nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒08‒07
eighteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. International Capital Market Frictions and Spillovers from Quantitative Easing By Margaux MacDonald
  2. Limited commitment and the demand for money in the U.K. By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  3. Why Did Bank Lending Rates Diverge from Policy Rates After the Financial Crisis? By Anamaria Illes; Marco Lombardi; Paul Mizen
  4. Monetary policy with asset-backed money By David Andolfatto; Aleksander Berentsen; Christopher Waller
  5. Won’t Get Fooled Again – Or Will We? Monetary Policy, Model Uncertainty, and ‘Policy Model Complacency’ By Mark Setterfield
  6. Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage By Bergin, Paul R; Corsetti, Giancarlo
  7. Understanding policy rates at the zero lower bound: insights from a Bayesian shadow rate model By Marcello Pericoli; Marco Taboga
  8. On the Limits of Macroprudential Policy By Marcin Kolasa
  9. Patience and Inflation By Hübner, Malte; Vannoorenberghe, Gonzague
  10. "Marx's Theory of Money and 21st-century Macrodynamics" By Tai Young-Taft
  11. Optimal Inflation Weights in the Euro Area By Daniela Bragoli; Massimiliano Rigon; Francesco Zanetti
  12. Theory and practice of contagion in monetary unions: Domino effects in EMU Mediterranean countries By Canofari Paolo; Di Bartolomeo Giovanni; Piersanti Giovanni
  13. An Open-Economy Model with Money, Endogenous Search, and Heterogeneous Firms By Lucas Herrenbrueck
  14. On the conditional distribution of euro area inflation forecast By Fabio Busetti; Michele Caivano; Lisa Rodano
  15. Macroeconomic Policy after the Global Financial Crisis By Quiggin, John
  16. Replicating Japan’s CPI Using Scanner Data By Satoshi Imai; Tsutomu Watanabe
  17. Can global economic conditions explain low New Zealand inflation? By Adam Richardson
  18. Weekly versus Monthly Unit Value Price Indexes By de Haan, Jan; Diewert, W. Erwin; Fox, Kevin J.

  1. By: Margaux MacDonald (Queen's University)
    Abstract: This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) during 2008–2014. I show that there was substantial heterogeneity in the way EME currency, equity, and long-term sovereign bond markets were impacted by these purchases. Drawing on the gravity-in-international- finance literature, I show evidence that the degree of economic integration between EMEs and advanced countries is able to explain some of the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of the domestic monetary policy, exchange-rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the US Federal Reserve or other advanced country central banks engaging in the purchases.
    Keywords: Emerging markets, Unconventional monetary policy, Gravity
    JEL: E4 E5 F3
    Date: 2015–07
  2. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: In the United Kingdom, money demand deviates from the convex relationship suggested by monetary theory. Limited commitment of borrowers via banks can explain this observation. Our finding is based on a microfounded monetary model, where a money market provides insurance against idiosyncratic liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.K. data and show that limited commitment significantly improves the fit between the theoretical money demand function and the data. Limited commitment can also explain the "liquidity trap"; i.e., why the ratio of credit to Ml is currently so low, despite the fact that nominal interest rates are at their lowest recorded levels.
    Keywords: Money demand, money markets, financial intermediation, limited commitment
    JEL: E4 E5 D9
    Date: 2015–07
  3. By: Anamaria Illes; Marco Lombardi; Paul Mizen
    Abstract: After the global finance crisis short-term policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between policy rates and lending rates, how should central banks view the post-crisis transmission of policy to lending rates? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over policy rates. It suggests central banks should focus on the cost of bank liabilities more broadly to understand the dynamics of lending rates.
    Keywords: Keywords: lending rates, policy rates, panel cointegration, financial crisis
    Date: 2015
  4. By: David Andolfatto; Aleksander Berentsen; Christopher Waller
    Abstract: We study the use of asset-backed money in a neoclassical growth model with illiquid capital. A mechanism is delegated control of productive capi- tal and issues claims against the revenue it earns. These claims constitute a form of asset-backed money. The mechanism determines (i) the number of claims outstanding, (ii) the dividends paid to claim holders, and (iii) the structure of redemption fees. We find that for capital-rich economies, the first-best allocation can be implemented and price stability is optimal. However, for sufficiently capital-poor economies, achieving the first-best allocation requires a strictly positive rate of inflation. In general, the minimum infiation necessary to implement the first-best allocation is above the Friedman rule and varies with capital wealth.
    Keywords: Limited commitment, asset-backed money, optimal monetary policy
    JEL: D82 D83 E61 G32
    Date: 2015–06
  5. By: Mark Setterfield (Department of Economics, New School for Social Research)
    Abstract: The question addressed in this paper is: can monetary policy succeed in stabilizing the economy even when the policy model on which it is predicated is mis-specified? Using variants of the 3-equation New Consensus Macroeconomics model, it is shown that this question can be answered in the affirmative. The purpose of the paper is not to encourage indifference towards model uncertainty, however, but rather to warn against the perils of “policy model complacency”. This arises if the success of policy is misinterpreted as successful understanding of the workings of the economy, which makes the policy maker vulnerable to surprises: events with systematic origins in the “true” model of the economy that are not anticipated by the (mis-specified) policy model. To safeguard against this problem, policy makers should always entertain eclectic views of the workings of the economy – a task that is easily accomplished by paying more attention to “outside the mainstream” macroeconomic thinking that frequently makes predictions that are at odds with those of the dominant policy model.
    Keywords: Monetary policy, central banking, model uncertainty, Lucas critique, Tinbergen principle
    JEL: E12 E13 E52 E58
    Date: 2015–07
  6. By: Bergin, Paul R; Corsetti, Giancarlo
    Abstract: Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for two tradable sectors in each country: while one sector is perfectly competitive, firms in the other sector produce differentiated goods under monopolistic competition subject to sunk entry costs and nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing markups, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Panel regressions based on worldwide exports to the U.S. by sector lend empirical support to the theory. Constraining monetary policy with an exchange rate peg lowers a country’s share of differentiated goods in exports between 4 and 12 percent.
    Keywords: firm entry; monetary policy; optimal tariff; production location externality
    JEL: F41
    Date: 2015–07
  7. By: Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy)
    Abstract: Term structure models are routinely used by central banks to assess the impact of their communication on market participants' views of future interest rate developments. However, recent studies have pointed out that traditional term structure models can provide misleading indications when policy rates are at the zero lower bound (ZLB). One of the main drawbacks is that they are unable to reproduce the stylized fact that policy rates tend to remain at the ZLB for prolonged periods of time once they reach it. A consensus has recently emerged that shadow rate models, first introduced by Black (1995), are apt to solve this problem. The main idea is that the shadow rate (i.e., the short-term interest rate that would prevail in the absence of the ZLB) can move in negative territory for long time spans even when the actual rate remains close to the ZLB. Due to their high nonlinearity, shadow rate models are particularly difficult to estimate and have been so far only estimated with approximate methods. We propose an exact Bayesian method for their estimation. We use it to study developments in euro and US dollar yield curves since the end of the '90s. Our estimates confirm - and provide a quantitative assessment of - the fact that there has been a significant divergence of monetary policies in the euro area and in the US over the past years: between 2009 and 2013, the shadow rate was much lower in the US than in the euro area, while the opposite has been true since 2014; furthermore, at the end of our sample (January 2015), the most likely date of the the first increase in policy rates was estimated to be around mid-2015 in the US and around 2020 in the euro area.
    Keywords: zero lower bound, shadow rate term structure model
    JEL: C32 E43 G12
    Date: 2015–07
  8. By: Marcin Kolasa (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: This paper considers a canonical New Keynesian macrofinancial model to analyze how macroprudential policy tools can help the monetary authority in reaching a selection of dual stabilization objectives. We show that using the loan-to-value ratio as an additional policy instrument does not allow to resolve the standard inflation-output volatility tradeoff. Simultaneous stabilization of inflation and either credit or house prices with monetary and macroprudential policy is possible only if the role of credit in the economy is very small. Overall, our results suggest that macroprudential policy has important limits as a complement to monetary policy.
    Date: 2015
  9. By: Hübner, Malte; Vannoorenberghe, Gonzague
    Abstract: Monetary policy makers constantly face an inter-temporal choice problem. By gener- ating surprise inflation they can temporarily increase employment and output. These short-run gains have however to be weighed against the long-run costs associated with higher inflation and a loss of reputation. More patient countries should therefore choose to implement lower inflation. Using cross-country data for up to 88 advanced and emerging economies, we provide empirical evidence that more patient countries had indeed lower average inflation rates over our sample period from 1961 to 2009. To address the possibility that patience may be endogenous to past inflation rates we use information on how the language spoken in a country encodes future time as an instrument for patience. Our results show that patience has a statistically and economically significant impact on inflation.
    Keywords: Inflation, Patience, Stability Culture
    JEL: D72 E31 E58 Z13
    Date: 2015–07–20
  10. By: Tai Young-Taft
    Abstract: Marx's theory of money is critiqued relative to the advent of fiat and electronic currencies and the development of financial markets. Specific topics of concern include (1) today's identity of the money commodity, (2) possible heterogeneity of the money commodity, (3) the categories of land and rent as they pertain to the financial economy, (4) valuation of derivative securities, and (5) strategies for modeling, predicting, and controlling production and exchange of the money commodity and their interface with the real economy.
    Keywords: Macroeconomics; Marx's Theory of Money; Monetary Theory; Transformation Problem
    JEL: B51 E11 G13
    Date: 2015–07
  11. By: Daniela Bragoli (Università Cattolica); Massimiliano Rigon (Bank of Italy); Francesco Zanetti (University of Oxford)
    Abstract: This study investigates the appropriate measure for stabilizing inflation in the Euro Area. We use a model that accounts for both the heterogeneity observed in the degree of price rigidities across regions and sectors, and asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or sector result from complex interactions between the degree of price stickiness, economic size and the distribution of shocks within regions.
    Keywords: Optimal monetary policy, Euro Area regions, asymmetric shocks, asymmetric price stickiness.
    JEL: E52 F41
    Date: 2015–07
  12. By: Canofari Paolo; Di Bartolomeo Giovanni; Piersanti Giovanni
    Date: 2014–09
  13. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: This paper is the first to describe a monetary general equilibrium model that features; (i) search frictions in the goods market, which create market power; (ii) endogenously chosen search effort by consumers, which mitigates this market power; (iii) heterogeneous firms and free entry; and (iv) an open economy, i.e. an arbitrary number of countries that trade goods and, potentially, assets. The model is flexible and well suited to studying questions in international macroeconomics, including the effects of monetary policy on production, firm entry, markups, trade, and welfare, at home or abroad. As part of this effort, I characterize a general class of matching processes which provide a novel approach to modeling firm sales: the number of customers per firm follows a bounded Pareto distribution with shape parameter less than or equal to one.
    Keywords: Monetary policy, optimal inflation, search frictions, search effort, price dispersion, open economy
    JEL: D43 E40 F12
    Date: 2015–07–01
  14. By: Fabio Busetti (Bank of Italy); Michele Caivano (Bank of Italy); Lisa Rodano (Bank of Italy)
    Abstract: The paper uses dynamic quantile regressions to estimate and forecast the conditional distribution of euro-area inflation. As in a Phillips curve relationship we assume that inflation quantiles depend on past inflation, the output gap, and other determinants, namely oil prices and the exchange rate. We find significant time variation in the shape of the distribution. Overall, the quantile regression approach describes the distribution of inflation better than a benchmark univariate trend-cycle model with stochastic volatility, which is known to perform very well in forecasting inflation. In an out-of-sample prediction exercise, the quantile regression approach provides forecasts of the conditional distribution of inflation that are superior, overall, to those produced by the benchmark model. Averaging the distribution forecasts of the different models improves robustness and in some cases results in the greatest accuracy of distributional forecasts.
    Keywords: quantile regression, Phillips curve, time-varying distribution
    JEL: C32 E31 E37
    Date: 2015–07
  15. By: Quiggin, John
    Abstract: This chapter describes the ideology of market liberalism, the macroeconomic policies and institutions it produced, and the failure of those policies and institutions that produced the GFC and the subsequent deep recession in most developed countries. Although it is impossible to prescribe a fully-developed alternative policy framework at this point, new directions in macroeconomic policy are sketched out, including countercyclical fiscal policy, the need for an increase in public sector revenue and expenditure, and new approaches to monetary policy and financial regulation.
    Keywords: Global financial crisis, market liberalism, Australia, monetary policy., Political Economy, Public Economics, G28, E6,
    Date: 2013–09
  16. By: Satoshi Imai (Statistics Bureau of Japan); Tsutomu Watanabe (Graduate School of Economics,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.
    Keywords: consumer price index; scanner data; sampling; price rigidity; menu costs; sale and regular prices
    Date: 2015–06
  17. By: Adam Richardson (Reserve Bank of New Zealand)
    Abstract: This note highlights the contribution the international economy has made to current low inflation in New Zealand. In addition, it investigates if international economic factors can help explain the residual uncertainty around the overall drivers of current inflation.
    Date: 2015–07
  18. By: de Haan, Jan; Diewert, W. Erwin; Fox, Kevin J.
    Abstract: A new source of potential bias in the Consumer Price Index (CPI) is described. We find that unit value (average) prices, commonly used for construction of the CPI should be constructed over the same period as the index to be constructed, rather than over an incomplete sub-period. The latter approach can lead to an upward bias in the CPI.
    Keywords: Elementary price indexes, aggregation, inflation.
    JEL: C43 C82 E31
    Date: 2015–07–20

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