nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒11‒15
33 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Do Fed Forecast Errors Matter? By Pao-Lin Tien; Tara M. Sinclair; Edward N. Gamber
  2. Working Paper – WP/15/02- Speculative Flows, Exchange Rate Volatility and Monetary Policy- the South African Experience By Shakill Hassan
  3. Working Paper - WP/14/01- Monetary Policy and Heterogeneous Inflation Expectations in South Africa By Alain Kabundi; Eric Schaling; Modeste Some
  4. The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone By Hertrich, Markus
  5. GENDER AND CENTRAL BANKING By Ibrahima Diouf; Dominique Pépin
  6. Working Paper - WP/13/06- Important channels of transmission of monetary policy shock in South Africa By Nombulelo Gumata; Alain Kabundi; Eliphas Ndou
  7. Monetary Policy and Bank Risk-taking: Evidence from Emerging Economies By Wu, Ji; Jeon, Bang Nam; Chen, Minghua; Wang, Rui
  8. Islamic monetary policy: Is there an alternative of interest rate? By Uddin, Md Akther; Halim, Asyraf
  9. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  10. Working Paper – WP/14/09- Variance Bounds as Thresholds for ‘Excessive’ Currency Volatility- Inflation Targeting Emerging Economies By Shaista Amod; Shakill Hassan
  11. Inflation Expectations and Consumption Expenditure By Michael Weber; Daniel Hoang; Francesco D'Acunto
  12. The Effectiveness of The ECB’s Asset Purchase Programs Of 2009 To 2012 By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  13. Working Paper – WP/15/01- Labour Market and Monetary Policy in South Africa By Nicola Viegi
  14. International spillovers in inflation expectations By Ciccarelli, Matteo; García, Juan Angel
  15. Five Questions on U.S. Monetary Policy By Bullard, James B.
  16. Balance sheet effects, foreign reserves and public policies By Gong Cheng
  17. Interbank Markets and Banking Crises: New Evidence on the Establishment and Impact of the Federal Reserve By Carlson, Mark A.; Wheelock, David C.
  18. Estimating Interest Rate Setting Behavior in Korea: A Constrained Ordered Choices Model Approach By Hyeongwoo Kim; Wen Shi; Kwang-Myoung Hwang
  19. Nonlinear Time Series and Neural-Network Models of Exchange Rates between the US Dollar and Major Currencies By David E. Allen; Michael McAleer; Shelton Peiris; Abhay K. Singh
  20. Alternative Indicator of Monetary Policy Stance for Macedonia By Magdalena Petrovska; Ljupka Georgievska
  21. Chinese Divisia Monetary Index and GDP Nowcasting By William Barnett; Biyan Tang
  22. Is the European banking system more robust? An evaluation through the lens of the ECB's Comprehensive Assessment By Guillaume Arnould; Salim Dehmej
  23. Assessment of CIS Countries Readiness for Creation of Currency Union By Assessment of CIS Countries Readiness for Creation of Currency Union; Mironov, Alexey
  24. Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009 By Bacchetta, Philippe; Merrouche, Ouarda
  25. Get ready for the Fed lift-off: The role of macroprudential policy By F. Gulcin Ozkan; D. Filiz Unsal
  26. Loan supply, credit markets and the euro area financial crisis By Altavilla, Carlo; Darracq Pariès, Matthieu; Nicoletti, Giulio
  27. Inflation and Activity: Two Explorations and Their Monetary Policy Implications By Olivier Blanchard; Eugenio Cerutti; Lawrence H. Summers
  28. Can GDP growth rate be used as a benchmark instrument for Islamic monetary policy? By Uddin, Md Akther
  29. What drives long-run inflation expectations? By Stefano Eusepi; Emanuel Moench; Bruce Preston; Carlos Carvalho
  30. Determinants of euro-area bank lending margins: financial fragmentation and ECB policies By Helen Louri; Petros M. Migiakis
  31. The Impact of Monetary Policy on Corporate Bonds under Regime Shifts By Massimo Guidolin; Alexei G. Orlov; Manuela Pedio
  32. Monetary/Fiscal Policy Mix and Asset Prices By Howard Kung; Gonzalo Morales; Francesco Bianchi
  33. International banking and liquidity risk transmission: lessons from the United Kingdom By Hills, Robert; Hooley, John; Korniyenko, Yevgeniya; Wieladek, Tomasz

  1. By: Pao-Lin Tien (Department of Economics, Wesleyan University); Tara M. Sinclair (The George Washington University); Edward N. Gamber (Congressional Budget Office)
    Abstract: There is a large literature evaluating forecasts by testing the rationality of forecasts and measuring the size of forecast errors, but we know little about the impact of forecast errors on economic outcomes. This paper constructs a measure of a forecast error shock for the Federal Reserve based on the assumption that the Fed follows a forward-looking Taylor rule. Given the effort the Fed puts towards producing forecasts that do not have an endogenous error component, this forecast error shock should be comparable to traditional monetary policy shocks and thus can be used to measure the impact of the Fed’s forecast errors on the U.S. economy. We follow Romer and Romer (2004) and investigate the effect of the forecast error shock on output and price movements. Our results suggest that although the magnitude of the forecast error shock is large, the impact of our shock on the macroeconomy is quite small. The impact is somewhat larger when we take into consideration the Fed’s inability to forecast recessions. The maximum impact across all potential models suggests a decline of approximately one percent of real GDP and two percent of GDP deflator in response to a one standard deviation contractionary forecast error shock.
    Keywords: Federal Reserve, Taylor rule, forecast evaluation, monetary policy shocks
    JEL: E32 E31 E52 E58
    Date: 2015–11
  2. By: Shakill Hassan
    Abstract: Long-term real exchange rate volatility raises the risks associated with investment in the tradable sector, and it is detrimental to long-term growth. Short-term volatility can however be hedged; reduces the currency’s attractiveness as a carry trade target; induces necessary caution against the build-up of liabilities denominated in foreign currency;  helps maintain the scope for independent monetary policy; and, through rapid up and down movements, it can help reduce prolonged misalignment and long-run volatility.Capital flow variability affects exchange rate volatility; restrictions (e.g., as adopted in Brazil) on the level of inflows do not necessarily reduce the variability of inflows. Measures of external vulnerability have a strong association with emerging market currencies’ sensitivity to global flows. South Africa’s external financing requirement leaves its currency vulnerable, and points to unused scope for foreign exchange reserve accumulation. (Existing restrictions on outflows by residents could also vary depending on the size and direction of non-resident inflows.) Macro fundamentals matter for long-run rand behaviour. Upper variance bounds implied by fundamentals are not systematically breached at low frequencies.Speculative carry inflows can be destabilizing, and may reduce the effectiveness and scope for independent monetary policy – depending on the responsiveness of domestic credit growth to capital inflows. In South Africa, this responsiveness has been comparatively low (under QE-driven liquidity). Yields at the short end of the South African term structure of interest rates are significantly responsive to the domestic factors which affect the (domestic) monetary policy stance. Changes in long-term yields are however highly responsive to changes in global yields, but not more so than long yields in advanced economies.Low and stable inflation serves a counter-speculative role. It permits low nominal interest rates (and interest differentials), which reduces the rand’s appeal as a speculative target, without the repression of negative real interest rates.  Low interest differentials are associated (cross-section) with low exchange rate volatility.
    Date: 2015–02–13
  3. By: Alain Kabundi; Eric Schaling; Modeste Some
    Abstract: This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents’ expectations.
    Date: 2014–02–19
  4. By: Hertrich, Markus
    Abstract: In the aftermath of the recent financial crisis, the central banks of small open economies such as the Czech National Bank and the Swiss National Bank (SNB) both implemented a unilateral one-sided exchange rate target zone vis-a-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime of CHF 1.20 per euro, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks to estimate ex-ante the costs of implementing and maintaining a unilateral one-sided target zone and to monitor these costs during the period where it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirical application to the Swiss case shows the actual size of these costs and reveals that these costs would have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB.
    Keywords: Foreign exchange reserves, minimum exchange rate, reflected geometric Brownian motion, target zone costs, Swiss National Bank
    JEL: E42 E52 E58 E6 E63 F33
    Date: 2015
  5. By: Ibrahima Diouf (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: Female Central Bank chairs represent but a tiny minority. To understand why, this article analyzes socioeconomic and socio-political characteristics of the countries where females have chaired Central Banks. Then, it suggests that gender differences in preferences as regards monetary policy goals may have some influence. This hypothesis is based on an empirical analysis showing that female Central Bank chairs focus more than their male colleagues on achieving the price stability goal. This means, then, that females are more resistant than males to political pressures. Finally, it concludes that gender differences in degree of conservatism, may be an explanatory factor in female underrepresentation in the Central Bank chairs.
    Keywords: monetary policy ,gender gap,Central Bank,conservatism,female underrepresentation
    Date: 2015–11
  6. By: Nombulelo Gumata; Alain Kabundi; Eliphas Ndou
    Abstract: This paper investigates the different channels of transmission of monetary policy shock in South Africa in a data-rich environment. The analysis contains 165 quarterly variables observed from 2001Q1 to 2012Q2. We use a Large Bayesian Vector Autoregressive model, which can easily accommodate a large cross-section of variables without running out of degree of freedom. The benefit of this framework is its ability to handle different channels of transmission of monetary policy simultaneously, instead of using different models. The model includes five channels of transmission- credit, interest rate, asset prices, exchange rate, and expectations. The results show that all channels seem potent, but their magnitudes and importance differ. The results indicate that the interest rate channel is the most important transmitter of the shock, followed by the exchange rate, expectations, and credit channels. The asset price channel is somewhat weak.
    Date: 2013–12–10
  7. By: Wu, Ji (Research Institute of Economics and Management); Jeon, Bang Nam (School of Economics); Chen, Minghua (Research Institute of Economics and Management); Wang, Rui (Research Institute of Economics and Management)
    Abstract: This paper addresses the impact of monetary policy on banks’ risk-taking by using the bank-level panel data from more than 1000 banks in 33 emerging economies during 2000-2012. We find that, consistent with the proposition of the “bank risk-taking channel” of monetary policy transmission, banks’ riskiness increases when monetary policy is eased. Bank risk-taking amid expansionary monetary policy is more conspicuous in small and less liquid banks, and in countries with a stronger deposit insurance scheme and a fixed exchange rate regime. We also find that the monetary policy-bank risk nexus is dampened in more concentrated banking markets and when monetary policy is more transparent.
    Keywords: Monetary policy; Bank risk-taking; Emerging economies
    JEL: E44 E52 G21
    Date: 2015–11–10
  8. By: Uddin, Md Akther; Halim, Asyraf
    Abstract: At the advent of global financial crisis conventional monetary policy has failed to regulate the money market and the consequence of which was seen in the global financial and capital market. This paper takes an attempt to give a brief outline of how Islamic monetary policy can be a sustainable alternative to the conventional. In order to understand Islamic monetary policy better we went back to early Islamic period and discussed how money was evolved and monetary policy was performed at that time. Reemergence of Islamic economic system in the latter half of the last century encouraged scholars in this field to have a fresh look at this issue. Comparative analysis shows that Islamic monetary policy can adopt many conventional instruments which are in line with the Shariah guidance such as: Legal Reserve Ratio, Credit Rationing, Selective credit control, Issue of directive, and Moral suasion etc. As interest rate, the key tool of conventional monetary policy regulation, is prohibited in Islamic economic system, the need for sustainable alternative is the order of the day. Unfortunately, Islamic banks and financial institutions set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. Literature shows that this a growing field of knowledge and many theoretical works have been conducted in this area but little empirical work, moreover, very few on alternative benchmark for Islamic economic system. By analyzing literature we propose in our study that GDP growth rate adjusted for inflation can be set as a benchmark for money market instrument and reference for financial and capital market as we argue GDP growth rates reflect real balanced growth potential of an economy as it is correlated with national income, savings, inflation, exchange rate and investment compare to real interest rate, which is fixed in the money market and does not take into account the real sector.
    Keywords: Monetary Policy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings, Foreign Direct Investment and Gross National Income
    JEL: A1 E4 N1
    Date: 2015–02–04
  9. By: Olivier Blanchard (Peterson Institute for International Economics); Gustavo Adler (International Monetary Fund); Irineu de Carvalho Filho (International Monetary Fund)
    Abstract: Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    Keywords: foreign exchange intervention, exchange rate, capital flows, gross capital flows
    JEL: E42 E58 F31 F40
    Date: 2015–11
  10. By: Shaista Amod; Shakill Hassan
    Abstract: At what level does a currency’s volatility become ‘excessive’, in a concrete sense? Any claim that an exchange rate is excessively volatile needs a benchmark for ‘normal’ variability. We compute variance bounds implied by exchange rate models as the norm, for a set of particularly volatile emerging market currencies; and find that long-run exchange rate volatility does not breach the upper bound implied by the present value of underlying fundamentals - for each currency in our sample, except the Brazilian real. However, nominal exchange rate variances get closer to implied upper bounds under inflation targeting. We also find a reduction in real exchange rate misalignment under inflation targeting.
    Date: 2014–12–02
  11. By: Michael Weber (University of Chicago); Daniel Hoang (Karlsruhe Institute of Technology); Francesco D'Acunto (University of California at Berkeley)
    Abstract: We document a positive cross-sectional association between households' inflation expectations and their willingness to purchase durable consumption goods. Households that expect inflation to increase are 8% more likely to have a positive spending attitude compared to households that expect constant or decreasing inflation. This positive association is higher for more educated households, working-age households, high-income households, and urban households. We use novel German survey data for the period from 2000 to 2013 to establish these facts. To obtain identification, we exploit an unexpected shock to households' inflation expectations: the newly-appointed administration unexpectedly announced in November 2005 a three percentage point increase in the value-added tax (VAT) effective in 2007. The unexpected VAT increase led to an exogenous increase in inflation expectations which had a large positive effect on the willingness to spend on durables. Our findings suggest that fiscal and monetary policy measures that engineer higher inflation expectations may be successful in stimulating consumption expenditures.
    Date: 2015
  12. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester and Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads.
    Keywords: Monetary-policy effectiveness; ECB’s asset purchase programs; euro-area crisis
    JEL: E43 E51 E52 E63 F33 F41 G01 G12
    Date: 2015–11
  13. By: Nicola Viegi
    Abstract: This paper analyses the influence of the South African labour market on the conduct of monetary policy. Because of the weak response of wages to changes in employment, the South African Reserve Bank is confronted by an unfavourable short run unemployment-inflation trade off that complicates the implementation of the inflation targeting framework. First we provide some reduced form evidence by estimating a form of the traditional wage Phillips curve, showing the weak relationship between wage dynamics and unemployment in South Africa. We then confirm this result by presenting an estimation of a structural model of the South African economy and give a quantitative assessment of the constraint imposed by the labour market on monetary policy. Finally we interpret these results in a strategic framework, analysing the role that inflation targeting might play in either improving coordination, or worsening the interaction between trade unions and Central Bank objectives.
    Date: 2015–02–12
  14. By: Ciccarelli, Matteo; García, Juan Angel
    Abstract: This paper investigates the factors behind developments in inflation expectations in euro area, the U.S. and the U.K. over the sample 2005-2015. Our analysis unveils the presence of a quantitatively important spillover from euro area long-term inflation expectations onto international ones, in particular the U.S., since August 2014. This finding has some important implications. From a policy perspective, it contributes to explain the somewhat puzzling declines in financial indicators of inflation expectations since the autumn 2014 (Yellen, 2015). From a research perspective, our findings suggest that the relatively weak performance of term-structure models (and other econometric models) to explain developments in long-term inflation expectations in major economic areas over 2014-15 may be due to the omission of international factors. These two dimensions may well carry a significant weight on the on-going and future debate on monetary policy normalisation in major central banks. JEL Classification: C11, C52, E31
    Keywords: deflation, global inflation, Inflation expectations, international spillovers
    Date: 2015–10
  15. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During the St. Louis Regional Chamber Financial Forum, St. Louis Fed President James Bullard said that any decision on whether to increase the policy rate from near-zero levels will be data-dependent. He also discussed five key questions for the FOMC; they relate to global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar.
    Date: 2015–11–06
  16. By: Gong Cheng (ESM)
    Abstract: This paper shows that countries can use foreign reserves to enhance their domestic economies’ resilience to potential risks from balance sheet effects. Based on a theoretical model, this paper demonstrates that the government can either deploy its foreign reserves to lend in foreign currency to the private sector or increase fiscal spending on domestic goods. Both these policy tools can remedy the bad equilibrium characterized by large-scale domestic currency depreciation and very low aggregate investment, but they diverge in how they stabilize the domestic economy and require different minimum amounts of foreign reserves. Targeted lending works by altering investors’ expectations of the domestic exchange rate and of firms’ net worth. As long as foreign reserves are sufficient to cover the private sector’s external debt, this approach eliminates the bad equilibrium without an actual depletion of reserves. In contrast, fiscal spending increases the demand for domestic goods and affects the relative price, leading to domestic exchange rate appreciation that subsequently increases firms’ net worth and facilitates investment.
    Keywords: Foreign reserves, Currency mismatch, Balance sheet effects
    JEL: F31 F32 F41 G01
  17. By: Carlson, Mark A. (Bank for International Settlements, Basel, Switzerland); Wheelock, David C. (Federal Reserve Bank of St. Louis)
    Abstract: This paper examines the impact of the Federal Reserve’s founding on seasonal pressures and contagion risk in the interbank system. Deposit flows among classes of banks were highly seasonal before 1914; amplitude and timing varied regionally. Panics interrupted normal flows as banks throughout the country sought funds from the central money markets simultaneously. Seasonal pressures and contagion risk in the system were lower by the 1920s, when the Fed provided seasonal liquidity and reserves. Panics returned in the 1930s, due in part to shocks from nonmember banks and because the Fed’s decentralized structure hampered a vigorous response to national crises.
    Keywords: Federal Reserve; banking crises; banking panics; interbank market; correspondent banks; contagion; Great Depression
    JEL: E58 G21 N21 N22
    Date: 2015–11–01
  18. By: Hyeongwoo Kim; Wen Shi; Kwang-Myoung Hwang
    Abstract: We study the Bank of Korea’s interest rate setting behavior using an array of constrained ordered choices models, where the Monetary Policy Committee revises the target policy interest rate only when the current market interest rate deviates from the optimal rate by more than certain threshold values. Our models explain changes in the monetary policy stance well for the monthly frequency Korean data since January 2000. We find important roles for the output gap and the foreign exchange rate in understanding the Bank of Korea’s rate decision-making process. We also implement out-of-sample forecast exercises with September 2008 (Lehman Brothers Bankruptcy) for a split point. We demonstrate that out-of-sample predictability improves greatly for the rate cut and the rate hike decisions using standard error adjusted inaction bands.
    Keywords: Monetary Policy; Bank of Korea; Probit Model; Robit Model; Logit Model; Target RP Rate; Interbank Call Rate; Taylor Rule
    JEL: C51 C52 E52 E58
    Date: 2015–11
  19. By: David E. Allen (The University of Sydney, The University of South Australia, Australia); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Spain); Shelton Peiris (The University of Sydney, Australia); Abhay K. Singh (Edith Cowan University, Australia)
    Abstract: This paper features an analysis of major currency exchange rate movements in relation to the US dollar, as constituted in US dollar terms. Euro, British pound, Chinese yuan, and Japanese yen are modelled using a variety of non-linear models, including smooth transition regression models, logistic smooth transition regressions models, threshold autoregressive models, nonlinear autoregressive models, and additive nonlinear autoregressive models, plus Neural Network models.The results suggest that there is no dominating class of time series models, and the different currency pairs relationships with the US dollar are captured best by neural net regression models, over the ten year sample of daily exchange rate returns data, from August 2005 to August 2015.
    Keywords: Non linear models; time series; non-parametric; smooth-transition regression models; neural networks; GMDH shell
    JEL: C45 C53 F3 G15
    Date: 2015–11–06
  20. By: Magdalena Petrovska (National Bank of the Republic of Macedonia); Ljupka Georgievska (National Bank of the Republic of Macedonia)
    Abstract: This paper applies a SVAR model which combines different monetary policy instruments to construct an alternative indicator of monetary policy stance in Macedonia. It employs the approach introduced by Bernanke and Mihov (1998) of isolating monetary policy shocks from the whole set of monetary policy instruments that otherwise react to real developments. The residuals from such VAR are cleaned from the central bank’s reaction function and represent true monetary policy innovations. Furthermore, we solve the interdependence among different monetary policy instruments contained in the residuals by developing a structural model. We use the model to extract unanticipated policy stance, as an alternative view on the monetary policy.
    Keywords: SVAR, Monetary policy stance, Monetary framework
    JEL: E50 E52
    Date: 2015–07
  21. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Biyan Tang (Department of Economics, The University of Kansas;)
    Abstract: Since China’s enactment of the Reform and Opening-Up policy in 1978, China has become one of the world’s fastest growing economies, with an annual GDP growth rate exceeding 10% between 1978 and 2008. But in 2015, Chinese GDP grew at 7 %, the lowest rate in five years. Many corporations complain that the borrowing cost of capital is too high. This paper constructs Chinese Divisia monetary aggregates M1 and M2, and, for the first time, constructs the broader Chinese monetary aggregates, M3 and M4. Those broader aggregates have never before been constructed for China, either as simple-sum or Divisia. The results shed light on the current Chinese monetary situation and the increased borrowing cost of money. GDP data are published only quarterly and with a substantial lag, while many monetary and financial decisions are made at a higher frequency. GDP nowcasting can evaluate the current month’s GDP growth rate, given the available economic data up to the point at which the nowcasting is conducted. Therefore, nowcasting GDP has become an increasingly important task for central banks. This paper nowcasts Chinese monthly GDP growth rate using a dynamic factor model, incorporating as indicators the Divisia monetary aggregate indexes, Divisia M1 and M2 along with additional information from a large panel of other relevant time series data. The results show that Divisia monetary aggregates contain more indicator information than the simple sum aggregates, and thereby help the factor model produce the best available nowcasting results. In addition, our results demonstrate that China’s economy experienced a regime switch or structure break in 2012, which a Chow test confirmed the regime switch. Before and after the regime switch, the factor models performed differently. We conclude that different nowcasting models should be used during the two regimes.
    Keywords: China, Divisia Monetary Index, Borrowing Cost of Money, Nowcasting, Real GDP Growth Rate, Dynamic Factor Model, Regime Switch
    JEL: C32 C38 C43 E47 E51 O53
    Date: 2015–11
  22. By: Guillaume Arnould (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe); Salim Dehmej (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, LABEX Refi - ESCP Europe)
    Abstract: The results of the Comprehensive Assessment (CA) conducted by the ECB seem to attest the soundness of the European banking system since only 8 of 130 assessed banks still need to raise €6 billion. However it would be a mistake to conclude that non failing banks are completely healthy. Using data provided by the ECB and the ECB and the EBA after the CA, we assess the capital shortfalls for each banks by considering the transitional arrangements, an implementation of Basel III sovereign debt requirements and an enhancement of the leverage ratio. In addition we show, that if the CA has been a very complex exercise, it is not the best lens through which the soundness of the eurozone banking system should be evaluated. The assumptions used for the Asset Quality Review (AQR) and the stress-tests lead to week scenarios and requirements that undermine the reliability of the results. Finally we show that the low profitability, the massive dividend distribution and the incurred fines, give rise to concern on the ability of eurozone banks to meet the incoming capital requirements.
    Keywords: Basel III,Financial stability,stress tests,banking,financial regulation
    Date: 2015–07
  23. By: Assessment of CIS Countries Readiness for Creation of Currency Union (Gaidar Institute for Economic Policy; Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Mironov, Alexey (Gaidar Institute for Economic Policy)
    Abstract: The authors analyze the CIS countries’ potential readiness to establish a currency union. Based on Optimum Currency Area (OCA) criteria that determine the countries’ readiness to form a currency union and some particular benefits and costs of a currency union several macroeconomic indicators are determined area. The authors analyze the period following the final transformation of CIS countries’ economies from centrally planned to the market ones – from 1999 to 2011. The paper also tests the stability of the results obtained to check the adequacy of obtained estimates and for ranging countries by their matching OCA criteria.
    Keywords: monetary union, optimal currency area, integration, exchange rate
    JEL: E42 F33 F36
    Date: 2014–04–24
  24. By: Bacchetta, Philippe; Merrouche, Ouarda
    Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.
    Keywords: corporate debt; credit crunch; foreign banks; money market
    JEL: E44 G21 G30
    Date: 2015–11
  25. By: F. Gulcin Ozkan; D. Filiz Unsal
    Abstract: This paper explores how best a small open economy can defend against a foreign interest rate rise, such as the impending Fed lift-off. We find that a broad based macroprudential policy is the mosteffective tool in containing fluctuations arising from the interest rate shock, hence yielding the lowest loss in welfare.
    Keywords: Foreign interest rates; emerging markets; monetary pol-icy; macroprudential measures; capital controls.
    JEL: E5 F3 F4 G1
    Date: 2015–10
  26. By: Altavilla, Carlo; Darracq Pariès, Matthieu; Nicoletti, Giulio
    Abstract: We use bank-level information on lending practices from the euro area Bank Lending Survey to construct a new indicator of loans’ supply tightening controlling for both macroeconomic and bank-specific factors. Embedding this information as external instrument in a Bayesian vector autoregressive model (BVAR), we find that tighter bank loan supply to non-financial corporations leads to a protracted contraction in credit volumes and higher bank lending spreads. This fosters firms’ incentives to substitute bank loans with market finance, producing a significant increase in debt securities issuance and higher bond spreads. We also show that loans’ tightening shocks explain a large fraction of the contraction in real activity and the widening of credit spreads especially over the recession which followed the euro area sovereign debt crisis. JEL Classification: E51, E44, C32
    Keywords: Bank Lending Survey, Credit Supply, External Instruments, Lending standards
    Date: 2015–10
  27. By: Olivier Blanchard (Peterson Institute for International Economics); Eugenio Cerutti (International Monetary Fund); Lawrence H. Summers (Harvard University)
    Abstract: We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy.
    Keywords: Recessions, Hysteresis, Phillips Curve, Monetary Policy
    JEL: E31 E32 E50
    Date: 2015–11
  28. By: Uddin, Md Akther
    Abstract: This paper discusses Islamic monetary policy which could potentially be a sustainable alternative to the conventional. Islamic banks and financial institutions have to set their benchmark based on London Interbank Offered Rate (LIBOR) which raises doubt and controversy of the uniqueness of Islamic finance. By analyzing current literature on Islamic monetary policy models it is proposed in this study that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instrument and reference rate for financial and capital market to set the cost of capital or rate of return. In order to test the two proposed models, one year data from 99 countries have been collected. The study uses the OLS regression and the result shows that real interest rate is not a viable instrument for monetary policy framework as no significant relationship has been found with key factors such as inflation and unemployment. On the other hand, GDP growth rate has a statistically significant relationship with inflation and unemployment, GDP growth rate is higher for OIC countries, however, unemployment rate is higher.
    Keywords: Monetary Policy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings
    JEL: E0
    Date: 2014–12–18
  29. By: Stefano Eusepi (Federal Reserve Bank of New York); Emanuel Moench (Deutsche Bundesbank); Bruce Preston (Melbourne University); Carlos Carvalho (PUC-Rio)
    Abstract: According to both central bankers and economic theory, anchored inflation expectations are key to successful monetary policymaking. Yet, we know very little about the drivers of inflation expectations -- especially about the long run. We explore a simple model of expectations formation and inflation determination in which the sensitivity of long-run inflation expectations to short-run inflation surprises is state-dependent. Price-setting agents act as econometricians trying to learn about average long-run inflation. They set sticky prices according to their views about future inflation, which hence feed into actual inflation. As in Marcet and Nicolini (2003), agents' estimates of long-run inflation move slowly in normal times, as they keep adding observations to the sample they consider. However, after being surprised repeatedly/largely enough, agents discard old observations and put more weight on recent developments. As a result, long-run inflation expectations become more sensitive to short-run news. We estimate the model using only short-run inflation forecasts from surveys, and find that it produces long-run forecasts that track survey measures quite closely. The estimated model has several uses: 1) It can tell a story of how inflation expectations got unhinged in the 1970s; it can also be used to construct a counterfactual history of inflation under anchored long-run expectations. 2) At any given point in time, it can be used to compute the probability of inflation or deflation scares. 3) If embedded into an environment with explicit monetary policy, it can also be used to study the role of policy in shaping the expectations formation mechanism.
    Date: 2015
  30. By: Helen Louri (Athens University of Economics and Business and London School of Economics (EI/HO)); Petros M. Migiakis (Bank of Greece)
    Abstract: In the present paper we study the determinants of the margins paid by euro-area non-financial corporations (NFCs) for their bank loans on top of the rates they earn for their deposits (bank lending margins). We use panel VAR techniques, in order to test for causality relationships and produce impulse response functions for eleven euro-area countries from 2003:1 to 2014:12. The countries are separated to two groups (distressed and non-distressed), in order to examine for heterogeneities in the relationships between lending margins, the period is also separated with reference to the peak of the global financial crisis (before and after the collapse of Lehman in September 2008). We find that significant heterogeneities existed even before the global financial crisis and remained in its aftermath, although the magnitude and the direction of the effects exercised by the explanatory variables have changed. Furthermore, apart from finding that market concentration and the prudence of banks’ management increase the lending margins NFCs pay for their loans, there is evidence of substitution effects between financing obtained from banks and corporate bond markets. The provision of ample liquidity from the ECB, in the aftermath of the global financial crisis was found to be effective only for the core countries, suggesting that further policy actions are needed in order to reduce the fragmentation of bank lending and promote financial integration to the benefit of the euro-area real economy.
    Keywords: bank lending margins; euro area; financial fragmentation; global financial crisis; European Central Bank
    JEL: E44 E51 E58 F36 F42
    Date: 2015–10
  31. By: Massimo Guidolin; Alexei G. Orlov; Manuela Pedio
    Abstract: We study the effects of a conventional monetary expansion, quantitative easing, and of the maturity extension program on corporate bond yields using impulse response functions to shocks obtained from flexible models with regimes. We construct weekly bond portfolios sorting individual bond trades by rating and maturity from TRACE. A standard single-state VAR model is inadequate to capture the dynamics of the data. On the contrary, under a three-state Markov switching model with time-homogeneous VAR coefficients, we find that unconventional policies may have been generally expected to decrease corporate yields. However, even though the sign of the responses is the one expected by policy-makers, the size of the estimated effects depends on the assumptions regarding the decline in long-term Treasury yields caused by unconventional policies, on which considerable uncertainty remains. Keywords: Unconventional monetary policy, corporate bonds, term structure of Treasury yields, impulse response function, Markov swit ching vector autoregression. JEL codes: G12, E43, C32.
    Date: 2015
  32. By: Howard Kung (London Business School); Gonzalo Morales (University of British Columbia); Francesco Bianchi (Cornell University)
    Abstract: This paper estimates monetary and fiscal policy rules using a New Keynesian model that allows for changes in the monetary/fiscal policy mix, generates a sizeable bond risk premia, and takes into account the effects of the zero lower bound.
    Date: 2015
  33. By: Hills, Robert (Bank of England); Hooley, John (International Monetary Fund); Korniyenko, Yevgeniya (International Monetary Fund); Wieladek, Tomasz (Bank of England)
    Abstract: This paper forms the United Kingdom’s contribution to the International Banking Research Network’s project examining the impact of liquidity shocks on banks’ lending behaviour, using proprietary bank-level data available to central banks. Specifically, we examine the impact of changes in funding conditions on UK-resident banks’ domestic and external lending from 2006–12. Our results suggest that, following a rise in the liquidity shock measure, UK-resident banks that grew their balance sheets quicker relative to their peers pre-crisis, decreased their external lending by more relative to other banks, and increased their domestic lending. When we account for country of ownership, we find that the same pattern was true for both UK-owned and foreign-owned banks, but more pronounced for UK-owned banks’ domestic and foreign-owned banks’ external lending. These results are robust to splitting the data into real and financial sector lending, the use of more granular bilateral country loan data and controlling for the various banking system interventions made by governments in 2008–09.
    Keywords: Liquidity shock; global financial crisis; cross-border and domestic lending.
    JEL: E44 E51 E52 G18 G21
    Date: 2015–11–06

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