nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒05‒09
39 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Normalizing Monetary Policy: Prospects and Perspectives : a speech at the "The New Normal Monetary Policy," a research conference sponsored by the Federal Reserve Bank of San Francisco, San Francisco, California, March 27, 2015 By Yellen, Janet L.
  2. Nonbank Financial Intermediation, Financial Stability, and the Road Forward : a speech at the "Central Banking in the Shadows: Monetary Policy and Financial Stability Postcrisis," 20th Annual Financial Markets Conference sponsored by the Federal Reserve Bank of Atlanta, Stone Mountain, Georgia, March 30, 2015 By Fischer, Stanley
  3. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Arias, Jonas E.; Caldara, Dario; Rubio-Ramirez, Juan F.
  4. A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle By Jung, Kuk Mo; Lee, Seungduck
  5. Credibility and monetary policy under inflation targeting By mhamdi, ghrissi; aguir, abdelkader; farhani, ramzi
  6. Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment By Arias, Jonas E.; Ascari, Guido; Branzoli, Nicola; Castelnuovo, Efrem
  7. Designing a simple loss function for the Fed: does the dual mandate make sense? By Debortoli, Davide; Kim, Jinill; Linde, Jesper; Nunes, Ricardo
  8. Quantitative and Qualitative Monetary Easing: Assessment of Its Effects in the Two Years since Its Introduction By Monetary Affairs Department
  9. Bank risks, monetary shocks and the credit channel in Brazil: identification and evidence from panel data. By J. Ramos-Tallada
  10. The Optimal Inflation Rate under Schumpeterian Growth By Koki Oikawa; Kozo Ueda
  11. The Eurosystem’s asset purchase programmes for monetary policy purposes By Pietro Cova; Giuseppe Ferrero
  12. Conducting Monetary Policy with a Large Balance Sheet : a speech at the 2015 U.S. Monetary Policy Forum, Sponsored by the University of Chicago Booth School of Business, New York, New York, February 27, 2015 By Fischer, Stanley
  13. Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia By Andrew J Filardo; Pierre L Siklos
  14. State-Dependent Pricing and Optimal Monetary Policy By Lie, Denny
  15. The natural yield curve: its concept and developments in Japan By Kei Imakubo; Haruki Kojima; Jouchi Nakajima
  16. Has Trend Inflation Shifted?: An Empirical Analysis with a Regime-Switching Model By Sohei Kaihatsu; Jouchi Nakajima
  17. Monetary Policy and the Independence Dilemma By Williams, John C.
  18. Monetary Policy Lessons and the Way Ahead : a speech at the Economic Club of New York, New York, New York, March 23, 2015 By Fischer, Stanley
  19. The Economic Outlook and Monetary Policy Loretta J Mester-President and CEO-Federal Reserve Bank of Cleveland-The Forecasters Club of New York-New York, NY-April 16, 2015 By Mester, Loretta J.
  20. Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  21. The stability of short-term interest rates pass-through in the euro area during the financial market and sovereign debt crises By Avouyi-Dovi, Sanvi; Horny, Guillaume; Sevestre, Patrick
  22. A compelling case for Chinese monetary easing By Guonan Ma
  23. Interest Rate Pass-Through and Asymmetries in Retail Deposit and Lending Rates: An Analysis using Data from Colombian Banks By Mark J. Holmes; Ana Maria Iregui; Jesús Otero
  24. The View from Here: The Economic Outlook and Its Implications for Monetary Policy By Williams, John C.
  25. The formation of European inflation expectations: One learning rule does not fit all By Christina Strobach; Carin van der Cruijsen
  26. Revisiting the Grennbook's relative forecasting performance By Paul Hubert
  27. Inflation Expectations and Recovery from the Depression in 1933: Evidence from the Narrative Record By Jalil, Andrew; Rua, Gisela
  28. Euro Area Government Bonds - Integration and Fragmentation during the Sovereign Debt Crisis By Michael Ehrmann; Marcel Fratzscher
  29. An agency problem in the MBS market and the solicited refinancing channel of large-scale asset purchases By Kandrac, John; Schlusche, Bernd
  31. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  33. Exchange Rate Pass-Through and Market Structure in a Multi-Country World By Kanda Naknoi
  34. A Model of Endogenous Loan Quality and the Collapse of the Shadow Banking System By Ferrante, Francesco
  35. Advancing Macroprudential Policy Objectives : a speech At the Office of Financial Research and Financial Stability Oversight Council's 4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts, Arlington, Virginia, January 30, 2015 By Tarullo, Daniel K.
  36. Clearinghouse Loan Certificates as a Lender of Last Resort By Christopher Hoag
  37. Toward Further Development of the Repo Market By Nobukazu Ono; Kouga Sawada; Akira Tsuchikawa
  38. For a Few Dollars More: Reserves and Growth in Times of Crises By M. Bussière, Gong Cheng, Menzie Chinn and Noëmie Lisack; G. Cheng; M. Chinn; N. Lisack
  39. Managing Credit Bubbles By Alberto Martín; Jaume Ventura

  1. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–27
  2. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–30
  3. By: Arias, Jonas E. (Board of Governors of the Federal Reserve System (U.S.)); Caldara, Dario (Board of Governors of the Federal Reserve System (U.S.)); Rubio-Ramirez, Juan F. (Duke University)
    Abstract: Following Leeper, Sims, and Zha (1996), we identify monetary policy shocks in SVARs by restricting the systematic component of monetary policy. In particular, we impose sign and zero restrictions only on the monetary policy equation. Since we do not restrict the response of output to a monetary policy shock, we are agnostic in Uhlig's (2005) sense. But, in contrast to Uhlig (2005), our results support the conventional view that a monetary policy shock leads to a decline in output. Hence, our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions.
    Keywords: SVARs; Monetary policy shocks; Systematic component of monetary policy
    JEL: C51 E52
    Date: 2015–03–12
  4. By: Jung, Kuk Mo; Lee, Seungduck
    Abstract: A new monetary theory is set out to resolve the “Uncovered Interest Parity Puzzle (UIP Puzzle)”. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premium due to their medium of exchange role as either collateral or means of payment. In this framework no-arbitrage condition ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory in fact has interesting implications on many empirical observations that risk based explanations find difficult to reconcile with.
    Keywords: uncovered interest parity puzzle, monetary search models, FOREX market
    JEL: E31 E4 E52 F31
    Date: 2015–05
  5. By: mhamdi, ghrissi; aguir, abdelkader; farhani, ramzi
    Abstract: After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Emphasizing the role of transparency and the credibility of monetary policy as a performance criterion that motivate any country wishing to adopt an inflation targeting regime, this study leads to the fact that these two basic principles toward which a inflation targeting regime cannot be achieved without respect for certain pre namely institutional and technical conditions
    Keywords: Credibility, Inflation targeting, Investment, Employment, Central bank, Interest rate.
    JEL: E5
    Date: 2015–01
  6. By: Arias, Jonas E. (Board of Governors of the Federal Reserve System (U.S.)); Ascari, Guido (University of Oxford); Branzoli, Nicola (Bank of Italy); Castelnuovo, Efrem (University of Melbourne)
    Abstract: Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.
    Keywords: Trend inflation; determinacy; and monetary policy
    JEL: C22 E30 E52
    Date: 2014–10–29
  7. By: Debortoli, Davide (Universitat Pompeu Fabra); Kim, Jinill (Korea University); Linde, Jesper (Sveriges Riksbank); Nunes, Ricardo (Federal Reserve Bank of Boston)
    Abstract: Variable and high rates of price inflation in the 1970s and 1980s led many countries to delegate the conduct of monetary policy to "instrument-independent" central banks and to give their central banks a clear mandate to pursue price stability and instrument independence to achieve it. Advances in academic research supported a strong focus on price stability as a means to enhance the independence and credibility of monetary policymakers. An overwhelming majority of these central banks also adopted an explicit inflation target to further strengthen credibility and facilitate accountability. One exception is the U.S. Federal Reserve, which since 1977 has been assigned the so-called "dual mandate," which requires it to "promote maximum employment in a context of price stability." Although the Fed has established credibility for the long-run inflation target, an important question is whether its heavy focus on resource utilization can be justified. The authors' reading of the academic literature is that resource utilization should be assigned a small weight relative to inflation under the reasonable assumption that the underlying objective of monetary policy is to maximize the welfare of households inhabiting the economy. Woodford (1998) showed that the objective function of households in a basic New Keynesian sticky-price model could be approximated as a (purely) quadratic function in inflation and the output gap, with the weights determined by the specific features of the economy. A potential drawback with the large literature that followed is that it focused on relatively simple calibrated (or partially estimated) models. In this paper the authors revisit this issue within the context of an estimated medium-scale model of the U.S. economy, specifically the Smets and Wouters (2007) model.
    Keywords: central banks’ objectives; simple loss function; monetary policy design; Smets-Wouters model
    JEL: C32 E58 E61
    Date: 2015–03–10
  8. By: Monetary Affairs Department (Bank of Japan)
    Abstract: Two years have passed since the Bank of Japan introduced quantitative and qualitative monetary easing (QQE) in April 2013. This article considers attempts to assess the effects of QQE on Japan's economic and financial developments during this period. The start of the transmission mechanism of QQE is as follows: (1) inflation expectations will be raised through a strong and clear commitment to the price stability target of 2 percent and large-scale monetary expansion to underpin the commitment; and concurrently, (2) downward pressure will be put on the entire yield curve through the Bank's massive purchases of Japanese government bonds (JGBs); thereby (3) decreasing real interest rates. On that basis, the assessment of QQE's effects was made in the following two stages: in the first stage, the degree of the decline in real interest rates was gauged; and in the second stage, the extent to which the decline in real interest rates affected economic activity and prices was assessed. The results of the assessment could be judged to be that (a) QQE lowered real interest rates by slightly less than 1 percentage point and (b) the actual improvement in economic activity and prices was mostly in line with the mechanism anticipated by QQE. Recently, however, the year-on-year rate of increase in the consumer price index slowed, mainly due to the effects of the decline in crude oil prices. Looking ahead, due attention needs to be paid to how the decline in the actual inflation rate will affect inflation expectation formation.
    Keywords: Monetary policy; real interest rate; inflation expectations
    JEL: E52 E44 E37 E47
    Date: 2015–05–01
  9. By: J. Ramos-Tallada
    Abstract: Using a large database of bank financial statements, this paper investigates the determinants of the bank lending channel (BLC) of monetary transmission in Brazil between 1995 and 2012. I extend the standard empirical approach in two main ways. First, I apply a micro-founded strategy for disentangling demand from supply shifts in credit. Using this identification scheme, I show that lending supply is negatively correlated with the short-term market interest rate over the long period. The sensitivity of credit supply to monetary shocks is not related to the bank characteristics generally used in the empirical literature, whereas a proxy of the individual bank external finance premium (EFP) tends to capture financial constraints better than size, liquid assets or capitalization ratios. However, the patterns of the BLC have changed since the onset of the global financial crisis. In the post-crisis period, the money market rate does not affect the lending supply of the average bank anymore, while small banks and those lacking access to long-term funds appear more sensitive to monetary shocks in some estimations. Second, I check whether several types of uncertainty may drive the BLC, beyond liquidity risk. Over the long period, I find evidence that higher market risk borne by banks' securities portfolios (captured by a longer duration of public debt bonds) and lower uncertainty in the money market (captured by a lower volatility of rates) appear to consistently enhance the effectiveness of monetary policy through the BLC.
    Keywords: Risks, Monetary policy transmission, Bank lending channel, Identification of supply shifts, Panel data, Brazil.
    JEL: E44 E52 F4 G21
    Date: 2015
  10. By: Koki Oikawa; Kozo Ueda
    Abstract: In this study, we analyze the relationship between inflation and economic growth. To this end, we construct a model of endogenous growth with creative destruction, incorporating sticky prices due to menu costs. Inflation and deflation reduce the reward for innovation via menu cost payments and, thus, lower the frequency of creative destruction. Central banks can maximize the rate of economic growth by setting their target inflation rate at the negative of a fundamental growth rate that would be realized without price stickiness. The optimal inflation rate, however, may differ from the growth-maximizing inflation rate because of overinvestment in R&D and indeterminacy. Both mechanisms indicate a higher optimal inflation rate than the negative of a fundamental growth rate. Our calibrated model shows that the optimal inflation rate is close to the growth-maximizing inflation rate and that a deviation from the optimal level has sizable impacts on economic growth.
    Keywords: creative destruction, menu cost, new Keynesian, monetary policy
    JEL: E31 E58 O33 O41
    Date: 2015–05
  11. By: Pietro Cova (Bank of Italy); Giuseppe Ferrero (Bank of Italy)
    Abstract: This paper analyzes the operation of the Eurosystem’s public and private assets purchases programmes for monetary policy purposes, quantifying the potential effect on the Italian economy. First we give an exhaustive account of the main transmission channels by which the purchases can be expected to affect economic activity and inflation. Then we assess the effects on the main channels of transmission to the economy and measure the impact on the main macroeconomic variables, applying the Bank of Italy’s quarterly model. For 2015-16 the purchase programme can be expected to make a significant contribution to the growth of output and of prices, of more than 1 percentage point in both cases. Among the channels examined, the largest contribution is judged to come through the depreciation of the euro and the reduction in the interest rates on government securities and bank loans. These effects are comparable in magnitude to those found by studies on the securities purchase programmes conducted in the United States and the United Kingdom.
    Keywords: unconventional monetary policy, quantitative easing, transmission mechanism
    JEL: E51 E52 E58
    Date: 2015–04
  12. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–02–27
  13. By: Andrew J Filardo; Pierre L Siklos
    Abstract: This paper examines past evidence of prolonged periods of foreign exchange reserves accumulation in the Asia-Pacific region. One empirical challenge is to identify periods of reserve accumulation that are sufficiently large and persistent to be categorised as prolonged. Several proxies for prolonged episodes are considered, including a newly proposed one based on a factor model. We then identify the key macrofinancial determinants of prolonged reserve accumulation. Two broad conclusions emerge from the stylised facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity of accumulating reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. Policy implications are also drawn.
    Keywords: foreign exchange reserves accumulation, monetary and financial stability
    Date: 2015–04
  14. By: Lie, Denny
    Abstract: This paper studies optimal monetary policy under precommitment in a state-dependent pricing (SDP) environment, in contrast to the standard assumption of time-dependent pricing(TDP). I show that the endogenous timing of price adjustment under SDP importantly alters the policy tradeoffs faced by the monetary authority, due to lower cost of inflation variation on the relative-price distortion. It is thus desirable under SDP for the monetary authority to put less weight on inflation stabilization, relative to other stabilization goals. The optimal Ramsey policy under SDP delivers a 24 percent higher standard deviation of inflation, but with 26 percent and 6 percent lower standard deviations of output gap and nominal interest rate, respectively. Within a simple, Taylor-like policy rule, the change in the policy tradeoffs is manifested in higher feedback response coefficients on the output gap and the lagged nominal interest rate deviation under SDP. Additionally, this paper studies the optimal policy start-up problem related to the cost of adopting the timeless perspective policy instead of the true Ramsey policy. The SDP assumption leads to different start-up dynamics compared to the dynamics under the TDP assumption in several important ways. In particular, the change in the policy tradeoffs gives rise to much higher start-up inflation under SDP.
    Keywords: optimal monetary policy, state-dependent pricing, start-up problem, policy tradeoff, Ramsey policy, simple policy rule
    Date: 2015–04
  15. By: Kei Imakubo (Bank of Japan); Haruki Kojima (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: Recent monetary policies aiming to influence the entire yield curve have come to play a more prominent role in advanced economies as there has been little room for further lowering the short-term interest rate. This means that the effects of monetary easing cannot be fully captured by the single gap between the actual real short-term rate of interest and the corresponding natural rate of interest. This article proposes the concept of the natural yield curve, which extends the idea of the natural rate of interest defined at a specific maturity to one defined for all maturities. The gap between the actual real yield curve and the natural yield curve enables us to measure not only the effects of conventional monetary policy through short-term interest rate control but also those of unconventional monetary policy through government bond purchases and forward guidance.
    Keywords: Natural yield curve; Yield curve gap; Natural rate of interest; Interest rate gap
    JEL: C32 E43 E52 E58
    Date: 2015–05–01
  16. By: Sohei Kaihatsu (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper proposes a new econometric framework for estimating trend inflation and the slope of the Phillips curve with a regime-switching model. As a unique aspect of our approach, we assume regimes for the trend inflation at one-percent intervals, and estimate the probability of the trend inflation being in each regime. The trend inflation described in the discrete manner provides for an easily interpretable explanation of estimation results as well as a robust estimate. An empirical result indicates that Japan's trend inflation stayed at zero percent for about 15 years after the late 1990s, and then shifted away from zero percent after the introduction of the price stability target and the quantitative and qualitative monetary easing. The U.S. result shows a considerably stable trend inflation at two percent since the late 1990s.
    Keywords: Phillips curve; Regime-switching model; Trend inflation
    JEL: C22 E31 E42 E52 E58
    Date: 2015–05–01
  17. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to Chapman University, Orange, California , May 1, 2015
    Date: 2015–05–01
  18. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–03–23
  19. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good afternoon. I would like to start by thanking Charlie Steindel and the Forecasters Club of New York for their invitation to speak today. It is a particular pleasure for me to address your group: first, because I have known Charlie for many years – we both grew up as economists in the Federal Reserve System – but also because I know I won’t have to explain to you what a difficult task economic forecasting can be, even in the best of times. Still, forecasting is something economists and policymakers must do, so today I will discuss my outlook for the economy and monetary policy. As always, the views I’ll present are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.
    Date: 2015–04–29
  20. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies - the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries’ financial variables to the center economies, controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor. While certain macroeconomic and institutional variables are important, the arrangement of open macro policies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. We also find, among other results, that an economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies. Nonetheless, exchange rate regimes have mostly indirect effects on the strength of financial linkages. We conclude the trilemma remains relevant.
    JEL: F33 F41
    Date: 2015–04
  21. By: Avouyi-Dovi, Sanvi; Horny, Guillaume; Sevestre, Patrick
    Abstract: We analyse the dynamics of the pass - through of banks’ marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in France, Germany, Greece, Italy, Portugal and Spain . We measure banks’ marginal cost by their rate on new deposits, contrary to the literature that focuses on money market rates. This allows us to account for banks’ risks. We focus on the interest rate on new short - term loans granted to non - financial corporations in these countries . Our analysis is based on an error - correction approach that we extend to handle the time - varying long - run relationship between banks’ lending rates and banks’ marginal cost, as w ell as stochastic volatility . Our empirical results are based on a harmoni s ed monthly database from January 2003 to October 201 4 . We estimate the model within a Bayesian framework, using Markov Chain Monte Carlo methods (MCMC). We reject the view that the t ransmission mechanism is time invariant. The long - run relationship moved with the sovereign debt crises to a new one, with a slower pass - through and higher bank lending rates. Its developments are heterogeneous from one country to the other. Impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore, its risks. We also find that rates to small firms increase compared to large firms in a few countries. Using a VAR model, we show that overall, the effec t of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010. These results confirm the slowdown in the transmission mechanism.
    Keywords: Bank interest rates; error-correction model; structural breaks; stochastic volatility; Bayesian econometrics; Taux bancaires; modèle à correction d’erreur; ruptures structurelles; volatilité stochastique; économétrie bayésienne;
    JEL: E43 G21
    Date: 2015–04
  22. By: Guonan Ma
    Abstract: â?¢ Chinese monetary policy was excessively tight in 2014 but started loosening in late 2014, in an attempt to cushion growth, facilitate rebalancing, support reform and mitigate financial risk. â?¢ There are three main reasons for this policy shift. First, there is evidence that the Chinese economy has been operating below its potential capacity. Second, among the big five economies, Chinaâ??s monetary policy stance and broader financial condition both tightened the most in the wake of the global financial crisis, likely weighing on domestic growth. Third, a mix of easy monetary policy and neutral fiscal policy would serve China best at the current juncture, because it would support domestic demand and help with the restructuring of China's local government debts, while facilitating a move away from the soft dollar peg. â?¢ Such a warranted shift in monetary policy stance faces the challenges of uncertain potential growth, a more liberalised financial system, an evolving monetary policy framework, the legacy of excess leverage and a politicised policy debate.
    Date: 2015–04
  23. By: Mark J. Holmes (University of Waikato); Ana Maria Iregui (Banco de la República); Jesús Otero (Universidad del Rosario)
    Abstract: Using a sample of Colombian banks, we examine retail interest rate adjustment in response to changes in wholesale interest rates. Interest rate pass-through running from wholesale to retail rates is found to be both partial and heterogeneous across banks. This suggests that the effectiveness of monetary policy is limited. Further investigation reveals that the behaviour of retail deposit rates appears consistent with collusive behaviour between banks insofar as interest rates are more rapidly adjusted downwards than upwards. In the case of retail lending rates, it appears that banks more rapidly reduce than increase rates. This suggests that expansionary monetary policy in Colombia may be relatively more effective than contractionary policy.
    Keywords: interest rate pass-through; asymmetries; M/TAR model
    JEL: C33 E43
    Date: 2015–04–30
  24. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to CFA Society Hawaii - Annual Economic Forecast Dinner , Honolulu, Hawaii, March 5, 2015
    Date: 2015–03–05
  25. By: Christina Strobach; Carin van der Cruijsen
    Abstract: We empirically investigate how well different learning rules manage to explain the formation of household inflation expectations in six key member countries of the euro area. Our findings reveal a pronounced heterogeneity in the learning rules employed on the country level. While the expectation formation process in some countries can be best explained by rules that incorporate forward-looking elements (Germany, Italy, the Netherlands), households in other countries employ information on energy prices (France) or form their expectations by means of more traditional learning rules (Belgium, Spain). Moreover, our findings suggest that least squares based algorithms significantly outperform their stochastic gradient counterparts, not only in replicating inflation expectation data but also in forecasting actual inflation rates.
    Keywords: Inflation expectations; adaptive learning algorithms; household survey
    JEL: E31 E37 D84 C53
    Date: 2015–04
  26. By: Paul Hubert (OFCE)
    Abstract: Since Romer and Romer (2000), a large literature has dealt with the relative forecasting performance of Greenbook macroeconomic forecasts of the Federal Reserve. This paper empirically reviews the existing results by comparing the different methods, data and samples used previously. The sample period is extended compared to previous studies and both real-time and final data are considered. We confirm that the Fed has a superior forecasting performance on inflation but not on output. In addition, we show that the longer the horizon, the more pronounced the advantage of Fed on inflation and that this superiority seems to decrease but remains prominent in the more recent period. The second objective of this paper is to underline the potential sources of this superiority. It appears that it may stem from better information rather than from a better model of the economy.
    Keywords: monetary policy; greenbook; forecasts
    Date: 2015–04
  27. By: Jalil, Andrew (Occidental College); Rua, Gisela (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper uses the historical narrative record to determine whether inflation expectations shifted during the second quarter of 1933, precisely as the recovery from the Great Depression took hold. First, by examining the historical news record and the forecasts of contemporary business analysts, we show that inflation expectations increased dramatically. Second, using an event-studies approach, we identify the impact on financial markets of the key events that shifted inflation expectations. Third, we gather new evidence--both quantitative and narrative--that indicates that the shift in inflation expectations played a causal role in stimulating the recovery.
    Keywords: Great Depression; inflation expectations; liquidity trap; narrative evidence; regime change
    JEL: E31 E32 E42 N12
    Date: 2015–04–22
  28. By: Michael Ehrmann; Marcel Fratzscher
    Abstract: The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantialfragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank’s (ECB’s) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB’s monetary policy to the various countries.
    Keywords: Sovereign debt, European crisis, integration, fragmentation, contagion, policy, ECB, high-frequency data, identification
    JEL: F3 E5 G15
    Date: 2015
  29. By: Kandrac, John (Board of Governors of the Federal Reserve System (U.S.)); Schlusche, Bernd (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper, we document that mortgage-backed securities (MBS) held by the Federal Reserve exhibit faster principal prepayment rates than MBS held by the rest of the market. Next, we show that this stylized fact persists even when controlling for factors that affect prepayment behavior, and thus determine the MBS that are delivered to the Federal Reserve. After ruling out several potential explanations for this result, we provide evidence that points to an agency problem in the secondary market for MBS, which has not previously been documented, as the most likely explanation for the abnormal prepayment behavior of Federal Reserve-held MBS. This agency problem--a key feature of the MBS market--arises when originators of mortgages that underlie the MBS no longer share in the prepayment risk of the securities, thereby increasing incentives to solicit refinancing activity. Therefore, Federal Reserve MBS holdings acquired from originators as a result of large-scale asset purchases can help stimulate economic activity through a so-called "solicited refinancing channel." Finally, we provide an estimate of the additional refinancing activity resulting from the solicited refinancing channel in the years after the Federal Reserve's first MBS purchase program, demonstrating that this channel conveyed savings on monthly mortgage payments to homeowners.
    Keywords: Federal Reserve; LSAP; Monetary policy; QE; mortgage; mortgage-backed securities; prepayment rates
    JEL: E52 G01 G21 R38
    Date: 2015–03–31
  30. By: Herman O. Stekler (The George Washington University); Hilary Symington (Barnard College)
    Abstract: In setting monetary policy, the Federal Open Market Committee uses forecasts and other information to assess the current and future states of the US economy. Numerous studies have evaluated the Greenbook forecasts but did not determine why a forecast was made, what factors were considered or the uncertainty that was involved. The minutes of the FOMC provide such information. While the minutes are qualitative, using a quantitative index, we show that the FOMC saw the possibility of a recession but did not predict it. Using textual analysis, we determined which variables informed the forecasts.
    Keywords: FOMC forecasts; forecast evaluation; uncertainty; Great Recession; textual analysis
    Date: 2014–09
  31. By: M. Ege Yazgan (Department of Economics, Kadir Has University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation-targeting (IT) regime that was successful in lowering and maintaining inflation at acceptable levels. During this low-inflation IT regime, it is also shown that inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey
    JEL: E31 F41
    Date: 2015–05
  32. By: Nguyen Van Phuong
    Abstract: Vietnam has been implementing the export-oriented economy, in which the central bank of Vietnam, well-known as the State Bank of Vietnam (SBV), adopted the managed float exchange rate regime in 1990. Therefore, the exchange rate movement plays an important role in stimulating the Vietnamese export activities. By applying the long-run SVAR model, pioneered by Blanchard and Quah (1989), this research examines how the real and nominal shocks impact the nominal and real exchange rate (USD/VND) in Vietnam. Based on monthly data concerning USD/VND exchange rate and, the price levels in Vietnam and the United States from May 1995 to December 2013, our empirical results reveal that: the real shock primarily leads the real and nominal exchange rate (USD/VND) to fluctuate over time. Meanwhile, the nominal shock has a temporary effect on the movement in the real exchange rate in Vietnam. Our research also finds that the long-run Purchasing Power Parity (PPP) does not hold in Vietnam.
    Keywords: The State Bank of Vietnam, the exchange rate, unit root test, SVAR.
    JEL: E60 E69
    Date: 2015–04–01
  33. By: Kanda Naknoi (University of Connecticut)
    Abstract: In a multi-country world, currencies do not move in isolation, and competitors’ exchange rate movements may help or hurt an exporting firm. Motivated by this fact, I construct a multi-country model to examine how export prices are affected by movements in own-currency and cross-currency exchange rates. Own-currency appreciations move firms along the demand curve while cross-currency appreciations shift the position of the demand curve. Both affect the price elasticity of demand and therefore the degree to which exchange rate movements affect prices. When own- and cross-currency appreciations are correlated, the exporter changes price in response to both. In the empirical section, I employ monthly data and provide estimates of own and cross exchange rate pass-through to the price of exports from Canada to the U.S. The cross exchange rate pass-through is found to exist in about one-third of sample sectors.
    Keywords: Exchange rate pass-through; Pricing to market; Exchange rate shocksLength: 35 pages
    JEL: F31 F41
    Date: 2015–04
  34. By: Ferrante, Francesco (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: I develop a macroeconomic model with a financial sector, in which banks can finance risky projects (loans) and can affect their quality by exerting a costly screening effort. Informational frictions regarding the observability of loan characteristics limit the amount of external funds that banks can raise. In this framework I consider two possible types of financial intermediation, traditional banking (TB) and shadow banking (SB), differing in the level of diversification across projects. In particular, shadow banks, by pooling different loans, improve on the diversification of their idiosyncratic risk and increase the marketability of their assets. Due to their ability to pledge a larger share of the return on their projects, shadow banks will have a higher endogenous leverage compared to traditional banks, despite choosing a lower screening level. As a result, on the one hand, the introduction of SB will imply a higher amount of capital intermediated. On the other han d it will make the economy more fragile via three channels. First, by being highly leveraged and more exposed to risky projects, shadow banks will amplify exogenous negative shocks. Second, during a recession, the quality of projects intermediated by shadow banks will endogenously deteriorate even further, causing a slower recovery of the financial sector. A final source of instability is that the SB-system will be vulnerable to runs. When a run occurs, shadow banks will have to sell their assets to traditional banks, and this fire sale, because of the limited leverage capacity of the TB-system, will depress asset prices, making the run self-fulfilling and negatively affecting investment. In this framework I study how central bank credit intermediation helps reduce the impact of a crisis and the likelihood of a run.
    Keywords: Bank Runs; Financial Frictions; Shadow Banking; Unconventional Monetary Policy
    JEL: E44 E58 G23 G23 G24
    Date: 2015–03–04
  35. By: Tarullo, Daniel K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–01–30
  36. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Which banks borrow from a lender of last resort? Looking across multiple panics of the nineteenth century, this paper treats borrowing of clearinghouse loan certificates as borrowing from a lender of last resort. We evaluate individual bank use of clearinghouse loan certificates in New York City using bank balance sheet data. Bank capital ratios do not predict borrowing. Lower pre-panic reserve ratios and greater reserve losses during the crisis increased the probability of positive net borrowing from a lender of last resort.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–04
  37. By: Nobukazu Ono (Bank of Japan); Kouga Sawada (Bank of Japan); Akira Tsuchikawa (Bank of Japan)
    Abstract: In money markets both inside and outside Japan, repos have been a major instrument in both borrowing and lending of cash and securities. With the recent global financial crisis in mind, discussions are taking place at international forums such as the G20 and the Financial Stability Board (FSB) on how to further increase the stability and transparency of repos and securities lending. Within Japan, it is vital to improve the efficiency of repos and speed up settlement even further, since there is demand for a facility that allows the rapid execution of same-day settlement of repos to shorten the Japanese government bond (JGB) settlement cycle. The Bank of Japan has been participating actively in these discussions and will continue to contribute, as the central bank, to further improvement of the stability and efficiency of repos and development of the repo market.
    Keywords: repo; securities lending
    Date: 2015–04–28
  38. By: M. Bussière, Gong Cheng, Menzie Chinn and Noëmie Lisack; G. Cheng; M. Chinn; N. Lisack
    Abstract: Based on a dataset of 112 emerging economies and developing countries, this paper addresses the question whether the accumulation of international reserves has effectively protected countries during the 2008-09 financial crisis. More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly when associated with a less open capital account. This suggests some degree of complementarity between reserve accumulation and capital controls.
    Keywords: Foreign reserves, capital controls, financial crises, economic growth.
    JEL: F31 G01
    Date: 2015
  39. By: Alberto Martín; Jaume Ventura
    Abstract: We study a dynamic economy where credit is limited by insufficient collateral and, as a result, investment and output are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles, that is, expansions in credit that are backed not by expectations of future profits (i.e. fundamental collateral), but instead by expectations of future credit (i.e. bubbly collateral). Credit bubbles raise the availability of credit for entrepreneurs: this is the crowding-in effect. But entrepreneurs must also use some of this credit to cancel past credit: this is the crowding-out effect. There is an "optimal" bubble size that trades off these two effects and maximizes long-run output and consumption. The equilibrium bubble size depends on investor sentiment, however, and it typically does not coincide with the "optimal" bubble size. This provides a new rationale for macroprudential policy. A credit management agency (CMA) can replicate the "optimal" bubble by taxing credit when the equilibrium bubble is too high and subsidizing credit when the equilibrium bubble is too low. This leaning-against-the-wind policy maximizes output and consumption. Moreover, the same conditions that make this policy desirable guarantee that a CMA has the resources to implement it.
    Keywords: bubbles, credit, business cycles, economic growth, financial frictions, pyramid schemes
    JEL: E32 E44 O40
    Date: 2015–03

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