nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒10‒17
37 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Domestic and international macroeconomic effects of the Eurosystem expanded asset purchase programme By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  2. Theinformational content of market-based measures of inflation expectations derived from govenment bonds and inflation swaps in the United Kingdom By Liu, Zhuoshi; Vangelista, Elisabetta; Kaminska, Iryna; Relleen, Jon
  3. Three Challenges to Central Bank Orthodoxy By Bullard, James B.
  4. Monetary Development and Transmission in the Eurosystem By Anton, Roman
  5. Asynchronous Monetary Policies and International Dollar Credit By Dong He; Eric Wong; Andrew Tsang; Kelvin Ho
  6. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution" By Jorg Bibow
  7. The impact of the ECB's conventional and unconventional monetary policies on stock markets By Reinder Haitsma; Deren Unalmis; Jakob de Haan
  8. The Use of Monetary Aggregates as Indicators of the Future Evolution of Consumer Prices: Monetary Growth and Inflation Target By Ramos Francia Manuel; Noriega Antonio E.; Rodríguez-Pérez Cid Alonso
  9. Determinants of global spillovers from US monetary policy By Georgiadis, Georgios
  10. An interest rate rule to uniquely implement the optimal equilibrium in a liquidity trap By Duarte, Fernando M.; Zabai, Anna
  11. Monetary Policy Transmission in Emerging Asia: The Role of Banks and the Effects of Financial Globalization By Nasha Ananchotikul; Dulani Seneviratne
  12. Fiscal Seigniorage "Laffer-curve effect" on Central Bank Autonomy in India. By Chakraborty, Lekha
  13. Clamoring for Greenbacks: Explaining the resurgence of the U.S. dollar in international debt By ITO Hiroyuki; Cesar RODRIGUEZ
  14. Decomposing Long-Term Interest Rates: An International Comparison By Luis Ceballos; Damián Romero
  15. Money demand estimations in Mexico and of its stability 1986-2010, as well as some examples of its uses By Noriega Antonio E.; Ramos Francia Manuel; Rodríguez-Pérez Cid Alonso
  16. How Robust Are SVARs at Measuring Monetary Policy in Small Open Economies? By Carrillo Julio A.; Elizondo Rocío
  17. Inflation Dynamics in LATAM: A Comparison with Global Trends and Implications for Monetary Policy By Elías Albagli; Alberto Naudon; Rodrigo Vergara
  18. Does trend inflation make a difference? By Michele Loberto; Chiara Perricone
  19. Still Very Accommodative By Bullard, James B.
  20. Dynamic term structure models: the best way to enforce the zero lower bound in the US By Andreasen, Martin M; Meldrum, Andrew
  21. QE and the Bank Lending Channel in the United Kingdom By Butt, Nicholas; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  22. Indeterminacy in a Matching Model of Money with Productive Government Expenditure By Chu, Angus C.; Liao, Chih-Hsing; Liu, Xiangbo; Zhang, Mengbo
  23. Recent Estimates of Exchange Rate Pass-Through to Import Prices in the Euro Area By Nidhaleddine BEN CHEIKH; Christophe RAULT
  24. Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone By Kleczka, Mitja
  25. The coming US interest rate tightening cycle: smooth sailing or stormy waters? By Carlos Arteta; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocker
  26. Any lessons for today? Exchange-rate stabilisation in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939 By Matthias Morys
  27. Exchange Rate Pass-Through to Prices: VAR Evidence for Chile By Santiago Justel; Andrés Sansone
  28. Monetary policy and financial spillovers: losing traction? By Piti Disyatat; Phurichai Rungcharoenkitkul
  29. Big Players Out of Synch: Spillovers Implications of US and Euro Area Shocks By Carolina Osorio Buitron; Esteban Vesperoni
  30. Bancarizing with Credit Cards: Experimental Evidence on Interest Rates and Minimum Payments Elasticities for New Clients By Seira Enrique; Castellanos Pascacio Sara Gabriela; Jiménez Hernández Diego J.
  31. Exchange rate pass - through after the crisis: the Hungarian experience By Mihály Hajnal; György Molnár; Judit Várhegyi
  32. Discussion of: "Should the FOMC Have a Ternary Mandate?" / Narayana Kocherlakota, President ... Boston, Massachusetts ... October 2, 2015 By Kocherlakota, Narayana R.
  33. Capital Controls or Macroprudential Regulation? By Anton Korinek; Damiano Sandri
  34. Financial-Monetary Instability Factors within the Framework of the Recent Crisis in Romania By Filip, Bogdan Florin
  35. "Choice of Collateral Currency Updated--A market model for the benchmark pricing--" By Masaaki Fujii; Akihiko Takahashi
  36. Financial Intermediation in a Global Environment By Nuguer Victoria
  37. Unified money circulation equation and an analogical explanation for its solvability By Miura, Shinji

  1. By: Pietro Cova (Bank of Italy); Patrizio Pagano (The World Bank); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the domestic and international macroeconomic effects of purchases of domestic long-term sovereign bonds by the Eurosystem. To this end, we calibrate a five-country dynamic general equilibrium model of the world economy. According to our results, the sovereign bond purchases would generate an increase in economic activity and in inflation in the euro area of about one percentage point in the first two years by inducing a fall in the long-term interest rates and an increase in liquidity. International spillovers may be nontrivial and expansionary, depending on the monetary policy stance of the partner countries and on the response of international relative prices.
    Keywords: DSGE models, open-economy macroeconomics, non-standard monetary policy, zero lower bound
    JEL: E43 E44 E52 E58
    Date: 2015–09
  2. By: Liu, Zhuoshi (China Investment Corporation); Vangelista, Elisabetta (UK Debt Management Office); Kaminska, Iryna (Bank of England); Relleen, Jon (Bank of England)
    Abstract: Market-based measures of inflation expectations can be derived either from the difference between yields on nominal and inflation-linked government bonds or from inflation swap rates. These measures are important indicators of the outlook for inflation and are monitored regularly by the United Kingdom’s Monetary Policy Committee (MPC), alongside other measures of inflation expectations such as those based on surveys. However, the market rates we observe are not perfect measures of expected future inflation. Moreover, in the United Kingdom inflation-linked market instruments reference RPI inflation, whereas the MPC’s target is CPI inflation of 2%. To better extract useful information about expectations for CPI inflation, we develop a no-arbitrage term structure model to decompose the forward inflation curve into: measures of CPI inflation expectations; the expected spread between expected RPI and CPI inflation (the RPI/CPI inflation ‘wedge’); and estimates of risk premia. We then further decompose risk premia estimates into inflation risk premia and liquidity risk premia. We show that long-horizon expectations of CPI inflation, as implied by our model, fell in the 1990s after the introduction of inflation targeting and the creation of the MPC and have since remained fairly stable at around 2%. Our model also suggests that the large falls in measures of implied inflation based on index-linked gilts after the financial crisis were to a large extent the result of changes in liquidity premia in inflation-linked gilt prices.
    Keywords: Affine arbitrage-free dynamic term structure model; breakeven inflation; inflation expectations; risk premia; funding liquidity; survey expectations
    JEL: C40 E31 E43 E52 G12
    Date: 2015–09–25
  3. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: October 2, 2015. In a speech to the Shadow Open Market Committee in New York, St. Louis Fed President James Bullard discussed the orthodox view of current monetary policy, which emphasizes that the FOMC's objectives are close to being met while monetary policy settings remain far from normal, along with three challenges to that view, which relate to strict inflation targeting, low real interest rates and globalization. He concluded that the U.S. economy will likely experience better outcomes if the monetary policy orthodoxy is preserved as the guiding principle.
    Date: 2015–10–02
  4. By: Anton, Roman
    Abstract: Since the launch of the European Economic and Monetary Union (EMU) in January 1999 till today in 2015, the Euro has ascended to become the second largest reference currency in the world. With about €1.6 trillion of currency in circulation at present it is even positioned above the US dollar with €1.3 trillion. The Eurosystem now comprises 19 EU countries with about 340 Million people and inherits an outstanding role for the economy of the EMU, world trade, and international finance. Despite its importance, a recent independent empirical review that conclusively analyzes all key factors and efficiencies remains much obsolete. Thus, this research and review sets out to empirically-theoretically compile the last 16 years of the EMU with a focus on monetary developments, functioning of monetary transmission channels (MTCs) and mechanisms, as well as the performance of the Eurosystem and its ECB governed monetary policies (MP). For the first time it reviews a complete set of 16 MTCs and systematically evaluates the functioning of the Eurosystem and its role for the real economy and its people. It finds a high efficiency loss in all MTCs related to fractional reserve banking, excessive EU indebtedness, or legal frameworks such as MFI, financial, or equity law. Scientifically, all available data lead inescapably to the only scientific conclusion that, instead of old-fashioned reserve banking, a switch to a digital full-reserve system is in fact an inevitable must, requiring a complete monetary reform at the earliest feasible date.
    Keywords: Europe; EU; EMU; monetary; money; system; fractional; full; reserve; developments; ECB; ESCB; Euro; transmission; trends; process; EU; policy; currency; efficiency; effectiveness; review; research; empirical; financial; crisis, sovereign; debt; reform; union; quantitative; easing; model; systematic; creation; bank; financial; institution; MFI; real; economy; economic; inflation; prices; level; stability; GDP; output; employment; theory; theories; independent; digital; dollar; euro; area; euroland; eurosystem; central;
    JEL: A1 A10 E0 E00 E01 E02 E4 E40 E42 E43 E44 E47 E6 E60 P4 P44
    Date: 2015–10–07
  5. By: Dong He (The International Monetary Fund); Eric Wong (Hong Kong Monetary Authority); Andrew Tsang (Hong Kong Monetary Authority); Kelvin Ho (Hong Kong Monetary Authority)
    Abstract: This paper presents a theoretical model in which the supply of international dollar credit by a global bank is responsive to unconventional monetary policies (UMPs) both in the US and its home country, the functioning of the FX swap market and the bank's default risk. The theoretical model is tested using two unique confidential datasets. The results suggest that the contractionary effect of US monetary normalisation on global liquidity would be partly offset by the expansionary effect of UMPs in Japan and the euro-area. However, a stress testing exercise shows that global liquidity would be seriously disrupted if normalisation of monetary policy in the US leads to financial market dislocation, in particular in the FX swap market. Finally, this study finds that global banks' risk-taking attitude, credit risk exposure, and the business model of their overseas offices are important factors affecting how dollar credit supplied by international banks would respond to UMPs.
    Date: 2015–09
  6. By: Jorg Bibow
    Abstract: This study assesses the European Central Bank's (ECB) crisis management performance and potential for crisis resolution. The study investigates the institutional and functional constraints that delineate the ECB's scope for policy action under crisis conditions, and how the bank has actually used its leeway since 2007--or might do so in the future. The study finds that the ECB may well stand out positively when compared to other important euro-area or national authorities involved in managing the euro crisis, but that in general the bank did "too little, too late" to prevent the euro area from slipping into recession and protracted stagnation. The study also finds that expectations regarding the ECB's latest policy initiatives may be excessively optimistic, and that proposals featuring the central bank as the euro's savior through even more radical employment of its balance sheet are misplaced hopes. Ultimately, the euro's travails can only be ended and the euro crisis resolved by shifting the emphasis toward fiscal policy; specifically, by partnering the ECB with a "Euro Treasury" that would serve as a vehicle for the central funding of public investment through the issuance of common Euro Treasury debt securities.
    Keywords: Monetary Policy, Currency Union, ECB, Lender of Last Resort, Euro Crisis, Banking Union
    JEL: E42 E44 E52 E58 E61
    Date: 2015–09
  7. By: Reinder Haitsma; Deren Unalmis; Jakob de Haan
    Abstract: Using an event study method, we examine how stock markets respond to the policies of the European Central Bank during 1999-2015. We use market prices of futures (government bonds) to identify surprises in (un)conventional monetary policy. Our results suggest that especially unconventional monetary policy surprises affect the EURO STOXX 50 index. We also find evidence for the credit channel, notably for unconventional monetary policy surprises. Our results also suggest that value and past loser stocks show a larger reaction to monetary policy surprises. These results are confirmed if identification of monetary policy surprises is based on the Rigobon-Sack heteroscedasticity approach.
    Keywords: monetary policy surprises; stock prices; event studies approach; identification through heteroscedasticity
    JEL: E43 E44 E52
    Date: 2015–09
  8. By: Ramos Francia Manuel; Noriega Antonio E.; Rodríguez-Pérez Cid Alonso
    Abstract: We construct inflation pressure indicators based on the long-run relationship that exists between monetary aggregates and prices, once it is adequately adjusted to account for the scale of transactions, as well as the opportunity cost of holding money. To that end, an extensive long-run econometric analysis of money demand is carried out for Mexico using the monetary aggregate M1. Based on it, two indicators are calculated, the money gap and the m* indicator. Such gap measures deviations of real M1 from its relationship with its long-run determinants. The m* indicator is based on the estimation of the price index which is congruent with the quantity of M1 in the economy once it is adjusted for the long-run tendency of its determinants considering its long-run coefficients. Our results indicate that monetary policy has been congruent with the inflation target of Banco de México.
    Keywords: Money demand; Inflation; Money gap; Autoregressive distributed lag model; Cointegration; General-to-specific; Stability; Structural change.
    JEL: C22 C32 E31 E41 E51
    Date: 2015–07
  9. By: Georgiadis, Georgios
    Abstract: This paper assesses the global spillovers from identified US monetary policy shocks in a global VAR model. US monetary policy generates sizable output spillovers to the rest of the world, which are larger than the domestic effects in the US for many economies. The magnitude of spillovers depends on the receiving country’s trade and financial integration, de jure financial openness, exchange rate regime, financial market development, labor market rigidities, industry structure, and participation in global value chains. The role of these country characteristics for the spillovers often differs across advanced and non-advanced economies and also involves non-linearities. Furthermore, economies which experience larger spillovers from conventional US monetary policy also displayed larger downward revisions of their growth forecasts in spring 2013 when the Federal Reserve upset markets by discussing tapering off quantitative easing. The results of this paper suggest that policymakers could mitigate their economies’ vulnerability to US monetary policy by fostering trade integration as well as domestic financial market development, increasing the flexibility of exchange rates, and reducing frictions in labor markets. Other policies - such as inhibiting financial integration, industrialisation and participation in global value chains - might mitigate spillovers from US monetary policy, but are likely to reduce long-run growth. JEL Classification: F4, E5, C3
    Keywords: Mixed cross-section global VAR, spillovers, US monetary policy
    Date: 2015–09
  10. By: Duarte, Fernando M. (Federal Reserve Bank of New York); Zabai, Anna (Bank for International Settlements)
    Abstract: We propose a new interest rate rule that implements the optimal equilibrium and eliminates all indeterminacy in a canonical New Keynesian model in which the zero lower bound on nominal interest rates (ZLB) is binding. The rule commits to zero nominal interest rates for a length of time that increases in proportion to how much past inflation has deviated—either upward or downward—from its optimal level. Once outside the ZLB, interest rates follow a standard Taylor rule. Following the Taylor principle outside the ZLB is neither necessary nor sufficient to ensure uniqueness of equilibria. Instead, the key principle is to respond strongly enough to deviations of past inflation from optimal levels by sufficiently increasing the amount of time interest rates are promised to be kept at zero.
    Keywords: zero lower bound; ZLB; liquidity trap; New Keynesian model; indeterminacy; monetary policy; Taylor rule; Taylor principle; interest rate rule; forward guidance
    JEL: E43 E52 E58
    Date: 2015–10–01
  11. By: Nasha Ananchotikul; Dulani Seneviratne
    Abstract: Given the heavy reliance on bank lending as the main source of financing in most Asian economies, banks could potentially play a pivotal role in monetary policy transmission. However, we find that Asia’s bank lending channel or, more broadly, credit channel of domestic monetary policy is not very strong at the aggregate level. Using bank-level data for nine Asian economies during 2000–2013, we show that heterogeneity of bank characteristics (e.g., ownership type, financial position), degree of foreign bank penetration of the domestic banking sector, and global financial conditions all have a bearing on the response of domestic credit to changes in domestic monetary policy, and may account for the apparently weak credit channel at aggregate level.
    Keywords: Monetary transmission mechanism;Asia;Emerging markets;Banks;Loans;Financial systems;Banking sector;Globalization;Monetary policy;Monetary policy transmission; bank lending channel; financial globalization
    Date: 2015–09–28
  12. By: Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: It is often emphasised that seigniorage financing of public sector deficits is technically a "free lunch" if the economy has not attained the full employment levels. However, conservative macroeconomic policies in many emerging and developing economies, especially in the last two decades, have moved away from seigniorage financing to debt financing of deficits to give greater autonomy to the central banks. Against this backdrop, the paper analyses the fiscal and monetary policy co-ordination in India by constructing a fiscal seigniorage Laffer curve. If such a curve exists, it is possible to derive a seigniorage-maximizing inflation rate to estimate the optimal level of seigniorage financing of deficits. The illustrative estimates from the Indian data using error correction mechanism models confirm the possibility of a fiscal seigniorage Laffer curve.
    Keywords: Fiscal-Monetary Policy Co-ordination ; Seigniorage ; Fiscal Deficits ; Error Correction Mechanism ; Seigniorage Laffer Curve
    JEL: E52 E58 E62 E63 H62
    Date: 2015–09
  13. By: ITO Hiroyuki; Cesar RODRIGUEZ
    Abstract: This paper investigates the determinants of currency denomination in international debt. Using data on currency shares for international debt securities for 82 countries from 1995 through 2013, we find that while the extent of foreign currency issuance has not changed much since the 1990s, especially for developing countries, the currency composition has shifted, especially between the U.S. dollar and the euro. Before the Global Financial Crisis (GFC) of 2008, the share of the U.S. dollar has been on a downward trend while that of the euro had been on a steady rising trend, but since the crisis, the U.S. dollar share rebounded. With these findings, we estimate the determinants for the shares of the U.S. dollar, the euro, and the total of foreign currencies in international debt denomination. Our empirical analysis yields the following findings. First, not only does economic size matter, but also a country's monetary, financial and fiscal stance. Second, countries seem to increase their reliance on the euro first before increasing their issuance of debt in domestic currency. Third, financial opening has a persistent, effective influence on both the extent of foreign currency denomination and the shares of individual major currencies. Lastly, by applying the baseline estimation model only to the data before 2007, we conduct a counterfactual analysis to examine what would have happened to the shares of the major currencies had it not been for the GFC. Our results show that without the occurrence of the GFC, the share of the euro in international debt in 2013 would have been 9 percentage points higher at 24%, while the share of the dollar would have been 13 percentage points lower at 54%. Considering a conservative scenario for the near future, the dollar will likely continue dominating the denomination of international debt. In 2020 the share of the dollar in international debt could be at 63% while the share of the euro could be 18%.
    Date: 2015–10
  14. By: Luis Ceballos; Damián Romero
    Abstract: This work analyzes the behavior of long-term interest rates for several economies, identifying the risk neutral and term premium components under different methodologies. With this, we analyze which of these two channels affected interest rate movements in different monetary policy regimes. Also, we quantify the transmission of US long-term yield to others economies using the spillovers index proposed by Diebold & Yilmaz (2009). We find that movements in long-term interest rates (respect to the pre-crisis period 2003-2007) in different monetary policy regimes are related to changes in the term premium for most countries. Also, our findings suggest a heterogeneous behavior in the US to other economies. In developed economies, long-term interest rates are affected in both components (risk neutral and term premium) mainly through the US risk-neutral channel; whereas in developing countries, the evidence suggests that the relevant transmission channel is the term premium which is affected by US term premium.
    Date: 2015–09
  15. By: Noriega Antonio E.; Ramos Francia Manuel; Rodríguez-Pérez Cid Alonso
    Abstract: This paper presents an econometric analysis of the demand for the monetary aggregate M1 in Mexico. Using cointegration techniques, we identify both a stable long-run relationship between M1 and its determinants, and a statistically sound single-equation error-correction model. Results are used to carry out the following simple applications: (1) empirical determination of the value and stability of dual inflationary equilibria, given the observed seigniorage levels; (2) calculation of the seigniorage maximizing inflation rate, and (3) analysis of the potential relationship between a measure of excess money and inflation. Results indicate that the low inflation equilibrium is stable, and that the excess money indicator shows, in retrospective, some capacity in predicting inflationary pressures.
    Keywords: Demand for money; seigniorage; inflation; dual inflationary equilibria; cointegration; general to specific; money gap.
    JEL: C22 C32 E31 E41 H62
    Date: 2015–07
  16. By: Carrillo Julio A.; Elizondo Rocío
    Abstract: We study the ability of exclusion and sign restrictions to measure monetary policy shocks in small open economies. Our Monte Carlo experiments show that sign restrictions systematically overshoot inflation responses to the said shock, so we propose to add prior information to limit the number of economically implausible responses. This modified procedure robustly recovers the transmission of the shock, whereas exclusion restrictions show large sensitivity to the assumed monetary transmission mechanism of the model and the set of foreign variables included in the VAR. An application with Mexican data supports our findings.
    Keywords: Exclusion Restrictions; Sign Restrictions; Small Open Economy; Monetary Policy Shock.
    JEL: C32 E52
    Date: 2015–09
  17. By: Elías Albagli; Alberto Naudon; Rodrigo Vergara
    Date: 2015–08
  18. By: Michele Loberto (Bank of Italy); Chiara Perricone (LUISS Guido Carli)
    Abstract: Although the average inflation rate of developed countries in the postwar period has been greater than zero, much of the extensive literature on monetary policy has employed models that assume zero steady-state inflation. In comparing four estimated medium-scale NK DSGE models with real and nominal frictions, we seek to shed light on the quantitative implications of omitting trend inflation, that is, positive steady-state inflation. We compare certain population characteristics and the IRFs for the four models by applying two loss functions based on a point distance criterion and on a distribution distance criterion, respectively. Finally, we compare the RMSE forecasts. We repeat the analysis for three sub-periods: the Great Inflation, the Great Moderation and the union of the two periods. We do not find clear evidence for always preferring a model that uses trend inflation.
    Keywords: new Keynesian DSGE, trend inflation, loss function, entropy
    JEL: C1 C5 E4 E5
    Date: 2015–09
  19. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: September 25, 2015. President James Bullard discussed the case for monetary policy normalization during an event co-sponsored by the Global Interdependence Center and the St. Louis Fed. He noted that, once normalization begins, monetary policy will remain extremely accommodative through the medium term. Following his prepared remarks, he and Laurence Meyer, senior managing director at Macroeconomic Advisers and former Fed governor, participated in a moderated discussion on new directions in monetary policy.
    Date: 2015–09–25
  20. By: Andreasen, Martin M; Meldrum, Andrew (Bank of England)
    Abstract: This paper studies whether dynamic term structure models for US nominal bond yields should enforce the zero lower bound by a quadratic policy rate or a shadow rate specification. We address the question by estimating quadratic term structure models (QTSMs) and shadow rate models (SRMs) with at most four pricing factors. Our findings suggest that QTSMs give a better in-sample fit than SRMs with two and three factors, whereas the SRM marginally dominates with four factors. Loadings from Campbell-Shiller regressions are generally better matched by the SRMs, which also outperform the QTSMs when forecasting bond yields, particularly with four pricing factors.
    Keywords: Bias-adjustment; forecasting study; quadratic term styructure models; sequential regression approach; shadow rate models
    JEL: C10 C50 G12
    Date: 2015–09–29
  21. By: Butt, Nicholas; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives 'flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: bank lending channel; monetary policy; Quantitative Easing
    JEL: E51 E52 G20
    Date: 2015–10
  22. By: Chu, Angus C.; Liao, Chih-Hsing; Liu, Xiangbo; Zhang, Mengbo
    Abstract: This study explores the effects of inflation on economic growth in a monetary search-and-matching model with productive government expenditure. Our results can be summarized as follows. When labor intensity in the production function is below a threshold value, the economy features a unique balanced growth equilibrium in which inflation reduces economic growth. When labor intensity in the production function is above a threshold value, the economy may feature multiple balanced growth paths. Multiple equilibria (i.e., global indeterminacy) arise when the matching probability in the decentralized market is sufficiently large. In this case, the high-growth equilibrium features a negative effect of inflation on economic growth whereas the low-growth equilibrium features a U-shaped effect of inflation on growth. Furthermore, under a sufficiently large matching probability in the decentralized market, both equilibria are locally determinate, and hence, either equilibrium may emerge in the economy.
    Keywords: Economic growth; inflation; money; random matching ; indeterminacy
    JEL: E3 E4 O42
    Date: 2015–10
  23. By: Nidhaleddine BEN CHEIKH; Christophe RAULT
    Date: 2015
  24. By: Kleczka, Mitja
    Abstract: This paper delivers a contemporary estimate of the Eurozone’s natural real rate of interest. While it is found that the natural real rate has declined substantially between 1997 and 2015, it has not become negative. Thus, even in the presence of low inflation and nominal interest rates at the zero lower bound, the Eurozone does not face an acute threat of secular stagnation as defined by Lawrence Summers. Similarly, it is deemed unlikely that a number of ‘headwinds’ or a demise of technological growth will lead to a secular decline of the Eurozone’s economic growth. At the same time, it is found that the Eurozone faces a rather profound threat of ‘diversity stagnation’, as large inter-state differences impair the efficiency of its single monetary policy. Combined with the insufficient enforcement of fiscal rules, this erodes the Eurozone’s economic potential as well as its stability. Far-reaching reforms of the monetary and fiscal framework could overcome the detrimental status quo. However, conflicting economic and political incentives among the different member states and governments render the implementation of a necessary reform unlikely.
    Keywords: Secular stagnation; natural rate of interest; zero lower bound; land; headwinds; innovation stagnation; Taylor rule; public debt; tragedy of the commons.
    JEL: E42 E5 H6
    Date: 2015–09–30
  25. By: Carlos Arteta; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocker
    Abstract: The U.S. Federal Reserve (Fed) is expected to start raising policy interest rates in the near term and thus commence a tightening cycle for the first time in nearly a decade. The taper tantrum episode of May-June 2013 is a reminder that even a long anticipated change in Fed policies can trigger substantial financial market volatility in Emerging and Frontier Market Economies (EFEs). This paper provides a comprehensive analysis of the potential implications of the Fed tightening cycle for EFEs. We report three major findings: First, since the tightening cycle will take place in the context of a robust U.S. economy, it could be associated with positive real spillovers to EFEs. Second, while the tightening cycle is expected to proceed smoothly, there are risks of a disorderly adjustment of market expectations. The sudden realization of these risks could lead to a significant decline in EFE capital flows. For example, a 100 basis point jump in U.S. long-term yields could temporarily reduce aggregate capital flows to EFEs by up to 2.2 percentage point of their combined GDP. Third, in anticipation of the risks surrounding the tightening cycle, EFEs should prioritize monetary and fiscal policies that reduce vulnerabilities and implement structural policy measures that improve growth prospects.
    Keywords: Federal Reserve, liftoff, tightening, interest rates, monetary policy, emerging markets, frontier markets, capital flows, sudden stops, crises.
    JEL: E52 E58 F30 G15
    Date: 2015–10
  26. By: Matthias Morys (Department of Economics, University of York)
    Abstract: We add a historical and regional dimension to the debate on the Greek debt crisis. Analysing the 1841-1939 exchange-rate experience of Greece, Bulgaria, Romania and Serbia/Yugoslavia, we find surprising parallels to the present: repeated cycles of entry to and exit from gold, government debt build-up and default, and financial supervision by West European countries. Periods of stable exchange-rates were more short-lived than in any other part of Europe as a result of “fiscal dominance”, i.e., a monetary policy subjugated to the treasury’s needs. Granger causality tests show that patterns of fiscal dominance were only broken under financial supervision, when strict conditionality scaled back the influence of treasury; only then were central banks able to pursue a rule-bound monetary policy and, in turn, stabilize their exchange-rates. Fiscal institutions have remained weak in the case of Greece and are at the heart of the current crisis. A lesson for today might be that the EU-IMF programmes – with their focus on improving fiscal capacity and made effective by conditionality similar to the earlier South-East European experience – remain the best guarantor of continued Greek EMU membership. Understandable public resentment against “foreign intrusion” needs to be weighed against their potential to secure the long-term political and economic objective of exchange-rate stabilisation.
    Keywords: fiscal dominance, gold standard, financial supervision, South-East Europe
    JEL: N13 N14 N23 N24 E63 F34
    Date: 2015–09
  27. By: Santiago Justel; Andrés Sansone
    Abstract: This paper investigates the exchange rate pass-through (ERPT) to different price indices in Chile. The analysis is carried out with a vector autoregressive (VAR) model with block exogeneity restrictions. Models were estimated using monthly data for Chile from January 1987 to December 2013. Average pass-through ratio to total CPI is estimated to be between 0.1 and 0.2 in the medium term. These results indicate a lower ERPT after the adoption of inflation targeting. Moreover, from 2002 onwards the effect of an exchange rate movement takes around four quarters to pass-through completely, compared to one to two years for the full sample.
    Date: 2015–02
  28. By: Piti Disyatat; Phurichai Rungcharoenkitkul
    Abstract: Has financial globalisation compromised central banks' ability to manage domestic financial conditions? This paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies. To gauge the extent to which external financial conditions complicate the conduct of monetary policy, we isolate a "contagion" component by focusing on comovements in measures of bond return risk premia that are unrelated to economic fundamentals. Our contagion measure is designed to more accurately capture spillovers driven by exogenous global shifts in risk preference or appetite. The analysis reaches several conclusions that run counter to popular presumptions based on comovements in bond yields. In particular, emerging market economies appear to be much less susceptible to global contagion than advanced economies, and the overall sensitivities to contagion have not increased post-crisis.
    Keywords: Monetary policy, financial spillovers, contagion, interest rates, trilemma, bond risk premium, capital flows
    Date: 2015–10
  29. By: Carolina Osorio Buitron; Esteban Vesperoni
    Abstract: Given the prospects of asynchronous monetary conditions in the United States and the euro area, this paper analyzes spillovers among these two economies, as well as the implications of asynchronicity for spillovers to other advanced economies and emerging markets. Through a structural vector autoregression analysis, country-specific shocks to economic activity and monetary conditions since the early 1990s are identified, and are used to draw implications about spillovers. The empirical findings suggest that real and monetary conditions in the United States and the euro area have oftentimes been asynchronous. The results also point to significant spillovers among them, in particular since early 2014—with spillovers from the euro area to the United States being particularly large. Against the backdrop of asynchronous conditions in these two economies, spillovers from real and money shocks to emerging markets and non-systemic advanced economies could be dampened.
    Keywords: Spillovers;United States;Euro Area;Monetary policy;External shocks;Exchange rates;Economic conditions;Developed countries;Emerging markets;Vector autoregression;Panel analysis;Spillovers, Monetary Policy, Economic News, Emerging Economies
    Date: 2015–09–30
  30. By: Seira Enrique; Castellanos Pascacio Sara Gabriela; Jiménez Hernández Diego J.
    Abstract: We study the bancarization of marginal borrowers using credit cards and document that this process is difficult: default risk is substantial, returns heterogeneous, and account closings common. We also take advantage of a randomized control trial that varied interest rates and minimum payments in a very wide range. Against our hypothesis, we find that default risk is very insensitive to (randomized) large changes in interest rates and minimum payments. This could imply that regulating these contract terms may not necessarily "protect" consumers against default and that moral hazard in this market is negligible on average.
    Keywords: Credit cards; Development finance; Consumer behavior; Mexico.
    JEL: D14 D18 D82 G21
    Date: 2015–06
  31. By: Mihály Hajnal (Magyar Nemzeti Bank (Central Bank of Hungary)); György Molnár (Magyar Nemzeti Bank (Central Bank of Hungary)); Judit Várhegyi (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: Exchange rate movements influence prices through numerous channels. In this paper we provide empirical evidence on pass-through of exchange rate movements into consumer prices. The pass-through depends on a number of factors, and its size may vary over time. In recent years, prices have responded less to a depreciation of the exchange rate than would have been warranted by estimates conducted before the crisis. Before the crisis a 1 per cent change in the exchange rate resulted in a 0.3 per cent change in price level after two years. Currently, the pass-through is estimated to be in the range of 0.1–0.2 per cent over a two-year horizon. Both cyclical (subdued demand) and structural (decline in level of inflation) factors have contributed to the weakening of the relationship.
    Keywords: exchange rate pass-through, inflation, time series models
    JEL: C32 E31 F31
    Date: 2015
  32. By: Kocherlakota, Narayana R. (Federal Reserve Bank of Minneapolis)
    Date: 2015–10–02
  33. By: Anton Korinek; Damiano Sandri
    Abstract: International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
    Keywords: Capital controls;Macroprudential policies and financial stability;Emerging markets;East Asia;Exchange rate depreciation;Borrowing;Domestic savings;Financial crises;Econometric models;Financial stability, pecuniary externalities, capital controls, macroprudential regulation, inequality.
    Date: 2015–10–01
  34. By: Filip, Bogdan Florin
    Abstract: The paper starts from the premise of the organic integration of the financialmonetary components, with their corresponding interrelations, within the macroeconomic system and from their role in ensuring the normal operation of the entire system. In this respect, it is invoked the impact of some financial-monetary components' functioning, with possible malfunctions reflected on the economic stability, and specific factors that determine financialmonetary instability. The development of research focuses on the analysis of some relevant manifestations of financial-monetary instability, marked by major imbalances expressed themselves, synthetically, through high variations of some specific indicators: inflation rate, bank loans interest rate, foreign exchange rate, etc. In this framework, most of the paper consists in econometric analysis, made through the prism of relations of determining that involve main factors generating financial-monetary instability, on the background of the conditions in Romania, in 2008-2013. There are taken so into calculations data for the previously mentioned indicators, considered as dependent variables, on the one hand, respectively those representing GDP, the NPLs volume, M2 monetary aggregate etc., considered as determinant factors and variables, on the other hand. On this basis, there are outlined conclusions and suggested some possibilities to counteract the financial-monetary instability.
    Keywords: Financial Monetary Imbalances; Inflation Rate; Exchange Rate, Interest Rate On Bank Loans; Non-Performing LoansLength: 49 pages
    JEL: C23 E63 G01
    Date: 2014–12
  35. By: Masaaki Fujii (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (Faculty of Economics, The University of Tokyo)
    Abstract: Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed <i>tenor structure</i>, which makes it readily implementable as a traditional Market Model of interest rates.
    Date: 2015–08
  36. By: Nuguer Victoria
    Abstract: I develop a two-country DSGE model with global banks (financial intermediaries in one country lend to banks in the other country). Banks are financially constrained on how much they can borrow from households. The main goal is to obtain a framework that captures the international transmission of a financial crisis through the balance sheet of the global banks, as well as to explain the insurance mechanism of the international asset market. A negative shock to the value of the capital in one country generates a global financial crisis through the international interbank market. In this model, unconventional credit policies help to mitigate the effects of a financial disruption. The policies are carried out by the policy maker of the country directly hit by the shock. Consumers of that country are better off with policy than without it, while consumers from the other country are worse off.
    Keywords: Global financial crisis; global banking; asset prices; financial frictions
    JEL: G01 E44 F40 G21
    Date: 2015–03
  37. By: Miura, Shinji
    Abstract: The equation of exchange is well-known as a quantitative expression of money circulation, but it has a defect in that the relation between the velocity of money and the situation of economic agents is not clear. This paper attempts to found the velocity which pays attention to movement of money. For that purpose, this paper shows a money circulation equation in which agents of the whole society are unified. If this equation has a unique solution, the velocity of money is reduced to the expenditure rate of the whole society. Thereby, the defect of the equation of exchange can be remedied. Our attempt can be interpreted as connecting the velocity of money with the multiplier analysis. Success or failure of the trial depends on its solvability. This solvability problem of the money circulation equation is closely related to the missing problems of the monetary budget constraint. This paper also attempts to explain the missing problems in the case of the budget constraint of the whole society. This paper explains that a time irreversible disposal solves those problems by using an analogy.
    Keywords: Equation of Exchange; Money Circulation; Budget Constraint
    JEL: C2 E4
    Date: 2015–10–10

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