nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒11‒07
24 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Unconventional Monetary Policy Tools and Bank Interest Rates By Mahir Binici; Hakan Kara; Pınar Özlü
  2. Monetary Regime Choice and Optimal Credit Rationing at the Official Rate: The Case of Russia By Andrey G. Shulgin
  3. Implicit Asymmetric Exchange Rate Intervention under Inflation Targeting Regimes By Ahmet Benlialper; Hasan Cömert; Nadir Öcal
  4. "The Malady of Low Global Interest Rates" By Tanweer Akram
  5. The International Price System By Gita Gopinath
  6. Currency intervention and the global portfolio balance effect: Japanese lessons By Petra Gerlach-Kristen; Robert N McCauley; Kazuo Ueda
  7. Mortgages and Monetary Policy By Garriga, Carlos; Kydland, Finn E.; Sustek, Roman
  8. Liquidity Risk, Bank Networks, and the Value of Joining the Federal Reserve System By Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
  9. The Challenges of the EU Banking Union - will it succeed in dealing with the next financial crisis? By Ida-Maria Weirsøe FALLESEN
  10. Exchange Market Pressure in OECD and Emerging Economies: Domestic vs. External Factors and Capital Flows in the Old and New Normal By Joshua Aizenman; Mahir Binici
  11. Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis By Mariana García-Schmidt; Michael Woodford
  12. How Important Are Nominal Shocks For Real Exchange Rate Fluctuations? Evidence From Inflation Targeting Emerging Market Economies By M. Fatih Ekinci; Fatma Pınar Erdem; Zübeyir Kılınç
  13. Optimal monetary policy in a currency union with labour market heterogeneity By Nikolas Kontogiannis
  14. On the Welfare and Cyclical Implications of Moderate Trend Inflation By Guido Ascari; Louis Phaneuf
  15. Microeconometric evidence on demand-side real rigidity and implications for monetary non-neutrality By Günter W. Beck; Sarah M. Lein
  16. Threshold-based forward guidance: hedging the zero bound By Boneva, Lena; Harrison, Richard; Waldron, Matt
  17. The effects of elections on monetary policy in Turkey: An evaluation in terms of Political Business Cycle Theory By Filiz Eryılmaz
  18. Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products By Tomas Havranek; Zuzana Irsova; Jitka Lesanovska
  19. The First Arrow Hitting the Currency Target: A Long-run Risk Perspective By KANO, Takashi; WADA, Kenji
  20. Global Imbalances and Currency Wars at the ZLB. By Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
  21. Measuring the natural rate of interest redux By Laubach, Thomas; Williams, John C.
  22. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Ben Cheikh, Nidhaleddine; Rault, Christophe
  23. Commonality in Liquidity: Effects of Monetary Policy and Macroeconomic Announcements By Ahmet Sensoy
  24. Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence By Olivier Blanchard; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon

  1. By: Mahir Binici (Central Bank of Turkey); Hakan Kara (Central Bank of Turkey); Pınar Özlü (Central Bank of Turkey)
    Abstract: In the aftermath of the global crisis, to alleviate the dilemma between price stability and financial stability and to reduce macro financial risks, many central banks in emerging economies developed unconventional policies and heavily used macro-prudential tools. In this process, the Central Bank of Turkey used a policy combination of interest rate corridor, one-week repo rate, reserve requirements, foreign exchange intervention and liquidity policy. In this study, using bank level data, we investigate the impact of alternative policy tool on the credit and deposit rates. Accordingly, we document that the impact of policy instruments on deposit and loan rates differs; implying different policy instruments could have significant implications for bank behavior.
    Date: 2015
  2. By: Andrey G. Shulgin (National Research University Higher School of Economics)
    Abstract: Stabilizing monetary policy in a small open economy is constrained by the open economy trilemma. In a crisis this constraint may not allow the Central Bank to cut interest rates because this may cause significant capital flight and the ensuing problems. In this paper we investigate whether the Central Bank’s credit rationing at the official rate (CROR) may soften the open economy trilemma constraint and improve the results of monetary policy for different monetary regimes. We construct a DSGE model appropriate for analysing the forward-looking behaviour of households facing a non-zero probability of credit rationing at the official rate. A simulation of estimated on a Russian data model and welfare optimization exercises allow us to contribute to the question of optimal monetary regime choice and to analyse the role of credit rationing for different monetary regimes. We have found significant credit rationing in the quarterly Russian data of 2001–2014. The share of liquidity constrained (non-Ricardian) households and the probability of CROR are estimated as 22% and 66% respectively. Welfare maximization exercises reveal a trade off between low-inflation and high-welfare solutions and favour of a floating exchange rate regime. Researching CROR gives mixed results. On the one hand we found the optimal value of the probability of CROR in both exchange rate-based and Taylor rule-based models. On the other hand the resulting improvement in welfare is very small.
    Keywords: DSGE; Bayesian estimation; intermediate exchange rate regime; rationing of credit; exchange rate rule; Russia
    JEL: E52 E58 F41
    Date: 2015
  3. By: Ahmet Benlialper (Ipek University, Department of Economics); Hasan Cömert (Middle East Technical University, Department of Economics); Nadir Öcal (Middle East Technical University, Department of Economics)
    Abstract: In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks to curb inflationary pressures, we ask whether central banks in developing countries have a different policy stance with respect to depreciation and appreciation. We specifically claim that during the period under investigation (2002-2008), central banks in developing countries which implement IT have tolerated appreciation but fought against depreciation in order to hit their inflation targets. In order to support our claim, we analyze two components of central bank’s response to exchange rate movements. First, we analyze central banks’ interest rate decisions by estimating a non-linear monetary policy reaction function using a panel threshold model. Evidence suggests that whereas central banks respond to depreciation pressures, they remain inactive to appreciation. Secondly, we construct a probit model in order to investigate the determinants of foreign exchange intervention of central banks. We find that depreciation has an explanatory power for sale interventions whereas appreciation does not explain purchase interventions. Hence, we conclude that central banks’ policy stance in IT developing countries with respect to exchange rate movements is asymmetric favoring appreciation. In this sense, IT seems to contribute to the ignorance of dangers regarding to financial flows leading to appreciation of currencies in developing countries.
    Keywords: Inflation Targeting, Central Banking, Developing Countries, Exchange Rates
    JEL: E52 E58 E31 F31
    Date: 2015
  4. By: Tanweer Akram
    Abstract: Long-term interest rates in advanced economies have been low since the global financial crisis. However, in the United States the Federal Reserve could begin to hike its policy rate, the federal funds target rate, before the end of the year. In the United Kingdom, the Bank of England could follow suit. What is the outlook for global long-term interest rates? What are the risks around interest rates? What can policymakers do to cure the malady of low interest rates? It is argued that global interest rates are likely to stay low in the remainder of this year and the first half of next year due to a combination of domestic and international factors, even if a few central banks gradually begin to tighten monetary policy. The cure for this malady lies in proactive fiscal policy and measures to support job growth. Boosting effective demand and promoting higher wages and real disposable income would help lift inflation rates close to their targets and raise long-term interest rates.
    Keywords: Government Bond Yields; Global Interest Rates; Long-Term Interest Rates
    JEL: E43 E50 E60
    Date: 2015–10
  5. By: Gita Gopinath
    Abstract: I define and provide empirical evidence for an "International Price System" in global trade, employing data for thirty-five developed and developing countries. This price system is characterized by two features. First, the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency. Second, international prices, in their currency of invoicing, are not very sensitive to exchange rates at horizons of up to two years. In this system, a good proxy for a country's inflation sensitivity to exchange rate fluctuations is the fraction of its imports invoiced in a foreign currency. U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it. Exchange rate depreciations (appreciations) make U.S. exports cheaper (expensive), while for other countries they mainly raise (lower) mark-ups and hence profits. U.S. monetary policy has spillover effects on inflation in other countries, while spillovers from other countries monetary policies on to U.S. inflation are more muted.
    JEL: E31 F0 F41
    Date: 2015–10
  6. By: Petra Gerlach-Kristen (Swiss National Bank); Robert N McCauley (Bank for International Settlements); Kazuo Ueda (The University of Tokyo)
    Abstract: This paper extends the analysis of Bernanke et al (2004) to show that the official Japanese purchases of foreign exchange in 2003-04 seem to have lowered long-term interest rates not only in the United States, but in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that global portfolio rebalancing spread the resulting decline in US dollar yields to bond markets in other currencies, thus easing global monetary conditions. We also show that the global portfolio balance effect is detectable in the response of yields to large Japanese intervention in data before and after 2003/04, though the effect is weaker. While our findings contribute to a growing body of work that points to common responses across bond markets to official portfolio shifts in the form of large-scale bond purchases ("quantitative easing"), our analysis has the advantage of focusing on a pure portfolio shock.
    Date: 2015–10
  7. By: Garriga, Carlos (Federal Reserve Bank of St. Louis); Kydland, Finn E. (University of California–Santa Barbara and NBER); Sustek, Roman (University of London and Centre for Macroeconomics)
    Abstract: Mortgages are long-term nominal loans. Under incomplete asset markets, monetary policy is shown to affect housing investment and the economy through the cost of new mortgage borrowing and the value of payments on outstanding debt. These channels, distinct from traditional transmission of monetary policy, are evaluated within a general equilibrium model. Persistent monetary policy shocks, resembling the level factor in the nominal yield curve, have larger effects than transitory shocks, manifesting themselves as long-short spread. The transmission is stronger under adjustable- than fixed-rate mortgages. Higher, persistent, inflation benefits homeowners under FRMs, but hurts them under ARMs.
    Keywords: Mortgage finance; monetary policy; general equilibrium; housing investment; redistribution
    JEL: E32 E52 G21 R21
    Date: 2015–10–25
  8. By: Charles W. Calomiris; Matthew Jaremski; Haelim Park; Gary Richardson
    Abstract: Reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the Federal Reserve System. Existing evidence on the post-Federal Reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission. Nevertheless, less than 8 percent of state-chartered banks joined the Federal Reserve in its first decade. Some have speculated that nonmembers could avoid higher costs of the Federal Reserve’s reserve requirements while still obtaining access indirectly to the Federal Reserve discount window through contacts with Federal Reserve members. We find that individual bank attributes related to the extent of banks’ ability to mitigate seasonal loan demand variation predict banks’ decisions to join the Federal Reserve. Consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers, we find that a bank’s position within the interbank network (as a user or provider of liquidity) predicts the timing of its entry into the Federal Reserve System and the effect of Federal Reserve membership on its lending behavior. We also find that indirect access to the Federal Reserve was not as good as direct access. Federal Reserve member banks saw a greater increase in lending than nonmember banks.
    JEL: G21 G28 N22
    Date: 2015–10
  9. By: Ida-Maria Weirsøe FALLESEN (European Commission, DG Competition, Cabinet of Commissioner Margrethe Vestager.)
    Abstract: The EU Banking Union combines micro- and macro-prudential regulation. It aims at breaking the “doom loop” between banks and sovereign debt, promoting financial stability and mitigating the next financial shock to the real EU economy, at the lowest possible cost to the financial institutions and to the taxpayers. Success, or failure, is determined by how the banking union copes with the challenges to its two main pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). Under the SSM, in its new supervisory role, the ECB may be subject to conflicts between the objectives of price and financial stability, and the single-supervisor role may be sub-optimal. Two regulators might have been preferable and more focus on ECB accountability will now be required. The shock-absorbing Single Resolution Fund (SRF), which is part of the SRM, may not have the capacity to deal with a crisis of the size of the one of 2008. Especially as the nature and severity of a future financial crisis cannot be forecasted. The design of the banking union is not the result of theoretical studies, but a political compromise to deal with an acute crisis. The theoretical studies that are included in this paper are not supportive of the banking union in its current form. Nevertheless, there is a good chance that the EU Banking Union may succeed, as ECB supervision of the 123 systemically important banks should contain potential demands on the SRM. In the event of a crisis that is too severe for the banking union to absorb with its current capability, the crucial assumption is that there is political will to rapidly provide new resources. The same applies, if a major financial crisis develops before the banking union is fully operational.
    Keywords: Banking Union, supervision, resolution, Eurozone, financial crisis
    JEL: E42 E52 F33 F36 G01 O52
    Date: 2015–10
  10. By: Joshua Aizenman; Mahir Binici
    Abstract: We study the ways domestic and external global factors (such as risk appetite, global liquidity, U.S. monetary policy, and commodity prices) affected the exchange market pressure before and after the global financial crisis as well as the role of these factors during the Federal Reserve’s tapering episode. Utilizing a comprehensive database on capital controls, we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows [net and gross]. Using quarterly data over the 2000–2014 period and a dynamic panel model estimation, we find that external factors played a significant role in driving exchange market pressure for both OECD countries and emerging market countries, with a larger impact on the latter. While the effect of net capital flows on exchange market pressure is muted, short-term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure. Short-term portfolio flows and long-term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for OECD countries. Capital controls seem to significantly reduce the exchange market pressure although the economic size of this impact is highly dependent on the institutional quality.
    JEL: F3 F31 F33
    Date: 2015–10
  11. By: Mariana García-Schmidt; Michael Woodford
    Abstract: We illustrate a pitfall that can result from the common practice of assessing alternative monetary policies purely by considering the perfect foresight equilibria (PFE) consistent with the proposed rule. In a standard New Keynesian model, such analysis may seem to support the “Neo-Fisherian” proposition according to which low nominal interest rates can cause inflation to be lower. We propose instead an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, a 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 such policies. Our alternative approach implies that a commitment to keep interest rates low should raise inflation and output, though by less than some PFE analyses apply.
    JEL: E31 E43 E52
    Date: 2015–10
  12. By: M. Fatih Ekinci (Central Bank of Turkey); Fatma Pınar Erdem (Central Bank of Turkey); Zübeyir Kılınç (Central Bank of Turkey)
    Abstract: This study compares the importance of the nominal shocks in explaining the real exchange rate fluctuations before and after the adoption of inflation targeting regime in emerging market economies. We follow the structural VAR methodology proposed by Clarida and Gali (1994) to identify the macroeconomic shocks that determine fluctuations in relative output growth, relative inflation and the real exchange rate. The structural decomposition shows that real shocks account for most of the variation in the real exchange rate. Furthermore, findings indicate that the explanatory power of the nominal shocks in the real exchange rate fluctuations have increased after the implementation of the inflation targeting regime.
    Keywords: Okun Kanunu, İşsizlik, Büyüme, Dinamik Panel Veri
    JEL: C32 F31 F41
    Date: 2015
  13. By: Nikolas Kontogiannis (University of Leicester)
    Abstract: I construct a New Keynesian, two-country model with labour market frictions in the search and matching process and real wage rigidity. Following a linear-quadratic approach, I analyse quantitatively the welfare-based optimal monetary policy in a currency union. I allow for labour market heterogeneity among the member states captured by an index based on the real wage rigidity differential. I show that when the optimal monetary policy is conducted, in the presence of productivity shocks, thewelfare loss in the currency union increasesmonotonically with the value of the labour market heterogeneity index. That is based on the key role of the terms of trade which intensify the effects of the shocks. I also draw the implications of labour market heterogeneity for the optimal regime choice by the central bank.
    Keywords: Currency union; Optimal monetary policy; Labour market heterogeneity.
    JEL: E24 E31 E52 F41
    Date: 2015
  14. By: Guido Ascari; Louis Phaneuf
    Abstract: Abstract We offer a comprehensive evaluation of the welfare and cyclical implications of moderate trend inflation. In an extended version of a medium-scale New Keynesian model, recent proposals to increase trend inflation from 2 to 4 percent would generate a consumption-equivalent welfare loss of 3.7 percent based on the non-stochastic steady state and of 6.9 percent based on the stochastic mean. Welfare costs of this magnitude are driven by four main factors: i) multiperiod nominal wage contracting, ii) trend growth in investment-specific and neutral technology, iii) roundaboutness in the U.S. production structure, and iv) and the interaction between trend inflation and shocks to the marginal efficiency of investment (MEI), insofar that this type of shock is sufficiently persistent. Moreover, moderate trend inflation has important cyclical implications. It interacts much more strongly with MEI shocks than with either productivity or monetary shocks.
    Keywords: Wage and price contracting; trend inflation; trend growth in technology; roundabout production; investment shocks; inflation costs; business cycles.
    JEL: E31 E32
    Date: 2015–11–03
  15. By: Günter W. Beck; Sarah M. Lein (University of Basel)
    Abstract: To model the observed slow response of aggregate real variables to nominal shocks, most macroeconomic models incorporate real rigidities in addition to nominal rigidities. One popular way of modelling such a real rigidity is to assume a non-constant demand elasticity. By using a homescan data set for three European countries, including prices and quantities bought for a large number of goods, in addition to consumer characteristics, we provide estimates of price elasticities of demand and on the degree of demand-side real rigidities. We find that price elasticities of demand are about 4 in the median. Furthermore, we find evidence for demand-side real rigidities. These are, however, much smaller than what is often assumed in macroeconomic models. The median estimate for demand-side real rigidity, the super-elasticity, is in a range between 1 and 2. To quantitatively assess the implications of our empirical estimates, we calibrate a menu-cost model with the estimated super-elasticity. We find that the degree of monetary non-neutrality doubles in the model including demand-side real rigidity, compared to the model with only nominal rigidity, suggesting a multiplier effect of around two. However, the model can explain only up to 6% of the monetary non-neutrality observed in the data, implying that additional multipliers are necessary to match the behavior of aggregate variables.
    Keywords: Demand curve, price elasticity, super-elasticity, price-setting, monetary non-neutrality
    JEL: E30 E31 E50 D12 C3
    Date: 2015
  16. By: Boneva, Lena (Bank of England); Harrison, Richard (Bank of England); Waldron, Matt (Bank of England)
    Abstract: Motivated by policies implemented by some central banks in response to the financial crisis, we use a simple New Keynesian model to study a particular form of forward guidance. We assume that the policy maker makes a state-contingent commitment to hold the policy rate at the zero lower bound (ZLB) in a way that ensures that specific macroeconomic variables (eg inflation) do not breach particular ‘thresholds’. In common with other similar policies, threshold-based forward guidance (TBFG) can be used to stimulate the economy at the ZLB via a commitment to hold the policy rate lower-for-longer than would otherwise have been the case. But TBFG also acts as a hedge against the asymmetric effects of shocks. That is because if further adverse shocks arise, prolonging the recession, exit would be expected to occur later and the policy would provide additional stimulus. In contrast, if positive shocks arrive, so that the economy recovers more quickly than originally expected, exit would be expected to occur sooner, thereby removing some of the policy stimulus. This hedging property of TBFG also means that there is a relatively low incentive for policy makers to renege on the policy, unlike lower-for-longer policies that depend purely on calendar time.
    Keywords: New Keynesian model; monetary policy; zero lower bound; forward guidance; thresholds
    JEL: E17 E31 E52
    Date: 2015–10–23
  17. By: Filiz Eryılmaz (Uludag University)
    Abstract: The Political Business Cycle Theory which emerged as one of the basic areas of discussion of Positive Public Choice Theory, were based on the studies of Kalecki (1943) and Akerman (1947) in the 1940s. Political Business Cycle Theory are examined under two main branches of Traditional Political Business Cycle Theory and Rational Political Business Cycle Theory. While Traditional Political Business Cycle Theory are classified in two groups as Traditional Opportunistic Political Business Cycle Theory and Traditional Partisan Political Business Cycle Theory, the Rational Political Business Cycle Theory are separated as Rational Opportunistic Political Business Cycle Theory and Rational Partisan Political Business Cycle Theory. While voters are assumed to have adaptive expectations in Traditional Political Business Cycle Theory, they are accepted as being rational in Rational Political Business Cycle Theory. Another model of differentiation of the relationship of Political Business Cycle Theory is the Opportunistic or Partisan relationship. In the Opportunistic model, it is assumed that the single aim of the governing parties, which are accepted as equally formed, is to apply policies which will maximise their chances of winning elections. In partisan models, the governing parties are not similar, and are in fact at different ends of the ideological spectrum as right and left-wing (Alesina and Roubini, 1990; Alesina, Roubini and Cohen, 1991). In this study, the Traditional Opportunistic Business Cycle Theory of Nordhaus (1975) was tested for the series of M0, M1, M2, M2Y, the interbank rate, the three-month Turkish lira (TL) time deposit rate, the three-month United States (US) dollar time deposit rate, nominal and real treasury auction rates for the Turkish economy. In the determination of whether or not political opportunistic policies were observed in general elections held in the period 1985M12- 2012M4, the autoregressive model used in studies by Alesina, Cohen ve Roubini (1991, 1992, 1997) of OECD countries and industrial countries, was used in this study.
    Keywords: Political Business Cycle Theory, Traditional Opportunistic Political Business Cycle Theory, Monetary Policy, Box-Jenkins Models, Turkey
    JEL: D72 E62 H62
    Date: 2015
  18. By: Tomas Havranek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Czech National Bank); Zuzana Irsova; Jitka Lesanovska (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic)
    Abstract: An important component of monetary policy transmission is the pass-through from financial market interest rates, directly influenced or targeted by central banks, to the rates that banks charge firms and households. Yet the available evidence on the strength and speed of the pass-through is mixed and varies across countries, time periods, and even individual banks. We examine the pass-through mechanism using a unique data set of Czech loan and deposit products and focus on bank-level determinants of pricing policies, especially cost efficiency, which we estimate employing both stochastic frontier and data envelopment analysis. Our main results are threefold: First, the long-term pass-through was close to complete for most products before the financial crisis, but has weakened considerably afterward. Second, banks that provide high rates for deposits usually charge high loan markups. Third, cost-efficient banks tend to delay responses to changes in the market rate, smoothing loan rates for their clie nts.
    Keywords: Monetary transmission, cost efficiency, bank pricing policies, stochastic frontier analysis, data envelopment analysis
    JEL: E43 E58 G21
    Date: 2015–10
  19. By: KANO, Takashi; WADA, Kenji
    Abstract: This paper reconsiders the successful currency outcome of the first arrow of the Abenomics. The Japanese yen depreciation against the U.S. dollar after the introduction of the first arrow comoves tightly with long-term yield differentials between Japan and the United States. The estimated term structure of the sensitivity of the currency return of the Japanese yen to the two-country interest rate differential indeed shifts up and becomes steeper after the onset of the Abenomics. To explain this structural change in the term structure of the Fama regression coeffiient, we employ a long-run risk model endowed with real and nominal conditional volatilities as in Bansal and Shaliastovich (2013). Under a plausible calibration, the model replicates the structural change when nominal uncertainty dominates real uncertainty in the U.S. bond market. We conjecture that the arrow was shot off from the U.S. side, not the Japan side.
    Keywords: Japanese yen/U.S. dollar exchange rate, Term structure, Fama regression, Long-run risk, Abenomics
    JEL: E31 E37 F41
    Date: 2015–10–29
  20. By: Ricardo J. Caballero; Emmanuel Farhi; 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 economy at the expense of other economies; (iv) While more price and wage flexibility exacerbates the risk of a deflationary 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 flexibility. 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.
    JEL: E0 F3 F4 G01
    Date: 2015–10
  21. By: Laubach, Thomas (Board of Governors of the Federal Reserve System); Williams, John C. (Federal Reserve Bank of San Francisco)
    Abstract: Persistently low real interest rates have prompted the question whether low interest rates are here to stay. This essay assesses the empirical evidence regarding the natural rate of interest in the United States using the Laubach-Williams model. Since the start of the Great Recession, the estimated natural rate of interest fell sharply and shows no sign of recovering. These results are robust to alternative model specifications. If the natural rate remains low, future episodes of hitting the zero lower bound are likely to be frequent and long-lasting. In addition, uncertainty about the natural rate argues for policy approaches that are more robust to mismeasurement of natural rates.
    Date: 2015–10–31
  22. By: Ben Cheikh, Nidhaleddine (ESSCA School of Management); Rault, Christophe (University of Orléans)
    Abstract: This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.
    Keywords: exchange rate pass-through, import prices, sovereign spreads, smooth transition models
    JEL: C22 E31 F31
    Date: 2015–10
  23. By: Ahmet Sensoy
    Abstract: After the recent nancial crisis, few issues receive more attention than central banks' actions or major macroeconomic announcements in markets. Motivated by this fact, we investigate the impact of specic macro-announcements on liquidity commonal-ity in Turkey. Using a weighted spread constructed by a proprietary database of order ows, we reveal that among several developed countries, only U.S. monetarypolicy and macroeconomic announcements raise commonality in liquidity. More-over, commonality is signicantly aected (increased) only beyond the best price quotes, showing that researchers may obtain misleading results on commonality if they consider spread at the best price levels as a liquidity proxy.
    Keywords: Commonality in liquidity, order book, monetary policy, macroeconomic announcements, market microstructure
    JEL: D23 D82 G11 G12
    Date: 2015–10
  24. By: Olivier Blanchard; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon
    Abstract: The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data.
    JEL: F21 F23
    Date: 2015–10

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