nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒11‒01
34 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. "Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935-75" By Josh Ryan-Collins
  2. Monetary policy in Turkey after Central Bank independence By Gürkaynak, Refet S.; Kantur, Zeynep; Tas, M. Anil; Yildirim, Secil
  3. Completing the unfinished house: Towards a genuine economic and monetary union? By Issing, Otmar
  4. Government and private e-money-like systems: federal reserve notes and national bank notes By Weber, Warren E.
  5. Central bank credibility and the expectations channel: Evidence based on a new credibility index By Grégory Levieuge; Yannick Lucotte; Sébastien Ringuedé
  6. Stock returns over the FOMC cycle By Annette Vissing-Jorgensen; Adair Morse; Anna Cieslak
  7. "Money Creation under Full-reserve Banking: A Stock-flow Consistent Model" By Patrizio Laina
  8. Notes on the Underground: Monetary Policy in Resource-Rich Economies By Andrea Ferrero; Martin Seneca
  9. The Role of Uncertain Government Preferences For Fiscal and Monetary Policy Interaction By Olga S. Kuznetsova; Sergey A. Merzlyakov
  10. From Karlsruhe, with love?: questioning the constitutionality of unconventional monetary policy By Michael Wilkinson
  11. Estimating New Zealand’s neutral interest rate By Adam Richardson; Rebecca Williams
  12. Risk, Intermediate Input Prices and Missing Deflation During the Great Recession By Engin Kara; Ahmed Jamal Pirzaday
  13. Does the Fisher Hypothesis Hold in Sweden? An Analysis of Long-Term Interest Rates under the Regime of Inflation Targeting By Takayasu Ito
  14. Did monetary forces cause the Hungarian crises of 1931? By Flora Macher
  15. Real Money and Economic Growth By BLINOV, Sergey
  16. Monetary Seigniorage in an Emerging Economy: Is there a scope for "free lunch" in financing public investment? By Chakraborty, Lekha S
  17. Modern Monetary Circuit Theory, Stability of Interconnected Banking Network, and Balance Sheet Optimization for Individual Banks By Alexander Lipton
  18. Lending-of-last-resort is as lending-of-last-resort does: Central bank liquidity provision and interbank market functioning in the euro area By Garcia de Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
  19. Central Bank Independence and Inflation in Transition Economies: A Comparative Meta-Analysis with Developed and Developing Economies By Iwasaki, Ichiro; Uegaki, Akira
  20. Euro crash risk By Kräussl, Roman; Lehnert, Thorsten; Senulyte, Sigita
  21. Exchanging Goods Using Valuable Money By J. V. Howard
  22. Tales of Transition Paths: Policy Uncertainty and Random Walks By Matthes, Christian; Hollmayr, Josef
  23. Global Economic Divergence and Portfolio Capital Flows to Emerging Markets By Zeyyad Mandalinci; Haroon Mumtaz
  24. Gold, currencies and market efficiency By Ladislav Kristoufek; Miloslav Vosvrda
  25. Dynamics of Exchange Rates and Capital Flows By Matteo Maggiori; Xavier Gabaix
  26. A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations By Chan, Joshua C C; Clark, Todd E.; Koop, Gary
  27. Monetary policy in Argentina: From the inflation of the 1970s to the default of the new millennium By Ferrandino, Vittoria; Sgro, Valentina
  28. Capital Controls as an Instrument of Monetary Policy By Ignacio Presno; Scott Davis
  29. Macroeconomic Effects of Oil Price Fluctuations on Emerging and Developed Economies in a Model Incorporating Monetary Variables By Taghizadeh-Hesary, Farhad; Yoshino, Naoyuki
  30. The Coming U.S. Interest Rate Tightening Cycle: Smooth Sailing or Stormy Waters? By Carlos Arteta; M. Ayhan Kose; Franziska Ohnsorge; Marc Stocke
  31. Effects of Monetary Policy Shocks on UK Regional Activity: A Constrained MFVAR Approach By Zeyyad Mandalinci
  32. Currency School versus Banking School: an ongoing confrontation By Charles Goodhart; Meinhard Jensen
  33. Virtual Currency and the Financial System: The Case of Bitcoin By Chowdhury, Abdur; Mendelson, Barry K.
  34. Global Imbalances and Currency Wars at the ZLB By Emmanuel Farhi; Ricardo J. Caballero; Pierre-Olivier Gourinchas

  1. By: Josh Ryan-Collins
    Abstract: Historically high levels of private and public debt coupled with already very low short-term interest rates appear to limit the options for stimulative monetary policy in many advanced economies today. One option that has not yet been considered is monetary financing by central banks to boost demand and/or relieve debt burdens. We find little empirical evidence to support the standard objection to such policies: that they will lead to uncontrollable inflation. Theoretical models of inflationary monetary financing rest upon inaccurate conceptions of the modern endogenous money creation process. This paper presents a counter-example in the activities of the Bank of Canada during the period 1935-75, when, working with the government, it engaged in significant direct or indirect monetary financing to support fiscal expansion, economic growth, and industrialization. An institutional case study of the period, complemented by a general-to-specific econometric analysis, finds no support for a relationship between monetary financing and inflation. The findings lend support to recent calls for explicit monetary financing to boost highly indebted economies and a more general rethink of the dominant New Macroeconomic Consensus policy framework that prohibits monetary financing.
    Keywords: Monetary Policy; Monetary Financing; Inflation; Central Bank Independence; Fiscal Policy; Debt; Credit Creation
    JEL: B22 B25 E02 E12 E31 E42 E51 E52 E58 E63 N12 N22 O43
    Date: 2015–10
  2. By: Gürkaynak, Refet S.; Kantur, Zeynep; Tas, M. Anil; Yildirim, Secil
    Abstract: We present an accessible narrative of the Turkish economy since its great 2001 crisis. We broadly survey economic developments and pay particular attention to monetary policy. The data suggests that the Central Bank of Turkey was a strong inflation targeter early in this period but began to pay less attention to inflation after 2009. Loss of the strong nominal anchor is visible in the break we estimate in Taylor-type rules as well as in asset prices. We also argue that recent discrete jumps in Turkish asset prices, especially the exchange value of the lira, are due more to domestic factors. In the post-2009 period the Central Bank was able to stabilize expectations and asset prices when it chose to do so, but this was the exception rather than the rule.
    Keywords: Turkey,CBRT,monetary policy,fiscal policy
    JEL: E52 E62 E31 E32 E02
    Date: 2015
  3. By: Issing, Otmar
    Abstract: [I. EMU, a Unique Experiment] The European Monetary Union (EMU) represents an unprecedented institutional arrangement. Never before in history have states, while maintaining their individual sovereignties, voluntarily renounced their national currencies in favour of a new common currency and ceded their authority over monetary policy to a supranational central bank. It can therefore be said that on January 1, 1999, when this new currency - the euro - was adopted, a bold experiment began, the outcome of which is still under debate 16 years later. This experiment has three dimensions - political, economic and monetary integration - which form the legs of a new and difficult “triangle” (Issing 2004). While the establishment of the European Central Bank (ECB) solved the monetary challenge on the institutional level, the problem of conducting a “one-size-fits-all” monetary policy continues to be a tremendous task due to economic divergences across the eurozone countries. [...]
    Date: 2015
  4. By: Weber, Warren E. (Bank of Canada, Federal Reserve Bank of Atlanta, University of South Carolina)
    Abstract: The period from 1914 to 1935 in the United States is unique in that it was the only time that both privately issued bank notes (national bank notes) and central-bank-issued bank notes (Federal Reserve notes) were simultaneously in circulation. This paper describes some lessons relevant to e-money from the U.S. experience during this period. It argues that Federal Reserve notes were not issued to be a superior currency to national bank notes. Rather, they were issued to enable the Federal Reserve System to act as a lender of last resort in times of financial stress. It also argues that the reason eventually to eliminate national bank notes was that they were potentially a source of bank reserves. As such, they could have threatened the Federal Reserve System's control of the reserves of the banking system and thereby the Fed's control of monetary policy.
    Keywords: Bank notes; e-money; financial services
    JEL: E41 E42 E58
    Date: 2015–08–01
  5. By: Grégory Levieuge; Yannick Lucotte; Sébastien Ringuedé
    Abstract: This article investigates the relationship between central bank credibility and the volatility of the key monetary policy instrument. Two main contributions are proposed. First, we propose a time-varying measure of central bank credibility based on the gap between inflation expectations and the official inflation target. While this new index addresses the main limitations of the existing indicators, it also appears particularly suited to assess the monetary experiences of a large sample of inflation-targeting emerging countries. Second, by means of EGARCH estimations, we formally prove the existence of a negative effect of credibility on the volatility of the short-term interest rate. Thus, in line with the expectations channel of monetary policy, the higher the credibility of the central bank, the lower the need to move its instruments to efficiently fulfill its objective.
    Keywords: Credibility, Inflation targeting, Emerging countries, EGARCH, Expectations
    JEL: E43 E52 E58
    Date: 2015
  6. By: Annette Vissing-Jorgensen (University of California at Berkeley); Adair Morse (University of California at Berkeley); Anna Cieslak (Northwestern University)
    Abstract: We document that since 1994 the US equity premium follows an alternating weekly pattern measured in FOMC cycle time, i.e. in time since the last Federal Open Market Committee meeting. The equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day). We show that this pattern is likely to reflect a risk premium for news (about monetary policy or the macro economy) coming from the Federal Reserve: (1) The FOMC calendar is quite irregular and changes across sub-periods over which our finding is robust. (2) Even weeks in FOMC cycle time do not line up with other macro releases. (3) Volatility in the fed funds futures market and the federal funds market (but not to the same extent in other markets) peaks during even weeks in FOMC cycle time. (4) Information processing/decision making within the Fed tends to happen bi-weekly in FOMC cycle time: Before 1994, when changes to the Fed funds target in between meetings were common, they disproportionately took place during even weeks in FOMC cycle time. In addition, after 2001 Board of Governors discount rate meetings (at which the board aggregates policy requests from regional federal reserve banks and receives staff briefings) tend to take place bi-weekly in FOMC cycle time. As for how the information gets from the Federal Reserve to the market, we rule out the Federal Reserve signaling policy via open market operations post-1994. Furthermore, the high return weeks do not systematically line up with official information releases from the Federal Reserve or with the frequency of speeches by Fed officials. We end with a discussion of quiet policy communications and unintended information flows.
    Date: 2015
  7. By: Patrizio Laina
    Abstract: This paper presents a stock-flow consistent model+ of full-reserve banking. It is found that in a steady state, full-reserve banking can accommodate a zero-growth economy and provide both full employment and zero inflation. Furthermore, a money creation experiment is conducted with the model. An increase in central bank reserves translates into a two-thirds increase in demand deposits. Money creation through government spending leads to a temporary increase in real GDP and inflation. Surprisingly, it also leads to a permanent reduction in consolidated government debt. The claims that full-reserve banking would precipitate a credit crunch or excessively volatile interest rates are found to be baseless.
    Keywords: Full-reserve Banking; Stock-flow Consistency; Money Creation; Banking System
    JEL: E27 E42 E51
    Date: 2015–10
  8. By: Andrea Ferrero; Martin Seneca
    Abstract: How should monetary policy respond to a commodity price shock in a resource-rich economy? As in the baseline New Keynesian model, the central bank of a small oil-exporting economy faces a tradeoff, between the stabilization of domestic infl ation and an appropriately defined output gap. But in our framework the output gap depends on oil technology, and the weight on output gap stabilization is increasing in the importance of the oil sector. Given substantial spillovers to the rest of the economy, optimal policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price infl ation would raise interest rates to limit the infl ationary impact of an exchange rate depreciation.
    Keywords: small open economy, oil export, monetary policy
    JEL: E52 E58 J11
    Date: 2015
  9. By: Olga S. Kuznetsova (National Research University Higher School of Economics); Sergey A. Merzlyakov (National Research University Higher School of Economics)
    Abstract: This paper explores the role of uncertain government preferences for fiscal and monetary policy interaction. Our analysis shows that the uncertainty about government preferences does not affect the macroeconomic equilibrium if the fiscal multiplier is known. In the case of multiplicative uncertainty, uncertain government preferences make fiscal policy more contractionary, while monetary policy becomes more expansionary. This leads to higher expected inflation and lower expected output, which means a stronger inflation bias
    Keywords: fiscal and monetary policy interaction, multiplicative uncertainty, uncertain preferences.
    JEL: E52 E58 E62 E63
    Date: 2015
  10. By: Michael Wilkinson
    Abstract: Does the European Central Bank (ECB) have a mandate to do ‘whatever it takes’ to save the Euro? Not according to the German Constitutional Court, which in February this year delivered its judgment from Karlsruhe on the ECB’s Outright Monetary Transactions programme (OMT). Will the European Court of Justice concur, or will it attempt to resist the might of the most powerful domestic Court in Europe?
    JEL: F3 G3
    Date: 2014–06
  11. By: Adam Richardson; Rebecca Williams (Reserve Bank of New Zealand)
    Abstract: The neutral interest rate is an important concept in monetary policy decision making, helping the Reserve Bank understand the extent to which current policy settings are either contractionary or expansionary with respect to the macroeconomy. This note outlines the range of technical approaches the Reserve Bank uses to estimate the nominal neutral 90-day bank bill rate. These approaches help inform the monetary policy judgements of the Bank’s committees.
    Date: 2015–09
  12. By: Engin Kara (Department of Economics, Ozyegin University); Ahmed Jamal Pirzaday
    Abstract: During the Great Recession, despite the large fall in output, inflation did not fall much. This is known as the missing deflation puzzle. In this paper, we develop and estimate a New Keynesian Dynamic Stochastic General Equilibrium model to provide an explanation for the puzzle. The new model allows for time-varying volatility in cross-sectional idiosyncratic uncertainty and accounts for the changes in intermediate goods prices. Our model can forecast the large fall in output and stable inflation during the Great Recession. We show that inflation did not fall much because intermediate goods prices were increasing during the Great Recession.
    Keywords: Price Mark-up Shocks; Great Recession; Inflation; DSGE; Intermediate Inputs.
    JEL: E52 E58
    Date: 2015–11
  13. By: Takayasu Ito (Meiji University)
    Abstract: This paper examines the validity of the Fisher hypothesis in Sweden by analyzing inflation expectations and long-term interest rates from January 1993 to February 2015 under a regime of inflation targeting. The Fisher hypothesis holds for the maturities of 2, 3, 4, 5, and 7 but not 10 years. The results show that changes in inflation expectations move in the same direction and degree as nominal long-term interest rates for the maturities of 2, 3, 4, 5, and 7 years. This can primarily be attributed to the credibility of the inflation-targeting framework in Sweden for the last 20 years and the success it has achieved in locking inflation expectations into the target range within these maturities. In the maturity of 10 years, this credibility has never been as certain.
    Keywords: Fisher Hypothesis, Inflation Targeting, Long Term Interest Rates
    JEL: E43 G19
  14. By: Flora Macher (London School of Economics)
    Abstract: The purpose of this paper is to analyze the causes of the Hungarian financial crisis of 1931. The prevailing view is that the episode was caused by monetary forces. After the October 1929 Wall Street crash, the already indebted country with high government deficits was unfavorably impacted by the reduced availability of foreign capital and deteriorating terms of trade. These factors together depleted the foreign currency reserves of the country and culminated in a currency crisis in 1931. Using a large macroeconomic dataset and relying on a database for the banking sector, both manually built from contemporary statistical publications and archival records, this paper develops a new interpretation to the Hungarian crisis of 1931 and shows that the financial system had a central role in this episode and it was, in fact, in the banking system where the origins of the crisis can be located. The causes behind banksÕ distress were a restrictive monetary policy in the aftermath of an early currency crisis in October 1928, an agricultural crisis in 1930, and an unorthodox fiscal policy which offered state-guarantees to banks and thereby further increased their exposure to the crisis-ridden agriculture.
    Date: 2015–10
  15. By: BLINOV, Sergey
    Abstract: People recognized the important role played by money in the economy a long time ago. However, it was only approximately 50 years ago that Milton Friedman convincingly proved that change in the quantity of money in the economy might have a very serious effect on the GDP. This paper reveals a most intimate non-linear linkage between growth of real GDP and growth of real money supply using the example of a number of countries and unions (Russia, Japan, Brazil and Eurozone). It is shown that exponential growth of real money supply corresponds to linear growth of real GDP. Hypotheses are advanced which explain such a nature of the inter-linkage. A number of practical recommendations are given which pertain, first of all, to monetary policy.
    Keywords: GDP, economic growth, money supply, monetary policy, Central Banks
    JEL: E41 E50 E51 E52 E58 O11 O23 O42
    Date: 2015–10–27
  16. By: Chakraborty, Lekha S
    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 monetary 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 monetary Seigniorage Laffer curve.
    Keywords: Fiscal-Monetary Policy Co-ordination, Seigniorage, Fiscal Deficits, error correction mechanism, Seigniorage Laffer Curve
    JEL: E5 E52 E58 E62 E63 H62
    Date: 2014
  17. By: Alexander Lipton
    Abstract: A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central banks as system stabilizers and liquidity providers is elucidated. It is shown how in the process of money creation banks become naturally interconnected. A novel Extended Structural Default Model describing the stability of the Interconnected Banking Network is proposed. The purpose of banks' capital and liquidity is explained. Multi-period constrained optimization problem for banks's balance sheet is formulated and solved in a simple case. Both theoretical and practical aspects are covered.
    Date: 2015–10
  18. By: Garcia de Andoain, Carlos; Heider, Florian; Hoerova, Marie; Manganelli, Simone
    Abstract: This paper investigates the impact of ample liquidity provision by the European Central Bank on the functioning of the overnight unsecured interbank market from 2008 to 2014. We use novel data on interbank transactions derived from TARGET2, the main euro area payment system. To identify exogenous shocks to central bank liquidity, we exploit the timing of ECB liquidity operations and use a simple structural vector auto-regression framework. We argue that the ECB acted as a de-facto lender-of-last-resort to the euro area banking system and identify two main effects of central bank liquidity provision on interbank markets. First, central bank liquidity replaces the demand for liquidity in the interbank market, especially during the financial crisis (2008-2010). Second, it increases the supply of liquidity in the interbank market in stressed countries (Greece, Italy and Spain) during the sovereign debt crisis (2011-2013).
    Keywords: central bank policy; financial crisis; interbank markets; lender-of-last-resort; sovereign debt crisis
    JEL: E58 F36 G01 G21
    Date: 2015–10
  19. By: Iwasaki, Ichiro; Uegaki, Akira
    Abstract: This paper aims to evaluate the central bank reforms in Central and Eastern Europe and the former Soviet countries through a comparative meta-analysis between studies of transition economies and those of other developed and developing economies that empirically examined the effect of central bank independence (CBI) on inflation. The results of a meta-synthesis using a total of 282 estimates collected from existing literature indicates that both transition and non-transition studies have successfully identified a negative relationship between CBI and inflation. Moreover, our meta-regression analysis suggested that the choice of estimator, inflation variable type, degree of freedom, and quality level of the study strongly affected the empirical results concerning transition economies. We also found that no significant difference exists between the two types of studies in terms of both effect size and statistical significance so long as we control for the degree of freedom and quality level of the study, implying that the socioeconomic setting of the society has so substantially developed in transition economies that the relation between CBI and its disinflation effect is observed in the same way as in non-transition economies.
    Keywords: central bank independence, inflation, transition economies, Central and Eastern Europe, former Soviet Union, meta-analysis, publication selection bias
    JEL: E31 E58 G18 P24 P34
    Date: 2015–08
  20. By: Kräussl, Roman; Lehnert, Thorsten; Senulyte, Sigita
    Abstract: We identify crucial events during the European sovereign debt crisis and investigate their impact on the euro currency. In particular, we analyse how specific announcements related to vulnerable Eurozone member states, European Central Bank (ECB) actions, and credit rating downgrades affect the value and the crash risk of the euro. We proxy the value changes of the euro by its abnormal foreign exchange (FX) rate returns with respect to 35 currencies. The crash risk of the euro is proxied by the conditional skewness of the FX rate return distribution with respect to the same currencies. We find that the market reacts positively to news related to countries under the European and International Monetary Fund (IMF) rescue umbrella. We discover that ECB actions on average result in a euro depreciation on the day of the announcement reflecting obvious concerns of market participants, but the effect is partly corrected the day after. Our analysis also shows that sovereign credit rating downgrades tend to lead to a depreciation of the euro and, more importantly, to an increase of the euro crash risk. Interestingly, we find that specific announcements about Greece on average do not substantially affect the euro exchange rate directly, however, it does have an overall significant effect on the euro rash risk, imposing a substantial risk for the stability of the common currency in the Eurozone.
    Keywords: Sovereign debt crisis,News announcements,Euro value,Euro crash risk
    JEL: G01 G14
    Date: 2015
  21. By: J. V. Howard
    Abstract: A group of people wishes to use money to exchange goods efficiently over several time periods. However, there are disadvantages to using any of the goods as money, and in addition fiat money issued in the form of notes or coins will be valueless in the final time period, and hence in all earlier periods. Also, Walrasian market prices are determined only up to an arbitrary rescaling. Nevertheless we show that it is possible to devise a system which uses money to exchange goods and in which money has a determinate positive value. The mechanism controls the flow rather than the stock of money: it introduces some trading frictions, some redistribution of wealth, and some distortion of prices, but these effects can all be made small.
    Date: 2015–10
  22. By: Matthes, Christian (Federal Reserve Bank of Richmond); Hollmayr, Josef (Deutsche Bundesbank)
    Abstract: What happens when fiscal and/or monetary policy changes systematically? We construct a DSGE model in which agents have to estimate fiscal and monetary policy rules and assess how uncertainty surrounding the conduct of policymakers influences transition paths after policy changes. We find that policy changes of the magnitude often considered in the literature can lead private agents to hold substantially different views about the nature of equilibrium than would be predicted by a full information analysis. In particular, random walk-like behavior can be observed for a large number of periods in equilibrium, even though the models we use admit stationary dynamics under full-information rational expectations.
    JEL: D83 E32 E62
    Date: 2015–10–23
  23. By: Zeyyad Mandalinci (Queen Mary University of London); Haroon Mumtaz (Queen Mary University of London)
    Abstract: This paper studies the role of global and regional variations in economic activity and policy in developed world in driving portfolio capital flows (PCF) to emerging markets (EMs) in a Factor Augmented Vector Autoregressive (FAVAR) framework. Results suggest that PCFs to EMs depend mainly on economic activity at the global level and monetary policy in America, positively on the former and negatively on the latter. In contrast, economic activity and policy shocks in Europe and Asia contribute significantly less to variations in PCFs to EMs. Hence, PCFs are driven by not only common shocks across all developed countries, but also variations in specific regions. This implies that economic divergence in the developed world can have significant effects on EMs via PCFs.
    Keywords: Portfolio capital flows; Bayesian analysis, Factor model, VAR, Emerging markets
    JEL: C11 C32 E30 E52 E58 F32
    Date: 2015–10
  24. By: Ladislav Kristoufek; Miloslav Vosvrda
    Abstract: Gold and currency markets form a unique pair with specific interactions and dynamics. We focus on the efficiency ranking of gold markets with respect to the currency of purchase. By utilizing the Efficiency Index (EI) based on fractal dimension, approximate entropy and long-term memory on a wide portfolio of 142 gold price series for different currencies, we construct the efficiency ranking based on the extended EI methodology we provide. Rather unexpected results are uncovered as the gold prices in major currencies lay among the least efficient ones whereas very minor currencies are among the most efficient ones. We argue that such counterintuitive results can be partly attributed to a unique period of examination (2011-2014) characteristic by quantitative easing and rather unorthodox monetary policies together with the investigated illegal collusion of major foreign exchange market participants, as well as some other factors discussed in some detail.
    Date: 2015–10
  25. By: Matteo Maggiori (Harvard University); Xavier Gabaix (Stern School of Business)
    Abstract: We explore the quantitative implications of a framework where exchange rates are directly affected by financiers' risk bearing capacity and capital flows. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. We calibrate the model show that it can account for the variability and correlation not only of financial variables, such as the exchange rate and capital flows, but also real variables, such as exports imports and consumption. The model can account for the "excess volatility" of the exchange rate, Backus and Smith puzzle, the failure of UIP, and the exchange rate disconnect. We also consider how policy interventions (especially interventions in the FX market) can mitigate the excess volatility and increase welfare.
    Date: 2015
  26. By: Chan, Joshua C C (Australian National University); Clark, Todd E. (Federal Reserve Bank of Cleveland); Koop, Gary (University of Strathclyde)
    Abstract: A knowledge of the level of trend inflation is key to many current policy decisions, and several methods of estimating trend inflation exist. This paper adds to the growing literature which uses survey-based long-run forecasts of inflation to estimate trend inflation. We develop a bivariate model of inflation and long-run forecasts of inflation which allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely unrelated, or anything in between. By including stochastic volatility and time-variation in coefficients, it extends existing methods in empirically important ways. We use our model with a variety of inflation measures and survey-based forecasts. We find that long-run forecasts can provide substantial help in refining estimates of trend inflation over popular alternatives. But simply equating trend inflation with the long-run forecasts is not appropriate.
    Keywords: trend inflation; inflation expectations; state space model; stochastic volatility
    JEL: C11 C32 E31
    Date: 2015–10–21
  27. By: Ferrandino, Vittoria; Sgro, Valentina
    Abstract: Since the end of World War II, Argentina has been through an uninterrupted series of financial/fiscal and monetary crises that have gradually eroded the credibilityof the economic institutions of the country. In the period from 1970 to 1990 alone, the Argentine economy experienced seven currency crises and three banking crises. The main objective of this contribution is to investigate the reasons for economic policy choices that, since the military dictatorship of Colonel Perón, have led the country to default, causing unemployment, runs on banks and popular uprisings.
    Keywords: monetary policy,financial crisis,Argentina
    JEL: N16 N26 N46
    Date: 2015
  28. By: Ignacio Presno (Universidad de Montevideo); Scott Davis (Federal Reserve Bank of Dallas)
    Abstract: Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy makers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by foreign capital inflows and outflows, the adoption of temporary capital controls can lead to a significant welfare improvement. The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.
    Date: 2015
  29. By: Taghizadeh-Hesary, Farhad (Asian Development Bank Institute); Yoshino, Naoyuki (Asian Development Bank Institute)
    Abstract: The goal of this paper is to examine the impact of crude oil price movements on two macro variables, the gross domestic product (GDP) growth rate and the consumer price index (CPI) inflation rate, in three countries, the People’s Republic of China (an emerging economy), Japan, and the United States (developed economies), in a model incorporating monetary variables (money supply and exchange rate). The main objective of this research is to investigate whether these economies are still reactive to oil price movements and compare their reactions. Monetary variables are included in this survey because our earlier research showed that they have a significant role in oil price determination. To assess the relationship between crude oil prices and macro variables we adopt an N-variable structural vector autoregression (SVAR) model. The results suggest that the impact of oil price fluctuations on developed oil importers’ GDP growth is much milder than on the GDP growth of an emerging economy. On the other hand, however, the impact of oil price fluctuations on the People’s Republic of China’s inflation rate was found to be milder than in the two developed countries that were examined.
    Keywords: Oil; GDP growth rate; CPI inflation; developed economies; emerging economies
    JEL: E31 O57 Q43
    Date: 2015–10–27
  30. By: Carlos Arteta (World Bank, Development Prospects Group); M. Ayhan Kose (World Bank, Development Prospects Group); Franziska Ohnsorge (World Bank, Development Prospects Group); Marc Stocke (World Bank, Development Prospects Group)
    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: 2015–11
  31. By: Zeyyad Mandalinci (Queen Mary University of London)
    Abstract: This paper examines the effects of monetary policy shocks on UK regional economic growth and dispersion in a novel Constrained Mixed Frequency Vector Autoregressive framework. Compared to a standard MFVAR, the model partially accounts for missing quarterly observations for regional growth by exploiting national growth data. Results suggest significant heterogeneity in the importance of monetary policy shocks across regions. Mortgage indebtedness is highly related to regional sensitivity to monetary policy shocks. Also, there is some evidence suggesting that regions with larger share of manufacturing output and small and medium sized firms in employ ment are more sensitive to monetary policy shocks.
    Keywords: Regional growth, Monetary policy, Bayesian analysis, VAR, Mixed frequency data
    JEL: E01 E3 E52 C11 C32 C5
    Date: 2015–10
  32. By: Charles Goodhart; Meinhard Jensen
    Abstract: The Chicago Plan and Laina’s full-reserve banking proposal are themselves extensions of Ricardo’s earlier proposal for separating money creation from bank intermediation, as incorporated in the 1844 Bank Act. This was the key Currency School position, which was opposed then and subsequently by the Banking School. In this Commentary we outline the criticisms which Banking School supporters have made over the centuries of the Currency School, and indicate what alternative principles the Banking School has proposed.
    Keywords: Currency School and Banking School; rules vs discretion; money vs quasi-money; evolutionary vs static banking structure.
    JEL: N0 F3 G3
    Date: 2015
  33. By: Chowdhury, Abdur (Department of Economics Marquette University); Mendelson, Barry K. (Capital Market Investments, Inc.)
    Date: 2013–12
  34. By: Emmanuel Farhi; Ricardo J. Caballero; Pierre-Olivier Gourinchas
    Abstract: This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap--a phenomenon we dub the \reserve currency paradox;" (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic domestic economy at the expense of other economies; (iv) While more price and wage exibility exacerbates the risk of adeflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage exibility. We use our model to shed light on the evolution of global imbalances,interest rates, and exchange rates since the beginning of the global financial crisis.
    Date: 2015–01

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