nep-mon New Economics Papers
on Monetary Economics
Issue of 2016‒01‒18
23 papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Global Liquidity and Monetary Policy Autonomy By Stefan Angrick
  2. What are monetary policy shocks? By Qureshi, Irfan
  3. Taking Stock - Credit Measures in Monetary Transmission By Stefan Behrendt
  4. Taming Macroeconomic Instability: Monetary and Macro Prudential Policy Interactions in an Agent-Based Model By Lilit Popoyan; Mauro Napoletano; Andrea Roventini
  5. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  6. The Evasive Predictive Ability of Core Inflation By Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
  7. What is the Monetary Standard By Hetzel, Robert L.
  8. Asset prices regime-switching and the role of inflation targeting monetary policy By Chatziantoniou, Ioannis; Filis, George; Floros, Christos
  9. European lending channel: differences in transmission mechanisms due to the global financial crisis By Tomáš Heryán; Panayiotis G. Tzeremes; Roman Matousek
  11. Fragility of Money Markets By Ranaldo, Angelo; Rupprecht, Matthias; Wrampelmeyer, Jan
  12. The U.S. Economy and Monetary Policy Remarks for the Panel Discussion, “The United States and the Global Economic Outlook” National Association for Business Economics/American Economic Association Meetings San Francisco, CA January 3, 2016 By Mester, Loretta J.
  13. DSGE model-based forecasting of modelled and nonmodelled inflation variables in South Africa By Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
  14. Systemic Risk-Taking Channel of Domestic and Foreign Monetary Policy By João Barata Ribeiro Blanco Barroso; Sergio Rubens Stancato de Souza; Solange Maria Guerra
  15. Shocking language: Understanding the macroeconomic effects of central bank communication By Hansen, Stephen; McMahon, Michael
  16. The Relation between Money, Interest and Consumption in Developing Countries: The Case of Turkey By Yılmaz, Engin; Süslü, Bora
  17. An argument for positive nominal interest By Bloise, Gaetano; Polemarchakis, Herakles
  18. What can Big Data tell us about the passthrough of big exchange rate changes? By Lewis, John
  19. Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Network. A Model of Incentives with Heterogeneous Agents By Muriel Fadairo; Cyntia Lanchimba; Miguel Yangari
  20. Perils of quantitative easing By McMahon, Michael; Peiris, Udara; Polemarchakis, Herakles
  21. New Information and Updating of Market Experts’ Inflation Expectations By Arnildo da Silva Correa; Paulo Picchetti
  22. Uncovered interest parity in Central and Eastern Europe : expectations and structural breaks By Juan Carlos Cuestas; Karsten Staehr; Fabio Filipozzi
  23. Catalytic IMF? A gross flows approach By Aitor Erce; Daniel Riera-Crichton

  1. By: Stefan Angrick
    Abstract: This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.
    Keywords: central banking, balance sheets, monetary policy, exchange rates, policy autonomy
    JEL: E51 E58 F41
    Date: 2015
  2. By: Qureshi, Irfan (Department of Economics University of Warwick)
    Abstract: I decompose deviations of the Federal funds rate from a Taylor type monetary policy rule into exogenous monetary policy shocks and a time-varying inflation target. I show that the role of exogenous shocks may be exaggerated in a fixed inflation target model, and a large fraction of business cycle fluctuations attributed to them may actually be due to changes in the inflation target. A time-varying inflation target explains approximately half of the volatility normally attributed to these deviations, and consequently more than a quarter of the fluctuations in the business cycle. This contributes approximately 39% additional inflation volatility during the Great Inflation. I show that shocks to the inflation target imply a lower sacrifice ratio compared to exogenous changes in the interest rate and therefore propose a gradual adjustment of the inflation target in order to achieve monetary policy objectives.
    Keywords: Time-varying monetary policy ; inflation volatility ; sacrifice ratio
    JEL: E30 E31 E50 E52 E58
    Date: 2015
  3. By: Stefan Behrendt (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: Empirical research on the monetary transmission mechanism considering credit developments is almost exclusively limited to the amount of outstanding credit in an economy. Two issues arise out of this. First, stock-flow inconsistencies might occur. Second, the change of the outstanding amount of credit on banks' balance sheets does not consist only of new lending activity, but also incorporates other factors. As central banks should predominantly be focused on the amount of newly created credits in an economy while analysing the impact of monetary policy towards lending activity, using the change in the stock of lending can lead to distorted results, because of the incorporation of data on maturing loans, revaluations, securitization, and write-offs into this variable. The majority of existing credit channel literature does not really account for these issues. This paper makes a case to better caption new lending activity in monetary policy research. What is shown in this paper is that empirical investigations might lead to differing results when accounting for the other factors in the stock data. Central bank policy might therefore be biased.
    Keywords: credit channel, monetary transmission, bank lending
    JEL: C18 C82 E51 E52
    Date: 2016–01–06
  4. By: Lilit Popoyan; Mauro Napoletano; Andrea Roventini
    Abstract: We develop an agent-based model to study the macroeconomic impact of alternative macro prudential regulations and their possible interactions with different monetary policy rules. The aim is to shed light on the most appropriate policy mix to achieve the resilience of the banking sector and foster macroeconomic stability. Simulation results show that a triple-mandate Taylor rule, focused on output gap, inflation and credit growth, and a Basel III prudential regulation is the best policy mix to improve the stability of the banking sector and smooth output fluctuations. Moreover, we consider the different levers of Basel III and their combinations. We find that minimum capital requirements and counter-cyclical capital buffers allow to achieve results close to the Basel III first-best with a much more simplified regulatory framework. Finally, the components of Basel III are nonadditive: the inclusion of an additional lever does not always improve the performance of the macro prudential regulation.
    Keywords: macro prudential policy; Basel III regulation; financial stability; monetary policy; agent-based computational economics
    Date: 2015–12–16
  5. 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
    JEL: E50 F41
    Date: 2015
  6. By: Pincheira, Pablo; Selaive, Jorge; Nolazco, Jose Luis
    Abstract: We explore the ability of traditional core inflation –consumer prices excluding food and energy– to predict headline CPI annual inflation. We analyze a sample of OECD and non-OECD economies using monthly data from January 1994 to March 2015. Our results indicate that sizable predictability emerges for a small subset of countries. For the rest of our economies predictability is either subtle or undetectable. These results hold true even when implementing an out-of-sample test of Granger causality especially designed to compare forecasts from nested models. Our findings partially challenge the common wisdom about the ability of core inflation to forecast headline inflation, and suggest a careful weighting of the traditional exclusion of food and energy prices when assessing the size of the monetary stimulus.
    Keywords: Inflation, Forecasting, Time Series, Monetary Policy, Core Inflation
    JEL: E3 E31 E37 E4 E43 E44 E5 E52
    Date: 2016–01–06
  7. By: Hetzel, Robert L. (Federal Reserve Bank of Richmond)
    Abstract: The monetary standard emerges out of the interaction of monetary policy with the structure of the economy. Characterization of the monetary standard thus requires specification of a model of the economy with a central bank reaction function. Such a specification raises all the fundamental issues of identification in macroeconomics.
    JEL: E50
    Date: 2015–11–09
  8. By: Chatziantoniou, Ioannis; Filis, George; Floros, Christos
    Abstract: This paper provides the empirical framework to assess whether UK monetary policy shocks induce both the UK housing market and the UK stock market to remain at a high-volatility (risk) environment. The Markov regime switching modelling approach is employed in order to identify two distinct environments for each market; namely, a high-risk environment and a low-risk environment, while a probit model is employed in order to test whether monetary policy shocks provide this predictive information regarding the current state of both markets under consideration. Our findings indicate that monetary policy shocks do indeed have predictive power on the stock market. In addition, in both asset markets there is a key role for inflation. Results are important especially within the framework of the inflation targeting monetary policy regime.
    Keywords: United Kingdom, Inflation targeting, Markov regime switching, Forecasting, Asset prices
    JEL: C22 E52 G1
    Date: 2015
  9. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Panayiotis G. Tzeremes (Department of Economics, University of Thessaly); Roman Matousek (University of Kent, Kent Business School)
    Abstract: This study focuses on the bank lending channels and transmission mechanisms of monetary policy in European Union (EU) countries. In accordance with previous empirical studies, we deploy the generalized method of moments (GMM) with pooled annual data. We examine the period from 1999 to 2012. We extend the current research on the transmission mechanisms of monetary policy in the following way: first, we compare the differences between the ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Second, we examine the interaction terms between bank characteristics and both monetary policy indicators. In particular, we examine the impact of short-term interest rates and monetary aggregate M2 on bank behaviour. Assuming a more obvious transmission mechanism, we argue that, in the group of ‘old’ EMU countries, the lending channel is affected by smaller banks that are less liquid or are strongly capitalized. For ‘new’ EU countries, we find similar results, i.e., the lending channel affects smaller banks. However, in terms of liquidity and capital adequacy and assuming a more obvious transmission mechanism, we find an opposing result. Those countries’ lending channel is affected by smaller banks with higher levels of liquidity and lower bank capital. Third, we describe how transmission mechanisms changed during the crises period.
    Keywords: lending channel, transmission mechanism, crisis times, old EMU and new EU countries
    JEL: C58 G01 G21 G28
    Date: 2016–01–04
  10. By: Benjamin Eden (Vanderbilt University); Maya Eden (World Bank)
    Abstract: This paper studies the possibility of using financial regulation that prohibits the use of money substitutes as a tool for mitigating the adverse effects of deviations from the Friedman rule. We establish that when inflation is not too high regulation aimed at eliminating money substitutes improves welfare by economizing on transaction costs. The gains from regulation depend on the distribution of income and on the level of direct taxation. The area under the demand for money curve is equal to the welfare cost of inflation only when there are no direct taxes and no proportional intermediation costs: otherwise, the area under the demand curve overstates the welfare cost of inflation when money substitutes are not important and understates the welfare cost when money substitutes are important.
    Keywords: Welfare cost of inflation, Liquidity, Regulations of money substitutes
    JEL: E0
    Date: 2016–01–11
  11. By: Ranaldo, Angelo; Rupprecht, Matthias; Wrampelmeyer, Jan
    Abstract: We provide the first comprehensive theoretical model for money markets encompassing unsecured and secured funding, asset markets, and central bank policy. Capital-constrained, leveraged banks invest in assets and raise short-term funds by borrowing in the unsecured and secured money markets. Our model derives how funding liquidity across money markets is related, explains how a shock to asset values can lead to mutually reinforcing liquidity spirals in both money markets, and shows how borrowers' flight-to-safety and risk-seeking behavior impacts their liability structure. We derive the social optimum and show which combination of conventional and unconventional monetary policies and regulatory measures can reduce money market fragility.
    Date: 2016–01
  12. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: I thank the National Association for Business Economics for organizing this session and giving me the opportunity to discuss the outlook for the U.S. economy and monetary policy. The views I’ll present today are my own and not necessarily those of the Federal Reserve System or my colleagues on the FOMC.
    Date: 2016–01–03
  13. By: Rangan Gupta; Patrick T. Kanda; Mampho P. Modise; Alessia Paccagnini
    Abstract: Inflation forecasts are a key ingredient for monetary policy-making – especially in an inflation targeting country such as South Africa. Generally, a typical Dynamic Stochastic General Equilibrium (DSGE) only includes a core set of variables. As such, other variables, for example alternative measures of inflation that might be of interest to policy-makers, do not feature in the model. Given this, we implement a closed-economy New Keynesian DSGE model-based procedure which includes variables that do not explicitly appear in the model. We estimate such a model using an in-sample covering 1971Q2 to 1999Q4 and generate recursive forecasts over 2000Q1 to 2011Q4. The hybrid DSGE performs extremely well in forecasting inflation variables (both core and nonmodelled) in comparison with forecasts reported by other models such as AR(1). In addition, based on ex-ante forecasts over the period 2012Q1–2013Q4, we find that the DSGE model performs better than the AR(1) counterpart in forecasting actual GDP deflator inflation.
    Keywords: DSGE model; Inflation; Core variables; Noncore variables
    JEL: C11 C32 C53 E27 E47
    Date: 2015
  14. By: João Barata Ribeiro Blanco Barroso; Sergio Rubens Stancato de Souza; Solange Maria Guerra
    Abstract: The paper investigates the impact of domestic and foreign monetary policy on two systemic risk indicators in Brazil, namely, the Default Correlation and the DebtRank, which summarize, respectively, the joint default probability of financial institutions and the contagion through the interbank market given a default event. Results show that the domestic policy rate has a robust and statistically significant inverse relation with systemic risk, consistent with the risk-taking channel of monetary policy extended here for correlated risks and network externalities. Results are similar for the foreign policy rate, although not statistically significant in the most recent sample, consistent with a lesser role of banks in the transmission of foreign shocks. Results are also similar for reserve requirement rates, but not statistically significant, consistent with its operation on a narrower transmission channel
    Date: 2016–01
  15. By: Hansen, Stephen (Universitat Pompeu Fabra and GSE); McMahon, Michael (IMF-STI, University of Warwick, CEPR, CAGE (Warwick), CfM (LSE), and CAMA (ANU))
    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: Monetary policy ; communication ; Vector Autoregression.
    JEL: E52 E58
    Date: 2015
  16. By: Yılmaz, Engin; Süslü, Bora
    Abstract: As the basis of the current economic approach, comes to the fore the intertemporal utility function of decision-making economic units. Decision-making economic units decide their expenditures upon the substitution of their future utility for present utility. They defer present consumption and head for making savings. Yet, the exact opposite may also apply. Changes in the policy decisions of monetary authority have impacts on the intertemporal utility maximization of economic units as well. In this study, the question whether the amount or the price of the money affects the aggregate demand in Turkish economy was examined within the framework of dynamic optimization. The results showed that in Turkish economy where nominal income expectations are high, the resource and loan creation would increase and that when the central bank increase the interest rates to hinder this process, consumption would head up even more.
    Keywords: New Neo Classical Synthesis, Consumption, Monetary Policy
    JEL: E51 E52 E58
    Date: 2015–09
  17. By: Bloise, Gaetano (Department of Economics, Yeshiva University, and Department of Economics, University of Rome); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: In a dynamic economy, money provides liquidity as a medium of exchange.A central bank that sets the nominal rate of interest and distributes its profit to shareholders as dividends is traded in the asset market. A nominal rates of interest that tend to zero, but do not vanish, eliminate equilibrium allocations that do not converge to a Pareto optimal allocation.
    Keywords: nominal rate of interest ; dynamic efficiency
    JEL: D60 E10
    Date: 2015
  18. By: Lewis, John (Bank of England)
    Abstract: Using a large data set of import volumes and values for goods imports from around 50 trading partners, and 3,000 goods type, this paper finds that the micro level, passthrough is non-linear in the exchange rate. The passthrough of larger bilateral exchange rate movements (ie more than 5%) is around four times larger than that of smaller changes. However, regressions on aggregate data indicate that passthrough at the macro level is close to full. The resolution to this apparent puzzle lies in the fact that larger bilateral movements account for the vast majority of variation in the exchange rate index, and hence the non-linearity at the micro level largely disappears at the macro level.
    Keywords: Exchange rate passthrough; Big Data; non-linearity
    JEL: E31 F14 F41
    Date: 2016–01–08
  19. By: Muriel Fadairo (Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France); Cyntia Lanchimba (National Polytechnic School, Quito, Ecuador; Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France); Miguel Yangari (National Polytechnic School, Quito, Ecuador)
    Abstract: Existing literature on franchising has extensively studied the presence of plural form distribution networks, where two types of vertical relationships - integration versus franchising - co-exist. However, despite the importance of monetary provisions in franchise contracts, their definition in the case of plural form networks had not been addressed. In this paper, we focus more precisely on the “share parameters” in integrated (company-owned retail outlet) and decentralized (franchised outlet) vertical contracts, respectively the commission rate and the royalty rate. We develop an agency model of payment mechanism in a two-sided moral hazard context, with one principal and two heterogenous agents distinguished by different levels of risk aversion. We define the optimal monetary provisions, and demonstrate that even in the case of segmented markets, with no correlation between demand shocks, the two rates (commission rate, royalty rate) are negatively interrelated.
    Keywords: Franchising, dual distribution, royalty rate, commission rate, moral hazard
    JEL: L14 D82
    Date: 2016
  20. 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 WarwickAbstract: Quantitative easing compromises the control of the central bank over the stochastic path of inflation)
    Keywords: Quantitative easing ; credit easing ; inflation
    JEL: D50 E31 E52
    Date: 2015
  21. By: Arnildo da Silva Correa; Paulo Picchetti
    Abstract: This paper investigates how the disclosure of new information regarding the recent behavior of inflation affects inflation expectations. Using a panel of more than 100 professional forecasters and the release of a signal about the inflation rate to identify the effects, we find that new information leads individual forecasters to update their expectations immediately. However, the parameter is not very high, which is consistent with sticky information and staggered updating of expectations. The precision of new information matters as well: when precision increases, agents put more weight on the piece of information received, which is consistent with Morris and Shin's (2002) model. These results are found to be robust, and absent in placebo regressions. Finally, estimates suggest that the magnitude of the update depends on the distance between the signal that agents receive and their current expectations
    Date: 2016–01
  22. By: Juan Carlos Cuestas; Karsten Staehr; Fabio Filipozzi
    Abstract: This paper examines the empirical validity of the hypothesis of uncovered interest parity (UIP) using data from five Central and Eastern European countries with floating exchange rates for the period 2003–2014. The analysis includes forward-looking as well as static expectations and also allows for different types of structural breaks. The variable representing the deviation from UIP is stationary when expectations are forward-looking, ruling out persistent divergences from UIP. The deviation from UIP is however typically not stationary when expectations are static, even when structural breaks are incorporated, and this leads to the rejection of the UIP hypothesis in this case. The results underscore the importance of the expectations assumptions when the UIP hypothesis is tested
    Keywords: uncovered interest parity, carry trade, expectations, structural breaks, Central and Eastern Europe
    JEL: C32 F15
    Date: 2015–12–30
  23. By: Aitor Erce (European Stability Mechanism); Daniel Riera-Crichton (Bates College)
    Abstract: The financial assistance the International Monetary Fund (IMF) provides is expected to catalyze private capital inflows. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF’s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we document dynamics that are absent from existing models of IMF catalysis. Our results show significant differences in how resident and foreign investors react to IMF programs. While IMF lending does not catalyze foreign capital, it does affect the behavior of resident investors, who are both less likely to place their savings abroad and more likely to repatriate their foreign assets. As domestic banks’ flows drive this effect, we conclude that IMF catalysis is “a banking storyâ€. In comparing the effects across crisis types, we find that the effect of the IMF on resident investors is strongest during sovereign defaults, and that it exerts the least effect on foreign investors during bank crises.
    Keywords: IMF, catalysis, residence, capital flows
    JEL: F32 F33 F36 G01 G15
    Date: 2015–12

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