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

  1. International Coordination of Central Bank Policy By Charles Engel
  2. The Federal Reserve and Shared Prosperity: A Guide to the Policy Issues and Institutional Challenges By Thomas I. Palley
  3. Pegging the exchange rate to gain monetary policy credibility By Davis, J. Scott ; Fujiwara, Ippei
  4. The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union By Jakob Palek
  5. A New Money Exchange System: The World Calorie Currency (WCC) By Zhou, Xinyi Jimmy
  6. From Galloping Inflation to Price Stability in Steps: Israel 1985–2013 By Rafi Melnick ; Till Strohsal ; ;
  7. Variance Bounds as Thresholds for ‘Excessive’ Currency Volatility: Inflation Targeting Emerging Economies By Shaista Amod and Shakill Hassan
  8. Is the Friedman Rule Stabilizing? Some Unpleasant Results in a Heterogeneous Expectations Framework By Mattia Guerini
  9. Forecasting the intraday market price of money By Andrea Monticini ; Francesco Ravazzolo
  10. The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information By Yuichio Waki ; Richard Dennis ; Ippei Fujiwara
  11. The Changing Transmission Mechanism of U.S. Monetary Policy By Norhana Endut ; James Morley ; Pao-Lin Tien
  12. Trilemma Challenges for the People's Republic of China By Kawai, Masahiro ; Liu, Li-Gang
  13. "Europe at the Crossroads: Financial Fragility and the Survival of the Single Currency" By Jan Kregel
  14. Exchange rate Pass-Through to domestic prices in Tunisia: a short and long run analysis By Helali, Kamel ; Kalai, Maha ; Boujelben, Thouraya
  15. House prices, heterogeneous banks and unconventional monetary policy options By Smith, Andrew Lee
  16. Assessment of Monetary Union in SADC: Evidence from Cointegration and Panel Unit Root Tests By Mulatu F Zerihun, Marthinus C Breitenbach and Francis Kemegue
  17. Accession to the Eurozone as Lithuania’s exit strategy from the currency board system By Dorota Zuchowska
  18. A Dynamic Factor Model for Icelandic Core Inflation By Bjarni G. Einarsson
  19. Forward Guidance at the Zero Lower Bound in a Model of Price-Level Targeting By Illing, Gerhard ; Siemsen, Thomas
  20. Yield curve and monetary policy expectations in small open economies By Doh, Taeyoung ; Park, Woong Yong ; Bong, Kwan Soo
  21. The International Transmission of Credit Bubbles: Theory and Policy By Jaume Ventura ; Alberto Martin
  22. Assessment of Monetary Union in SADC: Evidence from Cointegration and Panel Unit Root Tests By Mulatu F. Zehirun ; Marthinus C. Breitenbach ; Francis M. Kemegue
  23. Online Appendix to "Optimal Monetary Policy with Endogenous Export Participation" By Dudley Cooke
  24. Credible enough? Forward guidance and perceived National Bank of Poland’s policy rule By Pawel Baranowski ; Pawel Gajewski
  25. Overnight RRP operations as a monetary policy tool: some design considerations By Frost, Joshua ; Logan, Lorie ; Martin, Antoine ; McCabe, Patrick E. ; Natalucci, Fabio M. ; Remache, Julie
  26. Dynamic Shift to a Basket-Peg or Floating Regime in East Asian Countries in Response to the People's Republic of China's Transition to a New Exchange Rate Regime By Yoshino, Naoyuki ; Kaji, Sahoko ; Asonuma, Tamon
  27. Intergenerational Redistribution through Monetary Policy By Makoto Nakajima
  28. Inconsistent voting behavior in the FOMC By Lähner, Tom
  29. Monetary Policy and Inequality in the UK By Haroon Mumtaz ; Angeliki Theophilopoulou
  30. Why did bank lending rates diverge from policy rates after the financial crisis? By Anamaria Illes ; Marco Lombardi ; Paul Mizen
  31. Can monetary policy surprise the market? By Edda Claus, Mardi Dungey
  32. Defining the right internal exchange rate By Xavier Timbeau ; Lars Anderson ; Christophe Blot ; Jérôme Creel ; Andrew Watt
  33. Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area By Marcel Fratzscher ; Malte Rieth

  1. By: Charles Engel
    Abstract: This paper surveys the current state of the literature on international monetary policy coordination. It relates recent policy discussions to the lessons from the literature. It proposes several avenues for future research.
    JEL: F41 F42
    Date: 2015–02
  2. By: Thomas I. Palley
    Abstract: The Federal Reserve is a hugely powerful institution whose policies ramify with enormous effect throughout the economy. In the wake of the Great Recession, monetary policy focused on quantitative easing. Now, there is talk of normalizing monetary policy and interest rates. That conversation is important, but it is also too narrow and keeps policy locked into a failed status quo. There is need for a larger conversation regarding the entire framework for monetary policy and how central banks can contribute to shared prosperity. It is doubtful the US can achieve shared prosperity without the policy cooperation of the Fed. That makes understanding the Federal Reserve, the policy issues and institutional challenges, of critical importance.
    Date: 2015
  3. By: Davis, J. Scott (Federal Reserve Bank of Dallas ); Fujiwara, Ippei (Keio University )
    Abstract: Central banks that lack credibility often tie their exchange rate to that of a more credible partner in order to “import” credibility. We show in a small open economy model that a central bank that displays “limited credibility” can deliver significant improvements to a social welfare function that contains no role for exchange rate stabilization by maximizing an objective function that places weight on exchange rate stabilization, and thus the central bank with limited credibility will peg their currency to that of a more credible partner. As the central bank’s credibility improves it will place less weight on exchange rate stabilization in its objective function and thus loosen the peg. When the central bank is perfectly credible its objective function and the social welfare function are identical; it places no weight on exchange rate stabilization and allows the currency to freely float. Empirical results using a panel of both developed and developing countries show that as central banks become more independent they tend to allow more currency flexibility.
    JEL: E30 E50 F40
    Date: 2015–01–01
  4. By: Jakob Palek (University of Kassel )
    Abstract: Recent work on financial frictions in New Keynesian models suggest that there is a sizable spread between the risk-less interest rate and the borrowing rate. We analyze the optimal policy mix of monetary and fiscal authorities in a currency union with a country-specific credit spread by introducing a cost channel differential. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization. We show that the importance of fiscal policy in stabilizing shocks increases, when there is a gap in the inflation differential due to a relative shock, an idiosyncratic shock or a credit spread differential. The welfare losses will be increasing (decreasing) in the size of the cost channel, if the nominal interest rate is a demand- (supply-) side instrument.
    Keywords: cost channel; financial frictions; credit spreads; optimal monetary policy; fiscal policy; monetary union
    JEL: E31 E52 E62 E63
    Date: 2015
  5. By: Zhou, Xinyi Jimmy
    Abstract: The current ruble crisis causes much trouble for many of those eastern European countries like Russia and its neighbour countries: Strong ruble depreciation and high inflation for consumer goods are its most negative consequences. Because the ruble is only a national currency, but not a world currency, some people might ask if we introduce a new global currency, the World Calories Currency (WCC) or "Cal-Money", that currency would be less vulnerable and less crisis-prone. In this short paper, I firstly present the 4 main criteria of a successful and widely accepted currency: 1. Fair valuability & high inflation security, 2. high trust and acceptance among the users, 3.high distribution over the world and 4. high supportiveness of the real economy. After I compared the strength & weaknesses of the World Calorie Currency and present some concrete measures to make the Cal-Money implementation more smoothly, I then came to conclusion that all 4 main criteria of a successful, world wide applicable currency would be fulfilled by the WCC.
    Keywords: New Money Exchange System, World Calorie Currency (WCC), Real economy supportive, Ruble, currency crisis, world currency, CalorieCoin, Central bank supported, Hard currencies, BRICS, Food and energy sector, health supportive
    JEL: E40 E41 E42
    Date: 2015–02–22
  6. By: Rafi Melnick ; Till Strohsal ; ;
    Abstract: After the introduction of a stabilization program Israeli inflation decreased from 400% in 1985 to 2% in 2013. This paper analyzes how the remarkable transition process of Israel’s disinflation took place. We reinforce the existing hypothesis that inflationmoved in distinct steps characterized by constant levels with short-lived fluctuations around them. Multiple endogenous breakpoint tests provide strong empirical evidence in favor of our claim. We find that the disinflation process is defined by three clear steps of high, medium and low inflation. The break dates are in line with major economic events that constitute the end and the beginning of each disinflation step.
    Keywords: Inflation, Disinflation Steps, Multiple Breakpoint Tests, Inflation Targeting
    JEL: E31 E52 E58 C22
    Date: 2015–02
  7. By: Shaista Amod and Shakill Hassan
    Abstract: At what level does a currency’s volatility become ‘excessive’, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for ‘normal’variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and a…nd that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals –for each currency in our sample, except the Brazilian real. However, nominal exchangerate variances get closer to implied upper bounds under in‡inflation targeting. We also find a reduction in real exchange rate misalignment under inflation targeting.
    Keywords: Currency volatility, variance bounds, monetary exchange rate models, Inflation targeting, emerging markets
    JEL: F31 E52
    Date: 2015
  8. By: Mattia Guerini (Sant'Anna School of Advanced Studies, Pisa )
    Abstract: The recent economic crisis gave proof of the fact that the Taylor rule is no more that good instrument as it was thought to be just ten years ago; this might be due to the fact that agents acting in the economy hold Heterogeneous Expectations (HE). In a recent paper Anufriev et al. (2013) suggest that a way to force stability on the economic system is to adopt a more aggressive Taylor rule. In the present paper a standard NK-DSGE is considered in order to investigate whether a Friedman k-percent monetary policy rule may be a valid instrument to counteract the instability created by the presence of HE in a framework à la Brock and Hommes (1997). The model here presented suggests that when such a money supply rule is adopted by the Central Bank, stability strongly depends on the intensity of choice, which represents the ability of the agents to switch toward the best available predictor.
    Keywords: Heterogeneous Expectations, Friedman Monetary Policy Rule, Macroeconomic Stability
    JEL: E37 E52 E58
    Date: 2013–11
  9. By: Andrea Monticini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore ); Francesco Ravazzolo (Norges Bank and BI Norwegian Business School )
    Abstract: Central banks' operations and eciency arguments would suggest that the intraday interest rate should be set to zero. However, a liquidity crisis introduces frictions related to news, which can cause an upward jump of the intraday rate. This paper documents that these dynamics can be partially predicted during turbulent times. Long memory approaches or a combination of them to account for model uncertainty outperform random walk, autoregressive and moving average benchmarks in terms of point and density forecasting. The relative accuracy is higher when the full distribution is predicted. We also document that such statistical accuracy can provide economic gains in investment strategies based on lending in the intraday market.
    Keywords: interbank market, intraday interest rate, forecasting, density forecasting, policy tools.
    JEL: C22 C53 E4 E5
    Date: 2014–02
  10. By: Yuichio Waki ; Richard Dennis ; Ippei Fujiwara
    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 nd that it is optimal to grant \constrained discretion" to the central bank by imposing both upper and lower bounds on permissible in ation, 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
  11. By: Norhana Endut (Bank Negara Malaysia ); James Morley (School of Economics, Australian School of Business, the University of New South Wales ); Pao-Lin Tien (Wesleyan University )
    Abstract: We examine the relative importance of the interest rate, exchange rate, and banklending channels for the transmission mechanism of monetary policy in the United States over the past 50 years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results suggest a nontrivial role for the bank-lending channel at the aggregate level, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility occurring at the same time.
    Keywords: Bank-Lending Channel, Sign Restrictions, Great Moderation
    JEL: C32 E52
    Date: 2015–01
  12. By: Kawai, Masahiro (Asian Development Bank Institute ); Liu, Li-Gang (Asian Development Bank Institute )
    Abstract: This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policymaking in the People's Republic of China (PRC). It then observes that the PRC's monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and the McCallum-like rule to test whether the PRC's money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the renminbi as long as it continues to pursue capital account opening.
    Keywords: trilemma challenges; exchange rate regimes; monetary policy autonomy; peoples republic of china; taylor rule; mccallum rule
    JEL: E52 E58
    Date: 2015–02–16
  13. By: Jan Kregel
    Abstract: Given the continuing divergence between progress in the monetary field and political integration in the euro area, the German interest in imposing austerity may be seen as representing an attempt to achieve, de facto, accelerated progress toward political union; progress that has long been regarded by Germany as a precondition for the success of monetary unification in the form of the common currency. Yet no matter how necessary these austerity policies may appear in the context of the slow and incomplete political integration in Europe, they are ultimately unsustainable. In the absence of further progress in political unification, writes Senior Scholar Jan Kregel, the survival and stability of the euro paradoxically require either sustained economic stagnation or the maintenance of what Hyman Minsky would have recognized as a Ponzi scheme. Neither of these alternatives is economically or politically sustainable.
    Date: 2015–02
  14. By: Helali, Kamel ; Kalai, Maha ; Boujelben, Thouraya
    Abstract: This study analyzes the impact of the exchange rate fluctuations in the short and long-runs in Tunisia under a pure commitment policy through two channels. The first is the Structural Vector Autoregression used to analyze the short run effects of the exchange rate on the industrial production index and on the consumer and import price indexes. The second is the Vector Error Correction Model used to examine the long run dynamic effects of the exchange rate upon the same variables relying on Tunisian monthly data during the period January 1993 to June 2011. Unlike several empirical studies, which show that the impact of the exchange rate movements on prices has been reduced over the past few years in the industrialized countries, the exchange rate is found to be a potential source not only of production but also of inflation reduction in Tunisia. Indeed, the direct channel of the exchange rate seems to have a significant impact on production and inflation in the long-run, whereas the indirect one has no effect on the money supply. These results strongly support the monetary policy of the central bank targeting the exchange rate because there is a strong correlation between this rate and prices.
    Keywords: Exchange rate Pass-through; domestic prices; short and long run analysis; Tunisia.
    JEL: C32 E31 F31 F43
    Date: 2014–06–15
  15. By: Smith, Andrew Lee (Federal Reserve Bank of Kansas City )
    Abstract: This paper develops a nancial mechanism which integrates housing and the real econ- omy through housing-secured debt. In this environment, movements in home prices are ampli ed through both borrowers and banks' balance sheets, leading to a self-reinforcing credit/liquidity crunch. When placed within a traditional business cycle model, this - financial structure quantitatively captures empirical relationships the traditional nancial accelerator mechanism struggles to explain and the qualitative predictions of the model are consistent with dynamic responses from a VAR. The model provides a framework to examine the ability of QE policies and equity injections into big banks to mitigate a housing bust. Although both are e ective, the nuances of the policies are important. A prolonged asset purchase program is preferable to a short-term equity injection; however, the model suggests the equity injections may have been necessary to prevent an economic collapse at the acute stage of the 2008 Financial Crisis.
    Keywords: Financial Crises; Financial Frictions; Unconventional Monetary Policy; Housing
    JEL: E32 E44 G01 G21
    Date: 2014–10–01
  16. By: Mulatu F Zerihun, Marthinus C Breitenbach and Francis Kemegue
    Abstract: In this paper we investigate the likelihood of a proposed monetary union in the Southern African Development Community (SADC) being successful from the viewpoint of the Generalised Purchasing Power Parity (GPPP) hypothesis and optimum currency area (OCA) theory. We apply Johansen’s multivariate co-integration technique, panel unit root tests, Pedroni’s residual cointegration test and error correction based panel co-integration tests. The findings from this study confirm that GPPP holds among SADC member countries included in this study on account of cointegration and stationarity in real exchange rate series. The South African rand normalised long run beta coefficients of all the real exchange rates are below one except in the case of the Mauritian rupee and all bear negative signs except in the case of the Angolan New Kwanza and Mauritian rupee. This evidence support monetary union in the region except for Angola and Mauritius. However, the absolute magnitudes of the short run adjustment coefficients of SADC countries’ real exchange rates are low and bear positive signs in some cases. This finding implies that the observed slow speed of adjustment for the (log) real exchange rate of SADC member states might constrain the effectiveness of stabilization policies in the wake of external shocks, rendering SADC countries vulnerable to macroeconomic instability in the region. This result has important policy implications for the proposed monetary union in SADC.
    Keywords: SADC, OCA, GPPP, Real Exchange Rate, cointegration, panel unit root
    JEL: C32 E31 F15 F41
    Date: 2015
  17. By: Dorota Zuchowska (College of Social and Media Culture in Torun )
    Abstract: In the years 2004-2014 the Lithuania’s exchange rate policy was based on a rigid currency board system. After a period of uncontested success in the fight against inflation in the first decade of the transition and economic growth, entering the ERM II in 2004 and efforts to adopt the euro were treated as an optimal exit strategy from the currency board system. However, the consequences of this exchange rate system in the following years (until 2014) prevented Lithuania from meeting the economic convergence criteria. The starting point for the research is based on the theoretical analysis of literature studying benefits and risks associated with the use of the currency board system by the monetary authorities. The empirical analysis refers to the case of Lithuania and covers the years 2004-2014. The purpose of this analysis is to look at the effects of the use of the currency board system from the perspective of the convergence criteria of monetary nature and the extent of their implementation in the absence of opportunities for autonomous monetary policy.
    Keywords: Currency Board; Inflation;Euro Adoption; Lithuania
    JEL: E31 F31 F36
    Date: 2015–02
  18. By: Bjarni G. Einarsson
    Abstract: Using monthly data on 230 subcomponents of the consumer price index, a new measure of core inflation in Iceland is proposed based on a dynamic factor model. The measure is then compared along several dimensions to the set of core inflation measures currently monitored by the Central Bank of Iceland (including both exclusion and statistical measures). This comparison indicates that the dynamic factor measure outperforms other core inflation measures for the period March 1997 to July 2014 in terms of matching the mean of CPI inflation while having lower volatility. When examining subsamples determined by the availability of other measures of core inflation, the results are less clear-cut - the measures that match the mean of CPI inflation provide little or no reduction in volatility, while the dynamic factor measure does not match the mean of inflation perfectly but has the advantage of lower volatility. An evaluation of whether the core inflation measures are unbiased predictors of future inflation indicates that, of all the measures examined, only the dynamic factor measure and one exclusion measure (core index 1) are unbiased predictors, both of them weakly exogenous. A potential drawback of the dynamic factor model approach is that its core inflation estimate may be subject to large revisions when new data become available. However, the results indicate that the dynamic factor measure is quite robust to the addition of new data. Thus the results of the paper indicate that the dynamic factor measure of core inflation may be a valuable complement to the set of measures of core inflation currently monitored by the Central Bank of Iceland.
    Date: 2014–11
  19. By: Illing, Gerhard ; Siemsen, Thomas
    Abstract: We study monetary policy at the ZLB in a traceable three-period model, in which price-level targeting emerges endogenously in the welfare function. We characterize optimal price-level forward guidance under discretion and commitment. Potentially non-monotonic discretionary welfare losses are lowest with perfectly flexible prices. Price-level targeting introduces a new constraint on optimal forward guidance that restricts the credible amount of overshooting. With this constraint, the zero lower bound may be binding even after the shock has abated. We characterize conditions when the commitment to hold nominal rates at zero for an extended period is optimal. Finally, we introduce government spending and show that under persistently low policy rates optimal government spending becomes more front-loaded, while procyclical austerity fares worse than discretionary government spending.
    Keywords: zero lower bound; forward guidance; price-level target; optimal policy
    JEL: E43 E52 E58
    Date: 2015–02–09
  20. By: Doh, Taeyoung (Federal Reserve Bank of Kansas City ); Park, Woong Yong ; Bong, Kwan Soo
    Abstract: This paper estimates a New Keynesian dynamic stochastic general equilibrium (DSGE) model in small open economies using the yield curve data as well as standard macro data. The DSGE model is estimated on the data of three inflation-targeting small open economies (Australia, Canada, and New Zealand) using Bayesian methods. We find that the long-end of the yield curve is highly correlated with the current and future short-term interest rates determined by domestic central banks. Yield curve data are particularly informative about the future stance of monetary policy in Australia and Canada in that the correlation between the model-implied monetary policy expectations and the ex-post realized policy interest rates increases when the yield curve data are used in estimation. Unlike the estimation results solely based on the macro data that imply the cental bank’s relatively strong focus on inflation stabilization, our results using yield curve information suggest that even inflation-targeting central banks have a significant concern for output stabilization. We also document that persistent domestic shocks, not foreign disturbances, drive the average level of the yield curve in these three countries
    Keywords: dynamic general equilibrium model; small open economy model; yield curve; monetary policy expectations
    Date: 2014–11–01
  21. By: Jaume Ventura ; Alberto Martin
    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.
    JEL: E32 E44 O40
    Date: 2015–02
  22. By: Mulatu F. Zehirun (Department of Economics, Faculty of Economics and Finance, Tshwane University of Technology ); Marthinus C. Breitenbach (Department of Economics, University of Pretoria ); Francis M. Kemegue (Department of Economics, University of Pretoria )
    Abstract: In this paper we investigate the likelihood of a proposed monetary union in the Southern African Development Community (SADC) being successful from the viewpoint of the Generalised Purchasing Power Parity (GPPP) hypothesis and optimum currency area (OCA) theory. We apply Johansen’s multivariate co-integration technique, panel unit root tests, Pedroni’s residual cointegration test and error correction based panel cointegration tests. The findings from this study confirm that GPPP holds among SADC member countries included in this study on account of cointegration and stationarity in real exchange rate series. The South African rand normalised long run beta coefficients of all the real exchange rates are below one except in the case of the Mauritian rupee and all bear negative signs except in the case of the Angolan New Kwanza and Mauritian rupee. This evidence support monetary union in the region except for Angola and Mauritius. However, the absolute magnitudes of the short run adjustment coefficients of SADC countries’ real exchange rates are low and bear positive signs in some cases. This finding implies that the observed slow speed of adjustment for the (log) real exchange rate of SADC member states might constrain the effectiveness of stabilization policies in the wake of external shocks, rendering SADC countries vulnerable to macroeconomic instability in the region. This result has important policy implications for the proposed monetary union in SADC.
    Keywords: SADC, OCA, GPPP, real exchange rate, cointegration, panel unit root
    JEL: C32 E31 F15 F41
    Date: 2015–01
  23. By: Dudley Cooke (University of Exeter )
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2015
  24. By: Pawel Baranowski (Faculty of Economics and Sociology, University of Lodz ); Pawel Gajewski (Faculty of Economics and Sociology, University of Lodz )
    Abstract: Credible forward guidance should reduce the perceived impact of macroeconomic variables on the interest rate. Using a micro-level dataset we test the perception of monetary policy in Poland among professional forecasters and find evidence for forward guidance credibility.
    Keywords: minimum wages, survey data, forward guidance, Taylor rule, expectations
    JEL: E44 E52 E58
    Date: 2015–02
  25. By: Frost, Joshua (Federal Reserve Bank of New York ); Logan, Lorie (Federal Reserve Bank of New York ); Martin, Antoine (Federal Reserve Bank of New York ); McCabe, Patrick E. ; Natalucci, Fabio M. ; Remache, Julie (Federal Reserve Bank of New York )
    Abstract: We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP facility, as they seek to balance the objectives of setting an effective floor on money market rates during the normalization process and limiting any adverse secondary effects.
    Keywords: repo; reverse repo; overnight RRP; monetary policy; interest on excess reserves; money market funds; Federal Reserve Board; Federal Reserve System
    JEL: E52 E58 G21 G23
    Date: 2015–02–01
  26. By: Yoshino, Naoyuki (Asian Development Bank Institute ); Kaji, Sahoko (Asian Development Bank Institute ); Asonuma, Tamon (Asian Development Bank Institute )
    Abstract: This paper analyzes a desirable transition path for East Asian countries given the People's Republic of China's (PRC's) transition to a new exchange rate regime. It attempts to answer two main questions: (i) Would these countries be better off shifting to either a basket peg or a floating regime following the PRC's transition to a basket peg regime? (ii) How and when should these countries shift to the desired regime? The paper captures the influence of the PRC's predetermined shift in its exchange rate regime on East Asian countries' decisions regarding their optimal transition policies based on a dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our calibration exercise using Malaysian and Singapore data from the first quarter (Q1) of 2000 to Q4 2012 reveals that a gradual adjustment to a basket peg is the most desirable policy for both countries. A sudden shift to a basket peg is superior to maintaining a dollar peg in Malaysia, but not in Singapore. Finally, a sudden shift to a floating regime is even worse than maintaining a dollar peg in both countries.
    Keywords: basket peg; floating regime; exchange rate transition; peoples republic of china; monetary policy
    JEL: F33 F41 F42
    Date: 2015–02–17
  27. By: Makoto Nakajima (Federal Reserve Bank of Philadelphia )
    Abstract: How important are intergenerational heterogeneity and an aging population for the design of systematic monetary policy? We answer this question using a New-Keynesian business cycle model with overlapping generations of households. Our model features rich heterogeneity; households differ not only in their stage in the life-cycle, but also in the amount and allocation of wealth and in the size of non-financial income. Monetary policy generates redistribution of income and wealth in the model. Since retirees tend to hold larger (positive) amounts of financial assets and especially bonds, a rise in the interest rate induced by monetary policy increases their income. At the same time, working-age households tend to suffer because of falling wages and higher borrowing costs. The resulting wealth effects lead to a rise in aggregate labor supply, altering the monetary transmission channel compared to an representative agent economy. After showing that intergenerational redistribution of income and wealth can be significant when monetary policy strongly reacts to a severe recession, we study the design of implementable monetary policy in comparison to the complete market and representative agent benchmarks.
    Date: 2014
  28. By: Lähner, Tom
    Abstract: This paper examines determinants of inconsistent voting behavior in the Federal Open Market Committee (FOMC). Inconsistent voting behavior is defined as a changing preference on the preferred interest rate voiced in the policy go-around relative to the interest rate preference cast in the formal voting. It is hypothesized that the change in transparency in 1993 as well as individual characteristics of FOMC members may play a significant role in inconsistent voting behavior. Using FOMC voting data extracted from verbatim transcripts from 1989 until 2008 results can be summarized as follows: The regime shift in transparency has a significant impact on the probability of casting inconsistent votes. After 1993, the probability of casting inconsistent votes decreases significantly, on average by 3.3%. FOMC members with longer tenure on the committee have a lower probability of casting inconsistent votes. Further results suggest that Board members and bank presidents differ significantly, with bank presidents casting inconsistent votes more often than Board members do. This relation holds true for gender as well, with female members casting more inconsistent votes than males. In addition, political aspects and career backgrounds also contribute to explaining inconsistent voting behavior in the FOMC. Conditional effects reveal that after the change in transparency differences between Board members and bank presidents remain, whereas differences between male and female members have diminished. Further results suggest that FOMC members with a career in the government sector have been strongly affected by the regime shift in transparency.
    Keywords: FOMC; transcript data, inconsistent voting; logit estimations
    JEL: E43 E52 E58
    Date: 2015–01
  29. By: Haroon Mumtaz (Queen Mary University of London ); Angeliki Theophilopoulou (University of Westminister )
    Abstract: The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct historical measures of inequality from 1968 to 2008. We study whether monetary policy shocks played a significant role in explaining this increase before and after 1993. We find that contractionary monetary policy shocks lead to a deterioration in earnings and income inequality and contribute to its fluctuation. Our evidence suggest that this effect is smaller during the inflation targeting period.
    Keywords: Inequality, Earnings, Income, Mixed frequency Bayesian SVAR, Monetary policy shocks
    JEL: E2 E3 E4 E5
    Date: 2015–02
  30. By: Anamaria Illes ; Marco Lombardi ; Paul Mizen
    Abstract: The global finance crisis prompted central banks in many countries to cut short-term policy rates to near zero levels. Yet, lending rates did not fall as much as the decline in policy rates would have suggested. We argue that comparing lending rates to policy rates is misleading: banks do not obtain all their funds at policy rates, and after the crisis, costs of funding rose substantially. Comparing lending rates with a weighted average cost of funds suggests that banks did not substantially change their rate setting behaviour after the financial crisis: interest rate pass-through relationships across eleven countries in Europe appear to have remained stable.
    Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015–02
  31. By: Edda Claus, Mardi Dungey (Wilfrid Laurier University )
    Abstract: This paper extracts measures of monetary policy surprises for Australia, Canada and the United States using a latent factor framework. We distinguish monetary policy surprises which occur when central banks report new assessments of the economy (or do not reinforce changes expected by market assessments) from those when policy makers appear to change their preferences. Changing policy preferences are evident in all jurisdictions, particularly during periods of stress. No-change policy announcements have distinctly differing impacts across the three countries; in Canada these have the same impact as policy changes, in Australia they are not discernibly different to a normal trading day and the US market lies between these scenarios. The revealed differences in size and type of the policy surprise outcomes for these operationally similar central banks suggests that the role of transparency policy is more subtle than previously appreciated.
    Keywords: monetary policy, central banks, latent factor model
    JEL: E43 E52 C38
    Date: 2015–01–01
  32. By: Xavier Timbeau (OFCE ); Lars Anderson (Economic Council of the Labour Movement (ECLM) ); Christophe Blot (OFCE ); Jérôme Creel (OFCE ); Andrew Watt (Macroeconomic Policy Institute (IMK) )
    Date: 2015–02
  33. By: Marcel Fratzscher ; Malte Rieth
    Abstract: The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.
    Keywords: Credit risk, banks, sovereigns, monetary policy, bank bailout, heteroscedasticity, spillovers
    JEL: E52 G10 E60
    Date: 2015

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