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

  1. The Use of Divisia Monetary Aggregates in Nominal GDP Targeting By Barnett, William A.; Su, Liting
  2. The Optimal Level of the Inflation Target: A Selective Review of the Literature and Outstanding Issues By Oleksiy Kryvtsov; Rhys R. Mendes
  3. Impact of Monetary Policy on Inflation Control in Nigeria By Onwachukwu, Chinedu Increase
  4. Jagged cliffs and stumbling blocks: interest rate pass-through fragmentation during the Euro area crisis By Holton, Sarah; Rodriguez d'Acri, Costanza
  5. Household Inflation Expectations: The Term Structure and the Anchor Effects of Monetary Policy By Koichiro.Kamada; Jouchi Nakajima
  6. Reserve requirements and the bank lending channel in China By Fungácová , Zuzana; Nuutilainen , Riikka; Weill , Laurent
  7. An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy By William Barnett; Soumya Liting Su
  8. Modelling the Australian Dollar By Jonathan Hambur; Lynne Cockerell; Christopher Potter; Penelope Smith; Michelle Wright
  9. On the Theoretical Efficacy of Quantitative Easing at the Zero Lower Bound By Boel, Paola; Waller, Christopher J.
  10. Do Credit Market Imperfections Justify a Central Bank’s Response to Asset Price Fluctuations? By Kengo Nutahara
  11. Forward Guidance and the State of the Economy By Benjamin D. Keen; Alexander W. Richter; Nathaniel A. Throckmorton
  12. The Implemented Monetary Policy in Turkey after 1994 By Suleyman UGURLU; Murat BESER; Nazife Ozge KILIC
  13. The influence of monetary policy on bank profitability By Claudio Borio; Leonardo Gambacorta; Boris Hofmann
  14. Is the active use of macroprudential tools institutionally realistic? By Dudley, William
  15. Beggar-thy-neighbor? The international effects of ECB unconventional monetary policy measures By Bluwstein, Kristina; Canova, Fabio
  16. Macroprudential policy: case study from a tabletop exercise By Adrian, Tobias; de Fontnouvelle, Patrick; Yang, Emily; Zlate, Andrei
  17. International reserves and gross capital flow dynamics By Enrique Alberola-Ila; Aitor Erce; José María Serena
  18. A Literature Survey on Proposed African Monetary Unions By Simplice Asongu; Jacinta C. Nwachukwu; Vanessa S. Tchamyou
  19. (Why) Is the Euro system intrinsically unstable? By Bernardo Maggi
  20. Inflation forecasts: Are market-based and survey-based measures informative? By Grothe, Magdalena; Meyler, Aidan
  21. Measuring the effects of monetary policy on house prices and the economy By Williams, John C.
  22. Exchange Risk Management and the Choice of Invoice Currency: 2014 Questionnaire Survey of Japanese Overseas Subsidiaries (Japanese) By ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
  23. Currency unions and trade: a post-EMU mea culpa By Glick, Reuven; Rose, Andrew K.
  24. Bond vigilantes and inflation By Rose, Andrew K.; Spiegel, Mark M.
  25. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Eric van Wincoop; Philippe Bacchetta
  26. On stock-flow consistent approachesd the like: the 'rediscovery' of model building By Cavalieri, Duccio
  27. Labour Market and Monetary Policy in South Africa By Vincent Dadam and Nicola Viegi
  28. Evaluating the information in the Federal Reserve stress tests By Flannery, Mark J.; Hirtle, Beverly; Kovner, Anna
  29. Lift-off Uncertainty: What Can We Infer From the FOMC's Summary of Economic Projections? By Octavio Portolano Machado; Carlos Carvalho; Tiago Berriel
  30. Regulation and liquidity provision By Dudley, William
  31. Forecasting Inflation with the Hybrid New Keynesian Phillips Curve: A Compact-Scale Global VAR Approach By Medel, Carlos A.
  32. Optimal Inflation with Corporate Taxation and Financial Constraints By Finocchiaro, Daria; Lombardo, Giovanni; Mendicino, Caterina; Weil, Philippe

  1. By: Barnett, William A.; Su, Liting
    Abstract: One of the hottest topics in monetary policy research has been the revival of the proposal for “nominal GDP targeting.” Recent research has emphasized the potential importance of the Divisia monetary aggregates in implementing that policy. We investigate bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals by authors who advocate a role for a Divisia monetary aggregate in nominal GDP targeting. There are two particularly relevant proposals: (1) the proposal by Barnett, Chauvet, and Leiva-Leon (2015) to use a Divisia monetary aggregate as an indicator in the monthly Nowcasting of nominal GDP, as needed in implementation of any nominal GDP targeting policy; and (2) the proposal by Belongia and Ireland (2015) to use a Divisia monetary aggregate as an intermediate target, with nominal GDP being the final target of policy. We run well known diagnostic tests of bivariate time series properties of the Divisia M2 and nominal GDP stochastic processes. Those tests are for properties that are necessary, but not sufficient, for the conclusions of Belongia and Ireland (2014) and Barnett, Chauvet, and Leiva-Leon (2015). We find no time series properties that would contradict those implied by either of those two approaches.
    Keywords: Money, aggregation theory, index number theory, Divisia index, Divisia monetary aggregates, nominal GDP targeting.
    JEL: C43 E01 E3 E41 E51 E52 E58
    Date: 2015–05–25
  2. By: Oleksiy Kryvtsov; Rhys R. Mendes
    Abstract: Bank of Canada research done prior to the most recent renewal of the inflation-control agreement in 2011 concluded that the benefits associated with a target below 2 per cent were insufficient to justify the increased risk of being constrained by the zero lower bound (ZLB) on nominal interest rates. International experience and analysis since the 2011 renewal has reinforced the importance of the ZLB. Despite the deployment of unconventional monetary policy measures by many central banks, the ZLB has proven to be a more severe and persistent obstacle to the achievement of policy goals than expected. At the same time, analysis by the Bank and others has found that interest rates are likely to be lower on average in the future than they were during the first two decades of inflation targeting. As a consequence, the probability of being constrained by the ZLB is likely higher. Together, these factors suggest that a target above 2 per cent should be considered. This paper provides an overview of the current state of knowledge and key outstanding issues regarding the costs and benefits of a higher inflation target.
    Keywords: Inflation targets, Inflation: costs and benefits, Monetary policy framework
    JEL: E E5 E52 E58
    Date: 2015
  3. By: Onwachukwu, Chinedu Increase
    Abstract: Inflation is a major problem facing Nigeria as a country today. This has led to reduction in the standard of living of Nigerians. The Central Bank of Nigeria (CBN), however, has made efforts to fight it using different policy measures, of which monetary policy is one of them. Thus this paper focuses on the use of monetary policy to check inflation in Nigeria. The study is based on time series data from 1970 to 2010. Employing the method of Ordinary Least Squares (OLS) to estimate the model results, the study found that bank rate, deposit with the central bank, liquidity ratio, and broad money supply are statistically significant in explaining changes in inflation. However, exchange rate was found not to account for significant changes in inflation in Nigeria. The study recommended the need to check the excess reserves of commercial banks, which will help keep money supply at a low level.
    Keywords: Monetary Policy, Inflation, Money Supply
    JEL: E31 E5 E52
    Date: 2014–08–08
  4. By: Holton, Sarah; Rodriguez d'Acri, Costanza
    Abstract: The financial crisis has been characterised by fragmentation in the transmission of monetary policy, reflected in high dispersion in the cost of bank finance for euro area firms. Using micro-level bank data across a number of euro area countries, we identify individual bank balance sheet characteristics that contributed to this fragmentation. Interest rate pass-through heterogeneity is estimated using an error correction framework, which captures banks' funding constraints and balance sheet structures. Results show incomplete pass-through of changes in money market rates targeted by the central bank to firms' lending rates, with increases in sovereign bond yields affecting the cost of finance for firms, particularly in stressed countries. Individual bank characteristics have an effect on pass-through during the crisis, even after controlling for changes in macroeconomic conditions. The effect is greatest when looking at characteristics that capture bank funding difficulties, suggesting that a recovery in banks' funding capacities is an important element in reducing fragmentation in the transmission of monetary policy. JEL Classification: E52, E58, G01, G20, E43
    Keywords: financial crises, Interest rate pass-through, monetary policy transmission
    Date: 2015–09
  5. By: Koichiro.Kamada (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: The management of inflation expectations is one of the means by which central banks aim to achieve price stability. This is the reason why central bankers are required to have a deep understanding of the dynamics of inflation expectations. Kamada et al. (2015) examined a household survey and found that short-term and long-term inflation expectations behave differently: short-term expectations are easily affected by actual inflation, while long-term expectations are stable and immune to actual price developments. This result indicates that inflation expectations are anchored to a certain level in Japan from the long term point of view. Long-term expectations, however, are changeable and influenced by monetary policy. The price stability target and quantitative and qualitative monetary easing introduced by the Bank of Japan in 2013 are likely to raise and stabilize inflation expectations in Japan.
    Keywords: Inflation expectations; Term structure; Inflation target; Inflation anchor; Quantitative and qualitative monetary easing
    JEL: E31 E52 E58
    Date: 2015–09–30
  6. By: Fungácová , Zuzana (BOFIT); Nuutilainen , Riikka (BOFIT); Weill , Laurent (BOFIT)
    Abstract: This paper examines how reserve requirements influence the transmission of monetary policy through the bank lending channel in China while also taking into account the role of bank ownership. The implementation of Chinese monetary policy is characterized by the reliance on the reserve requirements as a regular policy tool with frequent adjustments. Using a large dataset of 170 Chinese banks for the period 2004–2013, we analyze the reaction of loan supply to changes in reserve requirements. We find no evidence of the bank lending channel through the use of reserve requirements. We observe, nonetheless, that changes in reserve requirements influence loan growth of banks. The same findings hold true for other monetary policy instruments. Further, we show that the bank ownership format influences transmission of monetary policy.
    Keywords: Chinese banks; bank lending channel; bank ownership
    JEL: E52 G21 P52
    Date: 2015–09–21
  7. 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 Liting Su (Department of Economics, The University of Kansas;)
    Abstract: One of the hottest topics in monetary policy research has been the revival of the proposal for “nominal GDP targeting.” Recent research has emphasized the potential importance of the Divisia monetary aggregates in implementing that policy. We investigate bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals by authors who advocate a role for a Divisia monetary aggregate in nominal GDP targeting. There are two particularly relevant proposals: (1) the proposal by Barnett, Chauvet, and Leiva-Leon (2015) to use a Divisia monetary aggregate as an indicator in the monthly Nowcasting of nominal GDP, as needed in implementation of any nominal GDP targeting policy; and (2) the proposal by Belongia and Ireland (2015) to use a Divisia monetary aggregate as an intermediate target, with nominal GDP being the final target of policy. We run well known diagnostic tests of bivariate time series properties of the Divisia M2 and nominal GDP stochastic processes. Those tests are for properties that are necessary, but not sufficient, for the conclusions of Belongia and Ireland (2014) and Barnett, Chauvet, and Leiva-Leon (2015). We find no time series properties that would contradict those implied by either of those two approaches.
    Keywords: money, aggregation theory, index number theory, Divisia index, Divisia monetary aggregates, nominal GDP targeting.
    JEL: C43 E01 E3 E40 E41 E51 E52 E58
    Date: 2015–10
  8. By: Jonathan Hambur (Reserve Bank of Australia); Lynne Cockerell (Reserve Bank of Australia); Christopher Potter (Reserve Bank of Australia); Penelope Smith (Reserve Bank of Australia); Michelle Wright (Reserve Bank of Australia)
    Abstract: This paper outlines an error correction model (ECM) of the Australian dollar real trade-weighted index (RTWI), which is one of the approaches used by Reserve Bank staff as a starting point for thinking about the level of the exchange rate. This particular model is designed to help answer a specific question, namely: <i>What is the level of the exchange rate that would be expected to prevail over the medium term based on the exchange rate's historical relationships with other theoretically and empirically relevant variables?</i> Notwithstanding the well-documented difficulties in empirically modelling exchange rates, the ECM has displayed robust explanatory power for a number of decades, in large part due to the strong historical relationship between Australia's terms of trade and the real exchange rate. That said, it is still worth considering whether two recent unusual economic forces – namely, Australia's resources boom and the adoption of unconventional monetary policy by several major foreign central banks – have been adequately captured by the model. With this purpose in mind, the paper also discusses several extensions to the ECM. Overall, these extensions provide little evidence that the relationships between the RTWI and its historical determinants have changed substantially over time. While there is some evidence that unusual economic forces did contribute to the exchange rate being somewhat higher in recent years than would otherwise have been the case, we do not find compelling evidence of omitted variables that have substantially influenced the exchange rate over a longer period of time.
    Keywords: Australian dollar; error correction model; exchange rates; resources boom; unconventional monetary policy
    JEL: C32 F31 F41
    Date: 2015–10
  9. By: Boel, Paola (Research Department, Central Bank of Sweden); Waller, Christopher J. (Federal Reserve Bank of St. Louis)
    Abstract: We construct a monetary economy in which agents face aggregate demand shocks and hetero- geneous idiosyncratic preference shocks. We show that, even when the Friedman rule is the best interest rate policy the central bank can implement, not all agents are satiated at the zero lower bound and therefore there is scope for central bank policies of liquidity provision. Indeed, we find that quantitative easing can be welfare improving even at the zero lower bound. This is because such policy temporarily relaxes the liquidity constraint of impatient agents, without harming the patient ones. Moreover, due to a pricing externality, quantitative easing may also have beneficial general equilibrium effects for the patient agents even if they are unconstrained in their holdings of real balances. Last, our model suggests that it can be optimal for the central bank to buy private debt claims instead of government debt.
    Keywords: Money; Heterogeneity; Stabilization Policy; Zero Lower Bound; Quantitative Easing
    JEL: E40 E50
    Date: 2015–09–01
  10. By: Kengo Nutahara
    Abstract: Do credit market imperfections justify a central banks response to asset price fluctuations? This study addresses this question from the perspective of equilibrium determinacy. In the model we use, prices are sticky and the working capital of firms is subject to asset values because of a lack of commitment. If credit market imperfections exist to a small degree, the Taylor principle is a necessary and sufficient condition for equilibrium determinacy, and monetary policy response to asset price fluctuations is good from the perspective of equilibrium determinacy. However, if credit market imperfections exist to a large degree such that the collateral constraint is binding, then the Taylor principle no longer guarantees equilibrium determinacy, and monetary policy response to asset price fluctuations becomes a source of equilibrium indeterminacy. We find that the existence of credit market imperfections makes it unsuitable to initiate a monetary policy response to deal with asset price fluctuations. We also find that reductions in credit market imperfections can enlarge the indeterminacy region of the model parameters.
    Date: 2015–09
  11. By: Benjamin D. Keen; Alexander W. Richter; Nathaniel A. Throckmorton
    Abstract: This paper examines the economic effects of forward guidance using a New Keynesian model with a zero lower bound (ZLB) constraint on the short-term nominal interest rate. Forward guidance is modeled with anticipated news shocks to the monetary policy rule. There are five key findings: (1) the stimulative effect of forward guidance falls as the economy deteriorates or as households expect a slower recovery because there is a smaller margin to lower expected policy rates; (2) longer forward guidance horizons do not generate increasingly larger impact effects on output when the total amount of news is fixed, unlike with an exogenous interest rate peg; (3) in steady state, an unanticipated shock has a larger impact effect on output than a news shock, but a news shock has a larger cumulative effect in every state of the economy; (4) at the ZLB, the cumulative effect on output from lengthening the forward guidance horizon increases over short horizons but decreases thereafter, which indicates the central bank faces limits on how far forward guidance can extend into the future and continue to add stimulus; and (5) forward guidance is stimulative in the absence of other shocks, but the observed effect on output is smaller or even negative if another shock simultaneously reduces demand.
    Keywords: Monetary Policy; Forward Guidance; Zero Lower Bound; News Shocks
    JEL: E43 E58 E61
    Date: 2015–07
  12. By: Suleyman UGURLU (The Faculty of Economics and Administrative Sciences); Murat BESER (The Faculty of Economics and Administrative Sciences); Nazife Ozge KILIC (The Faculty of Economics and Administrative Sciences)
    Abstract: Inflation and financial crisis is one of the basic economic problems for all countries since 1990’s. Inflation creates domestic issues more while financial crisis constitutes regional even global problems. There is an inevitable need for an active economical and tighter fiscal policy to overcome these economic problems. Central banks have a great role to provide stable economic growth rate under low inflation in long term in addition to financial and price stability. Central banks, which are responsible for implementation of monetary policy, take economic conditions of the country and fiscal policies of the government as data to determine main monetary policy objectives, what strategies they shall implement to achieve these objectives and to decide which monetary policy tools they shall use. In this context, aim of this study is to evaluate the implementation of the monetary policy decisions of the April 5, 1994 and is to identify the extent of success of these policies. In particular, inflation targeting regime which is applied after February 2001 crisis and monetary policies after 2008 global crisis are the focal point of the study.
    Keywords: Monetary Policy, Inflation, Financial Crisis, Central Banking, Credit
    JEL: E50
  13. By: Claudio Borio; Leonardo Gambacorta; Boris Hofmann
    Abstract: This paper investigates how monetary policy affects bank profitability. We use data for 109 large international banks headquartered in 14 major advanced economies for the period 1995-2012. Overall, we find a positive relationship between the level of short-term rates and the slope of the yield curve (the "interest rate structure", for short), on the one hand, and bank profitability - return on assets - on the other. This suggests that the positive impact of the interest rate structure on net interest income dominates the negative one on loan loss provisions and on non-interest income. We also find that the effect is stronger when the interest rate level is lower and the slope less steep, ie that non-linearities are present. All this suggests that, over time, unusually low interest rates and an unusually flat term structure erode bank profitability.
    Keywords: monetary policy, bank profitability, financial crisis
    Date: 2015–10
  14. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Panel remarks at the Macroprudential Monetary Policy Conference, Federal Reserve Bank of Boston, Boston, Massachusetts.
    Keywords: Committee on the Global Financial System; Financial Stability Oversight Council (FSOC); tabletop exercise; macroprudential tools; Adam Posen; macroprudential standards; Automatic rules; bubbles; tool calibration; countercyclical
    JEL: E58 E66
    Date: 2015–10–03
  15. By: Bluwstein, Kristina; Canova, Fabio
    Abstract: The effects that European Central Bank unconventional monetary policy measures have on nine European countries not adopting the Euro are examined with a novel Bayesian mixed frequency Structural Vector Autoregressive technique. The technique accounts for the fact that macro, monetary and financial data have different frequencies. Unconventional monetary policy disturbances generate important domestic fluctuations. The wealth, the risk, and the portfolio rebalancing channels matter for international propagation; the credit channel does not. International spillovers are larger in countries with more advanced financial systems and a larger share of domestic banks. A comparison with conventional monetary policy disturbances and with announcement surprises is provided.
    Keywords: Bayesian Mixed Frequency SVAR; Financial Spillovers; International Transmission; Unconventional Monetary Policy
    JEL: C11 C32 E52 F42 G15
    Date: 2015–10
  16. By: Adrian, Tobias (Federal Reserve Bank of New York); de Fontnouvelle, Patrick (Federal Reserve Bank of Boston); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that was aimed at confronting Federal Reserve Bank Presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the unwinding of the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables that were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as the leverage ratios, countercyclical capital buffer, and sectoral capital requirements; liquidity-based tools such as the liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; and supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. This paper presents the hypothetical macro-financial scenario, the set of macroprudential tools, and their transmission mechanism, as well as an account of the participants’ assessment of vulnerabilities and potential policy actions under the scenario. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.
    Keywords: macroprudential policy; monetary policy; tabletop exercise
    JEL: E58 G01 G18
    Date: 2015–09–01
  17. By: Enrique Alberola-Ila; Aitor Erce; José María Serena
    Abstract: This paper explores the role of international reserves as a stabiliser of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behaviour of gross capital flows. We analyse an extensive cross-country quarterly database, comprising 63 countries for the period 1991-2010, using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents - a fall in capital outflows. This partially offsets the drop in foreign capital inflows observed in such periods. For the whole sample, we also find that larger stocks of international reserves are linked to higher gross inflows and lower gross outflows. These results, which challenge current approaches to measuring reserve adequacy, call for refining such tools to better account for the role of resident investors.
    Keywords: Gross capital flows, international reserves, systemic crises, capital retrenchment
    Date: 2015–10
  18. By: Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Faculty of Business and Law, Coventry Un); Vanessa S. Tchamyou (Yaoundé/Cameroon)
    Abstract: This study provides a survey of recent advances in the literature on proposed African monetary unions. The survey comprises about 60 empirical papers published during the past fifteen years. Four main strands are discussed individually and collectively, notably, the proposed: West African Monetary Zone (WAMZ), East African Monetary Union (EAMU), Southern African Monetary Union (SAMU) and African Monetary Union (AMU). We observe a number of issues with establishing the feasibility and/or desirability of potential monetary unions, inter alia, variations in: choice of variables, empirical strategies, sampled countries and considered periodicities. We address this ambiguity by reviewing studies with scenarios that are consistent with Hegelian dialectics and establish selective expansion as the predominant mode of monetary integration. Some proponents make cases for strong pegs and institutions as viable alternatives to currency unions. Using cluster analysis, disaggregating panels into sub-samples and distinguishing shocks from responses in the examination of business cycle synchronisation provide more subtle policy implications. We caution that for inquiries using the same theoretical underpinnings, variables and methods just by modifying the scope/context and periodicity may only contribute to increasing the number of conflicting findings. Authors should place more emphasis on new perspectives and approaches based on caveats of, and lessons from the European Monetary Union (EMU) and CFA zones.
    Keywords: Currency Area; Policy Coordination; Africa
    JEL: F15 F36 F42 O55 P52
    Date: 2015–10
  19. By: Bernardo Maggi (Sapienza Universita' di Roma)
    Abstract: In this study we focus on the dynamics of taxation, debt, and monetary stability in a currency union area. We specifically adapt our theoretical set up to the Euro zone with special emphasis on the countries affected by critical conditions of public debt. We deal with such a problem in a dynamic optimization perspective by referring to the optimal control literature and find the optimal taxation and composition by maturity of the debt as it follows from the Stability and Growth Pact (SGP). Critical results depend upon the accumulation over time of the past decisions on public expenses and the consequent high level of taxation rate according to which a probability of failure to comply the SGP is evaluated.
    Keywords: Euro, Stability and Growth Pact, public debt.
    JEL: H63 H21 F40 C61
    Date: 2015–10
  20. By: Grothe, Magdalena; Meyler, Aidan
    Abstract: This paper analyses the predictive power of market-based and survey-based inflation expectations for actual inflation. We use the data on inflation swaps and the forecasts from the Survey of Professional Forecasters for the euro area and United States. The results show that both, market-based and survey-based measures have a non-negligible predictive power for inflation developments, as compared to statistical benchmark models. Therefore, for horizons of one and two years ahead, market-based and survey-based inflation expectations actually convey information on future inflation developments.
    Keywords: inflation expectations; inflation forecasting; inflation swap markets; market-based inflation expectations; Survey of Professional Forecasters; survey-based inflation expectations;
    JEL: E31 E37 G13
    Date: 2015
  21. By: Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Presentation to Bank Indonesia, BIS Conference on “Expanding the Boundaries of Monetary Policy in Asia and the Pacific”, Jakarta, Indonesia, August 20, 2015
    Date: 2015–08–20
  22. By: ITO Takatoshi; KOIBUCHI Satoshi; SATO Kiyotaka; SHIMIZU Junko
    Abstract: This study presents new findings of Japanese overseas subsidiaries' foreign exchange risk management and the choice of invoice currency, based on the 2014 RIETI Questionnaire Survey of Japanese Overseas Subsidiaries. First, 60% of Japanese subsidiaries conducted exchange risk management and chose the invoice currency on a discretionary basis. Second, Japanese subsidiaries increased U.S. dollar invoicing transactions, and a marked increase in the use of Asian currencies was not observed. Third, the effect of exchange rate changes on the subsidiaries' pricing behavior differed between the yen appreciation and depreciation periods. Fourth, Japanese subsidiaries reduced the use of the yen in trade with Japan in recent years. Only Japanese subsidiaries in China increased the share of renminbi invoicing trade, and subsidiaries in other Asian economies seldom chose renminbi invoicing in external trade, except for their trade with China.
    Date: 2015–10
  23. By: Glick, Reuven (Federal Reserve Bank of San Francisco); Rose, Andrew K. (Federal Reserve Bank of San Francisco)
    Abstract: In our European Economic Review (2002) paper, we used pre-1998 data on countries participating in and leaving currency unions to estimate the effect of currency unions on trade using (then-) conventional gravity models. In this paper, we use a variety of empirical gravity models to estimate the currency union effect on trade and exports, using recent data which includes the European Economic and Monetary Union (EMU). We have three findings. First, our assumption of symmetry between the effects of entering and leaving a currency union seems reasonable in the data but is uninteresting. Second, EMU typically has a smaller trade effect than other currency unions; it has a mildly stimulating effect at best. Third and most importantly, estimates of the currency union effect on trade are sensitive to the exact econometric methodology; the lack of consistent and robust evidence undermines confidence in our ability to reliably estimate the effect of currency union on trade.
    Date: 2015–07–17
  24. By: Rose, Andrew K. (University of California, Berkeley); Spiegel, Mark M. (Federal Reserve Bank of San Francisco)
    Abstract: We explore the relationship between inflation and the existence of a local domestic‐currency bond market. Domestic bond markets allow governments to inflate away their debt obligations, but also create a potential anti-inflationary force of bond holders. We develop a simple model where bond issuance may lead to political pressure on the government to choose a lower inflation rate. We then check this prediction empirically, finding that inflation‐targeting countries with bond markets experience inflation approximately three to four percentage points lower than those without. This effect is insensitive to a variety of estimation strategies and methods to account for potential endogeneity.
    Date: 2015–08–01
  25. By: Eric van Wincoop (University of Virginia); Philippe Bacchetta (University of Lausanne)
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. With price rigidity, the real cost of debt can be reduced through lower real interest rates. On the other hand, deflation of long-term debt is less effective and requires higher inflation rates. In general, we show that crisis equilibria can only be avoided with steep inflation rates for a sustained period of time, the cost of which is likely to be much larger than government default.
    Date: 2015
  26. By: Cavalieri, Duccio
    Abstract: This paper on the theoretical foundations of macroeconomic modelling pursues a need of conceptual clarification of a debated methodological problem concerning monetary and fiscal policies. In the first part of the paper the key features of Stock-Flow Consistent Approaches and Modern Monetary Theory are examined, in a critical perspective. These schools of thought consider the interaction between real and monetary factor at an aggregate level and re-propose with minor changes a well known system dynamics methodology, without implementing it and without even mentioning it. They rely on unrealistic and oversimplifying assumptions. Monetary circuit theories are also criticized. In the second part of the essay the guidelines of an alternative theoretical perspective are presented and their policy implications are discussed. Monetary and fiscal policy are not mutually independent. A reasoned choice of policy-mix is suggested.
    Keywords: money, SFCA, MMT, MCT, New Consensus, monetary and fiscal policy , New Consensus, monetary and fiscal policy
    JEL: B22 B41 E10 E4 E40 E42
    Date: 2015–09
  27. By: Vincent Dadam and Nicola Viegi
    Abstract: This paper analyses the in‡fluence 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-in‡flation trade off that complicates the implementation of the in‡flation 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 in‡flation targeting might play in either improving coordination, or worsening the interaction between trade unions and Central Bank objectives.
    Keywords: Labour market, Montetary Policy, South Africa
    Date: 2015
  28. By: Flannery, Mark J. (Securities and Exchange Commission); Hirtle, Beverly (Federal Reserve Bank of New York); Kovner, Anna (Federal Reserve Bank of New York)
    Abstract: We find evidence that the Federal Reserve stress tests (CCAR and DFAST) produce information about the stress-tested firms as well as other, non-stress-tested banking companies. Although standard event studies do not always show abnormal returns for the stress-tested sample on average, we argue that such tests are ill-suited for this sort of information event. Using a different empirical approach, we show that around stress test announcement dates, the absolute value of the cumulative abnormal returns (|CAR|) of stress-tested bank holding companies averages almost 3 percent. Cumulative abnormal trading volumes are more than 1 percentage point higher than a market model would predict. Absolute value abnormal returns and volumes are higher for more levered and riskier firms. We explore several theoretical hypotheses outlined in Goldstein and Sapra (2014) but find no evidence of negative welfare costs associated with the disclosure of stress test results.
    Keywords: stress test; bank capital; event study
    JEL: G14 G21 G28
    Date: 2015–10–01
  29. By: Octavio Portolano Machado (PUC-Rio); Carlos Carvalho (PUC-Rio); Tiago Berriel (PUC-Rio)
    Abstract: When the policy rate is constrained by the zero lower bound (ZLB), inference about central bank behavior becomes more difficult. As a result, despite possible efforts to counteract this effect through more active communication, policy uncertainty tends to increase. In particular, uncertainty about the degree of commitment becomes key. We use standard New Keynesian models subject to the ZLB to quantify the uncertainty around interest rate forecasts provided in the FOMC's Summary of Economic Projections (SEP). The first step involves an assessment of the degree of Fed commitment to provide accommodation for extended periods of time. To that end, we calibrate versions of the models under different assumptions about the degree of policy commitment, and assess which specification provides the best fit to the so-called "SEP dots". We then use the best-fitting specification to construct uncertainty bands around SEP interest rate forecasts, obtained by simulating policy responses to economic developments going forward. Our results suggest that the degree of Fed commitment to low rates for an extended period of time decreased since 2013. The reduction followed a change in FOMC forward guidance, and intensified as Quantitative Easing tapering took place. Quantitatively, our median projection indicates that lift-off will occur in 2015Q2, but there is some risk that rates will remain at zero until the end of 2016.
    Date: 2015
  30. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the SIFMA Liquidity Forum, New York City.
    Keywords: bank regulation; capital requirements; regulatory requirements; liquidity standards; liquidity measurement; supplementary leverage ratio (SLR); Comprehensive Capital Analysis and Review (CCAR)
    JEL: E58
    Date: 2015–09–30
  31. By: Medel, Carlos A.
    Abstract: In this article, it is analysed the multihorizon predictive power of the Hybrid New Keynesian Phillips Curve (HNKPC) making use of a compact-scale Global VAR for the headline inflation of six developed countries with different inflationary experiences; covering from 2000.1 until 2014.12. The key element of this article is the use of direct measures of inflation expectations--Consensus Economics--embedded in a Global VAR environment, i.e. modelling cross-country interactions. The Global VAR point forecast is evaluated using the Mean Squared Forecast Error (MSFE) statistic and statistically compared with several benchmarks. These belong to traditional statistical modelling, such as autoregressions (AR), the exponential smoothing model (ES), and the random walk model (RW). One last economics-based benchmark is the closed economy univariate HNKPC. The results indicate that the Global VAR is a valid forecasting procedure especially for the short-run. The most accurate forecasts, however, are obtained with the AR and especially with the univariate HNKPC. In the long-run, the ES model also appears as a better alternative rather than the RW. The MSPE is obviously affected by the unanticipated effects of the financial crisis started in 2008. So, when considering an evaluation sample just before the crisis, the GVAR also appears as a valid alternative in the long-run. The most robust forecasting devices across countries and horizons result in the univariate HNKPC, giving a role for economic fundamentals when forecasting inflation.
    Keywords: New Keynesian Phillips Curve; inflation forecasts; out-of-sample comparisons; survey data; Global VAR; time-series models
    JEL: C22 C26 C53 E31 E37 E47
    Date: 2015–10–05
  32. By: Finocchiaro, Daria (Research Department, Central Bank of Sweden); Lombardo, Giovanni (Bank for International Settlements); Mendicino, Caterina (European Central Bank); Weil, Philippe (Université Libre de Bruxelles)
    Abstract: This paper revisits the equilibrium and welfare effects of long-run inflation in the presence of distortionary taxes and financial constraints. Expected inflation interacts with corporate taxation through the deductibility of i) capital expenditures at historical value and ii) interest payments on debt. Through the first channel, inflation increases firms’ taxable profits and further distorts their investment decisions. Through the second, expected inflation affects the effective real interest rate negatively, relaxes firms’ financial constraints and stimulates investment. We show that, in the presence of collateralized debt, the second effect dominates. Therefore, in contrast to earlier literature, we find that when the tax code creates an advantage of debt financing, a positive rate of long-run inflation is beneficial in terms of welfare as it mitigates the financial distortion and spurs capital accumulation.
    Keywords: optimalmonetary policy; Friedman rule; credit frictions; tax benefits of debt
    JEL: E31 E43 E44 E52 G32
    Date: 2015–09–01

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