nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒08‒19
27 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Mortgages and Monetary Policy By Roman Sustek; Finn Kydland; Carlos Garriga
  2. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  3. FOMC Responses to Calls for Transparency By Acosta, Miguel
  4. Phases of Global Liquidity, Fundamentals News, and the Design of Macroprudential Policy By Javier Bianchi; Enrique G. Mendoza
  5. External Shocks, Financial Volatility and Reserve Requirements in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  6. Forward Guidance and Asset Prices By Yıldız Akkaya; Refet S. Gürkaynak; Burçin Kısacıkoğlu; Jonathan H. Wright
  7. Banking Union : a solution to the euro zone crisis By Maylis Avaro; Henri Sterdyniak
  8. Are the Responses of the U.S. Economy Asymmetric to Positive and Negative Money Supply Shocks? By Apostolos Serletis; Khandokar Istiak
  9. Monetary Policy Surprises, Credit Costs, and Economic Activity By Peter Karadi; Mark Gertler
  10. The Swedish Macroeconomic Policy Framework By Calmfors, Lars
  11. The distortionary effect of monetary policy: credit expansion vs. lump-sum transfers in the lab By Romain Baeriswyl; Camille Cornand
  12. Indicators of core inflation: Case of Tunisia By Ghrissi Mhamdi; Mounir Smida; Ramzi Farhani
  13. Spillover Implications of Differences in Monetary Conditions in the United States and the Euro Area By Carolina Osorio; Esteban Vesperoni
  14. Un-Networking: The Evolution of Networks in the Federal Funds Market By Beltran, Daniel O.; Bolotnyy, Valentin; Klee, Elizabeth C.
  15. Risk Management for Monetary Policy Near the Zero Lower Bound By Evans, Charles L.; Fisher, Jonas D. M.; Gourio, Francois; Krane, Spencer D.
  16. Inflation and speculation in a dynamic macroeconomic model By Matheus Grasselli; Adrien Nguyen Huu
  17. Dealing with the ECB's triple mandate? By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance
  18. Financial Crises and Systemic Bank Runs in a Dynamic Model of Banking By Roberto Robatto
  19. Monetary Policy and the Redistribution Channel By Adrien Auclert
  20. Assessing the link between Price and Financial Stability By Christophe Blot; Jérôme Creel; Paul Hubert; Fabien Labondance; Francesco Saraceno
  21. Unconventional monetary policies and the macroeconomy: the impact of the United Kingdom's QE2 and Funding for Lending Scheme By Churm, Rohan; Joyce, Mike; Kapetanios, George; Theodoridis, Konstantinos
  22. Dynamic Debt Deleveraging and Optimal Monetary Policy By Gauti Eggertsson; Federica Romei; Pierpaolo Benigno
  23. Disinflation and Inequality in a DSGE monetary model: A Welfare Analysis By Maria Ferrara; Patrizio Tirelli
  24. Japanese Fiscal Policy under the Zero Lower Bound of Nominal Interest Rates: Time-Varying Parameters Vector Autoregression By Morita, Hiroshi
  25. The interest rate pass-through in the euro area during the sovereign debt crisis By Leo Krippner; Sandra Eickmeier; Julia von Borstel
  26. Assessing the Interest Rate and Bank Lending Channels of ECB Monetary Policies By Jérôme Creel; Mathilde Viennot; Paul Hubert
  27. US Monetary and Fiscal Policies - conflict or cooperation? By Xiaoshan Che; Eric M. Leepe; Campbell Leith

  1. By: Roman Sustek (Queen and Mary University of London); Finn Kydland (University of California, Santa Barbara); Carlos Garriga (Federal Reserve Bank of St. Louis)
    Abstract: Mortgages are a prime example of long-term nominal loans. As a result, under incomplete asset markets, monetary policy affects household decisions through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels are distinct from the transmission through the real interest rate. A general equilibrium model incorporating these features is developed. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger real effects than transitory shocks. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher inflation benefits homeowners under FRMs but hurts them under ARMs.
    Date: 2015
  2. By: Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
    Abstract: Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    JEL: F31 F41
    Date: 2015–07
  3. By: Acosta, Miguel (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: I apply latent semantic analysis to Federal Open Market Committee (FOMC) transcripts and minutes from 1976 to 2008 in order to analyze the Fed's responses to calls for transparency. Using a newly constructed measure of the transparency of deliberations, I study two events that define markedly different periods of transparency over this 32-year period. First, the 1978 Humphrey-Hawkins Act increased the degree to which the FOMC used meeting minutes to convey the content of its meetings. Historical evidence suggests that this increased transparency reflected a response to the Act's requirement that the Fed provide greater detail in reporting with respect to its goals and objectives. Second, the 1993 decision to publish nearly verbatim transcripts also increased transparency. However, the cost was an increasing degree of conformity at each meeting, as evidenced by lower variance in content disagreement at the member level.
    Keywords: Federal Open Market Committee; transparency; latent semantic analysis; deliberation; natural language processing; conformity; central bank
    JEL: D78 D82 E58 H83
    Date: 2015–07–10
  4. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: The unconventional shocks and non-linear dynamics behind the high volatility of financial markets present a challenge for the implementation of macroprudential policy. This paper introduces two of these unconventional shocks, news shocks about future fundamentals and regime changes in global liquidity, into a quantitative non-linear model of financial crises. The model is then used to examine how these shocks affect the design and effectiveness of optimal macroprudential policy. The results show that both shocks contribute to strengthen the amplification mechanism driving financial crisis dynamics. Macroprudential policy is effective for reducing the likelihood and magnitude of financial crises, but the optimal policy requires significant variation across regimes of global liquidity and realizations of news shocks. Moreover, the effectiveness of the policy improves as the precision of news rises from low levels, but at high levels of precision it becomes less effective (financial crises are less likely, but the optimal policy does not weaken them significantly).
    Keywords: financial crises, macroprudential policy, systemic risk, global liquidity, news shocks
    Date: 2015–07
  5. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule
    Date: 2015–08
  6. By: Yıldız Akkaya (Bilkent University (E-mail:; Refet S. Gürkaynak (Bilkent University and CEPR (E-mail:; Burçin Kısacıkoğlu (Johns Hopkins University (E-mail:; Jonathan H. Wright (Johns Hopkins University (E-mail:
    Abstract: This paper examines the effects of forward guidance at the zero lower bound on the term structure of interest rates in a shadow-rate macro-finance term structure model. The effects on the yield curve are found to depend on the type of forward guidance and on the current level of the shadow rate. The more negative the shadow rate, and so the further away liftoff is, the less effective is forward guidance. Forward guidance affects both the expected path of future short rates, but also term premia. Our model allows us to estimate these effects separately. We also conduct an event-study in which we break out FOMC announcements into surprises concerning the future path of the funds rate, and uncertainty around that path, and then estimate the impacts of each on equity and currency markets.
    Keywords: Forward guidance, zero lower bound, term structure, event study
    JEL: C32 E43 E52
    Date: 2015–07
  7. By: Maylis Avaro (ENS Cachan - École normale supérieure - Cachan); Henri Sterdyniak (OFCE - OFCE - Sciences Po)
    Abstract: In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme (EDGS). Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues are related to the EU specificity (is the banking union a step towards more federalism?); the more stringent are related to structural choices regarding the European banking system. Banks'solvency and ability to lend, would depend primarily on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB?
    Date: 2014–04
  8. By: Apostolos Serletis (University of Calgary); Khandokar Istiak
    Abstract: We investigate whether the United States economy responds asymmetrically to positive and negative money supply shocks of different magnitude, using a test recently introduced by Kilian and Vigfusson (2011) based on impulse response functions. We use quarterly data, over the period from 1967:1 to 2014:1, and the new CFS Divisia monetary aggregates, making a comparison among the narrower monetary aggregates, M1 M2M, MZM, M2, and ALL, and the broad monetary aggregates, M4+, M4-, and M3. We show that there is no statistically signifiÂ…cant evidence of asymmetry in the response of the U.S. economy to positive and negative money supply shocks of different magnitude.
    Date: 2015–08–10
  9. By: Peter Karadi (European Central Bank); Mark Gertler (New York University)
    Abstract: We provide evidence on the transmission of monetary policy shocks in a setting with both economic and nancial variables. We first show that shocks identied using high frequency surprises around policy announcements as external instruments produce responses in output and in inflation that are typical in monetary VAR analysis. We also find, however, that the resulting "modest" move- ments in short rates lead to "large" movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission.
    Date: 2015
  10. By: Calmfors, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: The paper describes the monetary and fiscal policy frameworks in Sweden and analyses how they were established as well as current challenges. Sweden provides a good example of how deep economic crisis, in interaction with independent thinking by academics and other experts as well as policy influences from abroad, can lead to fundamental reforms of policy frameworks. It remains to be seen whether it will be possible in Sweden to adapt the monetary and fiscal frameworks to changed circumstances, while still preserving the benefits they have delivered
    Keywords: Independent central banking; Inflation targeting; fiscal rules; Fiscal councils
    JEL: E58 H61
    Date: 2015–08–01
  11. By: Romain Baeriswyl (Swiss National Bank - Swiss National Bank); Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - PRES Université de Lyon - CNRS)
    Abstract: In an experimental monetary general equilibrium economy, we assess two processes of monetary injection: credit expansion vs. lump-sum monetary transfers. In theory, both processes are neutral and exert no real effect on allocation. In the experiment, however, credit expansion leads to substantial distortions of real allocation and relative prices, and exerts a redistributive effect across subjects. By contrast, an increase in money through lump-sum transfers does not distort real allocation.
    Date: 2015
  12. By: Ghrissi Mhamdi (Université de Sousse); Mounir Smida (Université de Sousse); Ramzi Farhani (Université de Sousse)
    Abstract: The aim of this paper is to provide a credible measure of inflation. This credibility is of great importance for successful inflation targeting regime. This paper proposes a technique to solve a conceptual disparity between inflation phenomenon and its measurement. For this, we proposed an alternative measure called core inflation, defined as the inflation component that has no real impact on long-term production. Evaluation of core inflation was obtained using a VAR system under the assumption that variations in the extent of inflation are affected by two types of shock. The first type has no impact on real output in the long term, while the second can have this effect. This approach is a reconstruction of the approach of Quah and Vahey (1995) in the case of the Tunisian economy. The study concluded that the administered prices constitute a major obstacle to measure, interpret and forecast inflation. Central Bank of Tunisia has no control over a third of the CPI basket. This feature of the Tunisian economy is simply a sign of weakness of the economic system and the need for monetary authorities to continue its efforts to liberalize prices. Introduction The concept of core inflation has played an important role in the decisions of responsible monetary policy in recent years. However, despite the centrality of this concept, there is still no consensus on the best measure of core inflation. The most widely adopted approach is the exclusion of certain categories of price inflation rate as a whole. It reflects the origin of the concept of core inflation during the turbulent 1970s. However, more recently, many economists are trying to set a robust measure of core inflation. Core inflation has become in recent years the most important subject of study for central banks of various countries. In fact, many of them are given as central or even ultimate objective of reducing inflation and achieving price stability. However, government policies other than monetary policy can play an important role in maintaining this goal. But the central bank sees its role as crucial when it admits that inflation can persist for a long time if it is tolerated by the monetary policy. It is important, then, that it should follow closely the evolution of the inflation rate.
    Date: 2014–04–18
  13. By: Carolina Osorio; Esteban Vesperoni
    Abstract: This report analyzes the possible spillover effects that could result if the U.S. normalizes its monetary policy while euro area countries are increasing monetary stimulus (a situation referred to as asynchronous monetary conditions). This analysis identifies country-specific shocks to economic activity and monetary conditions since the early 1990s, finding that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous and have often resulted in significant spillover effects, particularly since early 2014.
    Keywords: Spillovers;Negative spillovers;Positive spillovers;United States;Euro Area;Monetary policy;spillovers;monetary policy
    Date: 2015–07–23
  14. By: Beltran, Daniel O. (Board of Governors of the Federal Reserve System (U.S.)); Bolotnyy, Valentin (Harvard University); Klee, Elizabeth C. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Using a network approach to characterize the evolution of the federal funds market during the Great Recession and financial crisis of 2007-2008, we document that many small federal funds lenders began reducing their lending to larger institutions in the core of the network starting in mid-2007. But an abrupt change occurred in the fall of 2008, when small lenders left the federal funds market en masse and those that remained lent smaller amounts, less frequently. We then test whether changes in lending patterns within key components of the network were associated with increases in counterparty and liquidity risk of banks that make up the core of the network. Using both aggregate and bank-level network metrics, we find that increases in counterparty and liquidity risk are associated with reduced lending activity within the network. We also contribute some new ways of visualizing financial networks.
    Keywords: Banks; credit unions; and other financial institutions; counterparty credit risk; data visualization; network models
    JEL: E50 G20
    Date: 2015–07–16
  15. By: Evans, Charles L. (Federal Reserve Bank of Chicago); Fisher, Jonas D. M. (Federal Reserve Bank of Chicago); Gourio, Francois (Federal Reserve Bank of Chicago); Krane, Spencer D. (Federal Reserve Bank of Chicago)
    Abstract: As projections have inflation heading back toward target and the labor market continuing to improve, the Federal Reserve has begun to contemplate an increase in the federal funds rate. There is however substantial uncertainty around these projections. How should this uncertainty affect monetary policy? In many standard models uncertainty has no effect. In this paper, we demonstrate that the zero lower bound on nominal interest rates implies that the central bank should adopt a looser policy when there is uncertainty. In the current context this result implies that a delayed liftoff is optimal. We demonstrate this result theoretically in two canonical macroeconomic models. Using numerical simulations of our models, calibrated to the current environment, we find optimal policy calls for 2 to 3 quarters delay in liftoff relative to a policy that does not take into account uncertainty about policy being constrained by the ZLB. We then use a narrative study of Federal Reserve communications and estimated policy reaction functions to show that risk management is a longstanding practice in the conduct of monetary policy.
    Keywords: risk; monetary policy; risk management; zero lower bound
    JEL: E53 E58
    Date: 2015–05–21
  16. By: Matheus Grasselli (Department of Mathematics and Statistics, McMaster University, Hamilton, Canada, Fields Institute for Research In Mathematical Sciences - Fields Institute for Research In Mathematical Sciences); Adrien Nguyen Huu (CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - École des Ponts ParisTech (ENPC) - Université Paris Est (UPE))
    Abstract: We study a monetary version of the Keen model by merging two alternative extensions, namely the addition of a dynamic price level and the introduction of speculation. We recall and study old and new equilibria, together with their local stability analysis. This includes a state of recession associated with a deflationary regime and characterized by falling employment but constant wage shares, with or without an accompanying debt crisis. We also emphasize some new qualitative behavior of the extended model, in particular its ability to produce and describe repeated financial crises as a natural pace of the economy, and its suitability to describe the relationship between economic growth and financial activities.
    Date: 2014–12–15
  17. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (ARPEGE - Atelier de recherche sur la politique économique et la gestion des entreprises - Facultés Universitaires Catholiques de Mons)
    Abstract: The prevailing consensus on the role of central banks has eroded. The pursuit of the goal of price stability only is now insufficient to ensure macroeconomic and financial stability. A new paradigm emerges in which central banks should ensure price stability, growth and financial stability. Recent institutional developments of the ECB go in this direction since it will be in charge of the micro-prudential supervision. In addition, the conduct of monetary policy in the euro area shows that the ECB also remained attentive to the evolution of economic growth. But if the ECB implements its triple mandate, the question of the proper relationship between these missions still arises. Coordination between the different actors in charge of monetary policy, financial regulation and fiscal policy is paramount and is lacking in the current architecture. Besides, certain practices should be clarified. The ECB has played a role as lender of last resort (towards banks and, to a lesser extent, towards governements) although this mission was not allocated to the ECB. Finally, in this new framework, the ECB suffers from a democratic illegitimacy, reinforced by the increasing role it plays in determining the macroeconomic and financial balance of the euro area. It seems important that the ECB is more explicit with regard to its different objectives and that it fulfils the conditions for close cooperation with the budgetary authorities and financial regulators. Finally, we call for the ex nihilo creation of a supervisory body of the ECB, which responsibility would be to discuss and analyze the relevance of the ECB monetary policy.
    Date: 2014–05
  18. By: Roberto Robatto (University Wisconsin-Madison)
    Abstract: I present a new dynamic general equilibrium model of banking to analyze monetary policy during financial crises. A novel channel gives rise to multiple equilibria. In the good equilibrium, all banks are solvent. In the bad equilibrium, many banks are insolvent and subject to runs. The bad equilibrium is also characterized by deflation and a flight to liquidity. Some central bank interventions are more effective than others at eliminating the bad equilibrium. Interventions that do not eliminate the bad equilibrium still counteract deflation and reduce the losses of insolvent banks, but, for some parameter values, amplify the flight to liquidity.
    Date: 2015
  19. By: Adrien Auclert (MIT)
    Abstract: This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Using consumer theory, I show that redistribution has aggregate effects whenever marginal propensities to consume (MPCs) covary, across households, with balance-sheet exposures to aggregate shocks. Unexpected inflation gives rise to a Fisher channel and real interest rate shocks to an interest rate exposure channel; both channels are likely to contribute to the expansionary effects of accommodative monetary policy. Indeed, using a sufficient statistic approach, I find that redistribution could be the dominant reason why aggregate consumer spending reacts to transitory changes in the real interest rate, provided households' elasticities of intertemporal substitution are reasonably small (0.3 or less in the United States). I then build and calibrate a general equilibrium model with heterogeneity in MPCs, and I evaluate how the redistribution channel alters the economy's response to shocks. When household assets and liabilities have short effective maturities, the interest rate exposure channel raises the elasticity of aggregate demand to real interest rates, which dampens fluctuations in the natural rate of interest in response to exogenous shocks and amplifies the real effects of monetary policy shocks. The model predicts that if U.S. mortgages all had adjustable rates---as they do in the U.K.---the effect of interest-rate changes on consumer spending would more than double. In addition, this effect would be asymmetric, with rate increases reducing spending by more than cuts would increase it.
    Date: 2015
  20. By: Christophe Blot (OFCE - OFCE - Sciences Po); Jérôme Creel (OFCE - OFCE - Sciences Po); Paul Hubert (OFCE - OFCE - Sciences Po); Fabien Labondance (ARPEGE - Atelier de recherche sur la politique économique et la gestion des entreprises - Facultés Universitaires Catholiques de Mons); Francesco Saraceno (OFCE - OFCE - Sciences Po)
    Abstract: This paper aims at investigating first the (possibly time-varying) empirical relationship between the level and conditional variances of price and financial stability, and second, the effects of macro and policy variables on this relationship in the United States and the Eurozone. Three empirical methods are used to examine the relevance of A.J. Schwartz's "conventional wisdom" that price stability would yield financial stability. Using simple correlations, VAR and Dynamic Conditional Correlations, we reject the hypothesis that price stability is positively correlated to financial stability. We then discuss the empirical appropriateness of the "leaning against the wind" monetary policy approach.
    Date: 2014–02
  21. By: Churm, Rohan (Bank of England); Joyce, Mike (Bank of England); Kapetanios, George (Queen Mary, University of London); Theodoridis, Konstantinos (Bank of England)
    Abstract: In this paper we assess the macroeconomic effects of two of the flagship unconventional monetary policies used by the Bank of England during the later stages of the global economic crisis: additional quantitative easing (QE) and the introduction of the Funding for Lending Scheme (FLS). We argue that these policies can be seen as complements, as QE effectively bypasses the banks by attempting to reduce risk-free yields directly in order to have a wider effect on asset prices, while FLS operates directly through banks by reducing their funding costs and increasing incentives to lend. We attempt to quantify the effects of these policies by estimating their impact on long-term interest rates and bank funding costs, respectively, and then tracing out their wider effects on the macroeconomy using simulations from a large Bayesian vector autoregression (VAR), which are cross-checked with a simpler auto-regressive distributed lag (ARDL) approach. We find that the second round of the Bank’s QE purchases during 2011–12 and the initial phase of the FLS each boosted GDP in the United Kingdom by around 0.5%–0.8%. Their effect on inflation was also broadly positive reaching around 0.6 percentage points, at its peak.
    Keywords: Bayesian methods; large-scale asset purchases; quantitative easing; Funding for Lending Scheme; vector autoregressions; auto-regressive distributed lag.
    JEL: C11 C32 E52 E58
    Date: 2015–08–14
  22. By: Gauti Eggertsson (Brown University); Federica Romei (European University Institute); Pierpaolo Benigno (LUISS)
    Abstract: This paper studies optimal monetary policy under dynamic debt deleveraging once the zero bound is binding. Unlike the existing literature, the natural rate of interest is endogenous and depends on macroeconomic policy. Optimal monetary policy successfully raises the natural rate of interest by creating an environment that speeds updeleveraging, thus endogenously shortening the duration of the crisis and a binding zero bound. Inflation should be front loaded. Fiscal-policy multipliers can be even higher than in existing models, but depend on the way in which public spending is financed.
    Date: 2015
  23. By: Maria Ferrara; Patrizio Tirelli
    Abstract: We investigate the redistributive e¤ects of a disinflation experiment in an otherwise standard medium-scale DSGE model augmented for Limited Asset Market Participation, implying that a fraction of households do not hold any wealth. We highlight two key mechanisms driving consumption and income distribution: i) the cash in advance constraint on firms working capital needs; ii) the response of profit margins to disinflation, which is crucially dependent on the two most used pricing assumptions in the New-Keynesian literature, i.e. Calvo vs Rotemberg. Results show that disinflation softens the cash in advance constraint and raises the real wage in steady state. This, in turn, lowers inequality. While under the Calvo formalism this e¤ect is reinforced by the fall of price markups, under Rotemberg it is more than compensated by the increase of price markups and, therefore, the opposite result obtains.
    Keywords: Disinflation, Inequality, Welfare, LAMP, Monetary Policy, Calvo Price Adjustment, Rotemberg Price Adjustment
    JEL: E31 E5
    Date: 2015–07
  24. By: Morita, Hiroshi
    Abstract: This study investigates whether the effects of fiscal policy are enhanced during ZLB periods. We present a new strategy for identifying unconventional monetary policy shocks in the framework of a time-varying parameters vector autoregressive model. The main findings are as follows. First, during ZLB periods, the volatility of short-term interest rates is quite small, while that of the monetary base is large. Second, fiscal policy shocks have significant positive time-varying effects on GDP after adoption of unconventional monetary policy. Third, the effects of fiscal policy shocks increase during a ZLB period.
    Keywords: TVP-VAR model, zero lower bound, sign restriction, fiscal policy
    JEL: E62 E52 C11 C32
    Date: 2015–07
  25. By: Leo Krippner; Sandra Eickmeier; Julia von Borstel (Reserve Bank of New Zealand)
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specifi…c interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Date: 2015–05
  26. By: Jérôme Creel (OFCE - OFCE - Sciences Po); Mathilde Viennot (ENS Cachan - École normale supérieure - Cachan); Paul Hubert (OFCE - OFCE - Sciences Po)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes for the money market, sovereign bonds at 6-month, 5-year and 10-year horizons, loans inferior and superior to 1M€ to non-financial corporations, cash and housing loans to households, and deposits, during the financial crisis and in the four largest economies of the Euro Area. We first identify two series of ECB policy shocks at the euro area aggregated level and then include them in country-specific structural VAR. The main result is that only the pass-through from the ECB rate to interest rates has been really effective, consistently with the existing literature, while the transmission mechanism of the ECB rate to volumes and of quantitative easing (QE) operations to interest rates and volumes has been null or uneven over this sample. One argument to explain the differentiated pass-through of ECB monetary policies is that the successful pass-through from the ECB rate to interest rates, which materialized as a huge decrease in interest rates during the sample period, had a negative effect on the supply side of loans, and offset itself its potential positive effects on lending volumes.
    Date: 2013–12
  27. By: Xiaoshan Che; Eric M. Leepe; Campbell Leith
    Abstract: Most of the literature estimating DSGE models for monetary policy analysis ignores Öscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both Öscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We Önd that US monetary and Öscal policy have often been in conáict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing Öscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent Öscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing Öscal regime may actually be welfare improving.
    Keywords: Bayesian Estimation, interest rate rules, Öscal policy rules, optimal mone- tary policy, optimal Öscal policy, great moderation, commitment, discretion
    Date: 2015–06

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