nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒05‒30
twenty-six papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Information Content of Monetary Statistics for the Great Recession: Evidence from Germany By Wenjuan Chen; Dieter Nautz; ;
  2. Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News By Drager, Lena; Lamla, Michael; Pfajfar, Damjan
  3. Towards a tacit low-degree independence central banking model ? By BLANCHETON Bertrand
  4. Hard Pegs versus Intermediate Currency Arrangements in the Pacific By Helble, Matthias; Prasetyo, Ahmad; Yoshino, Naoyuki
  5. Opening remarks at the Mortgage Contract Design: Implications for Households, Monetary Policy, and Financial Stability Conference By McAndrews, James J.
  6. Uncertainty and Monetary Policy in the CAEMC zone By NGNIADO NOGNOU Edwige
  7. Towards a New Keynesian Theory of the Price Level By John Barrdear
  8. Labor Market Policies and the "Missing Deflation" Puzzle: Lessons from Hoover Policies during the U.S Great Depression By Jordan Roulleau-Pasdeloup; Anastasia Zhutova
  9. A Microfounded Model of Money Demand Under Uncertainty, and its Empirical Validation Using Cointegration and Rolling-Window Dynamic Multiplier Analysis. By Ingrid Größl; Artur Tarassow
  10. Replica Core Equivalence Theorem: An Extension of the Debreu-Scarf Limit Theorem to Double Infinity Monetary Economies By Ken Urai; Hiromi Murakami
  11. Asymmetric shocks in a currency union: The role of central bank collateral policy. By F. Koulischer
  12. Intermediation, Money Creation, and Keynesian Macrodynamics in Multi-agent Systems By Bill Gibson; Mark Setterfield
  13. Anchoring Heuristic Messes with Inflation Targeting By Da Silva, Evelin; Da Silva, Sergio
  14. Shadow Banking: The Money View By Zoltan Pozsar
  15. Ex-post Inflation Forecast Uncertainty and Skew Normal Distribution: ‘Back from the Future’ Approach By Wojciech Charemza; Carlos Díaz; Svetlana Makarova
  16. The Time-Varying Degree of Inflation Expectations Anchoring By Till Strohsal; Rafi Melnick; Dieter Nautz;
  17. Time varying pass-through: Will the yen depreciation help Japan hit the inflation target? By Etsuro Shioji
  18. Do central bank forecasts matter for professional forecasters? By Jacek Kotłowski
  19. Capital Mobility and Monetary Policy: An Overview By Fuentes, Miguel; Raddatz, Claudio; Reinhart, Carmen
  20. The bankers’ paradox: the political economy of macroprudential regulation By Andrew Baker
  21. The interest rate pass-through in the euro area during the sovereign debt crisis By Julia von Borstel; Sandra Eickmeier; Leo Krippner
  22. Money and Credit as Means of Payment: A New Monetarist Approach By Lotz, Sebastien; Zhang, Cathy
  23. Macroprudential Policy: A Silver Bullet or Refighting the Last War? By Lopez, Claude; Markwardt, Donald; Savard, Keith
  24. Past, Present, and Future Challenges for the Euro Area : a speech at the ECB Forum on Central Banking conference "Inflation and Unemployment in Europe", Sintra, Portugal, May 21, 2015. By Fischer, Stanley
  25. On Default and Uniqueness of Monetary Equilibria By Lin, Li; Tsomocos, Dimitrios P.; Vardoulakis, Alexandros
  26. The relationship between Foreign Currency trading and Economic Development: A case Study of Pakistan By Mashkoor, Asim; Ahmed, Ovais; Herani, Dr. Gobin

  1. By: Wenjuan Chen; Dieter Nautz; ;
    Abstract: This paper introduces a Divisia monetary aggregate for Germany and explores its information content for the Great Recession. Divisia money and the corresponding simple sum aggregate are highly correlated in normal times but begin to diverge before the crisis. Out of sample forecast analysis and a conditional forecast exercise show that the predictive content of this divergence for the Great Recession is not only statistically significant, but also economically important.
    Keywords: Monetary aggregates, Divisia index, recession indicator, Great Recession
    JEL: E27 E32 E51 C43
    Date: 2015–05
  2. By: Drager, Lena (University of Hamburg); Lamla, Michael (University of Essex); Pfajfar, Damjan (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy.
    Keywords: Macroeconomic expectations; central bank communication; consumer forecast accuracy; macroeconomic literacy; monetary news; survey microdata
    JEL: C25 D84 E31 E52 E58
    Date: 2015–05–04
  3. By: BLANCHETON Bertrand
    Abstract: This article puts the independence of central banks into historical perspective. In doing so, it underlines the highly versatile nature of the balance of forces between central banks and governments. From this viewpoint, the situation of public finances emerges as a key explanatory factor, and an analysis of the sequence of central banking models is proposed from the late 19th century to the present day. The article upholds the thesis of the emergence, since the subprime crisis, of a new model qualified as “tacit low-degree independence”: central banks have, of their own volition, given up some of their de facto independence, helping governments to contain the rise in national debt. But while keeping a step ahead of pressure from governments, they have lost the control of money supply.
    Keywords: central banking, public debt, central bank independence
    JEL: N10 N20 G20 N40
    Date: 2015
  4. By: Helble, Matthias (Asian Development Bank Institute); Prasetyo, Ahmad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: The 14 Pacific developing member countries (DMCs) of the Asian Development Bank (ADB) have opted for very different exchange rate regimes with varying degrees of flexibility. Whereas several microstates have adopted an external currency as their legal tender, others have decided to use a basket currency and yet others have chosen a managed float. The choice of exchange rate regime can have far reaching economic consequences. In this paper, we first build a simple exchange rate model that illustrates how monetary authorities should best determine the weights of the basket currencies in order to keep fluctuations in gross domestic product (GDP) and in exchange rates to a minimum. We add to the literature by explicitly modeling tourism flows. In the second part of the paper we study the recent developments of the Pacific DMCs in terms of the volatility of their exchange rates, their GDP and their balance of trade. We find that Pacific DMCs with external currencies systematically exhibit lower GDP volatility compared to Pacific DMCs with basket currencies or floats. We conclude that Pacific DMCs with basket currencies or floats seem to have managed their exchange rate with the objective to minimize fluctuations of exchange rates, rather than those of their GDP. Our model therefore provides valuable guidance for those monetary authorities in the Pacific that would like to lower GDP fluctuations.
    Keywords: exchange rate policy; economic integration; economic development; microstates
    JEL: F31 F33
    Date: 2015–05–12
  5. By: McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: Remarks at Mortgage Contract Design: Implications for Households, Monetary Policy and Financial Stability Conference, Federal Reserve Bank of New York.
    Keywords: ARMs; Home Affordable Refinance Program (HARP); fixed-rate mortgages (FRMs)
    JEL: G21
    Date: 2015–05–21
  6. By: NGNIADO NOGNOU Edwige
    Abstract: This paper proposes to identify from the specificities of the CEMAC zone different sources of uncertainties that may affect monetary policies actions. We first realize a review of literature on the implementation of monetary policy under uncertainty as it is presented in the general theory. Two rules of conduct are mentioned. The certainty equivalence principle for which uncertainty has no effect on the optimal policy and the Brainard (1967) Conservatism principle that recommends more cautious and whose empirical validity is not always verified and depends on the type of uncertainty.
    Keywords: Monetary Policy – Uncertainty – CEMAC
    JEL: C32 E31 E52
    Date: 2015
  7. By: John Barrdear (Bank of England; Centre for Macroeconomics (CFM); Economics Department London School of Economics (LSE))
    Abstract: Modifying the standard New-Keynesian model to replace firms’ full information and sticky prices with flexible prices and dispersed information, and imposing mild and plausible restrictions on the monetary authority’s decision rule, produces the striking results that (i) there exists a unique and globally stable steady-state rate of inflation, despite the possibility of a lower bound on nominal interest rates; and (ii) in the vicinity of steady-state, the price level is determinate (and not just the rate of inflation), despite the central bank targeting inflation. The specification of firms’ signal extraction problem under dispersed information removes the need to make use of Blanchard-Kahn conditions to solve the model, thereby removing the need to adhere to the Taylor principle and consequently circumventing the critique of Cochrane (2011). The model admits a determinate, stable solution with no role for sunspot shocks when the monetary authority responds by less than one-for-one to changes in expected inflation, including under an interest rate peg. An extension to include incomplete information on the part of the central bank permits the consideration of (rational) errors of judgement on the part of policymakers and provides a theoretical basis for inertial policymaking without interest rate smoothing, in support of Rudebusch (2002, 2006).
    Keywords: New-Keynesian, indeterminacy, dispersed information, FTPL, Blanchard-Kahn, Taylor rules, Taylor principle
    JEL: D82 D84 E31 E52
    Date: 2015–05
  8. By: Jordan Roulleau-Pasdeloup; Anastasia Zhutova
    Abstract: We document the existence of a "missing deflation" puzzle during the U.S. Great Depression (1929-1941) and show that the solution of this puzzle lies in Hoover policies. Herbert Hoover made multiple public announcements asking firms not to cut wages, most of which complied. The consequences of such a policy are ambiguous since it affects aggregate fluctuations via two channels: as a negative aggregate supply shock this policy decreases output while increasing inflation, but more inflation can postpone the occurrence of a liquidity trap when the economy is hit by a large negative aggregate demand shock. We develop and estimate a medium scale New Keynesian model to measure the effect of Hoover policies during the Great Depression and we find evidence that without such polices the U.S. economy would have ended up in a liquidity trap two years before it actually did, suffering an even deeper recession with a larger deflation. In addition, the welfare effects of Hoover policy are found to be clearly positive.
    Keywords: Zero lower bound; Deflation; Great Depression
    JEL: C11 E24 E31 E32 E44 E52 N12
    Date: 2015–05
  9. By: Ingrid Größl (Universität Hamburg (University of Hamburg)); Artur Tarassow (Universität Hamburg (University of Hamburg))
    Abstract: In this article we derive a microfounded model of money demand under uncertainty built on intertemporally optimizing risk-averse households. Deriving a complete solution of the optimization problem taking the intertemporal budget constraint into account leads to ambiguous effects w.r.t. to the impact of capital as well as inflation risk, thus contradicting standard results. We estimate both the long- and short-run model dynamics as well as potential time-variation by means of a rolling-window dynamic multiplier analysis using the error-correction framework for the U.S. economy between 1978q1 to 2013q4. The results reveal that U.S. households increase their demand for money in response to positive changes in inflation and stock market risks.
    Keywords: Money Demand, Uncertainty, Inflation Risk, Stock Market Risk, Monetary Policy, ARDL Model, Cointegration, Dynamic Multiplier, Rolling-Window
    JEL: C22 E41 E51 E58 G11
    Date: 2015–05
  10. By: Ken Urai (Graduate School of Economics, Osaka University); Hiromi Murakami (Graduate School of Economics, Osaka University)
    Abstract: An overlapping generations model with the double infinity of commodities and agents is the most fundamental framework to introduce outside money into a static economic model. In this model, competitive equilibria may not necessarily be Pareto-optimal. Although Samuelson (1958) emphasized the role of fiat money as a certain kind of social contract, we cannot characterize it as a cooperative game-theoretic solution like a core. In this paper, we obtained a finite replica core characterization of Walrasian equilibrium allocations under non-negative wealth transfer and a core-limit characterization of Samuelsonfs social contrivance of money. Preferences are not necessarily assumed to be ordered.
    Keywords: Monetary Equilibrium, Overlapping Generations Model, Core Equivalence, Replica Econ- omy, Non-Ordered Preference
    JEL: C62 C71 D51 E00
    Date: 2014–11
  11. By: F. Koulischer
    Abstract: Currency unions limit the ability of the central bank to use interest rate policy to accommodate asymmetric shocks. I show that collateral policy can serve to dampen asymmetric shocks in a currency area when these shocks also affect the collateral held by banks and when collateral portfolios of banks differ systematically across countries. In my model banks from 2 countries use collateral to borrow from the money market or a central bank that targets a level of interest rate (or investment) in each economy. The distressed bank may enter a “collateral crunch” regime where it is constrained in its access to funding due to a moral hazard problem. The central bank faces an heterogeneous transmission of its interest rate: a unit change in rate has a smaller effect on the economy rate of the distressed country. The central bank therefore sets a high interest rate which is well transmitted in the booming economy and relaxes the haircut on the collateral owned by the distressed bank.
    Keywords: Central banking, currency union, collateral policy, repo, monetary policy.
    JEL: E58 G01 G20
    Date: 2015
  12. By: Bill Gibson (University of Vermont); Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: Keynesian economists refer to capitalism as a monetary production economy, in which the theory of money and the theory of production are inseparable (Skidelsky, 1992). One important aspect of this, brought to light by Robertson following the publication of The General Theory, is that in a Keynesian economy, endogenous money creation is logically necessary if the economy is to expand. A Keynesian economy cannot operate with an exogenously given supply of money as in verticalism. One way to ensure that money is endogenous is to simply assume that the supply of money is infinitely elastic, known in the literature as horizontalism. In this view, prior savings cannot be a constraint on current investment and it follows that the level of economic activity is determined by effective demand. Using a multi-agent systems model, this paper shows that real economies, especially those subject to recurrent financial crises, can be neither horizontalist nor verticalist. Horizontalism overlooks microeconomic factors that might block flows from savers to investors, while verticalism ignores an irreducible ability of the system to generate endogenous money, even when the monetary authority does everything in its power to limit credit creation.
    Keywords: Multi-agent system, intermediation, endogenous money, Keynesian macroeconomics
    JEL: D58 E12 C00
    Date: 2015–05
  13. By: Da Silva, Evelin; Da Silva, Sergio
    Abstract: We evaluate recent inflation-targeting using Brazilian data and also consider the framework of the macroeconomic model of adaptive learning blended with a cognitive psychology approach. We suggest that forecasters interpret the inflation target as an anchor, and adjust to it accordingly. As current inflation increases above the target level, a central bank loses credibility, and forecasters start the adjustment from the top because they expect an even higher future inflation. Then, they move back to the core target within a range of uncertainty, but the adjustment is likely to end before the core is reached, as predicted by the psychological theory of anchors. After calibrating the model, we find an asymptotic equilibrium of a 6.1 percent inflation rate, which overshoots the announced target inflation core of 4.5 percent. This example casts doubt on the very justification for inflation targeting, which is unlikely to succeed when private forecasters rely on anchoring heuristics.
    Keywords: Anchoring Heuristic, Inflation Targeting, Adaptive Learning
    JEL: D03
    Date: 2015
  14. By: Zoltan Pozsar (Office of Financial Research)
    Abstract: This paper presents an accounting framework for measuring the sources and uses of short-term funding in the global financial ecosystem. We introduce a dynamic map of global funding flows to show how dealer banks emerged as intermediaries between two types of asset managers: cash pools searching for safety via collateralized cash investments and levered portfolio managers searching for yield via funded securities portfolios and derivatives. We argue that the monetary aggregates (M0, M1, M2, etc.) and the Financial Accounts of the United States (formerly the Flow of Funds) do not adequately reflect the institutional realities of the modern financial ecosystem, and should be updated to allow policymakers to better analyze and monitor the shadow banking system and its potential contributions to financial instability. The monetary aggregates, used mainly to inform the aggregate demand management aspects of monetary policy, do not include the instruments that asset managers use as money, particularly repos. Asset managers' money demand is not driven by transaction needs in the real economy but in the financial economy: in this sense, repo-based money dealing activities in the shadow banking system are about the provision of working capital for asset managers, much like real bills provided working capital for merchants and manufacturers in Bagehot's world over 150 years ago. These developments should be systematically captured in a new set of Flow of Collateral, Flow of Risk and Flow of Eurodollar satellite accounts to supplement the Financial Accounts. The accounting framework presented with this paper also explains how the Federal Reserve's reverse repo facility helps reduce interconnections within the financial system and how they could evolve into minimum liquidity requirements for shadow banks and a tool to control market-based credit cycles. The global macro drivers behind the secular rise of cash pools and leveraged portfolio managers in the asset management complex are identical with the real economy drivers behind the idea of secular stagnation. As such, one way to interpret shadow banking is as the financial economy reflection of real economy imbalances caused by excess global savings, slowing potential growth, and the rising share of corporate profits relative to wages in national income.
    Keywords: Shadow Banking
    Date: 2014–07–02
  15. By: Wojciech Charemza; Carlos Díaz; Svetlana Makarova
    Abstract: Empirical evaluation of macroeconomic uncertainty and its use for probabilistic forecasting are investigated. New indicators of forecast uncertainty, which either include or exclude effects of macroeconomic policy, are developed. These indicators are derived from the weighted skew normal distribution proposed in this paper, which parameters are interpretable in relation to monetary policy outcomes and actions. This distribution is fitted to forecast errors, obtained recursively, of annual inflation recorded monthly for 38 countries. Forecast uncertainty term structure is evaluated for U.K. and U.S. using new indicators and compared with earlier results. This paper has supplementary material.
    Keywords: forecast term structure, macroeconomic forecasting, monetary policy, non-normality
    JEL: C54 E37 E52
    Date: 2015–05
  16. By: Till Strohsal; Rafi Melnick; Dieter Nautz;
    Abstract: Well-anchored inflation expectations have become a key indicator for the credibility of a central bank’s inflation target. Since the outbreak of the recent financial crisis, the existence and the degree of de-anchoring of U.S. inflation expectations have been under debate. This paper introduces an encompassing time-varying parameter model to analyze the changing degree of U.S. inflation expectations anchoring. We confirm that inflation expectations have been partially de-anchored during the financial crisis. Yet, our results suggest that inflation expectations have been successfully re-anchored ever since.
    Keywords: Anchoring of Inflation Expectations, Financial Crisis, Break-Even Inflation Rates, Time-Varying Parameter
    JEL: E31 E52 E58 C22
    Date: 2015–05
  17. By: Etsuro Shioji (Department of Economics, Hitotsubashi University)
    Abstract: There is a growing recognition that pushing up the public’s inflation expectation is a key to a successful escape from a chronic deflation. The question is how this can be achieved when the economy is stuck in a liquidity trap. This paper argues that, for Japan, the currency depreciation since the late 2012 could turn out to be useful for ending the country’s long battle with falling prices. Prior studies have suggested that household expectations are greatly influenced by prices of items that they purchase frequently. This paper demonstrates that the extent of exchange rate pass-through to those prices, once near-extinct, has come back strong in recent years. Evidence based on VARs as well as TVP-VARs indicates that a 25% depreciation of the yen would produce a 2% increase in the prices of goods that households purchase regularly.
    Keywords: exchange rate, pass-through, expected inflation, CPI by purchase frequency class, time series analysis.
    Date: 2015–03
  18. By: Jacek Kotłowski
    Abstract: This paper examines to what extent public information provided by the central bank affects the forecasts formulated by professional forecasters. We investigate empirically whether disclosing GDP and inflation forecasts by Narodowy Bank Polski (the central bank of Poland) reduces the disagreement in professional forecasters’ expectations. The results only partially support the hypothesis on the coordinating role of the central bank existing in the literature. The main finding is that by publishing its projection of future GDP growth, the central bank reduces the dispersion of one-year-ahead GDP forecasts. Moreover our study indicates that the role of the central bank in reducing the forecasts dispersion is strengthening over time. We also find using non-linear STR models that the extent to which the projection release affects the dispersion of GDP forecasts varies over the business cycle. By disclosing its own projection the central bank reduces the disagreement among the forecasters the most in the periods when the economy moves from one phase of the business cycle to another. On the contrary, the release of CPI projection by NBP affects neither the cross-sectional dispersion nor the level of forecasts formulated by professional forecasters.
    Keywords: Monetary policy, inflation targeting, forecasting, central bank communication, survey expectations, forecasts disagreement, STR models.
    JEL: C24 E37 E52 E58
    Date: 2015
  19. By: Fuentes, Miguel; Raddatz, Claudio; Reinhart, Carmen
    Abstract: While the global economic environment has changed considerably from end-2011 to the present for advanced and emerging economies alike, the themes and policy issues addressed by these papers share a timeless dimension. Collectively, the studies that comprise this volume deal with various aspects of the causes, consequences, and policy challenges associated with the repeated boom-bust cycles that have characterized market economies throughout most of their history. The papers have a decided open-economy focus and connect the prosperity-crisis-depression cycle to international capital flows and their impact on domestic and external indebtedness, currency fluctuations, and the banking sector; their connection to global factors, such as international interest rates, commodity prices and crises or turbulence outside the national borders is explored. While the analysis is tilted towards emerging markets—particularly in Latin America, the relevance of these topics for mature economies has been made plain by the Global Financial Crisis.
    Keywords: capital flows, contagion, capital controls, credit booms
    JEL: E0 E50 F3 F32 F4
    Date: 2015–04
  20. By: Andrew Baker
    Abstract: Macroprudential regulation, which has emerged as a new departure in financial regulation (albeit with a longer heritage), since the financial crash, is in a fluid, evolving and highly experimental phase. Understanding its future political economy requires engaging with macroprudential's constituent concepts and how they interrelate to one another. This paper argues that the emerging political economy of macroprudential regulation revolves around five paradoxes. The first three of these are paradoxes that characterise the financial system and are identified by the macroprudential perspective. In seeking to respond to these paradoxes, macroprudential policy, generates a further two distinctly institutional and political paradoxes. The last of these is a central bankers' paradox which relates to the source of independent central bank authority and the difficulty of building legitimacy and public support for macroprudential regulation. Functioning macroprudential regulation is about executing a technocratic control project that rests on a depoliticisation strategy, that in turn risks politicising central banks, exposing their claims to technical authority to critical scrutiny and potential political backlash. This is the ultimate central bankers’ paradox in the era of post-crash political economy. Central banks conducting macroprudential regulation need to be aware of this paradox and handle it with great care.
    JEL: E5 E6
    Date: 2015–04–29
  21. By: Julia von Borstel; Sandra Eickmeier; Leo Krippner
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specific interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks’ funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks’ markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Keywords: Interest rate pass-through, factor model, sovereign debt crisis, unconventional monetary policy
    JEL: E5 E43 E44 C3
    Date: 2015–05
  22. By: Lotz, Sebastien; Zhang, Cathy
    Abstract: This paper studies the choice of payment instruments in a simple model where both money and credit can be used as means of payment. We endogenize the acceptability of credit by allowing retailers to invest in a costly record-keeping technology. Our framework captures the two-sided market interaction between consumers and retailers, leading to strategic complementarities that can generate multiple steady-state equilibria. In addition, limited commitment makes debt contracts self-enforcing and yields an endogenous upper bound on credit use. So long as record-keeping is imperfect, money and credit coexist for a range of nominal interest rates. Our model captures the dependence of debt limits on monetary policy and explains how hold-up problems in technological adoption prevent retailers from accepting credit as consumers continue to coordinate on cash usage. With limited commitment, changes in monetary policy generate multiplier effects in the credit market due to complementarities between consumer borrowing and the adoption of credit by merchants.
    Keywords: money and credit, limited commitment, endogenous record-keeping
    JEL: E41 E51
    Date: 2015–05
  23. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. Our report aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward. The report also advocates the use of more refined indicators for financial cycles as benchmarks for policy discussions on macroprudential policy.
    Keywords: macroprudential policy, non-core liabilities, Basel III
    JEL: E6 F3
    Date: 2015–05
  24. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–05–21
  25. By: Lin, Li (International Monetary Fund); Tsomocos, Dimitrios P. (University of Oxford); Vardoulakis, Alexandros (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allows the central bank to earn profits from seigniorage in order to compensate for any losses.
    Keywords: Collateral; Default; Determinacy; Liquid wealth; Monetary policy
    JEL: D50 E40 E50
    Date: 2015–05–08
  26. By: Mashkoor, Asim; Ahmed, Ovais; Herani, Dr. Gobin
    Abstract: In order to determine the relationship between few factors whom not calculated or evaluated by central bank is a tough job. The researcher tried to accumulate such secondary factors which are directly combined together and form very important primary factors. The researchers have reviewed many international researches in order to enhance the accuracy and focus of the research data and their variables. These researches has provided many new variables which are not very commonly used in our monetary research paradigm. This is a descriptive research where the researchers identified some new dimensions of usage of secondary variables into the formation of primary variables. There are many limitations researchers have during the course of the research. The most important and notable is the unavailability of the statistical data regarding many important statistical aspects of the economy. In the conclusion the researchers have found that the inflation, interest rate and exchange rates are highly correlated with currency trading. By manipulating such factors, inflation and exchange rates are exert influenced by central banks and varies impact currency and inflation. The valuation of foreign currency trading needs high attention from capital formation, determinants of inflation rate and proper utilization of supply of money in economy. The growth rate of GDP is essential factor for both economic development and foreign currency trading.
    Keywords: Economic development, Foreign Currency Trade.
    JEL: G20 O1 O23 O24
    Date: 2015–05–20

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