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on Monetary Economics |
| By: | Vari, Miklos |
| Abstract: | This paper shows how interbank market fragmentation disrupts monetary policy implementation. Fragmentation is defined as the situation where some banks are cut from the interbank loan market. The paper introduces fragmentation into an otherwise standard theoretical model of monetary policy implementation, where profit maximizing banks, subject to reserve requirements, borrow and deposit funds at the central bank. In the presence of fragmentation, excess liquidity arises endogenously and the interbank rate declines below the central bank main rate. The interbank rate is then unstable. Using data on cross-border financial flows and monetary policy operations, this paper shows that this mechanism has been at work in the euro area since 2008. The model is suitable to analyze conventional and unconventional monetary policy measures in the euro area as well as in other currency areas. |
| Keywords: | Fragmentation, Excess liquidity, interbank market, TARGET2 imbalances |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:docweb:1516&r=mon |
| By: | Glick, Reuven (Federal Reserve Bank of San Francisco); Leduc, Sylvain (Federal Reserve Bank of San Francisco) |
| Abstract: | We examine the effects of unconventional monetary policy surprises on the value of the dollar using high-frequency intraday data and contrast them with the effects of conventional policy tools. Identifying monetary policy surprises from changes in interest rate future prices in narrow windows around policy announcements, we find that monetary policy surprises since the Federal Reserve lowered its policy rate to the effective lower bound have had larger effects on the value of the dollar. In particular, we document that the impact on the dollar has been roughly three times that following conventional policy changes prior to the 2007-08 financial crisis. |
| JEL: | E43 E5 F31 |
| Date: | 2015–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2015-18&r=mon |
| By: | Checo, Ariadne; Pradel, Salome; Ramirez, Francisco A. |
| Abstract: | Since the beginning of the international financial crisis in major developed economies, central banks of these countries implemented several monetary policy (MP) measures, oriented to stabilize the financial system and mitigate the effects on the real side of the economy. As more data on the recovery of US economy becomes available, the speech of FED authorities is turning to consider the rising of the FED fund rates (FFR), defined as “normalization”. The effects of the US MP normalization are unclear – mainly for economies with low degrees of financial development – since the reversion of a monetary policy to a pre-crisis stance would take place under a US growth scenario. We estimate the impact of the normalization on Central America and the Dominican economies, summarizing the information of nearly 80 variables in a few common factors and considering both effects through real and financial channels. We estimate a factor augmented VAR, to measure the impact of US MP shocks to these economies, using a sign restriction approach in the identification process of such shocks. Then we use measured shocks to map the effects on domestic variables. Our results indicate that this eventuality will affect these economies mostly through its effects on the real side of the economy due to its impact on external demand and the reduced role of exchange rate as a shock absorber, where countries with less flexible exchange rate regimes being more affected. On the financial side, domestic interest rate will rise and net international reserves will fall, as central banks limit volatility in exchange rates. |
| Keywords: | Transmission of Monetary Policy, Normalization, Interest Rates, Central America |
| JEL: | E32 E37 E5 E58 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:68293&r=mon |
| By: | - (Comisión Económica para América Latina y el Caribe (CEPAL) United Nations) |
| Abstract: | Divergence in macro trends and in monetary policy in advanced economies was a dominant driver of rates and currencies in emerging markets in 2014. Diverging macroeconomic developments were reflected in different monetary policy actions in 2014, with the European Central Bank (ECB) and the Bank of Japan (BOJ) moving in the opposite direction of the U.S. Federal Reserve. The unwinding of the U.S. monetary stimulus, while the ECB and the BOJ step up their monetary stimulus, has underpinned an appreciation by the U.S. dollar, in which most commodities are priced. Latin American markets, which started the year under pressure from fears of the U.S. Federal Reserve tapering off its quantitative easing program and concerns over stability, ended 2014 under pressure from a stronger U.S. dollar. However, there are many signs that a slowdown in LAC financial markets – particularly debt markets, which have been breaking records in debt issuance for the past six years – is under way. The region’s growth prospects look somewhat brighter in 2015 relative to 2014, but a strengthening U.S. dollar, uneven global growth and weakness in commodity prices are skewing the risk toward the downside for the 2015 forecasts across the region. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecr:col896:37739&r=mon |
| By: | D'Amico, Stefania (Federal Reserve Bank of Chicago); King, Thomas B. (Federal Reserve Bank of Chicago) |
| Abstract: | Forward rate guidance, which has been used with increasing regularity by monetary policymakers, relies on the manipulation of expectations of future short-term interest rates. We identify shocks to these expectations at short and long horizons since the early 1980s and examine their effects on contemporaneous macroeconomic outcomes. Our identification uses sign restrictions on survey forecasts incorporated in a structural VAR model to isolate expected deviations from the monetary policy rule. We find that expectations of future policy easing that materialize over the subsequent four quarters — similar to those generated by credible forward guidance — have immediate and persistent stimulative effects on output, inflation and employment. The effects are larger than those produced by an identical shift in the policy path that is not anticipated. Our results are broadly consistent with the mechanism underlying forward guidance in New Keynesian models, but they suggest that those models overstate the persistence of the inflation response. Further, we find that changes in short-rate expectations farther in the future have weaker macroeconomic effects, the opposite of what most New Keynesian models predict. |
| Keywords: | Monetary policy; Keynesian models; |
| JEL: | E12 E5 |
| Date: | 2015–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2015-10&r=mon |
| By: | Altavilla, Carlo (European Central Bank); Giannone, Domenico (Federal Reserve Bank of New York) |
| Abstract: | We assess the perception of professional forecasters regarding the effectiveness of unconventional monetary policy measures announced by the U.S. Federal Reserve after the collapse of Lehman Brothers. Using survey data collected at the individual level, we analyze the change in forecasts of Treasury and corporate bond yields around the announcement dates of nonstandard monetary policy measures. We find that professional forecasters expect bond yields to drop significantly for at least one year after the announcement of accommodative policies. |
| Keywords: | Survey of Professional Forecasters; large-scale asset purchases; quantitative easing; Operation Twist; forward guidance; tapering |
| JEL: | E58 E65 |
| Date: | 2015–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:752&r=mon |
| By: | Machava, Agostinho (Department of Economics, Umeå University); Brännäs, Kurt (Department of Economics, Umeå University) |
| Abstract: | While there is a relatively large empirical literature on the link between monetary policy and yield curve for developed economies, studies on emerging and developing economies are very rare. This paper contributes to reducing this gap by studying the effectiveness of monetary policy in Mozambique. Using monthly data it examines the pass-through of changes in the policy rate to the yield curve of treasury bills in the period 2006 - 2015. The main finding is that there is a pass-through from policy rate to treasury bill. However, the transmission from short to long term maturities in the yield curve is weak and slow. |
| Keywords: | Mozambique; Factor model; Policy rate; Effect; Estimation |
| JEL: | C32 C51 C58 E43 G20 |
| Date: | 2015–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0918&r=mon |
| By: | Elena Afanasyeva; Jochen Guntner |
| Abstract: | This paper investigates the risk channel of monetary policy on the asset side of banks’ balance sheets. We use a factor-augmented vector autoregression (FAVAR) model to show that aggregate lending standards of U.S. banks, such as their collateral requirements for firms, are significantly loosened in response to an unexpected decrease in the Federal Funds rate. Motivated by this evidence, we reformulate the costly state verification (CSV) contract to allow for an active financial intermediary, embed the partial equilibrium contract in a New Keynesian DSGE model, and show that – consistent with our empirical findings – an expansionary monetary policy shock implies a temporary increase in bank lending relative to borrower collateral. In the model, this is accompanied by a higher default rate of borrowers. |
| JEL: | D53 E44 E52 |
| Date: | 2015–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:hoo:wpaper:15115&r=mon |
| By: | Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park |
| 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: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2015-47&r=mon |
| By: | Kocherlakota, Narayana R. (Federal Reserve Bank of Minneapolis) |
| Date: | 2015–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsp:0141&r=mon |
| By: | White, William R. (OECD) |
| Abstract: | The current belief system that says “all will be well” if domestic price stability can be maintained is fundamentally flawed. If this can be achieved only through monetary, credit and debt expansion, the end result will be an increased risk of systemic crisis. Moreover, false beliefs about how exchange rate systems function, at both the global level and within the Eurozone, imply international “spillover” effects that increase both the likelihood and the seriousness of such crises. Gross international capital flows pose as many (perhaps more) dangers than do net flows (ie current account imbalances). And false beliefs about exchange rate regimes not only compromise crisis prevention, but they also hinder crisis management and resolution. At the global level, we still lack the instruments to do either effectively should current problems worsen. In the Eurozone, the crisis which began in 2010 has not been well managed and remains fundamentally unresolved. |
| JEL: | B52 E5 F42 |
| Date: | 2015–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:250&r=mon |
| By: | Kaplan, Robert Steven (Federal Reserve Bank of Dallas) |
| Abstract: | Remarks before the University of Houston, November 18, 2015. |
| Date: | 2015–11–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddsp:160&r=mon |
| By: | La Spada, Gabriele (Federal Reserve Bank of New York) |
| Abstract: | Do asset managers reach for yield because of competitive pressures in a low-rate environment? I propose a tournament model of money market funds (MMFs) to study this issue. When funds care about relative performance, an increase in the risk premium leads funds with lower default costs to increase risk-taking, while funds with higher default costs decrease risk-taking. Without changes in the premium, lower risk-free rates reduce the risk-taking of all funds. I show that these predictions are consistent with MMF risk-taking during the 2002-08 period and that rank-based performance is indeed a key determinant of money flows to MMFs. |
| Keywords: | reach for yield; money market funds |
| JEL: | G00 G20 G23 |
| Date: | 2015–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:753&r=mon |
| By: | Maëlle Della Peruta (University of Nice Sophia Antipolis, France; GREDEG CNRS) |
| Abstract: | This paper investigates the adoption patterns of Mobile Money in emerging and developing countries. Starting from macroeconomic comparative and case studies realised by practitioners experts, this paper proposes a wider macroeconomic approach based on cluster analysis as an alternative strategy for assessing similarity in adoption levels. By anchoring observations from previous studies in innovation adoption and diffusion theories, this article evaluates dissimilarity between groups of countries sharing the same adoption levels. Since the results matches with hypotheses from the innovation adoption and diffusion literature, this analysis nuances the potential of Mobile Money as an inclusive financial tool fighting banking exclusion. |
| Keywords: | Complementary currencies, scar effect, employability, mutual credit |
| JEL: | G00 O33 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2015-49&r=mon |