nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒02‒22
35 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Macroeconomic Impact of Unconventional Monetary Policy Shocks By Tillmann, Peter; Meinusch, Annette
  2. Can demography affect inflation and monetary policy? By Mikael Juselius; Előd Takáts
  3. Dynamics of Monetary-Fiscal Interaction under Learning By Hollmayr, Josef; Matthes, Christian
  4. Heterogeneous Expectations, Optimal Monetary Policy, and the Merit of Policy Inertia By Gasteiger, Emanuel
  5. How are firms affected by exchange rate shocks? Evidence from survey based impulse responses By Dirk Drechsel; Heiner Mikosch; Samad Sarferaz; Matthias Bannert
  6. Interest Rates and Structural Shocks in European Transition Economies By Mirdala, Rajmund
  7. How Large Is the Stress from the Common Monetary Policy in the Euro Area? By Quint, Dominic
  8. Optimal currency area and business cycle synchronization across U.S. states. By Aguiar-Conraria, Luis; Brinca, Pedro; Gudjonsson, Haukur; Soares, Joana
  9. Bubbles and Monetary Policy: To Burst or not to Burst? By Philipp König; David Pothier
  10. Inflation Targeting, Price-Level Targeting, the Zero Lower Bound, and Indeterminacy By Steve Ambler; Jean-Paul Lam
  11. A money-based indicator for deflation risk By Colavecchio, Roberta; Amisano, Gianni; Fagan, Gabriel
  12. Global Sunspots and Asset Prices in a Monetary Economy By Farmer, Roger E A
  13. Designing a Simple Loss Function for the Fed: Does the Dual Mandate Make Sense? By Debortoli, Davide; Kim, Jinill; Lindé, Jesper; Nunes, Ricardo
  14. Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area By Rieth, Malte; Fratzscher, Marcel
  15. Bringing Financial Stability into Monetary Policy By Eric Leeper; James Nason
  16. Transcript of a hearing before members of the House of Lords (UK) in Frankfurt on genuine economic and monetary union and its implication for the UK By Issing, Otmar; Krahnen, Jan Pieter
  17. The International Transmission of Credit Bubbles: Theory and Policy By Martin, Alberto; Ventura, Jaume
  18. Debt Overhang and Monetary Policy By James Bullard; Jacek Suda; Aarti Singh; Costas Azariadis
  19. Financial frictions and the volatility of monetary policy in a DSGE model By Anh Nguyen
  20. Optimal Monetary Policy with Learning by Doing By Chris Redl
  21. Analysis of Monetary Policy Responses after Financial Market Crises in a Continuous Time New Keynesian Model By Niehof, Britta; Hayo, Bernd
  22. Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk By Mitchener, Kris; Weidenmier, Marc
  23. Monetary Policy with Diverse Private Expectations By Mordecai Kurz; Maurizio Motolese; Giulia Piccillo; Howei Wu
  24. Policy Paradoxes in the New-Keynesian Model By Michael Kiley
  25. Does Money Impede Convergence? By John D Hey; Daniela Di Cagno
  26. Rational Bubble on Interest-Bearing Assets By Hajime Tomura
  27. Relative Prices and Inflation Stabilisation By Kosuke Aoki
  28. Breaking the Spell with Credit-Easing: Self-Confirming Credit Crises in Competitive Search Economies By Ramon Marimon; Gaetano Gaballo
  29. Sectoral effects of monetary policy shock: evidence from India By Singh, Sunny Kumar; Rao, D. Tripati
  30. The Chicago Plan Revisited By Kumhof, Michael; Benes, Jaromir
  31. Does the foreign interest rate matter for monetary policy? Evidence from nonlinear Taylor rules By Belke, Ansgar; Beckmann, Joscha; Dreger, Christian
  32. Optimal monetary policy, asset purchases, and credit market frictions By Schabert, Andreas
  33. Itâ??s not just Russia: Currency crisis in the Commonwealth of independent states By Marek Dabrowski
  34. On the role of the ECB's collateral framework in preventing fire sales By Podlich, Natalia
  35. Optimum Currency Areas, Real and Nominal Convergence in the European Union By João Sousa Andrade; António Portugal Duarte

  1. By: Tillmann, Peter; Meinusch, Annette
    Abstract: With the Federal Funds rate approaching the zero lower bound, the U.S. Federal Reserve adopted a range of unconventional monetary policy measures known as Quantitative Easing (QE). Quantifying the impact QE has on the real economy, however, is not straightforward as standard tools such as VAR models cannot easily be applied. In this paper we use the Qual VAR model (Dueker, 2005) to combine binary information about QE announcements with an otherwise standard monetary policy VAR. The model filters an unobservable propensity to QE out of the observable data and delivers impulse responses to a QE shocks. In contrast to other empirical approaches, QE is endogenously depending on the business cycle, can easily be studied in terms of unexpected policy shocks and its dynamic effects can be compared to a conventional monetary easing. We show that QE shocks have a large impact on real and nominal interest rates and financial conditions and a smaller impact on real activity.
    JEL: E32 E44 E52
    Date: 2014
  2. By: Mikael Juselius; Előd Takáts
    Abstract: Several countries are concurrently experiencing historically low inflation rates and ageing populations. Is there a connection, as recently suggested by some senior central bankers? We undertake a comprehensive test of this hypothesis in a panel of 22 countries over the 1955–2010 period. We find a stable and significant correlation between demography and low-frequency inflation. In particular, a larger share of dependents (ie young and old) is correlated with higher inflation, while a larger share of working age cohorts is correlated with lower inflation. The results are robust to different country samples, time periods, control variables and estimation techniques. We also find a significant, albeit unstable, relationship between demography and monetary policy.
    Keywords: demography, ageing, inflation, monetary policy
    Date: 2015–02
  3. By: Hollmayr, Josef; Matthes, Christian
    Abstract: The interaction between monetary and fiscal policy and the associated uncertainty about this interaction have been put on center stage by the recent financial crisis and the associated recession. In our model agents learn about both fiscal and monetary policy rules via the Kalman Filter. In particular, we study how an economy populated with agents acting as econometricians reacts to discrete changes in the actual policy rules.
    JEL: E32 D83 E62
    Date: 2014
  4. By: Gasteiger, Emanuel
    Abstract: The design and analysis of optimal monetary policy is usually guided by the paradigm of homogeneous rational expectations. Instead, we examine the dynamic consequences of implementation strategies, when the actual economy features expectational heterogeneity. Agents have either rational or adaptive expectations. Consequently the central bank's ability to achieve price-stability under heterogeneous expectations depends on its objective and implementation strategy. An expectations-based reaction function, which appropriately conditions on private sector expectations, performs exceptionally well. However, once the objective introduces policy inertia, popular strategies can fail. These results call for new implementation strategies under interest rate stabilization.
    JEL: E52 D84 D83
    Date: 2014
  5. By: Dirk Drechsel (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Heiner Mikosch (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Samad Sarferaz (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Matthias Bannert (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper studies the effects of a change in the Swiss franc/euro exchange rate floor, as introduced by the Swiss National Bank in September 2011 using a survey based impulse responses analysis. Survey based impulse responses incorporate experimental settings into representative firm surveys, expose firm executives to treatment or shock scenarios and evaluate the effects of the shocks on executives’ expected firm-level outcomes. Our results suggest that a change in the exchange rate floor from 1.20 to 1.10 Swiss francs per euro and a subsequent appreciation of the Swiss franc by the same magnitude considerably decreases expected turnovers, costs and profits of Swiss firms. Manufacturing turnover decreases by 3.3% within six months and by 4.3% within 18 months. Total costs decline by 1.3% within six months and 2.0% within 18 months, while profits shrink by 3.3% within six months. The effects are substantially lower for the service and the construction sector, but exhibit large variation across sub-sector industries. Panel regression analysis reveals that firm-specific export shares and intermediate goods import shares are key determinants of firms’ turnover, costs and profits reactions.
    Keywords: Swiss franc/euro exchange rate floor, survey based impulse responses, macroeconomic shock identification, structural micro data, disaggregation
    JEL: C83 C99 E37 F31
    Date: 2015–01
  6. By: Mirdala, Rajmund
    Abstract: European transition economies are still suffering from negative implications of economic crisis. Significant decrease in the key interest rates was followed by reduced maneuverability of central banks in providing incentives into real economies. Low interest rate environment together with effects of quantitative easing induced economists to examine sources of interest rates volatility. Responsiveness of short-term interest rates to the structural shocks provides unique platform to investigate sources of their unexpected volatility and associated effects on monetary policy decision making. Moreover, sources of interest rates volatility may help to reveal side effects of the exchange rate regime choice. Empirical investigation of interest rates determination under different exchange rate regimes highlights substantial implications of relative exchange rate diversity and its importance during the crisis period. In the paper we analyze sources of the short-term nominal interest rates volatility in ten European transition economies by employing SVAR methodology. We observed unique patterns of the short-term interest rates responsiveness in countries with different exchange rate arrangements that contributes to the fixed versus flexible exchange rate dilemma.
    Keywords: interest rates, structural shocks, exchange rate arrangements, economic crisis, VAR, impulse-response function
    JEL: C32 E43 F41
    Date: 2014–08
  7. By: Quint, Dominic
    Abstract: The ECB's one size monetary policy is unlikely to fit all euro area members, which raises a discussion about how much monetary policy stress this causes at the national level. We measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied optimal rates at the member state level. Optimal rates explicitly take into account the natural rate of interest to capture changes in trend growth. We find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German L nder.
    JEL: E58 E52 C22
    Date: 2014
  8. By: Aguiar-Conraria, Luis; Brinca, Pedro; Gudjonsson, Haukur; Soares, Joana
    Abstract: We use wavelet analysis to investigate to what extent individual U.S. states' business cycles are synchronized. The results show that the U.S. states are remarkably well synchronized compared to the previous findings w.r.t. the Euro Area. There is also a strong and significant correlation between business cycle dissimilitudes and the distance between each pair of states, consistent to gravity type mechanisms where distance affects trade. Trade, in turn, increases business cycle synchronization. Finally we show that a higher degree of industry specialization is associated with a higher dissimilitude of the state cycle with the aggregate economy.
    Keywords: Optimum currency areas, business cycle synchronization, continuous wavelet transform, trade
    JEL: E37 E52 R11
    Date: 2015–02–13
  9. By: Philipp König; David Pothier
    Abstract: The question of whether monetary policy should target asset prices remains a contentious issue. Prior to the 2007/08 financial crisis, central banks opted for a wait-and-see approach, remaining passive during the build-up of asset price bubbles but actively seeking to stabilize prices and output after they burst. The macroeconomic and financial turbulence that followed the subprime housing bubble has led to a renewed debate concerning monetary policy’s role in maintaining financial stability. This Round-Up provides a brief overview of this topic.
    Date: 2015
  10. By: Steve Ambler (CIRPÉE, UQAM, C.D. Howe Institute; The Rimini Centre for Economic Analysis, Italy); Jean-Paul Lam (Department of Economics, University of Waterloo; The Rimini Centre for Economic Analysis, Italy)
    Abstract: We compare inflation targeting and price-level targeting in the canonical New Keynesian model, with particular attention to multiple steady-states, indeterminacy, and global stability. Under price-level targeting we show the following: 1) the well-known problem of multiple steady-state equilibria under inflation targeting is absent; 2) the model’s dynamics close to the steady state are determinate for a much wider range of parameter values; 3) the model is globally saddlepoint stable. These results provide additional arguments in favour of price-level targeting as a monetary policy framework.
    Date: 2015–02
  11. By: Colavecchio, Roberta; Amisano, Gianni; Fagan, Gabriel
    Abstract: We employ a money-based early warning model in order to analyse the risk of a low inflation regime in the Euro Area, Japan and the US. The model specification allows for three different inflation regimes: "Low", "Medium" and "High" inflation, while state transition probabilities vary over time as a function of monetary variables. Using Bayesian techniques, we estimate the model with data from the mid 1970s up to the present. Our analysis suggests that the risks of a "Low" inflation regime in the Euro Area have been increasing in the course of the last six quarters of the estimation sample; moreover, money growth plays a significant role in the assessment of such risks. Evidence for Japan and the US shows that for both countries the inclusion of an indicator variable does not substantially change the assessment of the risk of a "Low" inflation regime.
    JEL: C11 C53 E31
    Date: 2014
  12. By: Farmer, Roger E A
    Abstract: This paper constructs a simple model in which asset price fluctuations are caused by sunspots. Most existing sunspot models use local linear approximations: instead, I construct global sunspot equilibria. My agents are expected utility maximizers with logarithmic utility functions, there are no fundamental shocks and markets are sequentially complete. Despite the simplicity of these assumptions, I am able to go a considerable way towards explaining features of asset pricing data that have presented an obstacle to previous models that adopted similar assumptions. My model generates volatile persistent swings in asset prices, a substantial term premium for long bonds and bursts of conditional volatility in rates of return.
    Keywords: asset prices; sunspots
    JEL: E44 G12
    Date: 2015–02
  13. By: Debortoli, Davide; Kim, Jinill; Lindé, Jesper; Nunes, Ricardo
    Abstract: Yes, it makes a lot of sense. Using the Smets and Wouters (2007) model of the U.S. economy, we find that the role of the output gap should be equal to or even more important than that of inflation when designing a simple loss function to represent household welfare. Moreover, we document that a loss function with nominal wage inflation and the hours gap provides an even better approximation of the true welfare function than a standard objective based on inflation and the output gap. Our results hold up when we introduce interest rate smoothing in the simple mandate to capture the observed gradualism in policy behavior and to ensure that the probability of the federal funds rate hitting the zero lower bound is negligible.
    Keywords: central banks' objectives; household welfare; linear-quadratic approximation; monetary policy design; simple loss function; Smets-Wouters model
    JEL: C32 E58 E61
    Date: 2015–02
  14. By: Rieth, Malte; Fratzscher, Marcel
    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 mostly 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.
    JEL: E52 G10 E60
    Date: 2014
  15. By: Eric Leeper (Indiana University); James Nason (North Carolina State University)
    Keywords: Financial frictions, incomplete markets, crises, new Keynesian, natural rate, monetary transmission mechanism
    JEL: E3 E4 E5 E6 G2 N12
    Date: 2014–11
  16. By: Issing, Otmar; Krahnen, Jan Pieter
    Abstract: On November 8, 2013, several members of the British House of Lords' Subcommittee A conducted a hearing at the ECB in Frankfurt, Germany, on "Genuine Economic and Monetary Union and its Implications for the UK". Professors Otmar Issing and Jan Pieter Krahnen were called as expert witnesses. The testimony began with a general discussion on the elements considered necessary for a functioning internal market. Do economic union and monetary union require a fiscal union or even a political union, beyond the elements of the banking union currently being prepared? In this context, also the critique of the German current account surplus and the international expectations that Germany stimulate internal demand to support growth in crisis countries, were discussed. With regard to the monetary union, the members of the subcommittee asked for an assessment of how European nations and the banking industry would have fared in the banking crisis that followed the Lehman collapse, had there not been a common currency. Given the important role that the ECB has played in the course of the crisis management, the members further asked for an evaluation of the OMT-program of the ECB and also if the monetary union is in need of common debt instruments, in order to provide the ECB with the possibility of buying EU liabilities, comparable to the Fed buying US Treasury bonds. Finally, the dual role of the ECB for monetary policy and banking supervision was an issue touched on by several questions.
    Keywords: European Central Bank,Monetary Union,Outright Monetary Transactions,UK
    Date: 2014
  17. By: Martin, Alberto; Ventura, Jaume
    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: asset bubbles; capital controls; exchange rates; financial globalization; interest rates; international capital controls
    JEL: E32 E44 O40
    Date: 2015–02
  18. By: James Bullard; Jacek Suda (Banque de France); Aarti Singh (University of Sydney); Costas Azariadis (Washington University in St Louis)
    Abstract: We study a theory in which households borrow during the first half of a 241-period life cycle as part of a DSGE. Households confront a persistent regime-switching process on aggregate labor productivity growth. When the economy switches to the high growth regime, there is more borrowing based on expectations of higher future income. When the economy switches back to the low growth regime, some households will have borrowed "too much" given contemporaneous income levels–the hallmark of debt overhang. A powerful central bank can intervene in private credit markets to influence real yields. If the central bank does intervene to keep real rates lower, consumption will be reallocated relative to a laissez faire case. The reallocation will generally be away from those households saving for retirement and possibly away from those households that are heavy users of money to smooth income fluctuations.
    Date: 2014
  19. By: Anh Nguyen
    Abstract: The paper investigates the impacts of the volatility of monetary policy on the economy in a DSGE model with financial frictions a la Bernanke, Gertler, and Gilchrist (1999). The model is estimated by the particle filter maximum likelihood estimator for the U.S. economy. Our results first show that a positive monetary volatility shock causes a contraction in economic activity: output, consumption, investment, hours, and real wages fall. Second, we argue that financial frictions amplify the effects of the shock via the financial accelerator mechanism. Third, we document that the size of the effects of the shock is relatively small mostly because of the counteracting response of monetary policy to the shock. Therefore, the impacts would be substantial if monetary policy was restrained to respond to changes in current conditions in the economy.
    Keywords: DSGE models, financial accelerator, Taylor rule, monetary policy, stochastic volatility, particle filter, higher-order approximations, policy uncertainty
    JEL: E32 E44 E52 C13
    Date: 2015
  20. By: Chris Redl
    Abstract: I study the implications of learning by doing in production for optimal monetary policy using a basic New Keynesian model. Learning-by-doing is modeled as a stock of skills that accumulates based on past employment. The presence of this learning-by-doing externality breaks the ’divine coincidence’ result, that by stabilising inflation the output gap will automatically be closed, for a variety of shocks that are important in explaining the buseiness cycle. In this context, the policy maker must consider the impact on future productivity of any trade-off between output and inflation today. The appropriate inflation-output trade off is between inflation today and the present value of deviations in the output gap. The approach to optimal monetary policy follows Woodford (2010) permitting a study of variations in key parameters and steady states which is uncommon in the literature that relies on a quadratic approximation to the utility function. Exploiting this variation I find that learning induces a small increase in the importance of the output gap under a cost-push shock for the (more realistic case) of a distorted steady state. The welfare costs of business cycles are shown to be significantly larger even under the optimal policy.
    Keywords: Monetary policy, Labor Productivity, Inflation
    JEL: E52 J24 E31
    Date: 2015
  21. By: Niehof, Britta; Hayo, Bernd
    Abstract: We develop a dynamic stochastic full equilibrium New Keynesian model of two open economies based on stochastic differential equations to analyse the interdependence between monetary policy and financial markets in the context of the recent financial crisis. The effect of bubbles on stock and housing markets and their transmission to the domestic real economy and the contagious effects on foreign markets are studied. We simulate adjustment paths for the economies under two monetary policy rules: an open-economy Taylor rule and a modified Taylor rule, which takes into account stabilisation of financial markets as a monetary policy objective. We find that for the price of a strong hike in inflation a severe economic recession can be avoided under the modified rule. Using Bayesian estimation techniques, we calibrate the model to the case of the United States and Canada and find that the resulting
    JEL: C02 E44 F41
    Date: 2014
  22. By: Mitchener, Kris; Weidenmier, Marc
    Abstract: We use a standard metric from international finance, the currency risk premium, to assess the credibility of fixed exchange rates during the classical gold standard era. Theory suggests that a completely credible and permanent commitment to join the gold standard would have zero currency risk or no expectation of devaluation. We find that, even five years after a typical emerging-market country joined the gold standard, the currency risk premium averaged at least 220 basis points. Fixed- effects, panel-regression estimates that control for a variety of borrower-specific factors also show large and positive currency risk premia. In contrast to core gold standard countries, such as France and Germany, the persistence of large premia, long after gold standard adoption, suggest that financial markets did not view the pegs in emerging markets as credible and expected devaluation.
    Keywords: currency risk; fixed exchange rates; gold standard; sovereign borrowing
    JEL: F22 F33 F36 F41 N10 N20
    Date: 2015–02
  23. By: Mordecai Kurz; Maurizio Motolese (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Giulia Piccillo; Howei Wu
    Abstract: We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows: (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policymakers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation” effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent.
    Keywords: New Keynesian Model; heterogenous beliefs; market state of belief; Rational Beliefs; monetary policy rule
    JEL: C53 D8 D84 E27 E42 E52 G12 G14
  24. By: Michael Kiley (Board of Governors of the Federal Reserve System)
    Abstract: The most common New-Keynesian model-with sticky-prices-has potentially implausible implications in a zero-lower bound environment. Fiscal and forward guidance multipliers can be implausibly large. Moreover, the sticky-price model implies that positive supply shocks, such as an increase in productivity, will lower production, and that increased price flexibility can exacerbate such a decline in output (as well as amplifying the effects of other shocks). These results are fragile and disappear under a plausible alternative to sticky prices - sticky information: Fiscal and monetary multipliers are smaller, positive supply shocks raise output, and greater price flexibility, in the sense of more frequent updating of information, moves the economy's response toward the neoclassical benchmark. These results suggest caution in drawing policy lessons from a single, sticky-price framework. Finally, we highlight how strategies akin to nominal-income targeting can enhance the ability of policymakers to affect demand in sticky-price and sticky-information models.
    Date: 2014
  25. By: John D Hey; Daniela Di Cagno
    Abstract: Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemploment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money intrading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.
    Keywords: clearing house mechanism, double auction mechanism, experimental markets, money, monetised trading, non-monetised trading.
    JEL: C92 D40 E24
    Date: 2015–02
  26. By: Hajime Tomura (Graduate School of Economics, University of Tokyo)
    Abstract: This paper compares fiat money and a Lucas' tree in an overlap- ping generations model. A Lucas' tree with a positive dividend has a unique competitive equilibrium price. Moreover, the price converges to the monetary equilibrium value of fiat money as the dividend goes to zero in the limit. Thus, the value of liquidity represented by a ra- tional bubble is part of the fundamental price of a standard interest- bearing asset. A Lucas' tree has multiple equilibrium prices if the dividend vanishes permanently with some probability. This case may be applicable to public debt, but not to stock or urban real estate.
    Date: 2015–01
  27. By: Kosuke Aoki (Faculty of Economics, University of Tokyo)
    Abstract: When price adjustment is sluggish, inflation is costly in terms of welfare because it distorts various kinds of relative prices. Stabilising aggregate price inflation does not necessarily minimise these costs, but stabilising a well-designed core inflation minimises the cost of relative price fluctuations and thus the cost of inflation.
    Keywords: Relative prices, inflation.
    JEL: E3
    Date: 2015–02
  28. By: Ramon Marimon (European University Institute); Gaetano Gaballo (Banque de France)
    Abstract: We analyze an economy where banks are uncertain about firms' investment opportunities and, as a result, credit tightness can result in excessive risk-taking. In the competitive credit market, banks announce credit contracts and firms apply to them, as in a directed search model. We show that high-risk Self-Confirming Equilibria, with misperceptions, coexist with a low-risk Rational Expectations Equilibrium, in this competitive search economy. Lowering the Central Bank policy rate may not be effective, while a credit-easing policy can be an effective experiment, breaking the high-risk (low-credit) Self-Confirming Equilibrium. We emphasize the differences with a model of Self-Fulfilling credit freezes and the social value of experimentation.
    Date: 2014
  29. By: Singh, Sunny Kumar; Rao, D. Tripati
    Abstract: This paper analyzes the effect of monetary policy shock on the aggregate as well as on the sectoral output of Indian economy using reduced form vector auto regression (VAR) model. We find that the impact of a monetary policy shock at the sectoral level is heterogeneous. Sectors such as, mining and quarrying, manufacturing, construction and trade, hotel, transport and communications seems to decline more sharply than aggregate output in response to a monetary tightening. We also augment the basic VAR by including three channels- credit channel, exchange rate channel and asset price channel of the monetary policy, and analyze the sector specific importance of each of the channel. The channels through which monetary policy is transmitted to the real economy are found to be different for every sector. In most of the cases, multiple channels are responsible for the changes in the aggregate and sectoral output to the monetary policy shock. These results clearly indicate the need for a sector specific monetary policy in India.
    Keywords: Monetary transmission mechanism, Sectoral output, VAR, Credit channel, Exchange rate channel, Asset price channel
    JEL: E5
    Date: 2014–07–01
  30. By: Kumhof, Michael; Benes, Jaromir
    Abstract: At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.
    JEL: E44 E52 G21
    Date: 2014
  31. By: Belke, Ansgar; Beckmann, Joscha; Dreger, Christian
    Abstract: Abstract. Deviations of policy interest rates from the levels implied by the Taylor rule have been persistent after the turn of the century even before the financial crisis. These deviations could be due to lower real interest rates, as stated by the savings glut hypothesis as well as the apparent success of monetary policy in combating inflation. Alternatively, they might reflect the omission of relevant variables in the standard rule, such as international dependencies in the interest rate setting of central banks. By using a smooth transition regression approach for three major central banks, this paper provides evidence for nonlinear threshold dynamics. In fact, the foreign interest rate is well-suited to improve standard Taylor-Rules.
    JEL: E43 E52 E42
    Date: 2014
  32. By: Schabert, Andreas
    Abstract: We examine how borrowing constraints affect monetary transmission and the trade-off of a welfare maximizing central bank. We develop a sticky price model where money serves as the means of payment and ex-ante identical agents borrow/lend among each other. The credit market is distorted as borrowing is constrained by available collateral, while the distortion is amplified under higher nominal interest rates. We show that the central bank cannot implement first best and that optimal monetary policy mainly aims at stabilizing prices. We further demonstrate that central bank purchases of loans can alleviate the borrowing constraint and enhance social welfare.
    JEL: E44 E52 E32
    Date: 2014
  33. By: Marek Dabrowski
    Abstract: â?¢ The currency crisis that started in Russia and Ukraine during 2014 has spread to neighbouring countries in the Commonwealth of Independent States (CIS). The collapse of the Russian ruble, expected recession in Russia, the stronger US dollar and lower commodity prices have negatively affected the entire region, with the consequence that the European Union's entire eastern neighbourhood faces serious economic, social and political challenges because of weaker currencies, higher inflation, decreasing export revenues and labour remittances, net capital outflows and stagnating or declining GDP. â?¢ The crisis requires a proper policy response from CIS governments, the International Monetary Fund and the EU. The Russian-Ukrainian conflict in Donbass requires rapid resolution, as the first step to return Russia to the mainstream of global economic and political cooperation. Beyond that, both Russia and Ukraine need deep structural and institutional reforms. The EU should deepen economic ties with those CIS countries that are interested in a closer relationship with Europe. The IMF should provide additional assistance to those CIS countries that have become victims of a new regional contagion, while preparing for the possibility of more emerging-market crises arising from slower growth, the stronger dollar and lower commodity pric
    Date: 2015–02
  34. By: Podlich, Natalia
    Abstract: In this paper, I analyze the impact of the extension of the ECB s collateral framework on securities sales. In addition, I evaluate the impact of different macroeconomic and bank-specific characteristics on banks selling behavior. At this, I distinguish between healthy banks and banks rescued from the German government hypothesizing that distressed banks manage sales of their assets differently. My analysis is based on quantile regressions for panel data containing securities holdings of 27 German banks, which allows an assessment of extremely large sales. Such selling behavior could cause a collapse of prices and lead to fire sales adversely impacting other financial institutions. I find clear evidence that the ECB s collateral framework has a stabilizing impact on sales of assets, especially for impaired banks and during the crisis the relationship is significant.
    JEL: B26 C21 E58
    Date: 2014
  35. By: João Sousa Andrade (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Duarte (Faculty of Economics, University of Coimbra and GEMF, Portugal)
    Abstract: It is well known and widely accepted by economists that the characteristics of the European countries that become the Eurozone in 1999 did not match the requirements of an Optimum Currency Area (OCA). The only criteria for membership of the new area were nominal. A strict level of convergence in inflation and interest rates was imposed. In addition to the nominal convergence (monetary), a process of convergence of nominal incomes in the new monetary unit was expected to be generated with the monetary integration. After summarizing the criteria for a successful currency area in the context of the OCA theory, we study the real and nominal convergence process for an older group (11) of countries to establish whether or not these countries form an OCA. We apply the original conditions imposed on ADF tests, together with the Schmidt-Phillips tests, and we estimate fractional differential process to overcome the disadvantages of the traditional tests. We conclude that a process of real divergence and nominal convergence does exist. We think this is a source of genuine imbalance in the European integration process that can destroy the harmonious development of a European Monetary Union.
    Keywords: Monetary integration, Optimum Currency Areas, real and nominal convergence, spectral analysis and total factor productivity.
    JEL: C01 E24 F31 J31
    Date: 2015–01

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