nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒11‒21
43 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. The International Experience with Negative Policy Rates By Harriet Jackson
  2. Household Forming Inflation Expectations: Why Do They ‘Overreact’? By Easaw, Joshy
  3. When is macroprudential policy effective? By Chris McDonald
  4. On the desirability of capital controls By Fabrizio Perri; Jonathan Heathcote
  5. A Comprehensive Evaluation of Measures of Core Inflation for Canada By Mikael Khan; Louis Morel; Patrick Sabourin
  6. On the Gains from Monetary Policy Commitment under Deep Habits By Givens, Gregory
  7. Do Interest Rates Affect the Exchange Rate under Capital Controls? An event study of Iceland’s experience with capital controls By Ágúst Arnórsson; Gylfi Zoega
  8. Quantum money By Ledenyov, Dimitri O.; Ledenyov, Viktor O.
  9. Alternative Indicator of Monetary Policy Stance for Macedonia By Magdalena Petrovska; Ljupka Georgievska
  10. Enter the ghost: cashless payments in the Early Modern Low Countries, 1500-1800 By Oscar Gelderblom; Joost Jonker
  11. Credit policies before and during the financial crisis By Palle Sørensen
  12. The impact of the euro on euro area GDP per capita By Cristina Fernández; Pilar García Perea
  13. Exchange Rate Pass-through in Russia By Ponomarev, Yuri; Trunin, Pavel V.; Uljukaev, Aleksej V.
  14. Monetary Policy and Financial Stability: Cross-Country Evidence By Christian Friedrich; Kristina Hess; Rose Cunningham
  15. The Distributional Consequences of Large Devaluations By Javier Cravino; Andrei A. Levchenko
  16. Monetary-Fiscal Policy Interaction and Fiscal Inflation: A Tale of Three Countries By M. Kliem; Alexander Kriwoluzky; S. Sarferaz
  17. Do heterogeneous expectations constitute a challenge for policy interaction? By Emanuel Gasteiger
  18. How does macroprudential regulation change bank credit supply? By Dimitrios Tsomocos; Alexandros Vardoulakis; Anil Kashyap
  19. Quantitative Easing as a Policy Tool Under the Effective Lower Bound By Abeer Reza; Eric Santor; Lena Suchanek
  20. Effects of US Quantitative Easing on Emerging Market Economies By Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
  21. Estimates of Fundamental Equilibrium Exchange Rates, November 2015 By William R. Cline
  22. Forward Guidance at the Effective Lower Bound: International Experience By Karyne B. Charbonneau; Lori Rennison
  23. When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries By Marcel Fratzscher; Oliver Goede; Lukas Menkhoff; Lucio Sarno; Tobias Stöhr
  24. Inflation Expectations in Hungary By Péter Gábriel; Judit Rariga; Judit Várhegyi
  25. Exchange Rate Dynamics and its Effect on Macroeconomic Volatility in Selected CEE Countries By Volha Audzei; Frantisek Brazdik
  26. An Appraisal of Floating Exchange Rate Regimes in Latin America By Roberto Frenkel
  27. The Effect of ECB Monetary Policies on Interest Rates and Volumes By Paul Hubert; Jérôme Creel; Mathilde Viennot
  28. Unconventional monetary policy, spillovers, and liftoff: implications for Northeast Asia By Noland, Marcus
  29. "Common Currency versus Currency Union: The U.S. Continental Dollar and Denominational Structure, 1775-1779" By Farley Grubb
  30. US Monetary Policy in a Globalized World By Jesus Crespo Cuaresma; Gernot Doppelhofer; Martin Feldkircher; Florian Huber
  31. Coordination and Crisis in Monetary Unions By Manuel Amador; Gita Gopinath; Emmanuel Farhi; Mark Aguiar
  32. Maintaining Central-Bank Financial Stability under New-Style Central Banking By Robert E. Hall; Ricardo Reis
  33. Professionals’ Forecast of the Inflation Gap and its Persistence By Easaw, Joshy; Heravi, Saeed; Dixon, Huw David
  34. Household Debt, Financial Intermediation, and Monetary Policy By Yahong
  35. International Portfolio Flows and Exchange Rate Volatility for Emerging Markets By Guglielmo Maria Caporale; Faek Menla Ali; Fabio Spagnolo; Nicola Spagnolo
  36. FOMC members’ incentives to disagree: regional motives and background influences By Hamza Bennani; Etienne Farvaque; Piotr Stanek
  37. Financial Heterogeneity and Monetary Union By jae sim; Raphael Schoenle; Egon Zakrajsek; Simon Gilchrist
  38. Can Monetary Policy Affect Economic Activity under Surplus Liquidity? Some Evidence from Macedonia. By Branimir Jovanovic; Aneta Krstevska; Neda Popovska-Kamnar
  39. Modelling the time-variation in euro area lending spreads By Boris Blagov; Michael Funke; Richhild Moessner
  40. Asymmetric financial integration bank ownership and monetary policy in emerging economies By Piotr Denderski; Wojciech Paczos
  41. The U.S. economic outlook and monetary policy By Dudley, William
  42. Eliciting GDP Forecasts from the FOMC’s Minutes Around the Financial Crisis By Neil R. Ericsson
  43. Dinner address for the Bank of England-Federal Reserve Bank of New York Conference on Money Markets and Monetary Policy Implementation By Potter, Simon M.

  1. By: Harriet Jackson
    Abstract: A key issue in the renewal of the inflation-control agreement is the question of the appropriate level of the inflation target. Many observers have raised concerns that with the reduction in the neutral rate, and the experience of the recent financial crisis, the effective lower bound (ELB) is more likely to be binding in the future if inflation targets remain at 2 per cent. This has led some to argue that the inflation target should be raised to reduce the incidence of ELB episodes. Much of this debate has assumed that the ELB is close to, but not below, zero. Recently, however, a number of central banks have introduced negative policy interest rates. This paper outlines the concerns associated with negative interest rates, provides an overview of the international experience so far with negative policy rates and sets out some general observations based on this experience. It then discusses how low policy interest rates might be able to go in these economies, and offers some considerations for the renewal of the inflation-control agreement.
    Keywords: Central bank research, Financial markets, International topics, Monetary policy framework
    JEL: E E5 E52 E58 E6 E65
    Date: 2015
  2. By: Easaw, Joshy (Cardiff Business School)
    Abstract: The purpose of the present paper is to provide a simple model which explains how households (or non-experts) form their inflation forecasts. The paper contributes to the existing literature and the understanding of how inflation expectations are formed in two ways. Firstly, we present an integrated model of how non-experts form their inflation expectations. The paper initially outlines how professionals form inflation forecast. Subsequently, the model presents the non-expert’s expectations formation incorporating the dynamics of the professional’s forecast. Secondly, we explain the prevalent phenomena where non-experts tend to overreact, or overshoot, initially as they revise their inflation forecast.
    Keywords: Inflation Expectations Formation; Information Rigidities; Over-reaction
    JEL: E3 E4 E5
    Date: 2015–10
  3. By: Chris McDonald (Reserve Bank of New Zealand)
    Abstract: Previous studies have shown that limits on loan-to- value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle. macroprudential policies.
    Date: 2015–11
  4. By: Fabrizio Perri (University of Minnesota); Jonathan Heathcote (Minneapolis FED)
    Abstract: In a standard two country international macro model we ask whether shutting down the market for international non-contingent borrowing and lending is ever desirable. The answer is yes. Imposing capital controls is unilaterally desirable when initial conditions are such that ruling out bond trade generates a sufficiently favorable change in the expected path for the terms of trade. Imposing capital controls can be welfare improving for both countries for calibrations in which changes in equilibrium terms of trade movements induced by the controls improve insurance against country specific shocks.
    Date: 2015
  5. By: Mikael Khan; Louis Morel; Patrick Sabourin
    Abstract: This paper evaluates the usefulness of various measures of core inflation for the conduct of monetary policy. Traditional exclusion-based measures of core inflation are found to perform relatively poorly across a range of evaluation criteria, in part due to their inability to filter unanticipated transitory shocks. In contrast, measures such as the trimmed mean and the common component of CPI perform favorably, since they better capture persistent price movements and tend to move with macroeconomic drivers. All measures of core inflation, however, have limitations – consequently, there is merit in monitoring a set of measures. Moreover, core inflation measures are best viewed as complements to, rather than substitutes for, the thorough analysis of inflation and capacity pressures that informs the monetary policy process.
    Keywords: Inflation and prices, Monetary policy framework
    JEL: E31 E52
    Date: 2015
  6. By: Givens, Gregory
    Abstract: I study the welfare gains from commitment relative to discretion in the context of an equilibrium model that features deep habits in consumption. Policy simulations reveal that the welfare gains are increasing in the degree of habit formation and economically significant for a range of values consistent with U.S. data. I trace these results to the supply-side effects that deep habits impart on the economy and show that they ultimately weaken the stabilization trade-offs facing a discretionary planner. Most of the inefficiencies from discretion, it turns out, can be avoided by installing commitment regimes that last just two years or less. Extending the commitment horizon further delivers marginal welfare gains that are trivial by comparison.
    Keywords: Deep Habits, Optimal Monetary Policy, Commitment, Discretion
    JEL: E52 E61
    Date: 2015–11
  7. By: Ágúst Arnórsson; Gylfi Zoega
    Abstract: We find that both actual changes and unexpected changes in interest rates affect the average exchange rate in Iceland when the year 2009 is included in the sample that ends in August of this year but not when it is excluded. This early period was characterized by lax capital controls until the autumn of 2009. It follows that, given the moderate changes of interest rates observed in the data, using interest rates to stabilise the exchange rate may work when the capital controls are not effectively enforced but is not as useful when they are enforced. However, it should be noted that large changes in interest rates may have an effect on exchange rates when capital controls are enforced, although such changes never occurred during our sample period.
    Date: 2015–11
  8. By: Ledenyov, Dimitri O.; Ledenyov, Viktor O.
    Abstract: The quantum money (q-money) as a possible convenient, socially innovative, technologically attractive and user/issuer friendly value storing/not storing unit, mean of payment and exchange medium in the advanced financial systems of the developed states is a subject of our scientific interest in this research article. The purpose of this research article is to report on a number of topics: 1. The historical evolution of the money in the financial systems within the economies of the scales and scopes over the centuries. 2. The definition on the electronic money in the financial systems within the economies of the scales and scopes. 3. The proposal and definition on the quantum money in the financial systems within the economies of the scales and scopes. 4. The theoretical framework on the quantum money functional principles in the financial systems within the quantum economies of the scale and scopes. 5. The monetary policies toward the quantum money introduction and functioning in the financial systems within the economies of the scales and scopes. 6. The possible change impacts by the quantum money on the central banks’ existing monetary policies and the financial systems structure within the economies of the scales and scopes. We believe that the quantum money is more convenient for the existing financial and economic systems, which can be accurately characterized by the quantum macroeconomic theory in Ledenyov D O, Ledenyov V O (2015h) and the quantum microeconomics theory in Ledenyov D O, Ledenyov V O (2015j) instead of the classic macroeconomics and microeconomics theories. The authors think that the present transition to the quantum money (q-money) from the electronic money (e-money) in the finances can be conditionally compared with the present transition to the quantum devices (lasers, quantum random number generators, quantum computers) from the electronic devices (vacuum tubes, transistors, integrated circuits, analog computers, digital computers) in the electronics.
    Keywords: quantum money, quantum network, electronic money, money network, cell phone money, paper money, electronic currency, electronic purse, digital cash, digital wallet, bit coin, currency competition, electronic payments instruments, debit cards, credit cards, stored-value cards, smart cards, transaction cost, nominal/real quantum money supply, nonlinearities, quantum econophysics science, probability science, econometrics science, finances science, financial policy, monetary policy, treasures, central banks, global capital markets.
    JEL: C0 G0 G15 G20 G21 G23 G28 G29
    Date: 2015–11–19
  9. 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
  10. By: Oscar Gelderblom; Joost Jonker
    Abstract: We analyze the evolution of payments in the Low Countries during the period 1500-1800 to argue for the historical importance of money of account or ghost money. Aided by the adoption of new bookkeeping practices such as ledgers with current accounts, this convention spread throughout the entire area from the 14th century onwards. Ghost money eliminated most of the problems associated with paying cash by enabling people to settle transactions in a fictional currency accepted by everyone. As a result two functions of money, standard of value and means of settlement, penetrated easily, leaving the third one, store of wealth, to whatever gold and silver coins available. When merchants used ghost money to record credit granted to counterparts, they in effect created a form of money which in modern terms might count as M1. Since this happened on a very large scale, we should reconsider our notions about the volume of money in circulation during the Early Modern Era.
    Keywords: Money, cashless payments, coins and credit, Early Modern Low Countries
    Date: 2015–11
  11. By: Palle Sørensen (Aarhus University and CREATES)
    Abstract: This paper empirically distinguishes between the two main contending explanations for credit cycles. Namely, the bank lending channel and the balance sheet channel. This is done by using unique Danish survey, register, rating, and bank data. The results indicate that the bank lending channel explains most of the changes in credit policy by Danish banks towards small and medium (SME) sized firms. However, the results show that both channels are operational, but the balance sheet channel is surprisingly weak partly because discouragement during the crisis kept struggling firms from applying for credit. The analysis also reveals that the credit supply was weaker in banks that were struggling during the crisis and indirectly that firms could not off-set this effect by changing banks. Furthermore, the evidence suggests that the financial crisis also affected the liquidity of non-financial firms, as credit demand rose immediately following the crisis.
    Keywords: Business Fluctuations, Financial Markets and the Macroeconomy, Banks, and Credit Policies.
    JEL: E32 E44 G21 G32
    Date: 2015–11–10
  12. By: Cristina Fernández (Banco de España); Pilar García Perea (Banco de España)
    Abstract: This paper poses the following question: what would euro area GDP per capita have been, had the monetary union not been launched? To this end we use the synthetic control methodology. We find that the euro did not bring the expected jump to a permanent higher growth path. During the early years of the monetary union, aggregate GDP per capita in the euro area rose slightly above the path predicted by its counterfactual; but since the mid-2000s, these gains have been completely eroded. Central European countries – Germany, the Netherlands and Austria – did not seem to obtain any gains or losses from the adoption of the euro. Ireland, Spain and Greece registered positive and significant gains, but only during the expansionary years that followed the launch of the euro, while Italy and Portugal quickly lagged behind the GDP per capita predicted by their counterfactual. We test the robustness of the synthetic estimation not only to the exclusion of any particular country from the donor pool but also to the omission of each of the selected determinants of GDP per capita and to the reduction of the dimensions in the optimisation programme, namely the number of GDP determinants.
    Keywords: treatment effects, synthetic control method, monetary union
    JEL: C33 E42 F15 O52
    Date: 2015–11
  13. By: Ponomarev, Yuri; Trunin, Pavel V.; Uljukaev, Aleksej V.
    Abstract: The article provides estimates of short-run and medium-run exchange rate pass-through into domestic prices in Russia during the period of 2000–2012 using vector error correction model. Exchange rate pass-through asymmetry estimates, its assessments on different sub-periods and exchange rate volatility effect on pass-through are also provided.
    Abstract: В статье приводятся оценки краткосрочной перспективе и обменного курса среднесрочной перспективе сквозной в внутренних цен в России в период 2000-2012 с использованием вектора коррекции ошибок модели. Обменный курс сквозного асимметрия оценкам, его оценки по различным суб-периодов и курсовой волатильности влияния на сквозного также предоставляются.
    Keywords: exchange rate pass-through,asymmetry of exchange rate pass-through,exchange rate volatility,inflation,monetary policy,vector error correction model
    JEL: C32 E31 E52 F31 F41
    Date: 2014–03
  14. By: Christian Friedrich; Kristina Hess; Rose Cunningham
    Abstract: Central banks may face challenges in achieving their price stability goals when financial stability risks are present. There is, however, considerable heterogeneity among central banks with respect to how they manage these potential trade-offs. In this paper, we review the institutional and operational policy frameworks of ten central banks in major advanced economies and then assess the effect of financial stability risks on their monetary policy decisions according to these frameworks. To do so, we construct a time-varying financial stability orientation (FSO) index that quantifies a central bank’s policy orientation with respect to financial stability that spans the major viewpoints of the literature: “leaning against the wind” versus “cleaning up after the crash.” The index encompasses three dimensions: (i) the nature of the statutory frameworks, (ii) the extent of the regulatory tool kit, and (iii) the prominence of financial stability references in central bank monetary policy statements. We then include our FSO index in a modified Taylor rule, which is estimated using a cross-country panel of up to ten central banks for the period from 2000Q1 to 2014Q4. We find that in episodes of high financial stability risks, measured by a strongly positive credit to GDP gap, “leaning-type” central banks, i.e., those with a high FSO index value, appear to account for financial stability considerations in their monetary policy rate decisions. For “cleaning-type” central banks, we do not find this to be the case. Our baseline specification suggests that a representative leaning-type central bank’s policy rate is about 0.3 percentage points higher when financial stability risks are present than the policy rate of a representative cleaning-type central bank. We also find that the strength of this response increases in the additional presence of a house price boom but not so for the simultaneous occurrence of an equity price boom.
    Keywords: Financial stability, International topics, Monetary policy framework
    JEL: E5 E4 G01
    Date: 2015
  15. By: Javier Cravino (University of Michigan and NBER); Andrei A. Levchenko (University of Michigan, NBER, and CEPR)
    Abstract: We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile.
    Keywords: exchange rates, large devaluations, distributional effects, consumption baskets
    JEL: F31
  16. By: M. Kliem; Alexander Kriwoluzky; S. Sarferaz
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: time-varying VAR, inflation, public deficits
    JEL: E42 E58 E61
    Date: 2015–11
  17. By: Emanuel Gasteiger
    Abstract: Yes, indeed; at least for macroeconomic policy interaction. We examine a Neo- Classical economy and provide the conditions for policy arrangements to successfully stabilize the economy when agents have either rational or adaptive expectations. For a contemporaneous-data monetary policy rule, the monetarist solution is unique and stationary under a passive fiscal/active monetary policy regime if monetary policy appropriately incorporates expectational heterogeneity. In contrast, the active fiscal/passive monetary policy regime’s fiscalist solution is prone to explosiveness due to empirically plausible expectational heterogeneity. Nevertheless, this can be a well-defined, rather orthodox equilibrium. For operational monetary policy rules, only the results for the fiscalist solution prevail. Moreover, our results are plausible from an adaptive learning viewpoint and, conditional on stationarity, both regimes yield promising business cycle dynamics.
    Keywords: Inflation, Heterogeneous Expectations, Fiscal and Monetary Policy Interaction
    JEL: E31 D84 E52 E62
    Date: 2015
  18. By: Dimitrios Tsomocos (to be added); Alexandros Vardoulakis (Board of Governors of the Federal Reserve System); Anil Kashyap (University of Chicago)
    Abstract: We analyze a variant of the Diamond-Dybvig (1983) model of banking in which savers can use a bank to invest in a risky project operated by an entrepreneur. The savers can buy equity in the bank and save via deposits. The bank chooses to invest in a safe asset or to fund the entrepreneur. The bank and the entrepreneur face limited liability and there is a probability of a run which is governed by the bank's leverage and its mix of safe and risky assets. The possibility of the run reduces the incentive to lend and take risk, while limited liability pushes for excessive lending and risk-taking. We explore how capital regulation, liquidity regulation, deposit insurance, loan to value limits, and dividend taxes interact to offset these frictions. We compare agents welfare in the decentralized equilibrium absent regulation with welfare in equilibria that prevail with various regulations that are optimally chosen. In general, regulation can lead to Pareto improvements but fully correcting both distortions requires more than one regulation.
    Date: 2015
  19. By: Abeer Reza; Eric Santor; Lena Suchanek
    Abstract: This paper summarizes the international evidence on the performance of quantitative easing (QE) as a monetary policy tool when conventional policy rates are constrained by the effective lower bound (ELB). A large body of evidence suggests that expanding the central bank’s balance sheet through large-scale asset purchases can provide effective stimulus under the ELB. Transmission channels for QE are broadly similar to those of conventional policy, notwithstanding some important but subtle differences. The effectiveness of QE may be affected by imperfect pass-through to asset prices, possible leakage through global capital reallocation, a reduced impact through the bank lending channel, and diminishing returns to additional rounds of QE. Although the benefits of QE appear, so far, to outweigh the costs, at some point this may be reversed. The exact “effective quantitative bound” where the costs of QE become larger than the benefits is as yet unknown. The summary of the evidence, however, suggests that QE is indeed an “adequate” substitute for monetary policy at the ELB, rather than a “perfect” one.
    Keywords: Central bank research, International topics, Monetary policy framework, Transmission of monetary policy
    JEL: N10 E52 E58 E61 E65
    Date: 2015
  20. By: Saroj Bhattarai (University of Texas at Austin); Arpita Chatterjee (UNSW Business School, UNSW); Woong Yong Park (University of Illinois at Urbana-Champaign)
    Abstract: We estimate international spillover effects of US Quantitative Easing (QE) on emerging market economies. Using a Bayesian VAR on monthly US macroeconomic and financial data, we first identify the US QE shock with non-recursive identifying restrictions. We estimate strong and robust macroeconomic and financial impacts of the US QE shock on US output, consumer prices, long-term yields, and asset prices. The identified US QE shock is then used in a monthly Bayesian panel VAR for emerging market economies to infer the spillover effects on these countries. We find that an expansionary US QE shock has significant effects on financial variables in emerging market economies. It leads to an exchange rate appreciation, a reduction in long-term bond yields, a stock market boom, and an increase in capital inflows to these countries. These effects on financial variables are stronger for the "Fragile Five" countries compared to other emerging market economies. We however do not find significant effects of the US QE shock on output and consumer prices of emerging markets.
    Keywords: US Quantitative Easing, Spillovers, Emerging Market Economies, Bayesian VAR, Panel VAR, Non-recursive Identification, Fragile Five Countries
    JEL: C31 E44 E52 E58 F32 F41 F42
    Date: 2015–11
  21. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The latest semiannual fundamental equilibrium exchange rate (FEER) estimates find that the US dollar is now overvalued by about 10 percent, comparable to levels in 2008 through early 2010 and again in 2011. Unlike then, the current strong dollar does not reflect a weak renminbi kept undervalued by major exchange rate intervention by China. Instead, China’s current account surplus has fallen sharply relative to GDP, and its recent intervention has been to prevent excessive depreciation rather than to prevent appreciation. Additionally, declines in the real effective exchange rates (REERs) for major emerging-market economies and resource-based advanced economies, driven by falling commodity prices in recent months, have strengthened the dollar. Recent increases in the REERs for the euro area and Japan have removed their modest undervaluation identified in the last FEERs estimates in May, and the Chinese renminbi remains consistent with its FEER. The dollar’s rise by nearly 15 percent in real effective terms over the past two years could impose a drag of nearly one-half percent annually on US demand growth over the next five years. As the Federal Reserve moves to normalize US monetary policy, it may need to consider a gentler rise in interest rates than it might otherwise have pursued, both to temper possible further strengthening of the dollar in response to higher interest rates and to help offset the demand compression from falling net exports.
    Date: 2015–11
  22. By: Karyne B. Charbonneau; Lori Rennison
    Abstract: Forward guidance is one of the policy tools that a central bank can implement if it seeks to provide additional monetary stimulus when it is operating at the effective lower bound (ELB) on interest rates. It became more widely used during and after the global financial crisis. This paper reviews the international experience, based on the six central banks that have used forward guidance when operating at the ELB, in order to assess its effectiveness and the potential risks associated with its implementation. We distinguish between three distinct types of forward guidance (qualitative, time contingent and state contingent) and discuss the channels through which forward guidance operates. Overall, we find that forward guidance can be an effective tool at the ELB when clearly communicated and perceived as credible. Though evidence from the literature is somewhat mixed—since the specific effects vary across economies, episodes and type of guidance—it has generally been found to be effective in (1) lowering expectations of the future path of policy rates, (2) improving the predictability of short-term yields over the near term and (3) changing the sensitivity of financial variables to economic news. However, as with other monetary policy tools, the benefits of forward guidance need to be weighed against the costs. Those costs are mainly associated with potential loss of credibility and increased financial stability risks. Moreover, the international experience with forward guidance under conditions of negative ELBs and interest rates is limited to date.
    Keywords: Monetary policy framework, Monetary policy implementation, Transmission of monetary policy, Uncertainty and monetary policy
    JEL: E43 E52 E58 E6
    Date: 2015
  23. By: Marcel Fratzscher; Oliver Goede; Lukas Menkhoff; Lucio Sarno; Tobias Stöhr
    Abstract: This study examines foreign exchange intervention based on novel daily data covering 33 countries from 1995 to 2011. We find that intervention is widely used and a highly effective policy tool, with a success rate in excess of 80 percent under some criteria. The policy works very well in terms of smoothing the path of exchange rates, and in stabilizing the exchange rate in countries with narrow band regimes. Moving the level of the exchange rate in flexible regimes requires that some conditions are met, including the use of large volumes and that intervention is made public and supported via communication.
    Keywords: Foreign exchange intervention, exchange rate regimes, effectiveness measures, communication, capital controls
    JEL: F31 F33 E58
    Date: 2015
  24. By: Péter Gábriel (Magyar Nemzeti Bank (Central Bank of Hungary)); Judit Rariga (Magyar Nemzeti Bank (Central Bank of Hungary)); Judit Várhegyi (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: The aim of this study is to provide an overview of the main characteristics of expectations of professional forecasters, households and firms in respect of Hungarian inflation trends. In countries where an inflation targeting regime is in place, inflation expectations are of key importance from the perspective of monetary policy and play a significant role in central bank decisionmaking and follow-up communication. The inflation expectations of economic agents are relevant for central banks for two main reasons. On the one hand, inflation expectations can provide direct information concerning the credibility of monetary policy. On the other hand, they may carry important information that can help central banks in forecasting macroeconomic developments. For the purpose of understanding and forecasting inflation developments, most central banks monitor the expectations of individual economic agents on a regular basis. Besides average expectations, the dispersion of inflation expecta tions may also contain significant information for central banks. For Hungary, inflation expectation data are available from surveys based on quantitative or qualitative questionnaires for households, firms and professional forecasters.
    Keywords: inflation expectations, survey, central bank
    JEL: C83 D84 E31 E52
    Date: 2014
  25. By: Volha Audzei; Frantisek Brazdik
    Abstract: To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of the exchange rate shock relative to other shocks allows us to evaluate whether the Exchange rate is a source of volatility or a buffer against shocks as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. We identify countries where shocks are predominantly symmetric relative to the effective counterpart and countries where the contribution of real exchange rate shocks is strong. In general, for all the countries considered the results are consistent with the real exchange rate having a shock-absorbing nature. Finally, a significant role of symmetric monetary policy shocks in movements in real exchange rates is found for some of the countries.
    Keywords: Asymmetric shocks, Central and Eastern Europe, monetary union, real exchange rates, sign restrictions method, structural vector autoregression
    JEL: C32 E32 F31 F41
    Date: 2015–09
  26. By: Roberto Frenkel (Buenos Aires University and CEDES)
    Abstract: The exchange rate regimes are the crucial variable of international economic relations. This paper attempts to evaluate the performance of floating exchange rate regimes in the major Latin American countries.
    Keywords: Central banks and their policies, Current account adjustment, Financial crises, Macroeconomic impact of globalization, Foreign exchange, Exchange rate regimes.
    JEL: E58 F32 G01 F31
    Date: 2015–11
  27. By: Paul Hubert (OFCE); Jérôme Creel (OFCE); Mathilde Viennot (École normale supérieure - Cachan)
    Abstract: This paper assesses the transmission of ECB monetary policies, conventional and unconventional, to both interest rates and lending volumes or bond issuance for three types of different economic agents through five different markets: sovereign bonds at 6-month, 5-year and 10-year horizons, loans to non-financial corporations, and housing loans to households, during the financial crisis, and for the four largest economies of the Euro Area. We look at three different unconventional tools: excess liquidity, longer-term refinancing operations and securities held for monetary policy purposes following the decomposition of the ECB’s Weekly Financial Statements. We first identify series of ECB policy shocks at the Euro Area aggregate level by removing the systematic component of each series and controlling for announcement effects. We second include these exogenous shocks in countryspecific structural VAR, in which we control for the credit demand side. The main result is that only the pass-through from the ECB rate to interest rates has been effective. Unconventional policies have had uneven effects and primarily on interest rates.
    Keywords: Transmission Channels; Unconventional Monetary Policy; Quantitative Easing; Bank Lending
    Date: 2015–11
  28. By: Noland, Marcus
    Abstract: Unconventional monetary policy (UMP) has had predictable effects. How exit plays out is scenario-dependent. Quantitative easing has had the predictable effect of encouraging currency depreciation and some partner countries may have attempted to offset these exchange rate effects. Korea presents a particularly interesting case: it is relatively small and relatively open and integrated, in both trade and financial terms, with the United States and Japan, two practitioners of UMP. Authorities have acted to limit the won’s appreciation primarily against the currency of China, not the US or Japan. Nevertheless, Korea’s policy is a source of tension with the US. Under legislation currently being considered, the currency manipulation issue could potentially interfere with Korean efforts to attract direct investment from the US and create an obstacle to Korea joining the Trans-Pacific Partnership.
    Keywords: unconventional monetary policy, quantitative easing, spillovers, currency manipulation, Korea
    JEL: E58 E65 F41 F42
    Date: 2015–11–19
  29. By: Farley Grubb (Department of Economics, University of Delaware)
    Abstract: I use denominational structure (the spacing and size of monetary units) to explain how the Continental Congress attempted to manage a successful common currency when sub-national political entities were allowed to have separate currencies and run independent monetary policies. Congress created a common currency that was too large to use in ordinary transactions. Congress hoped this currency would be held for post-war redemption and would not circulate as money during the war. As such, it would not contribute to wartime inflation. By contrast, individual state currencies were emitted in small enough denominations to function as the domestic medium of exchange.
    Keywords: bills of credit, legal tender, paper money, quantity theory of money, zero-coupon bonds.
    JEL: E42 E52 H77 N11
    Date: 2015
  30. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Gernot Doppelhofer (Norwegian School of Economics); Martin Feldkircher (Oesterreichische Nationalbank); Florian Huber (Department of Economics, Vienna University of Economics and Business; Oesterreichische Nationalbank)
    Abstract: We analyze the interaction between monetary policy in the US and the global economy proposing a new class of Bayesian global vector autoregressive models that accounts for time-varying parameters and stochastic volatility (TVP-SV-GVAR). Our results suggest that US monetary policy responds to shocks to the global economy, in particular to global aggregate demand and monetary policy shocks. On the other hand, US-based contractionary monetary policy shocks lead to persistent international output contractions and a drop in global inflation rates, coupled with rising interest rates in advanced economies and a real depreciation of currencies with respect to the US dollar. We find considerable evidence for heterogeneity in the spillovers across countries, as well for changes in the transmission of monetary policy shocks over time.
    Keywords: Global vector autoregression, time-varying parameters, stochastic volatility, monetary policy, international spillovers
    JEL: C30 E52 F41
    Date: 2015–11
  31. By: Manuel Amador (Federal Reserve Bank of Minneapolis); Gita Gopinath (Harvard); Emmanuel Farhi (Harvard University); Mark Aguiar (Princeton University)
    Abstract: We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    Date: 2015
  32. By: Robert E. Hall (Hoover Institution); Ricardo Reis
    Abstract: Since 2008, the central banks of advanced countries have borrowed trillions of dollars from their commercial banks in the form of interest-paying reserves and invested the proceeds in portfolios of risky assets. We investigate how this new style of central banking affects central banks’ solvency. A central bank is insolvent if its requirement to pay dividends to its government exceeds its income by enough to cause an unending upward drift in its debts to commercial banks. We consider three sources of risk to central banks: interest-rate risk (the Federal Reserve), default risk (the European Central Bank), and exchange-rate risk (central banks of small open economies). We find that a central bank that pays dividends equal to a standard concept of net income will always be solvent—its reserve obligations will not explode. In some circumstances, the dividend will be negative, meaning that the government is making a payment to the bank. If the charter does not provide for payments in that direction, then reserves will tend to grow more in crises than they shrink in normal times. To prevent this buildup, the charter needs to provide for makeup reductions in payments from the bank to the government. We compute measures of the financial strength of central banks, and discuss how different institutions interact with quantitative easing policies to put these banks in less or more danger of instability. We conclude that the risks to financial stability are real in theory, but remote in practice today.
    JEL: E42 E58
    Date: 2015–07
  33. By: Easaw, Joshy (Cardiff Business School); Heravi, Saeed (Cardiff Business School); Dixon, Huw David (Cardiff Business School)
    Abstract: The purpose of the present paper is to investigate perceived inflation gap persistence using actual data of professional forecasts. We derive the unobserved perceived inflation gap persistence and using a state dependent model we estimate the non-linear persistence coefficient of inflation gap. Our main result is that for GDP deflator inflation, the estimates of persistence largely confirm the results obtained indirectly using a linear model. However, when we look at CPI inflation, we find that there is strong evidence for state-dependence and time variation.
    Keywords: Perceived Inflation Gaps; Professional’s Survey-based Forecasts; State-Dependent Models
    JEL: E31 E52 E58
    Date: 2015–10
  34. By: Yahong (Department of Economics, University of Windsor)
    Abstract: The collapse of the housing prices in the U.S. during the Great Recession not only eroded housing wealth held by households, but also the values of the assets in the banking sector. As a result, during the Great Recession mortgage risk premium increases signi?cantly. I introduce a micro-founded banking sector to a standard DSGE model with household debt to study the interaction between housing prices, household debt and banks’ balance sheet positions. I estimate the model using the US data from 1991Q1 to 2014Q1. I ?nd that the model accounts well the negative relationship between housing prices and mortgage risk premium. In the model, a weakened households’ demand for housing leads to a decline in housing prices, which worsens the banks’ balance sheet positions, and as a result, risk premium rises. The results show that housing demand shocks as well as shocks that increases the riskiness of the banking sector contribute signi?cantly to the decline in output during the Great Recession. I also ?nd that the unconventional monetary policy implemented by the Federal Reserve mitigates the decline in output.
    Keywords: household debt, risk premium, banking, unconventional monetary policy
    JEL: E32 E44 E52
    Date: 2015–11
  35. By: Guglielmo Maria Caporale; Faek Menla Ali; Fabio Spagnolo; Nicola Spagnolo
    Abstract: This paper investigates the effects of equity and bond portfolio inflows on exchange rate volatility, using monthly bilateral data for the US vis-a-vis eight Asian developing and emerging countries (India, Indonesia, South Korea, Pakistan, Hong Kong, Thailand, the Philippines, and Taiwan) over the period 1993:01-2012:11, and estimating a time-varying transition probability Markov-switching model. We find that net equity (bond) inflows drive the exchange rate to a high (low) volatility state. In particular, net bond inflows increase the probability of remaining in the low volatility state in the case of Pakistan, Thailand, and the Philippines, whilst they increase the probability of staying in the high volatility state in the case of Indonesia. Finally, net equity inflows from India, Indonesia, South Korea, Hong Kong, and Taiwan towards the US also increase the probability of staying in the high volatility state. These findings can be plausibly interpreted in terms of the "return-chasing" hypothesis and suggest that credit controls on portfolio flows could be an effective tool to stabilise the foreign exchange market.
    Keywords: Bond flows, Equity flows, Exchange rates, Regime switching
    JEL: F31 F32 G15
    Date: 2015
  36. By: Hamza Bennani; Etienne Farvaque; Piotr Stanek
    Abstract: We study determinants of individual FOMC members disagreement with the decided policy rate. Utilizing a novel dataset of macroeconomic indicators for the Fed districts and preferences revealed by FOMC members in the transcripts, we construct individual reaction functions for each member for the period 1994-2008. Then, we explain the gap between each member’s preferred rate and the adopted policy rate by individual background characteristics. First, we find that FOMC members tend to react to regional economic conditions, in particular the unemployment rate. Second, that Professors, and individuals holding a master degree or issued from either private or public sector have a higher propensity to disagree on the dovish side during the meetings, while female members as well as governors nominated by a Democrat President tend to disagree on the hawkish side (as compared to the “reference†member, who is a male, PhD holder, Regional Bank President with experience in the financial sector). Moreover, we show that, under Ben Bernanke, in a period a large economic uncertainty, the propensity to disagree increased for all types of members.
    Keywords: Transcripts, FOMC, Interest Rate, Individual Taylor Rule.
    JEL: E43 E58 F36
    Date: 2015
  37. By: jae sim (Federal Reserve Board); Raphael Schoenle (Brandeis University); Egon Zakrajsek (Federal Reserve Board); Simon Gilchrist (Boston University)
    Abstract: In this paper, we analyze the business cycle and welfare consequences of monetary union among countries that face heterogeneous financial market frictions. We show that facing financial distress in the absence of devaluation, the firms in financially weak countries countries have an incentive to raise their prices to cope with liquidity shortfalls. At the same time, firms in countries with greater financial slack poach from the customer base of the former countries by undercutting their prices, without internalizing the detrimental effects on union-wide aggregate demand. Thus, a monetary union among countries with heterogeneous degrees of financial frictions may create a tendency toward internal devaluation for core countries with greater financial resources, leading to chronic current account deficits of the peripheral countries. A risk-sharing arrangement between the core and the periphery can potentially undo the distortion brought about by the currency union. However, such risk sharing requires unrealistic amounts of wealth transfers from the core to the periphery. We show that unilateral fiscal devaluation carried out by the peripheral countries can substantially improve the situation not only for themselves but also for the core countries if there exists an important degree of pecuniary externality not internalized by the predatory pricing strategies of individual firms.
    Date: 2015
  38. By: Branimir Jovanovic (National Bank of the Republic of Macedonia); Aneta Krstevska (National Bank of the Republic of Macedonia); Neda Popovska-Kamnar (National Bank of the Republic of Macedonia)
    Abstract: Surplus liquidity in the banking system changes the monetary transmission mechanism, reducing the effectiveness of the traditional instrument, the interest rate. In this paper we examine the real effects of several monetary-policy instruments in Macedonia, an economy characterized by surplus liquidity. We use regime-switching Vector Auto regressions and track the responses of different economic activity indicators to changes in the monetary policy instruments. Our findings suggest that the interest rate channel is weakly effective in Macedonia. The responses to the other instruments are not very sizeable, either, but are significant. This implies that monetary policy can affect economic activity through the reserve requirement and the offered amount of central bank bills. These findings have implications for both the analysis and the conduct of monetary policy in economies with surplus liquidity. Regarding analysis, the implication is that the traditional approach, which considers only the role of the interest rate, is likely to lead to wrong conclusions. Regarding conduct, the implication is that monetary authorities, besides on the price impact of the interest rate, should additionally rely on the reserve requirement and other available instruments producing volume impact.
    Keywords: monetary policy, surplus liquidity, excess liquidity, VAR, Macedonia
    JEL: E50 E52
    Date: 2015–10
  39. By: Boris Blagov; Michael Funke; Richhild Moessner
    Abstract: Using a Markov-switching VAR with endogenous transition probabilities, we analyse what has triggered the interest rate pass-through impairment for Italy, Ireland, Spain and Portugal. We find that global risk factors have contributed to higher lending rates in Italy and Spain, problems in the banking sector help to explain the impairment in Spain, and fiscal problems and contagion effects have contributed in Italy and Ireland. We also find that the ECB's unconventional monetary policy announcements have had temporary positive effects in Italy. Due to the zero lower bound these findings are amplified if EONIA is used as a measure of the policy rate. We did not detect changes in the monetary policy transmission for Portugal.
    Keywords: Lending rates, interest rate pass-through
    Date: 2015–11
  40. By: Piotr Denderski; Wojciech Paczos
    Abstract: Over the last 30 years cross-country financial integration has increased significantly. In this process many banks in developing and transition economies became foreign-owned. Using a panel data on banks in eleven Central and Eastern Europe economies we provide new evidence that foreign-owned banks react differently to monetary policy changes than domestic-owned banks not only during financial crises but also in normal times. We embed bank heterogeneity in a stylized DSGE model featuring monopolistic competition in the banking sector and show that such a pattern may be driven not only by a facilitated access to internal market within the financial conglomerate they belong to but also by their competitive advantages. While the first mechanism leads to a decrease of the responsiveness of the banking sector to the monetary policy, the second mechanism does not.
    Keywords: banks, bank ownership, bank lending channel, monetary policy
    JEL: E44 E50 G21
    Date: 2015
  41. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Remarks at the Economic Club of New York, New York City.
    Keywords: personal consumption expenditures (PCE) deflator; inflation expectations; zero lower bound; interest rate normalization; lift-off; short-term neutral real interest rate; nominal federal funds rate; real federal funds rate; r*; financial conditions
    JEL: E52 E66
    Date: 2015–11–12
  42. By: Neil R. Ericsson (Board of Governors of the Federal Reserve System)
    Abstract: Stekler and Symington (2016) construct indexes that quantify the Federal Open Market Committee’s views about the U.S. economy, as expressed in the minutes of the FOMC’s meetings. These indexes provide insights on the FOMC’s deliberations, especially at the onset of the Great Recession. The current paper complements Stekler and Symington’s analysis by showing that their indexes reveal relatively minor bias in the FOMC’s views when the indexes are reinterpreted as forecasts. Additionally, these indexes provide a proximate mechanism for inferring the Fed staff’s Greenbook forecasts of the U.S. real GDP growth rate, years before the Greenbook’s public release.
    Keywords: Autometrics; bias; Fed; financial crisis; FOMC; forecasts; GDP; Great Recession; Greenbook; impulse indicator saturation; projections; Tealbook; United States.
    JEL: E58 C53
    Date: 2015–11
  43. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the Bank of England-Federal Reserve Bank of New York Conference on Money Markets and Monetary Policy Implementation, London, United Kingdom.
    Keywords: quantitative easing (QE); monetary policy implementation; implementation tools; normalization; implementation framework; volatility; operating framework; balance sheet; interest on reserve balances
    Date: 2015–11–16

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