nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒06‒20
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Influence of Media Use on Laymen’s Monetary Policy Knowledge in Germany By Bernd Hayo; Edith Neuenkirch
  2. Quantitative Easing and Tapering Uncertainty: Evidence from Twitter By Annette Meinusch; Peter Tillmann
  3. Understanding Benign Liquidity Traps: The Case of Japan By Homburg, Stefan
  4. Normalization of unconventional US monetary policy and its implications: Korea’s monetary policy case By Chan-Guk Huh
  5. The U.S. economic and monetary policy outlook By Dudley, William
  6. Global Trends in the Choice of Exchange Rate Regime By Michael Bleaney; Mo Tian; Lin Yin
  7. Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control By Michael Funke; Petar Mihaylovski; Haibin Zhu
  8. Assessing core inflation indicators: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  9. Regional Inflation Convergence In Turkey By Hasan Engin Duran
  10. Empirical Evidence for the Bank Lending Channel in Bosnia and Herzegovina: Does Lending Differ Between Large and Small Banks? By Dejan Kovacevic
  11. Mexico’s monetary policy communication and money markets By Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
  12. Clearinghouse Loan Certificates as Interbank Loans By Christopher Hoag
  13. Changing economic relationships: implications for monetary policy and simple monetary policy rules By Rosengren, Eric S.
  14. Money and velocity during financial crises: from the Great Depression to the Great Recession By Anderson, Richard G.; Bordo, Michael D.; Duca, John V.
  15. Banking Integration and Fragmentation in the Interest Rate Channel By filippo gori
  16. Monetary Policy and Dutch Disease: The Case of Price and Wage Rigidity By Hevia, Constantino; Nicolini, Juan Pablo
  17. Nominal Income and Inflation Targeting By Arayssi, Mahmoud
  18. Inflation, financial conditions and non-standard monetary policy in a monetary union. A model-based evaluation By Lorenzo Burlon; Andrea Gerali; Alessandro Notarpietro; Massimiliano Pisani
  19. Short term inflation forecasting: the M.E.T.A. approach By Giacomo Sbrana; Andrea Silvestrini; Fabrizio Venditti
  20. Follow what I do and also what I say: monetary policy impact on Brazil’s financial markets By Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
  21. The Taylor Rule, Wealth Effects and the Exchange Rate By Rudan Wang; Bruce Morley; Javier Ordóñez
  22. Testing for Identification in SVAR-GARCH Models By Helmut Luetkepohl; George Milunovich; ;
  23. Measuring persistence in inflation: evidence for Angola By José Manuel Belbute; Leonardo Dia Massala; Júlio António Delgado
  24. Government and Private E-Money-Like Systems: Federal Reserve Notes and National Bank Notes By Warren E. Weber
  25. Stability and transitions in emerging market policy rules By Ashima Goyal; Shruti Tripathi
  26. Working Paper - 216 - Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa By AfDB AfDB
  27. Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System By Jaremski, Matthew; Wheelock, David C.
  28. Comparative assessment of macroprudential policies By Valentina Bruno; Ilhyock Shim; Hyun Song Shin
  29. The impossible trinity: Where does India stand? By Rajeswari Sengupta
  30. The distortionary effect of monetary policy : credit expansion vs. lump-sum transfers in the lab By Romain Baeriswyl; Camille Cornand
  31. Firm Inflation Expectations and Monetary Policy in Uruguay By Gerardo Licandro; Miguel Mello
  32. Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads By Jari Hännäkäinen
  33. Estimating the Determinants of Financial Euroization in Albania By Olta Manjani
  34. Inflation Expectation Decision and Saving Decision in Heterogeneously Endowed Overlapping Generation Model: An Experimental Evidence from Laboratory By Das, Abhishek; Gupta, Gautam
  35. How Effective are Macroprudential Policies? An Empirical Investigation By Akinci, Ozge; Olmstead-Rumsey, Jane
  36. Foreign Exchange Interventions at the Zero Lower Bound in the Czech Economy: A DSGE Approach By Simona Malovana
  37. Tight Money and the Sustainability of Public Debt By Sergey E. Pekarski
  38. Foreign exchange markets, intervention and exchange rate regimes By Ashima Goyal

  1. By: Bernd Hayo (University of Marburg); Edith Neuenkirch (University of Marburg)
    Abstract: We analyse German citizens’ knowledge about monetary policy and the European Central Bank (ECB), as well as the public’s use of mass communication media to obtain information about the ECB. We employ a unique representative public opinion survey of German households conducted in 2011. We find that a person’s desire to be informed about the ECB, together with the use of various media channels to keep informed, are decisive for both (i) the person’s perception of how much he or she knows about the ECB and (ii) the person’s actual knowledge. The media-related influence varies by level of education and is stronger for subjective knowledge. Women are significantly less interested in and knowledgeable about the ECB. We conclude that the ECB is not only well advised to continue with education programmes designed to convince the public of the importance of knowing about monetary policy, but to take the gender-specific differences into account in doing so.
    Keywords: ECB, Economic knowledge, Subjective knowledge, Information
    JEL: A20 E52 E58
    Date: 2015
  2. By: Annette Meinusch (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: In this paper we analyze the extent to which peoples' changing beliefs about the timing of the exit from Quantitative Easing (“tapering") impact asset prices. To quantify beliefs of market participants, we use data from Twitter, the social media application. Our data set covers the entire Twitter volume on Federal Reserve tapering in 2013. Based on the time series of beliefs about an early or late tapering, we estimate a VAR model with appropriate sign restrictions on the impulse responses to identify a belief shock. The results show that shocks to tapering beliefs have profound effects on interest rates, exchange rates and asset prices. We also derive measures of monetary policy uncertainty and disagreement of beliefs, respectively, and estimate their impact. The paper is the first to use social media data for analyzing monetary policy and also adds to the rapidly growing literature on macroeconomic uncertainty shocks.
    Keywords: success, Tapering, unconventional monetary policy, uncertainty, quantitative easing, social media
    JEL: E32 E44 E52
    Date: 2015
  3. By: Homburg, Stefan
    Abstract: Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach zero, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan’s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.
    Keywords: Liquidity trap, Japan, interest rate determination, monetary policy, quantitative easing, forward guidance, dynamic general equilibrium, secular stagnation.
    JEL: E31 E43 E52
    Date: 2015–06
  4. By: Chan-Guk Huh (Department of International Trade, Chungnam National University)
    Abstract: This study offers some empirical evidence that changes in the US monetary policy affect Korean financial market volatilities, and the efficacy of the Bank of Korea’s policy interest rate to market long-term rate channel of monetary policy since 2000, with emphasis on the post–2008 period, notable for unconventional US monetary policy. In addition, some structural issues related to the financial health of Korean central bank’s balance sheet are reviewed. Results suggest that capital inflow had weakened the efficacy of monetary policy since 2008. The resulting expanded domestic liquidity appears to have contributed to the trend of steady growth in Korean household indebtedness. Given the severe fluidity of the external monetary/financial situation in the short term, having more flexibility in policy rates in both directions seems advisable. It would also be desirable to grant more autonomy to the Bank of Korea in disposing its operating profits so that it could build up its equity reserves. This measure would enhance monetary policy credibility in the medium term by allaying concerns that monetary policy deliberations might be encumbered by potential operating losses, which could lead to onerous consequences for the Bank of Korea.
    Keywords: Monetary policy, Unconventional, U.S., Korea
    JEL: E52 E58 E44
  5. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Club of Minnesota’s June luncheon, Minneapolis
    Keywords: normalization; lift-off; interest rate paid on banks’ reserve balances (IOER); daily overnight reverse repo (ON RRP); short-term rates
    JEL: E52 E66
    Date: 2015–06–05
  6. By: Michael Bleaney; Mo Tian; Lin Yin
    Abstract: The raw data suggest that the global trend towards greater exchange rate flexibility that was evident before 1990 has since stopped. An optimum currency area (OCA) model of exchange rate regime choice is estimated. Four different schemes for classifying exchange rate regime are investigated. Trends in the explanatory variables made little difference to the trend towards greater flexibility before 1990 but have worked against it since, largely because of the reduction in inflation. Underlying preferences are still shifting gradually in the direction of greater flexibility.
    Keywords: exchange rate regimes, inflation, openness JEL codes: F31
    Date: 2015–03
  7. By: Michael Funke (Hamburg University, CESifo, Munich, and Hong Kong Institute for Monetary Research); Petar Mihaylovski (Hamburg University); Haibin Zhu (JP Morgan Chase Bank)
    Abstract: The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium (DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary policy transmission as well as the dynamics of the parallel shadow banking sector. Comparison of various interest rate liberalization scenarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.
    Keywords: DSGE Model, Monetary Policy, Financial Market Reform, Shadow Banking, China
    JEL: E32 E42 E52 E58
    Date: 2015–05
  8. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: The objective of this paper is to evaluate whether or not four core inflation indicators for Angola meet the conditions that must be met by any candidate to core inflation indicator. Our results suggest that the cross-section price change of the Consumer Price Index for Angola is right skewed and leptokurtic. Moreover, asymmetry and kurtosis are positively and highly correlated which make impossible to isolate and correct separately these two statistical characteristics of the sample. Our findings also suggest that the underlying inflation and the 10% trimmed inflation indicators satisfy the proposed conditions for a core inflation indicator. Therefore these two indicators can be used as useful measures for core inflation in Angola by the Banco Nacional de Angola.
    Keywords: Core inflation indicators; Underlying inflation; Trimmed mean; Assessment criteria.
    JEL: C43 E31 E52
    Date: 2015
  9. By: Hasan Engin Duran (Izmir Institute of Technology, City and Regional Planning Department, 35430 Urla-Izmir, Turkey)
    Abstract: The aim of the present article is to analyze the convergence of regional inflation rates in Turkey from 2004 to 2015 by adopting a distribution dynamics approach, namely discrete time Markovian chains. Convergence across regional inflation rates is politically a crucial matter for two reasons. First, if inflation rates differ largely between regions, monetary policy can hardly satisfy the needs of all regions equally. Such that, places which experience high inflation rates naturally require a contractionary monetary policy while the ones which experience low inflation need rather an expansionary monetary stance. Second, inflation differentials are likely to create a regional dispersion in real interest rates which induce differential effects on local economic growth. The outcomes of our research can be summarized in two groups. First, inflation disparities have declined over time, especially during the post-crisis period; after 2010. Hence, aggregate price stabilization and disinflation process in Turkey is coupled with convergence in inflation rates across regions. These results are confirmed using several methodologies (panel unit root tests and Kernel Density Estimates). Second, in addition to the findings in the literature, we found that regions change their relative inflation rate positions quite often. This indicates that regional inflation behaivor is random and non-structural as the relatively high and low inflationary places tend to change their quintiles frequently in time. Similarly, a geographical randomness of inflation is also verified using Moran I’s test.
    Date: 2015
  10. By: Dejan Kovacevic (Central bank of Bosnia and Herzegovina)
    Abstract: The paper investigates transmission of different foreign and domestic shocks to bank lending activity in Bosnia and Herzegovina through the bank lending channel. The bank lending channel is analyzed in a time series cross sectional data framework for the period 2006q1-2014q1, investigating reactions of small vs. large banks to those shocks. First, the evidence has been found that both groups of banks decreased their lending activity in the aftermath of the crisis. There is some evidence that liquidity shock after the onset of the crisis is mainly transmitted through large banks that are affiliates of the large Western European banking groups. Second, strong evidence is found that loosening of domestic monetary conditions through required reserves rate change had a positive effect on lending supply, especially for small banks operating in the country.
    Keywords: Financial crisis, monetary policy, bank lending channel, credit growth
    JEL: C13 C23 E58 E52
  11. By: Alicia Garcia-Herrero; Eric Girardin; Arnoldo Lopez Marmolejo
    Abstract: Central bank communication is becoming a key aspect of monetary policy. How much financial markets listen and, possibly, understand Banco de Mexico’s communication on its monetary policy stance should be a key consideration for the central bank to further modernize its monetary policy toolkit
    Keywords: Central Banks, Economic Analysis, Mexico, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  12. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: Before the founding of the Federal Reserve, bank clearinghouse associations served as a lender of last resort during the National Bank Era (1863-1913). This paper clarifies the operation of clearinghouse loan certificates during panic periods. If clearinghouse loan certificates are prohibited from circulating among the general public, then clearinghouse loan certificates should be viewed as interbank loans among clearinghouse member banks and not loans from a central clearinghouse organization to individual members.
    Keywords: bank, lender of last resort, loan certificates
    JEL: G21 G28 N21
    Date: 2015–05
  13. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Remarks by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, at Chatham House, London, England, April 16, 2015
    Date: 2015–04–16
  14. By: Anderson, Richard G. (Lindenwood University); Bordo, Michael D.; Duca, John V. (Federal Reserve Bank of Dallas)
    Abstract: This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal amid velocity shifts stemming from financial reform.
    Keywords: Money demand; Financial crises; Monetary policy; Liquidity; Financial innovation
    Date: 2015–05–01
  15. By: filippo gori (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: At the forefront of the economic consolidation of the euro area, banking integration came to a stall following the beginning of the 2008 crisis. Since then European banks started retrenching their asset holdings within national borders, effectively reducing the scale of their European operations. This paper explores the link between banking integration and fragmentation in the interest rate channel in the eurozone. Using a rolling VAR, I estimate the overtime evolution of the interest rate pass-through across European countries, and then I relate this evidence to banking integration dynamics. The results support the existence of a statistically significant and negative link between banking integration and cross-country differentials in the interest rate channel.
    Keywords: Monetary policy, banking integration, financial fragmentation.
    JEL: E31 E44 E52 F36
    Date: 2014–03–05
  16. By: Hevia, Constantino (Universidad Di Tella); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: We study a model of a small open economy that specializes in the production of commodities and that exhibits frictions in the setting of both prices and wages. We study the optimal response of monetary and exchange rate policy following a positive (negative) shock to the price of the exportable that generates an appreciation (depreciation) of the local currency. According to the calibrated version of the model, deviations from full price stability can generate welfare gains that are equivalent to almost 0.5% of lifetime consumption, as long as there is a significant degree of rigidity in nominal wages. On the other hand, if the rigidity is concentrated in prices, the welfare gains can be at most 0.1% of lifetime consumption. We also show that a rule - formally defined in the paper - that resembles a "dirty floating" regime can approximate the optimal policy remarkably well.
    Keywords: Dutch disease; Inflation targeting; Foreign exchange intervention
    JEL: F31 F41
    Date: 2015–06–08
  17. By: Arayssi, Mahmoud
    Abstract: In this paper a macro- economic model in the area of monetary policy game theory is extended to one-sided dismissal rules concerning observed nominal output and inflation targets for the central banker. These rules specify firing the central banker if some observed policy targets have been exceeded. Such rules are shown to reduce inflationary bias if the central banker perceives her reappointment chances as being strong and is preferred to discretionary monetary policy. Various policy targets are considered and it is shown that nominal output targeting may be preferred to inflation targeting under certain conditions.
    Keywords: Monetary Policy; Game Theory; Nominal Output Targeting; Inflation Targeting; Full Discretion; Dismissal Rule.
    JEL: E58 G18
    Date: 2014–06
  18. By: Lorenzo Burlon (Bank of Italy); Andrea Gerali (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.
    Keywords: DSGE models, financial frictions, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–06
  19. By: Giacomo Sbrana (NEOMA Business School); Andrea Silvestrini (Bank of Italy); Fabrizio Venditti (Bank of Italy)
    Abstract: Forecasting inflation is an important and challenging task. In this paper we assume that the core inflation components evolve as a multivariate local level process. This model, which is theoretically attractive for modelling inflation dynamics, has been used only to a limited extent to date owing to computational complications with the conventional multivariate maximum likelihood estimator, especially when the system is large. We propose the use of a method called “Moments Estimation Through Aggregation” (M.E.T.A.), which reduces computational costs significantly and delivers prompt and accurate parameter estimates, as we show in a Monte Carlo exercise. In an application to euro-area inflation we find that our forecasts compare well with those generated by alternative univariate constant and time-varying parameter models as well as with those of professional forecasters and vector autoregressions.
    Keywords: inflation, forecasting, aggregation, state space models
    JEL: C32 C53 E31 E37
    Date: 2015–06
  20. By: Alicia Garcia-Herrero; Eric Girardin; Enestor Dos Santos
    Abstract: We find that futures rates increase (decrease) after both an increase in the reference interest rate and a hawkish (dovish) communication by the BCB. Moreover, BCB words create more “noiseâ€, since they increase volatility of futures rates. Our analysis reveals that BCB communication has increased its effectiveness after the 2008 crisis, while deeds became less relevant.
    Keywords: Brazil, Central Banks, Latin America, Research, Working Paper
    JEL: E52 E58 E43
    Date: 2015–05
  21. By: Rudan Wang (Department of Economics, University of Bath, UK); Bruce Morley (Department of Economics, University of Bath, UK); Javier Ordóñez (Department of Economics, Universitat Jaume I, Castellón, Spain)
    Abstract: The aim of this study is to develop models of the Taylor rule and a Taylor rule based exchange rate model incorporating wealth effects, as represented by both asset prices and asset wealth. In addition these wealth effects are further divided into stock market and housing wealth. Using data for Australia, Sweden, UK and the US, the Taylor model is estimated and then used to forecast out-of-sample. The results suggest that the effects of the asset prices and wealth on the Taylor rule are mixed and depend on the country and the form the wealth takes. The outof-sample forecast performance of both the wealth augmented Taylor rule model and Taylor rule exchange rate model are then compared with the conventional Taylor Rule model and a random walk and overall the wealth augmented models outperform the conventional model and random walk in these countries.
    Keywords: exchange rate, wealth effect, forecast
    JEL: F30 F37
    Date: 2015
  22. By: Helmut Luetkepohl; George Milunovich; ;
    Abstract: Changes in residual volatility in vector autoregressive (VAR) models can be used for identifying structural shocks in a structural VAR analysis. Testable conditions are given for full identification for the case where the volatility changes can be modelled by a multivariate GARCH process. Formal statistical tests are presented for identification and their small sample properties are investigated via a Monte Carlo study. The tests are applied to investigate the validity of the identification conditions in a study of the effects of U.S. monetary policy on exchange rates. It is found that the data do not support full identification in most of the models considered, and the implied problems for the interpretation of the results are discussed.
    Keywords: Structural vector autoregression, conditional heteroskedasticity, GARCH, identification via heteroskedasticity
    JEL: C32
    Date: 2015–06
  23. By: José Manuel Belbute (Department of Economics, University of Évora, Portugal Center for Advanced Studies in Management and Economics - CEFAGE, Portugal); Leonardo Dia Massala (Departament of Economic Studies, Banco Nacional da Angola); Júlio António Delgado (INOVE Research)
    Abstract: Understanding inflation persistence in Angola is crucial because National Bank of Angola has approved in 2012 a new monetary policy operational framework which upgrades and expands the set of instruments to achieve its monetary goals. The purpose of this paper is to measure the degree of persistence of the headline, food, energy, underlying and 10% trimmed core inflations for Angola and to identify its implications for decision-making. Using both a traditional univariate method and non-parametric approach, our results suggest the presence of a statistically significant level of persistence in five inflation indicators for Angola. Moreover, the degree of persistence is similar both across the five inflation indicators and also across the sample period. Finally, our results also confirm that extracting the most volatile components of the headline inflation indicator does not generate a new inflation indicator that is less volatile and more persistent than the original. These results have important implications for the design, the implementations and the effectiveness of the monetary policy, specialty when under an inflation targeting regime. First, since shocks tend to temporarily deviate inflation from its trend value a permanent policy stance is required. Secondly, a low degree of persistence means that monetary policy aiming price stability can only be implemented in a favorable setting with a permanent policy stance. Moreover, a low degree of persistence means that inflation can be stabilized in a short period time following a shock. Finally results are also relevant for prediction and modeling purposes.
    Keywords: Inflation; Persistence; Angola.
    JEL: C14 C22 E31 E52
    Date: 2015
  24. By: Warren E. Weber
    Abstract: The period from 1914 to 1935 in the United States is unique in that it was the only time that both privately-issued bank notes (national bank notes) and central bank-issued bank notes (Federal Reserve notes) were simultaneously in circulation. This paper describes some lessons relevant to e-money from the U.S. experience during this period. It argues that Federal Reserve notes were not issued to be a superior currency to national bank notes. Rather, they were issued to enable the Federal Reserve System to act as a lender of last resort in times of financial stress. It also argues that the reason to eventually eliminate national bank notes was that they were potentially a source of bank reserves. As such, they could have threatened the Federal Reserve System’s control of the reserves of the banking system and thereby the Fed’s control of monetary policy.
    Keywords: Bank notes, E-Money, Financial services
    JEL: E E4 E41 E42 E5 E58
    Date: 2015
  25. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Shruti Tripathi (Indira Gandhi Institute of Development Research)
    Abstract: Conditions for stability in an open economy dynamic stochastic general equilibrium model adapted to a dualistic labor market (SOEME) are the same as for a mature economy. But the introduction of monetary policy transmission lags makes it deviate from the Taylor Principle. Under rational expectation a policy rule is unstable, but under adaptive expectations traditional stabilization gives a determinate path, with weights on the objective of less than unity. Estimation of a Taylor rule for India and optimization in the SOEME model itself, all confirm the low weights. The results imply that under rational expectations optimization is better than following a rule. If backward looking-behavior dominates, however, a policy rule can prevent overshooting and instability. Economy-specific rigidities must inform policy design, and the appropriate design will change as the economy develops.
    Keywords: DSGE; emerging market; rigidities; stability; optimization; Taylor rule
    JEL: E26 E52
    Date: 2015–02
  26. By: AfDB AfDB
    Date: 2015–01–20
  27. By: Jaremski, Matthew (Department of Economics, Colgate University); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: Established by a three person Reserve Bank Organization Committee (RBOC) in 1914, the structure of the Federal Reserve System has remained essentially unchanged ever since, despite criticism at the time and over ensuing decades. This paper examines the selection of cities for Reserve Banks and branches, and of district boundaries. We show that each aspect of the Fed’s structure reflected the preferences of national banks, including adjustments of district boundaries after the Fed was established. Further, using newly-collected information on the locations of each national bank’s correspondents, we find that banker preferences mirrored established interbank connections. The Federal Reserve was thus formed on top of the structure that it was meant to replace.
    Keywords: Federal Reserve System; Federal Reserve Banks; Reserve Bank Organization Committee; interbank networks; correspondent banking.
    JEL: E58 N21 N22
    Date: 2015–06–09
  28. By: Valentina Bruno; Ilhyock Shim; Hyun Song Shin
    Abstract: This paper provides a comparative assessment of the effectiveness of macroprudential policies in 12 Asia-Pacific economies, using comprehensive databases of domestic macroprudential policies and capital flow management (CFM) policies. We find that banking sector CFM polices and bond market CFM policies are effective in slowing down banking inflows and bond inflows, respectively. We also find some evidence of spillover effects of these policies. Finally, regarding the interaction of monetary policy and macroprudential policies, our empirical findings suggest that macroprudential policies are more successful when they complement monetary policy by reinforcing monetary tightening, than when they act in opposite directions.
    Keywords: macroprudential policy, capital flow management policy, interest rate policy, complementarity, Asia-Pacific
    Date: 2015–06
  29. By: Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: The Global Financial Crisis of 2008 and the heightened macroeconomic and financial volatility that followed the crisis raised important questions about the current international financial architecture as well as about individual countries' external macroeconomic policies. Policy makers dealing with the global crisis have been confronted with the 'impossible trinity' or the 'Trilemma', a potent paradigm of open economy macroeconomics asserting that a country may not target the exchange rate, conduct an independent monetary policy and have full financial integration, all at the same time. This issue is highly pertinent for India. A number of challenges have emanated from India's greater integration with the global financial markets during the last two decades, one of which includes managing the policy tradeoffs under the Trilemma. In this chapter, I present a comprehensive overview of a few empirical studies that have explored the issue of Trilemma in the Indian context. Based on these studies I attempt to analyze how have Indian policy makers dealt with the various trade-offs while managing the Trilemma over the last two decades.
    Keywords: Impossible Trinity, Financial Integration, Currency Stabilization, International Reserves, Sterilized Intervention
    JEL: F3 F4
    Date: 2015–03
  30. By: Romain Baeriswyl (Swiss National Bank, Boersenstrasse 15, 8022 Zurich, Switzerland); Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon Saint-Etienne, Ecully, F-69130, France; Université Lyon 2, Lyon, F-69007, France)
    Abstract: In an experimental monetary general equilibrium economy, we assess two processes of monetary injection : credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.
    Keywords: laboratory experiment, money neutrality, credit expansion, lump-sum monetary transfers
    JEL: C92 E52 E58
    Date: 2015
  31. By: Gerardo Licandro (Banco Central del Uruguay); Miguel Mello (Banco Central del Uruguay)
    Abstract: Using a novel monthly survey of firm inflation expectations for Uruguay from October 2009 to June 2013, this paper studies the impact of monetary policy on inflation expectations at the micro level. Using several panel data techniques we consistently find a negative and statistically significant relationship between monetary policy and inflation expectations. We also find a high level of inertia in expectations. Past inflation changes have a positive impact on inflation expectations, while exchange rate changes have a significant but low importance on expectations. We observe a negative link between inflation expectations and expected economic activity, potentially due to past experiences of a monetary financing of crisis. Contrary to intuition, there is no clear link between firm inflation expectations and the median assessment of experts published by the Central Bank.
    Keywords: Monetary transmission, inflation expectations, expectations channel
    JEL: C18 C82 E23 E24 J21 L16 L70
    Date: 2014
  32. By: Jari Hännäkäinen (School of Management, University of Tampere)
    Abstract: This paper re-examines the out-of-sample predictive power of interest rate spreads when the short-term nominal rates have been stuck at the zero lower bound and the Fed has used unconventional monetary policy. Our results suggest that the predictive power of some interest rate spreads have changed since the beginning of this period. In particular, the term spread has been a useful leading indicator since December 2008, but not before that. Credit spreads generally perform poorly in the zero lower bound and unconventional monetary policy period. However, the mortgage spread has been a robust predictor of economic activity over the 2003–2014 period.
    Keywords: business fluctuations, forecasting, interest rate spreads, monetary policy, zero lower bound, real-time data
    JEL: C53 E32 E44 E52 E58
    Date: 2014–06
  33. By: Olta Manjani (Bank of Albania)
    Abstract: This paper examines the phenomenon of financial euroization in Albania, focusing on the liability side of the banking system. It explores some of the main theoretical and empirical determinants of deposit euroization in the context of the high euroization rates originating in the transition period of the early 1990s. Despite gradual improvements in the macroeconomic framework, euroization rates have continued to be persistent throughout, long after the reversal of the original triggers of such phenomenon. The high level of euroization entails policy relevant concerns for euroized economies, as it has been shown to have potential adverse effects on macroeconomic policies and financial stability, issues of vital importance for a central bank. Using a VAR framework to capture the simultaneous dynamic relationships between macroeconomic aggregates, this paper finds evidence that euroization rates are highly persistent in Albania, while being influenced by several factors such as interest rate differentials, exchange rates, and credit euroization
  34. By: Das, Abhishek; Gupta, Gautam
    Abstract: In this paper we use a heterogeneously endowed Overlapping Generation model (OLG) in an experimental framework. . In our experimental OLG economy young subjects are asked either to predict the inflation rate for the next period or to decide his/her savings for the current period. We find that for both the decisions neither higher amount of government expenditure nor the higher amount of money supply by monetary authority will move inflation rate towards equilibrium. We also find that that if there is much uncertainty, Friedman Conjecture will not work.
    Keywords: OLG-model; Expectations; Inflation; Stability; Monetary policy; Experiments
    JEL: C92 E21 E31 E52
    Date: 2015–06–12
  35. By: Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.)); Olmstead-Rumsey, Jane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In recent years, policymakers have generally relied on macroprudential policies to address financial stability concerns. However, our understanding of these policies and their efficacy is limited. In this paper, we construct a novel index of domestic macroprudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately. The effectiveness of these policies in curbing bank credit growth and house price inflation is then assessed using a dynamic panel data model. The main findings of the paper are: (1) Macroprudential policies have been used far more actively after the global financial crisis in both advanced and emerging market economies. (2) These policies have primarily targeted the housing sector, especially in the advanced economies. (3) Macroprudential policies are usually changed in tandem with bank reserve requirements, capital flow management measures, and monetary policy. (4) Empirical analysis suggests that macroprudential tightening is associated with lower bank credit growth, housing credit growth, and house price inflation. (5) Targeted policies--for example, those specifically intended to limit the growth of housing credit--seem to be more effective. (6) In emerging economies, capital inflow restrictions targeting the banking sector are also associated with lower credit growth, although portfolio flow restrictions are not.
    Keywords: Bank credit; house prices; macroprudential policy; dynamic panel data model
    JEL: E32 F41 F44 G15
    Date: 2015–06–01
  36. By: Simona Malovana (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank)
    Abstract: The paper contributes to understanding the economic dynamics at the zero lower bound and the exchange rate movements under different central bank intervention regimes. It provides a theoretical framework for modeling foreign exchange interventions at the ZLB within a dynamic general equilibrium model. We find a pronounced volatility of real and nominal macroeconomic variables in response to the domestic demand shock, the foreign demand and financial shocks and the terms-of-trade shock at the ZLB. This effects become severe in response to highly persistent shocks which leads to stronger reaction of variables and prolong period of binding constraint. The FX interventions have proven to be effective in mitigating deflationary pressures and recovering the economic activity in response to all examined shocks at the ZLB. In this sense, the central bank achieves the best performance by fixing the nominal exchange rate temporarily at the ZLB.
    Keywords: zero lower bound, foreign exchange interventions, dynamic stochastic general equilibrium, Bayesian estimation, exchange rate and price dynamics
    JEL: C11 E31 E43 E52 E58 F31
    Date: 2015–05
  37. By: Sergey E. Pekarski (National Research University Higher School of Economics)
    Abstract: In the celebrated paper “Some unpleasant monetarist arithmetic”, Sargent and Wallace (1981) showed that tight monetary policy is not feasible unless it is supported by appropriate fiscal adjustment. In this paper, we explore a simple forward-looking monetary model to show that an anticipated decrease in the growth rate of base money is not necessarily characterized by “unpleasant arithmetic”. This is due to a possible transitory gain in seigniorage, which keeps public debt on a sustainable path. High interest rates worsen the fiscal stance, but actually support the feasibility of anticipated tighter monetary policy. Thus an increase in the present discounted value of budget deficits does not necessarily have inflationary consequences.
    Keywords: public debt sustainability; tight money paradox; unpleasant monetarist arithmetic
    JEL: E41 E52 E61 E63
    Date: 2015
  38. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: While macroeconomic fundamentals determine the exchange rate at long horizons, there are substantial and persistent deviations from these fundamentals. The market microstructure within which they operate, macroeconomic fundamentals, and policies all affect foreign exchange (FX) markets. The paper describes the institutional features of these markets, with special emphasis on the process of liberalization and deepening in Indian FX markets, in the context of global integration. Since the mechanics of FX trading affect exchange rates, they have implications for the appropriate exchange rate regime. First, bounds on the volatility of the exchange rate can lower noise trading in FX markets decrease variance, improve fundamentals and give more monetary policy autonomy. Second, the speculative demand curve is well behaved under strategic interaction between differentially informed speculators and the Central Bank (CB) when there is greater uncertainty about fundamentals as in emerging markets. So a diffuse target and strategic revelation of selected information can be expected to be effective. Analysis of Indian experience confirms these research results. CB actions, including intervention and signaling, have major effects.
    Keywords: Foreign exchange markets; intervention; information; exchange rate bounds
    JEL: F41 G15
    Date: 2015–05

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