending rates and government bond rates has substantially weakened since the end of 2008.
    JEL: E42 E43 E58
    Date: 2014
  18. By: Termos, Ali (American University of Beirut); Genc, Ismail H. (American University of Sharjah); Naufal, George S (Timberlake Consultants)
    Abstract: The strong economic ties between the GCC economies and the U.S. are manifested in three ways: currency peg, coupling of monetary policy, and the adoption of the U.S. dollar as the trading currency for oil. This paper examines how these dynamics result in a misalignment of the U.S. monetary policy with the business cycles of the GCC economies. The study shows how the staggering amount of remittances outflow of the GCC economies plays a stabilizing role as a tacit monetary policy tool. Incorporating remittances in the money demand equation results in a more robust model than otherwise. We further find that the effect of the Federal Funds rate on money demand in these countries diminishes in significance during the period of oil boom between 2002 and 2009. However, the transmission effect of the recession periods in the U.S. into the demand for money in the GCC countries is not statistically significant.
    Keywords: remittances, inflation, monetary policy, GCC
    JEL: F24 N15
    Date: 2015–01
  19. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the National Association for Business Economics / American Economic Association Meetings, Boston, Massachusetts, January 3, 2015.
    Date: 2015–01–03
  20. By: Schmidt, Sandra
    Abstract: At present, the world-economy is exceedingly fragile. Debt levels of nations peak. Monetary assets increase, too, and concentrate in the hands of few. In this paper, I show that a mechanism at the root of today’s monetary system entails an inherently fragile economy. I simulate the consequences of this mechanism within a macroeconomic model. I motivate a new monetary system that gives money the role it should have: to facilitate complex interactions in a stable environment.
    Keywords: Money; debt; banks and inequality. Reform of the monetary system; equity-based money.
    Date: 2015–01–28
  21. By: Hürtgen, Patrick; Cloyne, James
    Abstract: This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US.
    JEL: E31 E32 E58
    Date: 2014
  22. By: Lucas, Robert E. (University of Chicago); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We show that regulatory changes that occurred in the banking sector in the early eighties, which considerably weakened Regulation Q, can explain the apparent instability of money demand during the same period. We evaluate the effects of the regulatory changes using a model that goes beyond aggregates as M1 and treats currency and different deposit types as alternative means of payments. We use the model to construct a new monetary aggregate that performs remarkably well for the entire period 1915-2012.
    Keywords: Money demand; Monetary base
    JEL: E40 E41
    Date: 2015–02–02
  23. By: Ishaq, Tahira; Mohsin, Dr Hassan
    Abstract: Institutions are important for the analysis of the association between the deficits and inflation. This study used central bank independence and financial markets as institutional variables to investigate whether deficits are inflationary or not in the presence of dependent central bank and fragile financial markets. Panel dataset has been used for eleven Asian economies from 1981 to 2010. Empirical results suggests deficits are inflationary for Asian economies but budget deficits are particularly stronger candidates for inflationary pressure when financial markets are not fully developed and central banks are not free in followings goals and objectives under political pressure in financing the deficits.
    Keywords: fiscal deficits; inflation; institutions; central bank independence; financial markets development.
    JEL: E31 E50 H6 H60
    Date: 2014–09–01
  24. By: Joscha Beckmann; Ansgar Belke; Christian Dreger
    Abstract: Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent before the financial crisis and increased especially after the turn of the century. Compared to the Taylor benchmark, policy rates were often too low. This paper provides evidence that both international spillovers, among them dependencies in the interest rate setting of central banks, and nonlinear reaction patterns can offer a more realistic specification of the Taylor rule of four major central banks.
    Keywords: Taylor rule, international spillovers, monetary policy interaction, smooth transition models
    JEL: E43 F36 C22
    Date: 2015–01
  25. By: Lannoo, Karel
    Abstract: With publication of the results of its Comprehensive Assessment at the end of October 2014, the European Central Bank has set the standard for its new mandate as supervisor. But this was only the beginning. The heavy work started in early November, with the day-to-day supervision of the 120 most significant banks in the eurozone under the Single Supervisory Mechanism. The centralisation of the supervision in the eurozone will pose a number of challenges for the ECB in the coming months and years ahead. This report analyses these challenges in detail, drawing on the discussions and presentations in the CEPS Task Force on ECB Banking Supervision, and reinforced by extensive research undertaken by the rapporteur. José María Roldán, Presidente, Asociación Española de Banca, served as Chairman of the Task Force.
    Date: 2014–12
  26. By: Martin Uribe (Columbia University); Alessandro Rebucci (The Johns Hopkins Carey Business School); Andres Fernandez (Inter American Development Bank)
    Abstract: A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.
    Date: 2014
  27. By: Burgert, Matthias; Schmidt, Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. In our model, while the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap.
    JEL: E31 E63 D11
    Date: 2014
  28. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to Washington and Lee University’s H. Parker Willis Lecture in Political Economy, Lexington, Virginia, November 10, 2014.
    Date: 2014–11–10
  29. By: Leo de Haan; Jan Willem van den End; Philip Vermeulen
    Abstract: We provide empirical evidence on banks' responses to shocks in wholesale funding, using data of 181 euro area banks over the period August 2007 to June 2013. Banks' adjustments of loan volumes and lending rates in response to funding liquidity shocks are analysed in a panel VAR framework. The results show that shocks in the securities and interbank markets have significant effects on loan rates and credit supply, particularly of banks in stressed countries. Central bank liquidity has mitigated this effect. Lending to non-financial corporations is more sensitive to wholesale funding shocks than lending to households. Moreover, bank characteristics matter for monetary transmission: loan growth of large banks that are typically more dependent on wholesale funding and of banks with large exposure to government bonds shows relatively stronger responses to wholesale funding shocks.
    Keywords: banking/financial intermediation; financial crisis
    JEL: G21 G32
    Date: 2015–01
  30. By: Van den Hauwe, Ludwig
    Abstract: In the wake of the Financial Crisis and the subsequent Great Recession several commentators have suggested that the analysis of financial instability provided by various strands of heterodox economics got it "right" and that mainstream economics got it "wrong". In this paper two variants of heterodox views about financial instability are compared critically: the views of the late Hyman P. Minsky on the one hand, and the theses of the Austrian School on the other. Indeed there seem to exist a number of prima facie similarities and analogies between Minsky’s approach to the study of financial instability and that of the Austrian School. In particular attention can be drawn to such elements as, among others, the following: (a) both theories are theories of the upper turning point; (b) both theories give due attention to institutional factors, in particular the role of banks and financial institutions; (c) both approaches reject mainstream static equilibrium theorizing; (d) both approaches adhere to a monetary theory of the business cycle and explain, in their respective ways, the non-neutrality and the endogeneity of money; (e) in both approaches the role of Knightian uncertainty is appreciated; (f) in both approaches an attempt is made to provide the theory of the business cycle with adequate micro-foundations as well as with price-theoretic foundations. At the same time it can be seen that these similarities and analogies are quite superficial. The most important differences between both approaches relate to (a) the fundamental causal analysis of business cycles and the role of the interest-rate mechanism; (b) the identification of the relevant institutional context; (b) the role of capital and capital theory; (c) the quite different appreciation of the role of liquidity and liquidity preference; (d) the link between uncertainty and institutional context and (e) the quite different remedies that are proposed by the two approaches. It is concluded that the apparent similarities between both approaches are superficial, while the divergences are profound and fundamental.
    Keywords: Financial Instability, Business Cycle, Minsky, Austrian School
    JEL: B50 B53 B59 E3 E30 E32
    Date: 2014–12–24
  31. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, to the Wisconsin Bankers Association's 2015 Wisconsin Economic Forecast Luncheon, Madison, Wisconsin, January 8, 2015.
    Date: 2015–01–08
  32. By: Diez, Federico J. (Federal Reserve Bank of Boston)
    Abstract: The emerging market economies (EME) experienced financial distress during two recent periods, both linked to the prospect of the Federal Reserve starting to slow its asset purchases. This policy change was expected to reverse the capital flows directed to the EME. Despite this aggregate effect, a closer analysis shows that there were significant differences across the EME during the time when talk of the upcoming taper began and the period when the policy was implemented. The author makes use of the literature on currency crises to analyze the different cross-country responses and to identify a potential crisis period in the near future, defined as the next 24 months.
    Keywords: currency crises; exchange rates; emerging markets
    JEL: F31 F32 F41 F42
    Date: 2014–11–14

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