nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒03‒13
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Adverse Effects of Monetary Policy Signalling By Jan Filacek; Jakub Mateju
  2. A DSGE Model for China’s Monetary and Macroprudential Policies By Sinclair, Peter; Sun, Lixn
  3. Spillover of the ECB's Monetary Policy Outside the Euro Area: How Different is Conventional From Unconventional Policy? By Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
  4. The Effects of Conventional and Unconventional Monetary Policy Surprises on Asset Markets in the United States By Unalmis, Deren; Unalmis, Ibrahim
  5. Monetary Policy and the Financial Sector By Singh, Aarti; Stone, Sophie; Suda, Jacek
  6. Monetary policy implications for an oil-exporting economy of lower long-run international oil prices By Franz Hamann; Jesús Bejarano; Diego Rodríguez
  7. Quantitative easing with bite: a proposal for conditional overt monetary financing of public investment By Andrew Watt
  8. "Deflation/Inflation Dynamics: Analysis based on Micro Prices " By Hiroshi Yoshikawa; Hideaki Aoyama; Yoshi Fujiwara; Hiroshi Iyetomi
  9. Cross-Border Liquidity, Relationships and Monetary Policy: Evidence from the Euro Area Interbank Crisis By Abbassi, Puriya; Bräuning, Falk; Fecht, Falko; Peydró, José Luis
  10. Innovations in mortgage finance and the onset of the Great Recession in a small open economy with a euro peg By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj
  11. Leaning Against the Credit Cycle By Paolo Gelain; Kevin J. Lansing; Gisle J. Natvik
  12. How do Shocks to Domestic Factors Affect Real Exchange Rates of Asian Developing Countries By Taya Dumrongrittikul; Heather M. Anderson
  13. The Conduct of Monetary Policy in the Future: Instrument Use By Kei-Ichiro Inaba; Rory O’Farrell; Łukasz Rawdanowicz; Ane Kathrine Christensen
  14. Regional Inflation, Financial Integration and Dollarization By de Haas, R.; Brown, M.; Sokolov, V.
  15. Credit Smoothing and Determinants of Loan Loss Reserves. Evidence from Europe, US, Asia and Africa By Ozili, Peterson K
  16. Why do we need both liquidity regulations and a lender of last resort? A perspective from Federal Reserve lending during the 2007-09 US financial crisis By Mark Carlson; Burcu Duygan-Bump; William Nelson
  17. Inflation Dynamics and the Hybrid Neo Keynesian Phillips Curve: The Case of Chile By Medel, Carlos
  18. A dynamic network model of the unsecured interbank lending market By Francisco Blasques; Falk Bräuning; Iman van Lelyveld
  19. Household Borrowing Constraints and Monetary Policy in Emerging Economies By ARRUDA, Gustavo; LIMA, Daniela; TELES, Vladimir K.
  20. Assessing the CNH-CNY pricing differential: role of fundamentals, contagion and policy By Michael Funke; Chang Shu; Xiaoqiang Cheng; Sercan Eraslan
  21. Searching for Money Illusion in Europe By Alberto Montagnoli; Andrea Vaona
  22. A Veblenian Articulation of the Monetary Theory of Production By Zdravka Todorova
  23. Measuring the Core Inflation in Turkey with the SM-AR Model By Kulaksizoglu, Tamer
  24. Market reactions to the ECB's Comprehensive Assessment By Cenkhan Sahin; Jakob de Haan
  25. The Budgetary Implications of Higher Federal Reserve Board Interest Rates By Dean Baker
  26. Openness-Inflation Nexus in South Caucasus Economies By Aliyev, Khatai; Gasimov, Ilkin
  27. Real exchange rate persistence: The case of the Swiss franc-US dollar rate By Katarina Juselius; Katrin Assenmacher-Wesche
  28. Overfunding and underfunding, a main cause of the business cycle? By De Koning, Kees
  29. European Economic and Monetary Union Sovereign Debt Markets By Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu

  1. By: Jan Filacek; Jakub Mateju
    Abstract: Assuming information asymmetry between private agents and the central bank about the state of the economy, an unexpected change in interest rates signals the central bank's perceived state of the economy and facilitates an update of private expectations in an adverse, perhaps unintended way. This "updating channel" might counteract the standard transmission from interest rates to inflation and output. We develop a simple model laying down a theoretical basis for the adverse effects of monetary policy signalling. We also detect the presence of the updating channel in private forecasts of inflation in a cross-country sample of selected OECD countries.
    Keywords: Asymmetric information, monetary policy, monetary transmission, signalling, updating channel
    JEL: E17 E43 E58
    Date: 2014–12
  2. By: Sinclair, Peter; Sun, Lixn
    Abstract: This paper develops a calibrated DSGE model for simulating China’s monetary policy and macroprudential policy. The empirical results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio when the central bank is solely concerned by the price stability; second, that the loan-to-value (LTV) ratio is a very useful macroprudential tool for China’s financial stability, and the required reserve ratio could be used as an instrument for both objectives. Whether macroprudential policy complements or conflicts with monetary policy depends upon the instruments choices of two policies. Our policy experiments suggest three combination choices of instruments for China’s monetary and macroprudential policies.
    Keywords: DSGE Model, Monetary Policy, Macroprudental Policy, China’s Economy
    JEL: E5 E6 G1
    Date: 2014–05
  3. By: Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
    Abstract: This paper studies the macroeconomic impact of ECB policy on the euro area and six non-EMU countries. The analysis is based on the evolution of a synthetic index of overall euro area monetary conditions (MCI) that can be decomposed into conventional and unconventional policy measures. A standard monetary VAR including the MCI subcomponents shows that the transmission of unconventional monetary policy in the euro area is quite different than under conventional policy: prices react quickly, but the response of output (industrial production) is muted. A block-restricted VAR analysis confirms that euro area monetary policy spills over to the macroeconomic developments of non-EMU countries. While conventional monetary policy has a generalised effect on economic activity, exchange rates and prices, unconventional measures have generated a variety of responses. Exchange rates respond rather quickly, but an effect on the real economy is found only for some countries, and inflation remains largely unaffected.
    Keywords: ECB, monetary policy, synthetic indicator, unconventional measures, VAR
    JEL: E58 F42
    Date: 2014–12
  4. By: Unalmis, Deren; Unalmis, Ibrahim
    Abstract: This study estimates the impacts of conventional and unconventional monetary policy surprises on asset markets in the United States using the heteroskedasticity-based GMM technique suggested by Rigobon and Sack (2004). Monetary policy surprises have statistically significant effects on major asset markets in both periods, yet magnitudes of responses differ notably in the unconventional period. For the unconventional period, the impacts of monetary policy surprises on stock returns and the implied volatilities in stock and bond markets are found to be lower compared to the conventional period. For most of the other asset returns however, responses are similar or higher in the unconventional period.
    Keywords: Monetary Policy; Asset Markets; Identification through Heteroscedasticity
    JEL: E43 E44 E52
    Date: 2015–03–04
  5. By: Singh, Aarti; Stone, Sophie; Suda, Jacek
    Abstract: In this paper we study whether central banks should react to financial sector variables in their policy rules. We find that responding to asset prices has no impact and does not increase the likelihood of equilibrium indeterminacy. However, a response to entrepreneurial net worth increases the likelihood of determinacy in current and forward-looking policy rules.
    Keywords: Monetary policy, determinacy, financial sector, asset prices
    Date: 2015–02
  6. By: Franz Hamann (Banco de la República de Colombia); Jesús Bejarano (Banco de la República de Colombia); Diego Rodríguez (Banco de la República de Colombia)
    Abstract: The sudden collapse of oil prices poses a challenge to inflation targeting central banks in oil exporting economies. This paper illustrates that challenge and conducts a quantitative assessment of the impact of permanent changes in oil prices in a small and open economy, in which oil represents an important fraction of its exports. We calibrate and estimate a variety of real and monetary dynamic stochastic general equilibrium models using Colombian historical data. We find that, in these artificial economies the macroeconomic effects can be large but vary depending on the structure of the economy. The main channels through which the shock passes to the economy come from the increased country risk premium, the real exchange rate depreciation, the sectoral reallocation of resources from nontradables to tradables and the sluggish adjustment of prices. Contrary to the conventional findings in the literature of the financial accelerator mechanism for single-good closed economies, in multiple-goods small open economies the financial accelerator does not play a significant role in magnifying macroeconomic fluctuations. The sectoral reallocation from nontradable to tradables diminishes the financial amplification mechanism. Classification JEL: C61, E31, E37, E52, F41
    Keywords: oil prices, precautionary savings, monetary policy, credit, leverage, financial accelerator, Colombia
    Date: 2015–03
  7. By: Andrew Watt
    Abstract: To address the on-going crisis in the euro area it is proposed to introduce a scheme of conditional, overt monetary financing of public investment (COMFOPI). The inadequate response of monetary and fiscal policy is shown to explain the weak performance of the euro area compared with other advanced countries since the crisis. The measures currently on the table, including the Juncker Plan and quantitative easing QE, are unlikely to bring about the needed substantial improvement in economic growth, while putting growth on a sustainable footing. Advantages and dangers of monetary financing of fiscal policy are discussed in the light of the recent literature. COMFOPI is a form of QE in which bonds newly issued by the European Investment Bank are purchased, on secondary markets, by the ECB, and the financial resources are made available to national governments to finance investment projects. The scheme is explicitly time-limited by being made subject to a price-stability criterion ("conditional"). The provision of central bank money leads directly to higher spending in the economy ("overt"), unlike with QE which relies on indirect channels. A number of ways to operationalise the scheme are discussed.
    Keywords: Euro area, monetary financing, quantitative easing, European Central Bank, European Investment Bank, public investment, sustainable growth
    Date: 2015
  8. By: Hiroshi Yoshikawa (Faculty of Economics, The University of Tokyo); Hideaki Aoyama (Graduate School of Science, Kyoto University and Research Institute of Economy, Trade and Industry (RIETI)); Yoshi Fujiwara (Graduate School of Simulation Studies, The University of Hyogo,); Hiroshi Iyetomi (Department of Mathematics, Niigata University,)
    Abstract: Micro price data shows that individual price settings are not time-invariant as presumed in the existing literature. Furthermore, the analysis of autocorrelations shows that interactions of micro prices with leads and lags ignored in the literature play a very important role in explaining the behavior of aggregate price index. The price index such as CPI contains \noises" for the purpose of macroeconomics and monetary policy. The "core" CPI used by central banks is, however, defined merely on common sense and casual observation. We present a new method of extracting information on the systemic changes of the aggregate price based on micro price data. The "true core price index" so defined is correlated with over-time hours worked, the unemployment rate, and the exchange rate. It is not significantly correlated with money supply. Our analysis also shows that inertia arising from interactions of micro prices more plausibly explains the behavior of aggregate price than expectations. --
    Date: 2015–02
  9. 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: credit rationing; credit supply; euro area; financial crises; financial globalization; information asymmetry; interbank liquidity; monetary policy
    JEL: E44 E58 G01 G21 G28
    Date: 2015–03
  10. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics)
    Abstract: The Global Financial Crisis (GFC) of 2008 hit Denmark particularly hard. In this paper we argue that a combination of innovation in mortgage finance and the need to defend a euro exchange rate peg was partly responsible. Sustained pressure against the Danish krone forced the central bank to increase policy interest rates consecutively in the last quarter of 2008. Monetary tightening in the midst of the GFC deepened the ongoing recession for the usual Keynesian aggregate demand reasons. Innovations in mortgage finance, which had made the economy more sensitive to changes in the policy rate, exacerbated this effect.
    Keywords: Global Financial Crisis; Great Recession; currency peg; financial innovation; adjustable-rate mortgages
    JEL: E20 E30 E40 F33
    Date: 2015–03–10
  11. By: Paolo Gelain (Norges Bank (Central Bank of Norway)); Kevin J. Lansing (Federal Reserve Bank of San Francisco); Gisle J. Natvik (Norges Bank (Central Bank of Norway) and Department of Economics, BI Norwegian Business School)
    Abstract: We study the interaction between monetary policy and household debt dynamics. To this end, we develop a dynamic stochastic general equilibrium model where household debt is amortized gradually, and only new loans are constrained by the current value of collateral. Long-term debt implies that swings in leverage do not simply reect shifts in borrowing, and brings model implied debt dynamics closer to their empirical counterparts. The model implies that contractive monetary policy has muted inuence on household debt, increasing debt-to-GDP in the short run, while reducing it only in the medium run. If the interest rate is systematically raised whenever the debt-to-GDP ratio or the real debt level is high, equilibrium indeterminacy and greater volatility of debt itself follows. Responding to debt growth does not cast this destabilizing influence.
    Keywords: Monetary policy, Credit, Long-term debt.
    JEL: E52 E32 E44
    Date: 2015–02–27
  12. By: Taya Dumrongrittikul; Heather M. Anderson
    Abstract: This paper examines real exchange rate responses to shocks in exchange rate determinants for fourteen Asian developing countries. The analysis is based on a panel structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are not immediate and last only for a few years. Real exchange rate responses to unexpected monetary tightening are consistent with the long-run neutrality of money. The evidence suggests that trade liberalization and government consumption have a strong effect on real exchange rates, while the effects of traded-sector productivity shocks are much weaker.
    Keywords: Exchange rate fundamentals, Government consumption, Monetary policy, Panel vector error correction model, Productivity improvement in the traded sector, Real exchange rates, Sign and zero restrictions, Trade liberalization.
    JEL: C33 C51 E52 F31
    Date: 2015
  13. By: Kei-Ichiro Inaba; Rory O’Farrell; Łukasz Rawdanowicz; Ane Kathrine Christensen
    Abstract: The set of monetary policy instruments has expanded since the start of the global financial crisis in the many OECD economies. Against this background, this paper analyses whether some of the new instruments should be retained in the long term when broader financial stability objectives are likely to feature more prominently as monetary policy goals than prior to the crisis. It also assesses if these new instruments should be used during the transition to this situation and when countries are stuck in persistent stagnation. In the post recovery situation, central banks could ultimately revert to targeting short-term market rates with small balance sheets. This might, however, require changes to monetary policy implementation due to new liquidity requirements. The transition to this situation will be lengthy and will require a mixture of liquidity draining instruments. Alternatively, they could adopt a floor system, which may benefit financial stability. The use of unconventional measures as a substitute for policy rate cuts will no longer be needed unless countries remain in persistent stagnation. Nevertheless, in the post-recovery normal, extended collateral and counterparty eligibility could be sustained, and currency swap lines among central banks could be expanded.<P>La conduite de la politique monétaire à l'avenir : L'utilisation d'instruments<BR>Dans de nombreux pays de l’OCDE, la palette des instruments de la politique monétaire s’est élargie depuis le début de la crise financière mondiale. Dans ce contexte, on s’efforce dans le présent document d’analyser s’il conviendrait de conserver certains de ces nouveaux instruments dans la durée, lorsque les objectifs de stabilité financière au sens large s’affirmeront probablement davantage en tant qu’objectifs de la politique monétaires qu’avant la crise. Il s’agit également d’évaluer si ces nouveaux instruments doivent être utilisés pendant la période de transition, et lorsque les pays sont enlisés dans une stagnation persistante. Après la reprise, les banques centrales pourraient revenir au ciblage des taux de marché à court terme avec des bilans d’ampleur modeste. Ceci pourrait toutefois obliger à modifier la mise en oeuvre de la politique monétaire, du fait des nouvelles exigences en matière de liquidité. La phase de transition vers une telle situation sera longue et nécessitera une panoplie d’instruments permettant de drainer des liquidités. Autrement, les banques centrales pourraient adopter un système de plancher, qui pourrait être bénéfique à la stabilité financière. Le recours à des mesures non conventionnelles pour suppléer des baisses des taux directeurs ne sera plus nécessaire, sauf si les pays se retrouvent dans une situation de stagnation persistante. Néanmoins, dans une situation normale d’après reprise, une extension des conditions d’admissibilité des garanties et des contreparties pourrait être maintenue, et les lignes de crédit réciproques entre banques centrales pourraient être élargies.
    Keywords: liquidity, corridor and floor interest rate systems, forward guidance, quantitative easing, conventional and unconventional monetary policy, liquidité, assouplissement quantitatif, systèmes de corridors de taux d’intérêt et de taux d’intérêt plancher, Politique monétaire conventionnelle et non conventionnelle, indications prospectives
    JEL: E42 E43 E52 F33
    Date: 2015–03–05
  14. By: de Haas, R. (Tilburg University, Center For Economic Research); Brown, M. (Tilburg University, Center For Economic Research); Sokolov, V.
    Abstract: We exploit variation in consumer price inflation across 71 Russian regions to examine the relationship between the perceived stability of the domestic currency and financial dollarization. Our results show that regions with higher inflation experience an increase in the dollarization of household deposits and a decrease in the dollarization of loans to households and to firms in non-tradable sectors. The impact of inflation on credit dollarization is weaker in regions with less integrated banking markets. This suggests that the currency-portfolio choices of households and firms may be constrained by the asset-liability management of banks.
    Keywords: Financial dollarization; Financial Integration; regional inflation
    JEL: E31 E42 E44 F36 G21 G22 G24
    Date: 2015
  15. By: Ozili, Peterson K
    Abstract: This study provides a link between accounting, managerial discretion and monetary policy. Monetary authorities encourage banking institutions to supply credit to the economy. Increased bank supply of credit is a good thing but too much of a good can be a bad thing. This paper investigates under what circumstances excessive loan supply ceases to be a good thing and how bank managers react to this. After examining 82 bank samples, I find that (i) bank underestimate the level of reserves to boost credit supply in line with expectations of monetary authorities, particularly, in Asia and UK (ii) consistent with the credit smoothing hypothesis, US and Chinese banks smooth credit supply to minimize unintended stock market signaling; (iii) managerial priority during a recession is to smooth credit over time rather than to boost credit supply; (iv) non-performing loans, bank portfolio risk and loan portfolio size are significant determinants of the level of loan loss reserves; and (v) credit risk, proxy by loan growth, do not have a significant impact on loan loss reserves but tend to have some significant effect during a recession, particularly, when change in loans is negative. The implications of these findings are two-fold: (i) bank managers use their discretion over reserves to influence bank credit supply; (ii) bank supply of credit is not solely driven by loan demand but by a combination of several factors, particularly, capital market concerns, the need to avoid scrutiny from monetary authorities, and country-specific factors.
    Keywords: Credit Risk, Monetary Policy, Loan Loss Reserves, Credit Smoothing, Accounting, Signaling, Bank supervision.
    JEL: E52 E58 G21 G28 M41
    Date: 2015–03–07
  16. By: Mark Carlson; Burcu Duygan-Bump; William Nelson
    Abstract: During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks.
    Keywords: Lender of last resort, central banks, liquidity regulation, financial crises
    Date: 2015–03
  17. By: Medel, Carlos
    Abstract: It is recognised that the understanding and accurate forecasts of key macroeconomic variables are fundamental for the success of any economic policy. In the case of monetary policy, many efforts have been made towards understanding the relationship between past and expected values of inflation, resulting in the so-called Hybrid Neo-Keynesian Phillips Curve (HNKPC). In this article I investigate to which extent the HNKPC help to explain inflation dynamics as well as its out-of-sample forecast, for the case of the Chilean economy. The results show that the forward-looking component is significative and accounts from 1.58 to 0.40 times the lagged inflation coefficient. Also, I find predictive gains close to 45% (respect to a backward-looking specification) and up to 80% (respect to the random walk) when forecasting at 12-months ahead.
    Keywords: New Keynesian Phillips Curve; inflation forecast; out-of-sample comparisons; survey data; real-time dataset
    JEL: C22 C53 E31 E37 E47
    Date: 2015–03–06
  18. By: Francisco Blasques; Falk Bräuning; Iman van Lelyveld
    Abstract: We introduce a structural dynamic network model of the formation of lending relationships in the unsecured interbank market. Banks are subject to random liquidity shocks and can form links with potential trading partners to bilaterally Nash bargain about loan conditions. To reduce credit risk uncertainty, banks can engage in costly peer monitoring of counterparties. We estimate the structural model parameters by indirect inference using network statistics of the Dutch interbank market from 2008 to 2011. The estimated model accurately explains the high sparsity and stability of the lending network. In particular, peer monitoring and credit risk uncertainty are key factors in the formation of stable interbank lending relationships that are associated with improved credit conditions. Moreover, the estimated degree distribution of the lending network is highly skewed with a few very interconnected core banks and many peripheral banks that trade mainly with core banks. Shocks to credit risk uncertainty can lead to extended periods of low market activity, amplified by a reduction in peer monitoring. Finally, our monetary policy analysis shows that a wider interest rate corridor leads to a more active market through a direct effect on the outside options and an indirect multiplier effect by increasing banks' monitoring and search efforts.
    Keywords: Interbank liquidity, financial networks, credit risk uncertainty, peer monitoring, monetary policy, trading relationships, indirect parameter estimation
    Date: 2015–02
  19. By: ARRUDA, Gustavo; LIMA, Daniela; TELES, Vladimir K.
    Abstract: Credit markets in emerging economies can be distinguished from those in advanced economies in many respects, including the collateral required for households to borrow. This work proposes a DSGE framework to analyze one peculiarity that characterizes the credit markets of some emerging markets: payroll-deducted personal loans. We add the possibility for households to contract long-term debt and compare two different types of credit constraints with one another, one based on housing and the other based on future income. We estimate the model for Brazil using a Bayesian technique. The model is able to solve a puzzle of the Brazilian economy: responses to monetary shocks at first appear to be strong but dissipate quickly. This occurs because income – and the amount available for loans – responds more rapidly to monetary shocks than housing prices. To smooth consumption, agents (borrowers) compensate for lower income and for borrowing by working more hours to repay loans and erase debt in a shorter time. Therefore, in addition to the income and substitution effects, workers consider the effects on their credit constraints when deciding how much labor to supply, which becomes an additional channel through which financial frictions affect the economy.
    Date: 2015–03–02
  20. By: Michael Funke; Chang Shu; Xiaoqiang Cheng; Sercan Eraslan
    Abstract: Renminbi internationalisation has brought about an active offshore market where the exchange rate frequently diverges from the onshore market. Using extended GARCH models, we explore the role of fundamentals, global factors and policies related to renminbi internationalisation in driving the pricing differential between the onshore and offshore exchange rates. Differences in the liquidity of the two markets play an important role in explaining the level of the differential, while rises in global risk aversion tend to increase the differential's volatility. On the policy front, measures permitting cross-border renminbi outflows have a particularly discernible impact in reducing the volatility of the pricing gap between the two markets.
    Keywords: renminbi exchange rates, China, onshore and offshore markets, GARCH models
    Date: 2015–02
  21. By: Alberto Montagnoli (University of Sheffiled); Andrea Vaona (Department of Economics (University of Verona))
    Abstract: We apply recent money illusion tests on data on individual life satisfaction from the Eurobarometer for the period 1980–2003. The null hypothesis of no money illusion cannot be rejected. Different nominal rigidities across European countries and EMU countries, specifically, cannot be explained by different degrees of money illusion.
    Keywords: cost of living; subjective well-being; price index; money illusion
    JEL: I31 D12 D60 C23 D31
    Date: 2015–03
  22. By: Zdravka Todorova (Wright State University)
    Abstract: The artical presents a further articulation of the monetary theory of production inspired by the writings of Thorstein Veblen. Particularly I offer a formulation of the monetary theory of production as part of broader theorizing about social provisioning and the life process. This includes an analytical focus on non-commodities; an extension of the Veblenian dichotomy to non-market activities; discussion of Veblen's theory of social valuation in connection to monetary theory of production and class; delineation of as social process that constitute social provisioning and their commodity and non-commodity aspects. The goal is bridging the gap between monetary theory of production and analysis of 'the social'.
    Keywords: Monetary theory of production, Thorstein Veblen, capitalism, heterodox economics, social provisioning, class, political economy
    JEL: B15 B41 B52 B54 P16 Z13
    Date: 2015–03
  23. By: Kulaksizoglu, Tamer
    Abstract: This paper employs a new econometric technique to estimate the core inflation in Turkey measured as the shifting means in levels between 1955 and 2014. Using monthly series, we determine the number of shifts using the BIC, the hv-block cross-validation, the Lin-Teräsvirta parameter constancy test, and the neural networks test for neglected non-linearity. We find that there are at least three shifts in the inflation series. The findings help detect the exact dates of the shifts between different inflation regimes and the duration of each shift, which should be important information in evaluating the success of past economic policies in fighting inflation.
    Keywords: Inflation; Shifting mean autoregressive model; Transition function
    JEL: C22 C45 C52 E31
    Date: 2015–03–07
  24. By: Cenkhan Sahin; Jakob de Haan
    Abstract: Using an event study approach, we examine financial markets' reactions to the publication of the ECB's Comprehensive Assessment of banks in the euro area. Our results suggest that banks' stock market prices and CDS spreads generally did not react to the publication of the results of the Comprehensive Assessment. This conclusion also holds for banks with a capital shortfall. Only for banks in some countries do we find weak evidence for (mixed) effects on stock prices, while CDS spreads for German banks declined.
    Keywords: ECB Comprehensive Assessment; stress tests; bank equity returns; CDS Spreads
    JEL: G21 G28
    Date: 2015–02
  25. By: Dean Baker
    Abstract: This paper explores the potential impact of the Federal Reserve Board’s decision on interest rates on the budget deficit. The first part recounts the history of the 1990s surplus, correcting the widely held misunderstanding that this surplus was achieved by the Clinton administration’s tax increases and spending cuts. The second part examines the direct and indirect impact of Fed rate hikes on the federal budget deficit. The third part examines the impact of Fed rate hikes on state budgets.
    Keywords: jobs, employment, interest rates, unemployment, economic policy, Fed
    JEL: E E4 E5
    Date: 2015–03
  26. By: Aliyev, Khatai; Gasimov, Ilkin
    Abstract: Following Romer (1993), openness-inflation nexus has been subject to many empirical researches. However, South Caucasus economies are not studied yet. The aim of this research is to fill this gap in empirical literature by using multiple regression models and impulse-response function analysis for the region countries, Georgia, Armenia, and Azerbaijan, separately for the period 1996-2012. To define the level of openness, methodology in Ashra (2002) is used. Findings provide no significant impact of the openness on inflation level in all region countries, except partially Georgia. However, the direction of the relationship differs across countries because of the international trade patterns.
    Keywords: Openness, inflation, Georgia, Armenia, Azerbaijan, time-series analysis, impulse-response analysis
    JEL: F11 F13 F14 F15
    Date: 2014–10
  27. By: Katarina Juselius; Katrin Assenmacher-Wesche
    Abstract: Asset prices tend to undergo wide swings around long-run equilibrium values, which can have detrimental effects on the real economy. To get a better understanding of how the financial sector and the real economy interact, this paper models the long swings in the Swiss franc-US dollar foreign currency market using the I(2) Cointegrated VAR model. The results show strong evidence of self-reinforcing feedback mechanisms in the Swiss-US foreign exchange market that are consistent with the observed pronounced persistence in Swiss-US parity conditions. Generally, the results provide support for models allowing expectations formation in financial markets to be based on imperfect information.
    Keywords: Long swings, Imperfect Knowledge, I(2) analysis, Self-reinforcing feed-back
    JEL: C32 C51 F31
    Date: 2015
  28. By: De Koning, Kees
    Abstract: In 1946 the economist Arthur Burns defined a business cycle as a period of expansion occurring about the same time in many economic activities, followed by similar general recessions, contractions and revivals, which merge into the expansion phase of the next cycle. Cycles may take from one year to ten or twelve years. Milton Friedman argued that the concept of “cycle” was a misnomer as business declines are more of a monetary phenomenon. In this paper it will be argued that the increase and decrease in individual household debts in the U.S., especially of the long-term variety of home mortgages, was responsible for causing the latest cycle period. It will be argued that the cycle started in 1998 when overfunding became apparent. “Overfunding” occurs when mortgage funds are not only used to build new homes, but also to cause house prices to exceed the CPI indexed levels. In 2004 and 2006 68% of all new mortgage funding was used to cause such excess and only 32% of the funding was used for building new homes. The recession sets in when doubts arise about the ability of individual households to continue to service their long-term debts. Such doubts came into the open in 2007 when the liquidity for U.S. mortgage-backed securities dried up. The contraction was characterized by a turn around from a lending expansion period to a forceful reduction in outstanding debt through foreclosure proceedings and home repossessions. The period of “underfunding” started. The contraction resulted in substantial job losses, income losses for households and a switch to use incomes to reduce debt levels. The latter set off the reduced demand levels for other goods and services. The households most affected were the lower and middle-income families, whose livelihood depends on income earnings rather than on the use and benefits of savings. The tax revenues of the U.S. (Federal, State and Local) government were also seriously affected. The annual tax revenues dropped by $1.5 trillion in fiscal year 2009 as compared to fiscal year 2007; a drop of 29%. The Federal Reserve’s efforts to create a compensatory overfunding situation through Quantitative Easing: a $4.2 trillion exercise in buying up government and mortgage bonds, did not directly address the financial pressures on individual households. It helped the savers, who saw their financial assets increase in values, but not the borrowers who saw their jobs disappear and income levels drop. In a way the rich got richer, but the poor got much poorer. Inequality was enhanced. There is another way and this paper highlights the need to provide overfunding to individual households, once a recession sets in. Such method works directly, rather than indirectly, and shortens the contraction period. It also addresses the inequality issue.
    Keywords: overfunding, underfunding, business cycle, U.S. mortgage lending, U.S. house price inflation, foreclosure proceedings, home repossessions, inequality between rich and poor, U.S.loss of tax revenues,Quantitative Easing,economic growth incentive method.
    JEL: D1 E3 E32 E4 E43 E44 E6 E60
    Date: 2015–03–03
  29. By: Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu
    Abstract: We focus on the developments in the EMU sovereign debt markets in the last decade. First, we show the integration structure of the EMU bond markets before and after the sovereign debt crisis. Accordingly, a fair integration is observed between EMU bond markets during the pre-crisis period. However, a strict segmen-tation emerges with the sovereign debt turmoil. Second, we comment on the recent decreasing trend in EMU member bond yields and their increasing co-movement degree. Accordingly, these changes are argued to de-pend on not the fiscal performances but the illusion of quality appeared with the Fed tapering signals in 2013.
    Keywords: EMU, global financial crisis, eurozone sovereign debt crisis, systemic risk, ight to quality, Fed tapering, dynamic conditional correlation
    JEL: C58 D85 E58 E62 F34 F36
    Date: 2015–03

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