nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒07‒11
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The QE experience: Worth a try? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  2. Simultaneous Monetary Policies in the Context of the Trilemma: Evidence from the Central Bank of Turkey By Yasin Kursat Onder; Mauricio Villamizar-Villegas
  3. The role of external shocks for monetary policy in Colombia and Brazil: A Bayesian SVAR analysis By Christian Rohe; Matthias Hartermann
  4. Price Level Targeting and Risk Management* By Billi, Roberto
  5. Different types of central bank insolvency and the central role of seignorage By Reis, Ricardo
  6. Optimal monetary policy in the presence of human capital depreciation during unemployment By Lien Laureys
  7. Monetary Policy in the United States and in Developing Countries : A speech at the Crockett Governors' Roundtable 2015 for African Central Bankers, University of Oxford, Oxford, United Kingdom, June 30, 2015 By Fischer, Stanley
  8. Central Bank Credibility, Reputation and Inflation Targeting in Historical Perspective By Michael David Bordo; Pierre Siklos
  9. Forward Guidance and the State of the Economy By Keen, Benjamin D.; Richter, Alexander; Throckmorton, Nathaniel
  10. Central bank policy paths and market forward rates: A simple model By De Graeve, Ferre; Iversen, Jens
  11. Learning-by-Sharing: Monetary Policy and the Information Content of Public Signals By Alexandre Kohlhas
  12. Measuring the Non-Linear Effects of Monetary Policy By Christian Matthes; Regis Barnichon
  13. Lethal lapses: How a positive interest rate shock might stress German life insurers By Feodoria, Mark; Förstemann, Till
  14. Reflections on Inflation Targeting and Financial Stability By Jacob Frenkel
  15. The International Transmission of Credit Bubbles: Theory and Policy By Alberto Martin; Jaume Ventura
  16. Is the Intrinsic Value of Macroeconomic News Announcements Related to their Asset Price Impact? By Gilbert, Thomas; Scotti, Chiara; Strasser, Georg; Vega, Clara
  17. Building a Safer Payment System : A speech at the Federal Reserve Bank of Kansas City Conference, "The Puzzle of Payments Security: Fitting the Pieces Together to Protect the Retail Payments System", Kansas City, Missouri, June 25, 2015 By Powell, Jerome H.
  18. Cryptocurrencies: New Opportunities for Postal Financial Services By Christian Jaag; Christian Bach
  19. Faster payments in the United States: how can private sector systems achieve public policy goals? By Hayashi, Fumiko
  20. On the Importance of Sales for Aggregate Price Flexibility By Nicolas Vincent; Oleksiy Kryvtsov

  1. By: Christophe Blot (OFCE); Jérôme Creel (OFCE); Paul Hubert (OFCE); Fabien Labondance (Centre de REcherches sur les Stratégies Economiques (CRESE))
    Abstract: The ECB has decided to implement large-scale quantitative easing (QE) measures since March 2015 until September 2016. This unconventional monetary policy has had a variety of precedents, in the Japanese, UK and US economies. These experiments have been effective at modifying government and corporate bond yields, mostly in the UK and US and to a lesser extent in Japan. This conclusion is not context-free. The European QE has started in a deflation era which requires more activism and cooperation from the ECB and Euro area governments than in the UK and the US when their central banks embarked in QE. The success of the European QE will also depend substantially on the depreciation of the Euro and will require clear communication by the ECB that it is prepared to accept a large depreciation at least until the inflation rate goes back to its target.
    Keywords: Monetary policy; Quantitative easing
    JEL: E52
    Date: 2015–04
  2. By: Yasin Kursat Onder; Mauricio Villamizar-Villegas
    Abstract: Many central banks that have opted for monetary autonomy have also been reluctant to relinquish control over the value of their currencies. As a result, they have operated through both interest rate and foreign exchange interventions. However, in the context of the monetary trilemma, both effects can potentially offset each other. Using daily data from the Central Bank of Turkey during the period of 2002 - 2010, we study the effects of simultaneous policies by first purging the intended monetary decisions from responses to real-time macroeconomic variables, and then determining their impact on economic activity. We find that the Central Bank of Turkey adjusted its policy rate mostly in response to inflation levels relative to both the yearly target and agents’ expectations, and conducted purchases and sales of foreign currency in response to exchange rate behavior. These responses varied depending on whether interventions were pre-announced. We also find that unannounced purchases of foreign currency had a significant effect in reducing exchange rate volatility but appeared to have no effect on exchange rate changes. On the other hand, changes in the policy rate significantly affected inflation but had no discernible effect on output growth.
    Keywords: Central bank intervention, simultaneous policies, monetary shocks, price puzzle, monetary policy trilemma, foreign exchange intervention
    JEL: E43 E52 E58 F31
    Date: 2015–07–03
  3. By: Christian Rohe; Matthias Hartermann
    Abstract: This paper identifies the effects of US interest rate and commodity price shocks on the monetary policy of two in flation targeting emerging economies from Latin America, Colombia and Brazil. We estimate country-specic Bayesian SVARs with block exogeneity restrictions and account for the fact that central banks in both countries use two different instruments of monetary policy, a policy interest rate and foreign exchange market interventions. Our findings show that the Colombian and, to a lesser degree, the Brazilian central bank use sterilized interventions as a systematic component of their infl ation targeting regimes, which are more accurately described as "in flation-targeting-cum-intervention". Foreign exchange interventions are used in both countries to set domestic interest rates more independently from US monetary policy and, in Colombia, to increase interest rates in response to rising import prices without further deteriorating the terms of trade. Our results also indicate a lower susceptibility to shocks emanating from outside Colombia or Brazil under this policy regime than what studies for the pre-infl ation targeting period have found.
    Keywords: External Shocks, Inflation Targeting, Foreign Exchange Intervention, Bayesian SVAR, Block Exogeneity
    JEL: C32 E52 E58 F31 O54
    Date: 2015–06
  4. By: Billi, Roberto (Research Department, Central Bank of Sweden)
    Abstract: Many argue that, in the presence of a lower bound on nominal interest rates, central banks should use a risk management approach for setting policy, which implies committing to a more expansionary policy to deal with uncertainty about the economic recovery. Using a standard model for monetary policy analysis, I study the effects of an uncertain future for both price level targeting and nominal GDP level targeting. The results clarify that, during lower bound episodes, the extent to which policy can overcome uncertainty depends crucially on the choice of policy framework.
    Keywords: nominal level targets; optimal discretionary policy; zero lower bound
    JEL: E31 E52 E58
    Date: 2015–06–01
  5. By: Reis, Ricardo
    Abstract: A central bank is insolvent if its plans imply a Ponzi scheme on reserves so the price level becomes infinity. If the central bank enjoys fiscal support, in the form of a dividend rule that pays out net income every period, including when it is negative, it can never become insolvent independently of the fiscal authority. Otherwise, this note distinguishes between intertemporal insolvency, rule insolvency, and period insolvency. While period and rule solvency depend on analyzing dividend rules and sources of risk to net income, evaluating intertemporal solvency requires overcoming the difficult challenge of measuring the present value of seignorage.
    Keywords: central bank capital; fiscal support; monetary policy
    JEL: E42 E58 E59
    Date: 2015–07
  6. By: Lien Laureys (Bank of England)
    Abstract: When workers are exposed to human capital depreciation during periods of unemployment, hiring affects the unemployment pool's composition in terms of skills, and hence the economy’s production potential. Introducing human capital depreciation during unemployment into an otherwise standard New Keynesian model with search frictions in the labour market leads to the finding that the flexible price allocation is no longer constrained-efficient even when the standard Hosios condition holds. This is because it generates a composition externality in job creation: firms ignore how their hiring decisions affect the extent to which the unemployed workers’ skills erode, and hence the output that can be produced by new matches. Consequently, it might be desirable from a social point of view for monetary policy to deviate from strict inflation targeting. But quantitative analysis shows that although optimal price inflation is no longer zero, strict inflation targeting stays close to the optimal policy.
    Date: 2015
  7. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–06–30
  8. By: Michael David Bordo; Pierre Siklos
    Date: 2015–06–26
  9. By: Keen, Benjamin D. (Department of Economics, University of Oklahoma); Richter, Alexander (Department of Economics, Auburn University); Throckmorton, Nathaniel (Department of Economics, College of William & Mary)
    Abstract: This paper examines the economic effects of forward guidance using a New Keynesian model with a zero lower bound (ZLB) constraint on the short-term nominal interest rate. Forward guidance is modeled with anticipated news shocks to the monetary policy rule. There are five key findings: (1) the stimulative effect of forward guidance falls as the economy deteriorates or as households expect a slower recovery because there is a smaller margin to lower expected policy rates; (2) longer forward guidance horizons do not generate increasingly larger impact effects on output when the total amount of news is fixed, unlike with an exogenous interest rate peg; (3) in steady state, an unanticipated shock has a larger impact effect on output than a news shock, but a news shock has a larger cumulative effect in every state of the economy; (4) at the ZLB, the cumulative effect on output from lengthening the forward guidance horizon increases over short horizons but decreases thereafter, which indicates the central bank faces limits on how far forward guidance can extend into the future and continue to add stimulus; and (5) forward guidance is stimulative in the absence of other shocks, but the observed effect on output is smaller or even negative if another shock simultaneously reduces demand.
    Keywords: Monetary Policy; Forward Guidance; Zero Lower Bound; News Shocks
    JEL: E43 E58 E61
    Date: 2015–06–27
  10. By: De Graeve, Ferre (Research Department, Central Bank of Sweden); Iversen, Jens (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Increasingly many central banks announce likely paths for future policy rates. Re- cent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations.
    Keywords: Policy path; forward rate; forward guidance
    JEL: E43 E44 E58
    Date: 2015–06–01
  11. By: Alexandre Kohlhas (Stockholm University)
    Abstract: This paper studies the effect of a central bank releasing public information about the state of the economy in a dispersed information business cycle model in which market participants learn from the distribution of prices, economy-wide output and the level of the interest rate. It demonstrates how central bank information disclosure can increase the information content of public signals by making expectations of future central bank actions closer to common knowledge. This effect is shown in a calibrated business cycle model to completely offset the standard learning externality of additional public information. Central bank information disclosure can thus decrease the level of uncertainty about the state of the economy for everyone -- even the central bank itself. This qualifies the "anti-disclosure" result in Morris and Shin (2005) and Amador and Weill (2010).
    Date: 2015
  12. By: Christian Matthes (Federal Reserve Bank of Richmond); Regis Barnichon (CREI)
    Abstract: This paper proposes a method to identify the non-linear effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to monetary policy and find that the effect of a monetary intervention depends strongly on (i) the sign of the intervention, (ii) the size of the intervention, and (iii) the state of the business cycle at the time of the intervention. A contractionary policy has a strong adverse effect on output, much stronger than linear estimates suggest, but an expansionary policy has, on average, no significant effect on output. An expansionary policy can have some expansionary effect on output, but only if the intervention is large and during a recession. Even so, a contractionary policy is always more potent than its expansionary counterpart.
    Date: 2015
  13. By: Feodoria, Mark; Förstemann, Till
    Abstract: Life insurers typically grant policyholders a surrender option. We demonstrate that the resulting lapse risk could materialise in the form of a "policyholder run" if interest rates were to increase sharply. An inverse stress test based on a unique set of regulatory panel data suggests that German life insurers have become less resistant to an upward interest rate shock in the course of the financial and sovereign debt crisis from 2007 to 2011. Despite the challenges presented by the low-interestrate environment, the situation has not deteriorated since then. In light of the quantitative easing (QE) of monetary policy in the euro area, life insurers may find it difficult to continue this positive trend.
    Keywords: life insurance,interest rate risk,lapse risk,rational policyholder run,inverse stress test
    JEL: G22 G33 C72 C13
    Date: 2015
  14. By: Jacob Frenkel
    Abstract: Transcript of Jacob Frenkel’s1 presentation on reflectionson Inflation Targeting and Financial Stability
    Date: 2015–06–26
  15. By: Alberto Martin; Jaume Ventura
    Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to include many countries and general preferences, and uses it to study how financial integration affects the properties of credit bubbles, how the latter are transmitted across countries, and the role of international policy coordination.
    Keywords: Önancial globalization, international capital áows, sudden stops, credit bubbles, international policy coordination
    JEL: E32 E44 O40
    Date: 2015–05
  16. By: Gilbert, Thomas (Foster School of Business); Scotti, Chiara (Board of Governors of the Federal Reserve System (U.S.)); Strasser, Georg (Boston College); Vega, Clara (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: The literature documents a heterogeneous asset price response to macroeconomic news announcements: Some announcements have a strong impact on asset prices and others do not. In order to explain these differences, we estimate a novel measure of the intrinsic value of a macroeconomic announcement, which we define as the announcement's ability to nowcast GDP growth, inflation, and the Federal Funds Target Rate. Using the same nowcasting framework, we then decompose this intrinsic value into the announcement's characteristics: its relation to fundamentals, timing, and revision noise. We find that in the 1998-2013 period, a significant fraction of the variation in the announcements' price impact on the Treasury bond futures market can be explained by differences in intrinsic value. Furthermore, our novel measure of timing explains significantly more of this variation than the announcements' relation to fundamentals, reporting lag (which previous studies have used as a measure of timing), or revision noise.
    Keywords: Macroeconomic announcements; central bank policy; coordination role of public information; learning; macroeconomic forecasting; price discovery
    JEL: E44 G14
    Date: 2015–04–23
  17. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–06–25
  18. By: Christian Jaag; Christian Bach
    Abstract: Contrary to traditional currencies, cryptocurrencies neither have physical form nor are they guaranteed or backed by any central authority. They simply attain value by usage and the confidence of those participating in the respective system. A crypto-payment-system is a technology which allows for payments between individuals digitally with-out relying on central institutions, intermediaries or further infrastructure as required for conventional payment systems. While its legitimacy as currency has been questioned due to its high exchange rate volatility, the significant potential of the Bitcoin technology as a payment system is undeniable. As postal operators typically have a role as financial intermediaries and act in an inter-national and increasingly digital environment, crypto-payment-systems may be of par-ticular interest to them. In fact, as the post has a wide network of access points and is highly trusted by the general public, it may be well-suited to offer services which coun-ter some disadvantages of crypto-payment systems and cryptocurrencies, while retain-ing the benefits of their technology. By turning to crypto-payment-systems postal opera-tors may extend their role as a financial intermediary with new domestic and interna-tional services. Furthermore, postal operators may even issue their own cryptocurrency to protect customers from the high exchange-rate volatility of cryptocurrencies.
    Keywords: Postal Sector, Cryptocurrencies, Bitcoin, Financial Services, Financial Inclusion
    JEL: L43 L51
    Date: 2015–06
  19. By: Hayashi, Fumiko (Federal Reserve Bank of Kansas City)
    Abstract: Consumers and businesses are increasingly expecting faster payments. While many countries have already developed or are in process of developing faster payments, the availability of these payments is fragmented in the United States. The recently released paper by the Federal Reserve encourages private sector participants to provide faster payment services. However, private-sector faster payments systems will face significant challenges in achieving public policy goals of ubiquity, safety, and efficiency unless system governance represents broad public interests. One way to better align private-sector interests with those of the public is for the Federal Reserve to influence governance of the private-sector systems through its leadership role.
    Keywords: Faster payments; Federal Reserve and payments; System governance
    JEL: L5 L88 M14
    Date: 2015–06–01
  20. By: Nicolas Vincent (HEC Montréal); Oleksiy Kryvtsov (Bank of Canada)
    Abstract: Macroeconomists traditionally ignore temporary price mark-downs ("sales") under the assumption that they are unrelated to aggregate phenomena. We challenge this view. First, we provide evidence from the U.K. and U.S. CPI micro data that the frequency of sales is strongly countercyclical. Second, we build a general equilibrium model in which sales arise endogenously. In response to a monetary contraction, firms facing rigid regular prices post more sales, and households search more intensively. The resulting fall in the aggregate price level can be significantly larger than if sales were ignored, implying a much smaller response of real consumption to monetary shocks.
    Date: 2015

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