nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒06‒13
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Communication about future policy rates in theory and practice: A Survey By Richhild Moessner; David-Jan Jansen; Jakob de Haan
  2. Estimating Monetary Policy Rules When Nominal Interest Rates Are Stuck at Zero By Jinill Kim; Seth Pruitt
  3. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
  4. Money Multiplier under Reserve Option Mechanism By Akturk, Halit; Gocen, Hasan; Duran, Suleyman
  5. Monetary dialogue 2009-2014: Looking backward, looking forward By Belke, Ansgar
  6. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  7. Does the central bank respond to credit market factors? A Bayesian DSGE approach By Paul Kitney
  9. Deflation expectations and Japan's lost decade By Roberto Piazza
  10. Trends in the Money Market in Japan - Results of the Tokyo Money Market Survey (August2014) - By Financial Markets Department
  11. The natural yield curve: its concept and measurement By Kei Imakubo; Haruki Kojima; Jouchi Nakajima
  12. Estimates of Fundamental Equilibrium Exchange Rates, May 2015 By William R. Cline
  13. Macroprudential policies: a discussion of the main issues By Paolo Angelini
  14. Exit strategies and their impact on the Euro area: A model based view By Belke, Ansgar
  16. The role of central banks in supporting economic growth and creation of productive employment : the case of Pakistan By Sayeed, Asad; Abbasi, Zubair Faisal
  17. Financial inclusion policy in Ecuador : roles of the Central Bank towards economic and job creation By Arias, Daniela
  18. The U.S. Dollar and Global Imbalances By Liu, Kai; Zhou, Xuan

  1. By: Richhild Moessner; David-Jan Jansen; Jakob de Haan
    Abstract: We discuss the theoretical rationale for central bank communication about future policy rates as part of inflation targeting or of forward guidance. We also summarize actual central bank communication about future policy rates in major advanced countries as well as empirical evidence on the effectiveness of both types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, with theory assuming commitment by the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.
    Keywords: Central bank communication; interest rate forecasts; forward guidance; inflation targeting
    JEL: E52 E58
    Date: 2015–06
  2. By: Jinill Kim (Department of Economics, Korea University, Seoul, Republic of Korea); Seth Pruitt (Federal Reserve Board)
    Abstract: Did the Federal Reserve's response to economic fundamentals change with the onset of the Global Financial Crisis? Estimation of a monetary policy rule to answer this question faces a censoring problem since the interest rate target has been set at the zero lower bound since late 2008. Surveys by forecasters allow us to sidestep the problem and to use conventional regressions and break tests. We nd that the Fed's in ation response has decreased and that the unemployment response has remained as strong, which suggests that the Federal Reserve's commitment to stable in ation has become weaker in the eyes of the professional forecasters.
    Keywords: monetary policy, policy rule, zero lower bound, survey data, market perceptions, censoring, Tobit, Blue Chip survey
    JEL: E53 E58
    Date: 2015
  3. By: Philippe Bacchetta; Elena Perazzi; Eric van Wincoop
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fullling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. Under conventional policy the central bank can preclude a debt crisis through inflation, lowering the real interest rate and raising output. These reduce the real value of the outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. Unconventional policies take the form of liquidity support or debt buyback policies that raise the monetary base beyond the satiation level. We find that generally the central bank cannot credibly avoid a self-fulfilling debt crisis. Conventional policies needed to avert a crisis require excessive inflation for a sustained period of time. Unconventional monetary policy can only be effective when the economy is at a structural ZLB for a sustained length of time.
    Keywords: Monetary Policy; Sovereign Debt; Self-fulfilling Crises
    JEL: E52 E60 E63
    Date: 2015–06
  4. By: Akturk, Halit; Gocen, Hasan; Duran, Suleyman
    Abstract: This paper introduces a generalized money (M2) multiplier formula to the literature for a monetary system with Reserve Option Mechanism (ROM). Various features of the proposed multiplier are then explored using monthly Turkish data during the decade 2005 to 2015. We report a step increase in the magnitude and a slight upward adjustment in the long-run trend of the multiplier with the adoption of ROM. We provide evidence for substantial change in the seasonal pattern of the multiplier, cash ratio, required and excess reserves under ROM. We show that money (M2) multiplier is less volatile in a monetary system with ROM and discuss the subsequent stabilizing influence of more predictable multiplier on the foreign exchange market.
    Keywords: Money multiplier, macroprudential policy, reserve option mechanism, reserve requirements, financial stability
    JEL: E51 E52 E58 F31
    Date: 2015–06
  5. By: Belke, Ansgar
    Abstract: This Paper comments on the role of the Monetary Dialogue in the context of an evolving monetary policy. The discussion is conducted in terms of the adoption of forward guidance on interest rates by the European Central Bank (ECB), the ECB's model choice and data revision policies in inflation forecasts, its membership in the Troika, its activities as a financial supervisor, as well as regards its bond purchasing activities and the implication for ECB monetary policy stemming from Fed's envisaged exit from unconventional monetary policies. This paper also assesses on a case-by-case basis the actual exchange of information between the European Parliament (EP) and the ECB. We argue that the new ECB supervisory role has made the Monetary Dialogue exercise even more important 'now' than in 'normal' times. Still, we suggest changes, both procedural as well as regarding its focus range, to make it even more effective. In our view, the transparency/accountability issue represented by a Supervisory Board 'hosted' by ECB needs to be addressed. A crucial challenge for the Monetary Dialogue is also to assess the optimal degree of ECB transparency and accountability towards the EP, the key democratic institution.
    Abstract: Dieses Paper kommentiert die Bedeutung des vom Europa-Parlament seit Jahren fest institutionalisierten und viel beachteten 'Monetary Dialogue' des EZB-Präsidenten mit dem Unterausschuss Wirtschaft und Währung im Kontext einer sich gegenwärtig stark verändernden Geldpolitik. Die Diskussion wird geführt im Hinblick auf die Verwendung eines Zinsausblicks ('Forward Guidance') durch die Europäische Zentralbank (EZB) im Rahmen ihrer Transparenzoffensive, die Modellwahl und Datenbereinigungsverfahren der Inflationsprognosen der EZB, die Mitgliedschaft der EZB in der Troika, die EZB-Aktivitäten als Finanzaufsicht, die angekündigten EZB-Staatsanleihekäufe und die Folgen der Abkehr der US-Fed von unkonventionellen Geldpolitiken ('Exit') für die Geldpolitik der EZB.
    Keywords: accountability,European Parliament,forward guidance,monetary dialogue,transparency
    JEL: E52 E58
    Date: 2014
  6. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross-border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: Monetary policy autonomy; Financial Flows; International Monetary System;
    JEL: E42 E52 G15
    Date: 2015–05
  7. By: Paul Kitney
    Abstract: This paper estimates a version of a New Keynesian Dynamic Stochastic General Equilibrium model with financial frictions for the United States using Bayesian techniques. Various Henderson-McKibbin-Taylor style monetary policy rules are examined, which react to inflation, output and credit market factors including credit spreads, financial leverage and credit growth. The central question is whether the central bank responds to credit market factors in setting the policy interest rate, which is investigated using posterior odds tests. The paper explores whether there is evidence of stabilization, if indeed the central bank is responding to credit market factors. This is conducted using impulse response analysis and an examination of parameter posterior distributions. The most compelling result during the period under study is the US Fed responded to credit spreads in setting the policy rate. The empirical results also confirm that credit spreads offer stabilization benefits. This result is robust to variations in the policy rule. It is also found that while financial leverage improves model fit when included in the policy rule, the response is pro-cyclical, which would unlikely be a feature of stabilization policy. Finally, there is no evidence that the policy interest rate responded to credit growth.
    Date: 2015–06
  8. By: Yuzo Honda (Department of Informatics, Kansai University); Hitoshi Inoue (Faculty of Economics, Sapporo Gakuin University)
    Abstract: We empirically investigate the dynamic nature of three alternative hypotheses on the foreign exchange rate between the Japanese yen and US dollar in a multivariate context, using data from April 1985 to October 2014. The three hypotheses are the uncovered interest rate parity hypothesis, the current account hypothesis, and the quasi purchasing power parity hypothesis. Each hypothesis has significant influence on the yen-dollar exchange rate. Furthermore, it takes two to three years for the yield spread between the yen and dollar to have its largest impact on the exchange rate. In addition, the effects of unexpected shocks to the exchange rate on the export price ratio and current account are long lasting.
    Keywords: Quasi Purchasing Power Parity, Uncovered Interest Rate Parity, Soros Chart, Monetary Policy, Vector Autoregression
    JEL: E52 F31
    Date: 2015–06
  9. By: Roberto Piazza (Bank of Italy)
    Abstract: Starting from the early 1990s, GDP in Japan stagnated for about a decade while inflation has been persistently low, at times even negative. This paper provides new stylized facts about the Japanese deflationary process and puts these facts into the context of the literature addressing the origins of the Japanese "lost decade". In order to properly understand the evolution of inflation in Japan and the role of monetary and fiscal policy, a crucial question is whether the deflationary process, a phenomenon specific only to Japan during the period under consideration, was anticipated by agents. The paper suggests a positive answer to the question. In particular, I show that once a "global" inflation forecasting error, common across advanced countries, is removed from Japanese inflation expectations, then the remaining "idiosyncratic" inflation forecasting error is close to zero at various forecasting horizons. This indicates that the Japan-specific deflationary process was fully anticipated by agents, with medium-term (and "idiosyncratic") inflation expectations disanchoring very soon along the deflationary path.
    Keywords: deflation, lost decade, inflation expectations
    JEL: E2 E5 G21
    Date: 2015–06
  10. By: Financial Markets Department (Bank of Japan)
    Date: 2014–11–20
  11. By: Kei Imakubo (Bank of Japan); Haruki Kojima (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper illustrates the concept of the natural yield curve and how to measure it. The natural yield curve extends the idea of the natural rate of interest defined at a single maturity to one defined for all maturities. If the actual real yield curve matches the natural yield curve, the output gap will converge to zero. An empirical analysis using data for Japan shows that past monetary easing programs expanded the gap between the actual real yield curve and the natural yield curve mainly for short and medium maturities and led to accommodative financial conditions. By contrast, the quantitative and qualitative monetary easing policy has expanded the gap for long maturities as well as short and medium maturities. The natural yield curve is expected to provide a useful benchmark in the conduct of both conventional monetary policy and unconventional monetary policy aiming to influence the entire yield curve.
    Keywords: Natural yield curve; Yield curve gap; Natural rate of interest; Interest rate gap; Term structure
    JEL: C32 E43 E52 E58
    Date: 2015–06–04
  12. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Plummeting oil prices combined with asymmetric phasing of quantitative easing (QE) in the United States versus the euro area and Japan has prompted unusually large changes in major exchange rates over the past year. New estimates of fundamental equilibrium exchange rates (FEERs) find the major currencies are now misaligned, with the US dollar moderately overvalued and the euro and yen modestly undervalued. However, the Chinese yuan is no longer undervalued. Just over half of the 34 economies followed in this series experienced changes in real effective exchange rates (REERs) of about 6 percent or more from April 2014 to April 2015. The most important changes were the large effective appreciations by the US dollar (about 12 percent) and the Chinese yuan (about 12 percent), and the large effective depreciations of the euro (about 11 percent) and the yen (about 8 percent). Although the dollar has risen to about 8 percent above its FEER, it is too early to conclude that any adverse effects of the stronger dollar outweigh the benefits associated with stimulus to global growth from additional QE in the euro area and Japan. However, if the dollar were to continue along a path of further strengthening, the associated distortions could prove counterproductive for both the United States and the world economy at some point.
    Date: 2015–05
  13. By: Paolo Angelini (Bank of Italy)
    Abstract: Systemic risk, which macroprudential policies aim to minimize, is conceptually easy to define, but it is very difficult to identify ex ante. The search for indicators that may allow to activate macroprudential policies in time to prevent or contain crises, has given disappointing results so far, with the important exception of the class of indicators based on credit growth. A set of macroprudential tools is emerging through practice and legislation, but its outlines are not yet well defined. Also, the effects, effectiveness, and mutual interactions of the tools are not quite clear yet. Moreover, little is known about the interactions between macroprudential policy and other policies � e.g. monetary and microprudential. A reliable theoretical-analytical system to understand its functioning, and to calibrate and measure the effectiveness of macroprudential policies, is not available yet. In Europe, additional challenges arise from the complex architecture of the system of financial supervision and the changes introduced recently - the establishment of National Macroprudential Authorities and the start of the Single Supervisory Mechanism. On the economic front, while the macroeconomic developments in the Euro Area would suggest that expansionary macroprudential policies should be implemented, the measures adopted so far in many countries were almost exclusively of a restrictive nature. Overall, the analysis highlights several areas of uncertainty but also the strong potential of the new macroprudential policies, which can contribute, together with monetary policy, to a more stable macrofinancial system.
    Keywords: macroprudential policies, macroprudential instruments, monetary policy, systemic risk
    JEL: G21 E44 E58
    Date: 2015–06
  14. By: Belke, Ansgar
    Abstract: This paper comments on the pros and cons of exit strategies. The focus is on the impact on the Euro area economy of the exit from unconventional monetary policies (UMP) by the Fed, which appears to be the first central bank to lay out an exiting path. In this context, it discusses the issue of policy coordination between central banks in the light of the substantial potential spillover effects via capital flows and exchange rate adjustments of unconventional monetary policies. The risks of a premature versus a delayed exit are assessed. In particular, the paper looks at the risk associated to spillover effects from UMP exit and the different shapes of exit paths. It also analyses exit strategies in a wider context and the associated financial stability risks, with a specific focus on the role of uncertainty. The paper presents estimates of the impact of the Feds exit from UMP in 2014 on the Euro area economy using new and innovative global IMF models. Finally, specific policy options to minimize exit risks are discussed and compared.
    Abstract: Dieser Beitrag untersucht die Argumente für und gegen einen Ausstieg aus der expansiven Geldpolitik. Der Fokus liegt dabei auf der Betrachtung der Effekte eines Ausstiegs der amerikanischen Notenbank Fed auf die Eurozone. Dies erscheint sinnvoll, da die Fed als eine der ersten großen Zentralbanken einen Fahrplan für eine geldpolitische Straffung skizziert hat. In diesem Zusammenhang wird ein Schwerpunkt auf die Koordination der Geldpolitiken gelegt, da es bei einem Ausstieg zu Übertragungseffekten durch Kapitalflüsse oder Wechselkurse kommen dürfte. Weiterhin werden die Risiken eines zu frühen bzw. zu späten Zurückfahrens der expansiven Maßnahmen erörtert. Vor allem werden die Gefahren, die aus verschiedenen Ausstiegsszenarien und Übertragungseffekten herrühren, betrachtet. Zusätzlich werden auch die Risiken in Bezug auf die Finanzmarktstabilität einbezogen, wobei die Rolle der Unsicherheit herausgestellt wird. Abschließend stellt dieser Beitrag Schätzungen des Einflusses eines geldpolitischen Ausstiegs der Fed auf die Eurozone auf Basis eines IWF-Modells dar. Abschließend werden die Optionen der Geldpolitk, um die Ausstiegsrisiken zu minimieren, dargelegt und verglichen.
    Keywords: federal funds rate,exit strategies,global spillovers,international policy coordination,sudden stop
    JEL: G01 G12 E58 H12
    Date: 2014
  15. By: GHARDACH, jaouad
    Abstract: The present working paper aims to examine theoretically and empirically the long run relationship of the exchange rate pass-through to import prices. Using a heterogeneous panel approach to estimate the ERPT for four developing countries. Our methodology consists of a no stationary panel estimation and a coïntegration test, our results show that the ERPT in developing countries has a heterogeneous character.
    Keywords: ERPT, Panel coïntégration, heterogeneous panel, Pooled Mean Group Estimator
    JEL: C33 D21 E31 F31
    Date: 2014–06–10
  16. By: Sayeed, Asad; Abbasi, Zubair Faisal
    Abstract: This study explores different facets of the evolving structure, functions and conduct of Pakistan’s central bank or the State Bank as it is usually called. The study commences by offering an overview of the country’s macroeconomic, labour market and social indicators and evaluates how they have evolved over time. It attempts to gauge the conduct of the State Bank through its response to moments of economic significance faced by the country in the last two and a half decades. Specific attention is paid to the conduct of monetary policy, the role of the State Bank in channelling investment resources to priority sectors and its coordination with fiscal policy.
    Keywords: bank, economic growth, employment creation, Pakistan, banque, croissance économique, création d'emploi, Pakistan, banco, crecimiento económico, creación de empleos, Pakistán
    Date: 2015
  17. By: Arias, Daniela
    Abstract: The basic premise of this study is that promoting financial inclusion is one of the most effective ways in which a central bank can support economic growth and productive employment creation. The study shows that the scope of the government's financial inclusion programme in Ecuador is wide and varied. It then proceeds to encapsulate the main objectives of the financial inclusion policy and identify the main actors involved in its execution.
    Keywords: bank, financial policy, economic policy, employment creation, Ecuador, banque, politique financière, politique économique, création d'emploi, Equateur, banco, política financiera, política económica, creación de empleos, Ecuador
    Date: 2015
  18. By: Liu, Kai; Zhou, Xuan
    Abstract: Global Imbalances are mainly featured by the massive and long-lasting U.S. trade deficit. Since the Breton Woods system collapsed and was replaced by the Jamaica Agreement, the U.S. trade deficit has been lasting for about 40 years. This paper proves that permanent global imbalances can be sustainable due to the special role of the U.S. dollar, by building a two-country cash-in-advance growth model with a dollar standard in the international trade. The permanent U.S. trade deficit is an increasing function of the strength of off-shore dollar demand, the long-run growth rate of global nominal GDP, the openness of the international trade, the elasticity of substitution between domestic and foreign goods, and the relative size of the U.S. economy to the rest of the world. The long-run non-neutrality of the U.S. dollar as the world currency exists. Structural global imbalances are accompanied by an unequal international trade with the terms of trade being beneficial to the U.S., and the welfare analysis indicates that: a weakened U.S. dollar in the international trade will reduce the welfare of the U.S. households, but increase the welfare of the whole world.
    Keywords: U.S. dollar, global imbalances, dollar standard, cash in advance
    JEL: E42 F32 F41
    Date: 2015–06–04

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