nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒10‒04
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy: Its Effects and Implementation: Summary of the 2015 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan By Yushi Endo; Takushi Kurozumi; Takemasa Oda; Kenichirou Watanabe
  2. Back to gold: Sterling in 1925 By Gerlach, Stefan; Kugler, Peter
  3. Dynamic models for monetary transmission By Paolo Giudici; Laura Parisi
  4. Inflation, Output, and Markup Dynamics with Forward-Looking Wage and Price Setters By Louis Phaneuf; Eric R. Sims; Jean Gardy Victor
  5. On the Nexus of Monetary Policy and Financial Stability: Recent Developments and Research By Oleksiy Kryvtsov; Miguel Molico; Ben Tomlin
  6. 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.
  7. Negative Policy Rates, Banking Flows and Exchange Rates By Anwar Khayat
  8. Les indicateus avancés de l'inflation en RDCongo By Henry Ngongo
  9. Labour Market and Monetary Policy in South Africa By Vincent Dadam; Nicola Viegi
  10. Decreasing Transaction Costs and Endogenous Fluctuations in a Monetary Model By Antoine Le Riche; Francesco Magris
  11. Monetary policies to counter the zero interest rate: an overview of research By Honkapohja, Seppo
  12. External Shocks, Banks and Monetary Policy in an Open Economy: Loss Function Approach By Yasin Mimir; Enes Sunel
  13. An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy By William Barnett; Soumya Suvra Bhadury; Taniya Ghosh
  14. Structural interdependence in monetary economics: theoretical assessment and policy implications By Cavalieri, Duccio
  15. The Welfare Cost of Inflation Risk Under Imperfect Insurance By Olivier Allais; Xavier Ragot; Edouard Challe; Yann Algan
  16. Business cycles and monetary regimes in the U.S. (1960 – 2014): A plea for monetary stability By Cendejas Bueno, José Luis; Castañeda, Juan Enrique; Muñoz, Félix
  17. Variable Selection for Inflation : A Pseudo Out-of-sample Approach By Selen Baser Andic; Fethi Ogunc
  18. Mobile Money, Trade Credit, and Economic Development: Theory and Evidence By Beck, Thorsten; Pamuk, Haki; Ramrattan, Ravindra; Uras, Rasim Burak
  19. U.S. Inflation Developments : A speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, August 29, 2015 By Fischer, Stanley
  20. Fiscal Rules, Monetary Rules and External Shocks in a Primary-Export Economy: a Model for Latin America and the Caribbean By Waldo Mendoza
  21. Disinflations in a model of imperfectly anchored expectations By Christopher G. Gibbs Author-1-Name: Christopher Author-2-Name: Gibbs Author Email:; Mariano Kulish Author-1-Name: Mariano Author-2-Name: Kulish Author Email: Authors Workplace name: School of Economics, UNSW Business School, UNSW
  22. Monetary Policy with Diverse Private Expectations By Mordecai Kurz; M. Motolese; G. Piccillo; H. Hu
  23. Inflation Dynamics and Monetary Policy : A speech at the Philip Gamble Memorial Lecture, University of Massachusetts, Amherst, Amherst, Massachusetts, September 24, 2015. By Yellen, Janet L.
  24. Structural Changes in Inflation Dynamics: A Bayesian Analysis Allowing for Multiple Breaks at Different Dates for Different Parameters By Eo, Yunjong
  25. Reserve Option Mechanism : Does it Work as an Automatic Stabilizer? By Oguz Aslaner; Ugur Ciplak; Hakan Kara; Doruk Kucuksarac
  26. Interest Rate Corridor and the Monetary Policy Stance By A. Hakan Kara
  27. UK Term Structure Decompositions at the Zero Lower Bound By Andrea Carriero; Sarah Mouabbi; Elisabetta Vangelista
  28. Interest Rate Surprises and Transmission Mechanism in Turkey: Evidence from Impulse Response Analysis By K. Azim Ozdemir
  29. Money, interest rates and prices in Ireland, 1933-2012 By Gerlach, Stefan; Stuart, Rebecca
  30. Monetary Policy, Credit Spreads, and Business Cycle Fluctuations By Edward Herbst; Dario Caldara
  31. Common and Country Specific Economic Uncertainty By Michael Chin; Thomai Filippeli; Konstantinos Theodoridis
  32. The Impact of the ECB's Asset Purchase Programmes on Sovereign Bond Spreads in the Euro Are By Gibran Watfe

  1. By: Yushi Endo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takushi Kurozumi (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takemasa Oda (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Kenichirou Watanabe (Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The Institute for Monetary and Economic Studies (IMES) of the Bank of Japan (BOJ) held the 2015 BOJ-IMES Conference, titled “Monetary Policy: Its Effects and Implementation,” on June 4-5, 2015 at the BOJ Head Office in Tokyo. The conference was attended by about 90 distinguished participants from academia, international organizations, and central banks. The participants discussed a wide range of issues concerning the effects and implementation of unconventional monetary policy. In his opening remarks, the BOJ Governor Kuroda raised several issues that central banks currently faced, for instance, the effects of unconventional monetary policy and its transmission channels. In the policy panel discussion, five panelists from central banks and academia, together with conference participants, discussed the issues and the thesis of secular stagnation, which had attracted growing attention in recent years. There were also five paper sessions presented by professors and central bank economists, which addressed various issues including relationship between maturity structure and supply factors in Japanese government bond markets. The conference closed with the Mayekawa Lecture on secular stagnation.
    Date: 2015–09
  2. By: Gerlach, Stefan; Kugler, Peter
    Abstract: Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar - Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes' view that Sterling was overvalued after the return to gold.
    Keywords: Gold Standard,Sterling,exchange rate,PPP,expectations
    JEL: E5 F31 N1
    Date: 2015
  3. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. Parisi et al. (2015) analyzed the Chong error correction model, extended it and proposed an alternative, simpler to interpret, one-equation model, and applied it to the recent time period, characterized by close-to-zero monetary rates. In this paper we extend the previous models in a dynamic sense, modelling monetary transmission effects by means of stochastic processes.The main contribution of this work consists in novel parsimonious models that provide endogenously determined and generalizable models. Secondly, this paper introduces a predictive performance assessment methodology, which allows to compare all the proposed models on a fair ground. From an applied viewpoint, the paper applies the proposed models to different interest rates on loans, showing how the monetary policy differentially impacts different types of lendings.
    Keywords: Error Correction Forecasting Bank Rates, Monte Carlo predictions, Stochastic Processes.
    Date: 2015–09
  4. By: Louis Phaneuf; Eric R. Sims; Jean Gardy Victor
    Abstract: We formulate a medium-scale DSGE model that emphasizes a strong interplay between a roundabout production structure and a working capital channel that requires firms to borrow funds to finance the costs of all their variable inputs and not just the wage bill. Despite an absence of backward-looking price and wage indexation, our model is able to account for (i) a persistent and hump-shaped response of inflation to a monetary policy shock, (ii) a large and persistent response of output to a monetary policy shock, (iii) a mild "price puzzle," (iv) a procyclical price markup conditional on a monetary shock, (v) non-inertial responses of inflation to non-monetary shocks, and (vi) a negative unconditional autocorrelation of the first difference of inflation that is consistent with the data. A medium-scale model relying on backward indexation of wages and prices to past inflation fails along several of these dimensions.
    JEL: E00 E1 E4
    Date: 2015–09
  5. By: Oleksiy Kryvtsov; Miguel Molico; Ben Tomlin
    Abstract: Because financial and macroeconomic conditions are tightly interconnected, financial stability considerations are an important element of any monetary policy framework. Yet, the circumstances under which it would be appropriate for the Bank to use monetary policy to lean against financial risks need to be more fully specified (Côté 2014). The extent to which financial stability concerns should be taken into account by monetary policy will be a priority topic of research at the Bank for the renewal of the inflation-control target agreement in 2016. This paper reviews four considerations of interest, taking stock of key domestic and international developments and knowledge gained over the past few years: (i) Canada and other countries have made significant progress in the implementation of micro- and macroprudential regulatory reforms, and limited existing research finds that most of these policies were effective in reducing the potential need for leaning by monetary policy; (ii) the effectiveness of the monetary policy transmission mechanism depends on the state of the financial system, implying that financial system conditions need to be taken into account by monetary policy; (iii) although exceptionally low interest rates and other forms of monetary stimulus are sometimes needed to support growth and achieve inflation-target mandates, they may lead to excessive risk-taking activities and therefore contribute to the buildup of financial imbalances; and (iv) coordination of monetary and macroprudential policies for dealing with imbalances may, in some circumstances, be beneficial. The paper concludes by identifying future areas of research to further clarify the role of monetary policy in addressing financial stability risks.
    Keywords: Financial stability, Monetary policy framework
    JEL: E0 E44 E52 E58 G18
    Date: 2015
  6. 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
  7. By: Anwar Khayat (AMSE - Aix-Marseille School of Economics - EHESS - École des hautes études en sciences sociales - Centre national de la recherche scientifique (CNRS) - Ecole Centrale Marseille (ECM) - AMU - Aix-Marseille Université)
    Abstract: Setting negative nominal rates is one of the unconventional policies implemented after the Great Recession to overcome the Zero Lower Bound. Using data from the euro area and Denmark, I assess the impact of introducing a negative interest rate on reserves. I find that it did put a depreciation pressure on the currency due to a reversal in banking flows. This effect is not only caused by policy differentials, but also by a distinct impact of going into negative territory from lowering interest rates.
    Keywords: monetary policy,negative nominal rates,exchange rates,banking flows
    Date: 2015–09
  8. By: Henry Ngongo (UEA - Université Evangélique en Afrique)
    Abstract: This study aims to identify the leading of inflation indicators of monetary policy in DRC. The results reveal that the most relevant inflation indicators usually come from the monetary origin than the real sector. Variance decomposition analyzes place in the foreground the rate of exchange, the money supply and the public consumption like the most relevant indicators. In order to achieve its goal of price stability and to support a strong economic growth, the intermediate objective of the Central Bank baseded on the controle of the money supply seems to be less relevant. Relates to a high level of the dollarization, the central bank will be able to adopt either the strategy of nominal anchoring of the rate of exchange, this calls the return of the fixed exchange regime or to adopt a strategy of inflation targeting is to restore the credibility of the monetary policy
    Keywords: leading indicators of inflation, monetary policy
    Date: 2015–05–24
  9. By: Vincent Dadam (University of Pretoria); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: This paper analyses the influence of the South African labour market on the conduct of monetary policy. Because of the weak response of wages to changes in employment, the South African Reserve Bank is confronted by an unfavourable short run unemployment-inflation trade off that complicates the implementation of the inflation targeting framework. First we provide some reduced form evidence by estimating a form of the traditional wage Phillips curve, showing the weak relationship between wage dynamics and unemployment in South Africa. We then con.rm this result by presenting an estimation of a structural model of the South African economy and give a quantitative assessment of the constraint imposed by the labour market on monetary policy. Finally we interpret these results in a strategic framework, analysing the role that inflation targeting might play in either improving coordination, or worsening the interaction between trade unions and Central Bank objectives.
    Date: 2015–09
  10. By: Antoine Le Riche (GAINS, Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS); Francesco Magris (LEO, University “François Rabelais” of Tours)
    Abstract: We study an infinite horizon economy with a representative agent whose utility function includes consumption, real balances and leisure. Real balances enter the utility function pre-multiplied by a parameter reflecting the inverse of the degree of financial market imperfection, i.e. the inverse of the transaction costs justifying the introduction of money in the utility function. When labor is supplied elastically, indeterminacy arises through a transcritical and a flip bifurcation, for degree of financial imperfection arbitrarily close to zero. Similar results are observed when labor is supplied inelastically: indeterminacy occurs through a flip bifurcation for values of the degree of financial imperfection unbounded away from zero. We also study the existence and the multiplicity of the steady states.
    Keywords: bifurcations, Indeterminacy, market imperfections, money demand
    Date: 2015–09–11
  11. By: Honkapohja, Seppo (Bank of Finland)
    Abstract: Many central banks have lowered their interest rates close to zero in response to the crisis since 2008. In standard monetary models the zero lower bound (ZLB) constraint implies the existence of a second steady state in addition to the inflation-targeting steady state. Large scale asset purchases (APP) have been used as a tool for easing of monetary policy in the ZLB regime. I provide a theoretical discussion of these issues using a stylized general equilibrium model in a global nonlinear setting. I also review briefly the empirical literature about effects of APP’s.
    Keywords: adaptive learning; monetary policy; inflation targeting; zero interest rate lower bound
    JEL: E52 E58 E63
    Date: 2015–08–20
  12. By: Yasin Mimir; Enes Sunel
    Abstract: We systematically document that the 2007-09 financial crisis exposed emerging market economies (EMEs) to an adverse feedback loop of capital outflows, depreciating exchange rates, deteriorating balance sheets, rising credit spreads and falling real economic activity. Using a medium-scale New Keynesian DSGE model of a small open economy augmented with a banking sector that has access to both domestic and foreign funds, we explore the quantitative performances of alternative augmented IT rules in terms of macroeconomic and financial stabilization. In response to external financial shocks, credit-augmented IT rules are found to outperform output and exchange rate augmented rules in achieving policy mandates that target financial and external stability. A countercyclical reserve requirement policy that positively responds to the noncore liabilities share is found effective especially in coordination with monetary policy in reducing the procyclicality of the financial system.
    Keywords: External shocks, Banks, Foreign debt, Reserve requirements
    JEL: E44 G21 G28
    Date: 2015
  13. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Soumya Suvra Bhadury (Department of Economics, The University of Kansas;); Taniya Ghosh (Indira Gandhi Institute of Development Research (IGIDR), Reserve Bank of India, Mumbai, India)
    Abstract: Following the exchange-rate paper by Kim and Roubini (2000), we revisit the questions on monetary policy, exchange rate delayed overshooting, the inflationary puzzle, and the weak monetary transmission mechanism; but we do so for the open Indian economy. We further incorporate a superior monetary measure, the aggregation-theoretic Divisia monetary aggregate. Our paper confirms the efficacy of the Kim and Roubini (2000) contemporaneous restriction, customized for the Indian economy, especially when compared with recursive structure, which is damaged by the price puzzle and the exchange rate puzzle. The importance of incorporating correctly measured money into the exchange rate model is illustrated, when we compare models with no-money, simple-sum monetary measures, and Divisia monetary measures. Our results are confirmed in terms of impulse response, variance decomposition analysis, and out-of-sample forecasting. In addition, we do a flip-flop variance decomposition analysis, finding two important phenomena in the Indian economy: (i) the existence of a weak link between the nominal-policy variable and real-economic activity, and (ii) the use of inflation-targeting as a primary goal of the Indian monetary authority. These two main results are robust, holding across different time period, dissimilar monetary aggregates, and diverse exogenous model designs.
    Keywords: Monetary Policy; Monetary Aggregates; Divisia monetary aggregates; Structural VAR; Exchange Rate Overshooting; Liquidity Puzzle; Price Puzzle; Exchange Rate Puzzle; Forward Discount Bias Puzzle.
    JEL: C32 E51 E52 F31 F41
    Date: 2015–08
  14. By: Cavalieri, Duccio
    Abstract: This is a theoretical analysis of structural interdependence in monetary economics. Some recent attempts to integrate money and finance in the theory of income and expenditure are initially examined. The Sraffian dichotomic interpretation of classical political economy is refused. A version of the classical surplus approach devoid of separating connotations is sketched, where flows and stocks are consistently reconciled and net financial wealth vanishes in the aggregate. Marx’s law of value is considered and set aside, as historically outdated by the advent of cognitive capitalism. New Consensus and New Neoclassical Synthesis macroeconomic models are criticized from an orthodox Keynesian point of view. Two further results emerge from the analysis: the illegitimacy of Marx’s asymmetrical treatment of constant and variable capital in the theory of value and the suggestion of a correct method for measuring the unit cost of real capital. Some reasons for reconsidering in this perspective the traditional approaches to monetary theory and policy are indicated.
    Keywords: monetary theory; monetary policy; fiscal policy; structural interdependence; Sraffian dichotomy; post-Keynesian economics; SFCA; MMT; MEV
    JEL: B22 E12 E44 E5 E52 M41
    Date: 2015–07–09
  15. By: Olivier Allais (Inra); Xavier Ragot (Paris School of Economics); Edouard Challe (Ecole Polytechnique); Yann Algan (Sciences Po)
    Abstract: What are the costs of inflation fluctuations and who bears those costs? In this paper, we investigate this question by means of a quantitative incomplete-market, heterogenous-agent model wherein households hold real and nominal assets and are subject to both idiosyncratic labor income shocks and aggregate inflation risk. Inflation risk is found to generates signicant welfare losses for most households, i.e., between 1 and 1.5 percent of permanent consumption. The loss is small or even negative for households at the very top of the productivity and/or wealth distribution. A key feature of our analysis is a nonhomothetic specication for households' preferences towards money and consumption goods. Unlike traditional specications, ours allows the model to reproduce the broad features of the distribution of monetary assets (in addition to being consistent with the distribution of nonmonetary assets).
    Date: 2015
  16. By: Cendejas Bueno, José Luis (Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria); Castañeda, Juan Enrique (Economics and International Studies Department. University of Buckingham.); Muñoz, Félix (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)
    Abstract: It is still highly debated whether the Fed took sufficiently into account the rapid increase in both financial and real asset prices as well as money growth in the framing of monetary policy decisions in the years prior to the outbreak of the Global Financial Crisis; something similar occurred in the 1970s as regard the slow and insufficient response of the Fed to the growth of CPI prices. In our view, these two episodes are prime examples of how the absence of a more comprehensive monetary strategy has resulted in a case-by-case decision-making policy by the Fed lacking in consistency and effectiveness over the long term. In this respect, two elements of the central bank strategy become key: the choice of the information set the monetary authorities process and use to make policy decisions and the (main) economic model used to process that information. In this paper we consider a wide range of indicators to identify the dynamics and interaction between several output and price indicators (broadly defined to include CPI, industrial and asset prices) along the business cycle. In particular, we adopt unobserved component models to estimate and analyse the cyclical common factors of output measures, inflation and asset prices, interest rates (both short and longer term), and narrow and broad money growth measures, since 1960 to 2014 in the US. Once estimated, we analyse the correlations between these common factors and their changes in order to identify common behavioural patterns amongst them along the cycle. This analysis will result in a ‘core information set’ for the Fed suitable to frame and possibly implement a more stable monetary policy throughout the business cycle.
    Keywords: US business cycle; US monetary policy regimes; Central Bank strategy; Money; Inflation; Cyclical common factors; Core information set.
    JEL: C32 E32 E52
    Date: 2015–09
  17. By: Selen Baser Andic; Fethi Ogunc
    Abstract: In this paper, we analyze the forecasting properties of a wide variety of variables for Turkish inflation, and thereby pin down the ones producing robust forecasts periodically. Defining the lag structure of a variable in two different ways, we determine the non-leading forecasters and leading indicators of inflation. We employ a pseudo out-of-sample approach and compare the forecasting performance of each variable ex-post with the benchmark model. We measure forecast errors over forecast horizons instead of over time for each horizon. Results suggest that no single variable gives the best forecasts at all times, hence inflation is best forecast by different variables each period. This finding promotes the use of forecast combination strategies and/or multivariate model settings.
    Keywords: Inflation, Variable selection, Leading indicator, Turkey
    JEL: C50 C53 E31 E37
    Date: 2015
  18. By: Beck, Thorsten; Pamuk, Haki; Ramrattan, Ravindra; Uras, Rasim Burak
    Abstract: Using a novel enterprise survey from Kenya (FinAccess Business), we document a strong positive association between the use of mobile money as a method to pay suppliers and access to trade credit. We develop a dynamic general equilibrium model with heterogeneous entrepreneurs, imperfect credit markets and the risk of theft to account for this empirical pattern. Mobile money dominates fiat money as a medium of exchange in its capacity to avoid theft, but comes with higher transaction costs. The interaction between risk of theft and limited access to trade credit generates demand for mobile money as a payment method with suppliers and the use of mobile money in turn raises the value of a credit relationship and hence the willingness to apply for trade credit. Calibrating the stationary equilibrium to match a set of moments that we observe in Kenyan FinAcces enterprise survey data and quantifying the importance of the endogenous interactions between mobile money and trade credit on entrepreneurial performance and macroeconomic development, we find that the availability of the mobile money technology increases GDP by 0.33-0.47%.
    Keywords: Kenya; mobile money; small business finance; trade credit
    JEL: D14 G21 O12 O16
    Date: 2015–09
  19. By: Fischer, Stanley (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–08–29
  20. By: Waldo Mendoza (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: The macroeconomic performance of Latin America and the Caribbean (LAC) is closely linked to the evolution of the world economy. The lost decade of the eighties cannot be explained by abstracting it from the deterioration in the terms of trade and the rising interest rates in the developed world that occurred during that period. Nor can the golden decade of 2002 to 2011 be understood without considering the significant improvement in the terms of trade and the considerable reduction in international interest rates. Finally, it is not possible to understand the slowdown in economic growth in LAC since 2011 by ignoring the deterioration of the region's terms of trade and rising global interest rates. This article discusses the connections to the global economy of a small, open, primaryexport economy dependent on external financing, where monetary policy operates under an inflation-targeting scheme; the reference rate for interbank markets is a policy instrument; and fiscal policy works by imposing a limit on the fiscal deficit as a percentage of GDP. The model allows us to evaluate the effects of changes in the prices of export commodities and global interest rates, as well as the impact of monetary and fiscal policies on output, price level, exchange rate, and the domestic interest rate. JEL Classification-JEL: E1, E5, E6
    Keywords: Fiscal rules, monetary rules, external shocks, Latin America and the Caribbean
    Date: 2015
  21. By: Christopher G. Gibbs Author-1-Name: Christopher Author-2-Name: Gibbs Author Email:; Mariano Kulish Author-1-Name: Mariano Author-2-Name: Kulish Author Email: Authors Workplace name: School of Economics, UNSW Business School, UNSW
    Abstract: We study disinflations under imperfect credibility of the central bank. Imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations. Lower credibility increases the mean, variance, and skewness of the distribution of sacrifice ratios. When credibility is low, disinflationary policies become very costly for adverse realizations of the shocks. Even if the impact of an announcement decreases with lower credibility, pre-announcing a disinflation reduces the sacrifice ratio. Additionally, disinflationary policies implemented after a period of below trend inflation lead to lower sacrifice ratios. Opportunistic disinflations are desirable when credibility is low.
    Keywords: disinflation; sacrifice ratio; imperfect credibility; adaptive expectations; rational expectations
    JEL: E52
    Date: 2015–09
  22. By: Mordecai Kurz; M. Motolese; G. Piccillo; H. Hu
    Abstract: We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual’s perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic functions. Aggregation renders the belief distribution an aggregate state variable. Although the model has standard technology and policy shocks, diverse expectations change materially standard results about a smooth trade-off between inflation volatility and output volatility. Our main results are summed up as follows: (i) The policy space contains a curve of singularity which is a collection of policy parameters that divides the space into two sub-regions. Some trade-off between output and inflation volatilities exists within each region and some across regions. (ii) The singularity causes volatility of variables to be non monotone in policy parameters. Policymakers cannot assume a more aggressive policy will change outcomes in a predictable manner. (iii) When beliefs are diverse a central bank must also consider the volatility of individual consumption and the related volatility of financial markets. We show aggressive anti-inflation policy increases consumption volatility and aggressive output stabilization policy entails rising inflation volatility. Efficient central bank policy must therefore be moderate. (iv) High optimism about the future typically lowers aggregate output and increases inflation. This “stagflation†effect is stronger the stickier prices are. Policy response is muted since the effects of higher inflation and lower output on interest rates partially cancel each other. Effective policy requires targeting exuberance directly or its effects in asset markets. Central banks already do so with short term interventions. (v) The observed high serial correlation of 0.80 in policy shocks contributes greatly to market volatility and we show that a reduction in persistence of central bank’s deviations from a fixed rule will contribute to stability. (vi) Belief dispersion is measured by cross sectional standard deviation of individual beliefs. An increased belief diversity is found to make policy coordination harder and results in lower aggregate output and lower rate of inflation. Bank policy can lower belief dispersion by being more transparent.
    Keywords: New Keynesian Model, heterogeneous beliefs, market state of belief, Rational Beliefs, monetary policy rule
    Date: 2015
  23. By: Yellen, Janet L. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–09–24
  24. By: Eo, Yunjong
    Abstract: I make inferences about complicated patterns of structural breaks in inflation dynamics. I extend Chib's (1998) approach by allowing multiple parameters such as the unconditional mean, a group of persistence parameters, and/or the residual variance to undergo mutually independent structural breaks at different dates with the different number of breaks. Structural breaks are modeled as abrupt changes to identify potential regime shifts in economic structure such as a long-run inflation target, monetary policy, and price-setting behavior. I consider postwar quarterly U.S. inflation rates based on the CPI and the GDP deflator over the period from 1953:Q1 to 2013:Q4. I find that two inflation measures had distinct structural changes in different parameters as well as at different dates using Bayesian model selection procedures. CPI inflation experienced a dramatic drop in persistence around the early 1980s, but GDP deflator inflation is still persistent. In addition, the residual variance for both inflation measures switched from a low volatility regime to a high volatility regime in the early 1970s, but it returned to another low volatility regime at different dates: the early 1980s for GDP deflator inflation and the early 1990s for CPI inflation. The residual variance for CPI inflation has increased again since the early 2000s, while GDP deflator inflation has remained less volatile. These volatility shifts are confirmed by the empirical results based on the unobserved components model with stochastic volatility. However, I do not find evidence of a structural shift in the unconditional mean. When reviewing the recent literature, considerable controversy exists over the structural break in inflation persistence around the early 1980s but this appears to be dependent on the measures of inflation, as highlighted by the empirical findings in this paper.
    Keywords: Bayesian Analysis; Structural Breaks; Multiple-Group Changepoint; Inflation Dynamics; Persistence; UC-SV Model
    Date: 2015–10
  25. By: Oguz Aslaner; Ugur Ciplak; Hakan Kara; Doruk Kucuksarac
    Abstract: Central Bank of the Republic of Turkey (CBRT) designed and implemented a new scheme since end-2011, called reserve option mechanism (ROM), in order to alleviate the adverse impact of capital flow volatility on the domestic economy. Although there are numerous studies on the mechanics of ROM, there has been no attempt to investigate the determinants of the ROM utilization in practice. In this note, we aim to fill this gap by using bank-level data to assess the behavioral aspects of ROM. Our results suggest that the relative cost of Turkish lira funding to foreign currency funding, as well as the reserve option coefficients set by the CBRT, largely explains the variations in the ROM utilization. In this context, we find that the most relevant proxy for the cost of Turkish lira funding for banks is overnight money market interest rates and the cost of weighted average CBRT funding. Moreover, foreign currency liquidity does not seem to be a significant parameter in driving the utilization of ROM. In light of these findings, we argue that the systematic policy induced movements in the short term domestic interest rates—higher during outflows, lower during inflows—may undermine the automatic stabilizer feature of ROM. In the conclusion part, we propose an adjustment in the remuneration of reserve requirements to strengthen the automatic stabilizer effect of ROM.
    Keywords: Monetary policy, Reserve Requirements, Capital flows, Financial Stability
    JEL: E52 E58 F31 F32
    Date: 2014
  26. By: A. Hakan Kara
    Abstract: [EN] Central Bank of Turkey (CBT) has been implementing a multi-instrument monetary policy strategy within a wide interest rate corridor since 2010. In this approach, composition of the central bank liquidity provision is an important component of the policy stance. Therefore, interpreting the changes in the monetary policy decisions necessitates an understanding of the practical implementation of monetary policy. By presenting a simplified exposition of the CBT’s operational framework, this note aims to answer questions such as (i) How are the short term interest rates determined? (ii) What is the implication of a change in the funding composition? (iii) Which interest rate is more relevant for the monetary transmission mechanism? We attempt to address these questions to provide some insight into the assessment of the monetary policy stance.
    Date: 2015
  27. By: Andrea Carriero (Queen Mary University of London); Sarah Mouabbi (Banque de France); Elisabetta Vangelista (UK Debt Management Office)
    Abstract: This paper employs a Zero Lower Bound (ZLB) consistent shadow-rate model to decompose UK nominal yields into expectation and term premia components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting and effectively captures the countercyclical nature of term premia. The ZLB model is then exploited to estimate inflation expectations and risk premia. This entails jointly pricing and decomposing nominal and real UK yields. We find evidence that medium- and long-term inflation expectations are contained within narrower bounds since the early 1990s, suggesting monetary policy credibility improved after the introduction of inflation targeting.
    Keywords: No-arbitrage, Term structure, Zero-lower bound, Risk premia, Inflation Expectations
    JEL: E31 E43 E52 E58 G12
    Date: 2015–09
  28. By: K. Azim Ozdemir
    Abstract: This paper investigates the importance of interest rate shocks in explaining macroeconomic dynamics during the relatively low-inflation period in Turkey after mid-2000s. For this purpose, we compute impulse response functions using not only VAR models but also multi-step ahead forecast regressions, which are referred as Local Projections. Estimations are carried out on two different monthly data sets, a set of conventional series and a newly constructed set of series for measuring real GDP, the price level and the exchange market pressure in Turkey. Impulse responses obtained from newly constructed series exhibit more plausible dynamics than the conventional series after an interest rate shock. Moreover, results from Local Projections show remarkably similar dynamic responses to those obtained from the VAR models. This finding can be interpreted as an evidence that the identified VAR models successfully capture the true relationships among the variables.
    Keywords: Monetary Policy, Identification, VAR, Local Projections, Interpolation
    JEL: C32 E52 C82
    Date: 2015
  29. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: In this paper we assemble an annual data set on broad and narrow money, prices, real economic activity and interest rates in Ireland from a variety of sources for the period 1933-2012. We discuss in detail how the data set is constructed and what assumptions we have made to do so. Furthermore, we estimate a simple SVAR model to provide some empirical evidence on the behaviour of these time series. Money supply shocks appear to be the most important drivers of both money and prices. Interest rate shocks, which capture monetary policy, play an important role driving output and, of course, interest rates. The GDP shocks, which raise prices, seem of less importance.
    Keywords: Ireland,historical statistics,long time series,business cycles,SVAR
    JEL: E3 E4 N14
    Date: 2015
  30. By: Edward Herbst (Federal Reserve Board); Dario Caldara (Federal Reserve Board)
    Abstract: This paper provides new evidence on the transmission of monetary policy shocks to the real economy and to credit markets. The identification of monetary policy shock is based on a high-frequency event study analysis. Two key results emerge from the analysis for the Great Moderation period. First, monetary policy shocks were a key driver of business and credit market conditions, explaining 35% of the forecast error of industrial production and 50% of the excess bond premium. Second, monetary policy shocks explain all movement in the excess bond premium correlated with real activity leaving no role for exogenous disruptions in credit intermediation. Finally, we extend our analysis to include the Great Recession and to examine the role of unconventional monetary policy.
    Date: 2015
  31. By: Michael Chin (Bank of England); Thomai Filippeli (Queen Mary University of London); Konstantinos Theodoridis (Bank of England)
    Abstract: Long-term interest rates in a number of small-open inflation targeting economies co-move more strongly with US long-term rates than with short-term rates in those economies. We augment a standard small open-economy model with imperfectly substitutable government bonds and time-varying term premia that captures this phenomenon. The estimated model fits a range of US and UK data remarkably well, and produces term premium estimates that are comparable to estimates from the affine term structure model literature. We find that the strong co-movement between US and UK long-term interest rates arises primarily via correlated policy rate expectations, rather than through correlated term premia. This is due to policymakers in both economies responding to foreign productivity and discount factor shocks that cause persistent changes in inflation. We also overcome the common failure of similar models to account for the large influence of foreign disturbances on domestic economies found empirically, where in our model around 40% of the variation in UK GDP can be explained by shocks originating in the US economy.
    Keywords: DSGE model, Small open economy, Yield curve, Long-term interest rates, Term premia, Co-movement
    JEL: E43 E44 F30 F44 G15
    Date: 2015–09
  32. By: Gibran Watfe (European Economic Studies Department, College of Europe)
    Abstract: This paper estimates the immediate impact of the European Central Bank's asset purchase programmes on sovereign bond spreads in the euro area between 2008 and 2015 using a country-by-country GARCH model. The baseline estimates are rigorously diagnosed for misspecication and subjected to a wide range of sensitivity tests. Among others, changes in the dependent variable, the independent variables and the number of (G)ARCH terms are tested. Moreover, the model is applied to subsamples and dynamic conditional cor- relations are analyzed to estimate the eects of the asset purchases on the contagion of spread movements. Generally, it is found that the asset purchase programmes triggered an reduction of sovereign bond spreads. More specically, the Securities Markets Programme (SMP) had the most signicant immediate eects on sovereign bond spreads across the euro area. The announcements related to the Outright Monetary Transactions (OMT) programme also yielded substantial spread compression in the periphery. In contrast to that, the most recent Public Sector Purchase Programme (PSPP) announced in January 2015 and implemented since March 2015 had no signicant immediate eects on sovereign bond spreads, except for Irish spreads. Hence, immediate eects seem to be dependent upon the size of the programme, the extent to which it targets distressed sovereigns and the way in which it is communicated.
    Keywords: European Central Bank, asset purchase programmes, sovereign bond yield spreads, event study, GARCH model
    JEL: E52 E58 E44 G12
    Date: 2015–09

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