nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒08‒13
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The Evolution of US Monetary Policy: 2000-2007 By Michael T. Belongia; Peter N. Ireland
  2. Exit Strategies and Trade Dynamics in Repo Markets By Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
  3. Monetary Policy under the Microscope: Intra-bank Transmission of Asset Purchase Programs of the ECB By L. Cycon; Michael Koetter
  4. Financial Stability and Monetary Policy By Martin Hellwig
  5. Monetary Policy and Foreign Exchange Management: Reforming Central Bank Functions in Myanmar By Nijathaworn, Bandid; Chaikhor, Suwatchai; Chotika-arpa, Suppakorn; Sakkankosone, Suchart
  6. What Measure of Inflation Should a Developing Country Central Bank Target? By Anand, Rahul; Prasad, Eswar; Zhang, Boyang
  7. Impact of trilemma indicators on macroeconomic policy: Does central bank independence matter? By Geeta Garg
  8. Federal Reserve Tools for Managing Rates and Reserves By Antoine Martin; James McAndrews; Ali Palida; David Skeie
  9. A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks? By Temesvary, Judit; Ongena, Steven; Owen, Ann L.
  10. The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure By Juan Rubio-Ramirez; Dario Caldara; Jonas Arias
  11. What drives the global official/policy interest rate? By Ronald A. Ratti; Joaquin L. Vespignani
  12. Monetary Policy and the Risk-Taking Channel By Michele Piffer
  13. Monetary Policy under Behavioral Expectations: Theory and Experiment By Cars Hommes; Domenico Massaro; Matthias Weber
  14. Bank's Price Setting and Lending Maturity: Evidence from an Inflation- Targeting Economy By Emiliano Luttini; Michael Pedersen
  15. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.
  16. The oil cycle, the Federal Reserve, and the monetary and exchange rate policies of Qatar By Khalid Rashid, Alkhater; Syed Abul, Basher
  17. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  18. Applying an Inflation Targeting Lens to Macroprudential Policy 'Institutions' By Güneş Kamber; Özer Karagedikli; Christie Smith
  19. Inflation forecasting models for Uganda: is mobile money relevant? By Janine Aron; John Muellbauer; Rachel Sebudde
  20. Prudential Regulation, Currency Mismatches and Exchange Rate Regimes in Latin America and the Caribbean By Martín Tobal
  21. Monetary Shocks in Models with Inattentive Producers By francesco lippi; Luigi Paciello; Fernando Alvarez
  22. Credit and Macroprudential Policy in an Emerging Economy: a Structural Model Assessment By Horacio A. Aguirre; Emilio F. Blanco
  23. On the Desirability of Nominal GDP Targeting By Julio Garín; Robert Lester; Eric Sims
  24. On the sustainability of exchange rate target zones with central parity realignments By Martinez-Garcia, Enrique
  25. The Real-Time Predictive Content of Asset Price Bubbles for Macro Forecasts By Benjamin Beckers
  26. Completing the Monetary Union of Europe as Mid-term Solution of the Euro Crisis By Fischer, Justina A.V.; Pastore, Francesco
  27. Cold Turkey vs. gradualism: Evidence on disinflation strategies from a laboratory experiment By Giamattei, Marcus
  28. FOMC Communication and Interest Rate Sensitivity to News By Jenny Tang
  29. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  30. Payment systems to facilitate South Asian integration By Ashima Goyal
  31. Do inflation expectations propagate the inflationary impact of real oil price shocks?: Evidence from the Michigan survey By Benjamin Wong

  1. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: This paper estimates a VAR with time-varying parameters to characterize the changes in Federal Reserve policy that occurred from 2000 through 2007 and assess how those changes affected the performance of the U.S. economy. The results point to a gradual shift in the Fed's emphasis over this period, away from stabilizing inflation and towards stabilizing output. A persistent deviation of the federal funds rate from the settings prescribed by the estimated monetary policy rule appears more important, however, in causing inflation to overshoot its target in the years leading up to the Great Recession.
    Keywords: Federal Reserve, Monetary Policy, Bayesian VAR, Time-Varying Parameters
    JEL: C32 E31 E32 E37 E52 E58
    Date: 2015–08–07
  2. By: Aleksander Berentsen; Sébastien Philippe Kraenzlin; Benjamin Müller
    Abstract: How can a central bank control interest rates in an environment with large excess reserves? In this paper, we develop a dynamic general equilibrium model of a secured money market and calibrate it to the Swiss franc repo market to study this question. The theoretical model allows us to identify the factors that determine demand and supply of central bank reserves, the money market rate and trading activity in the money market. In addition, we simulate various instruments that a central bank can use to exit from unconventional monetary policy. These instruments are assessed with respect to the central bank's ability to control the money market rate, their impact on the trading activity and the operational costs of an exit. All exit instruments allow central banks to attain an interest rate target. However, the trading activity differs significantly among the instruments and central bank bills and reverse repos are the most cost-effective.
    Keywords: exit strategies, money market, repo, monetary policy, interest rates
    JEL: E40 E50 D83
    Date: 2015
  3. By: L. Cycon; Michael Koetter
    Abstract: With a unique loan portfolio maintained by a top-20 universal bank in Germany, this study tests whether unconventional monetary policy by the European Central Bank (ECB) reduced corporate borrowing costs. We decompose corporate lending rates into refinancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy effects on loan rate components, we exploit the co-existence of eurozone-wide security purchase programs and regional fiscal policies at the district level. ECB purchase programs reduced refinancing costs significantly, even in an economy not specifically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins.
    Keywords: unconventional monetary policy, asset purchase programs, ECB, interest rate channel, internal capital markets
    JEL: G01 G21 E42 E43 E52
    Date: 2015–07
  4. By: Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper gives an overview over issues concerning the role of financial stability in monetary policy. Historically, financial stability has figured highly among central banks’ objectives, with policy measures ranging from interest rate stabilization to serving as a lender of the last resort. With the ascent of macroeconomics, these traditional tasks of central banks have been displaced by macroeconomic objectives, price stability, full employment, growth. The financial crisis has shifted the focus back to financial stability concerns. Along with these developments, the shift from a specie standard to a pure fiat money system has widened the scope for central bank policies, which are no longer constrained by legal obligations attached to central bank money. The paper first surveys the evolution of financial-stability and macroeconomic-stability concerns in central banking and monetary policy. Then it discusses two major challenges: (i) What should be done to assess the relevance of financial stability concerns in any given situation? How should one deal with the fact that systemic interdependence takes multiple forms and is changing all the time and that many contagion risks cannot be measured? (ii) What is the relation between financial-stability and macroeconomic-stability objectives? To what extent do they coincide, to what extent are they in conflict? How should tradeoffs be handled and what can be done to reduce the risk of the central bank’s succumbing to financial dominance?
    Keywords: financial stability, Systemic Risk, monetary policy, central banking
    JEL: E58 E44 E42 E52
    Date: 2015–10
  5. By: Nijathaworn, Bandid (Thai Institute of Directors); Chaikhor, Suwatchai (Bank of Thailand); Chotika-arpa, Suppakorn (Bank of Thailand); Sakkankosone, Suchart (Bank of Thailand)
    Abstract: Myanmar’s macroeconomic policy framework does not adequately support the new functions of the Central Bank of Myanmar. The monetary policy regime is deficient and institutions that complement the working of a market-based economy lacking. This paper identifies 10 priority areas for reform to allow the central bank to effectively perform its emerging new functions in support of economic growth and stability. This is a three-front effort: dismantle nonmarket arrangements, especially in the finance sector; implement a monetary policy framework and operational procedures, including financial markets development; and enhance central bank policy capacity. The latter includes elevating the policy process, central banking functions, and institutional roles to match the tasks of a modern monetary authority in a market-based economy.
    Keywords: central bank; financial markets; monetary policy; Myanmar
    JEL: E51 E52 E58
    Date: 2015–05–01
  6. By: Anand, Rahul (International Monetary Fund); Prasad, Eswar (Cornell University); Zhang, Boyang (Cornell University)
    Abstract: In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.
    Keywords: inflation targeting, monetary policy framework, core inflation, headline inflation, financial frictions
    JEL: E31 E52 E61
    Date: 2015–07
  7. By: Geeta Garg (Indira Gandhi Institute of Development Research)
    Abstract: As countries have become increasingly integrated in their capital accounts and moved away from fixed exchange rates, pressures mount on central banks to maintain an independent monetary policy. Amidst the constraints imposed by this monetary policy trilemma, the ability of central banks to take decisions independent of domestic political pressures becomes crucial. The literature suggests that the trilemma choices when opted carefully render the independence of central banks unnecessary in stabilizing macroeconomic outcome. For a sample of 42 high and middle income countries analyzed over a period of 30 years ranging from 1982 till 2011, this paper shows that while an efficient trilemma policy choice can help lower inflation and improve growth, the independence of central banks from the domestic political pressure, as measured in terms of the actual number of turnover of central bank governors, still matters. This is especially true of middle income countries. A less independent central bank can worsen the outcome derived from an effective trilemma policy choice. In addition, this paper shows that the institutional changes such as Inflation Targeting (IT) helps lower inflation without depending upon the level of Central Bank Independence (CBI) in a country as is suggested in the literature while the occurrence of general elections (ELEC) in any country exacerbates the macroeconomic outcome if a country grants lower autonomy to its central bankers.
    Keywords: Central Bank Independence, Trilemma, Monetary Independence, Exchange Rate Stability, Capital Account Openness, Inflation targeting, Elections
    JEL: E0 E5 E6
    Date: 2015–07
  8. By: Antoine Martin (Federal Reserve Bank of New York (E-mail:; James McAndrews (Federal Reserve Bank of New York (E-mail:; Ali Palida (Federal Reserve Bank of New York (E-mail:; David Skeie (Federal Reserve Bank of New York (E-mail:
    Abstract: Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic downturn led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market interest rates in this situation. We study several of these tools, namely interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the relative intensity of the frictions that banks face, which are bank balance sheet costs and interbank monitoring costs in our model. We show that when both costs are large, using the RRP and TDF concurrently most effectively raises short- term rates. While public money supplied by the Federal Reserve in the form of reserves can alleviate bank liquidity shocks by reducing interbank lending costs, large levels of reserve increase banks' balance sheet size and can induce greater bank moral hazard. RRPs can reduce levels of costly bank equity that banks are endogenously required to hold as a commitment device against risk-shifting returns on assets.
    Keywords: monetary policy, fixed-rate full allocation overnight reverse repurchases, term deposit facility, interest on excess reserves, FOMC, banking
    JEL: E42 E43 G12 G20
    Date: 2015–07
  9. By: Temesvary, Judit; Ongena, Steven; Owen, Ann L.
    Abstract: We examine how U.S. monetary policy affects the international activities of U.S. Banks. We access a rarely studied US bank-level dataset to assess at a quarterly frequency how changes in the U.S. Federal funds rate (before the crisis) and quantitative easing (after the onset of the crisis) affects changes in cross-border claims by U.S. banks across countries, maturities and sectors, and also affects changes in claims by their foreign affiliates. We find robust evidence consistent with the existence of a potent global bank lending channel. In response to changes in U.S. monetary conditions, U.S. banks strongly adjust their cross-border claims in both the pre and post-crisis period. However, we also find that U.S. bank affiliate claims respond mainly to host country monetary conditions.
    Keywords: bank lending channel; monetary transmission; global banking; cross-country analysis
    JEL: E44 E52 F42 G15 G21
    Date: 2015–08–01
  10. By: Juan Rubio-Ramirez (Duke University); Dario Caldara (Federal Reserve Board); Jonas Arias (Federal Reserve Board)
    Abstract: Following Leeper, Sims, and Zha (1996), we identify monetary policy shocks in SVARs by restricting the systematic component of monetary policy. In particular, we impose sign and zero restrictions only on the monetary policy equation. Since we do not restrict the response of output to a monetary policy shock, we are agnostic in Uhlig's (2005) sense. But, in contrast to Uhlig (2005), our results support the conventional view that a monetary policy shock leads to a decline in output. Hence, our results show that the contractionary effects of monetary policy shocks do not hinge on questionable exclusion restrictions.
    Date: 2015
  11. By: Ronald A. Ratti; Joaquin L. Vespignani
    Abstract: We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of official/policy interest rate. We find that 62% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (21%), oil prices (18%), global output (15%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output and prices and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.
    Keywords: Global interest rate, global monetary aggregates, oil prices, GFAVAR
    JEL: E44 E50 Q43
    Date: 2015–07
  12. By: Michele Piffer
    Abstract: Before the 2007 crisis, the trade-off between output and inflation played a leading role in the discussion of monetary policy. Instead, issues relating to financial stability played a less pronounced role in shaping the stance of monetary policy andwere limited to asset price dynamics. This Round-Up argues that the great interest that emerged after the 2007 crisis in the effects of monetary policy on financial stability reflects the shift in attention from asset price dynamics to risk-taking incentives of financial intermediaries. The Round-Up reviews the economic literature that contributed to this shift in the interpretation of the main trade-offs faced by central banks in setting interest rates.
    Date: 2015
  13. By: Cars Hommes (University of Amsterdam); Domenico Massaro (University of Amsterdam); Matthias Weber (University of Amsterdam)
    Abstract: Expectations play a crucial role in modern macroeconomic models. We replace the common assumption of rational expectations in a New Keynesian framework by the assumption that expectations are formed according to a heuristics switching model that has performed well in earlier work. We show how the economy behaves under these assumptions with a special focus on inflation volatility. Contrary to comparable models based on full rationality, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions with a learning to forecast experiment. The experimental results support the behavioral model and the claim that reacting to the output gap in addition to inflation can indeed lower inflation volatility.
    Keywords: Experimental Macroeconomics; Heterogeneous Expectations; Learning to forecast Experiment; Trade-off Inflation and Output Gap
    JEL: C90 E52 D84
    Date: 2015–07–27
  14. By: Emiliano Luttini; Michael Pedersen
    Abstract: Acknowledging that pass-through of the policy interest rate may be different amongst the private banks, this paper presents evidence of monetary pass-through conditional on different banks characteristics. A simple theoretical model is used to argue that the inflation rate also has to be taken into account when analyzing monetary pass-through. The focus is on nominal and real interest rates for commercial and consumer loans with different payback horizons. Taking a closer look at the construction of the interest rate data available, it becomes clear that short-term consumption rates are quite rigid and, thus, by construction react less to changes in the policy rate. Evidence from panel estimations with Chilean data for the period 2008 to 2014 suggests that short-term commercial rates react quite fast to changes in the monetary policy rate, while those at long-term seem to react more to inflation. Particularly size and deposit strength affect banks when fixing nominal commercial rates, while the determination of rates of consumer loans is particularly influenced by bank size and capital strength. With respect to real interest rates, commercial loans are affected by deposit strength, noninterest income and external obligations, while mortgages are affected by liquidity strength and provisions. The evidence provided in the present study reveals that the degree to which different bank characteristics affect pass-through of changes in the monetary policy rate and inflation depends to a great extent on the horizons of the loans.
    Date: 2015–07
  15. By: Dräger, Lena; Proaño, Christian R.
    Abstract: Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modeled by letting the loanto-value (LTV) ratio that banks demand of entrepreneurs depend on either regional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context.
    Keywords: cross-border banking,euro area,monetary unions,DSGE,monetary policy
    JEL: F41 F34 E52
    Date: 2015
  16. By: Khalid Rashid, Alkhater; Syed Abul, Basher
    Abstract: Supporters of the Arab oil-exporting countries’ decades-long fixed exchange rate regime argue that since, oil is traded in United States (US) dollars, pegging to the dollar is optimal. However, the weakening relationship between oil prices and the US economy in terms of the Federal Reserve’s expansionary monetary stance amid soaring oil prices for much of the previous decade has raised questions about the viability of the peg. Using Qatar as a case study, this paper empirically analyzes whether the synchronization pattern of business cycles has recently changed between Qatar and the US. The results of the analysis show a pronounced desynchronization or decoupling of business cycles between Qatar and the US during 2001–2010. Moreover, the dissimilarly of demand shocks between the two countries suggests that the imported monetary policy stance of the Federal Reserve has not been viable for Qatar in recent years. A natural implication of our findings is the need for a truly independent monetary policy oriented towards domestic goals.
    Keywords: Oil price, Business cycle synchronization, Counter-cyclical monetary policy, Exchange rate regimes.
    JEL: E32 E61 F44
    Date: 2015–06–03
  17. By: Marcel Fratzscher (DIW Berlin, Humboldt-University Berlin and CEPR (E-mail:; Marco Lo Duca (European Central Bank (E-mail:; Roland Straub (European Central Bank (E-mail:
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2015–07
  18. By: Güneş Kamber; Özer Karagedikli; Christie Smith (Reserve Bank of New Zealand)
    Abstract: We describe the origins of inflation targeting in New Zealand, and then use the four key attributes of inflation targeting - independence, the inflation target, transparency, and accountability - as an organizing device to analyze macroprudential policy 'institutions' - the rules, regulations and governance frameworks that implement macroprudential policies.
    Date: 2015–06
  19. By: Janine Aron; John Muellbauer; Rachel Sebudde
    Abstract: Forecasting inflation is challenging in emerging markets, where trade and monetary regimes have shifted, and the exchange rate, energy and food prices are highly volatile. Mobile money is a recent financial innovation giving financial transaction services via a mobile phone, including to the unbanked. Stable models for the 1-month and 3-month-ahead rates of inflation in Uganda, measured by the consumer price index for food and non-food, and for the domestic fuel price, are estimated over 1994-2013. Key features are the use of multivariate models with equilibrium-correction terms in relative prices; introducing non-linearities to proxy state dependence in the inflation process; and applying a ‘parsimonious longer lags’ (PLL) parameterisation to feature lags up to 12 months. International influences through foreign prices and the exchange rate (including food prices in Kenya after regional integration) have an important influence on the dependent variables, as does the growth of domestic credit. Rainfall deviation from the long-run mean is an important driver for all, most dramatically for food. The domestic money stock is irrelevant for food and fuel inflation, but has a small effect on non-food inflation. Other drivers include the trade and current account balances, fiscal balance, terms of trade and trade openness, and the international interest rate differential. Parameter stability tests suggest the models could be useful for short-term forecasting of inflation. There is no serious evidence of a link between mobile money and inflation.
    Keywords: Error Correction Models; Model Selection; Multivariate Time Series
    JEL: E31 E37 E52 C22 C51 C52 C53
    Date: 2015
  20. By: Martín Tobal (Banco de México)
    Abstract: In this paper, the author reports some of the results from a survey on limits and reserve requirements involving FX positions and the flexibility of their exchange rate regimes. The survey reveals new facts. Countries that have more intensively implemented these measures have taken the bulk of their policies in the transition towards exchange rate flexibility. The author shows that, in flexible regimes, policymakers have higher motivations for implementing FX regulation to achieve exchange rate stability. Yet, policy makers’ concerns differ substantially across countries and implementation characteristics are heterogeneous across policies constraining the same relationship in the balance sheet.
    Keywords: Prudential regulation, currency mis-matches, exchange rate regimes, Latin America,Caribbean.
    JEL: E58 F31
    Date: 2014–11
  21. By: francesco lippi (University of Sassari); Luigi Paciello (Einaudi Institute (EIEF)); Fernando Alvarez (University of Chicago)
    Abstract: We study models where prices respond slowly to shocks because firms are rationally inattentive. Producers must pay a cost to observe the determinants of the current profit maximizing price, and hence observe them infrequently. To generate large real effects of monetary shocks in such a model the time between observations must be long and/or highly volatile. Previous work on rational inattentiveness has allowed for observation intervals which are either constant-but-long (e.g. Caballero (1989) or Reis (2006)) or volatile-but-short (e.g. Reis's (2006) example where observation costs are negligible), but not both. In these models, the real effects of monetary policy are small for realistic values of the average time between observations. We show that non-negligible observation costs produce both these effects: intervals between observations are both infrequent and volatile. This generates large real effects of monetary policy for realistic values of the average time between observations.
    Date: 2015
  22. By: Horacio A. Aguirre; Emilio F. Blanco
    Abstract: We build a small structural open economy model, augmented to depict the credit market and interest rate spreads (distinguishing by credit to firms and families); monetary policy with sterilized intervention in the foreign exchange market; and macroprudential policy as capital requirements. We estimate the model using Bayesian techniques with quarterly data for Argentina in 2003-2011; it can be extended to other emerging economies, allowing for comparative empirical analysis. Results indicate that shocks to lending rates and spread weigh on macroeconomic variables; likewise, the credit market is affected by macroeconomic shocks. Capital requirements, beyond their strictly prudential role, appear to have contributed to lower volatility of key variables such as output, prices, credit and interest rates. The interaction of monetary policy, foreign exchange intervention and prudential tools appears to be synergic: counting on a larger set of tools helps dampen volatility of both macroeconomic and financial system variables, taking into account the type of shocks faced during the estimation period.
    Keywords: macroprudential policy, semi-structural model, Bayesian estimation
    Date: 2015–07
  23. By: Julio Garín; Robert Lester; Eric Sims
    Abstract: This paper evaluates the welfare properties of nominal GDP targeting in the context of a New Keynesian model with both price and wage rigidity. In particular, we compare nominal GDP targeting to inflation and output gap targeting as well as to a conventional Taylor rule. These comparisons are made on the basis of welfare losses relative to a hypothetical equilibrium with flexible prices and wages. Output gap targeting is the most desirable of the rules under consideration, but nominal GDP targeting performs almost as well. Nominal GDP targeting is associated with smaller welfare losses than a Taylor rule and significantly outperforms inflation targeting. Relative to inflation targeting and a Taylor rule, nominal GDP targeting performs best conditional on supply shocks and when wages are sticky relative to prices. Nominal GDP targeting may outperform output gap targeting if the gap is observed with noise, and has more desirable properties related to equilibrium determinacy than does gap targeting.
    JEL: E31 E47 E52 E58
    Date: 2015–07
  24. By: Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas)
    Abstract: I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler’s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.
    JEL: E58 F31 F33 F41 G15
    Date: 2015–06–01
  25. By: Benjamin Beckers
    Abstract: This paper contributes to the debate of whether central banks can \lean against the wind" of emerging stock or house price bubbles. Against this background, the paper evaluates if new advances in real-time bubble detection, as brought forward by Phillips et al. (2011), can timely detect bubble emergences and collapses. Building on simulations, the paper shows that the detection capabilities of all indicators are sensitive to their exact specifications and to the characteristics of the bubbles in the sample. Therefore, the paper suggests a combination approach of different bubble indicators which helps to account for the uncertainty around start and end dates of asset price bubbles. Additionally, the paper then investigates if the individual and combination indicators carry predictive content for inflation and output growth when the real-time availability of all variables is taken into account. It finds that a combination indicator is best suited to uncover the most common stock and house price bubbles in the U.S. and shows that this indicator improves output forecasts.
    Keywords: Asset price bubbles, financial stability, leaning-against-the-wind, monetary policy, real-time forecasting, unit root monitoring test
    JEL: C22 C53 E44 E47 G12
    Date: 2015
  26. By: Fischer, Justina A.V. (University of Mannheim); Pastore, Francesco (University of Naples II)
    Abstract: This research note discusses the Euro crisis in Greece in light of the referendum of July the 5th. It lays out the social and political costs of a GREXIT, but also of a continuing austerity policy. It proposes a reform policy fostering growth in Greece and discusses the role of conditionality. Finally, the important role of mid-left parties is highlighted.
    Keywords: IMF, Germany, Greece, Euro, Europe, Monetary Union
    JEL: E12 E62 F15 F16 F33 F55 H12 H50 H63 O42 O43
    Date: 2015–07
  27. By: Giamattei, Marcus
    Abstract: Disinflation can be implemented gradually or via Cold Turkey - an immediate change of policy - with the latter being mainly recommended by theory and empirical literature. But Cold Turkey may only be superior because it is endogenously selected for favorable environments. To eliminate this endogeneity and to disentangle the credible push through of a disinflation policy from ex-ante credibility, I run an experiment where a central banker has to decide for a disinflationary strategy and four forecasters try to coordinate on it. The design abstracts from any rigidities and provides full information so that Cold Turkey is the Nash equilibrium. But Cold Turkey fails to be the most successful strategy because forecasters react sluggishly due to limited reasoning. Cold Turkey does not speed up learning or increase reasoning, is less successful and is reversed more often.
    Keywords: Disinflation,Credibility,Cold Turkey,Gradualism,Limited Reasoning,Endogenous Treatments
    JEL: E52 E58 C72 C92
    Date: 2015
  28. By: Jenny Tang (Federal Reserve Bank of Boston)
    Abstract: This paper examines whether communications by the Federal Open Markets Committee play a role in determining the types of macroeconomic news that financial markets pay attention to. To do so, I construct a novel measure of labor-related word use in FOMC statements and meeting minutes. I find that these word use measures are related to the amount by which interest rates' response to labor-related news exceeds their response to all other news. This relationship is especially strong for interest rates of longer maturities.
    Date: 2015
  29. By: Guillaume Arnould (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi)); Salim Dehmej (Centre d'Economie de la Sorbonne - Labex Régulation Financière (Réfi))
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements
    Keywords: financial stability; stress tests; banking; financial regulation; Basel III
    JEL: G21 G28
    Date: 2015–07
  30. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: Considerable technology-based evolution in payment systems offers opportunities for convergence to a regional payment system. Though South Asian wholesale payment systems are more developed compared to retail, and smaller countries still lag behind, the South Asian Association for Regional Cooperation Payment Council offers a forum to facilitate convergence. The existing Asian Clearing Union can also be revitalized using developments in payment systems. Changes include faster settlement using real time flow through the system backed by local liquidity encouraging local currency use, reduction in transaction costs and delays, expansion of facilities offered, types of flows allowed, and number of participants. Invoicing in local currencies reduces pass through of changes in exchange rates, and hence lowers their inflationary impact. Electronic systems can discriminate between types of flows and provide detailed information without procedural delays, reducing security concerns.
    Keywords: Payment systems, South Asia, integration, Asian Clearing Union
    JEL: F36 F42 F55
    Date: 2015–07
  31. By: Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: This paper presents evidence that inflation expectations, as measured by the Michigan Survey of consumers, only play a minimal role in the propagation of real oil price shocks into inflation. This is despite evidence which confirms in flation expectations are sensitive to real oil price shocks. Further analysis exploring structural breaks suggest at some point after the mid-1990s, inflation expectations may have played no part in propagating real oil price shocks into inflation.
    JEL: C32 D84 E31
    Date: 2015–04

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