nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒10‒25
29 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Development and Transmission in the Eurosystem By Anton, Roman
  2. The evolution of inflation expectations in Canada and the US By James Yetman
  3. International Evidence on the Role of Monetary Policy in the Uncovered Interest Rate Parity Puzzle By Alfred V Guender
  4. Real-Exchange-Rate-Adjusted Inflation Targeting in an Open Economy: Some Analytical Results By Richard T. Froyen; Alfred V Guender
  5. More on Three Challenges to Central Bank Orthodoxy By Bullard, James B.
  6. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By García-Schmidt, Mariana; Woodford, Michael
  7. Monetary Policy Objectives and Money's Role in U.S. Business Cycles By Eurilton Araújo
  8. The Impact of a Low Interest Rate Environment: Empirical Evidence from the Euro Area Bank Lending Survey By Khosravi, Taha
  9. Monetary and fiscal policy in the Great Moderation and the Great Recession By Allsopp, Christopher; Vines, David
  10. Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence By Laurence Savoie-Chabot; Mikael Khan
  11. Forward Guidance and Heterogeneous Beliefs. By P. Andrade; G. Gaballo; E. Mengus; B. Mojon
  12. Distributional Effects of Monetary Policy By Veronika Selezneva; Martin Schneider; Matthias Doepke
  13. The market value of a central bank By Ricardo Reis
  14. A sectoral framework for analyzing money, credit and unconventional monetary policy By Cloyne, James; Thomas, Ryland; Tuckett, Alex; Wills, Samuel
  15. The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework By Luk, Paul; Vines, David
  16. QE and the Bank Lending Channel in the United Kingdom By Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
  17. In the absence of fiscal union, the Eurozone needs a more flexible monetary policy By Pietro Alessandrini; Michele Fratianni
  18. The international transmission of credit bubbles: theory and policy By Jaume Ventura; Alberto Martin
  19. Examining Full Collateral Coverage in Canada’s Large Value Transfer System By Lana Embree; Varya Taylor
  20. Scotland's Lender of Last Resort Options By Angus Armstrong
  21. Dollarization and De-dollarization: Formulation of Agenda By Dzmitry Kruk
  22. Does Unconventional Monetary Policy Affect Inequality? Evidence from Japan By Ayako Saiki; Jon Frost
  23. Inflation as a Global Phenomenon—Some Implications for Policy Analysis and Forecasting By Ayse Kabukcuoglu; Enrique Martínez-García
  24. Forecasting Inflation: Phillips Curve Effects on Services Price Measures By Tallman, Ellis W.; Zaman, Saeed
  25. Financial Dampening By Mu-Jeung Yang; Johannes Wieland
  26. Flashes from the Past: Establishment of the Bulgarian national Bank as Central bank of Bulgaria By Bojinov, Bojidar
  27. Objectives and Challenges of Macroprudential Policy By Alfred Duncan; Charles Nolan
  28. Breaking free of the triple coincidence in international finance By Stefan Avdjiev; Robert Neil McCauley; Hyun Song Shin
  29. Collateral Constraints and the Interest Rate By Donal Smith

  1. 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 it is at present 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, based on all data and results, there is no way to reach a different conclusion and reminder that stresses the need, exigency and must to replace an old-fashioned reserve banking system by digital full-reserve banking via monetary reform at the earliest feasible date possible.
    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; banking;
    JEL: A1 A10 E0 E00 E01 E02 E4 E40 E42 E43 E44 E47 E6 E60 P4 P44
    Date: 2015–10–07
  2. By: James Yetman
    Abstract: We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989-1998 to 2.2% for 2004-2013. By contrast, it has remained close to 2% since the mid-1990 for Canadian forecasts. Second, the variance of estimates of the long-run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada's adoption of inflation targets. And third, forecasters in Canada look much more alike than those in the US in terms of the weight that they place on the anchor. One explanation for these results is that an explicit inflation targeting regime (Canada) provides for less uncertainty about future monetary policy actions than a monetary policy regime where there was no explicit numerical inflation target (the US before 2012) to anchor expectations.
    Keywords: Inflation expectations, decay function, inflation targeting
    Date: 2015–10
  3. By: Alfred V Guender (University of Canterbury)
    Abstract: CPI inflation targeting necessitates a flexible exchange rate regime. This paper embeds an endogenous target rule into a simple open economy macro model to explain the UIP puzzle. The model predicts that the change in the exchange rate is inversely related to the lagged interest rate differential. Openness and aversion to inflation variability determine the strength of this linkage. Foreign inflation and the foreign interest rate also affect exchange rate changes. This hypothesis is tested on data from three small open economies, Canada, Norway, and Switzerland, all of which target CPI inflation and maintain extensive trade and finance links with a larger neighboring country. Supportive evidence is strongest for Switzerland during a clean float period before the outbreak of the Global Financial Crisis.
    Keywords: Uncovered Interest Rate Parity (UIP) Puzzle, Target Rule, Optimal Monetary Policy, Openness, Aversion to Inflation Variability
    JEL: E4 E5 F3
    Date: 2015–08–01
  4. By: Richard T. Froyen; Alfred V Guender (University of Canterbury)
    Abstract: Under optimal policy from a timeless perspective, a central bank targeting an inflation measure which is adjusted for changes in the real exchange rate (REX inflation) has the ability to stabilize the output gap and inflation against demand disturbances in an open economy. This distinct advantage is lost if a central bank follows a Taylor-type rule. The bank has an incentive to add the real exchange rate to the Taylor rule because it duplicates the performance of the optimal policy for portfolio shocks. The Taylor-type rule becomes a Monetary Conditions Index (MCI) that outperforms Taylor-type rules which accord no weight at all or a higher weight to the real exchange rate. In the current environment of concern about sudden increases in U.S. interest rates, the properly designed MCI would have a considerable advantage.
    Keywords: REX Inflation, Optimal Policy, Taylor-Type Rules, MCI, Openness, Portfolio Shocks
    JEL: E3 E5 F5
    Date: 2015–06–19
  5. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During the 57th NABE annual meeting, St. Louis Fed President James Bullard discussed the orthodox view of current monetary policy, which emphasizes that the FOMC's objectives have essentially been met while monetary policy settings remain far from normal. He also discussed three challenges to that view, which relate to strict inflation targeting, low real interest rates and globalization. He noted that the orthodoxy suggests a prudent policy of returning policy settings to more normal levels gradually over time, providing plenty of monetary accommodation during the transition to guard against macroeconomic risks.
    Date: 2015–10–13
  6. By: García-Schmidt, Mariana; Woodford, Michael
    Abstract: A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian" proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance" are likely, in the case of a long-horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
    JEL: E31 E43 E52
    Date: 2015–10
  7. By: Eurilton Araújo
    Abstract: In a sticky-price model in which money can potentially play a key role in business cycles, I estimate monetary policy preference parameters under commitment in a timeless perspective. Empirical findings suggest that inflation stabilization and interest rate smoothing are the main objectives of monetary policy, with a very small role for output gap stabilization. Though the money growth rate is irrelevant as an argument in the Fed's objective function, its presence in structural equations improves model fit. Moreover, marginal likelihood comparisons show that the data favor Taylor rules over optimal policies. Finally, the way of describing monetary policy matters for macroeconomic dynamics
    Date: 2015–09
  8. By: Khosravi, Taha
    Abstract: This paper investigates the effect of a protracted period of low monetary policy rates on loosening of banks’ credit standards concerning enterprises, households and consumer loans. Using a balanced panel dataset of 9 countries that have taken part ever since the initiation of the Euro area Bank Lending Survey, this study focuses on three different time frames of pre- (2002Q4-2008Q3), mid- (2008Q4-2010Q4) and post- (2011Q1-2014:Q4) financial crisis. The results indicate that low short term interest rates prior to the crisis produce a disproportionate loosening of credit standards in all three types of loans. In spite of the scope of expansionary monetary policy documented primarily in the post-crisis sample, the data analysed indicates that negative Taylor-rule residuals lead only to a softening of total lending standards for enterprises loans. Additionally, the outcomes of this study indicate that the European Central Bank 3 year long-term refinancing operations brought a fall in the progress of banks’ credit tightening. However, the benefits of this have yet to be experienced in the EA9 real economy. While regrouping the original sample in stressed nations, the results suggest that excessive risk-taking in bank lending behaviour took place, especially during periods of low monetary policy rates both pre- and post-crisis.
    Keywords: Monetary policy, Bank lending Survey, Euro area, LTROs announcement, Panel data.
    JEL: E44 E50 E52 E58 G01
    Date: 2015–10–20
  9. By: Allsopp, Christopher; Vines, David
    Abstract: In this paper we argue for a new approach to monetary and fiscal policy. During the Great Moderation, the inflation targeting regime worked well. Central banks used the interest rate to stabilize inflation, and—subject to inflation being controlled—stabilized the level of demand. Fiscal policy exerted discipline over the public-sector deficits, thereby—indirectly—managing the level of public debt. Such ‘fiscal housekeeping’ worked well, because the monetary authorities were stabilizing the economy. But once private-sector deleveraging led to the Great Recession, and interest rates hit their zero bound, the economy could no longer be managed by monetary policy. Since then, recovery has come to depend on the ‘automatic stabilizers’: as output and tax revenues have fallen, public debt has been created, producing the assets which a deleveraging private sector wishes to hold. But the effect has been very gradual. Recovery would have been faster if fiscal policy had been responsible for the restoration of full employment, in an environment which tolerated the necessary rises in public debt. Conversely, policies of austerity, designed to reduce public debt, have slowed the recovery. Growth will not be resumed until the private sector begins to invest strongly again, creating the financial assets which the private sector wishes to hold, thereby enabling public debt to be retired. This has not yet happened because the private sector, correctly, does not believe that macroeconomic policy is capable of sustaining a strong recovery.
    Keywords: fiscal policy; inflation targeting; monetary policy; quantitative easing; zero lower bound
    JEL: E44 E52 E58 E61 E62
    Date: 2015–10
  10. By: Laurence Savoie-Chabot; Mikael Khan
    Abstract: In an open economy such as Canada’s, exchange rate movements can have a material impact on consumer prices. This is particularly important in the current context, with the significant depreciation of the Canadian dollar vis-a-vis the U.S. dollar since late 2012. This paper provides a broad overview of the various mechanisms by which exchange rate movements pass through to consumer prices and discusses the implications of exchange rate pass-through (ERPT) for the conduct of monetary policy. It then describes some of the tools used at the Bank of Canada to help quantify ERPT. We conclude by taking a closer look at the current situation in Canada, presenting a range of evidence that suggests ERPT has played an important role in recent inflation dynamics.
    Keywords: Exchange rates, Inflation and prices
    JEL: E31 E52 F31
    Date: 2015
  11. By: P. Andrade; G. Gaballo; E. Mengus; B. Mojon
    Abstract: We analyze the effects of forward guidance when agents have heterogeneous interpretations of whether forward guidance contains a commitment on future policy actions. Using survey expectations, we document that forward guidance lowered disagreement about future short-term interest rates to historically low levels while it did not affect much disagreement about future inflation and future consumption. We introduce heterogenous beliefs on future policy and fundamentals in an otherwise standard New-Keynesian model. We show that, because the commitment type of the central bank is unobserved, agreement on the future path of interest rates can coexist with disagreement on the length of the trap. Such heterogeneity of beliefs can strongly mitigate the effectiveness of forward guidance. It also alters the optimal policy at the zero lower bound compared to a situation where beliefs are homogenous.
    Keywords: monetary policy, forward guidance, communication, heterogeneous beliefs, disagreement.
    JEL: E31 E52 E65
    Date: 2015
  12. By: Veronika Selezneva (Northwestern University); Martin Schneider (Stanford University); Matthias Doepke (Northwestern University)
    Abstract: We assess the distributional consequences of monetary policy in the current economic environment in the United States. Through its effect on inflation, monetary policy affects the real value of nominal assets and liabilities, and therefore redistributes wealth between borrowers and lenders in the economy. In addition, unconventional policies such as 'quantitative easing' affect real interest rates and the availability of credit, once again leading to redistributional effects. We first document the potential exposure to redistribution effects on the U.S. economy using recent data from the Flow of Funds accounts and the Survey of Consumer Finance. We then quantify the redistribution effects of monetary policy using a rich life-cycle model with idiosyncratic risk, financial constraints, a housing sector, and nominal borrowing and lending. We also discuss the extent to which the recent financial crisis, which has lowered net worth of many households and tightened financial constraints, has changed the nature of distributional consequences of monetary policy.
    Date: 2015
  13. By: Ricardo Reis (Columbia University)
    Abstract: The fiscal capacity of a central bank is given by the present value of the seignorage from issuing banknotes plus the market value of its assets minus non-required reserves. Its size determines the solvency of a central bank and constrains unconventional monetary policy. We estimate this capacity for the US, as well as its elasticity with respect to inflation. To do so, we use balance-sheet information to measure the market value of central bank assets and how it will fall with inflation. We also estimate annual seignorage and how it varies with inflation and use options data for inflation to recover stochastic discount factors with which to value cash flows to the central bank. Our results suggest that the fiscal capacity of the Fed is large, but insensitive to plausible changes in inflation.
    Date: 2015
  14. By: Cloyne, James (Bank of England); Thomas, Ryland (Bank of England); Tuckett, Alex (Bank of England); Wills, Samuel (Bank of England)
    Abstract: This paper sets out an empirical framework for examining the dynamics of money and credit at a sectoral level. Our purpose is to understand and monitor the transmission mechanisms of different policies that affect the financial sector, with an eye to practical policy analysis. We use the banking system’s balance sheet as an organising framework and model the stocks of broad money and credit held by different sectors. Each sector is modelled as a separate block with money, credit, and sectoral expenditure modelled jointly together with the relevant financial yields. The sectors are then knitted together using aggregate relationships and identities. Overall the model can be thought of as an estimated disaggregated version of the IS-LM-CC model which additionally incorporates the principle that ‘loans create deposits’. We illustrate, by example, how this framework can be used in practice: first by examining the sectoral transmission of quantitative easing and second, the effect of disturbances to credit markets. We also discuss how other policy tools, such as the Funding for Lending Scheme and macroprudential policies, could be examined in our framework.
    Keywords: Monetary policy; quantitative easing; business cycles; money; credit; sectoral modelling
    JEL: E40 E51 E52 E58
    Date: 2015–10–09
  15. By: Luk, Paul; Vines, David
    Abstract: This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.
    Keywords: fiscal policy; monetary policy; New Keynesian model
    JEL: E52 E61 E62
    Date: 2015–10
  16. By: Nick Butt; Rohan Churm; Michael McMahon; Arpad Morotz; Jochen Schanz
    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: Monetary policy, Bank lending channel, Quantitative Easing
    JEL: E51 E52 G20
    Date: 2015–10
  17. By: Pietro Alessandrini (Universit… Politecnica delle Marche, MoFiR); Michele Fratianni (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR)
    Abstract: This paper makes three points. The first is that inter-member external imbalances are a relevant objective for the performance of a monetary union. The second is that policy should aim at reducing inter-member external disequilibria, by setting targets on current-account imbalances applied symmetrically to both deficit and surplus countries. The correction of external imbalances needs to be taken as seriously as that of fiscal imbalances and debt-to-GDP ratios. The third is that, while the principle of the unified supranational monetary policy should remain the core of the monetary union, the heterogeneity in economic performances and current-account imbalances of member states calls for a more flexible common monetary policy. Our specific proposal is that National Central Banks should add a risk premium cost to official interest rates on banks that accumulate "excessive" borrowings or deposits to compensate, respectively, for outflows and inflows of the monetary base due to the effect of external imbalances.
    Keywords: Eurozone, adjustment mechanism, external imbalances, sterilisation
    JEL: E42 E52 E58
    Date: 2015–10
  18. By: Jaume Ventura (CREI); Alberto Martin (CREI, UPF and Barcelona GSE)
    Abstract: We live in a new world economy characterized by financial globalization and historically low interest rates. This environment is conducive to countries experiencing credit bubbles that have large macroeconomic effects at home and are quickly propagated abroad. In previous work, we built on the theory of rational bubbles to develop a framework to think about the origins and domestic effects of these credit bubbles. This paper extends that framework to two-country setting and studies the channels through which credit bubbles are transmitted across countries. We find that there are two main channels that work through the interest rate and the terms of trade. The former constitutes a negative spillover, while the latter constitutes a negative spillover in the short run but a positive one in the long run. We study both cooperative and noncooperative policies in this world. The interest-rate and terms-of-trade spillovers produce policy externalities that make the noncooperative outcome suboptimal.
    Date: 2015
  19. By: Lana Embree; Varya Taylor
    Abstract: The Large Value Transfer System (LVTS) is Canada’s main electronic interbank funds transfer system that financial institutions use daily to transmit thousands of payments worth several billions of dollars. The LVTS is different than real-time gross settlement (RTGS) systems because, while each payment is final and irrevocable, settlement occurs on a multilateral net basis at the end of the day. Furthermore, LVTS payments are secured by a collateral pool that mutualizes losses across participants in the event of a default. In this paper, we use the Bank of Finland Simulator to examine the implications of fully collateralizing LVTS payments, similar to an RTGS. An important caveat to consider, however, is that the simulations do not take into account the anticipated change in payment behaviour in response to a change in collateral requirements. In this regard, we include a queuing mechanism to at least reflect more efficient use of liquidity. The results indicate that collateral requirements vary by participant and some participants actually require less collateral in the simulation than what is required under the current LVTS design.
    Keywords: Financial Institutions, Payment clearing and settlement systems
    JEL: E E4 E47 G G2 G21
    Date: 2015
  20. By: Angus Armstrong
    Abstract: Scotland’s lender of last resort options depends on its choice of currency. If Scotland becomes independent, there is no question that it could use sterling. But this looks likely to be without the backing of the UK government and therefore without the Bank of England. Using sterling in these circumstances would constitute an informal currency union or ‘dollarization’.
    Date: 2014–08
  21. By: Dzmitry Kruk (Belarusian Economic Research and Outreach Center (BEROC))
    Abstract: This policy paper deals with the phenomena of dollarization and prospects of de-dollarization policies in Belarus. During last two decades Belarus has been a highly dollarized economy. Recently, the authorities declared a campaign of de-dollarization, which, however, focuses mainly on de-dollarization of payments. Such a policy is unlikely to become effective. We show that Belarus suffers from all possible forms of dollarization that interact with each other, forming a kind of vicious circle. Through this, de-dollarization policies, if needed in general, must be systemic and consider different forms of dollarization. We show that strategically Belarus is situated in ‘boarder-line’ area between the options of autonomous monetary policy and official dollarization. If deferring to autonomous monetary policy, a sequence of systemic de-dollarization policies is crucial for its effectiveness. The mix of the policies depends on the scope of different forms of dollarization. However, there is no precise assessment for real dollarization in Belarus (which is the direction for future research). Hence, we formulate a number of scenarios of such policies for cases with different intensity of real dollarization.
    Keywords: äîëëàðèçàöèÿ, äåäîëëàðèçàöèÿ, ðåàëüíàÿ äîëëàðèçàöèÿ, ôèíàíñîâàÿ äîëëàðèçàöèÿ, äîëëàðèçàöèÿ ðàñ÷åòîâ, ðåæèì ìîíåòàðíîé ïîëèòèêè.
    JEL: E42 E44 E52 E58 E61
    Date: 2015–04
  22. By: Ayako Saiki (De Nederlandsche Bank); Jon Frost (De Nederlandsche Bank)
    Abstract: Inequality has been largely ignored in the literature and practice of monetary policy, but is gaining more attention recently. Here, we exclusively focus on the impact of unconventional monetary policy (UMP) on inequality. We look at how the recent UMP in Japan affected inequality, using household survey data. Our vector auto regression results show that UMP widened income inequality after Q4 2008 as the Bank of Japan (BoJ) resumed its zero-interest rate policy and reinstated UMP. This is largely due to the portfolio channel. To the best of our knowledge, this is the first study to empirically analyze the distributional impact of UMP. Japan’s extensive experience with UMP may hold important policy implications for other countries.
    Date: 2014–10
  23. By: Ayse Kabukcuoglu (Koc University); Enrique Martínez-García (Federal Reserve Bank of Dallas & Southern Methodist University)
    Abstract: We evaluate the performance of inflation forecasts based on the open-economy Phillips curve by exploiting the spatial pattern of international propagation of inflation. We model these spatial linkages using global inflation and either domestic slack or oil price fluctuations, motivated by a novel interpretation of the forecasting implications of the workhorse open-economy New Keynesian model (Martínez-García and Wynne (2010), Kabukcuoglu and Martínez-García (2014)). We find that incorporating spatial interactions yields significantly more accurate forecasts of local inflation in 14 advanced countries (including the U.S.) than a simple autoregressive model that captures only the temporal dimension of the inflation dynamics.
    Keywords: Inflation Dynamics; Open-Economy Phillips Curve; Forecasting.
    JEL: C21 C23 C53 F41
    Date: 2015–10
  24. By: Tallman, Ellis W. (Federal Reserve Bank of Cleveland); Zaman, Saeed (Federal Reserve Bank of Cleveland)
    Abstract: We estimate an empirical model of inflation that exploits a Phillips curve relationship between a measure of unemployment and a subaggregate measure of inflation (services). We generate an aggregate inflation forecast from forecasts of the goods subcomponent separate from the services subcomponent, and compare the aggregated forecast to the leading time-series univariate and standard Phillips curve forecasting models. Our results indicate notable improvements in forecasting accuracy statistics for models that exploit relationships between services inflation and the unemployment rate. In addition, models of services inflation using the short-term unemployment rate (less than 27 weeks) as the real economic indicator display additional modest forecast accuracy improvements.
    Keywords: Inflation forecasting; Phillips curve; disaggregated inflation forecasting models; trend-cycle model
    JEL: C22 C53 E31 E37
    Date: 2015–10–14
  25. By: Mu-Jeung Yang (University of Washington, Seattle); Johannes Wieland (University of California, San Diego)
    Abstract: We propose a novel mechanism, 'financial dampening,' whereby financial sector deleveraging attenuates the effectiveness of monetary policy. In our model of financial intermediation, where banks have leverage targets and asymmetric portfolio adjustment costs, deleveraging banks will have a lower pass-through from reductions in policy rates to credit supply. We find consistent evidence for financial dampening in micro- data on U.S. regulated financial intermediaries. We instrument deleveraging at local banks using average deleveraging at spatially-separate banks of the same bank holding company to isolate local deleveraging independent of local demand conditions. We find that in response to a 1% monetary policy shock, a bank at the 25th percentile of the deleveraging distribution increases its loan growth by 3.70% more than a bank at the 75th percentile according to our baseline specification. Thus, our mechanism provides a rationale for why recoveries from financial crisis may be slow.
    Date: 2015
  26. By: Bojinov, Bojidar
    Abstract: The study aims to outline the specifics related with the emergence and development of central banking in Bulgaria. Established in 1879 as an ordinary commercial bank, Bulgarian National Bank experienced a number of ups and downs in its 130 year history. In its evolutionary development, it became a central issue and Bank of Bulgaria in 1928. In the years of socialism, Bulgarian National Bank is experiencing its devolution development to become in the period 1971-1982 in the only bank in country (monobank system). With the transition to a market conomy in 1991, the National Bank again returned to its independence and autonomy. After the banking crisis of 1996-1997, the National Bank began operating in the currency board arrangement.
    Keywords: banks, central bank, Bulgarian national bank, history
    JEL: B00 G21
    Date: 2015–10–15
  27. By: Alfred Duncan; Charles Nolan
    Abstract: The establishment of the UK Financial Policy Committee is a landmark development in macroprudential oversight. However, its purview may be overly narrow. Macroprudential policy ought to be concerned with the overall eciency of the nancial system. Macroprudential policymakers should have a role as much concerned with providing authoritative, public advice on areas of policy relevant to aggregate nancial eciency as with imposing additional restrictions on bank lending. Issues of independence and transparency loom large under the current regime as well as with some suggestions we make.
    Keywords: Macroprudential policy; monetary economics; risk; financial markets.
    JEL: E13 E44 G11 G24 G28
    Date: 2015–09
  28. By: Stefan Avdjiev; Robert Neil McCauley; Hyun Song Shin
    Abstract: The traditional approach to international finance is to view capital flows as the financial counterpart to savings and investment decisions, assuming further that the GDP boundary defines both the decision-making unit and the currency area. This "triple coincidence" of GDP area, decision-making unit and currency area is an elegant simplification but misleads when financial flows are important in their own right. First, the neglect of gross flows, when only net flows are considered, can lead to misdiagnoses of financial vulnerability. Second, inattention to the effects of international currencies may lead to erroneous conclusions on exchange rate adjustment. Third, sectoral differences between corporate and official sector positions can distort welfare conclusions on the consequences of currency depreciation, as macroeconomic risks may be underestimated. This paper illustrates the pitfalls of the triple coincidence through a series of examples from the global financial system in recent years and examines alternative analytical frameworks based on balance sheets as the unit of analysis.
    Keywords: capital flows, global liquidity, international currencies
    Date: 2015–10
  29. By: Donal Smith
    Abstract: This paper establishes a transmission mechanism between credit constraints and persistently low real interest rates. In doing so, it establishes a link between two strands of macroeconomic literature that have become prominent since the nancial crisis; nancial frictions literature and zero lower bound literature. In order to analyse the credit constraints and interest rate interaction, the paper presets a perpetual youth overlapping generations model, which is extended to incorporate an endogenous nancial friction in the form of a collateral constraint. Analytical expressions and elementary diagrams are presented to illustrate the results of the model. It is found that a tightening of the nancial friction reduces the steady state rate of interest, and that non-lineaities exist in this relationship. This result occurs endogenously in the model subsequent to a change in the constraint. The model also supports hypotheses from the secular stagnation literature by way of illustrating that population ageing and higher debt levels canleave an economy more likely to encounter episodes of persistent low interest rates.
    Keywords: Financial Frictions, Overlapping Generations, Interest Rate
    JEL: E21 E43 D91
    Date: 2015–10

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