nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒01‒03
38 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. International Spillovers of ECB’s Unconventional Monetary Policy: The Effect on Central and Eastern Europe By Klara Halova; Roman Horvath
  2. How can it work? On the impact of quantitative easing in the Eurozone By Francesco Saraceno; Roberto Tamborini
  3. Even Keel and the Great Inflation By Humpage, Owen F.; Mukherjee, Sanchita
  4. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.
  5. Central bank accountability under adaptive learning. By Marine Charlotte André; Meixing Dai
  6. Dynamic Effects of Monetary Policy Shocks on Macroeconomic Volatility By Konstantinos Theodoridis; Haroon Mumtaz
  7. Lessons from the crisis.Did central banks do their homework? By Aleksandra Hałka
  8. Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows By Anaya, Pablo; Hachula, Michael; Offermanns, Christian
  9. Deleveraging, deflation and depreciation in the euro area By Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
  10. The interaction between monetary and macroprudential policy: Should central banks "lean against the wind" to foster macrofinancial stability? By Krug, Sebastian
  11. Unconventional Monetary Policy Shocks in OECD Countries: How Important is the Extent of Policy Uncertainty? By Rangan Gupta; Charl Jooste
  12. Credit Frictions and Optimal Monetary Policy By Cúrdia, Vasco; Woodford, Michael
  13. Floor systems and the Friedman rule: the fiscal arithmetic of open market operations By Keister, Todd; Martin, Antoine; McAndrews, James J.
  14. Managing Capital Flows in Asia: An Overview of Key Issues By Villafuerte , James; Yap, Josef T.
  15. Money in the equilibrium of banking By Jin Cao; Gerhard Illing
  16. Shocking language: Understanding the macroeconomic effects of central bank communication By Hansen, Stephen; McMahon, Michael
  17. Transparency and Trust: The Case of the European Central Bank By Roman Horvath; Dominika Katuscakova
  18. Conservatism and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt
  19. Can Central Banks Successfully Lean against Global Headwinds? By Malte Rieth
  20. Transmission Channels and Welfare Implications of Unconventional Monetary Easing Policy in Japan By Hiroshi Ugai
  21. Declining Trends in the Real Interest Rate and Inflation: Role of aging By FUJITA Shigeru; FUJIWARA Ippei
  22. Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism By Cloyne, James; Ferreira, Clodomiro; Surico, Paolo
  23. Forward Guidance in the Yield Curve: Short Rates versus Bond Supply By Greenwood, Robin; Hanson, Samuel G; Vayanos, Dimitri
  24. Unified money circulation equation and an analogical explanation for its solvability By Miura, Shinji
  25. The decentralised central bank: regional bank rate autonomy in Norway, 1850-1892 By Jan Tore Klovland; Lars Fredrik Øksendal
  26. Short- and Long-Run Tradeoff Monetary Easing By Koki Oikawa; Kozo Ueda
  27. Seasonality in the Frequency of Price Change and Optimal Monetary Policy By Söderberg, Johan
  28. A Hat Trick for the FOMC By Bullard, James B.
  29. An Approach About Monetary Policy Risk Balance In Colombia: A Multivariate Analysis Based On Time Series By Fernando Uscátegui; Mike Woodcock; Carlos Méndez
  30. Whose inflation is it anyway? The inflation spillovers between the euro area and small open economies By Aleksandra Hałka; Karol Szafranek
  31. Is macroprudential policy instrument blunt? By Katsurako Sonoda; Nao Sudo
  32. The Quantity Theory of Money Revisited: The Improved Short-Term Predictive Power of Household Money Holdings with Regard to Prices By Jean-Charles BRICONGNE
  33. Forecasting Inflation in Emerging Markets: An Evaluation of Alternative Models By Zeyyad Mandalinci
  34. Graphic explanation for welfare economic foundation of hoarding loss By Miura, Shinji
  35. Persistence Dependence in Empirical Relations: The Velocity of Money By Ashley, Richard; Verbrugge, Randal
  36. The Role of International Reserves Holding in Buffering External Shocks By Jean-Pierre Allegret; Audrey Sallenave
  37. Macro Credit Policy and the Financial Accelerator By Carlstrom, Charles T.; Fuerst, Timothy S.
  38. From Organization to Activity in the US Collateralized Interbank Market By Oet, Mikhail V.; Ong, Stephen J.

  1. By: Klara Halova; Roman Horvath
    Abstract: We examine how unconventional monetary policy of the European Central Bank influences macroeconomic stability in Central and Eastern European economies. We estimate various panel vector autoregressions using monthly data from 2008-2014. Using the shadow policy rate and central bank assets as measures of unconventional policies, we find that output and prices in Central and Eastern Europe temporarily increase following an expansionary unconventional monetary policy shock by the European Central Bank. Using both impulse responses and variance decompositions, we find that the effect of unconventional policies on output is much stronger than the effect on inflation. In addition, our results provide evidence that unconventional policy tends to reduce market uncertainty and domestic interest rates but that the effect on the real exchange rate is not significant.
    Keywords: Unconventional Monetary Policy, ECB, Central and Eastern Europe, Panel Vector Autoregression
    JEL: E52 E58
    Date: 2015–10
  2. By: Francesco Saraceno; Roberto Tamborini
    Abstract: How can the quantitative easing (QE) programme launched in March 2015 by the ECB be successful in the Eurozone (EZ)? What will be its impact on the member countries? And how will it relate to countries' fiscal policies? To address these questions, we use a simple extension of the three-equation New Keynesian model. We modify the benchmark model in two respects: 1) we (re)-introduce an LM money supply and demand equation to capture the fact that the ECB operates at the zero lower bound and hence cannot use a standard Taylor rule; and 2) we extend the model to a two-country framework. The model supports the ECB official view that the channel whereby QE is meant to operate is the reversal of deflationary expectations. It also highlights that instrumental to this goal is the elimination of persistent output gaps, both at the EZ and at the country level, and hence the reduction of country-specific interest-rate spreads − the "unofficial" objective of the programme. We show that QE, if large enough, can succeed for the EZ as a whole. The ECB nevertheless cannot also close individual countries' output gaps, unless specific and unrealistic conditions are met. In this case fiscal accommodation at the country level should also intervene. We show that QE can enhance the effectiveness of fiscal policy, and therefore conclude that the coordination of fiscal and monetary policies is of paramount importance
    Keywords: Monetary Policy, ECB, Deflation, Zero-Lower-Bound, Fiscal Policy
    JEL: E3 E4 E5
    Date: 2015
  3. By: Humpage, Owen F. (Federal Reserve Bank of Cleveland); Mukherjee, Sanchita (University of California at Santa Cruz (UCSC))
    Abstract: Using IV-GMM techniques and real-time data, we estimate a forward looking, Taylor-type reaction function incorporating dummy variables for even-keel operations and a variable for foreign official pressures on the U.S. gold stock during the Great Inflation. We show that when the Federal Reserve undertook even-keel operations to assist U.S. Treasury security sales, the FOMC tended to delay monetary-policy adjustments and to inject small amounts of reserves into the banking system. The operations, however, did not contribute significantly to the Great Inflation, because they occurred during periods of both monetary ease and monetary tightness, at least in the FOMC’s view. Consequently, the average federal funds rate during months containing even-keel events was no different than the average federal funds rate in other months, suggesting that even keel had no effect on the thrust of monetary policy. We also show that prospective gold losses had no effect on the FOMC’s monetary-policy decisions in the 1960s and early 1970s.
    Keywords: Even Keel; Taylor Rule; Federal Reserve; U.S. Treasury
    JEL: E5 F3 N1
    Date: 2015–12–21
  4. By: Dräger, Lena; Proaño, Christian R.
    Abstract: Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a global banking sector along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the dominating region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be partly mitigated if the central bank reacts to loan rate spreads, at least relative to the case with constant lending standards.
    Keywords: cross-border banking,euro area,monetary unions,DSGE,monetary policy
    JEL: F41 F34 E52
    Date: 2015
  5. By: Marine Charlotte André; Meixing Dai
    Abstract: Using a New Keynesian model, we examine the accountability issue in a delegation framework where private agents form expectations through adaptive learning while the central bank is rational and optimally sets monetary policy under discretion. Learning gives rise to an incentive for the central bank to accommodate less the effect of inflation expectations and cost-push shocks on inflation and induces thus a deviation of endogenous variables from rational expectations equilibrium. To help the central bank to better manage the intratemporal tradeoff, the government should nominate a liberal central banker, i.e., set a negative optimal inflation penalty according to the value of learning coefficient. By reducing the deviation of the feedback effects of inflation expectations and cost-push shocks on inflation and the output gap from the corresponding ones under rational expectations, the optimal inflation penalty allows the economy to be more efficient and improves the social welfare. The main conclusions are valid under both constant- and decreasing-gain learning.
    Keywords: Adaptive learning, optimal monetary policy, accountability, inflation penalty, rational expectations.
    JEL: E42 E52 E58
    Date: 2015
  6. By: Konstantinos Theodoridis; Haroon Mumtaz
    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 increase 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
  7. By: Aleksandra Hałka
    Abstract: The outbreak of the global financial crisis triggered changes in thinking about the way monetary policy is conducted, in particular about the desired central banks’ reaction function. However, a change in thinking does not necessarily mean that central banks really implemented these modifications. Therefore, I investigate whether four selected European central banks in small open economies – ˇCesk´a N´arodn´ı Banka, Magyar Nemzeti Bank, Narodowy Bank Polski and Sveriges Riksbank, have adjusted their reaction function to the new paradigm of how monetary policy should be conducted. To address this problem I use a logit model to see first, how the relative importance of inflation and GDP forecasts in the process of setting interest rates evolved over time, second, how the forecast horizon which central banks take into consideration when setting the interest rate has changed, and finally whether they conduct more accommodative monetary policy. The outcomes indicate that all banks after the Lehman Brother’s collapse became more flexible in the way they conduct monetary policy. In order to maintain the stability of the whole economy they are ready to accept an extended period or greater deviations of inflation from the target, although each one in its own way – through extension of the forecasting horizon, the increase of the GDP’s importance, permanent shift of the monetary policy stance to more accommodative one or a mixture of these factors.
    Keywords: product-level inflation, CEE economies, multi-level factor model.
    JEL: C25 E52 E58
    Date: 2015
  8. By: Anaya, Pablo; Hachula, Michael; Offermanns, Christian
    Abstract: A growing literature stresses the importance of the 'global financial cycle', a common global movement in asset prices and credit conditions, for emerging market economies (EMEs). It is argued that one of the key drivers of this global cycle is monetary policy in the U.S., which is transmitted through international capital flows. In this paper, we add to this discussion and investigate empirically whether U.S. unconventional monetary policy (UMP) between 2008 and 2014 is related to financial conditions in EMEs, and, whether it is transmitted through portfolio flows. We find that a U.S. UMP shock significantly increases portfolio flows from the U.S. to EMEs for almost two quarters. The rise in inflows is accompanied by a persistent increase in several real and financial variables in EMEs. Moreover, we find that, on average, EMEs reacted with an easing of their own monetary policy stance in response to an expansionary U.S. shock.
    Keywords: unconventional monetary policy,International capital flows,global financial cycle,global VAR,trilemma vs. dilemma
    JEL: C54 E52 F42
    Date: 2015
  9. By: Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
    Abstract: During the post-crisis period, economic performance has been highly heterogenous across the euro area. While some economies rebounded quickly after the 2009 output collapse, others are undergoing a protracted further decline as part of an extensive deleveraging process. At the same time, inflation has been subdued throughout the whole of the euro area and intra-euro-area exchange rates have hardly moved. We interpret these facts through the lens of a two-country model of a currency union. We find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy, as it becomes constrained by the zero lower bound. As a result, the real exchange rate response becomes muted, and the output collapse---concentrated in the deleveraging economies.
    Keywords: currency union; deflationary spillovers; deleveraging; downward wage rigidity; paradox of flexibility; real exchange rate; zero lower bound
    JEL: E42 F41
    Date: 2015–12
  10. By: Krug, Sebastian
    Abstract: The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should "lean against the wind" or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. We aim to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macro-model with endogenous money. We find that policies make use of their comparative advantage leading to superior outcomes concerning their respective intended objectives. In particular, we show that "leaning against the wind" should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy. In contrast, leaning against the wind seems to have no positive impact on financial stability which strengthens proponents of Tinbergen's principle arguing that both policies are designed for their specific purpose and that they should be used accordingly.
    Keywords: Financial Stability,Monetary Economics,Macroprudential Policy,Financial Regulation,Central Banking,Agent-Based Macroeconomics
    JEL: E44 E50 G01 G28 C63
    Date: 2015
  11. By: Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the effects of unconventional monetary policy shocks on output, inflation and uncertainty using a sign restricted panel VAR over the monthly period of 2008:1-2015:1. Our sample includes primarily OECD countries (Canada, Germany, France, Italy, Japan, Spain, UK and US) that reached the interest rate zero lower bound in response to the recent financial crisis. Central bank balance sheets are used to gauge the size of unconventional monetary policy reactions to the crisis. We control for the degree of uncertainty by estimating the economic response to balance sheet shocks in two economic states: high versus low uncertainty. We use sign restrictions to identify our shocks, but remain agnostic regarding price and output responses to balance sheet shocks. We show that the mean group response of prices and output increases in response to monetary policy. The results, however, vary by country and are sensitive to the degree of uncertainty. Prices and output do not necessarily increase uniformly across countries.
    Keywords: Unconventional monetary policy, Economic policy uncertainty, Macroeconomic effects, OECD countries
    JEL: C33 E58
    Date: 2015–11
  12. By: Cúrdia, Vasco; Woodford, Michael
    Abstract: We extend the basic (representative-household) New Keynesian [NK] model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion—a linear relation that should be maintained between the inflation rate and changes in the output gap—that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. Such a flexible inflation target" can be implemented by a central-bank reaction function that is similar to a forward-looking Taylor rule, but adjusted for changes in current and expected future credit spreads
    Keywords: credit spreads; flexible inflation targeting; policy rules; quadratic loss function; target criterion
    JEL: E44 E52
    Date: 2015–12
  13. By: Keister, Todd (Rutgers University and Paris School of Economics); Martin, Antoine (Federal Reserve Bank of New York); McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: In a floor system of monetary policy implementation, the central bank remunerates bank reserves at or near the market rate of interest. Some observers have expressed concern that operating such a system will have adverse fiscal consequences for the public sector and may even require the government to subsidize the central bank. We show that this is not the case. Using the monetary general equilibrium model of Berentsen et al. (2014), we show how a central bank that supplies reserves through open market operations can always generate non-negative net income, even when using a floor system to implement the Friedman rule.
    Keywords: monetary policy implementation; central bank operations; interest on reserves
    JEL: E42 E52 E58
    Date: 2015–12–01
  14. By: Villafuerte , James (Asian Development Bank); Yap, Josef T. (University of the Philippines)
    Abstract: Global capital flows into emerging markets, including those in Asia, continue to be volatile. These capital flows generate both benefits and costs. The latter are associated with episodes of currency and banking crises like the 1997 Asian financial crisis and the 2008 global financial and economic crisis. Policy responses can be implemented to minimize the costs. At the same time, policy responses should vary depending on whether “pull” factors or “push” factors dominate the capital flows. Data show that the main impact of capital flows on economies of East Asia is reflected in real effective exchange rates, equity prices, and accumulation of foreign exchange reserves. If “pull” factors are dominant, policy makers should allow real exchange rates to appreciate in the long-term. Three broad categories of macroeconomic measures are available to countries facing surges of capital inflows, if they are not willing to allow the nominal exchange rate to appreciate: (i) sterilized intervention, (ii) greater exchange rate flexibility, and (iii) fiscal tightening (preferably through expenditure cuts). However, all of them have major drawbacks. Instead, capital controls or, more generally, macroprudential policy can be considered. Other policy recommendations include measures to encourage foreign direct investment, as this type of capital flow is more stable and beneficial; exchange rate coordination to reduce the adverse impacts of currency appreciation on the global competitiveness of domestic firms; and regional financial cooperation, particularly in the development of local bond markets. Recent data show the adverse impact of Quantitative Easing tapering on Asian economies. This is verified by econometric results showing the strong linkages between the United States bond markets and those in Asia. These findings enhance the role of macroprudential policy, which can be implemented in the context of regional cooperation in order to reduce negative spillovers across economies in Asia.
    Keywords: capital flows; exchange rates; regional cooperation; volatility
    JEL: F31 F32 F36
    Date: 2015–11–25
  15. By: Jin Cao (The Central Bank of Norway); Gerhard Illing (Ludwig-Maximilians-Universität)
    Abstract: In most banking models, money is merely modeled as a medium of transactions, but in reality, money is also the most liquid asset for banks. Central banks do not only passively supply money to meet demand for transactions, as often assumed in these models, instead they also actively inject liquidity into market, taking banks’ illiquid assets as collateral. We examine both roles of money in an integrated framework, in which banks are subject to aggregate illiquidity risk. With fixed nominal deposit contracts, the monetary economy with an active central bank can replicate constrained efficient allocation. This allocation, however, cannot be implemented in market equilibrium without additional regulation: Due to moral hazard problems, banks invest excessively in illiquid assets, forcing the central bank to provide liquidity at low interest rates. We show that interest rate policy to reduce systemic liquidity risk on its own is dynamically inconsistent. Instead, the constrained efficient solution can be achieved by imposing an ex ante liquidity coverage requirement.
    Keywords: Central banking; liquidity facility; systemic liquidity risk
    JEL: G21 G28
    Date: 2015–12–31
  16. By: Hansen, Stephen; McMahon, Michael
    Abstract: We explore how the multi-dimensional aspects of information released by the FOMC has effects on both market and real economic variables. Using tools from computational linguistics, we measure the information released by the FOMC on the state of economic conditions, as well as the guidance the FOMC provides about future monetary policy decisions. Employing these measures within a FAVAR framework, we find that shocks to forward guidance are more important than the FOMC communication of current economic conditions in terms of their effects on market and real variables. Nonetheless, neither communication has particularly strong effects on real economic variables.
    Keywords: communication; monetary policy; Vector Autoregression
    JEL: E52 E58
    Date: 2015–12
  17. By: Roman Horvath (Charles University, Prague); Dominika Katuscakova
    Abstract: We examine how the transparency of the European Central Bank’s monetary policy affects the amount of trust that the citizens of the European Union have in this institution. We use nearly half a million individual responses from the European Commission’s Eurobarometer survey from 2000-2011 and estimate probit regressions with sample selection. We find that transparency exerts a non-linear effect on trust. Transparency increases trust, but only up to a certain point; too much transparency harms trust. This result is robust to controlling for a number of macroeconomic conditions, financial stability transparency measures, and economic and socio-demographic characteristics of respondents, including examining respondents in European Union countries that do not use the euro and addressing clustering issues.
    Keywords: European Central Bank, trust, transparency, survey
    JEL: E52 E58
    Date: 2015–10
  18. By: Taisuke Nakata (Federal Reserve Board); Sebastian Schmidt (European Central Bank)
    Abstract: In an economy with an occasionally binding zero lower bound (ZLB) constraint, the anticipation of future ZLB episodes creates a trade-off for discretionary central banks between inflation and output stabilization. As a consequence, inflation systematically falls below target even when the policy rate is above zero. Appointing Rogoff’s (1985) conservative central banker mitigates this deflationary bias away from the ZLB and enhances welfare by improving allocations both at and away from the ZLB.
    Keywords: Deflationary Bias, Inflation Conservatism, Inflation Targeting, Liquidity Traps, Zero Lower Bound
    JEL: E52 E61
    Date: 2014–10
  19. By: Malte Rieth
    Abstract: Despite expansionary central bank action, inflation remains low in the euro area. How much can we expect from the additional stimulus in face of anaemic global growth and declining oil prices? More generally, have central banks lost the ability to steer inflation in a globalised world where external factors have powerful effects on domestic inflation? This roundup summarises the evidence in the literature and concludes that central banks retain influence on domestic inflation.
    Date: 2015
  20. By: Hiroshi Ugai (School of International and Public Policy, Hitotsubashi University)
    Abstract: This paper examines the effects of the Quantitative and Qualitative Monetary Easing Policy (QQE <2013-current>) of the Bank of Japan (BOJ) by transmission channels in comparison with those of the Comprehensive Monetary Easing Policy (CE) and the subsequent monetary easing policies (2010-2012), based on the event study using financial market data. As for the QQE under normal market conditions, depreciation of foreign exchange rate in the context of portfolio balance channel functions quite strongly, while as for the CE, signaling channel through the commitment and credit easing channel at the dysfunctional markets work. The direct inflation expectation channel is weak for both QQE and CE, although the QQE has adopted various ways to exert a direct and strong influence on inflation expectation. It can be conjectured that the gradual rise in inflation expectation comes mainly from other channels like the depreciation of the yen. The most crucial characteristic of the QQE is to maximize the potential effects of easing policy by explicitly doubling and later tripling the purchased amount of JGBs and then the monetary base proportionally. The amount of JGB purchases by the BOJ surpasses the issuance amount of JGBs, thereby reducing the outstanding amount of JGBs in the markets. Shortage of safety assets would increase the convenience yield, which itself would reduce the economic welfare and not permeate the yields of other risky assets theoretically. This paper then examines the impact of reduction in JGBs on yield spreads between corporate bonds and JGBs based on money-in-utility type model applied to JGBs, and finds that at least severe scarcity situations of JGBs as safe assets are avoided, since the size of Japan’s public debt outstanding is the largest in the world. Even so, the event study shows no clear evidence that the decline in the yield of long-maturity JGBs induced by the QQE permeates the yields of corporate bonds. Recently demands for JGBs have been increasing from both domestic and foreign investors as collaterals after the Global Financial Crisis and from financial institutions that have to correspond to strengthened global liquidity regulation, while the Government of Japan is planning to consolidate the public debts. These recent changes as well as market expectation for future path of JGB amounts should also be taken account of to examine the scarcity of safe assets in case of further massive purchases of JGBs.
    Keywords: Quantitative easing, Credit easing, Inflation expectation, Safety asset
    JEL: E43 E44 E52
    Date: 2015–07
  21. By: FUJITA Shigeru; FUJIWARA Ippei
    Abstract: This paper explores a causal link between the aging of the labor force and declining trends in the real interest rate and inflation in Japan. We develop a new Keynesian search/matching model that features heterogeneities in age and firm-specific skill levels. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure driven by the drop induce significant low-frequency movements in per-capita consumption growth and the real interest rate. They also lead to similar movements in the inflation rate when the monetary policy rule follows the standard Taylor rule, failing to recognize the time-varying nature of the natural rate of interest. The model suggests that the aging of the labor force accounts for roughly 40% of the decline in the real interest rate observed between the 1980s and 2000s in Japan.
    Date: 2015–12
  22. By: Cloyne, James; Ferreira, Clodomiro; Surico, Paolo
    Abstract: In response to an interest rate change, mortgagors in the U.K. and U.S. adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the U.K. than in the U.S., these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit- constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income isquantitatively more important than the direct effect on cashflows.
    JEL: E21 E32 E52
    Date: 2015–12
  23. By: Greenwood, Robin; Hanson, Samuel G; Vayanos, Dimitri
    Abstract: We present a model of the yield curve in which the central bank can provide market participants with forward guidance on both future short rates and on future Quantitative Easing (QE) operations, which affect bond supply. Forward guidance on short rates works through the expectations hypothesis, while forward guidance on QE works through expected future bond risk premia. If a QE operation is expected to be undone in the near term, then its announcement will have a hump-shaped effect on the yield and forward-rate curves; otherwise the effect may be increasing with maturity. Humps associated to QE announcements typically occur at maturities longer than those associated to short-rate announcements, even when the effects of the former are expected to last over a shorter horizon. We use our model to re-examine the empirical evidence on QE announcements in the US.
    Keywords: central banks; forward guidance; limited arbitrage; quantitative easing; yield curve
    JEL: E43 E52 G12 H63
    Date: 2015–12
  24. By: Miura, Shinji
    Abstract: The equation of exchange is well-known as a quantitative expression of money circulation, but it has a defect in that the relation between the velocity of money and the situation of economic agents is not clear. This paper attempts to found the velocity which pays attention to movement of money. For that purpose, this paper shows a money circulation equation in which agents of the whole society are unified. If this equation has a unique solution, the velocity of money is reduced to the expenditure rate of the whole society. Thereby, the defect of the equation of exchange can be remedied. Our attempt can be interpreted as connecting the velocity of money with the multiplier analysis. Success or failure of the trial depends on its solvability. This solvability problem of the money circulation equation is closely related to the missing problems of the monetary budget constraint. This paper also attempts to explain the missing problems in the case of the budget constraint of the whole society. This paper explains that a time irreversible disposal solves those problems by using an analogy.
    Keywords: Equation of Exchange; Money Circulation; Budget Constraint
    JEL: C2 E4
    Date: 2015–10–10
  25. By: Jan Tore Klovland (Norwegian School of Economics and Norges Bank); Lars Fredrik Øksendal (Norges Bank and Norwegian School of Economics)
    Abstract: Before 1893 the regional branches of Norges Bank set their own bank rates. We discuss how bank rate autonomy could be reconciled with the fixed exchange rate commitments of the silver and gold standard. Although the headquarters of the bank was in Trondhjem, we find that the Christiania branch played the key role in providing leadership in bank rate policy. Foreign interest rate impulses were important for bank rate decisions, but there was also some leeway for responding to idiosyncratic shocks facing the Norwegian economy.
    Keywords: bank rate, gold standard, monetary policy
    JEL: E58 N23
    Date: 2015–12–23
  26. By: Koki Oikawa (Waseda University); Kozo Ueda (School of Political Science and Economics, Waseda University and Centre for Applied Macroeconomic Analysis (CAMA))
    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
  27. By: Söderberg, Johan (Dept. of Economics, Stockholm University)
    Abstract: The implications for optimal monetary policy of introducing seasonality in the frequency of price change in the baseline New Keynesian model are studied. In the resulting model, both the parameters of the Phillips curve and the weight on inflation stabilization in the welfare criterion vary seasonally. I show that for a plausible calibration, even a modest degree of seasonality in the frequency of price change gives rise to large seasonal differences in the equilibrium responses of the output gap and inflation to cost-push shocks. The effects on welfare, however, are small under both discretionary and commitment policy.
    Keywords: Price Setting; Staggering; Seasonality; Optimal Monetary Policy
    JEL: E31 E32
    Date: 2015–12–18
  28. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: At Ball State University in Muncie, Ind., St. Louis Fed President James Bullard assessed the Federal Open Market Committee's forecasts running up to 2015 and discussed implications for monetary policy. He said that the forecasts look to have missed on all three key variables—real GDP growth, unemployment and inflation—and that the misses are such that they continue to pull the committee in different directions on monetary policy.
    Date: 2015–12–07
  29. By: Fernando Uscátegui; Mike Woodcock; Carlos Méndez
    Abstract: Monetary policy has been important as a tool at maintaining dynamic stability on inflation rate, an increasing growth rate and several changes in financial variables. The trend in those macroeconomic variables could be accounted for a straightforward or roundabout change in monetary policy tools. Hence, in this paper, we will present a historical trend about macroeconomic variables which change with monetary policy effects and we will use multivariate time series analysis which could give us empiric evidence to explain the impact of monetary policy in these variables. First, there will be a brief introduction about the importance of the subject will be made. Second, it will take place the description of the variables and a brief state of art for each variable analyzing the current literature in the subject. Third, it will be carried out all the subjects regarding the construction of two econometric models, VAR model and M-GARCH model, anyone not interested in this part is encourage to skip that section and continue reading the next section. Finally, it will be shown the final remarks and the conclusion of this paper.
    Keywords: Monetary policy, Risk balance, macroeconomic variables, VAR modeling, MGARCH modeling
    JEL: E43 E44 E47 E5 C39 C58
    Date: 2015–12–29
  30. By: Aleksandra Hałka; Karol Szafranek
    Abstract: For the last two years inflation has been systematically falling across countries in the European Union and lately it exhibits rising deflationary pressures. Recent studies suggest that apart from global determinants influencing broad inflation measures, e.g. plummeting commodity prices, core inflation components are subjected to the rising influence of globalization. Our analysis focuses on two aspects: the extent of the HICP components infected with deflation and the spillovers of headline, core, non-energy goods as well as services inflation between the euro area and distinguished small open economies. In order to answer the question of inflation broadness we calculate the percentages of HICP components which dynamics fall into certain thresholds and introduce a simple measure - the Discrepancy Index showing the relative strength of deflationary and inflationary groups. To address the problem of quantifying the inflation spillovers across distinguished economies we use the Diebold and Yilmaz (2012) spillover indices. Results indicate that the share of deflationary groups for most countries has been consistently rising since 2010 with the Discrepancy Index approximating its all-time lows in the fourth quarter of 2014. Simultaneously we show that the spillover index for non-energy industrial goods and services inflation has lately risen considerably with the measure for headline inflation remaining elevated and for core inflation dropping. The euro area remains a net inflation transmitter in most cases.
    Keywords: inflation, spillovers, VAR, disaggregation, small open economy, euro area.
    JEL: C32 C53 E31 E37
    Date: 2015
  31. By: Katsurako Sonoda (Bank of Japan); Nao Sudo (Bank of Japan)
    Keywords: Short-term interest rates; Macroprudential instrument; Boom-and-Bust Cycle
    JEL: E20 J11
    Date: 2015–12–21
  32. By: Jean-Charles BRICONGNE
    Keywords: , Quantity theory of money , household money holdings , inflation , forecasting
    Date: 2015
  33. By: Zeyyad Mandalinci (Queen Mary University of London)
    Abstract: This paper carries out a comprehensive forecasting exercise to assess out-of-sample forecasting performance of various econometric models for inflation across three dimensions; time, emerging market countries and models. The competing forecasting models include univariate and multivariate, fixed and time varying parameter, constant and stochastic volatility, small and large dataset, with and without bayesian variable selection models. Results indicate that the forecasting performance of different models change notably both across time and countries. Similar to some of the recent findings of the literature that focus on developed countries, models that account for stochastic volatility and time-varying parameters provide more accurate forecasts for inflation than alternatives in emerging markets.
    Keywords: Forecasting, Bayesian Analysis, Emerging Markets, Forecast Comparison
    JEL: E37 C11 E31
    Date: 2015–12
  34. By: Miura, Shinji
    Abstract: Saving brings an economic loss. The author intends to publish a paper, which gives a foundation of this paradox of thrift by connecting money circulation analysis and welfare economics in the case where saving is limited to hoarding. As an introduction of the intended paper, this paper provides a simple explanation for hoarding loss using some graphs. Under certain conditions, the representative agent hoards money in order to increase utility, but the hoarding actually decreases it against agent’s rational intention. This irrationality of rationality occurs because the agent maximizes their utility while lowering the budget of the entire relevant term. This conclusion is derived from the agent making the decision with an ignorance of the whole expenditure reflux. Since the interest of a selfish agent is limited to their private range, the agent ignores the objective truth.
    Keywords: Money Circulation; Welfare Economics; Under-Consumption; Paradox of Thrift; Intertemporal Choice
    JEL: D60 E21 E40
    Date: 2015–12–27
  35. By: Ashley, Richard (Department of Economics-Virginia Polytech Institute and State University (Virginia Tech)); Verbrugge, Randal (Federal Reserve Bank of Cleveland)
    Abstract: Standard theory predicts persistence dependence in numerous economic relationships. (For example, persistence dependence is precisely the kind of nonlinear relationship posited in the Permanent Income Hypothesis; persistence dependence is the inverse of “frequency dependence” in a relationship.) Until recently, however, it was challenging to achieve credible inference about persistence dependence in an economic relationship using available methods. However, recently developed econometric tools (Ashley and Verbrugge, 2009a) allow one to elegantly quantify the variation in a time-series relationship across persistence levels, even when the data must be first-differenced because they are I(1), or nearly so. We apply these tools to study the velocity of money. Standard theory predicts that velocity should be positively correlated with the nominal interest rate: A high nominal interest rate raises the opportunity cost of holding wealth in liquid form, prompting agents to economize on money holdings. But as Cochrane (2012) pointed out, the velocity-interest rate linkage appears to be weak upon first-differencing. We argue that the root cause of this phenomenon is a particularly intuitive form of nonlinear dependence in the relationship: The strength of the relationship depends on the persistence level of a particular interest rate fluctuation. In particular, this relationship is substantially (and statistically significantly) stronger at low frequencies—i.e., at high interest rate fluctuation persistence levels. Because we allow for persistence dependence in the estimated relationship, this strong association is apparent despite the first-difference transformation applied to these data.
    Keywords: money demand; frequency-dependence; spectral regression
    JEL: C22 C32 E00 E31 E5
    Date: 2015–12–15
  36. By: Jean-Pierre Allegret; Audrey Sallenave
    Abstract: IAn extended literature analyzes the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This paper deserves more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of 9 emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995-2003 and 2004-2013. We implement threshold VAR (TVAR) model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.
    Keywords: Reserve accumulation, Threshold VAR model, Output gap, External shocks, Emerging countries.
    JEL: E52 F30 F41
    Date: 2015
  37. By: Carlstrom, Charles T. (Federal Reserve Bank of Cleveland); Fuerst, Timothy S. (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies macro credit policies within the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The focus is on borrower-based restrictions on lending such as loan-to-value (LTV) ratios. We find that the efficacy of cyclical taxes on LTV ratios depends upon the nature of the underlying loan contract. If the loan contract contains equity-like features such as indexation to aggregate conditions, then there is little role for cyclical taxation. But if the loan contract is not indexed to aggregate conditions, then there are substantial gains to procyclical taxes on LTV ratios.
    Keywords: credit policy; loan-to-value ratios; borrower-based lending restrictions
    JEL: C68 E44 E61
    Date: 2015–12–21
  38. By: Oet, Mikhail V. (Federal Reserve Bank of Cleveland); Ong, Stephen J. (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies and connects market organization and activity in the US collateralized interbank market using an assumption-neutral approach. We apply cluster analysis to aggregate activity factors suggested by prior studies to support two market organizations: three-tier and core-periphery. We find that four bank-specific factors and one economic conditions factor explain interbank activity for both alternative organizations. We also find evidence that the interbank market organization affects institutions’ borrowing and lending. While both organizations moderate interbank activity, the three-tier structure detects distinct market operations which are not represented in the core-periphery structure.
    Keywords: collateralized interbank market; market organization; tiering; interbank activity factors; cluster analysis; latent factor analysis
    JEL: C30 C38 E44 G10 G21
    Date: 2015–12–14

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