nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒07‒04
forty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Transmission of Quantitative Easing: The Role of Central Bank Reserves By Jens H.E. Christensen; Signe Krogstrup
  2. Russia’s Monetary and Fiscal Policy in 2014 By Alexandra Bozhechkova; Pavel Trunin; Michael Khromov; Alexander Knobel; Anna Kiyutsevskaya
  3. Has the publication of minutes helped markets to predict the monetary policy decisions of the Bank of England's MPC? By El-Shagi, Makram; Jung, Alexander
  4. Jagged Cliffs and Stumbling Blocks: Interest Rate Pass-through Fragmentation during the Euro Area Crisis By Holton, Sarah; Rodriguez d’Acri, Costanza
  5. The Macroeconomic Pass-through Effects of Monetary Policy through Sign Restrictions Approach: In the Case of Albania By Gerti Shijaku
  6. A SVAR approach to evaluation of monetary policy in India By William A. Barnett; Soumya Suvra Bhadury; Taniya Ghosh
  7. Reassessing exchange rate overshooting in a monetary framework By Soumya Suvra Bhadury; Taniya Ghosh
  8. What has driven inflation dynamics in the Euro area, the United Kingdom and the United States By Melolinna, Marko
  9. Looking forward, forward looking: the path for monetary policy By Williams, John C.
  10. Conservatism and liquidity traps By Schmidt, Sebastian; Nakata, Taisuke
  11. Money, Interest Rates and Output Revisited By Joseph H. Haslag; Xue Li
  12. The information content of money and credit for US activity By Albuquerque, Bruno; Baumann, Ursel; Seitz, Franz
  13. Destabilizing carry trades By Guillaume Plantin; Hyun Song Shin
  14. Monetary transmission in low-income countries : an overview By Montiel, Peter J
  15. Data is the new black: monetary policy by the numbers By Williams, John C.
  16. Development central banking : a review of issues and experiences By Epstein, Gerald
  17. What Determines Institutional Arrangements for Macroprudential Policy? By Eri Egawa; Akira Otani; Toshiyuki Sakiyama
  18. Role of the Central Bank in supporting economic diversification and productive employment in Cambodia By Khou, Vouthy; Cheng, Oudom; Leng, Soklong; Meng, Channarith
  19. Mortgage arrears in Europe: The impact of monetary and macroprudential policies By Petra Gerlach-Kristen; Seán Lyons
  20. The Informational Content of the Term-Spread in Forecasting the U.S. Inflation Rate: A Nonlinear Approach By Periklis Gogas; Theophilos Papadimitriou; Vasilios Plakandaras; Rangan Gupta
  21. The euro's savior? Assessing the ECB's crisis management performance and potential for crisis resolution By Jörg Bibow
  22. Measuring Inflation Expectations: Consumers' Heterogeneity and Nonlinearity By Abe, Naohito; Ueno, Yuko
  23. The Welfare Cost of Inflation Risk Under Imperfect Insurance By Olivier Allais; Yann Algan; Edouard Challe; Xavier Ragot
  24. Challenges for the ECB in times of deflation By Saraceno, Francesco
  25. Does uncertainty affect participation in the European Central Bank's Survey of Professional Forecasters? By López Pérez, Víctor
  26. Macroprudential policy in a microprudential world By Williams, John C.
  27. Cross-country co-movement in long-term interest rates: a DSGE approach By Chin, Michael; Filippeli, Thomai; Theodoridis, Konstantinos
  28. Money and Credit Redux By Chao Gu; Fabrizio Mattesini; Randall Wright
  29. The effects of ultra-loose monetary policies on inequality By Grégory Claeys; Zsolt Darvas; Alvaro Leandro; Thomas Walsh
  30. Changing Exchange Rate Pass-Through in Japan: Does It Indicate Changing Pricing Behavior? By Naoko Hara; Kazuhiro Hiraki; Yoshitaka Ichise
  31. Do banks' overnight borrowing rates lead their CDS Price? evidence from the Eurosystem By Jokivuolle, Esa; Tölö, Eero; Virén, Matti
  32. Determinants of the multiple-term structures from interbank rates By Juan Ángel Lafuente; Nuria Petit; Pedro Serrano
  33. Banking and currency crises: differential diagnostics for developed countries By Joy, Mark; Rusnák, Marek; Šmídková, Kateřina; Vašíček, Bořek
  34. The U.S. economy and financial system in an international context By Musalem, Alberto G.
  35. The Mortgage Interest Rates and Cash Rate Cycle Relationship and International Funding Cost: Evidence in the Context of Australia By Quynh Chau Pham; Benjamin Liu; Eduardo Roca
  36. Replicating Japan's CPI Using Scanner Data By Satoshi Imai; Tsutomu Watanabe
  37. The exchange rate, asymmetric shocks and asymmetric distributions By Demian, Calin-Vlad; di Mauro, Filippo
  38. Bank bailouts and competition - Did TARP distort competition among sound banks? By Koetter, Michael; Noth, Felix
  39. Capital inflows and euro area long-term interest rates By Carvalho, Daniel; Fidora, Michael
  40. Robustness in Foreign Exchange Rate Forecasting Models: Economics-based Modelling After the Financial Crisis By Medel, Carlos; Camilleri, Gilmour; Hsu, Hsiang-Ling; Kania, Stefan; Touloumtzoglou, Miltiadis

  1. By: Jens H.E. Christensen; Signe Krogstrup
    Abstract: We argue that the issuance of central bank reserves per se can matter for the effectof central bank large-scale asset purchases-commonly known as quantitative easing- on long-term interest rates. This effect is independent of the assets purchased, and runs through a reserve-induced portfolio balance channel. For evidence we analyze the reaction of Swiss long-term government bond yields to announcements by the Swiss National Bank to expand central bank reserves without acquiring any long-lived securities. We find that declines in long-term yields following the announcements mainly reflected reduced term premiums suggestive of reserve-induced portfolio balance effects.
    Keywords: unconventional monetary policy, reserve-induced portfolio balance channel, term structure modeling
    JEL: G12 E43 E52 E58
    Date: 2015
  2. By: Alexandra Bozhechkova (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy); Michael Khromov (Gaidar Institute for Economic Policy); Alexander Knobel (Gaidar Institute for Economic Policy); Anna Kiyutsevskaya (RANEPA)
    Abstract: This paper deals with Russia's monetary policy in 2014
    Keywords: Russian economy; monetary policymoney market; inflation; balance of payments; exchange rate;
    JEL: E31 E43 E44 E51 E58 E52
    Date: 2015
  3. By: El-Shagi, Makram; Jung, Alexander
    Abstract: This paper examines whether the minutes of the Bank of England’s Monetary Policy Committee (MPC) have provided markets with additional information about the future course of monetary policy. The paper conducts an econometric approach based on an Ordered Probit model explaining future policy rate changes (sample 1998 to 2014), and the Vuong test for model selection, which helps to identify changes in the market assessment around the release of MPC minutes. Our results suggest that the Bank of England’s published minutes of the MPC’s deliberations have indeed helped markets in forming their expectations on future monetary policy decisions. JEL Classification: C34, D78, E52, E58
    Keywords: Communication, monetary policy committee, MPC minutes, Probit, Vuong test
    Date: 2015–06
  4. By: Holton, Sarah (Central Bank of Ireland); Rodriguez d’Acri, Costanza (Central Bank of Ireland)
    Abstract: The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. This paper shows the first results using a new micro dataset on euro area banks to identify individual bank balance sheet characteristics that have contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks’ funding constraints and balance sheet structures. Our results show incomplete pass-through of changes in money market rates targeted by the central bank to firms’ lending rates charged by banks over the crisis, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. We find that individual bank characteristics have an effect on the pass-through of policy rate cuts over the crisis, even after we control for changes in macroeconomic conditions across countries. The effect is greatest when looking at characteristics that capture bank funding difficulties, with riskier banks transmitting less of the policy rate cuts through to firms. This suggests that a recovery in banks’ balance sheets,funding capacities and risk perception will help reduce fragmentation in the transmission of monetary policy.
    Keywords: Interest rate pass-through, Monetary policy transmission, Financial crises.
    JEL: E52 E58 G01 G20 E43 E44
    Date: 2015–06
  5. By: Gerti Shijaku (Bank of Albania)
    Abstract: This paper examines the transmission mechanism of monetary policy in Albania during 2002 M01 - 2014 M12. The main question addresses the macroeconomic pass-through effects of a monetary policy shock, with regards to a conventional interest rate and possible different balance sheet policy changes. The analysis is based on a structural vector autoregressive model for Albanian economy that includes means of the Cholesky identification scheme and the sign restrictions approach. The former produces mixed results, that are either statistically insignificant or show a puzzle behavior. The latter is found to reduce bias, albeit with some supportive significant clear cut robustness evidences of the short run macroeconomic pass-through effects of a stimulus monetary policy that materialises within twelve periods. A stimulus monetary policy is found to support economic activity and increase price level. The effect is positive with regards to bank lending and monetary money stock variables. Exchange rate depreciates, accomplished by some higher stress on financial market condition. Both of these variables show a contemporaneously stronger response compared to the other variables. Analyses show that the greatest impact, through means of policy rate, is found to be on price level, bank lending and real money stock. In contrast, the greatest impact, through the liquidity effect, is on output, exchange rate and financial market conditions.
    Keywords: Monetary transmission mechanism, financial market condition, VAR, sign restriction identification.
    JEL: C11 C32 E12 E13 E52 E58
    Date: 2015–06–18
  6. By: William A. Barnett (University of Kansas); Soumya Suvra Bhadury (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research)
    Abstract: After almost 15 years, following the flagship exchange-rate paper written by Kim and Roubini (K&R henceforth); we revisit the widely relevant questions on monetary policy, exchange rate delayed overshooting, inflationary puzzle and weak monetary transmission mechanism in the Indian context. We further try to incorporate a superior form of the monetary measure called the Divisia monetary aggregate in the K&R setup. Our paper still rediscovers the efficacy of K&R contemporaneous restriction (customized for the Indian economy which is a developing G-20 nation unlike advanced G-6 nations that K&R worked with) especially when we compared with the recursive structure (which is plagued by price puzzle and exchange rate puzzle). The importance of bringing back 'Money' in the exchange rate model especially correctly measured monetary aggregate is convincingly illustrated when we contested across models with no-money, simple-sum monetary models and Divisia monetary models; in terms of impulse response (eliminating some of the persistent puzzles), variance decomposition analysis (policy variable explaining more of the exchange rate fluctuation) and out-of-sample forecasting (LER forecasting graph). Further, we do a flip-flop variance decomposition analysis, which leads us to conclude two important phenomena in the Indian economy, (i) weak link between the nominal-policy variable and the real-economic activity (ii) Indian monetary authority had inflation-targeting as one of their primary goals, in tune with the RBI Act. These two main results are robust, holding across different time period, dissimilar monetary aggregates and diverse exogenous model setups.
    Keywords: Monetary Policy; Monetary Aggregates; Divisia; Structural VAR; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle
    JEL: C32 E41 E51 E52 F31 F41 F47
    Date: 2015–06
  7. By: Soumya Suvra Bhadury (University of Kansas); Taniya Ghosh (Indira Gandhi Institute of Development Research)
    Abstract: Money overtime has been deemphasized from most of the macroeconometric models of exchange rate making interest rate 'alone' the monetary policy instrument. One such model is Bjornland's (1999) Journal of International Economics and Monetary Policy and Exchange Rate Overshooting: Dornbusch was right after all. The model sets out to establish the empirical validity of Dornbusch exchange rate overshooting hypothesis for four small open economies. It does so though not with exact precision. When the same model is done using the correct econometric techniques, the impulse response functions for exchange rate due to a monetary policy shock are infact 'insignificant'. In this paper we revisit the Dornbusch exchange rate overshooting in a different model setting. A real money demand equations is added to the original model. Identification is achieved by imposing short-run and long-run restrictions while keeping the short-run interactions between the two variables monetary policy and exchange rate free. Classical neutrality of money is imposed according to which the monetary shocks are long-run neutral to certain real variables. Our paper rediscovers the validity of Dornbusch Overshooting hypothesis for Australia, Canada, Newzealand and Sweden when we compare it with Bjornland's model. More specifically, a contractionary monetary policy shock leads to exchange rate overshooting as predicted by Dornbusch. The exchange rate appreciates 'significantly' on impact to a monetary policy shock as shown by the impulse response functions and thereafter depreciates. Also the variance decomposition results justify our analysis by showing that money demand and money supply shocks explain siginificant portion of exchange rate fluctuations vis-a-vis Bjornland's original model.
    Keywords: Monetary Policy; Money Demand; Structural VAR; Short Run; Long Run; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle
    JEL: C32 E41 E51 E52 F31 F41 F47
    Date: 2015–06
  8. By: Melolinna, Marko
    Abstract: This paper studies factors behind inflation dynamics in the euro area, the UK and the US. It introduces a factor-augmented vector autoregression (FAVAR) framework with sign restrictions to study the effects of fundamental macroeconomic shocks on inflation in the three economies. The FAVAR model framework is also applied to study the effects on inflation subcomponents in the more recent past. The FAVAR models suggest that headline inflation in the three economies has reacted in a relatively similar fashion to macroeconomic shocks over the last four decades, with demand shocks causing the most persistent effects on inflation. According to the subcomponent FAVAR models, the responses of inflation subcomponents to macroeconomic shocks have also been relatively similar in the three economies. However, there is evidence of a stronger foreign exchange channel of monetary policy transmission as well as supply shocks in the responses of non-energy tradable goods prices in the UK than the other two economies, while the reaction of services inflation has been more muted to all types of shocks in the euro area than the other two economies. JEL Classification: C22, C32, E31, E52
    Keywords: FAVAR, inflation, macroeconomic shocks, sign restrictions
    Date: 2015–06
  9. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to the New York Association for Business Economics, New York, New York , May 12, 2015
    Date: 2015–05–12
  10. By: Schmidt, Sebastian; Nakata, Taisuke
    Abstract: In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB. JEL Classification: E52, E61
    Keywords: Deflationary Bias, Inflation Conservatism, Inflation Targeting, Liquidity Traps, Zero Lower Bound
    Date: 2015–06
  11. By: Joseph H. Haslag (Department of Economics, University of Missouri-Columbia); Xue Li
    Abstract: There is a long tradition in economic research that studies the relationship between money, interest rates and output. In this paper, we specify VARs using cyclical measures of monetary aggregate, interest rates, and output to assess whether money has marginal predictive content for output. Because there is no consensus on how to identify the cyclical component, we consider four alternatives. One goal is to re-examine the result that when the interest rate variable is included, the marginal predictive content of money become insignificant. In addition, we decompose the monetary aggregates into base money and money multiplier components. In this way, we can determine whether inside money has marginal predictive content for output. We can also assess whether the interest rate has marginal predictive content for the money multiplier. The evidence suggests that with the M2 aggregate, movements in money do temporally precede movements in output. However, the evidence is strong that movements in interest rates temporally precede movements in output. The evidence is mixed regarding the movements in interest rates and future movements in the money multiplier.
    Keywords: Detrending methods, marginal predictive content, inside money vs. outside money, time-varying VAR
    JEL: E31 E32 E51
    Date: 2015–04–22
  12. By: Albuquerque, Bruno; Baumann, Ursel; Seitz, Franz
    Abstract: We analyse the forecasting power of different monetary aggregates and credit variables for US GDP. Special attention is paid to the influence of the recent financial market crisis. For that purpose, in the first step we use a three-variable single-equation framework with real GDP, an interest rate spread and a monetary or credit variable, in forecasting horizons of one to eight quarters. This first stage thus serves to pre-select the variables with the highest forecasting content. In a second step, we use the selected monetary and credit variables within different VAR models, and compare their forecasting properties against a benchmark VAR model with GDP and the term spread. Our findings suggest that narrow monetary aggregates, as well as different credit variables, comprise useful predictive information for economic dynamics beyond that contained in the term spread. However, this finding only holds true in a sample that includes the most recent financial crisis. Looking forward, an open question is whether this change in the relationship between money, credit, the term spread and economic activity has been the result of a permanent structural break or whether we might go back to the previous relationships. JEL Classification: E41, E52, E58
    Keywords: credit, forecasting, money
    Date: 2015–06
  13. By: Guillaume Plantin (Département d'économie); Hyun Song Shin (Princeton University)
    Abstract: We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.
    Keywords: Currency Carry Trades; Inflation Targeting; Financial Instability
    JEL: G01 G15 E58
    Date: 2015–04
  14. By: Montiel, Peter J
    Keywords: monetary system, banking, credit, low income, monetary policy, developing countries, système monétaire, activité bancaire, crédit, faible revenu, politique monétaire, pays en développement, sistema monetario, actividad bancaria, crédito, bajos ingresos, política monetaria, países en desarrollo
    Date: 2015
  15. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to NBER East Asia Seminar on Economics, San Francisco, California, June 19, 2015
    Date: 2015–06–19
  16. By: Epstein, Gerald
    Keywords: banking, monetary system, economic recession, financial market, inflation, stabilization, developing countries, activité bancaire, système monétaire, récession économique, marché financier, inflation, stabilisation, pays en développement, actividad bancaria, sistema monetario, recesión económica, mercado financiero, inflación, estabilización, países en desarrollo
    Date: 2015
  17. By: Eri Egawa (Financial Infrastructure Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: eri.; Akira Otani (Head of Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: akira.; Toshiyuki Sakiyama (Associate Director, Economic and Financial Studies Division, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We use information on institutional arrangements for macroprudential policy in 66 countries to examine the recent developments in and characteristics on institutional arrangements for macroprudential policy. Then we conduct empirical analyses on drivers behind the choice of institutional arrangements, especially the roles of a central bank and a government. We show that many countries have recently developed their institutional arrangements with respect to the set-up of a mandate for macroprudential policy and a multi-agency communication/coordination framework. In addition, the current arrangements can be largely divided into two types: centralization in the central bank, where the central bank or a committee of the central bank is the sole owner of the macroprudential mandate; and coordination by the government, where the government coordinates views or policies among multiple agencies with the macroprudential mandate as the sole chairperson of the financial stability committee. Our empirical analyses suggest that wide-ranging features including economic and financial characteristics, the exchange rate regime, and the degree of democracy influence the differences in the roles the central bank and the government play in macroprudential policy in each country.
    Keywords: Macroprudential policy, Ordered probit analyses, Institutional arrangements, Financial stability committee
    JEL: E58 E61 G28 O57
    Date: 2015–06
  18. By: Khou, Vouthy; Cheng, Oudom; Leng, Soklong; Meng, Channarith
    Abstract: This study was undertaken by a team from the National Bank of Cambodia (NBC). It is a prime example of collaboration between a major national institution responsible for the conduct of monetary and financial policy and the ILO.
    Keywords: economic growth, bank, employment creation, Cambodia, croissance économique, banque, création d'emploi, Cambodge, crecimiento económico, banco, creación de empleos, Camboya
    Date: 2015
  19. By: Petra Gerlach-Kristen; Seán Lyons
    Abstract: Mortgage arrears arise if a household faces affordability problems and/or is in negative equity. Because widespread arrears pose a risk to the stability of banks and limit households' future access to credit, a crucial question is how monetary or macroprudential policies influence their incidence. We use a European household data set to analyse what drives arrears and find that affordability problems, such as unemployment, low income and high mortgage payments, matter, which suggests that monetary policy has an impact. Households facing the dual trigger of affordability problems and negative equity are more likely to go into longer-term arrears; macroprudential regulation preventing high loan-to-value (LTV) ratios can thus also have an impact.
    Keywords: Arrears, negative equity, monetary policy, loan-to-value ratios
    JEL: D14 E58 G28
    Date: 2015
  20. By: Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece); Theophilos Papadimitriou (Department of Economics, Democritus University of Thrace, Greece); Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Greece); Rangan Gupta (Department of Economics, University of Pretoria)
    Abstract: The difficulty in modelling inflation and the significance in discovering the underlying data generating process of inflation is expressed in an ample literature regarding inflation forecasting. In this paper we evaluate nonlinear machine learning and econometric methodologies in forecasting the U.S. inflation based on autoregressive and structural models of the term structure. We employ two nonlinear methodologies: the econometric Least Absolute Shrinkage and Selection Operator (LASSO) and the machine learning Support Vector Regression (SVR) method. The SVR has never been used before in inflation forecasting considering the term--spread as a regressor. In doing so, we use a long monthly dataset spanning the period 1871:1 – 2015:3 that covers the entire history of inflation in the U.S. economy. For comparison reasons we also use OLS regression models as benchmark. In order to evaluate the contribution of the term-spread in inflation forecasting in different time periods, we measure the out-of-sample forecasting performance of all models using rolling window regressions. Considering various forecasting horizons, the empirical evidence suggests that the structural models do not outperform the autoregressive ones, regardless of the model’s method. Thus we conclude that the term-spread models are not more accurate than autoregressive ones in inflation forecasting.
    Keywords: U.S. Inflation, forecasting, Support Vector Regression, LASSO
    JEL: C22 C45 C53 E31 E37
    Date: 2015–06
  21. By: Jörg Bibow
    Abstract: his study assesses the ECB's crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB's scope for policy action under crisis conditions and how the ECB has actually used its leeway since 2007; or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro or national authorities involved in managing the euro crisis but that in general the bank did "too little, too late" to prevent the euro area from slipping into recession and protracted stagnation, ending up in its current predicament. The study also finds that expectations regarding the ECB's latest policy initiatives may be excessively optimistic and that proposals featuring the ECB as the euro's savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately the euro's travails can only be ended and the euro crisis resolved by shifting the emphasis towards fiscal policy, by partnering up the ECB with a "Euro Treasury" as a vehicle for the central funding of public investment through common euro treasury debt securities in particular.
    Date: 2015
  22. By: Abe, Naohito; Ueno, Yuko
    Abstract: Using the results of detailed random experiments, we find clear evidence of the effects of information provision on consumers’ inflation expectations. The responses of expectations to new information are nonlinear, including those of a sizable share of individuals who do not change their expectations. We document that the updates of consumers are quite heterogeneous, leading to a varied extent of revisions in the face of new information. One possible interpretation is the heterogeneity in consumers’ knowledge of inflation-related issues, as well as the difference in the content of the information. Consumers learn and update their expectations vis-à-vis future inflation based on new information, through a mechanism that is more complex than a simple learning model.
    Keywords: Inflation expectations, Information, Heterogeneous updating, Nonlinearity, Survey experiments
    JEL: E31 C81 D80
    Date: 2015–06
  23. By: Olivier Allais (Laboratoire de Recherche sur la Consommation); Yann Algan (Département d'économie); Edouard Challe (Department of Economics, Ecole Polytechnique); Xavier Ragot (OFCE)
    Abstract: What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. A key feature of our analysis is a nonhomothetic specification for households' preferences towards money and consumption goods. Unlike traditional specifications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets). Inflation risk is found to generate significant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution.
    Keywords: Money-in-the-utility; Incomplete Markets; Inflation Risks; Welfare
    JEL: E21 E32 E41
    Date: 2015–05
  24. By: Saraceno, Francesco
    Keywords: monetary policy, economic recession, deflation, banking, impact evaluation, fiscal policy, EMU, politique monétaire, récession économique, déflation, activité bancaire, évaluation de l'impact, politique fiscale, UEM, política monetaria, recesión económica, deflación, actividad bancaria, evaluación de impacto, política fiscal, UEM
    Date: 2015
  25. By: López Pérez, Víctor
    Abstract: This paper explores how changes in macroeconomic uncertainty have affected the decision to participate in the European Central Bank’s Survey of Professional Forecasters. Two different approaches are employed in order to address this question. First, a time-series analysis explores if changes in measures of uncertainty over time have led to changes in aggregate response rates. And second, a discrete-choice model for panel data is estimated to test if changes in uncertainty measures have had effects on the likelihood to participate by SPF forecasters. The main result of the paper is that higher (lower) uncertainty reduces (increases) participation in the survey. This effect is statistically and economically significant. As participation and uncertainty are found to be negatively correlated, measures of uncertainty from the ECB’s SPF could be biased downwards. JEL Classification: D81, D84, E66
    Keywords: European Central Bank, participation, survey of professional forecasters, uncertainty
    Date: 2015–06
  26. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Symposium on Asian Banking and Finance, Singapore, May 28, 2015
    Date: 2015–05–28
  27. By: Chin, Michael (Bank of England); Filippeli, Thomai (Queen Mary University of London); Theodoridis, Konstantinos (Bank of England)
    Abstract: Long-term interest rates in a number of small open inflation-targeting economies co-move more strongly with US long-term rates than with short-term rates in those economies. We augment a standard small open economy model with imperfectly substitutable government bonds and time-varying term premia, that captures this phenomenon. The estimated model fits a range of US and UK data remarkably well, and produces term premium estimates that are comparable to estimates from the affine term structure model literature. We find that the strong co-movement between US and UK long-term interest rates arises primarily via correlated policy rate expectations, rather than through correlated term premia. This is due to policymakers in both economies responding to foreign productivity and discount factor shocks that cause persistent changes in inflation. We also overcome the common failure of similar models to account for the large influence of foreign disturbances on domestic economies found empirically, where in our model around 40% of the variation in UK GDP can be explained by shocks originating in the US economy.
    Keywords: Open-economy; international; co-movement; yield curve; interest rates
    JEL: F41 F44 G15
    Date: 2015–06–19
  28. By: Chao Gu (University of Missouri-Columbia); Fabrizio Mattesini; Randall Wright
    Abstract: We analyze money and credit as competing payment instruments in decentralized exchange. In natural environments, we show the economy does not need both: if credit is easy, money is irrelevant; if credit is tight, money can be essential, but then credit is irrelevant. Changes in credit conditions are neutral because real balances respond endogenously to keep total liquidity constant. This is true for exogenous or endogenous policy and debt limits, secured or unsecured lending, and a general class of pricing mechanisms. While we show how to overturn some results, the benchmark model suggests credit might matter less than people think.
    Keywords: Money, Credit, Debt, Essentiality, Neutrality
    JEL: E42 E51
    Date: 2015–03–29
  29. By: Grégory Claeys; Zsolt Darvas; Alvaro Leandro; Thomas Walsh
    Abstract: Low interest rates, asset purchases and other accommodative monetary policy measures tend to increase asset prices and thereby benefit the wealthier segments of society, at least in the short-term, given that asset holdings are mainly concentrated among richest households.Such policies also support employment, economic activity, incomes and inflation, which can benefit the poor and middle-class, which have incomes more dependent on employment and which tend to spend a large share of their income on debt service.Monetary policy should focus on its mandate, while fiscal and social policies should address widening inequalities by revising the national social redistribution systems for improved efficiency, intergenerational equity and fair burden sharing between the wealthy and poor.
    Date: 2015–06
  30. By: Naoko Hara (Bank of Japan); Kazuhiro Hiraki (Bank of Japan); Yoshitaka Ichise (Bank of Japan)
    Abstract: This paper empirically explores recent changes in the exchange rate pass-through in Japan. We take a two-pronged approach. First, we estimate the exchange rate pass-through into domestic prices using time-varying parameter estimation. Second, we decompose the estimated exchange rate pass-through into the responsiveness of marginal costs to the exchange rate and the responsiveness of inflation to marginal costs. The estimation results show that the rates of exchange rate pass-through into the Producer Price Index and the Consumer Price Index have been increasing since the late 2000s. Evidence from international input-output tables suggests that the import-intensity of Japan's manufacturing sector has increased considerably over the last decade. We find that although the increasing dependence on imports in production (as well as in the retail sector) accounts for part of the rise in exchange rate pass-through, a larger part of the rise is due to greater responsiveness of inflation to marginal costs. This finding hints at a structural change in firms' pricing behavior since the late 2000s.
    Keywords: Exchange Rate Pass-Through; Phillips Curve; Time-Varying Parameter Estimation; Markov Chain Monte Carlo Estimation; International Input-Output Tables
    JEL: C11 E31 F41
    Date: 2015–06–25
  31. By: Jokivuolle, Esa; Tölö, Eero; Virén, Matti
    Abstract: We construct a measure of a bank’s relative creditworthiness from Eurosystem’s proprietary overnight loan data: the bank’s “average overnight borrowing rate spread, relative to overnight rate index” (AOR). We investigate the dynamic relationship between the AOR and the credit default swap spread (CDS) of 60 banks in years 2008 - 2013. We find that in daily differences the AOR leads the CDS at least by one day. The lead is concentrated on days of market stress for banks which mainly borrow from “relationship” lender banks. Such borrower banks are typically smaller, have weak ratings, and likely reside in crisis countries. In longer differences, up to several weeks, both the AOR and the CDS have some predictive power over one another. In sum, overnight borrowing rates may provide additional early-warning indications on certain banks’ deteriorating financial health over and above bank CDS spreads. JEL Classification: G01, G14, G21
    Keywords: credit default swaps (CDS), early-warning indicators, Eurosystem, leadlag relationship, money markets, overnight borrowing rates, TARGET2
    Date: 2015–06
  32. By: Juan Ángel Lafuente; Nuria Petit; Pedro Serrano
    Abstract: The classic relationship between deposit rates and interest rate derivatives has been fractured since August 2007. Uncertainty in the interbank money market has increased the risk premia differentials on unsecured deposits rates of different tenors, such as Euribor, leading to a new pricing framework of interest rate derivatives based on multiple curves. This article analyzes the economic determinants of this new multi-curve framework. We employ basis swap (BS) spreads &-floating-to-floating interest rate swaps- as instruments for extracting the interest rate curvedifferentials. Our results show that the multi-curve framework mirrors the standard single-curve setting in terms of level, slope and curvature factors. The level factor captures 90% of the total variation in the curves, and this factor significantly covaries with a proxy for systemic risk. Moreover, the curve residuals are significantly correlated with interbank liquidity. Our empirical findings also show unidirectional causality running from risk (and liquidity) to level (and noise) factors.
    Keywords: Basis swap , Noise measure , Credit risk , Liquidity risk , Capital arbitrage
    Date: 2015–06
  33. By: Joy, Mark; Rusnák, Marek; Šmídková, Kateřina; Vašíček, Bořek
    Abstract: We identify a set of “rules of thumb” that characterise economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970–2010. We use the Classification and Regression Tree methodology (CART) and its Random Forest (RF) extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises we find that low net interest rate spreads in the banking sector and a shallow or inverted yield curve are their most important forerunners in the short term, whereas in the longer term it is high house price inflation. For currency crises, high domestic short-term rates coupled with overvalued exchange rates are the most powerful short-term predictors. We find that both country structural characteristics and international developments are relevant banking crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short-term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values. JEL Classification: C14, E44, F37, F47, G01
    Keywords: Banking crises, binary classification tree, currency crises, early warning indicators
    Date: 2015–06
  34. By: Musalem, Alberto G. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Institute of International Bankers Annual General Meeting, New York City.
    Keywords: spillovers; normalization; emerging market economies (EME); Fed communication; Regulation YY
    JEL: E66 F02
    Date: 2015–06–24
  35. By: Quynh Chau Pham; Benjamin Liu; Eduardo Roca
    Keywords: Bank mortgage rates, cash rate, international funding cost
    JEL: E43 G21 E58
    Date: 2015–04
  36. By: Satoshi Imai (Statistics Bureau of Japan); Tsutomu Watanabe (The University of Tokyo)
    Abstract: We examine how precisely one can reproduce the CPI constructed based on price surveys using scanner data. Specifically, we closely follow the procedure adopted by the Statistics Bureau of Japan when we sample outlets, products, and prices from our scanner data and aggregate them to construct a scanner data-based price index. We show that the following holds the key to precise replication of the CPI. First, the scanner databased index crucially depends on how often one replaces the products sampled. The scanner data index shows a substantial deviation from the actual CPI when one chooses a value for the parameter associated with product replacement such that replacement occurs frequently, but the deviation becomes much smaller if one picks a parameter value such that product replacement occurs only infrequently. Second, even when products are replaced only infrequently, the scanner data index differs significantly from the actual CPI in terms of volatility. The standard deviation of the scanner data-based monthly inflation rate is 1.54 percent, which is more than three times as large as that for actual CPI inflation. We decompose the difference in volatility between the two indexes into various factors, showing that it mainly stems from the difference in price rigidity for individual products. We propose a filtering technique to make individual prices in the scanner data stickier, thereby making scanner data-based inflation less volatile.
    Date: 2015–06
  37. By: Demian, Calin-Vlad; di Mauro, Filippo
    Abstract: The elasticity of exports to exchange rate fluctuations has been the subject of a large literature without a clear consensus emerging. Using a novel sector level dataset based on firm level information, we show that exchange rate elasticities double in size when the country and sector specific firm productivity distribution is taken into account in empirical estimates. In addition, exports appear to be sensitive to appreciation episodes, but rather unaffected by depreciations. Finally, only rather large changes in the exchange rate appear to matter. JEL Classification: F14, F41, F31
    Keywords: bilateral trade, exchange rate elasticity, productivity dispersion, TFP
    Date: 2015–06
  38. By: Koetter, Michael; Noth, Felix
    Abstract: This study investigates if the Troubled Asset Relief Program (TARP) distorted price competition in U.S. banking. Political indicators reveal bailout expectations after 2009, manifested as beliefs about the predicted probability of receiving equity support relative to failing during the TARP disbursement period. In addition, the TARP affected the competitive conduct of unsupported banks after the program stopped in the fourth quarter of 2009. The risk premium required by depositors was lower, and loan rates were higher for banks with higher bailout expectations. The interest margins of unsupported banks increased in the immediate aftermath of the TARP disbursement but not after 2010. These effects are economically very small though. No effects emerged for loan or deposit growth, which suggests that protected banks did not increase their market shares at the expense of less protected banks. JEL Classification: C30, C78, G21, G28, L51
    Keywords: bailout expectations, Banking, competition, TARP
    Date: 2015–06
  39. By: Carvalho, Daniel; Fidora, Michael
    Abstract: Capital flows into the euro area were particularly large in the mid-2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis. We show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, which is in line with previous studies that document a similar impact of foreign bond buying on US Treasury yields. These results are relevant both from a euro area and a global perspective, as they show that the phenomenon of lower long-term interest rates due to foreign bond buying is not exclusive to the United States and foreign inflows into euro area debt securities may have added to increased risk appetite and hunt-for-yield at the global level. JEL Classification: E43, E44, F21, F41, G15
    Keywords: Capital flows, long-term interest rates ECB
    Date: 2015–06
  40. By: Medel, Carlos; Camilleri, Gilmour; Hsu, Hsiang-Ling; Kania, Stefan; Touloumtzoglou, Miltiadis
    Abstract: The aim of this article is to analyse the out-of-sample behaviour of a bunch of statistical and economics-based models when forecasting exchange rates (FX) for the UK, Japan, and the Euro Zone in relation to the US. A special focus is given to the commodity prices boom of 2007-8 and the financial crisis of 2008-9. We analyse the forecasting behaviour of six economic plus three statistical models when forecasting from one up to 60-steps-ahead, using a monthly dataset comprising from 1981.1 to 2014.6. We first analyse forecasting errors until mid-2006 to then compare to those obtained until mid-2014. Our six economics-based models can be classified in three groups: interest rate spreads, monetary fundamentals, and PPP with global measures. Our results indicate that there are indeed changes of the first best models when considering the different spans. Interest rate models tend to be better predicting using the short sample; also showing a better tracking when crisis hit. With the longer sample the models based on price differentials are more promising; however, with heterogeneous results across countries. These results are important since shed some light on what model specification use when facing different FX volatility.
    Keywords: Foreign exchange rates; Economic forecasting; Financial crisis
    JEL: C32 C53 E17 E37
    Date: 2015–06–07

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