nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒12‒08
thirty-two papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Excess reserves and monetary policy normalization By Armenter, Roc; Lester, Benjamin
  2. Taylor rules, central bank preferences and inflation targeting By Juan Paez-Farrell
  3. Monetary Policy in a Developing Country: Loan Applications and Real Effects By Charles Abuka; Ronnie K. Alinda; Camelia Moniou; Jose-Luis Peydro; Andrea Filippo Presbitero
  4. The shocks matter: improving our estimates of exchange rate pass-through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  5. Is globalisation reducing the ability of central banks to control inflation? By Grégory Claeys; Guntram B. Wolff
  6. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  7. Macroprudential and Monetary Policy Interaction: a Brazilian perspective By Fabia A. de Carvalho; Marcos R. de Castro
  8. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Haroon Mumtaz; Konstantinos Theodoridis
  9. Financial Sector Interconnectedness and Monetary Policy Transmission By Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
  10. Inflation targeting in developing economies revisited By John Thorton
  11. Macroprudential Policy: What Does It Really Mean By Lopez, Claude; Markwardt, Donald; Savard, Keith
  12. Parameter bias in an estimated DSGE model: does nonlinearity matter? By Yasuo Hirose; Takeki Sunakawa
  13. Squaring the cycle: capital flows, financial cycles, and macro-prudential policy in the euro area By Silvia Merler
  14. "The Two Approaches to Money: Debt, Central Banks, and Functional Finance" By Giuseppe Mastromatteo; Lorenzo Esposito
  15. The lean versus clean debate and monetary policy in South Africa By Raputsoane, Leroi
  16. Dynamic hierarchical models for monetary transmission By Paolo Giudici; Laura Parisi
  17. Shoe-leather costs in the euro area and the foreign demand for euro banknotes By Alessandro Calza; Andrea Zaghini
  18. The macroeconomic effects of low and falling inflation at the zero lower bound By Stefano Neri; Alessandro Notarpietro
  19. Perils of quantitative easing By McMahon, Michael; Peiris, Udara; Polemarchakis, Herakles
  20. The relevance or otherwise of the central bank’s balance sheet By Miles, David; Schanz, Jochen
  21. Monetary Policy According to HANK By Gianluca Violante; Benjamin Moll; Greg Kaplan
  22. Measurement Errors and Monetary Policy: Then and Now By Amir-Ahmadi, Pooyan; Matthes, Christian; Wang, Mu-Chun
  23. Answers to Five Questions Related to U.S. Monetary Policy By Bullard, James B.
  24. Endogenous interest rate with accommodative money supply and liquidity preference By Angel Asensio
  25. Macroprudential supervision: from theory to policy By Dirk Schoenmaker; Peter Wierts
  26. Identifying Central Bank Liquidity Super-Spreaders in Interbank Funds Networks By Leon Rincon, C.E.; Machado, C.; Sarmiento Paipilla, N.M.
  27. What are the macroeconomic effects of asset purchases? By Wales, Martin; Wieladek, Tomasz
  28. Emergency Liquidity Facilities, Signalling and Funding Costs By Céline Gauthier; Alfred Lehar; Héctor Pérez Saiz; Moez Souissi
  29. Monetary and Macroprudential Policies under Fixed and Variable Interest Rates By Margarita Rubio
  30. Taylor rules for CEE-EU countries: How much heterogeneity? By Sydykova, Meerim; Stadtmann, Georg
  31. Interest rate pass-through: a nonlinear vector error-correction approach By Michal Popiel
  32. The Conquest of Israeli Inflation and Current Policy Dilemmas By Cukierman, Alex; Melnick, Rafi

  1. By: Armenter, Roc (Federal Reserve Bank of Philadelphia); Lester, Benjamin (Federal Reserve Bank of Philadelphia)
    Abstract: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.
    Keywords: Excess reserves; Federal funds market; Federal funds rate
    JEL: E42 E43 E52 E58
    Date: 2015–09–15
  2. By: Juan Paez-Farrell (Department of Economics, University of Sheffield)
    Abstract: The objective of this paper is to infer the policy preferences of three inflation targeting central banks, Australia, Canada and New Zealand, using an estimated New Keynesian small open economy model. While I assume that the monetary authorities optimise, I depart from previous research by assuming that monetary policy is implemented via simple Taylor-type rules, as suggested by most of the empirical literature. I then derive the weights in the objective function that make the resulting optimal interest rate rule coincide with its estimated counterpart. Therefore, from the central bank’s point of view, actual policy is optimal.
    Keywords: Small open economies; monetary policy; policy preferences; Taylor rule; inverse opti-mal control; inflation targeting
    JEL: E52 E58 E61 F41
    Date: 2015–11
  3. By: Charles Abuka (Bank of Uganda); Ronnie K. Alinda (Bank of Uganda); Camelia Moniou (International Monetary Fund (IMF)); Jose-Luis Peydro (ICREA-Universitat Pompeu Fabra,CREI, Barcelona GSE and CEPR.); Andrea Filippo Presbitero (International Monetary Fund, Universit… Politecnica delle Marche - MoFiR)
    Abstract: We examine the bank lending channel in Uganda, a developing country where monetary policy transmission may be impaired by weaknesses in the contracting environment, shallow financial markets, and a concentrated banking system. Our analysis employs a supervisory loan-level dataset and focuses on a short period during which the policy rate rose by 1,000 basis points and then came down by 1,100 basis points. We find that an increase in interest rates reduces the supply of bank credit both on the extensive and intensive margins, and there is significant pass-through to retail lending rates. We document a strong bank balance sheet channel, as the lending behavior of banks with high capital and liquidity is different from that of banks with low capital and liquidity. Finally, we show the impact of monetary policy on real activity across districts depends on banking sector conditions. Overall, our results indicate significant real effects of the bank lending channel in developing countries.
    Keywords: Bank balance sheet channel, Bank lending channel, Developing countries, Monetary policy transmission
    JEL: E42 E44 E52 E58
    Date: 2015–12
  4. By: Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Nenova, Tsvetelina (Monetary Policy Committee Unit, Bank of England)
    Abstract: A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations ‘pass through’ into import and consumer prices. We show that in a standard open-economy model the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we develop an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with our theoretical model. Applying this framework to the United Kingdom, we find that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations. For example, exchange rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks. This framework helps explain why pass-through can change over time, including why sterling’s post-crisis depreciation caused a sharper increase in prices than expected and sterling’s recent appreciation has had a more muted effect.
    Keywords: Exchange rate pass-through; import prices; consumer prices; inflation; vector autoregression.
    JEL: E31 F41
    Date: 2015–12–01
  5. By: Grégory Claeys; Guntram B. Wolff
    Abstract: Highlight After soaring in the 1970s, inflation in Organisation of Economic Cooperation and Development countries stabilised, coming down from 9 percent on average in the early 1980s to about 2 percent in the years before the crisis, and to a lower level in recent years. This trend coincided with the acceleration of globalisation, triggering a debate about whether global integration (of goods, labour and financial markets) could be one of the main drivers of the disinflation process and whether central banks’ ability to control inflation could be weaker as a result. We explore the different ways in which globalisation could have an impact on inflation and monetary policy transmission channels. We conclude that inflation dynamics can be affected by globalisation and that central banks should take external factors into account in their decision-making processes and in their economic models. Even if the transmission mechanisms are affected by globalisation and in particular by financial integration, ultimately, central banks retain their ability to control medium-term inflation, as long as they adopt flexible exchange rates. Executive Summary After soaring in the 1970s and early 1980s, inflation has declined significantly in all advanced countries and is now at very low levels. This movement coincided with the acceleration of globalisation, triggering a recent debate on whether globalisation could be one of the main drivers of the disinflation process, and whether the ability of central banks to control inflation could be undermined as a result. The acceleration in globalisation has mainly taken three forms that could affect inflation dynamics and monetary policy - trade integration, labour market integration and financial integration. Openness in terms of trade and finance has led to a greater sensitivity of domestic price levels to external price shocks. Trade with low-cost countries has increased massively in the last two decades, which has logically resulted in a reduction in the price of imported goods. Global competition between firms might have also reduced the pricing power of domestic companies, while the integration of billions of workers into the global labour market has likely reduced the bargaining power of domestic workers. The empirical literature shows that the contribution of globalisation to the global disinflation movement since the 1990s has been positive, but rather limited for the moment. A more important question is whether these integration trends affect the transmission mechanisms of monetary policy and reduce the ability of central banks to fulfil their mandate. The transmission channels of monetary policy could potentially be affected at various levels. First, central banks could lose their ability to control inflation if inflation becomes a function of global slack instead of being a function of domestic slack. Second, central banks could lose control of short-term rates if rates become a function of global liquidity instead of the liquidity provided by the domestic central bank. And third, central banks could lose their hold over domestic inflation and economic activity if long-term interest rates depend only on the balance between savings and investment at the global level, and not at the domestic level. It is true that the negative relationship between domestic slack and domestic inflation has changed and that that the slope of the Phillips curve has flattened since the mid-1980s. However, recent empirical studies have failed to demonstrate that globalisation had been one of the main drivers behind this trend. A more plausible explanation seems to lie in the monetary policy changes that have taken place since the mid-1980s, with the adoption of credible inflation-targeting regimes in many advanced countries. Concerning the control of central banks over the domestic yield curve, it is clear that as long as central banks retain some kind of domestic monopoly over the issuance of base money, they will be able to control the shorter end of the domestic yield curve. For long-term rates, this is less clear, however. The conundrum episode of 2004-06 in the US suggests that long-term rates can become less sensitive to short-term rates and that external factors can affect them significantly. Since the beginning of the crisis, central banks also showed that they were willing to use less conventional monetary tools in order to influence the whole yield curve, in particular when they are constrained at the short end of the curve by the zero lower bound. In any case, even if financial integration could result in a reduction of the role of the long-term interest rate channel, for countries that accept flexible rates globalisation should at the same time increase the role of the exchange rate as a transmission mechanism, because of the increased sensitivity to differences in interest rates of the demand for domestic and foreign assets. Given the potentially greater effects of external shocks on more open economies and the potential alteration of monetary policy transmission channels in more integrated financial markets, globalisation forces central banks to take external developments into account in their monetary policy decisions.
    Date: 2015–11
  6. By: Peiris, M.Udara (International College of Economics and Finance, National Research University-Higher School of Economics, Moscow, Russia and Department of Economics, University of Warwick); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets Key words: quantitative easing ; exchange rates JEL classication numbers: E50 ; F41.
    Date: 2015
  7. By: Fabia A. de Carvalho; Marcos R. de Castro
    Abstract: This paper discusses the interaction between monetary and macroprudential policy in Brazil under both normative and positive perspectives. We investigate optimal combinations of simple, implementable macroprudential and monetary policy rules that react to the financial cycle using a DSGE model built to reproduce Brazilian particularities, and estimated with Bayesian techniques with data from the inflation targeting regime. We also investigate whether recent macroprudential policy announcements that targeted credit variables had important spillover effects on variables targeted by monetary policy in Brazil. To this end, we use a rich daily panel of private inflation forecasts surveyed by the Central Bank of Brazil’s Investor Relations Office and investigate the impact of announcements of macroprudential policy changes on the gap between inflation forecasts and the inflation target. The paper also presents an overview of the challenges facing macroprudential policy in Brazil after the global financial crisis and glimpses at a few important future challenges
    Date: 2015–11
  8. By: Haroon Mumtaz (Queen Mary University of London); Konstantinos Theodoridis (Bank of England, and Lancaster University)
    Abstract: We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and Epstein-Zin preferences to study the volatility implications of a monetary policy shock. An unexpected increases in the policy rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard deviations. VAR based empirical results support the model implications that contractionary shocks increase volatility. The volatility effects of the shock are driven by agents' concern about the (in)ability of the monetary authority to reverse deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation.
    Keywords: DSGE, Non-linear SVAR, New Keynesian, Non-zero steady state inflation, Epstein-Zin preferences, Stochastic volatility
    JEL: E30 E40 E52 C11 C13 C15 C50
    Date: 2015–11
  9. By: Alessandro Barattieri; Maya Eden; Dalibor Stevanovic
    Abstract: We document that, in the U.S., the share of financial assets that have a direct counterpart in the financial system has increased by between 15.8 and 21.8 percentage points during the period 1952-2011. Using a SVAR and a FAVAR, we find that, during the same period, the impulse responses of several real and financial variables to monetary policy shocks dampened. To relate these two trends, we present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur's net worth, thus affecting the transmission mechanism of monetary policy through the credit channel.
    Keywords: Financial sector interconnectedness, monetary policy transmission mechanism
    JEL: E44 E52 G20
    Date: 2015
  10. By: John Thorton (Bangor University)
    Abstract: In a recent paper, Gonalvez and Salles (2008) (G-S) report that developing countries adopting the inflation targeting regime experienced greater drops in inflation and GDP growth volatility than non-inflation targeting developing countries. In this paper, I find that the G-S results do not hold up when their analytical framework is employed in the context of a more rational and larger sample of developing countries that controls for the comparability of monetary regimes as suggested by Ball (2010). In particular, adoption of an IT regime did not help reduce inflation and growth volatility in developing countries compared to the average experience with other monetary regimes and was no more advantageous in these regards than the adoption of a hard or crawling peg exchange rate regime.
    Keywords: inflation targeting, monetary regimes, developing economies
    JEL: E4 E5
    Date: 2015–07
  11. By: Lopez, Claude; Markwardt, Donald; Savard, Keith
    Abstract: As many central banks contemplate the normalization of monetary policy, their focus is turning to the promise of macroprudential policy as a tool to manage possible future systemic risk in financial markets. Janet Yellen and Mario Draghi, among others, are pinning much of their hopes for managing financial stability in the context of Basel III on macroprudentialism. Despite central banks’ clear intention that this policy will play a significant role in developed economies, few policymakers or financial players know what macroprudential policy is, much less how to assess its efficacy or necessity. The paper is a shorter version of a report on the same subject. It aims to clarify the concept of macroprudential policy for a broader audience, cultivating a better understanding of these tools and their implications for broader monetary policy going forward.
    Keywords: Macroprudential, Systemic Risk
    JEL: E6 F3
    Date: 2015–10
  12. By: Yasuo Hirose; Takeki Sunakawa
    Abstract: How can parameter estimates be biased in a dynamic stochastic general equilibrium model that omits nonlinearity in the economy? To answer this question, we simulate data from a fully nonlinear New Keynesian model with the zero lower bound constraint and estimate a linearized version of the model. Monte Carlo experiments show that significant biases are detected in the estimates of monetary policy parameters and the steady-state inflation and real interest rates. These biases arise mainly from neglecting the zero lower bound constraint rather than linearizing equilibrium conditions. With fixed parameters, the variance-covariance matrix and impulse response functions of observed variables implied by the linearized model substantially differ from those implied by its nonlinear counterpart. However, we find that the biased estimates of parameters in the estimated linear model can make most of the differences small.
    Keywords: Nonlinearity, Zero lower bound, DSGE model, Parameter bias, Bayesian estimation
    JEL: C32 E30 E52
    Date: 2015–11
  13. By: Silvia Merler
    Abstract: Highlights Before the financial and economic crisis, monetary policy unification and interest rate convergence resulted in the divergence of euro-area countries’ financial cycles. This divergence is deeply rooted in the financial integration spurred by currency union and strongly correlated with intra-euro area capital flows. Macro-prudential policy will need to deal with potentially divergent financial cycles, while catering for potential cross-border spillovers from domestic policies, which domestic authorities have little incentive to internalise. The current framework is unfit to deal effectively with these challenges. The European Central Bank should be responsible for consistent and coherent application of macro-prudential policy, with appropriate divergences catering for national differences in financial conditions. The close link between domestic financial cycles and intra-euro area capital flows raises the question of whether macro-prudential policy in the euro area can be compatible with free flows of capital. Financial cycle divergence had its counterpart in the build-up of macroeconomic imbalances, so effective implementation of the Macroeconomic Imbalance Procedure would support and strengthen macro-prudential policy.
    Date: 2015–11
  14. By: Giuseppe Mastromatteo; Lorenzo Esposito
    Abstract: The scientific reassessment of the economic role of the state after the crisis has renewed interest in Abba Lerner's theory of functional finance (FF). A thorough discussion of this concept is helpful in reconsidering the debate on the nature of money and the origin of the business cycle and crises. It also allows a reevaluation of many policy issues, such as the Barro-Ricardo equivalence, the cause of inflation, and the role of monetary policy. FF, throwing a different light on these issues, can provide a sound foundation for discussing income, fiscal, and monetary policy rules in the right context of flexibility in the management of national budgets, assessing what kind of policies should be awarded priority, and the effectiveness of tackling the crisis with the different part of public budget. It also allows us to understand ways of increasing efficiency through public investment while reducing the total operational costs of firms. In the specific context of the eurozone, FF is useful for assessing the institutional framework of the euro and how to improve it in the face of protracted low growth, deflation, and weak public finances.
    Keywords: Crisis; Functional Finance; Debt; Growth; Sustainability of Public Finance; Central Bank Independence
    JEL: B22 E62 E63
    Date: 2015–11
  15. By: Raputsoane, Leroi
    Abstract: This paper contributes to the lean versus clean debate by examining whether or not monetary policy in South Africa leans against the wind or cleans up after the bubble has bust. This is achieved by analysing the behaviour of asset prices during the different phases of monetary policy stance. The models that allow the behaviour of the asset prices to differ during periods of tight and easy monetary conditions as well as during periods of contractionary and expansionary monetary conditions are specified. The results provide evidence of an asymmetric behaviour between monetary policy interest rate and asset prices during the periods of easy and tight monetary conditions. The empirical results further provide evidence of symmetric behaviour between the monetary policy interest rate and asset prices during the periods of contractionary and expansionary monetary conditions. Thus monetary policy in South Africa supports the proposition of leaning against the wind as opposed to the proposition of cleaning up after the bubble has burst.
    Keywords: Lean versus clean debate, Monetary policy regimes, Financial distress
    JEL: C51 E52 E61 G01
    Date: 2015–11–30
  16. By: Paolo Giudici (Department of Economics and Management, University of Pavia); Laura Parisi (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is thus essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. Parisi et al. (2015) analyzed the Chong error correction model, extended it and proposed an alternative, simpler to interpret, one-equation model, and applied it to the recent time period, characterized by close-to-zero monetary rates. In this paper we extend the previous models in a dynamic sense, modelling monetary transmission effects by means of dynamic linear models. The main contribution of this work consists in a novel methodology that provides a mechanism to identify the time dynamics of interest rates, linking them to monetary rates and to macroeconomic, country-specific variables. In addition, it introduces a predictive performance assessment methodology, which allows to compare the proposed models on a fair ground. From an applied viewpoint, the paper applies the proposed models to interest rates on different loans, showing how the monetary policy and the specific situation of each country differently impact lendings, not only across countries but also across time.
    Keywords: Forecasting Bank Interest Rates, Dynamic Time Series Models, Hierarchical Models
    Date: 2015–11
  17. By: Alessandro Calza (ECB); Andrea Zaghini (Bank of Italy)
    Abstract: We estimate the shoe leather costs of inflation in the euro area by using monetary data adjusted for holdings of euro banknotes abroad. While we find evidence of marginally negative shoe leather costs for very low nominal interest rates, our estimates suggest that these costs are non-negligible even for relatively moderate levels of anticipated inflation. We conclude that, despite the increased circulation of euro banknotes abroad, inflation tax is still predominantly borne by domestic agents in the euro area, with transfers of resources from abroad remaining small.
    Keywords: money demand, welfare cost of inflation, currency abroad, euro banknotes
    JEL: E41 C22
    Date: 2015–11
  18. By: Stefano Neri (Bank of Italy); Alessandro Notarpietro (Bank of Italy)
    Abstract: This paper assesses the macroeconomic consequences of a prolonged period of low and falling inflation when monetary policy is constrained by the zero lower bound (ZLB) on short-term nominal interest rates, the private sector is indebted in nominal terms (debt deflation mechanism) and nominal wages are downward rigid. Cost-push shocks that in normal circumstances would reduce inflation and stimulate output have contractionary effects on economic activity, once the ZLB interacts with the debt deflation mechanism. The contractionary effects are larger and more persistent when nominal wages cannot be reduced and when the private sector is highly indebted.
    Keywords: DSGE models, zero lower bound, debt-deflation channel, down- ward nominal wage rigidities.
    JEL: E21 E31 E37 E52
    Date: 2015–11
  19. By: McMahon, Michael (University of Warwick, CEPR, CAGE (Warwick), CEP (LSE), CfM (LSE) and CAMA (ANU)); Peiris, Udara (CEF, National Research University Higher School of Economics, Russian Federation.); Polemarchakis, Herakles (University of Warwick)
    Abstract: Quantitative easing compromises the control of the central bank over the stochastic path of inflation
    Keywords: Quantitative easing ; credit easing ; in flation JEL Classification Numbers: D50 ; E31 ; E52
    Date: 2015
  20. By: Miles, David (Monetary Policy Committee Unit, Bank of England); Schanz, Jochen (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. One of the ways in which such asset purchases could influence prices and demand is via portfolio balance effects. We develop and calibrate a simple OLG model in which risk-averse households hold money and bonds to insure against risk. Central bank asset purchases have the potential to affect households’ choices by changing the composition and return of their asset portfolios. We find that the effect is weak, and that its size depends on how fiscal policy is conducted. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Our finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless our results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.
    Keywords: Unconventional monetary policy; quantitative easing.
    JEL: E51 E52
    Date: 2015–12–01
  21. By: Gianluca Violante (NYU); Benjamin Moll (Princeton University); Greg Kaplan (Princeton University)
    Abstract: A new framework for analyzing fiscal and monetary policy.
    Date: 2015
  22. By: Amir-Ahmadi, Pooyan (Goethe University Frankfurt); Matthes, Christian (Federal Reserve Bank of Richmond); Wang, Mu-Chun (University of Hamburg)
    Abstract: Should policymakers and applied macroeconomists worry about the difference between real-time and final data? We tackle this question by using a VAR with time-varying parameters and stochastic volatility to show that the distinctionbetween real-time data and final data matters for the impact of monetary policy shocks: The impact on final data is substantially and systematically different (in particular, larger in magnitude for different measures of real activity) from theimpact on real-time data. These differences have persisted over the last 40 years and should be taken into account when conducting or studying monetary policy.
    Keywords: real-time data; time-varying parameters; stochastic volatility; impulse responses
    Date: 2015–11–05
  23. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: During an event hosted by the Fort Smith Chamber of Commerce and the University of Arkansas – Fort Smith, St. Louis Fed President James Bullard said that any decision on whether to increase the policy rate from near-zero levels will be data-dependent. He also discussed five key questions for the FOMC—on global uncertainty, U.S. financial conditions, labor markets, inflation and the dollar.
    Date: 2015–11–20
  24. By: Angel Asensio (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The paper offers theoretical discussion and modelling showing that -in accordance to the post Keynesian approach to endogenous money- the credit-worthy demand for loans determines the supply of loans at the prevailing interest rate, while -in accordance with Keynes's liquidity preference theory- the rate of interest is endogenously determined as to equalize the demand and supply of liquidity-money in terms of stocks. As a consequence, the markup reflected in the spread between the central bank refinancing interest rate and the market interest rate is endogenously determined by the total demand and supply of liquidity-money. The paper also argues that, while the central bank effectively controls the base interest rate, additional conditions are required to control the liquidity-money market interest rate, owing to the conventional nature of the rate of interest Keynes pointed out.
    Keywords: Accommodationism,Credit-money,Endogenous money,Horizontalism,Interest rate,Liquidity preference,Monetary policy,Verticalism
    Date: 2015–11–20
  25. By: Dirk Schoenmaker; Peter Wierts
    Abstract: HIGHLIGHTS Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries and sectors. Macroprudential supervision has been discussed since the onset of the great financial crisis, but policymakers are still slow on the ground. While the current monetary policy stance of quantitative easing may be needed to stimulate subdued growth, the risk of financial booms is increasing. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent.
    Date: 2015–11
  26. By: Leon Rincon, C.E. (Tilburg University, Center For Economic Research); Machado, C.; Sarmiento Paipilla, N.M. (Tilburg University, Center For Economic Research)
    Abstract: We model the allocation of central bank liquidity among the participants of the interbank market by using network analysis’ metrics. Our analytical framework considers that a super-spreader simultaneously excels at receiving (borrowing) and distributing (lending) central bank’s liquidity for the whole network, as measured by financial institutions’ hub centrality and authority centrality, respectively. Evidence suggests that the Colombian interbank funds market exhibits an inhomogeneous and hierarchical network structure, akin to a core-periphery organization, in which a few financial institutions fulfill the role of central bank’s liquidity super-spreaders. Our results concur with evidence from other interbank markets and other financial networks regarding the flaws of traditional direct financial contagion models based on homogeneous and non-hierarchical networks. Also, concurrent with literature on lending relationships in interbank markets, we confirm that the probability of being a super-spreader is mainly determined by financial institutions’ size. We provide additional elements for the implementation of monetary policy and for safeguarding financial stability.
    Keywords: interbank; liquidity; monetary policy; financial stability; networks; super-spreader; central bank
    JEL: E5 G2 L14
    Date: 2015
  27. By: Wales, Martin (Monetary Policy Committee Unit, Bank of England); Wieladek, Tomasz (Monetary Policy Committee Unit, Bank of England)
    Abstract: We examine the impact of large-scale asset purchases of government bonds on real GDP and the CPI in the United Kingdom and the United States with a Bayesian VAR, estimated on monthly data from 2009 M3 to 2013 M5. We identify an asset purchase shock with sign and zero restrictions. In contrast to the impulse response analysis in previous work, the reactions of real GDP and CPI are left unrestricted, so as formally to test whether these variables are affected by asset purchases. We then explore the transmission channels to the domestic economy and emerging markets. Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom). In the United States, this policy lowers yields on long-term government bonds and the real exchange rate. In the United Kingdom, on other hand, interest rate futures and measures of financial market uncertainty are more affected. There is also some evidence that emerging market sovereign bond and corporate bond spreads decline, with industrial production rising in response a positive asset purchase shock in either country.
    Keywords: Unconventional monetary policy; Bayesian VAR; Hierarchical prior; Litterman prior.
    JEL: E50 E51 E52
    Date: 2015–12–01
  28. By: Céline Gauthier; Alfred Lehar; Héctor Pérez Saiz; Moez Souissi
    Abstract: In the months preceding the failure of Lehman Brothers in September 2008, banks were willing to pay a premium over the Federal Reserve’s discount window (DW) rate to participate in the much less flexible Term Auction Facility (TAF). We empirically test the predictions of a new signalling model that offers a rationale for offering two different liquidity facilities. In our model, illiquid yet solvent banks need to pay a high cost to access the TAF as a way to signal their quality, in exchange for more favourable funding in the future. Less solvent banks access the less costly and more flexible DW in case they experience an unexpected run, paying a higher future funding cost. The existence of two facilities with different characteristics allowed banks to signal their level of solvency, which helped to decrease asymmetric information during the crisis. Using recently disclosed data on access to these facilities, we provide evidence consistent with these results. Banks that accessed TAF in 2008 paid approximately 31 basis points less in the interbank lending market in 2010 and were perceived as less risky than banks that accessed the DW. Our results can contribute to a better design of liquidity facilities during a financial crisis.
    Keywords: Financial Institutions, Financial stability, Lender of last resort
    JEL: G G0 G01 G2 G21 G28
    Date: 2015
  29. By: Margarita Rubio
    Abstract: In this paper, I analyze the ability of monetary policy to stabilize both the macroeconomy and nancial markets under two different scenarios: fixed and variable-rate mortgages. I develop and solve a New Keynesian dynamic stochastic general equilibrium model that features a housing market and a group of constrained individuals who need housing collateral to obtain loans. A given share of constrained households borrows at a variable rate, while the rest borrows at a fixed rate. I consider two alternative ways of introducing a macroprudential approach to enhance nancial stability: one in which monetary policy, using the interest rate as an instrument, responds to credit growth; and a second one in which the macroprudential instrument is instead the loan-to-value ratio (LTV). Results show that when rates are variable, a countercyclical LTV rule performs better to stabilize financial markets than monetary policy. However, when they are fixed, even though monetary policy is less effective to stabilize the macroeconomy, it does a good job to promote financial stability.
    Keywords: Fixed/Variable-rate mortgages, monetary policy, macroprudential policy, LTV, housing market, collateral constraint
    Date: 2015
  30. By: Sydykova, Meerim; Stadtmann, Georg
    Abstract: We derive Taylor rates for those CEE-EU countries which are not part of the Eurozone. The degree of heterogeneity decreased tremendously over time (2005 - 2015). Nevertheless, the business cycles are still not fully synchronized. As a consequence, joining the Eurozone seems to be premature and should not be an option right now.
    Keywords: CEE,monetary policy,currency union,convergence,Taylor rule
    JEL: E52 E58 F15
    Date: 2015
  31. By: Michal Popiel (Queen's University)
    Abstract: This paper analyzes pass-through from money market rates to consumer retail loan and deposit rates in Canada from 1983 to 2015 using a nonlinear vector error-correction model. In contrast to empirical frameworks used in previous studies, this model permits estimation of long-run pass-through coefficients while simultaneously accounting for asymmetric adjustments and short-run dynamics. It also allows testing of commonly made assumptions such as exogeneity of the market rate. I find that pass-through was complete for all rates before the financial crisis although only after the mid 1990s for the 1 year mortgage rate. Since the end of the 2008--09 recession, pass-through remains complete in the mortgage market but has significantly declined for deposit rates. Furthermore, many rates adjust asymmetrically but the direction of rigidity differs among rates and time periods.
    Keywords: Interest rate pass-through, cointegration, asymmetric adjustment, nonlinear vector error-correction model
    JEL: C32 E43 E52 G21
    Date: 2015–12
  32. By: Cukierman, Alex; Melnick, Rafi
    Abstract: During the five decades since the creation of the Bank of Israel in 1954 Israel experienced high and extremely variable inflation. Price stability (as defined by current international norms) was finally achieved at the beginning of the twenty first century. The paper divides the 1954-2015 sample into six sub-periods characterized by different inflation environments. The first part of the paper documents the impact of those different inflation environments on the average speed of individual price adjustments, the related pass-through from the exchange rate to domestic prices, inflation uncertainty, the extent of dollarization, relative price variability and the cost and time to maturity of the public debt. There are major quantitative differences in the above mentioned variables between the five inflationary sub-periods and the more recent price stability period. Among those are dramatic changes in the anchoring of inflation expectations, in the pass-through coefficient, inflation uncertainty, the speed of price adjustments, relative price variability, the (rather late) disappearance of dollarization in the real estate market and the benefits induced by price stability for the financing of the public debt. The paper provides an explanation for the fact that high inflation was stabilized in “one shot” while the subsequent moderate inflation was stabilized gradually within an inflation targeting framework. It argues that the second stabilization fits into the mold of the opportunistic approach to disinflation. The second part of the paper focuses solely on the period of price stability. It documents major, non-inflation related, structural changes since the turn of the century and discusses current policy dilemmas. Among the major structural changes are a persistent switch from current account deficits to surpluses, increased flexibility in the labor market, a reduction in the size of government, separation of pension and provident funds from the banking system and the emergence of a corporate bond market. Particularly remarkable is the macroeconomic resilience of the Israeli economy to the world financial crisis. As in many developed economies both the inflation gap and the output gap are recently in the negative range implying that, on both counts, monetary policy should be expansionary. The current policy rate is indeed almost at the zero bound. On one hand this policy, along with occasional interventions in the forex market, partially offsets overvaluation pressures on the exchange rate. On the other it reinforces a nine year long cycle of price increases in the real estate market.
    Keywords: dollarization; expectations anchoring; inflation uncertainty; relative price variability
    JEL: E3 E4 E5 G10
    Date: 2015–11

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