nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒12‒20
fifteen papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy and Indeterminacy after the 2001 Slump By Firmin Doko Tchakota; Nicolas Groshenny; Qazi Haque; Mark Weder
  2. Inflation targeting or Exchange Rate Targeting: Which Framework Supports The Goal of Price Stability in Emerging Market Economics? By Nora Abu Asab; Juan Carlos Cuestas; Alberto Montagnoli
  3. Volatility effects of news shocks in (B)RE models with optimal monetary policy By Offick, Sven; Wohltmann, Hans-Werner
  4. Foreign Exchange Interventions, Capital Controls and Monetary Policy: The Case of China By Hao Jin
  5. Does easing monetary policy increase financial instability? By Cesa-Bianchi, Ambrogio; Rebucci, Alessandro
  6. Towards Greater Diversification in Central Bank Reserves By Marie Briere; Valérie Mignon; Kim Oosterlinck; Ariane Szafarz
  7. Nonlinear time series and neural-network models of exchange rates between the US dollar and major currencies By Allen, D.E.; McAleer, M.J.; Peiris, S.; Singh, A.K.
  8. Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies By Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
  9. Quantitative and Qualitative Monetary Easing and Long-Term Interest Rates: The Effects through the Stock of "Net Supply" and Maturity Structure of Japanese Government Bonds By Ichiro Fukunaga; Naoya Kato
  10. Monetary-fiscal policy interaction and fiscal inflation: A tale of three countries By Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
  11. The Asian Currency Unit, Deviation Indicators, and Exchange Rate Coordination in East Asia: A Panel-Based Convergence Approach By Pontines, Victor; You, Kefei
  12. Neoliberal growth models, monetary union and the Euro crisis. A post-Keynesian perspective By Engelbert Stockhammer
  13. Currency-based measures targeting banks - Balancing national regulation of risk and financial openness By Annamaria de Crescenzio; Marta Golin; Anne-Christelle Ott
  14. Do speculative traders anticipate or follow USD/EUR exchange rate movements? New evidence on the efficiency of the EUR currency futures market By Hossfeld, Oliver; Röthig, Andreas
  15. Money as Minimal Complexity By Pradeep Dubey; Siddhartha Sahi; Martin Shubik

  1. By: Firmin Doko Tchakota (School of Economics, University of Adelaide.); Nicolas Groshenny (School of Economics, University of Adelaide.); Qazi Haque (School of Economics, University of Adelaide.); Mark Weder (School of Economics, University of Adelaide.)
    Abstract: This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical inflation indicators in the estimation. When using CPI or PCE, we find support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. The interpretation changes when using core PCE and monetary policy appears to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator. We re-formulate the artificial economy as a factor model where the theory's concept of inflation is the common factor to the three empirical inflation series. We find that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy.
    Keywords: Great Deviation, Indeterminacy, Taylor Rules
    JEL: E32 E52 E58
    Date: 2015–12
  2. By: Nora Abu Asab (Department of Economics, University of Sheffield); Juan Carlos Cuestas (Department of Economics, University of Sheffield); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: We investigate the relationship between inflation and inflation uncertainty under inflation targeting and a conventional fixed exchange rate system and the impact of each regime on inflation and inflation uncertainty over the span from 1980:01 to 2014:06. The results from GARCH in mean models reveal that, under the two monetary regimes, inflation increases inflation uncertainty and inflation uncertainty raises inflation. This positive bi-directional relationship between inflation and inflation uncertainty provides evidence of the importance of non-discretionary monetary policies. Both regimes appear effective in reducing inflation uncertainty in the long-run which suggests the importance of monetary regimes as signalling devices for inflation expectations. The fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering average inflation and inflation persistence of its followers. Nevertheless, the results provide evidence that inflation targeting countries have not benefited equally from inflation targeting.
    Keywords: Inflation Targeting, Fixed Exchange Rate System, GARCH, Monetary Policy, Price Stability
    JEL: C54 C58 E50 E58
    Date: 2015–12
  3. By: Offick, Sven; Wohltmann, Hans-Werner
    Abstract: This paper studies the volatility implications of anticipated cost-push shocks (i.e. news shocks) in a New Keynesian model under optimal unrestricted monetary policy with forward-looking rational expectations (RE) and backward-looking boundedly rational expectations (BRE). If the degree of backward-looking price setting behavior is sufficiently small (large), anticipated cost-push shocks lead to a higher (lower) volatility in the output gap and in the central bank's loss than an unanticipated shock of the same size. The inversion of the volatility effects of news shocks between rational and boundedly rational expectations follows from the inverse relation between the price-setting behavior and the optimal monetary policy. By contrast, if the central bank does not optimize and follows a standard Taylor-type rule and the price setters are purely (forward-) backward-looking, the volatility of the economy is (increasing with) independent of the anticipation horizon. The volatility results for the inflation rate are ambiguous.
    Keywords: Anticipated shocks,Optimal monetary policy,Bounded rationality,Volatility
    JEL: E32 E52
    Date: 2015
  4. By: Hao Jin (Indiana University)
    Abstract: China has maintained a closed capital account to the private sector and channeled capital flows through the public sector by foreign exchange interventions. This paper presents an open economy model that incorporates this capital account policy configuration in order to study whether foreign exchange interventions can improve welfare in the presence of capital controls, compared to an open capital account. Furthermore, I analyze how these interventions affect the conduct of monetary policy. I find that optimal interventions improve welfare by strategically managing the terms of trade. In the presence of domestic nominal rigidity, interventions increase welfare even if monetary policy is set optimally. I find monetary policy effectively eliminates domestic price distortions, while foreign exchange interventions efficiently correct terms-of-trade externalities.
    Keywords: Foreign Exchange Interventions; Capital Controls; Monetary Policy; Chinese Economy; Welfare
    Date: 2015–10
  5. By: Cesa-Bianchi, Ambrogio (Bank of England); Rebucci, Alessandro (Bank of England)
    Abstract: This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macroprudential policy and to the role of US monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macroprudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the US policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.
    Keywords: Macroprudential policies; monetary policy; financial crises; frictions; interest rate rigidities.
    JEL: E44 E52 E61
    Date: 2015–12–11
  6. By: Marie Briere; 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: 2015–12–11
  7. By: Allen, D.E.; McAleer, M.J.; Peiris, S.; Singh, A.K.
    Abstract: This paper features an analysis of major currency exchange rate movements in relation to the US dollar, as constituted in US dollar terms. Euro, British pound, Chinese yuan, and Japanese yen are modelled using a variety of non- linear models, including smooth transition regression models, logistic smooth transition regressions models, threshold autoregressive models, nonlinear autoregressive models, and additive nonlinear autoregressive models, plus Neural Network models. The results suggest that there is no dominating class of time series models, and the different currency pairs relationships with the US dollar are captured best by neural net regression models, over the ten year sample of daily exchange rate returns data, from August 2005 to August 2015.
    Keywords: non linear models, time series, non-parametric, smooth-transition regression models, neural networks, GMDH shell
    JEL: C45 C53 F3 G15
    Date: 2015–11–01
  8. By: Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms---such as reductions in employment protection---increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath---either because of the zero bound on policy rates or because of membership in a monetary union---may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.
    Keywords: employment protection; firm entry; product market regulation; structural reforms; unemployment benefits
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2015–12
  9. By: Ichiro Fukunaga (Bank of Japan); Naoya Kato (Bank of Japan)
    Abstract: The relationship between the supply-demand structure of government bond markets and long-term interest rates has been studied both theoretically and empirically, motivated by the implementation of large-scale government bond purchases by many central banks in advanced economies. Fukunaga, Kato, and Koeda (2015) examined the effects of changes in the holders and maturity structures of Japanese Government Bonds (JGBs) on the term structure of interest rates and the risk premium on long-term bonds. Using a regression approach and a term structure model approach, they confirmed that the "net supply" of JGBs-that is, the amount outstanding of JGBs issued (supplied) by the government minus that held (demanded) by investors with preferences for particular maturities, including the Bank of Japan (BOJ)-had statistically significant effects on long-term interest rates. They also reported calculations based on the two approaches showing that the BOJ's JGB purchases as part of its Quantitative and Qualitative Monetary Easing (QQE) had substantial effects on the long-term interest rates.
    Keywords: Japanese Government Bonds; Term structure of interest rates; Preferred-habitat investors; Quantitative and Qualitative Monetary Easing
    JEL: E43 E52 G12 H63
    Date: 2015–12–11
  10. By: Kliem, Martin; Kriwoluzky, Alexander; Sarferaz, Samad
    Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using crosscountry data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.
    Keywords: Time-Varying VAR,Inflation,Public Deficits
    JEL: E42 E58 E61
    Date: 2015
  11. By: Pontines, Victor (Asian Development Bank Institute); You, Kefei (Asian Development Bank Institute)
    Abstract: Employing the panel convergence method of Phillips and Sul (2007) to the nominal deviation indicators of two recent unofficial constructions of the Asian Currency Unit (ACU) index, this paper examines the existence and extent of convergence in the movements of East Asian currencies against the ACU. Empirical results reveal that intra-East Asian exchange rate movements have not converged to form a cohesive, unified bloc where currencies share homogenous movements, regardless of whether one examines the data on intra-East Asian exchange rate movements before or after the collapse of Lehman Brothers in September 2008. Instead, a separate number of convergent clubs or blocs in the region have formed in recent years. Finally, and most importantly, economies in the region are, generally, converging at different speeds to two opposing poles of convergence: groups of relatively depreciating currencies, and groups of relatively appreciating currencies.
    Keywords: Asian Currency Unit; exchange rate movements; currency blocs
    JEL: C33 F31 F36
    Date: 2015–12–08
  12. By: Engelbert Stockhammer (Kingston University)
    Abstract: The paper offers an account of the Euro crisis based on post-Keynesian monetary theory and its typology of demand regimes. Neoliberalism has transformed social and financial relations in Europe but it has not given rise to a sustained profit-led growth process. Instead, growth has relied either on financial bubbles and rising household debt ('debt-driven growth') or on net exports ('export-driven growth'). In Europe the financial crisis has been amplified by an economic policy architecture (the Stability and Growth Pact) that aimed at restricting the role of fiscal policy and monetary policy. This neoliberal economic policy regime in conjunction with the separation of monetary and fiscal spheres has turned the financial crisis of 2007 into a sovereign debt crisis in southern Europe.
    Keywords: Euro crisis, neoliberalism, European economic policy, European integration, financial crisis, sovereign debt crisis
    JEL: E02 E12 E50 E60 F50 P16
    Date: 2015–12
  13. By: Annamaria de Crescenzio; Marta Golin; Anne-Christelle Ott
    Abstract: This paper presents and analyses new datasets of de jure Currency-Based Measures (CBMs) directed at banks in a sample of 49 countries between 2005 and 2013. These measures are bank regulations that apply a discrimination−e.g. a less favourable treatment−on the basis of the currency of an operation, typically foreign currencies. The new data shows that CBMs have been increasingly used in the post-crisis period, including for macro-prudential purposes. In particular, some Emerging Market Economies, including some OECD countries, have increasingly resorted to and tightened their CBMs, especially to manage capital inflows. Information from these new datasets is also matched with measures on countries’ inability to borrow in domestic currency on international markets, defined as the original sin concept. With the exception of China, only countries suffering from original sin used and tightened CBMs on banks’ foreign exchange liabilities.
    Keywords: capital flows, foreign currency, financial stability, banking regulations, macroprudential policy, capital controls
    JEL: C82 E58 F3 G28
    Date: 2015–12–10
  14. By: Hossfeld, Oliver; Röthig, Andreas
    Abstract: We address the question of whether various types of speculative investor correctly anticipate future USD/EUR currency movements or whether they tend rather to react to past exchange rate movements. Throughout the analysis, we differentiate between large and small traders, and an upper bound of total speculation. To account for the large number of testable hypotheses, we contrast results obtained from predictive regressions based on individual significance tests with those based on either controlling the false discovery rate (FDR) or the family-wide error rate (FER). While the statistical evidence in favor of a causal relationship from speculative positions to exchange rate movements, and therefore an inefficient Euro futures market, largely collapses if we account for multiple testing, such a pattern does not emerge in the other direction. In addition, findings based on a contemporaneous analysis point to some notable differences between small and large speculators, and a non-linear relationship between USD/EUR movements and changes in the open interest position of large speculators.
    Keywords: speculative positions,currency futures,exchange rates,predictive regressions,multiple testing
    JEL: C32 F31 G15
    Date: 2015
  15. By: Pradeep Dubey; Siddhartha Sahi; Martin Shubik
    Date: 2015

This nep-mon issue is ©2015 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.