nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒12‒01
thirty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Unconventional Monetary Policy in the Euro Zone By John Driffill
  2. A search-based model of the interbank money market and monetary policy implementation By Morten Linneman Bech; Cyril Monnet
  3. Ambiguity, monetary policy and trend inflation By Masolo, Riccardo; Monti, Francesca
  4. The effect of ECB monetary policies on interest rates and volumes By Jérôme Creel; Paul Hubert; Mathilde Viennot
  5. The effect of ECB monetary policies on interest rates and volumes By Jérôme Creel; Paul Hubert; Mathilde Viennot
  6. External shocks, banks and optimal monetary policy in an open economy By Yasin Mimir; Enes Sunel
  7. Housing and Monetary Policy in the Business Cycle: What do Housing Rents have to Say? By Joao Bernardo Duarte; Daniel A. Dias
  8. Should We Worry About Excess Reserves? By Phelan, Christopher
  9. US Domestic Money, Output, Inflation and Unemployment By Ackon, Kwabena
  10. On the separation of monetary and prudential policy: how much of the pre-crisis consensus remains? By Cecchetti, Stephen G
  11. Inflation dynamics during the financial crisis By Gilchrist, Simon; Schoenle, Raphael; Sim, Jae W.; Zakrajsek, Egon
  12. Price Setting Under Uncertainty About Inflation By Diego Perez; Andres Drenik
  13. Towards Greater Diversification in Central Bank Reserves By Marie Brière; Valérie Mignon; Kim Oosterlinck; Ariane Szafarz
  14. Monetary Policy and Welfare in a Currency Union By D’Aguanno, Lucio
  15. QE and the Bank Lending Channel in the United Kingdom By Butt, Nick; Churm, Rohan; McMahon, Michael; Morotz, Arpad; Schanz, Jochen
  16. Reputational Risk Management in Central Banks By Jill Vardy
  17. Countercyclical Foreign Currency Borrowing:Eurozone Firms in 2007-2009 By Philippe Bacchetta; Ouarda Merrouche
  18. Trends in the Money Market in Japan - Results of the Tokyo Money Market Survey (August2015) - By Financial Markets Department
  19. Central Bank CollaterALL By Jeannette Capel
  20. Deposit dollarization in emerging markets: modelling the hysteresis effect By Krupkina , Anna; Ponomarenko , Alexey
  21. U.S. Payment System Improvement and the Federal Reserve 11.18.15 Loretta J. Mester The Clearing House Annual Conference, New York, NY By Mester, Loretta J.
  22. Short- and long-run tradeoff monetary easing By Koki Oikawa; Kozo Ueda
  23. Equilibria Under Monetary and Fiscal Policy Interactions in a Portfolio Choice Model By Gliksberg, Baruch
  24. Core Inflation and the Business Cycle By Yoshihiko Hogen; Takuji Kawamoto; Moe Nakahama
  25. Performances of Core Indicators of Japanfs Consumer Price Index By Shigenori Shiratsuka
  26. The Global Financial Safety Net through the Prism of G20 Summits By Cheng, Gong
  27. Evidence-based policy making? The Commission¡¯s Proposal for an FTT By Giorgia Maffini; John Vella
  28. On the Essentiality of E-Money By Jonathan Chiu; Tsz-Nga Wong
  29. The Federal Reserve’s counterparty framework: past, present, and future By Potter, Simon M.
  30. Inflation Co-movement across Countries in Multi-maturity Term Structure: An Arbitrage-Free Approach By Shi Chen; Wolfgang Karl Härdle; Weining Wang;
  31. 'Cyclically Adjusted Provisions and Financial Stability' By Kyriakos C. Neanidis; L. Pereira da Silva

  1. By: John Driffill
    Abstract: The European Central Bank adopted a policy of quantitative easing early in 2015, long after the US and UK, and after implementing a succession of measures to increase liquidity in the Euro zone financial markets, none of which proved sufficient eventually. The paper draws out lessons for the Euro zone from US and UK experience. Numerous event studies have been undertaken to uncover the effects of QE on yields on and prices of financial assets. Estimated effects on long-term government bond yields are then converted into the size of the cut in the policy rate that would normally have been needed to produce them. From these implicit cuts in policy rates, estimates of the effect on GDP and inflation are generated. Euro zone QE appears to have had a much smaller effect on bond yields for the core members states than did QE in the US or UK. Therefore its effects on output and inflation are likely to be proportionately smaller. Its effects on long-term government bond yields in periphery members are greater. QE is compressing interest differential among Euro zone member states. The dangers of QE to which various commentators draw attention, that it creates a danger of inflation in the future, that it creates asset price bubbles, that it allows zombie firms and banks to survive, slowing down the process of adjustment, seem remote. Meanwhile it makes a useful contribution to cutting the costs of debt service and allowing member states more fiscal room for maneouvre.
    Keywords: quantitative easing, unconventional monetary policy, Euro zone, financial crisis, European Central Bank
    JEL: E31 E43 E51 E58 E63
    Date: 2015–11
  2. By: Morten Linneman Bech; Cyril Monnet
    Abstract: We present a search-based model of the interbank money market and monetary policy implementation. Banks are subject to reserve requirements and the central bank tenders reserves. Interbank payments redistribute holdings and banks trade with each other in a decentralized (over-the-counter) market. The central bank provides standing facilities where banks can either deposit surpluses or borrow to cover shortfalls of reserves overnight. The model provides insights on liquidity, trading volume, and rate dispersion in the interbank market - features largely absent from the canonical models in the tradition of Poole (1968) - and fits a number of stylized facts for the Eurosystem observed during the recent period of unconventional monetary policies. Moreover, it provides insights on the implications of different market structures.
    Keywords: Interbank market, monetary policy implementation, unconventional monetary policy
    Date: 2015–11
  3. By: Masolo, Riccardo (Bank of England); Monti, Francesca (Bank of England)
    Abstract: We develop a model that can explain the evolution of trend inflation in the United States in the three decades before the Great Recession as a function of the reduction in uncertainty about the monetary policy maker’s behaviour. The model features ambiguity-averse agents and ambiguity regarding the conduct of monetary policy, but is otherwise standard. Trend inflation arises endogenously and has these determinants: the strength with which the central bank responds to inflation, the degree of uncertainty about monetary policy perceived by the private sector, and, if it exists, the inflation target. Given the importance of monetary policy for the determination of trend inflation, we also study optimal monetary policy in the case of lingering ambiguity.
    Keywords: Ambiguity aversion; monetary policy; trend inflation.
    JEL: D84 E31 E43 E52 E58
    Date: 2015–11–13
  4. By: Jérôme Creel (OFCE); Paul Hubert (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 country-specific 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; Pass through; Bank lending
    JEL: E51 E52 E58
    Date: 2015–10
  5. By: Jérôme Creel (OFCE Sciences Po & ESCP Europe); Paul Hubert (OFCE-SciencesPo); Mathilde Viennot (Paris School of Economics)
    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, Pass-through, Bank Lending
    JEL: E51 E52 E58
    Date: 2015–10
  6. By: Yasin Mimir; Enes Sunel
    Abstract: We document empirically that the 2007-09 Global Financial Crisis exposed emerging market economies (EMEs) to an adverse feedback loop of capital outflows, depreciating exchange rates, deteriorating balance sheets, rising credit spreads and falling real economic activity. In order to account for these empirical findings, we build a New-Keynesian DSGE model of a small open economy with a banking sector that has access to both domestic and foreign funding. Using the calibrated model, we investigate optimal, simple and operational monetary policy rules that respond to domestic/external financial variables alongside inflation and output. The Ramsey-optimal policy rule is used as a benchmark. The results suggest that such an optimal policy rule features direct and non-negligible responses to lending spreads over the cost of foreign debt, the real exchange rate and the US policy rate, together with a mild anti-inflationary policy stance in response to domestic and external shocks. Optimal policy faces trade-offs in smoothing inefficient fluctuations in the intratemporal and intertemporal wedges driven by inflation, credit spreads and the real exchange rate. In response to productivity and external shocks, a countercyclical reserve requirement (RR) rule used in coordination with a conventional interest rate rule attains welfare levels comparable to those implied by spread- and real exchange rate-augmented rules.
    Keywords: Optimal monetary policy, banks, credit frictions, external shocks, foreign debt
    Date: 2015–11
  7. By: Joao Bernardo Duarte; Daniel A. Dias
    Abstract: In this paper we unveil a feedback loop between monetary policy, housing tenure choice (own vs rent) and measured inflation and quantify its consequences. This feedback loop is explained in three parts: i) Housing rents respond positively to contractionary monetary policy shocks; ii) This effect of interest rates on housing rents gives rise to an important and systematic inflation mismeasurement problem because, directly and indirectly, housing rents weigh approximately 30\% in the CPI and 13\% in the PCE; iii) When interest rates are set according to a Taylor rule, the systematic mismeasurement of inflation gives rise to a feedback loop by which the monetary authority keeps setting interest rates too high (low) because inflation is apparently too high (low). To rationalize i) and quantify the importance of iii) we propose a standard New Keynesian model augmented with an endogenous housing tenure choice mechanism. Using a calibrated version of the model, we do a counterfactual exercise and estimate that, when the monetary authority targets the implied consumer price index net of housing rents instead of the implied consumer price index, the loss function of monetary policy is 14.5\% lower and the welfare in terms of consumption equivalent variation is 0.9\% higher. Finally, analyzing the same alternative scenario for the 1983-2006 US experience, we find that the standard deviation of housing prices and nominal inflation would have been 24.8\% and 19.9\% lower, respectively.
    JEL: E31 E43 R21
    Date: 2015–11–26
  8. By: Phelan, Christopher (Federal Reserve Bank of Minneapolis)
    Abstract: Banks in the United States have the potential to increase liquidity suddenly and significantly—from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. {{p}} Policymakers could guard against this inflationary possibility by the Fed selling financial assets it acquired during quantitative easing or by Congress significantly raising reserve requirements.
    Date: 2015–11–03
  9. By: Ackon, Kwabena
    Abstract: The relationship between money and macroeconomic variables such as output, inflation and unemployment is the basis of macroeconomic policy piquing the interests of both academic economists and policy makers especially in the aftermath of the Great Recession. With the Federal Reserve expanding its balance sheet by an estimated $4 trillion, the current economic debate is whether there is a stable relationship between money and macroeconomic variables. In fact, previous research had shown that the link is tenuous and a more recent paper by Aksoy and Piskorski (2006) had concluded that accounting for the foreign holdings of US dollars holds predictive content for the path key macroeconomic variables such as output and inflation. This paper aimed to test this theory on a larger dataset including testing a small sample for the period after the Great Recession. I found that accounting for foreign holdings of US dollars improved the intrinsic information held in domestic money for the path of output after the great recession and the path of inflation between 1965-2007.
    Keywords: Currency, Money, Output, Inflation, Unemployment, Granger Causality, Forecasting
    JEL: E0 E3 E31 E37 E5 E52 E58
    Date: 2015–11–27
  10. By: Cecchetti, Stephen G
    Abstract: Prior to the crisis, monetary policymakers and prudential authorities had clearly defined tools and goals with little or no conflict. The crisis revealed a variety of overlaps, where one set of policies seem to influence those in another. Does this mean that two policy realms can no longer remain separate? I address the question by first asking whether monetary policy creates significant financial stability risks. My answer is generally no. Given that, central bankers should refrain from reacting to financial stability risks in most circumstances. Instead, the job of safeguarding the financial system should be left, as it was prior to the crisis, to prudential policymakers. But how can prudential policy best maintain financial stability? I argue that, given our current state of knowledge, stress tests are the best tool to ensure crisis will be rare and not terribly severe. So, my answer to the question in the title is that the pre-crisis consensus remains largely intact.
    Keywords: capital requirements; financial stability policy; monetary policy; prudential policy; stress tests
    JEL: E52 G01 G28
    Date: 2015–11
  11. By: Gilchrist, Simon (Boston University and NBER); Schoenle, Raphael (Brandeis University); Sim, Jae W. (Federal Reserve Board of Governors); Zakrajsek, Egon (Federal Reserve Board of Governors)
    Abstract: Firms with limited internal liquidity significantly increased prices in 2008, while their liquidity unconstrained counterparts slashed prices. Differences in the firms' price-setting behavior were concentrated in sectors likely characterized by customer markets. The authors develop a model in which firms face financial frictions while setting prices in a customer-markets setting. Financial distortions create an incentive for firms to raise prices in response to adverse demand or financial shocks. These results reflect the firms' reaction to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output.
    Keywords: missing deflation; sticky customer base; costly external finance; financial shocks; cost channel; inflation-output tradeoff
    JEL: E31 E32 E44 E51
    Date: 2015–11–01
  12. By: Diego Perez (Stanford); Andres Drenik (Stanford)
    Abstract: When setting prices firms use idiosyncratic information about the demand for their products as well as public information about the aggregate macroeconomic state. This paper provides an empirical assessment of the effects of the availability of public information about inflation on price setting. We exploit an event in which economic agents lost access to information about the inflation rate: starting in 2007 the Argentinean government began to misreport the national inflation rate. Our difference-in-difference analysis reveals that this policy led to an increase in the coefficient of variation of prices of 18% with respect to its mean. This effect is analyzed in the context of a general equilibrium model in which agents make use of publicly available information about the inflation rate to set prices. We quantify the model and use it to further explore the effects of higher uncertainty about inflation on the effectiveness of monetary policy and aggregate welfare. We find that monetary policy becomes more effective in a context of higher uncertainty about inflation and that not reporting accurate measures of the CPI entails significant welfare losses.
    Date: 2015
  13. By: Marie Brière; Valérie Mignon; Kim Oosterlinck; Ariane Szafarz
    Abstract: This paper compares the performance of various diversification strategies regarding foreign exchange reserves. The aim is to provide central banks with guidelines in portfolio allocation. We pay particular attention to the situation of upward pressures on U.S. interest rates by implementing our analysis over both the whole 1986-2015 period and a rising rate subsample. Relying on geometric tests of mean-variance efficiency, we show that introducing currencies weakly correlated to the USD (AUD and CAD) significantly reduces portfolio risk. Expected return is improved through mortgage-backed securities, corporate bonds, and equities.
    Keywords: Foreign exchange reserves; diversification; asset allocation.
    JEL: F31 G11 G15 E58
    Date: 2015
  14. By: D’Aguanno, Lucio (Department of Economics University of Warwick)
    Abstract: What are the welfare gains from being in a currency union? I explore this question in the context of a dynamic stochastic general equilibrium model with monetary barriers to trade, local currency pricing and incomplete markets. The model generates a trade off between monetary independence and monetary union. On one hand, distinct national monetary authorities with separate currencies can address business cycles in a countryspecific way, which is not possible for a single central bank. On the other hand, short-run violations of the law of one price and long-run losses of international trade occur if different currencies are adopted, due to the inertia of prices in local currencies and to the presence of trade frictions. I quantify the welfare gap between these two international monetary arrangements in consumption equivalents over the lifetime of households, and decompose it into the contributions of di.erent frictions. I show that the welfare ordering of alternative currency systems depends crucially on the international correlation of macroeconomic shocks and on the strength of the monetary barriers affecting trade with separate currencies. I estimate the model on data from Italy, France, Germany and Spain using standard Bayesian tools, and I find that the trade off is resolved in favour of a currency union among these countries.
    Keywords: Currency union ; Incomplete markets ; Nominal rigidities ; Local currency pricing ; Trade frictions ; Welfare
    JEL: D52 E31 E32 E42 E52 F41 F44
    Date: 2015
  15. By: Butt, Nick (Bank of England); Churm, Rohan (Bank of England); McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU)); Morotz, Arpad (Bank of England); Schanz, Jochen (Bank for International Settlements)
    Abstract: We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives `flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.
    Keywords: Monetary policy; Bank lending channel; Quantitative Easing JEL Classification: E51, E52, G20
    Date: 2015
  16. By: Jill Vardy
    Abstract: This paper discusses reputational risk in the context of central banking and explains why it matters to central banks. It begins with a general discussion of reputational risk within the broader framework of risk management. It then outlines how central banks define, measure, monitor and manage reputational risk, citing examples from central banks around the world, including the Bank of Canada. Finally, it presents a model for integrating reputational risk into policy analysis and operational planning—an “embedded communications” approach that ensures such considerations are brought into the core of central bank decision making.
    Keywords: Credibility, International topics, Monetary policy implementation
    JEL: E5 E52 E58
    Date: 2015
  17. By: Philippe Bacchetta; Ouarda Merrouche
    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, especi ally 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: Money market, swaps, credit crunch, corporate debt, foreign banks
    JEL: G21 G30 E44
    Date: 2015–08
  18. By: Financial Markets Department (Bank of Japan)
    Date: 2015–11–20
  19. By: Jeannette Capel
    Abstract: Until the last financial crisis hit, collateral policy was not considered a core 9 function. Most financial institutions considered it a back-office activity. Central banks, too, did not have to spend too much time on the design of their collateral policy. As trust in the financial system was high, many market participants deemed it unnecessary to have their risk exposures collateralized. In cases where they did ask for collateral, they often accepted a wide range of assets owing to the favourable credit quality assessments for many financial assets. As a result, central banks did not have to worry much about collateral and liquidity shortages in the financial system or about the potential impact of their own collateral frameworks on the financial markets.
    Date: 2015–07
  20. By: Krupkina , Anna (BOFIT); Ponomarenko , Alexey (BOFIT)
    Abstract: We apply empirical modelling set-ups developed to capture the hysteresis effect in the data on deposit dollarization in a cross-section of emerging market economies. Specifically, we estimate a nonlinear relationship that determines two equilibrium levels of deposit dollarization depending on the current value of dollarization and previous episodes of sharp depreciation of the national currency over the past five years. When exchange rates are stable, convergence to a higher equilibrium level of dollarization begins when the 45–50% thresh-old of deposit dollarization is exceeded. We estimate the model for short-run dynamics of dollarization and find that the speed of convergence to the higher equilibrium implies quarterly increases of 1.2–3 percentage points in the ratio of foreign currency deposits to total deposits.
    Keywords: dollarization; hysteresis; nonlinear model; emerging markets
    JEL: C23 E41 F31
    Date: 2015–11–10
  21. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Good morning. As the central bank of the United States, the Federal Reserve has a strong interest in fostering a well-functioning payment system. In my brief time this morning, I will answer three broad questions about the collaborative initiatives being led by the Federal Reserve working with private-sector stakeholders. These initiatives are aimed at improving the U.S. payment system’s speed, efficiency, access, and security. As always, the views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee
    Date: 2015–11–19
  22. By: Koki Oikawa; Kozo Ueda
    Abstract: In this study, we illustrate a tradeoff between the short-run positive and long-run negative effects of monetary easing by using a dynamic stochastic general equilibrium model embedding endogenous growth with creative destruction and sticky prices due to menu costs. While a monetary easing shock increases the level of consumption because of price stickiness, it lowers the frequency of creative destruction (i.e., product substitution) because inflation reduces the reward for innovation via menu cost payments. The model calibrated to the U.S. economy suggests that the adverse effect dominates in the long run.
    Keywords: Schumpeterian, new Keynesian, non-neutrality of money
    JEL: E31 E58 O33 O41
    Date: 2015–11
  23. By: Gliksberg, Baruch (Department of Economics, University of Haifa)
    Abstract: This paper analyzes the aftermath of monetary and fiscal policy interactions from the perspective of portfolio choice. In particular, it studies how the presence of income- taxes change the properties of general equilibrium models. It finds that relative to the previous literature [following Leeper (1991)] a new regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. It characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state in order to obtain the size of the new regime. In the new regime, the inflation target can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).
    Keywords: Distorting Taxes; Dynamic Laffer Curve; Fiscal Policy; Liquidity-in- advance; Monetary Policy; Portfolio Choice; Unpleasant Monetarist Arithmetic.
    JEL: C62 E60 G11 H60
    Date: 2015–10–14
  24. By: Yoshihiko Hogen (Bank of Japan); Takuji Kawamoto (Bank of Japan); Moe Nakahama (Bank of Japan)
    Abstract: We estimate various measures of core inflation which remove temporary disturbances from price indicators and examine their characteristics over the business cycle. In particular, we focus on some new measures of core inflation for Japan, the mode and weighted median inflation rates, which represent shifts in the price change distribution, as well as the CPI excluding fresh food and energy, which the Bank of Japan has recently focused on. Measures of core inflation that simply exclude volatile items closely follow the business cycle as measured by the output gap, while measures such as the mode and the weighted median are much more weakly linked to developments in the output gap.
    Date: 2015–11–20
  25. By: Shigenori Shiratsuka (Bank of Japan)
    Abstract: The Bank of Japan (BOJ), in conducting monetary policy, employs the core indicators of the consumer price index (CPI) to identify the underlying trend of inflation by excluding various idiosyncratic disturbances from the overall CPI. Considering that sources of such idiosyncratic disturbances are not always constant over time, this article examines the performance of the core indicators by focusing on the stability over the estimation period. Empirical evidence reveals that the CPI excluding fresh food and trimmed mean generally show better performance than other indicators. It also shows that the performance of the CPI excluding fresh food is deteriorating currently, even though such deterioration, affected by large swings in crude oil prices, is likely to be temporary. In examining the underlying trend of inflation and explaining it to the public, it is thus important to consider various indicators, such as trimmed mean, and the CPI excluding fresh food and energy, even though the CPI excluding fresh food remains a main indicator, considering its high public awareness.
    Date: 2015–11–20
  26. By: Cheng, Gong
    Abstract: Since the Global Financial Crisis, the Group of Twenty (G20) has not only become the premier forum for policy coordination among major economies but has also played an important role in promoting reforms to safeguard global financial stability. This paper focuses on the commitments the G20 has made to strengthen the Global Financial Safety since its first Leaders' Summit in Washington, D.C. in 2008. This paper first compares reform proposals that the G20 achieved and those it did not during the subsequent six years, or by the 2014 Summit in Australia. The paper finds that reforms aimed at enhancing financial resources and renewing instruments for emergency liquidity provision were substantially implemented. However, institutional reforms concerning the governing structure of International Financial Institutions were delayed. The paper then analyses, from a political economic perspective, why the G20 delivered on the first set of reforms, but not on the second. The urgency of responding to the crisis, the role of particular countries as well as institutional characteristics of the G20 framework determine the political interests in this reform area.
    Keywords: Global Financial Safety Net, G20, International Monetary Fund, Regional Financing Arrangements
    JEL: F33 F53 F55
    Date: 2015–05
  27. By: Giorgia Maffini (Oxford University Centre for Business Taxation and Dondena Centre at Bocconi University, Milan); John Vella (Oxford University Centre for Business Taxation)
    Abstract: The central conclusion of this paper is that the Commission¡¯s evidence is not persuasive and does not make the case for an FTT. Whilst some of the objectives pursued by the proposals are reasonable, others are questionable. More importantly, the Commission¡¯s evidence does not support the choice of the FTT as the instrument which is best suited to achieve these objectives. More targeted and more efficient instruments should and could be used to achieve these objectives.
    Date: 2015
  28. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: Recent years have witnessed the advances of e-money systems such as Bitcoin, PayPal and various forms of stored-value cards. This paper adopts a mechanism design approach to identify some essential features of different payment systems that implement and improve the constrained optimal resource allocation. We find that, compared to cash, emoney technologies allowing limited participation, limited transferability and non-zerosum transfers can help mitigate fundamental frictions and enhance social welfare, if they satisfy conditions in terms of parameters such as trade frequency and bargaining powers. An optimally designed e-money system exhibits realistic arrangements including nonlinear pricing, cross-subsidization and positive interchange fees even when the technologies incur no costs. Regulations such as a cap on interchange fees (à la the Dodd- Frank Act) can distort the optimal mechanism and reduce welfare.
    Keywords: Bank notes, E-Money, Payment clearing and settlement systems
    JEL: E E4 E42 E5 E58 L5 L51
    Date: 2015
  29. By: Potter, Simon M. (Federal Reserve Bank of New York)
    Abstract: Remarks at the 2015 Roundtable on Treasury Markets and Debt Management, Federal Reserve Bank of New York, New York City.
    Keywords: primary dealer system; Treasury Market Practices Group (TMPG); secondary market for Treasury Securities; counterparty risks; Ken Garbade; dealer surveillance; the Desk; transparency; daily reverse repurchase agreement (RRP)
    Date: 2015–11–19
  30. By: Shi Chen; Wolfgang Karl Härdle; Weining Wang;
    Abstract: Inflation expectation is acknowledged to be an important indicator for policy makers and financial investors. To capture a more accurate real-time estimate of inflation expectation on the basis of financial markets, we propose an arbitrage-free model across different countries in a multi-maturity term structure, where we first estimate inflation expectation by modelling the nominal and inflation-indexed bond yields jointly for each country. The Nelson-Siegel model is popular in fitting the term structure of government bond yields, the arbitrage-free model we proposed is the extension of the arbitrage-free dynamic Nelson-Siegel model proposed by Christensen, Diebold and Rudebusch (2011). We discover that the extracted common trend for inflation expectation is an important driver for each country of interest. Moreover, the model will lead to an improved forecast in a benchmark level of inflation and will provide good implications for financial markets.
    Keywords: inflation expectation dynamics, arbitrage free, yield curve modelling, inflation risk
    JEL: G12 E43 E31
  31. By: Kyriakos C. Neanidis; L. Pereira da Silva
    Abstract: This paper studies the extent to which alternative loan loss provisioning regimes affect the procyclicality of the financial system and financial stability. It uses a DSGE model with financial frictions (namely, balance sheet and collateral effects, as well as economies of scope in banking) and a generic formulation of provisioning regimes. Numerical experiments with a parameterized version of the model show that cyclically adjusted (or, more commonly called, dynamic) provisioning can be highly effective in terms of mitigating procyclicality and financial instability, measured in terms of the volatility of the credit-output ratio and real house prices, in response to financial shocks. The optimal combination of simple cyclically adjusted provisioning and countercyclical reserve requirements rules is also studied. The simultaneous use of these instruments does not improve the ability of either one of them to mitigate financial instability, making them partial substitutes rather than complements.
    Date: 2015

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